Tag: Payroll Automation

by Naziha , Digital Marketing Executive

Processing employee salaries is not just about calculating gross pay and transferring the final amount to an employee’s bank account. One of the most important responsibilities for employers and payroll teams is calculating and deducting the correct amount of Tax Deducted at Source (TDS).

With employees having a choice between the old and new tax regimes, payroll processing has become more complex. HR and payroll teams must understand the employee’s tax regime, consider eligible deductions and exemptions, calculate projected annual taxable income, and ensure that monthly TDS is deducted correctly.

A wrong tax calculation can create problems for both the employer and the employee. Employees may face unexpected tax deductions or refunds, while employers may face payroll corrections and compliance issues.

For the 2026–27 tax year, payroll teams also need to ensure that their systems and processes reflect the applicable tax rules for the relevant period.

This guide explains the key differences between the old and new tax regimes and what employers should consider while processing employee payroll.

Understanding the Old and New Tax Regimes

India currently provides different tax structures for eligible individual taxpayers.

The new tax regime is the default regime, while eligible taxpayers can choose to opt for the old regime. The two regimes differ mainly in their tax rates and the availability of deductions and exemptions.

The old regime generally provides access to a wider range of deductions and exemptions, while the new regime generally offers different tax slabs and allows only limited deductions and exemptions.

For employers, this means payroll processing cannot follow a one-size-fits-all approach.

What Is the Old Tax Regime?

The old tax regime follows the traditional tax structure.

Under this regime, employees may be able to claim various eligible tax deductions and exemptions, subject to applicable conditions and limits.

Common examples may include:

• House Rent Allowance (HRA), subject to applicable conditions

• Leave Travel Allowance (LTA), where eligible

• Certain deductions relating to investments

• Eligible insurance-related deductions

• Eligible deductions for specified expenses

• Home loan-related tax benefits, where applicable

Because more deductions and exemptions may be available, the old regime can be beneficial for some employees who have significant eligible tax-saving investments or exemptions.

However, payroll teams must collect and verify the required declarations and supporting documents where necessary.

What Is the New Tax Regime?

The new tax regime is the default tax regime for eligible taxpayers.

It generally provides a different tax slab structure while allowing fewer deductions and exemptions compared with the old regime.

Under the official slab information available for AY 2026–27, the new regime for most individual taxpayers uses the following slab structure:

Taxable IncomeTax RateUp to ₹4 lakhNil₹4 lakh – ₹8 lakh5%₹8 lakh – ₹12 lakh10%₹12 lakh – ₹16 lakh15%₹16 lakh – ₹20 lakh20%₹20 lakh – ₹24 lakh25%Above ₹24 lakh30%

These rates are subject to applicable provisions, rebate rules, surcharge, and Health and Education Cess.

The lower or differently structured tax rates may benefit employees who do not have substantial deductions or exemptions available under the old regime.

Old Tax Regime vs New Tax Regime: A Quick Comparison

FactorOld Tax RegimeNew Tax RegimeDefault regimeNoYesTax slabsTraditional slab structureRevised slab structureDeductionsMore deductions may be availableLimited deductionsExemptionsSeveral exemptions may be availableMany exemptions are restrictedInvestment declarationsOften important for tax calculationDepends on eligible deductionsBest optionDepends on employee’s deductions and exemptionsDepends on employee’s income and tax position

There is no single regime that is automatically best for every employee.

The better option depends on factors such as:

• Annual income

• Eligible deductions

• Eligible exemptions

• Investments

• Salary structure

• Other taxable income

The Income Tax Department itself advises taxpayers to compare the tax liability under both regimes before making a decision.

1. Collect the Employee’s Tax Regime Intimation

One of the first things employers should do is obtain the employee’s intended tax regime for payroll purposes.

According to Income Tax Department guidance, an employee should intimate the employer regarding their intended tax regime during the year. If the employee does not provide an intimation, the employer generally treats the employee under the default new tax regime for TDS purposes.

Best practice for employers

At the beginning of the financial year, provide employees with a clear process to:

• Select their intended tax regime for payroll purposes

• Submit required declarations

• Provide relevant information for TDS calculations

This helps payroll teams avoid incorrect assumptions.

2. Do Not Treat Every Employee the Same

A common payroll mistake is assuming that all employees should be processed under the same tax regime.

Employees have different financial situations.

For example:

Employee A

May have:

• Significant eligible investments

• Eligible HRA exemptions

• Other applicable deductions

The old regime may potentially be more favourable.

Employee B

May have:

• Few tax-saving investments

• Limited exemptions

• A relatively simple salary structure

The new regime may potentially result in a better tax outcome.

Employers should not recommend a regime without considering the individual’s circumstances. Their primary responsibility is to process payroll correctly based on the applicable rules and employee declarations.

3. Understand the Impact on Investment Proof Collection

The old and new regimes can significantly affect how HR teams collect investment declarations and proofs.

Under the old tax regime, employee declarations and eligible supporting documents may be important for calculating deductions and exemptions.

Payroll teams may need to process information relating to eligible:

• Investments

• Insurance payments

• Rent details

• Other deductions

• Applicable exemptions

Under the new regime, many traditional deductions and exemptions are not available, although certain specified benefits may still be permitted under applicable tax provisions.

This can reduce the number of investment proofs required for some employees.

However, employers should not assume that no declarations are ever required under the new regime. The payroll team must consider deductions or exemptions that remain available under the applicable rules.

4. Calculate TDS Based on Projected Annual Income

Salary TDS should not simply be calculated by applying a tax percentage to one month’s salary.

Employers generally need to estimate the employee’s projected taxable income for the relevant tax year.

The calculation may include:

• Monthly salary

• Bonus payments

• Incentives

• Arrears

• Other taxable benefits

• Eligible exemptions

• Applicable deductions

Once projected taxable income is determined, the employer can calculate the estimated annual tax liability and distribute the TDS appropriately across the remaining payroll months.

This is particularly important when an employee receives:

• A salary increment

• A bonus

• A promotion

• Variable pay

• Additional taxable benefits

5. Update TDS When Salary Changes

Employee tax calculations should not remain unchanged throughout the year if the employee’s income changes.

For example, an employee may receive:

• A salary increase

• Annual bonus

• Performance incentive

• Sales commission

• Arrears

These changes can increase projected annual income and affect the employee’s tax liability.

Payroll teams should review TDS calculations periodically rather than waiting until the end of the financial year.

6. Handle New Joiners Carefully

When a new employee joins an organization during the financial year, their current employer may need information about salary received from previous employment.

Without considering previous salary income, the employer may calculate TDS only on the salary paid by the current organization, potentially resulting in incorrect overall tax deductions.

HR and payroll teams should have a structured process for collecting relevant previous employment and salary information where required for accurate TDS processing.

7. Keep Accurate Employee Declarations and Records

Payroll compliance depends heavily on documentation.

Employers should maintain appropriate records relating to:

• Employee tax regime intimation

• Salary declarations

• Investment declarations

• Supporting documents, where applicable

• Previous employment income information

• Tax calculations

• TDS deductions

Proper documentation can help organizations explain and support payroll calculations if questions arise later.

8. Understand That the New Regime Is the Default for Payroll Purposes

The new tax regime is the default regime under the applicable framework.

If an employee does not intimate their intended choice to the employer for the relevant year, the employer generally deducts TDS based on the default new tax regime.

This makes employee communication extremely important.

A simple annual email or HR portal declaration can help reduce confusion.

9. Employees May Have Different Options at the Return Stage

Employers should understand the difference between:

• TDS processing during the year, and

• The employee’s final tax position when filing their income tax return

For eligible individuals without business or professional income, the option relating to the tax regime may generally be exercised according to the applicable rules when filing the income tax return.

The employer’s payroll calculation is based on the information and regime intimation provided for TDS purposes during the year.

This is why employees should understand that payroll TDS and final tax return filing are related but should not always be treated as identical processes.

10. Update Payroll Systems for Current Tax Rules

Tax rules and administrative provisions can change.

For 2026–27, the Income Tax Department has specifically advised employers to reset TDS computation from 1 April 2026 for the new tax year, considering projected income, deductions, and the applicable tax regime. Payroll systems also need to reflect the relevant legislative and section-numbering changes applicable to the new tax year.

Payroll teams should ensure that:

• Tax slabs are updated

• TDS formulas are reviewed

• The correct tax year is selected

• Regime options are configured properly

• Payroll software reflects current requirements

Using outdated payroll settings can result in incorrect deductions for every employee.

Common Payroll Mistakes Employers Should Avoid

1. Automatically Applying the Same Regime to Everyone

Employees may have different tax situations.

Always obtain the required regime intimation and process TDS accordingly.

2. Using Outdated Tax Slabs

Tax slabs can change from one tax year to another.

Payroll software should be reviewed at the beginning of every financial year.

3. Ignoring Employee Investment Declarations

For employees using the old regime, eligible declarations and supporting information can significantly affect taxable income.

4. Forgetting Salary Revisions

A salary increment or bonus can change projected annual tax liability.

TDS should be recalculated when necessary.

5. Not Considering Previous Employment Income

New employees may already have received taxable salary from another employer during the same year.

6. Waiting Until the Last Month to Correct TDS

Waiting until the end of the year can result in a large and unexpected TDS deduction from the employee’s final salaries.

Periodic reviews are much better.

A Simple Payroll Checklist for HR Teams

Before finalizing payroll, HR and payroll teams should check:

✔ Has the employee provided their tax regime intimation?

✔ Is the default regime being applied correctly where no intimation has been provided?

✔ Are the current tax slabs configured correctly?

✔ Has projected annual income been calculated?

✔ Have salary increments and bonuses been considered?

✔ Are applicable deductions and exemptions processed correctly?

✔ Have required declarations and documents been collected?

✔ Has previous employment income been considered where necessary?

✔ Has monthly TDS been reviewed and adjusted?

✔ Are payroll records securely maintained?

How Technology Can Simplify Tax Regime Management

Modern payroll systems can help employers manage tax compliance by:

• Allowing employees to select a tax regime

• Collecting declarations digitally

• Tracking investment submissions

• Calculating projected tax liability

• Automatically adjusting TDS

• Generating payroll reports

• Maintaining employee records

However, automation should always be supported by regular payroll reviews.

Incorrect system configuration can automate errors just as efficiently as it automates correct calculations.

Final Thoughts

The choice between the old and new tax regimes has made payroll processing more important than simply calculating monthly salary.

Employers need a structured process to collect employee tax regime information, calculate projected annual income, process eligible deductions and exemptions, and review TDS regularly throughout the year.

The new tax regime is the default, but the most suitable regime can vary depending on an employee’s income, deductions, and exemptions.

For HR and payroll teams, the goal is not to decide which tax regime is universally better. The goal is to ensure that payroll calculations are accurate, employee declarations are properly recorded, and TDS is processed according to the latest applicable rules.

By maintaining updated payroll systems, communicating clearly with employees, and reviewing TDS throughout the year, employers can reduce errors and make tax compliance significantly easier.

When tax rules or an employee’s circumstances are complex, organizations should verify the latest official guidance or seek advice from a qualified tax professional before making payroll decisions.