TDS on Salary Calculation & Tax Reporting: Complete Guide for FY2026-27

Calculating TDS (Tax Deducted at Source) on salaries — and reporting it correctly — is one of the most common compliance tasks for any organization with employees. It starts with calculating TDS on monthly salary at the average rate under Section 86, then depositing the deducted amount to the government treasury. This is just the first step; several other filings follow throughout the year.

Getting this right matters because non-compliance carries steep penalties. Missing a deposit deadline attracts a manageable 2% simple interest charge. But calculating TDS incorrectly, or missing a required filing, can trigger penalties at the corporate standard tax rate — a much costlier mistake.

In this article, we’ll walk through a simple example to cover the complete TDS calculation and reporting process step by step. Keep in mind the exact requirements may vary depending on your specific circumstances.

Let’s start the monthly TDS calculation on salary, step by step.

Step 1: Calculating Taxable Income

First, calculate total taxable income. In our example, we’ve used the monthly salary income. Since we’re calculating tax on the full year’s salary income, multiply the monthly payment by 12 to get the yearly gross salary. Doing so, you’ll arrive at BDT 1,344,000 as the gross salary.

Once you have the gross salary income, divide it by 3 to determine the exemption amount. If one-third of the gross salary is below BDT 500,000, that amount is your exemption. But if one-third exceeds the maximum cap, the exemption is capped at BDT 500,000.

In our example, the exemption amount works out to BDT 448,000. After deducting this exemption, the taxable income is BDT 896,000.

Step 2: Calculating Tax Rebate

Before moving on to calculate the tax liability on taxable income, we first calculate the tax rebate on eligible taxable income.

Since you’re calculating TDS on salary from the first month of the financial year — i.e., July — you won’t yet have any information about the employee’s actual investment amount. So at this stage, don’t concern yourself with whether the employee has invested or plans to invest.

Instead, simply calculate the tax rebate by applying 3% to the taxable income. In our example, applying this rate to BDT 896,000 gives a tax rebate of BDT 26,880.

Step 3: Calculating Monthly TDS on Salaries

We now have the taxable income and tax rebate amount, so let’s calculate Mr. Karim’s total tax liability to determine the monthly TDS amount. Important note: although you’re paying salary in the 2026-27 income year, the employee will file their return for the 2027-28 assessment year.

Since the National Board of Revenue publishes tax rates for the upcoming assessment year in advance, you should apply the 2027-28 assessment year’s tax-free limit and slab-wise tax rates when calculating the tax liability.

As per the Finance Act 2026, for the Assessment Year 2027-28 (Income Year 2026-27), the tax-free limit for a male taxpayer is BDT 400,000. We’ll apply the new slab-wise tax rates in below table.

Now deduct the tax rebate from the tax liability, and you’ll get a net tax liability of BDT 32,520. Divide this by 12, since we’re deducting TDS from the monthly salary, and the monthly TDS on salary comes to BDT 2,710 — you can round this to BDT 2,700. In the final month (June), you can adjust the TDS amount when making the last payment of the year.

So far, we’ve calculated the average monthly TDS amount. But as mentioned, a final adjustment is needed in the last month. It’s also worth noting that beyond this year-end adjustment, there are other situations that may require you to revise your TDS calculation during the income year, or at year-end. Let’s look at these.

Adjustments and Special Considerations

Salary Changes

If there are any changes to an employee’s salary or benefits during the year (e.g., increments), adjust the TDS calculation accordingly for the remaining months.

Year-End Reconciliation

At the end of the income year (June), perform a final reconciliation. Compare the total TDS deducted throughout the year against the actual tax liability based on the full year’s income. Make any necessary adjustments — deducting more or refunding excess TDS — in the final salary payment.

Advance Income Tax (AIT) on Car

If an employee owns a personal car and has paid advance tax on it (e.g., BDT 25,000), this AIT can be offset against their total tax liability. In Mr. Karim’s case, if he had paid BDT 25,000 in AIT on his car, his net tax liability would become BDT 32,520 – BDT 25,000 = BDT 7,520. His monthly TDS would then be BDT 7,520 / 12 = BDT 626.67.

With that, you’ve completed the TDS calculation on salary. But calculating and depositing TDS is only part of the job — you also need to fulfill the salary tax reporting requirements under the Income Tax Act 2023. Let’s look at these below.

Essential Tax Reporting Requirements Related to TDS on Salaries

Deducting and depositing TDS is only one part of your responsibility. You also need to submit various statements and returns to the tax authority throughout the year.

Salary Certificate

You must issue a salary certificate to each employee, detailing their total salary paid, the tax deducted and deposited, the tax challan number and date, income year, and their personal details. The specific information required is outlined in the Withholding Tax Rules 2026.

Statement of Deduction of Tax Under the Head “Salaries”

This statement is part of the monthly withholding tax return. It should only include the tax deducted from eligible employees and their detailed salary information for previous month. The prescribed format is provided under Rule 13, Schedule (Ga) of the Withholding Tax Rules 2026.

Statement Regarding the Payment of Salary

This annual statement provides comprehensive information about total salary payments for the entire year. Its format is specified under Rule 13, Schedule (Cha) of the Withholding Tax Rules 2026. It’s vital to ensure the total salary amount reported in this statement reconciles with your company’s audited financial statements to avoid potential scrutiny during tax assessment. This statement must be submitted to the tax office in September each year.

Statement Regarding Filing of Return by Employees

This statement must be submitted to the tax office in April each year. To prepare it, you’ll need employees to provide acknowledgments that they’ve submitted their individual income tax returns. The necessary information is typically drawn from these acknowledgment receipts. The prescribed format is found under Rule 13, Schedule (Chha) of the Withholding Tax Rules 2026.

By diligently following these steps and complying with the reporting requirements, you can ensure accurate TDS calculation and maintain good standing with the tax authorities, avoiding potential penalties. Staying updated with the tax compliance calendar is always a good practice!

Frequently Asked Questions About TDS on Salary