Testing TDS on salary means recomputing the tax withheld for a sample of employees against their declared tax regime and investment declarations under the Income Tax Act's salary TDS provisions, matching the quarterly figures to Form 24Q filed with the tax department, and reconciling three numbers that should agree but often don't: TDS deducted per the payroll register, TDS actually deposited with the government, and TDS reported in the quarterly return.
The three-way reconciliation at the center of this test
Most TDS-on-salary findings are not computation errors — they are breaks between deduction, deposit, and reporting. An employer can deduct the right amount from an employee's salary, deposit a different amount by mistake, and report a third figure in the return because the return was prepared from a different data pull. Each leg needs independent evidence.
| Figure | Source | What a mismatch usually means |
|---|---|---|
| TDS deducted | Payroll register, payslip for the employee | The amount actually withheld from the employee in that month |
| TDS deposited | Challan (CIN) and the bank statement | A deposit shortfall here means the employer owes the tax department directly, regardless of what was withheld from the employee |
| TDS reported | Form 24Q and the resulting Form 16 / Form 26AS credit for the employee | A reporting error does not change the employer's cash liability but can deny the employee their rightful tax credit, which becomes the employee's problem and eventually the employer's complaint to handle |
Recomputing TDS for a sample
Recomputation has to start from what the employee actually declared, not from a generic slab calculation, because an employee's tax liability on salary depends heavily on choices only they make: which regime they opted for, what investment and allowance declarations they submitted, and whether those declarations were updated during the year.
- 01Obtain the regime declaration (old or new regime) and the investment/allowance declaration for each sampled employeeUnder the Income Tax Act, an employee can choose between the two regimes for TDS purposes, and the employer is required to compute TDS based on the regime the employee has intimated. An employer applying a default regime without regard to the employee's actual declaration is a recurring error.
- 02Recompute annual projected salary income as the employer would have, as of the month testedIncludes fixed pay, taxable perquisites, and any one-time payments like bonus or arrears known at that point in the year, since TDS on salary is computed on an annualized, cumulative basis rather than per-payment.
- 03Apply the deductions and exemptions the employee is entitled to under the regime selectedUnder the old regime, this includes items like HRA exemption and permitted deductions supported by proofs; under the new regime, most such deductions are not available. Confirm supporting proofs were actually collected before the exemption was given effect, not merely declared.
- 04Recompute the tax liability using the slab rates and surcharge/cess applicable for that financial yearRates, slabs, and rebate thresholds change by Finance Act and should be confirmed for the year under audit rather than assumed from memory.
- 05Divide the recomputed annual liability by the remaining months to arrive at the monthly TDS, and compare to what was actually deductedA mid-year change in declaration or a late-discovered perquisite should shift the monthly figure going forward; check the employer actually re-ran the projection rather than continuing the old monthly figure for convenience.
An employee who submits investment proofs late in the year, or revises their regime choice, should see TDS recomputed on a cumulative basis so the full year's liability is still collected within the year. Employers who simply apply the change prospectively from the month of revision, without catching up the shortfall, routinely under-deduct — and the under-deduction becomes a compliance exposure for the employer, not just a tax shortfall for the employee.
Matching to Form 24Q
Form 24Q is the quarterly TDS return specific to salary payments, and Annexure II (filed with the fourth-quarter return) consolidates the full-year salary and deduction detail used to generate Form 16. The audit does not need to re-verify every field on every return, but it should confirm the return is internally consistent with the payroll data at a sample and summary level.
- Agree the quarterly gross salary and TDS totals in Form 24Q to the payroll register for the corresponding quarter.
- For the sampled employees, agree the annual figures in Form 16 / Annexure II to the recomputation performed above.
- Check that employees added or removed from payroll mid-year appear in the correct quarters only, and that a departed employee's full-and-final TDS was captured in the return for the quarter of exit.
- Confirm the return was filed within the statutory due date; a late filing fee and interest exposure under the Income Tax Act applies independently of whether the tax itself was deposited on time.
Deduction-to-deposit-to-return reconciliation
- 01Total TDS deducted per the payroll register for the yearThis is the starting population and should tie to the salary expense recognized in the books for the deduction component.
- 02Agree total deposits per challans to the amount in step oneA shortfall here is a direct liability — the employer is treated as an assessee in default for the undeposited amount under the Income Tax Act, with associated interest.
- 03Agree the annual total reported in Form 24Q to both of the aboveA mismatch that cannot be explained by timing differences between quarters usually traces back to a data extract used for the return that was taken at a different point than the final payroll register.
- 04Spot-check Form 26AS or the TRACES portal credit for a handful of sampled employeesConfirms the credit actually reached the employee's tax account, which is the ultimate purpose of the whole chain and the thing an employee will complain about if it breaks.
How we think about this
Recomputing TDS for an employee is a deterministic calculation once the regime, declarations, and slab rates are known, and it should be run the same way for every employee rather than sampled unless the sheer volume of declarations makes full recomputation impractical to document. Deciding whether an employee's declared regime choice or a disputed exemption claim is genuine, though, is not something a recomputation settles — that is a question for the auditor, informed by the supporting documents on file.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Payroll & employee costPayroll audit procedure: a complete checklistMaster data testing, gross-to-net recomputation, statutory deduction checks, and the approval trail — the full payroll audit procedure in order.
- Payroll & employee costPF and ESI compliance testing in a statutory auditApplicability, challan matching, due-date testing, and the employer-versus-employee contribution reconciliation — the PF and ESI compliance checks a payroll audit needs.
- Payroll & employee costAuditing bonus and incentive paymentsPayment of Bonus Act basics, provision-versus-actual testing, approval evidence for discretionary schemes, and accrual cut-off — the audit approach to bonus and incentive payments.
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