How to recite tahiyya?
We begin with Allah’s blessed name, we praise him and we glorify him, seek his forgiveness and ask him to guide us. Whoever Allah guides, None can lead astray and whoever he misguides, None can guide. There is no power and no strength except from Allah, The most high, the Most great, the most powerful. We bear witness that there is no one worthy of worship but Allah Alone, and we bear witness that Prophet Muhammad (pbuh) is His slave-servant and the seal of His Messengers. We pray for peace and blessings on all the noble messengers and in particular on the last of them all “the blessed prophet Mohammad (pbuh)”
The Messenger of Allah (may peace be upon him) used to begin prayer with takbir (saying Allih-o-Akbar) and the recitation:" Praise be to Allah, the Lord of the Universe." When he bowed he neither kept his head up nor bent it down, but kept it between these extremes; when he raised his bead after bow- ing he did not prostrate himself till he had stood erect; when he raised his head after prostration he did not prostrate himself again till he satup. At the end of every two rak'ahs he recited the tahiyya; and he used to place his left foot flat (on the ground) and raise up the right; he prohibited the devil's way of sitting on the heels,
and he forbade people to spread out their arms like a wild beast. And he used to finish the prayer with the taslim.
SAHIH MUSLIM [Book 4 : Hadith 1005]
Regarding how one should sit in tashud the below mentioned narration will explains that:
Abbas bin SAhl [bin Sa'd] narrated:
"Abu Humaid, Abu Usaid, Sahl bin Sa'd, and Muhammad bin Maslamah were once together and they were mentioning the Salat of Allah's Messenger. Abu Humaid said: "I am the most knowledgeable among you of the Salat of Allah's Messenger: Indeed Allah's Messenger sat - meaning for Tashah-hud - he spread his left foot, and made the top of his right (foot) face the Qiblah, and he placed his right hand on his right knee, and his left hand on his left knee, and indicated with his finger - meaning the index finge.
'" (Hasan) AT-TIRMIDHI [Vol. 1, Book 2, Hadith 293]
Our beloved prophet (pbuh) guided us, how and what to recite when a believer is on the sitting of second rakah (tashud).
It was narrated from Hittan bin 'Abdullah that Al-Ash'ari said:
"The Messenger of Allah (ﷺ) addressed us and taught us our Sunnahs and our prayer. He said: 'Make your rows straight, then let one of you lead the others. When he says the takbir, then say the takbir; when he says: "Wa lad-dallin" then say "Amin" and Allah (SWT) will answer you. When the Imam says the takbir and bows, then say the takbir and bow, for the Imam bows before you and stands up before you.' The Prophet of Allah (ﷺ) said: 'This makes up for that. When he says: 'Sami Allahu liman hamidah (Allah hears the one who praises Him), say: "Rabbana wa lakal-hamd (Our Lord, to You be praise)," Allah (SWT) will hear you, for indeed Allah, the Mighty and Sublime, has said on the tongue of His Prophet (ﷺ): "Allah hears the one who praises Him." Then when the Imam says the takbir and prostrates, say the takbir and prostrate, for the Imam prostrates before you and rises before you.' The Prophet of Allah (ﷺ) said: 'This makes up for that. Then when you are sitting, let the first thing that any one of you says be: At-tahiyyatu lillahi was-salawatu wat-tayyibat, as-salamu 'alaika ayyuhan-Nabiyyu wa rahmatAllahi wa baraktuhu. As-salamu 'alaina wa 'ala 'ibad illahis-salihin, ashahdu an la illaha ill-Allah wa ashhadu anna Muhammadan 'abduhu wa rasuluhu
(Allah compliments, prayers and pure words are due to Allah. Peace be upon you, O Prophet, and the mercy of Allah (SWT) and his blessings. Peace be upon us and upon the righteous slaves of Allah (SWT). I bear witness that none has the right to be worshipped except Allah and I bear witness that Muhammad is His slave and Messenger)." (Sahih) Sunan an-Nasa'i 
"The Messenger of Allah (ﷺ) taught us the tashahhud just as he taught us a surah from the Quran: "At-tahiyyatu lillahi was-salawatu wat-tayyibat, as-salamu 'alaika ayyuhan-Nabiyyu wa rahmatAllahi wa baraktuhu. As-salamu 'alaina wa 'ala 'ibad illahis-salihin, ashahdu an la illaha ill-Allah wa ashhadu anna Muhammadan 'abduhu wa rasuluhu (Allah compliments, prayers and pure words are due to Allah. Peace be upon you, O Prophet, and the mercy of Allah (SWT) and his blessings. Peace be upon us and upon the righteous slaves of Allah (SWT). I bear witness that none has the right to be worshipped except Allah and I bear witness that Muhammad is His slave and Messenger)." (Sahih) Sunan an-Nasa'i 
Thus when one is in tashud one should recite:
" التَّحِيَّاتُ لِلَّهِ وَالصَّلَوَاتُ وَالطَّيِّبَاتُ السَّلاَمُ عَلَيْكَ أَيُّهَا النَّبِيُّ وَرَحْمَةُ اللَّهِ وَبَرَكَاتُهُ السَّلاَمُ عَلَيْنَا وَعَلَى عِبَادِ اللَّهِ الصَّالِحِينَ أَشْهَدُ أَنْ لاَ إِلَهَ إِلاَّ اللَّهُ وَأَشْهَدُ أَنَّ مُحَمَّدًا عَبْدُهُ وَرَسُولُهُ "
According to the Shaf'iyyah, one points with the finger only once, when saying "except Allah" in the statement bearing witness. The Hanifiyyah raise the finger in the denial part of the statement (there is no god) and put it back down during the confirmation part (except Allah). The Malikiyyah move the finger to the left and right until they finish the prayer. The Hanbaliyyah point with the finger every time they mention Allah, as a reflection of the oneness of Allah, and they do not move it.
"There is no strong evidence in the authentic and established Sunnah either to raise the index finger continuously during the whole recitation of the tashahud, nor to keep moving the finger from the beginning of the recitation to its end".
It is a Sunnah to raise one’s index finger erect when reciting only the first part of the ‘Shahaadah’ (Ash hado an-laa ilaaha illalaah) during the recitation of tashahud in prayer.
In the last tashahud, it is preferred for the person to say prayers upon the Prophet in the following manners:
Abdullah b. Zaid-he who was shown the call (for prayer in a dream) narrated it on the authority of Mas'ad al-Ansiri who said:
We were sitting in the company of Sa'id b. 'Ubida when the Messenger of Allah (may peace be upon him) came to us. Bashir b. S'ad said: Allah has commanded us to bless you. Messenger of Allah! But how should we bless you? He (the narrator) said: The Messenger of Allah (may peace be upon him) kept quiet (and we were so much perturbed over his silence) that we wished we had not asked him. The Messenger of Allah (may peace be upon him) then said: (For blessing me) say:" 0 Allah, bless Muhammad and the members of his household as Thou didst bless the mernbers of Ibrahim's household. Grant favours to Muhammad and the members of his household as Thou didst grant favours to the members of the household of Ibrahim in the world. Thou art indeed Praiseworthy and Glorious" ; and salutation as you know. SAHIH MUSLIM [Book 004, Number 0803]
اللَّهُمَّ صَلِّ عَلَى مُحَمَّدٍ وَعَلَى آلِ مُحَمَّدٍ كَمَا صَلَّيْتَ عَلَى آلِ إِبْرَاهِيمَ وَبَارِكْ عَلَى مُحَمَّدٍ وَعَلَى آلِ مُحَمَّدٍ كَمَا بَارَكْتَ عَلَى آلِ إِبْرَاهِيمَ فِي الْعَالَمِينَ إِنَّكَ حَمِيدٌ مَجِيدٌ
Says Ibn al-Qayyim, "It is not reported from the Prophet that he would say prayers upon himself or his family during the first tashahud. Nor would he seek refuge from the torment of the grave or the Hell-fire, or from the test of life, death and of the false Messiah. Those who say such supplications are deducing their arguments from the general application (of the supplications and the word tashahud), but the correct position is that their proper place is in the last tashahud.
Thus if one is intended to offer two rakah, then one should recite darood and supplications after tahiyya, where as if one is intended to offer four rakah then one should recite the darood and other supplications only in the last tashud.
It is preferred for one to supplicate after the final tashahud and before making the final salutations ((salam) the end of prayer). The person may ask for whatever one wishes of the good of this life and the hereafter.
One may keeping the right hand in these three ways while in tashud (these are from Sunnah & a believer can follow any one, as they all belong to the Sunnah of our beloved prophet Mohammad (pbuh)).
1. closing hand (I.e. making fist)& forming a ring.
2. making a circle with middle finger and thumb(I.e. making ring by thumb & the finger next to index finger) and point with his index finger
3. Not making of a circle or a fist i.e. keeping hand in normal position.
And Allah alone knows the best.
I ask Allah to make this a sincere effort, seeking his pleasure, and I ask him to grant us refuge in him from the evils within ourselves, and that in our deeds. I ask him to grant us success in achieving whatever pleases him; And May Allah Shower His blessings and mercy upon our beloved Prophet
Muhammad (pbuh), his family and his Companions and on all those who follow him until the final hour.
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