TDS on Salary & Accumulated Balance — Section 392
TDS on Salary & Accumulated Balance
Complete provisions for deduction of tax at source on salary income, perquisites, provident fund balances, and start-up ESOPs — under Section 392 of the Income Tax Act 2025.
📖 Chapter: XIX — Collection and Recovery of Tax (B. Deduction and collection at source)
🔄 Replaces: Sections 192 and 192A of the Income Tax Act 1961
📅 Effective: 1st April 2026 (Tax Year 2026-27 onwards)
🔗 Related Sections: Section 16 (definition of salary) · Section 17 (perquisites) · Section 157 (relief for arrears) · Section 140 (eligible start-ups)
Section 392(1) — The Core Obligation
This sub-section establishes three essential elements of salary TDS:
| Element | Provision |
|---|---|
| Who deducts? | The person responsible for paying salary — i.e., the employer. In case of a company, the company itself including the principal officer. |
| At what rate? | Average rate of income-tax — computed by estimating total salary income for the full tax year and dividing the resulting tax by 12 (or remaining months). Not a flat rate. |
| When? | At the time of payment — each month, every time salary is disbursed. |
What Counts as "Salary"? — Section 16
Section 16 of the Income Tax Act 2025 provides an inclusive definition of "salary". TDS under Section 392 applies to all of the following:
- Wages
- Annuity or pension
- Gratuity
- Fees or commission
- Perquisites [Section 17(1)]
- Profits in lieu of salary
- Advance of salary
- Leave encashment
- Recognised PF annual accretion (taxable portion)
- Employer's NPS contribution [Section 124]
- Agniveer Corpus Fund contribution [Section 125]
- HRA (subject to limits)
- Standard deduction ₹75,000
- Leave travel allowance
- Gratuity up to prescribed limits
- VRS compensation up to ₹5,00,000
- Provident fund (recognised) — exempt portions
- Death-cum-retirement gratuity (Govt employees)
Perquisites — Section 17(1)
Under Section 17(1), "perquisite" includes the following — all of which are subject to TDS under Section 392:
| Sl. | Nature of Perquisite | Valuation |
|---|---|---|
| 17(1)(a) | Rent-free accommodation provided by employer | As prescribed by rules |
| 17(1)(b) | Concessional accommodation — value in excess of rent paid | As prescribed by rules |
| 17(1)(c) | Free/concessional benefit to director or substantial interest employee (and others above salary threshold) | As prescribed by rules |
| 17(1)(d) | Specified securities or sweat equity shares — allotted free or at concessional rate (including by former employer) | Fair market value on date of exercise minus amount paid |
| 17(1)(e) | Any other prescribed benefit or amenity | As prescribed |
| 17(1)(f) | Any obligation of employee paid by employer | Actual amount paid |
| 17(1)(g) | Life insurance premium or annuity contract paid by employer | Actual premium paid |
Section 392(2) — Non-Monetary Perquisites: Employer's Option
Where the employer provides a non-monetary perquisite (e.g., rent-free housing, car, club membership), the employer has an option under Section 392(2):
Employer reduces salary payment by the TDS amount. Employee receives net salary. This is the standard approach.
Employer pays tax on the non-monetary perquisite out of its own pocket, without reducing the employee's cash salary. The tax paid by employer is itself treated as a perquisite and subject to grossing-up.
Section 392(3) — ESOPs in Eligible Start-Ups
For employees of eligible start-ups (as defined in Section 140), where ESOPs or sweat equity shares are provided as a perquisite, the TDS deduction timing is deferred. Tax is not deducted at the time of allotment of shares.
Instead, tax is deducted or paid at the rates in force for the tax year in which the shares are allotted, but the payment is made at the time specified for the employee under Section 289(3) — i.e., when the earliest of the following events occurs:
- Expiry of 48 months from the end of the relevant tax year
- Date of sale of such securities by the employee
- Date on which the employee ceases to be employed by the start-up
Purpose: This avoids a cash-flow problem for start-up employees who receive illiquid ESOPs but may not have cash to pay tax immediately upon allotment.
Section 392(4) — Employee Declarations to Employer
An employee may, at his option, furnish certain details to the employer in the prescribed form. The employer must take these into account when computing TDS, as they will either increase or decrease the tax to be deducted:
| Item the Employee Can Disclose | Effect on TDS |
|---|---|
| Salary from any other employer during the tax year [Section 392(4)(a)(i)] | ⬆ Increases TDS — employer aggregates total salary income |
| Relief under Section 157 (arrear/advance salary, salary for more than 12 months) [Section 392(4)(a)(ii)] | ⬇ Decreases TDS — relief reduces effective tax rate |
| Loss under head "House Property" for the same year [Section 392(4)(a)(iii)] | ⬇ Decreases TDS — set off against salary income (capped at ₹2 lakh) |
| Income under any other head (not a loss) [Section 392(4)(a)(iv)] | ⬆ Increases TDS — e.g., rental income, business income |
| Tax already deducted or collected at source from other income [Section 392(4)(a)(v)] | ⬇ Decreases TDS — avoids double deduction |
- Loss under the head "Income from House Property"; and
- TDS/TCS already deducted under other provisions of Chapter XIX.
Section 392(5) — Employer's Obligations
The employer has three distinct obligations under Section 392(5):
Must furnish a statement in prescribed form with correct and complete particulars of all perquisites or profits in lieu of salary paid, along with their monetary value, to the employee. This forms the basis for Form 16 (Part B).
Must obtain proof, evidence, or particulars of all prescribed claims made by the employee (including set-off of losses) in the prescribed form and manner. This covers investment proofs, rent receipts, housing loan certificates, etc.
May increase or reduce TDS in any month during the year to adjust for any excess or deficiency in earlier deductions. This allows TDS to be corrected during the year itself — particularly useful in the last quarter when actual figures become clearer.
Section 392(6) — Recognised PF & Superannuation Fund
Section 392(6) deals with TDS on accumulated balances paid out from employee funds:
| Fund Type | TDS Provision | Reference |
|---|---|---|
| Recognised Provident Fund — accumulated balance | TDS as per paragraph 10 of Part A of Schedule XI, applicable only where paragraph 9 of Part A of Schedule XI applies (i.e., balance is taxable) | Section 392(6)(a) |
| Approved Superannuation Fund — employer contribution paid to employee | TDS by trustees as per paragraph 7 of Part B of Schedule XI | Section 392(6)(b) |
Section 392(7) — TDS on EPF Accumulated Balance
This is a standalone provision that applies irrespective of anything else in the Act. The EPFO trustees or any authorised person paying accumulated EPF balance must deduct TDS as follows:
| Condition | TDS Rate |
|---|---|
| Aggregate EPF payout is ₹50,000 or more, AND the balance is includible in the employee's total income (i.e., paragraph 8 of Part A of Schedule XI does NOT apply — meaning employee has less than 5 years of continuous service) | 10% |
| Aggregate EPF payout is less than ₹50,000, OR the balance is exempt (5+ years continuous service) | Nil — no TDS |
Section 392(8) — Salary in Foreign Currency
Where salary is payable in a foreign currency (e.g., for expatriates or Indian employees of foreign companies), Section 392(8) provides that:
Section 157 — Relief for Arrear/Advance Salary
Where salary is received in arrears or advance, or for more than 12 months in a single year, the total income may be assessed at a higher slab rate than would otherwise apply. Section 157 provides relief in such cases:
| Type of Receipt | Relief Available |
|---|---|
| Arrear salary or advance salary [Section 157(1)(a)] | Assessing Officer shall grant relief as prescribed on application by assessee. Effectively, tax is computed as if the income had been received in the years to which it relates, and the incremental tax (if any) is the tax payable. |
| Salary for more than 12 months in one year [Section 157(1)(b)] | |
| Profits in lieu of salary [Section 157(1)(c)] | |
| Arrears of family pension [Section 157(1)(d)] |
How to Compute Monthly Salary TDS — Step by Step
Include all components: basic, HRA, allowances, perquisites, bonus, other salary income from previous employer (if disclosed).
Deduct HRA exemption, LTA, gratuity exemption, and other applicable exemptions to arrive at taxable salary.
Add income from other heads (if disclosed); deduct house property loss (if disclosed) and other TDS credits.
Apply the income-tax slab rates in force for the tax year on the estimated net taxable income. Include surcharge and health & education cess (4%) to arrive at gross tax.
Average rate = (Annual tax ÷ Estimated annual income) × 100. This is the rate at which TDS is to be deducted each month.
Apply the average rate to each month's actual salary payment. Adjust in subsequent months for any over/short deduction [Section 392(5)(c)].
Illustrative Example
Assume: Employee's annual gross salary = ₹15,00,000 | House property loss disclosed = ₹1,50,000 | Rebate under Section 156 not applicable
| Computation | Amount (₹) |
|---|---|
| Gross Salary | 15,00,000 |
| Less: Standard Deduction | (75,000) |
| Net Salary Income | 14,25,000 |
| Less: House property loss [Sec 392(4)(a)(iii)] | (1,50,000) |
| Estimated Total Income | 12,75,000 |
| Tax at slab rates (New Regime FY 2026-27) | ~1,15,000 |
| Add: Health & Education Cess @ 4% | ~4,600 |
| Total Annual Tax | ~1,19,600 |
| Average Rate = 1,19,600 ÷ 12,75,000 | ~9.38% |
| Monthly TDS = ₹1,25,000 × 9.38% | ~₹11,725 |
* This is an illustrative computation. Actual tax depends on tax regime chosen, applicable surcharge, rebates, and other disclosures by the employee.