Section 392: TDS on salary and accumulated provident fund balance

Introduction

Section 392 is the employer-side salary deduction provision. The payer estimates salary income for the tax year and deducts at the average rate at payment, while the section separately covers non-monetary perquisites, eligible start-up equity benefits and specified fund payouts.

An employee may supply prescribed particulars affecting the deduction. The employer also has duties concerning perquisite statements and evidence for prescribed claims; the subsection on reducing a deduction has its own limits.

Key takeaways

Deduction from salary at the average rate

Any person responsible for paying income chargeable under the head "Salaries" must deduct income-tax on the amount payable. The deduction is made at the time of payment, at the average rate of income-tax computed on the basis of the rates in force for the tax year in which the payment is made, applied to the assessee's estimated income under the "Salaries" head for that year.

Employer's option to bear tax on non-monetary perquisites

Without prejudice to the deduction rule above, the person responsible for paying income in the nature of a non-monetary perquisite chargeable under Section 17(1) may, at his option, pay tax on the whole or part of such income himself, without deducting it, at the time the tax would otherwise have been deductible.

That tax is determined at the average rate described above, on the income chargeable under "Salaries" including the perquisite income, and is treated as if it were tax deducted at source from salary, subject to this Chapter.

Eligible start-up ESOPs and sweat equity

An eligible start-up under Section 140, paying income of the nature specified in Section 17(1)(d) in any tax year, must deduct or pay tax on such income based on the rates in force for the tax year in which the specified security or sweat equity share is allotted or transferred, within the time specified for the payee in Section 289(3).

Particulars the employee can furnish

For the purpose of the salary TDS deduction, the employer takes into account particulars furnished by the assessee (at the assessee's option, in prescribed form and manner), which can increase or decrease the tax deducted:

• Income under "Salaries" due or received from any other employer during the tax year
• Any relief allowable under Section 157 (for Government servants or employees of a company, co-operative society, local authority, university, institution, association or body entitled to such relief)
• Any loss under "Income from house property" for the same tax year
• Any income chargeable under any other head (not being a loss) other than the house-property loss above, for the same tax year
• Any tax already deducted or collected at source under this Chapter for the same tax year

Limit on reducing the deduction

The tax deductible from salary income cannot be reduced in any case, except on account of: (i) loss under "Income from house property"; and (ii) tax already deducted and collected under other provisions of this Chapter.

Employer's statement and evidence obligations

The person responsible for paying salary must: furnish a statement, in prescribed form and manner, with correct and complete particulars of perquisites or profits in lieu of salary paid, along with their value; obtain from the assessee evidence or proof or particulars of prescribed claims (including claims for set-off of loss) in prescribed form and manner, for estimating income or computing the tax deductible; and may increase or reduce the amount deducted to adjust for any excess or deficiency arising from a previous deduction or failure to deduct during the tax year.

TDS on recognised provident fund and superannuation fund payouts

The trustees of a recognised provident fund, or any person authorised by the fund's regulations to pay accumulated balances to employees, must - where paragraph 9 of Part A of Schedule XI applies - deduct tax as provided in paragraph 10 of Part A of Schedule XI at the time the accumulated balance is paid.

Where any contribution made by an employer (including interest on such contributions) in an approved superannuation fund is paid to the employee, the trustees of the fund must deduct tax to the extent provided in paragraph 7 of Part B of Schedule XI.

10% TDS on Employees' Provident Fund withdrawals of ₹50,000 or more

Irrespective of anything else in the Act, the trustees of the Employees' Provident Funds Scheme, 1952 (made under Section 5 of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952), or any person authorised under that scheme to pay accumulated balances, must - at the time of paying an accumulated balance to an employee participating in a recognised provident fund - "deduct income-tax thereon at the rate of 10%, where the aggregate amount of such payment is ₹50,000 or more", and such accumulated balance is includible in the employee's total income because paragraph 8 of Part A of Schedule XI does not apply (i.e., where the withdrawal does not qualify for exemption).

Salary paid in foreign currency

For the purposes of deducting tax on salary payable in foreign currency, the value in rupees of that salary is calculated at such rate of exchange as may be prescribed.

Step-by-step flow for applying Section 392

1. 1

   Is the payment income chargeable under "Salaries"?

   • No: Check the other TDS provisions (for example, Section 393).
   • Yes: Go to the next step.
2. 2

   Estimate the employee's salary income for the year

   Take into account particulars the employee furnishes in the prescribed form: salary from other employers, relief under Section 157, loss from house property, and income under other heads.

3. 3

   Compute tax at the average rate on the estimated income

   Deduct at the time of each payment at the average rate based on rates in force for that tax year.

4. 4

   Any non-monetary perquisites?

   • Employer chooses to bear the tax: Pay the tax on them without deducting it from salary (Section 392(2)).
   • No: Include them in the estimate.
5. 5

   Deposit the tax, file statements and issue certificates

   Follow the time limits and forms under Sections 395 and 397.

Practical checklist

Glossary

Average rate of income-tax

The rate derived from the tax calculated on estimated salary income for the tax year under the rates then in force.

Non-monetary perquisite

A salary benefit provided otherwise than as money; subsection (2) permits an employer to bear its tax in the stated manner.

Frequently asked questions