Library / Income-tax Act, 2025: The Professional's Master Guide

36. TDS on Salary (Section 392)

Section 392 requires every employer to deduct tax from salary at the time of payment, at the average rate of tax on the estimated income of the employee for the year. Unlike other TDS, the employer must compute the employee's tax liability.

Judicial view: Salary paid abroad

CIT v. Eli Lilly and Co. (India) (P) Ltd. (Supreme Court, 2009): salary paid abroad by a foreign parent to expatriates for services rendered in India is taxable in India, and the Indian employer must deduct tax on the total salary, including the portion paid abroad.

36.1 What the employer takes into account

Salary, allowances and perquisites (valued under the Rules), including perquisites for which the employer may choose to pay the tax.
The regime chosen by the employee (new regime by default unless the employee opts for the old regime with the employer for TDS purposes).
In the old regime, deductions and exemptions declared and supported by evidence (Form 124, old 12BB).
Salary from previous employers during the year, if the employee furnishes details.
Other income and TDS on it, and loss from house property (old regime only), if the employee furnishes details; a loss under any other head is not considered.
Relief for arrears (section 157) where applicable.

Illustration 140: Monthly TDS

Rahul (new regime) has gross salary of Rs. 18,00,000, car perquisite of Rs. 1,20,000 and employer NPS contribution of Rs. 1,00,000 (within 14% of salary) for Tax Year 2026-27.

Salary including NPS contribution (18,00,000 plus 1,00,000)	19,00,000
Add: car perquisite	1,20,000
Less: standard deduction	(75,000)
Less: employer NPS contribution (section 124)	(1,00,000)
Estimated total income	18,45,000
Tax: 20,000 + 40,000 + 60,000 + 20% of 2,45,000 (49,000)	1,69,000
Add: cess 4%	6,760
Annual tax	1,75,760
Monthly TDS (1,75,760 / 12)	14,647

If Rahul joins another company in October, the new employer must take into account the salary and TDS of the first employer (if furnished) to avoid short deduction. Otherwise Rahul will have to pay the shortfall as self assessment tax with interest.

36.2 Employer paying tax on non-monetary perquisites

An employer can choose to bear the tax on non-monetary perquisites. The tax paid by the employer is not a further perquisite for the employee, and it is not a deductible expense for the employer. The employee reports the perquisite and claims the tax paid as TDS credit.

36.3 Form 130 and reporting

The employer issues Form 130 (old Form 16) by 15 June after the end of the tax year, with Part A from TRACES (TDS deposited) and Part B (salary computation). Details of perquisites are in Form 123 (old 12BA). Quarterly salary TDS is reported in Form 138 (old 24Q), with the salary break up in the last quarter.

Chapter summary

• The employer computes the employee's tax and deducts at the average rate.

• The regime chosen by the employee and declared deductions affect TDS.

• Form 130 by 15 June; quarterly Form 138.