Section 392 of the Income-tax Act, 2025 requires any person paying salary to deduct income-tax at the average rate of income-tax on the estimated income for the year, at the time of payment, and allows the employer to bear tax on non-monetary perquisites.
What section 392 does
Section 392 is salary TDS — the successor to sections 192 and 192A of the Income-tax Act, 1961. It is deliberately kept outside section 393, the consolidated TDS section, because salary deduction works on a different principle.
That principle is in sub-section (1): deduction is made at the time of payment, at the average rate of income-tax computed on the rates in force for the tax year, applied to the estimated income of the assessee under the salary head for that year. The employer therefore estimates the annual liability and spreads it across the year, rather than applying a flat rate to each payment.
Three features make the section practically important: the employer's option to bear tax on non-monetary perquisites, the deferral of deduction on start-up ESOPs, and the employee's right to have other income, house property loss and section 157 relief taken into account.
The Income-tax Act, 2025 takes effect from 1 April 2026 and applies from tax year 2026-27. The Income-tax Act, 1961 continues to govern every year up to 31 March 2026, including assessments, appeals and penalties for those years, because of the repeal and savings provision in section 536. Figures quoted here are the amounts written into the Act as enacted (with the Gazette corrigenda of 3 September 2025); the annual Finance Act can change rates and thresholds.
Old Act and new Act, side by side
The table below shows what the Income-tax Act, 1961 did and where the same ground is covered in the Income-tax Act, 2025.
| Income-tax Act, 1961 | What it did | Income-tax Act, 2025 |
|---|---|---|
| 192(1) | Deduction at the average rate on estimated salary | 392(1) |
| 192(1A) and (1B) | Employer's option to pay tax on non-monetary perquisites | 392(2) |
| 192(1C) | Deferral for eligible start-up ESOPs | 392(3) |
| 192(2), (2A), (2B) | Particulars furnished by the employee | 392(4) |
| 192A | Accumulated provident fund balance | 392 |
| 17(2)(vi) | ESOP perquisite | 17(1)(d) |
| 156(2) | Deferred payment for start-up ESOPs | 289(3) |
Section 392 sub-section by sub-section
Read this alongside the bare text — each heading below is a sub-section of the section as enacted.
Sub-section (1) — the average rate mechanism
Any person responsible for paying income chargeable under the head Salaries shall deduct income-tax on the amount payable, at the time of such 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, on the estimated income of the assessee under this head for that year. There is no threshold — the obligation arises whenever estimated salary is taxable.
Sub-section (2) — the employer may bear the perquisite tax
The person 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 it without deducting from the employee, at the time the tax was deductible. That tax is determined at the average rate on salary including the perquisite, and is treated as tax deductible at source from salary, subject to the rest of Chapter XIX.
Sub-section (3) — start-up ESOPs
An eligible start-up referred to in section 140 paying income of the nature in section 17(1)(d) — specified security or sweat equity shares — shall deduct or pay tax on that income at the rates in force for the tax year in which the shares are allotted or transferred, but within the time specified for the payee in section 289(3). The employer's deduction obligation therefore follows the same deferral the employee gets.
Sub-section (4) — what the employee can ask to be taken into account
The employer shall take into account particulars furnished by the assessee, at the employee's option, in the prescribed form, which may increase or decrease the tax deducted: (i) salary from any other employer during the tax year; (ii) relief under section 157 for arrears, where the employee is a Government servant or employed by a company, co-operative society, local authority, university, institution, association or body; (iii) any loss under the head Income from house property for the same tax year; and (iv) income chargeable under any other head.
Why the house property loss limb matters
Clause (4)(a)(iii) is the statutory basis on which an employee's home loan interest loss is given effect in monthly payroll rather than waiting for a refund at the end of the year. Note it is confined to a loss under that head — other head income may only increase the deduction, not reduce it.
How it fits with the rest of Chapter XIX
Certificates for lower or nil deduction are under section 395; compliance, TAN and statements under section 397; consequences of failure under section 398; and the penalty for failure to deduct under section 448, with prosecution for non-deposit under section 476.
Worked example
An employer computes salary TDS for an employee for tax year 2026-27.
| Step | Amount | Basis |
|---|---|---|
| Estimated salary for the year after section 19 deductions | ₹18,00,000 | Sub-section (1) |
| Add: non-monetary perquisite the employer chooses to bear tax on | ₹2,00,000 | Sub-section (2)(a) |
| Less: house property loss declared by the employee | (₹2,00,000) | Clause (4)(a)(iii) |
| Estimated income under the head | ₹18,00,000 | |
| Estimated tax for the year, say | ₹2,10,000 | Rates in force, section 202 slabs |
| Monthly deduction | ₹2,10,000 ÷ 12 = ₹17,500 | Average rate under sub-section (1) |
Two points follow. Because the employer opted under sub-section (2) to bear the tax on the ₹2,00,000 perquisite, that tax is not recovered from the employee but is still treated as tax deducted at source. And the ₹2,00,000 house property loss reduces monthly deductions immediately, rather than being claimed as a refund a year later.
If the employer were an eligible start-up allotting ESOPs, sub-section (3) would defer the deduction on that perquisite to the timeline in section 289(3).
Compliance checklist and due dates
- Estimate the employee's annual salary income and deduct at the average rate, revising the estimate through the year.
- Collect declarations from employees for other employer salary, house property loss, other head income and section 157 relief in the prescribed form.
- Where the employer bears tax on a non-monetary perquisite, treat it as TDS and report it as such under sub-section (2)(b).
- For an eligible start-up under section 140, defer ESOP deduction to the section 289(3) timeline.
- Apply the correct regime — the section 202 slabs and the ₹75,000 standard deduction under section 19 apply where tax is computed under section 202(1).
- Issue the certificate required by section 395(4) within the prescribed period.
- Deposit deducted tax on time; late deposit beyond the statement due date is an offence under section 476.
Common mistakes
- Applying a flat rate rather than the average rate on estimated annual income.
- Ignoring an employee's declaration of house property loss, which clause (4)(a)(iii) requires to be taken into account.
- Failing to gross up correctly where the employer bears tax on a non-monetary perquisite.
- Treating salary TDS as part of section 393; it is a separate section with a different mechanism.
- Overlooking the start-up ESOP deferral in sub-section (3) and deducting at allotment.
This is an explanatory guide, not tax advice, and it does not reproduce the section in full. Read the bare text of the section before you rely on it, and check for later amendments, the Income-tax Rules made under the new Act, and CBDT circulars and notifications.