Average Tax Rate For TDS Under The Head Salary: Income Tax Act 2025

Summary: Section 392(1) of the Income Tax Act, 2025 mandates that an employer deduct Tax Deducted at Source (TDS) on salary income at the average rate of income-tax. This rate is computed based on the total estimated income (Salary plus any declared other income minus admissible deductions/losses) for the full financial year. The process requires calculating the employee’s total estimated tax liability for the year and then dividing that net liability by the total estimated salary income. For example, under the Old Tax Regime, if the net tax payable is Rs.57,000 on an estimated salary ofRs.9,50,000, the average TDS rate is 6.00%. Crucially, Section 392(5) allows the employer to revise and adjust the average rate throughout the year to account for changes, such as bonus payments or increments. If a bonus increases the total tax liability, the average TDS rate for the remaining months must be recalculated and adjusted to ensure the correct total tax is deducted by the year’s end. This calculation differs significantly if the employee opts for the New Tax Regime, where certain deductions are disallowed, potentially leading to a TDS rate initially due to a full tax rebate, which then sharply increases upon receipt of a large bonus that pushes the total income above the rebate limit.

TDS ON SALARY: SECTION 392 – HOW TO COMPUTE THE AVERAGE RATE OF TAX?

Unlike the other provision of the Income Tax Act applicable for deduction of tax at Sources (TDS), where the rate of tax to be deducted is specified, Section 392 of the Act leaves it to the Employer to determine the TDS rate. Section 392(1) of the Income Tax Act, 2025 says –

392(1) Any person responsible for paying any income chargeable under the  head “Salaries” shall deduct income-tax on the amount payable and this deduction shall be made 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 such year.

 We will see how to compute the average rate on the estimated income in this Article.

A) UNDER OLD TAX REGIME

Let us consider the following assumed figures for the purpose of calculating average tax rate for TDS under Salary

[Table – 1]

* based on declaration given by the Employee in accordance with Section 392.

Average Rate of TDS on Salary is calculated:

Net Tax Payable ÷ Total Salary Income = 57,000/9,50,000

The employer shall deduct TDS of Rs.4,750/- every month under section 392(1) at 6% on the Salary as TDS as detailed below:

[Table – 2]

REVISION IN THE AVERAGE RATE

When there is an Increment or additional payment is made to the employees, the additional payments results in a revised average tax rate. Section 392(5) mandates to adjust the tax deduction, whenever there is an increase or decrease in the amount of tax to be deducted –

(5)The person responsible for paying any income chargeable under the head “Salaries” to the assessee—

(a) …

(b) …

(c) may, increase or reduce the amount to be deducted under this section for adjusting any excess or deficiency arising out of any previous deduction or failure to deduct during the tax year.

Let us consider, an additional payment of Rs.2,00,000 as Bonus in the above example, which will be paid as Deepavali bonus during October 2026:

[Table 3]

* based on declaration given by the Employee in accordance with Section 392.

[Table – 4]

6% on 1^st 6 months calculated as per Table – 1 above.

The employer shall deduct TDS every month under section 392(1) at 6% for 1^st 6 months of the financial year (01-04-2026 to 30-09-2026) and @ 10.39% on the Salary as TDS from        Oct-2026 onwards, once the payment of bonus is made during October 2026 as detailed below:

[Table – 6]

Tax Rates considered (Old Tax Regime):

[Table – 7]

Education Cess: 4% on Income tax.

 Note: Table – 7 is based on existing tax rate as applicable for FY 2025-26 [ AY 2026-27]. AS the New Income Tax 2025 is applicable from FY 2026-27, the actual tax rate applicable for FY 2026-27 (AY 2027-28) will be notified through the Finance Act, 2027 by way of Budget Presentation in February, 2027.

 B) UNDER NEW TAX REGIME

Let us consider the same figures for the purpose of TDS for an Employee, who will opt for payment of Tax under New Tax Regime [Section 202 of the Income Tax Act, 2025]:

[Table – 8]

* Loss under House property and deduction under section 123 are not allowable under New Tax Regime of Section 202 of the IT Act, 2025.

Let us consider, an additional payment of Rs.2,00,000 as Bonus in the above example (New Tax Regime), which will be paid as Deepavali Bonus during October 2026:

[Table – 9]

* based on declaration given by the Employee in accordance with Section 392.

[Table – 10]

The employer shall not deduct any TDS under section 392(1) for 1^st 6 months of the financial year (01-04-2026 to 30-09-2026) and @ 10.37% on the Salary as TDS from Oct-2026 onwards, once the payment of bonus is made during October 2026 as detailed below:

[Table – 11]

Tax Rates considered (New Tax Regime):

[Table – 12]

Education Cess: 4% on Income tax.

The tax slabs specified under Section 202 or rebate under section 156 of Income Tax Act 2025, if modified through Finance Act, 2027 will be applicable.