Excel for
Chartered Accountants

As per section 192(1) of the Income-tax Act, 1961, related to deduction of tax at source under the head “salaries”, tax is to be determined at the average of income tax computed on the basis of rate in force for the financial year, on the income chargeable under the head "salaries", including the value of perquisites for which tax has been paid by the employer himself. The average rate, as it name denotes is total tax equally spread over the period of the payments.

The section 192(1) is extracted hereunder:

“Any person responsible for paying any income chargeable under the head salaries shall at the time of payment deduct income-tax on the amount payable at the average rate of income tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year.”

Thus, every Drawing and Disbursing Officer in Government Offices or in other cases, the person who is responsible for paying any income chargeable under the head "Salaries" is required to estimate the income of the payee on the basis of total payments to be made, other incomes reported and qualifying deductions or rebates. Further the payer is mandatorily required to deduct income-tax on the estimated income of the payee under the head "Salaries" for the financial year concerned. The income-tax is required to be calculated on the basis of the rates applicable for the previous year and shall be deducted at the time of each payment.

Example of Computation of tax at Average Rate with Uniform Salary (AY: 2015-16)
The income chargeable under the head salaries of an employee below sixty years of age for the year inclusive of all perquisites is Rs.40,000/- p.m. The monthly income tax to be deducted at average rate is computed as under:

Income Chargeable under the head Salaries inclusive of all perquisites [40000x12]	480000
Tax on Total Salary (including Cess)	23000
Rebate U/s 87A	2000
Net Tax Payable	21000
Education and SHE Cess @ 3%	630
Total Income Tax + Cess	21630
Average Rate of Tax [(21630 / 480000) X 100]	4.51%
Amount required to be deducted each month [40000 x 4.51%]	1804

Alternatively, this can be calculated by dividing the tax payable by the number of months. For Example 21630 / 12 = 1804 in the above example.

Example of Computation of tax at Average Rate with Varying Salary (AY: 2015-16)
In case of change/ variation in the salary amount, the average rate has to be calculated for the period remaining from the date of variation. The income chargeable under the head salaries of an employee below sixty years of age for the year inclusive of all perquisites is Rs.40,000/- p.m. from 01/04/2014 to 31/12/2014 and Rs. 50000/- p.m. The monthly income tax to be deducted at average rate is computed as under:

The average tax that would have been deducted till 31/12/2014 taking Rs. 40000/- as estimated salary p.m. for the whole year works out to be Rs. 16236/- as under:

Income Chargeable under the head Salaries [40000x12]	480000
Tax on Total Salary (including Cess)	23000
Rebate U/s 87A	2000
Net Tax Payable	21000
Education and SHE Cess @ 3%	630
Total Income Tax + Cess	21630
Average Rate of Tax [(21630 / 480000) X 100]	4.51%
Amount required to be deducted each month [40000 x 4.51%]	1804
Total Tax deducted from April to Dec [1804 x 9]	16236

Now, after the revision in the salary amount, the re-computation of estimated tax at average rate is as under:

Income Chargeable under the head Salaries [40000x9]+[50000x3]	510000
Tax on Total Salary (including Cess)	27000
Rebate U/s 87A	NIL
Net Tax Payable	27000
Education and SHE Cess @ 3%	810
Total Income Tax + Cess	27810
Average Rate of Tax [(27810 / 510000) X 100]	5.46%
Monthly amount of TDS for the whole Year [(510000/12) x 5.46%]	2320
Tax to be deducted from Jan-2015 to March 2015 [(2320-1804) x 9+(2316x3)]]/3	3860

Alternatively this can be calculates as [27810-16236]/3=3860

Computation of Income Tax Deduction at Source (TDS) from Salaries at Average Rate of Tax