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July 9, 2020

Know all about TDS on salary under the Income Tax

by Mahesh Mara in Income Tax

Know all about TDS on salary under the Income Tax

Tax deduction at source is a means of collecting tax on income, dividends or asset sales, by requiring the payer to deduct tax due before paying the balance to the payee. In India, under the Indian Income Tax Act of 1961, income tax must be deducted at source as per the provisions of the Income Tax Act, 1961. In this article we will discuss Tax deducted at source on Salary.

Who are liable for deducting TDS on salary?

As per section 192, every person responsible to pay any income chargeable to tax under the head “Income from Salary” is liable to deduct TDS on the amount payable.

What are the manner of deduction of TDS?

Under section 192 of the Income tax act, TDS has to be calculated at the average rate of income tax computed on the basis of the rates in force for the relevant financial year in which the payment is to be made, on the estimated total income of the assesse. Therefore, the liability to deduct TDS in case of salaries arises only at the time of payment. Average rate of income tax means the rate arrived at by dividing the amount of income tax calculated on the total income, by such total income. We can say that the TDS must be calculated considering prevailing the slab rates. As per the Finance act 2020, the employee has option either to choose old rate or new rate as per section 115BAC which is discussed further in the article.

In case the assesse is employed under more than one employer or the assesse takes up the job with another employer during the financial year after his resignation or retirement from the services of the former employer, he may furnish the details of the income under the head “Salaries” due or received by the assesse from the previous or other employer, the TDS related to such salary and any other details if any to the current employer. Thus the subsequent employer must take such information into consideration and then deduct the tax remaining payable in respect of the employee’s remuneration from both the employers put together for the relevant financial year.

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For the purpose of deduction of TDS out of salaries payable in foreign currency, the value of salaries in terms of rupees should be calculated at the prescribed rate of exchange as specified in rule 26 of the income tax act 1962.

Assesse having salary income in addition to other income chargeable to tax for that financial year shall send the following to the employer:

a. Details of such income

b. Details of tax deducted under any other provision

c. Details of loss if any under the head “Income from house property”

The employer shall take the above particulars into account at the time of calculating TDS.

What is the treatment of tax on non-monetary perquisites?

Section 192, covers the treatment of non-monetary perquisites. As per the provision the employer may pay the tax at his option in lieu of TDS from salary payable to the employee. Such tax will have to be worked at the average rate applicable to aggregate salary income of the employee and payment of tax will have to be made every month along with TDS at source on monetary payment of salary, allowances etc.

What are the details required in case of profits in lieu of salary by employer?

Section 192(2C) of the Income tax act provides that the employer shall furnish to the employee, a statement in Form No. 12BA giving correct and complete particulars of perquisites or profits in lieu of salary provided to him and the value thereof. The statement shall be in prescribed form and manner. This requirement is applicable only where the salary paid or payable to any employee exceeds Rs. 1, 50, 000. For the employees, the particulars of perquisite or profits in lieu of salary shall be given in Form 16 itself.

Is there any requirement to obtain proof of deduction or income from employee?

Yes, there is requirement to obtain proof of deduction or income from employee. The person responsible for making the payment of income under the head Income from Salary” is liable to collect the evidence or proof or any other details relating to the claims or deduction being considered including the set off of loss under this provisions. Such evidence shall be made in a prescribed form and manner for the purpose of estimating income of the assesse or computing TDS under this section i.e. section 192.

Rule 26C has been inserted in the income tax rules 1962, with effect from 1st June 2016 which states the requirement to furnish the evidence of the claims made by an employee to the person responsible for making payment under section 192 in Form no. 12BB for the purpose of estimating his income or computing his income or computing the tax deduction of tax at source:

S. noNature of claimEvidence required
1House Rent allowanceName, address and PAN of the Landlords where the aggregate rent paid during the year exceeds Rs. 1 Lakh
2Leave travel concession or assistanceEvidence of expenditure made
3Deduction of housing loan interest under the head “Income from house property”Name, address and PAN of the lender
4Deduction under chapter VIAEvidence of investment or expenditure

What are the implication of section 115BAC?

The 2020 Budget has introduced a new tax regime under Section 115BAC in order to make taxation simpler for people. This new tax regime has given an option to individuals and HUF taxpayers to pay income tax at lower rates. The new tax rates will be applicable for income earned in the FY 2020-21. This new tax regime was proposed for individuals willing to forego certain specified deductions or exemptions while computing total income for tax purpose and paying taxes at a lower rate.

As per section 115BAC Employer has to take declaration from Employee. An employee, having income other than the income under the head “profits and gains of business or professions” and intending to opt for the concessional rate under section 115BAC of the act, has to intimate the deductor, being his employer, of such intention for each previous year and upon such intimation, the deductor shall compute his total income and make TDS thereon in accordance with the provision of section 115BAC of the act.

If such intimation is not made by the employee, the employer shall make TDS without considering the provision of section 115BAC of the act. Employer has to deduct TDS considering in Old Slab Rates.

The intimation would not amount to exercising option in terms of sub section (5) of section 115BAC of the act and the person shall be required to do so along with the return to be furnished under sub-section (1) of section 139 of the Act for the previous year. Thus, option at the time of filing of return of income under sub-section (1) of section 139 of the act could be different from the intimation made by such employee to the employer for that previous year.

As per section 115BAC the following are the rates of tax applicable for individuals for FY 2020-21.

Person opting for old tax regime the following are the slab rates applicable:

Slabs of IncomeTax Rate
0 to 2,50,0000%
2,50,001 to 5,00,0005%
5,00,001 to 10,00,00020%
Above Rs. 10,00,00030%

Person opting for new tax regime the following are the slab rates applicable:

Slabs of IncomeTax Rate
0 to 2,50,0000%
2,50,001 to 5,00,0005%
5,00,001 to 7,50,00010%
7,50,001 Rs. 10,00,00015%
10,00,001 to 12,50,00020%
12,50,001 to 15,00,00025%
Above Rs. 15,00,00030%

Apart from above health and education cess at the rate of 4% is charged on the total tax calculated.

Case laws related to TDS on Salary:

1. Tips received by employee is considered as Income from other sources: ITC ltd. v CIT (2016)

In the above case the issue under consideration before the Supreme Court was whether tips received by the hotel company from its customers and distributed to the employees fell within the meaning of “salaries” to attract TDS under section 192.

The Supreme Court observed that in respect of tips collected by the company from the customers and distributed to the employees, the person responsible for paying the employee was not the employer at all, but a third person, namely the customer. As income from tips would be chargeable in the hands of the employees as “Income from Other Sources”, on account of such tips being received from customers and not from employer, section 192 would not get attracted at all.

2. If agreement made by doctors is a contract for service than section 192 is not applicable: Manipal Health Systems Pvt Ltd v CIT (2015)

In the above case the issue under consideration before the Karnataka high Court that whether the Appellate Authorities were correct in holding that the remuneration paid to consultant Doctors employed by the assesse hospital is not under an employer and employee relationship and therefore tax at source has to be deducted u/s. 192 of the Act and not u/s. 194J of the Act?

The court observed that contract between the assesse and doctors was not a “Contract of Service” but “Contract for service”. Thus the payment made to doctors by the hospital are covered under section 194J of the Income tax act, also as per the agreement made by the doctors and the assesse the doctors were not in employment and PF, ESI etc of the doctors was not done.

3. Employer is not considered as assesse in default if employee has failed to provide details of previous employer: CIT V/s Marubeni India Pvt. Ltd. (2007)

In the above case the issue under consideration before the Delhi High court is whether employer is considered as assesse in default if the employee has failed to provide the details of the previous employer.

The court observed that where an assesse has more than one employer liability of employer to deduct TDS arises only after employee furnishes to such employer the details of the income due or received by him from the other employer. There is no short deduction and the deductor is not an assesse in default.

Understanding with examples

Case 1:

Mr. X is an employee of XYZ pvt ltd. The entity pays Mr. X salary of Rs. 80,000 per month. At the end of the year Mr. X has provided the following details for TDS deduction:

1. Home loan interest certificate for FY 2020-21 consisting of Interest component of Rs. 1,08,000 and Principal component of Rs. 1,20,000

2. LIC premium receipts of Rs. 50,000

3. Medical premium receipt of Rs. 12,000

The company has deducted Profession tax of Rs. 2,500 for the FY 2020-21. The company has also deducted Provident fund of Rs. 80,000 during the year from Mr. X salary.

Let us calculate the TDS the of Mr. X.

In the give case XYZ is liable to deduct TDS of Mr. X. It is assumed that Mr. X has opted for old tax regime

ParticularsAmountAmount
Total Salary for the year   960,000
Less: Profession tax u/s 16    2,500 
Less: Standard deduction u/s 16  50,000  (52,500)
Income from Salary   907,500
Income from house property (108,000)
Gross total Income   799,500
Less: Deduction under chapter VIA  
80C: Specified Investments  
a. Home loan repayment120,000 
b. LIC premium paid 50,000 
 170,000 
Section 80C is limited to Rs. 150000   150,000
80D: Mediclaim premium     12,000
Net Total Income 637,500
Tax on above Income as per slab rates  
0 – 250000–   
250001 to 50000012,500 
500001 to 10,00,00027,500 
Total40,000 
Add: Health and education cess of 4%1,600 
Total Tax liability of Mr. X for FY 2020-21     41,600

XYZ Pvt Ltd is liable to deduct TDS of Rs. 41,600 from Salary of Mr. X for the year ended FY 2020-21.

Case 2:

Considering all the details from case 1 let us assume that Mr. X has opted for new tax regime. Under new tax regime Mr. X will not be liable to claim the following:

1. Deduction under chapter VIA like 80C investment and Mediclaim premium

2. Housing loan Interest

3. Deduction under section 16 i.e. Profession tax and Standard deduction

The total TDS to be deducted by XYZ pvt ltd from Mr. X shall be as follows:

ParticularsAmountAmount
Income from Salary     960,000
Total Income     960,000
Tax on above Income as per slab rates  
0 – 250000              –   
250001 to 500000     12,500 
500001 to 7,50,000     25,000 
7,50,001 to 10,00,000     31,500 
Total     69,000 
Add: Health and education cess of 4%       2,760 
Total Tax liability of Mr. X for FY 2020-21        71,760

XYZ Pvt Ltd is liable to deduct TDS of Rs. 71,760 from Salary of Mr. X for the year ended FY 2020-21.

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