FINANCIAL YEAR 1976-77
1694. Instructions for deduction of tax at source from salary during financial year 1976-77 at the rates specified in part III of First Schedule to Finance Bill, 1976
1. I am directed to invite a reference to this Ministry’s Circular Nos. 161 [F. No. 275/12/75-ITJ], dated 22-3-1975 and 176 [F. No. 275/12/75-ITJ], dated 16-8-1975 on the subject of deduction of income-tax from salaries paid during the year 1975-76. The Finance Bill introduced in the Parliament on March 15, 1976, inter alia, prescribes the rates at which income-tax has to be deducted during the financial year 1976-77 from income chargeable under the head “Salaries”. These rates will be applicable to deduction of tax from the salaries paid or payable on or after April 1, 1976. An extract of Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the Finance Bill, 1976, insofar as it relates to levy of income-tax on “salaries” is enclosed [Annex I]. It is requested that pending the passing of the Finance Bill, 1976, deduction of tax from “salaries” may be made during the financial year 1976-77 according to the rates in the said Schedule. Three typical examples of calculations are given in Annex II.
2. The substance of the main provisions in the law insofar as they relate to income from “salaries” on which tax is to be deducted at source during the financial year 1976-77 is given hereunder :
(1) No tax will be deductible at source in any case unless the estimated salary income for the financial year exceeds Rs. 8,000.
(2) The value of the perquisites by way of free residential accommodation and motor cars provided by employers to their employees shall be determined under rule 3 of the Income-tax Rules, 1962, and it shall be taken into account for the purposes of computing the estimated salary income of the employees for the purposes of deduction of tax at source during the financial year 1976-77.
(3) For the purpose of computing the total income of an employee, the amount credited to his ledger account in the Additional Dearness Allowance Deposit Account under the provisions of the Additional Emoluments (Compulsory Deposit) Act, 1974 shall not be included in his total income of the previous year in which it is so credited but so much of the amount as is repaid to him shall be liable to be included in his total income of the previous year in which it is repaid as already explained in this Ministry’s Circular No. 182 [F. No. 275/12/75-ITJ], dated 28-10-1975. The amount repaid will include an element of interest also. While the repayment of principal sum will be regarded as salary paid during the relevant financial year and assessed to tax accordingly, the interest element will qualify for exemption under section 80L.
(4) The amount of deposit made by a taxpayer under the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974 is not allowable as deduction in computing his taxable income. Accordingly, such deposit has to be ignored for the purposes of determining the amount of income-tax deductible at source.
(5) Under section 16, the taxable salary is to be computed after providing a standard deduction in respect of expenditure incidental to employment. The standard deduction is to be allowed in an amount equal to 20 per cent of the salary up to Rs. 10,000 and 10 per cent of the salary in excess thereof, subject to a maximum of Rs. 3,500. For this purpose, the term “salary” will include fees, commission, perquisites or profits in lieu of or in addition to salary but will not include any payments received by the employee which are specifically exempt from tax under clauses (10), (10A), (10B ), (11), (12) and (13A ) of section 10. Thus, house rent allowance which is exempt under section 10(13A) of the Income-tax Act will not be taken into account for the purposes of computing the amount of the standard deduction. It may be noted that the standard deduction on the above basis is to be allowed irrespective of whether any expenditure incidental to employment is actually incurred by the employee or not. This deduction will, however, not be admissible in the case of retired pensioners who have not been in employment at any time during the financial year 1976-77. In the case of persons who retire from service in the course of the financial year 1976-77, the standard deduction will be calculated only with reference to the salary derived from employment during that financial year without taking into account the pension received by the employee. Further, the standard deduction will be limited to Rs. 1,000 only in cases (a) where the employee is in receipt of a conveyance allowance, or (b) where he is provided with any motor car, motor cycle, scooter or other moped by his employer (for use otherwise than wholly or exclusively in the performance of his duties) or where he is allowed the use of any one or more motor cars (otherwise than wholly or exclusively in the performance of his duties) out of a pool of motor cars owned or hired by the employer. In this connection, it may be noted that the use of a motor car by the employees for the purposes of going from his residence to the place where the duties of employment are to be performed or from such place back to his residence will not be regarded as use of the motor car in the performance of his duties.
(6) Under section 80C, while computing the taxable income, the disbursing officers should allow a deduction of the whole of the first Rs. 4,000, 50 per cent of the next Rs. 6,000 and 40 per cent of the balance of the qualifying amount of payments towards life insurance premia, contributions to provident fund, contributions for participation in the Unit-linked Insurance Plan, 1971 made under section 19(1)(cc) of the Unit Trust of India Act, 1963 and deposits in a 10-year Account or 15-year Account under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959. It may be mentioned that the monetary ceiling limit in respect of contributions to recognised provident funds laid down in clause (d) of sub-section (2) of section 80C as qualifying for tax relief is proposed to be raised from Rs. 8,000 to Rs. 10,000 through the Finance Bill, 1976. The qualifying amount of these items taken together will be limited to 30 per cent of the estimated “salary” [after the deduction in respect of expenditure incidental to the employment of the assessee referred to in item (5) above], or Rs. 20,000, whichever is less.
(7) Section 80FF provides for deduction in respect of the expenditure incurred by a person on higher education of his dependent children, brother or sister. The deduction is admissible only in the case of Indian citizens whose “gross total income” does not exceed Rs. 12,000. Where the said dependent of the taxpayer is studying for a degree or post-graduate course in medicine (including surgery and obstetrics) architecture, engineering, technology or business management, a deduction of Rs. 1,000 and where the dependent is studying for a diploma course in these subjects or for any other degree or post-graduate course, a deduction of Rs. 500 for each dependent is to be allowed. In cases where the taxpayer has incurred expenditure on the education of more than two dependents the deduction under the proposed provision will be allowed at the above rates with reference to two such dependents as may be chosen by him. It may be noted that deduction at this rate is to be allowed irrespective of the actual amount spent by the assessee provided some amount is spent by the assessee on such education. The benefit of this deduction can be allowed at the stage of deduction of tax at source on assessee’s furnishing a certificate to the effect that he has incurred expenditure during the previous year out of his income chargeable to tax on full time education of his child(ren), brother or sister wholly or mainly dependent on him and also declaring the nature of the course for which they are studying.
(8) Under section 10(13A), any special allowance specifically granted to an assessee by his employer to meet expenditure actually incurred on payment of rent (by whichever name called) in respect of residential accommodation occupied by the assessee is exempt from income-tax to the extent (not exceeding Rs. 400 p.m.) as may be prescribed having regard to the area or place in which such accommodation is situated and other relevant considerations. Rule 2A prescribes the limits in respect of the amount which is not to be included in the total income of the assessee for the purpose of section 10(13A). It has to be noted that only the expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the assessee, subject to the limits laid down in rule 2A, qualifies for exemption from income-tax. Thus, house rent allowance granted to an employee who is residing in a house/flat owned by him is not exempt from income-tax. The disbursing authorities should satisfy themselves in this regard by insisting on production of evidence of actual payment of rent before excluding the house rent allowance from the taxable income of the employee.
(9) No deduction should be made from the salary income in respect of any donations for charitable purposes. The tax relief on such donations admissible under section 80G will have to be claimed by the taxpayer separately at the time of the finalisation of the assessment. However, in cases where contributions to the National Defence Fund, Jawaharlal Nehru Memorial Fund, the Prime Minister’s Drought Relief Fund or the Prime Minister’s National Relief Fund are made 50 per cent of such contributions may be deducted in computing the taxable income of the employee. Care should be taken to see that the aggregate of such contributions for the year is not less than Rs. 250. Disbursing officers should show the total contributions in the remarks column of the return under section 206.
(10) The total income computed in accordance with the provisions of the Act should be rounded off to the nearest multiple of ten rupees by ignoring the fraction which is less than five rupees and increasing the fraction which amounts to five rupees or more, to ten rupees. The net amount of tax deductible should be similarly rounded off to the nearest rupee.
(11) Attention is also invited to section 276B, wherein it is provided that if a person without reasonable cause or excuse fails to deduct or after deducting fails to pay the tax as required under the provisions of Chapter XVII-B he shall be punishable :—
(a) in a case where the amount of tax which he has failed to deduct or pay exceeds one hundred thousand rupees, with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine;
(b) in any other case, with rigorous imprisonment for a term which shall not be less than three months but which may extend to three years and with fine.
3. If any changes are made in the Finance Bill, 1976 before it is passed into law, the same will be communicated to you in due course.
Circular : No. 195 [F. No. 275/47/76-ITJ], dated 25-3-1976.
ANNEX I – EXTRACT FROM PART III OF FIRST SCHEDULE TO FINANCE BILL, 1976
Paragraph A
Sub Paragraph I
In the case of every individual or Hindu undivided family or unregistered firm or other association of persons or body of individuals, whether incorporated or not, or every artificial juridical person referred to in sub-clause (vii ) of clause (31) of section 2 of the Income-tax Act, not being a case to which Sub-Paragraph II of this Paragraph or any other Paragraph of this Part applies, —
Rates of income-tax
| (1) | where the total income does not exceed Rs. 8,000 | Nil; |
| (2) | where the total income exceeds Rs. 8,000 but does not exceed Rs. 15,000 | 15 per cent of the amount by which the total income exceeds Rs. 8,000; |
| (3) | where the total income exceeds Rs. 15,000 but does not exceed Rs. 20,000 | Rs. 1,050 plus 18 per cent of the amount by which the total income exceeds Rs. 15,000; |
| (4) | where the total income exceeds Rs. 20,000 but does not exceed Rs. 25,000 | Rs. 1,950 plus 25 per cent of the amount by which the total income exceeds Rs. 20,000; |
| (5) | where the total income exceeds Rs. 25,000 but does not exceed Rs. 30,000 | Rs. 3,200 plus 30 per cent of the amount by which the total income exceeds Rs. 25,000; |
| (6) | where the total income exceeds Rs. 30,000 but does not exceed Rs. 50,000 | Rs. 4,700 plus 40 per cent of the amount by which the total income exceeds Rs. 30,000; |
| (7) | where the total income exceeds Rs. 50,000 but does not exceed Rs. 70,000 | Rs. 12,700 plus 50 per cent of the amount by which the total income exceeds Rs. 50,000; |
| (8) | where the total income exceeds Rs. 70,000 but does not exceed Rs. 1,00,000 | Rs. 22,700 plus 55 per cent of the amount by which the total income exceeds Rs. 70,000; |
| (9) | where the total income exceeds Rs. 1,00,000 | Rs. 39,200 plus 60 per cent of the amount by which the total income exceeds Rs. 1,00,000; |
ANNEX II – TYPICAL EXAMPLES OF INCOME-TAX CALCULATION
Example I
| Rs. | ||
| 1. | Total salary income (including Rs. 180) deposited under the Additional Emoluments (Compulsory Deposit) Act, 1974 | 9,680 |
| 2. | Contributions to general provident fund | 720 |
| 3. | Payment towards life insurance premium | 500 |
| 1,220 | ||
| 4. | Total salary income | 9,680 |
| 5. | Deduct : amount deposited under the Additional Emoluments (Compulsory Deposit) Act, 1974 | 180 |
| 9,500 | ||
| 6. | Deduct : standard deduction of 20 per cent of salary in respect of expenditure incidental to the employment | 1,900 |
| 7,600 | ||
| 7. | Deduct : whole of the qualifying contributions towards general provident fund and life insurance premia | 1,220 |
| 6,380 | ||
| 8. | Taxable income | 6,380 |
| 9. | Income-tax payable on Rs. 6,380 | Nil |
Example II
Example II
| 1. | Total salary income (including Rs. 240) deposited under the Additional Emoluments (Compulsory Deposit) Act, 1974 | 18,565 |
| 2. | Contributions to general provident fund | 1,200 |
| 3. | Payment towards life insurance premia | 1,600 |
| 2,800 | ||
| 4. | Total salary income | 18,565 |
| 5. | Deduct : amount deposited under the Additional Emoluments (Compulsory Deposit) Act, 1974 | 240 |
| 18,325 | ||
| 6. | Deduct : standard deduction in respect of expenditure incidental to employment at Rs. 2,000 plus 10 per cent of the amount by which salary exceeds Rs. 10,000 | 2,832.50 |
| 15,492.50 | ||
| 7. | Deduct : whole of the Rs. 2,800 qualifying contributions towards general provident fund and life insurance premia | 2,800.00 |
| 8. | Taxable income | 12,692.50 |
| Rounded off to | 12.690.00 | |
| 9. | Income-tax on Rs. 12,690 (i.e., at 15 per cent of Rs. 4,690) | 703.50 |
| 10. | Union surcharge at 10 per cent | 70.35 |
| 11. | Total tax payable | 773.85 |
| Rounded off to | 774.00 |
Example III
Example III
| 1. | Total salary income (including Rs. 451) deposited under the Additional Emoluments (Compulsory Deposit) Act, 1974 | 29,039 | |
| 2. | Contribution to general provident fund | 3,500 | |
| 3. | Payment towards life insurance premium | ||
| [The employee is in receipt of a conveyance allowance of Rs. 200 per month from his employer] | 6,275 | ||
| 9,775 | |||
| 4. | Total salary income | 29,039 | |
| 5. | Deduct : Amount deposited under the Additional Emoluments (Compulsory Deposit) Act, 1974 | 451 | |
| 28,588 | |||
| 6. | Deduct : Standard deduction in respect of expenditure incidental to employment restricted to Rs. 1,000 | 1,000 | |
| 27,588 | |||
| 7. | Deduction on account of contribution towards general provident fund and life insurance premia. Paid Rs. 9,775 in all but limited to 30 per cent of Rs. 27,588 i.e., Rs. 8,276.40 | ||
| – on the first Rs. 4,000 (full) | Rs. 4,000.00 | ||
| – on the next Rs. 4,276.40 at 50 per cent | Rs. 2,138.20 | 6,138.20 | |
| 8. | Taxable income | 21,449.80 | |
| Rounded off to | 21,450.00 | ||
| 9. | Income-tax on Rs. 21,450 (Rs. 1,950 plus 25 per cent of Rs. 1,450) | 2,312.50 | |
| 10. | Union surcharge at 10 per cent | 231.25 | |
| 11. | Total tax payable | 2,543.75 | |
| Rounded off to | 2,544.00 |
