Circular No. 225 -Income Tax dated 30-6-1977

 Instructions for deduction of tax at source from salary during financial year 1977-78 at the rates specified in Part III of First Schedule to Finance (No. 2) Bill, 1977

1. I am directed to invite a reference to this Ministry’s Circu­lar No. 214 of even number dated 30-3-1977 on the subject of deduction of income-tax from salaries paid during the year 1977-78. The Finance (No. 2) Bill, 1977 introduced in the Parliament on June 17, 1977, inter alia, prescribes the rates at which income-tax has to be deducted during the financial year 1977-78 from income chargeable under the head “Salaries”.

An extract of Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the Finance (No. 2) Bill, 1977, is enclosed as Annex I. It will be observed that while the basic rates of in­come-tax laid down in the said Sub-Paragraph are the same as the rates in force for deduction of tax at source during the finan­cial year 1976-77, the rate of surcharge on income-tax has been raised from 10 per cent to 15 per cent of the income-tax. Fur­ther, no income-tax will be payable in cases where the total income of the person does not exceed Rs. 10,000. Where the total income exceeds Rs. 10,000 by a small margin, the taxpayer will be enti­tled to marginal relief as provided in the said Sub-Paragraph. Although the Finance (No. 2) Bill, 1977 is not likely to be enacted into law before the end of July 1977, it is suggested that deduction of tax at source from salaries even during the interregnum may be made on the basis of the rates as proposed in the Bill so as to avoid adjustment of the deficiency arising out of a short deduction against salary payable in subsequent months.

A few 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 1977-78 is given hereunder :

(1) No tax will be deductible at source in any case unless the entimated salary income for the financial year exceeds Rs. 10,000.

(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 1977-78.

(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, 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 of 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) 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 1977-78. In the case of persons who retire from service in the course of the financial year 1977-78, 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 has been raised from Rs. 8,000 to Rs. 10,000 through the Finance Act, 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)], 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 the 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 prescribed 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 (No. 2) Bill, 1977 before it is passed into law, the same will be communicated to you in due course.

4. While making the payment of tax deducted at source to the credit of the Central Government, it may kindly be ensured that the correct amount of income-tax and surcharge is recorded in the relevant challan. Wherever the amount of tax deducted at source is credited to the Central Government through book adjustment, proper case should be taken to ensure that the correct amount of income-tax and surcharge is reflected there.

Circular No. 225 [F. No. 275/13/77-IT(B)], dated 30-6-1977