Salary Income – Certain Tax & Legal Aspects

Background

The phenomenal growth of the Indian economy has resulted in a large number of salaried income tax filers. In India, it is estimated that there are about 8.50 crore tax-filers and of which the salaried and managerial personnel constitute the largest segment.

The personal tax rates for individuals in India (including the applicable surcharge and education cess) ranges from 0% to 42.7%. Further, in case of individuals there are certain avenues available to optimize and plan the tax outgo. This article provides an overview on certain taxation aspects of Salary income.

Salary Income – Tax Incidence

For any remuneration to be subjected to tax under the head ‘Salary’, the existence of employer-employee relationship is a pre-requisite and there is a necessity for agreement of service as opposed to an agreement for service. Salary would be subjected to tax in the hands of the employee on accrual or receipt basis, whichever is earlier. However, salary arrears would be taxable on receipt basis and the taxpayer may claim relief u/s 89 of the Income Tax Act (“IT Act”) against such arrears.

Old Tax Regime vs New Tax Regime

The taxpayer has the option to select between the old tax regime and new tax regime each financial year. It is important to note that in case the tax-filer opts for the new regime, he may not be eligible for certain specified deductions/exemptions. As a result, it is prudent for the taxpayer to make the computation under both the regimes and then decide the regime to be opted for.

The comparative rates as per Old Tax regime and New Tax regime for Financial Year 2022-23 are as follows:

Note*:

Resident Individual Taxpayers with Total Income exceeding Rs. 2,50,000 but not exceeding Rs. 5,00,000 would be entitled to claim a rebate under section 87A of tax payable [excluding Health and Education cess] or Rs. 12,500, whichever is lesser, resulting in NIL tax liability upto total income of Rs. 5,00,000

Note**

Basic exemption income slab in case of a resident individual of the age 60 years or more (senior citizen) and resident individual of the age 80 years or more (very senior citizens) at any time during the financial year, continues to remain the same, at Rs. 3,00,000 and Rs. 5,00,000 respectively. However, for those senior citizens opting for New Tax regime, the threshold limit would be Rs. 2,50,000 and not the enhanced limit as aforementioned.

The tax rates as aforementioned would be further increased by 4% Health & Education Cess and the applicable Surcharge and Marginal relief, if any, would be provided.

Tax Exemptions and Deductions

Tax exemptions and deductions are available for various specified allowances and perquisites. These include exemptions for house rent allowance, gratuity, leave encashment and employer’s contribution to the provident fund and superannuation fund. The eligible deductions include section 16 (standard deduction, profession tax), section 24 (interest on housing loans), section 80C (investments in eligible avenues), 80CCB, 80D (Mediclaim), 80G (donation to registered charities), 80GG (housing rent) and 80TTA (interest on bank and certain other deposits) of the IT Act. It is important to carefully review the entire list of exemptions and deductions to explore opportunities for tax optimization. However, any taxpayer opting for new tax regime would not be able to avail certain tax deductions including those under Chapter VI-A such as 80C, 80D, etc (except u/s 80CCD(2) where an employer makes a contribution to National Pension Scheme). 

Perquisites

The term perquisites include all benefits and amenities provided by the employer in addition to salary and wages either in cash or kind which are convertible into money. The perquisites are valued in accordance with the specified rules or based on the market value of the same. The rules provide for valuation of certain perquisites in a manner which may result in concessional tax treatment. These include employee stock options, rent free accommodation, car facility, medical facility etc. 

Payment of Tax on Salary

Every taxpayer with total tax liability of Rs 10,000 or more in a financial year would be required to pay advance tax. Advance tax applies to all taxpayers except senior citizens not having any business or professional income. Non-payment of advance tax will result in levy of interest under 234B and 234C of the IT Act.  

For the purpose of filing their tax return efficiently, the taxpayer needs to reconcile their tax return with the following documents:

a. Form 16 is a certificate, in which employer certifies the details about the salary and the tax deducted at source from the salary during the year. Form 16 is issued once in a financial year, on or before 15^th June of the next year immediately following the financial year in which tax is deducted.

b. Form 26AS is a consolidated tax credit statement issued to a taxpayer and shows the Income tax that has been deposited with the government with respect to the taxpayer and Form 26AS It contains all the details of the taxes paid and deposited with the Income Tax Department. Similarly, the taxpayer may also refer the Annual Information Statement (AIS), commonly known as AIS which provides details of certain major financial transactions for the purpose of such reconciliation. 

Filing of Tax return

All Individual taxpayers (not required for tax audit) whose total income exceeds the Basic exemption limit need to file their tax returns on or before 31st July each assessment year. For instance, tax returns for FY 2021-22 are required to be filed on or before 31^st July 2022.

Interest under section 234A is levied for delay in filing the return of income and accordingly the taxpayer is liable to pay simple interest at 1% per month or part of the month of delay. Further, as per section 234F of the IT Act, late fees of Rs. 5,000 would be applicable and if total income less than Rs 5 lakh, the fees amount would be restricted to Rs. 1,000.

If the return of income has not been filed within the due date, a belated return may still be furnished or the filed return may be revised on or before three months prior to the expiry (i.e. 31^st December) of the Assessment Year or completion of assessment, whichever is earlier. Further, Updated Tax Returns can be furnished within 2 years from the end of the Assessment Year, subject to payment of additional tax.