TDS on Salaries – Procedure to deduct TDS – Compliances

CA C. Maheshwar Reddy

TDS on Salaries – Section 192- Procedure to deduct TDS – Compliance with Income Tax Act and rules there under

Back Ground:

Under Section 192, the employer is required to deduct Tax at Source while making the payment of salary during financial year to the employees, at the rate of applicable to the individuals. For deduction of Tax at source (TDS), the tax has to be calculated according to slab wise rate. The applicable slab wise rate for deduction of tax at source will be notified through the Finance Act.

Applicable rate of Tax on income chargeable under the head “Salaries” for the financial year 2015-16 (i.e., Assessment Year 2016-17) is as follows:

TDS should be deducted at applicable rates as above along with surcharge and Education Cess.

Surcharge at the rate of 12% applicable where the taxable income exceeds Rs.1 Crores. Education Cess at the rate of 3% (without any limit in taxable income) on income tax plus surcharge will be levied.

Every person who is paying salary has to comply with the provisions of the Income tax Act and the rules made there under. The following are the steps / Points that may be followed in complying with the same:

1. Declaration from Employees: Take a declaration from the employees with regard to their savings, investments or sums qualified for deduction or exemption under salaries.

Points to be considered by the employer at the time of taking declarations from employees for TDS purpose:

a. Salary from more than one employer:

• Section 192(2) deals with situations where an individual is working under more than one employer or has changed from one employer to another.
• In Such circumstances it provides for deduction of tax at source by such employer (as the taxpayer may choose) from the aggregate salary of the employee who is or has been in receipt of salary from more than one employer.
• The employee is now required to furnish to the present/chosen employer details of the income under the head “Salaries” due or received from the former/other employer and also tax deducted at source therefrom, in writing and duly verified by him and by the former/other employer
• The present/ chosen employer will be required to deduct tax at source on the aggregate amount of salary (including salary received from the former or other employer).

b. Income under any other Heads:

• Section 192(2B) enables a taxpayer to furnish particulars of income under any head other than “Salaries”. If the employee furnishes the details of any other income, then the same need to be considered at the time of deduction of TDS under salaries.
• The employer shall not consider any other loss other than the loss under the head “income from house property” received by the assessee for the same financial year and of any tax deducted at source thereon.
• Employee has to declare if he has gained any other income should be intimated to employee through declaration form.

2. Calculation of Taxable Salary:

Calculate the taxable salary by giving the effect of the following:

A. Allowable Exemptions under Salaries:

i. House Rent allowance: If the employee is receiving the House Rent allowance (HRA) and paying the Rent, then least of the following amount is to be allowed as exemption under HRA.

The lower of the above three will be allowable as exemption from HRA allowance.

Note: The Employer has to take the lease deed / rental agreement or rent paid receipt from the employee for giving the above exemption.

ii. Conveyance / Transport Allowance: If the employee is receiving the Conveyance / transport allowance for commuting between the place of residence and duty (coming to office and going back to home), a sum of Rs.1,600 per month or actual allowance received whichever is lower is allowable as exemption.

iii. Medical Allowance: If the employee is receiving the medical allowance is exempted Rs.1,250 per month or actual expenditure whichever is less. Fixed Medial allowance is fully chargeable to tax.

iv. Uniform Allowance: When the employee is receiving the uniform allowance to meet the terms and conditions of the working culture, then the actual allowance amount or expenditure incurred on buying of the Uniform whichever is lower is exempted.

The above allowances are illustrative only. The allowances would be based on the HR policy on providing the allowances to the employees as part of salary and the exemption would be based on the provisions of the Income Tax Act and the rules made there under.

B. Deduction under Section 24(a) for Self occupied House Property – Interest on Housing Loan: Section 24(b) of the Act allows deduction from income from house property on interest on borrowed capital as under:-

• The deduction is allowed only in case of house property which is owned and in the occupation of the employee for his own residence.

• However, if it is not actually occupied by the employee in view of his place of the employment being at other place, his residence in that other place should not be in a building belonging to him

• The quantum of deduction allowed as per table below:

• The house so acquired or constructed should be completed within3 years from the end of the Fin.year in which the capital was borrowed. Hence it is necessary to acquire completion certificate of the house property against which deduction is claimed either from the builder or through self-declaration from the employee.

• Further any prior period interest for the fin.years, up to the fin.year in which the property was acquired and constructed shall be deducted in equal installments for the fin.year in which it was completed and subsequent four fin.years.

• The employee has to furnish to the Employer a certificate from the person to whom any interest is payable on the borrowed capital specifying the amount of interest payable. In case a new loan is taken to repay the earlier loan, then the certificate should also show the comprehensive picture of Principal and Interest of the loan so repaid.

3. Calculation of Tax deducted at Source: After calculating the Taxable Salary as mentioned in previous steps, give the allowable deduction as given below:

Allowable Deductions under Sec. 80C to 80 U:

i. SEC 80C:

Section 80C, entitles an employee to deductions for the whole of amounts paid or deposited in the current financial year in the following schemes, subject to a limit of Rs. 1,50,000/-.

Section 80C, entitles an employee to deductions for the whole of amounts paid or deposited in the current financial year in the following schemes, subject to a limit of Rs. 1,50,000/-.

a. Investments in capital issues of equity shares and/or Debentures and/or Units of Mutual Funds/Public limited Companies, Engaged in developing, maintaining or operating an infrastructure/power generation or distribution/Telecom facility, approved by Central Board of direct taxes (CBDT)

b. Interest accrued on National Savings Certificates, (VIII or IX Issue) is eligible for tax relief under Section 8OC of the Income Tax Act, 1961. The rates of interest are given behind the certificate.

c. Life insurance Premium paid

d. Contribution to statutory PF and recognized PF

e. Contribution to 15 years P.P.F.

f. Contribution towards approved superannuation fund

g. Any sum paid as subscription to Home Loan Account Scheme of the National Housing Bank

h. Any sum paid as subscription to National Saving Certificate issues

i. Contribution to ULIP of UTI

j. Contribution to Equity – Linked Saving Scheme of a Mutual Fund/UTI

k. A) Any installment as part payment of the amount due under any self financing or other scheme of any development authorities, Housing Board engaged in the construction and sale of the house property

B) Any installment as part payment of the amount due to any company or co-operative society of which the individual is a scheme holder or member towards the cost of the house Properties.

C) Repayment of the amount borrowed by the individual from 1. Central or State Government, 2. Any Bank including Co-operative Bank, 3. LIC, 4. National Housing Bank, 5. Any Public Company with the main object of providing long term finance for Construction/purchase of houses.

l. Any amount deposited in scheduled bank fixed deposit scheme for a period exceeding 5 years.

m. Amount deposited in five year time deposit scheme in post office.

n. Any contribution by an individual to any notified pension fund setup by notified mutual fund or UTI

o. Tuition Fees: subject to the following conditions

1) The taxpayer is an individual.

2) He has paid tuition fees. It does not include payments towards any development fees or donation or payment of similar nature

3) Such fee is paid at the time of admission or thereafter.

4) It is paid to a university, college, school or other educational institutions situated in India

5) It is paid for full time education.

6) It is paid for any two children of the taxpayer. Children may (or may not) be dependent upon the taxpayer; moreover, children may (or may not) be minor.

If the aforesaid conditions are satisfied, then the tuition fees paid per child subject to a maximum of 2 children. (Only those payments, which were made between 1st April to, 31^st March has to be considered and proper receipt for the same has to be produced to the concerned disbursing officer)

ii. 80CCC: Contribution to Pension Fund:

The deduction under Sec.80CCC towards amount paid or deposited to keep in force a contract for any annuity plan of LIC of India or any other insurer for receiving pension from the fund. The amount deposited or Rs.1,00,000 whichever is lowers is deductible. [subject to the maximum deduction under 80CCC and 80CCCD(1) Rs.1,50,000.].

iii. 80CCD: Contribution to National Pension System:

The deduction under Sec.80CCD available to only An individual employed by the Central Government on or after 1.1.2004 or any other employer as well as self employed Individual who has paid or deposited any amount in his account under a notified pension scheme .

The deduction available, in case of a salaried individual, deduction of own contribution under section 80CCD(1) is restricted to 10% of his salary. In any other case, deduction under section 80CCD(1) is restricted to 10% of gross total income. Further, the deduction under section 80CCD(1) cannot exceed Rs. 1 lakh.

The entire employer’s contribution would be included in the salary of the employee. The deduction of employer’s contribution under section 80CCD(2) would be restricted to 10% of salary. However, the limit of Rs.1 lakh under section 80CCD(1) and Rs.1.50 lakh under section 80CCE does not apply to deduction under section 80CCD(2 ).

iv. SEC 80CCG:

• Newly inserted Section 80CCG provides in respect of investment made under notified equity saving scheme. The deduction under this section is available if following conditions are satisfied.
  • The assessee is a resident individual (may be ordinarily resident or not ordinarily resident)
  • His gross total income does not exceed Rs. 12 lakhs
  • He has acquired listed shares in accordance with a notified scheme
  • The assessee is a new retail investor as specified in the above notified scheme
  • The investment is locked-in for a period of 3 years from the date of acquisition in accordance with the above scheme
  • The assessee satisfies any other condition as may be prescribed

• Amount of deduction:

The amount of deduction is at 50% of amount invested in equity shares. However, the amount of deduction under this provision cannot exceed Rs. 25,000. The deduction is available for three consecutive assessment years beginning with the assessment year in which equity shares or units were first acquired.

v. SEC 80D:

Section 80D provides for deduction available for health insurance premium paid, etc. which is calculated as under:

Here the employee must ensure that the medical insurance referred to above shall be in accordance with a scheme made in this behalf by-

• the General Insurance Corporation of India formed under section 9 of the General Insurance Business (Nationalization) Act, 1972 (57 of 1972) and approved by the Central Government in this behalf; or
• any other insurer and approved by the Insurance Regulatory and Development Authority established under sub -section (1) of section 3 of the Insurance Regulatory and Development Authority Act, 1999(41 of 1999).

vi. Sec.80DD: Maintenance including medical treatment of a dependent disabled:

Any amount incurred for the medical treatment, training and rehabilitation of a dependent disabled

and / or

Any amount paid or deposited under the scheme framed in this behalf by the LIC or any other insurer or Administrator or Specified Company.

Then flat deduction of Rs.75,000 is allowed as deduction. In case of severe disability (i.e. person with 80% or more disability) the flat deduction shall be Rs. 1,25,000 allowed as deduction.

vii. Sec.80DDB: Deduction for medical treatment of specified diseases or ailments:

Amount paid for specified diseases or ailment as prescribed under Rule DD of the Income Tax Rules. The deduction available to Individual for himself or his dependent spouse, children, parents, brothers or sisters. In the case of HUF, any member of his family

The deduction available is actual sum paid or Rs.40,000 (Rs.60,000, if the payment is for medical treatment of a senior citizen. Rs.80,000, if the payment is for medical treatment of a super senior citizen – resident who is at least 80 years of age at any time during the previous year), whichever is less, minus the amount reimbursed from the insurance company or the employer. Any amount incurred for the medical treatment, training and rehabilitation of a dependent disabled

viii. Sec.80E: Deduction in respect of Interest on Loan taken for higher studies:

Interest on loan should be taken from any financial institution or approved charitable institution. Such loan is taken for pursuing his higher education or higher education of his or her relative i.e., spouse or children of the individual.

The deduction is available for interest payment in the initial assessment year (year of commencement of interest payment) and seven assessment years immediately succeeding the initial assessment year or until the interest is paid in full by the assessee, whichever is earlier.

4. Arriving of Total Income: After giving the deduction under Section 80C to 80U from the taxable salary, then arrived amount would be treated as Total Income on which the TDS need to be deducted.

5. Calculation of Tax: After giving the deduction under Section 80C to 80U, as mentioned above, calculate the tax according to slab wise.

6. Deduction of TDS from Salaries: The TDS as calculated according to the previous steps, deduct the TDS by calculating average for 12 months, then deduct TDS on monthly basis. If short deduct in the previous months, the balance need to be deducted from available months.

7. Obtain Confirmations / Proofs for investments or Savings: The employer has to obtain the proofs for the savings or investments made by the employee. If the employee has not submitted or not invested as given in his declaration, then calculate the Tax assuming the employee has not invested or done any savings and accordingly deduct the balance TDS from his salary before the payment of Salary.

8. Depositing of TDS deducted: The employer has deposit the TDS which was deducted from the Salaries. The due date for the same are, for the month of April to Feb of the Financial year the due date is 7^th of the subsequent month in which the TDS was deducted.

9. Filing of E-TDS Returns: The Employer has to file the E-TDS return in Form-24Q for each quarter. The following are the due dates for filing of the online E-TDS returns.

10. Issue of Form-16 to the Employees: The Employer has to issue the Form-16 along with Form – 12BA to the respective employees on or before 31^st May (after ending of the financial year).

(Republished with Amendments)