“Explore Section 192 of the Income Tax Act, 1961, outlining TDS on Salary. Understand the definition of salary, permissible deductions, and the employer’s responsibility in tax deduction at source.”
Section 194 of the Income Tax Act, 1961 provides different sub sections for payment of any expenditure with certain limits to deduct income tax on such payments. Section 192 of the Act provides that any person make payment of Salary to other person, and if recipient is liable to pay income tax, tax is to be deducted by the payer of the salary.
In case of Salary, when employer pay the amount of salary to an employee, if it exceeds the exemption limit, tax is to be deducted on the amount and remaining amount is to be paid as salary.
The word “Salary” is defined under section 17(1) as inclusive of the following items:
(i) Wages as per Section 17(1)(i);
(ii) Any annuity or pension as per Section 17(1)(ii);
(iii) Any gratuity as per Section 17 (1)(iii);
(iv) Any fees, commissions, perquisites or profit in lieu of or in addition to any salary or wages as per Section 17(1)(iv);
(v) Any advance of salary as per Section 17(1)(v);
(vi) Any payment received by an employee while in service in respect of any period of leave not availed of by him as per Section 17(1)(va);
(vii) (a) The portion of the annual accretion in any previous year to the balance at the credit of an employee participating in a recognized provident fund, consisting of employer’s contribution in excess of 12% of the salary of an employee as per Section 17(1)(vi);
(b) Interest credited on the balance in so far as it exceeds 9.5%, as per Section 17(1)(vi);
(viii) Transferred balance in a recognized provident fund to the extent to which it is chargeable to tax under sub rule(4) of Rule 11 of Part A of the Forth Schedule to the Income Tax Act as per Section 17(1)(vii); and
(ix) Contribution made by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD, as per Section17(1)(viii)
Please remember that, any lump sum payment made gratuitously or by way of compensation or otherwise to widow or legal heir of an employee who dies while in service will not be taxable under the Income Tax Act (vide Circular No 573, dt. 21.08.1990)
Dearness Allowance is an additional payment over and above the basic salary for meeting the high cost of living and is chargeable under the head “Salaries”.
Bonus will be treated as salary and not as a benefit or perquisite in the following type of cases:
(a) Payment of bonus made under a service agreement between the employer and employee;
(b) Bonus paid under the Payment of Bonus Act, 1965;
(c) Bonus paid in accordance with the decision of a trade association which is binding on its members;
(d) Bonus paid as an award by a Labor Tribunal where the award is binding on the employer and employees.
If the bonus is paid gratuitously without there being any legal or contractual obligation, the payment will be in the nature of a perquisite or benefit.
The basic principle of Salary Income is that there should be relationship of an employer and employee.
Deductions from “Salaries”
From the gross salary as mention above following deductions are permissible under section 16 of the Income Tax Act, 1961.
Standard Deduction: [Section 16(ia)]
Separate deductions will not be available in respect of expenditure on books, expenditure on travelling or the purpose of employment and expenditure incidental to employment. Instead standard deduction will be allowed in respect of the above mentioned items of expenditure in relation to assessment year 2020-21 and subsequent years, u/s 16(ia) is Rs. 50,000 or the amount of salary, whichever is less.
For the purpose of standard deduction, the term “salary” includes fees, commissions, perquisites, gratuity, etc. but excludes any payment which are specifically exempt under various provisions of the Income Tax Act.
The pensioners and the employees in in receipt of conveyance allowance are also entitled to standard deduction as stated above.
Please remember that standard deduction is to be claimed before allowing any deductions permissible under Chapter VI A of the Income Tax Act.
Entertainment allowance:[Section 16(ii)]
Entertainment allowance received by an employee will first be included in employee’s income under the hear “Salary” and thereafter a deduction therefrom is permissible subject to the conditions and limits laid down under section 16(ii). From assessment year 2002-03 and onwards, entertainment allowance received, by an employee of a non-Government employer, is not eligible for deduction u/s 16(ii) and hence said allowance received by such employee will be taxed as income under the head “Salaries”.
Tax on employment: [Section 16(iii)]
Any sum paid by an employee on account of the tax on employment (i.e. professional tax) which levied by State Government is allowable as deduction from the salary of the employee provided it has been paid by him[section 16(iii)]. Employers can allow deductions for the professional tax paid by the employee while computing the tax to be deducted at source from “Salaries”.
Deduction of Tax at Source from” Salaries”
We know that Section 192 is pertaining to tax deduction at source. Under section 192(1) tax should be deducted at source on “Salary” payments if the annual estimated income under this head exceeds the maximum amount not liable to tax. The obligation to deduct the tax lies on the person responsible for the payment of salary i.e. employer. For this purpose, the employer should make an estimate the total emoluments payable to an employee during the financial year after taking in to account the increment or arrears of pay which are expected to be paid during that financial year.
It may be noted that under section 192(1), the tax on salary is to be deducted at the rates applicable to the estimated salary for the entire relevant previous year and when an employee has during that year worked under more than one employer, then, in order to facilitate proper deduction of tax at source from the aggregate salary due or received in the same year, the employee may furnish in the prescribed form No. 12B, to one of the said employer as he may choose, details of the salary due or received from such other employer or employers during that year and also the tax deducted therefrom. [Section 192(2)]
When an employee having any income chargeable under the head “Salaries” has in addition any income chargeable under any other head of income, for the same financial year he may send to his employer, a statement of particulars of such other income and the tax if any deducted thereon and also the loss if any, under the head
“ income from house property” for the same financial year, he may send it to his employer a statement of particulars of such other income and the tax, if any deducted thereon and the loss, if any, under the head “ Income from House Property” This statement is to be accompanied by verification as prescribed in Rule26B(2). The employer shall take that also in to account for deduction of tax at source.
A Government employee in a company, co-operative society, local authority universal institution, association or body, if he is entitled to relief under section 89, he may furnish to the employer the prescribed particulars in Form No 10E, if he does so, the employer shall compute the relief under section 89 on the basis of such particulars take in to account while deducting tax at source. [vide section 192(2A).
While filling Income Tax Return by an employee, he has to claim the amount of tax deducted at source, and if tax payable is higher, that is to be paid along with interest u/s 234B and 234C.
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