How to compute amount of tax to be deducted under section 192? a Find out Salary Income including taxable perquisites

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1 TDS ON SALARIES CA. Vishesh Sangoi Salary!!! Isn t it everyones favourite? It s paid once in a month and fully expensed out in 5 days or less. Every employee is aggrieved when less salary is received and higher tax is deducted by the employer. So let s understand the provisions of deduction of tax at source on salary payments. Section 192 of the Income Tax Act, 1961 ( ITA ) governs the provisions for deduction of tax at source regarding salary payments. As per section 192(1), any person responsible for paying any income chargeable under the head Salaries is required to deduct income tax, at the time of payment, on the estimated income of the employee under the head Salaries for the financial year in which the payment is made. A payment can be categorised as salary only if it arises out of employeremployee relationship. In other words, the contract must be a contract of service and not a contract for service between the employer and the employee. Section 192 unlike some other provisions, does not distinguish between payment of salary, to a resident or a non resident. Thus all payments which are taxable under the head salaries are also covered by the provisions of TDS, irrespective of the residential status of the recipient. What is salary? Salary is said to be the remuneration received by or accruing to an individual for service rendered as a result of an express or implied contract. The statute, gives an inclusive but not exhaustive definition of salary in section 17(1) of ITA. When tax is to be de ducted? Tax is to be deducted at the time of payment of salary, i.e., tax is to be deducted at the time of 'actual payment' of the salary. When the salary is only credited to the account of employee and is not actually paid to him, tax is not required to be deducted. In CIT v. Tej Quebecor Printing Ltd. [2006] 151 Taxman 210 (Delhi) it was held that no deduction at source is contemplated under section 192 in cases where a payment towards salary has accrued but is not made. Rate at which tax is to be deducted Tax is to be calculated at the slab rates prescribed for the year in which payment is taxable in the hands of recipient subject to the provisions related to requirement to furnish PAN as per section

2 206AA of ITA. No tax is required to be deducted at source in any case unless estimated salary income including the value of perquisites and/or profit in lieu of salary paid or allowed during the financial year exceeds the maximum amount not chargeable to tax for the individual relevant for the financial year. How to compute amount of tax to be deducted under section 192? a Find out Salary Income including taxable perquisites Xx (Chargeable salary + Perquisites Payments exempt from tax Deduction under section 16) b Add: Other Incomes declared by the employee (in case of loss, only loss on house Xx property would be taken into consideration) c Find out aggregate of (a) and (b) Xx d Less: Deductions under section 80C to 80U* Xx e Find out (c) (d) Xx f Find out tax on (e) Xx g Add: Surcharge(if applicable) and Secondary and Higher Education Cess X h Less: Tax Deducted by others as per information given by the employee Xx i Find out tax liability [(f) + (g) (h)] Xx *Employer should take into consideration amount deductible under sections 80C, 80CCC, 80CCD, 80CCG, 80D, 80DD, 80E, 80GG, 80TTA and 80U. The employer should not give any deduction in respect of donation given by an employee under section 80G. Tax on perquisites Paid by employer Section 192(1A) gives an option to the employer to pay tax on non-monetary perquisites given to an employee. The employer may at his option, make payment of tax on such perquisites himself without making any TDS from the salary of the employee. However, the employer will have to pay the tax at the time when such tax was otherwise deductible i.e. at the time of payment of income chargeable under the head salaries to the employee. For this purpose, tax is to be determined at the average of income tax computed on the basis of rates in force for the financial year. Illustration:

3 The income chargeable under the head salaries of an employee below sixty years of age for the year inclusive of all perquisites is Rs.4,50,000/-, out of which, Rs.50,000/- is on account of nonmonetary perquisites and the employer opts to pay the tax on such perquisites as per the provisions contained in section 192(1A). STEPS: Income Chargeable under the head Salaries inclusive of all perquisites Rs. 4,50,000/- Tax on Total Salary (including Cess) Rs. 25,750/- Average Rate of Tax [(25,750/4,50,000) X 100] 5.72% Tax payable on Rs.50,000/= (5.72% of 50,000) Rs. 2,861/- Amount required to be deposited each month Rs. 240 (Rs ) =2881/12) Amount paid directly by the employer to discharge the assessee s income tax liability does not qualify as a monetary perquisite and consequently falls within the category of non-monetary perquisite. As long as the benefit is not expressed in monetary terms in the hands of the employee (i.e. it is not funded as a part of salary), it should not be treated as a monetary benefit. As per section 10(10CC) of ITA the tax paid by employer on non-monetary perquisites given to employee is not taxable in hands of the employee. However as per section 40a(v) of ITA, the amount of tax paid by employer on perquisites referred to in section 10(10CC) is not allowed as business expenses. Grossing Up under section 195A Courts have held that tax paid by the employer, on behalf of the employee qualifies as a nonmonetary perquisite. Hence applying the provisions of section 10(10CC) of ITA, tax borne by the employer needs to be added only once in the salary of the employee and it cannot be subjected to multiple grossing up in the hands of the employees. For example, an employee s taxable income is Rs. 100 and tax rate is 30%. Without considering the exemption limit, the total tax to be deducted will be Rs. 39 (i.e., R30 + Rs. 9 [tax on Rs. 30]). Hence, the employer may not be required to pay additional tax on the tax paid by him. More than one employer Where an employee has more than one employer, he is required by section 192(2) of ITA to furnish in Form No. 12B to one of the employers (as selected by the employee) the details of salary due / received by him from employer. Where an employee receives payment from a former employer, the

4 present employer can deduct tax at source, if the employee so chooses and the employee furnishes details of such income and tax to be deducted at source there from in writing and duly verified by him, in Form No. 12B. The present employer or the employer so chosen by the employee will then deduct tax at source on the aggregate amount of salary, i.e., salary paid by him as well as salary paid by other or former employer. Relief when salary paid in arrear or advance Section 192(2A) of ITA provides that in respect of salary payments of employees of Government of public sector undertakings, company, co-operative society, local authority, university, institution, association or body of association, deduction of tax is to be made after allowing relief under section 89 which provides for relief when salary is paid in arrears or in advance. To avail this benefit, the concerned employee should furnish information in Form No. 10E to the employer. Deduction of tax at source in respect of other incomes of employee Section 192(2B) of ITA enables a taxpayer to furnish particulars of income under any head other than Salaries (not being a loss under any such head except loss under the head Income from House Property ) received by the taxpayer for the same financial year and of any tax deducted at source then. The particulars may be furnished in a simple statement, which is properly signed and verified by the taxpayer in the manner as prescribed under Rule 26B(2) of the Income Tax Rules. It is to be noted that it is not compulsory for an employee to disclose details of other income. However, if disclosed, it is mandatory for the employer to deduct TDS on the other income also. Illustration Suppose for the financial year the taxable salary income of a male employee below 60 years of age is estimated by the employer at Rs. 10,00,000. In addition, the employee has furnished to the employer details of his other income/loss/tax deducted in a statement as follows: Loss from house property Rs. 15,000 Long-term capital gains Rs. 30,000 Interest income on which a sum of Rs. 1,236 has been deducted as tax at source Rs. 12,000 The employer must determine the tax deductible at source as follows:

5 Salary income Rs. 10,00,000 Less: loss from house property Rs. 15,000 Balance Rs. 9,85,000 Add interest income Rs. 12,000 Total income (other than long-term Rs. 9,97,000 capital gains) Tax on Rs. 9,97,000: Rs. 1,29,400 Add tax on long-term capital gains Rs. 6,000 of Rs. 30,000 at 20% under section 112 Total income-tax Rs. 1,35,400 Add education cess 2% Rs. 2,708 Add SHE cess 1% Rs. 1,354 Tax deductible at source (Gross) Rs. 1,39,462 Less tax deducted at source on Rs. 1,236 interest Net tax deductible at source Rs. 1,38,226 Furnishing correct particulars As per section 192(2C), the responsibility of providing correct and complete particulars of perquisites or profits in lieu of salary given to an employee is placed on the person responsible for paying such income i.e., the person responsible for deducting tax at source. The form and manner of such particulars are prescribed in Rule 26A, Form 12BA and Form 16 of the Rules. Information relating to the nature and value of perquisites is to be provided by the employer in Form 12BA in case salary paid or payable is above Rs.1,50,000/-. In other cases, the information would have to be provided by the employer in Form 16 itself. (Circular No. 08 /2013 issued by CBDT) Adjustment for short or Shortfall of deduction Section 192(3) of ITA allow the deductor to make adjustments for any excess or shortfall in the deduction of tax already made during the financial year, in subsequent deductions for that employee within that financial year itself. Section 192(1) of ITA nowhere mandates that each monthly instalment of tax deducted at source should be exactly 1/12 of the total tax deductible at source for the year, as the question of increasing or reducing the amount which is authorised under section 192(3) will otherwise have no meaning. As a consequence, interest for shortfall in the monthly

6 deductions cannot be levied, and such interest will become leviable only if the total tax deducted by the end of the year is less than the tax deductible on the taxable salary paid during that year. Deduction from provident fund payment [section 192(4)/(5)] Where contribution made by the employer, or interest credited to the account of an employee, participating in a recognized provident fund, is in excess of the permissible limit, the excess amount is also includible in the salary income of the employee. Similarly, where any contribution made by an employer, including interest on contributions, to an approved superannuation fund, is paid to the employee [in circumstances other than those referred to in section 10(13)], the amount is also includible in the sa lary income. In both such cases, the tax will have to be deducted at source from the amounts included in salary. Salary paid in Foreign Currency In case the salary is paid in foreign currency, the same is to be converted to value in rupees as per the rates prescribed under Rule 26 of the Rules and section 115 of ITA and then amount of tax to be deducted is to be calculated. Issues Q. What rate of TDS should be applied on salary accrued on 31 st March however paid in the subsequent financial year? A. As per section 192, tax should be calculated at the rate prescribed for the year in which payment is taxable in the hands of the recipient. Hence if salary accrues on 31 st March 2014 and payment is made in the April 2014, rates applicable for the year ended 31 st March 2014 will apply. Q. Whether the employer is responsible for ensuring that investments qualify for deductions? A. When an employee furnishes investments/payments made by him to the employer for purposes of taking any deduction/rebate into account, the employer can only verify whether the said investments/payments are evidenced by proper proof, like receipts, certificates, passbook entries, etc. The employer has no authority to go any further so as to enquire into the source from which the investment/payment has been made by the employee. - State Bank of Patiala v. CIT 1998 Tax LR 636 (Pun & Har.).

7 Q. Can credit for taxes paid in foreign countries be considered while deduction tax on salary? A. In cases where the employee discloses its other income (foreign income) and taxes paid in foreign, the employer should certainly consider it while deducting tax at source. Q. Whether stipend paid to students should be considered as salary and subject to TDS? A. Though there are few tribunal rulings holding that stipend paid to interns / articles is paid to meet the cost of education and hence should be exempt from tax under section 10(16) of ITA, however it is advisable to deduct TDS on stipend if the stipend amount paid is a sizeable amount. A. Can non-deduction of tax on salary trigger disallowances in computing business income? A. Section 40(a)(ia) of ITA stipulates that any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction has not been paid on or before the due date specified in section 139(1), such amounts shall not be tax deductible while computing business income. However there is no mention of salary in section 40(a)(ia) and hence there will be no disallowance under this section. However section 40(a)(iii) stipulates that any payment which is chargeable under the head "Salaries", if it is payable (A) outside India; or (B) to a non-resident, and if the tax has not been paid thereon nor deducted there from then such amounts are not deductible while computing business income. Q. Whether TDS is required to be deducted at source u/s 192 from payment of sitting fees to directors? A. In my view, sitting fees are paid to non-executive directors who are not employed by the company and thus such directors are not employees of the company. Hence the provisions of section 192 are not applicable in respect of payment of siting fees to non-executive directors. Q. Whether tax is deductible under section 192 on salary to partners in case of partnership firms? A. Salary, bonus, commission or remuneration paid to a partner by a firm is an appropriation of profits. It is not chargeable under the head Salaries but is taxable under the head Profits and Gains of Business and Profession. Tax is therefore not deductible under section 192 by the firm from salary paid to a partner.

8 Q. Whether tax is deductible on salary which is forgone? A. Section 15 taxes salary on due basis even if it is not received whereas tax is deductible under section 192 in respect of salary income only at the time of payment. If an employee forgoes his salary (after it becomes due but before its receipt), it is nonetheless chargeable in his hands under section 15, though tax cannot be deducted under section 192 unless it is actually paid to him. Q. Whether tax is deductible on leave salary paid to legal heirs of a deceased employee? A. Salary payable to legal heirs of a deceased employee in respect of leave standing to the credit such employee at the time of his death is not taxable as salary and hence not subject to tax deduction at source under section 192. (Circular Letter No. 35/1/65-IT(B), dated ) Q. Whether salary payments made to non-residents covered under section 192 or section 195? A. Payments in the nature of income chargeable under the head Salaries are liable for deduction of tax under section 192 and are out of the purview of section 195. Q. Whether TDS is to be deducted under section 192 by the hotel employers at the time when they pass on the tips collected by them to their employees by treating them as a part of salary of such employees or these should be treated as an income from other sources in the hands of recipients? A. The terms salary, "perquisite" and "profits in lieu of salary are defined under section 17 of the Income-tax Act, Apparently the tips collected by the hotel employers and given by them to their employees do not come under the purview of salary or "perquisite". However, the scope of the term "profits in lieu of Salary becomes significant here. In addition, the manner and the way of collection and distribution of tips to the employees has to be considered, e.g., the tips are paid by the customers on their own once they are pleased with the service rendered to them or the tip is charged compulsorily from them by way of a service charge and is included in the bills raised by the hotels, which on collection comes under the books of account of the hotels first and then is paid to employees. Delhi High Court in the case of CIT v. ITC Ltd. [2011] 199 Taxman 412, held that the receipt of tips by the employees is chargeable under the head Salaries and, thus, is liable for TDS deduction under section 192 of the Act as section 17 widens the scope of section 15 of the Act. Further, in the said case it is mentioned that the tips were collected from the customers by way

9 of service charges and were to be paid to the assessee necessarily and without any option to the customers, thus, such payment was not gratuitous or voluntary contribution by the customers. Also, when such tips were collected by the assessee it was routed through its books of account and when it was finally disbursed among the employees of the assessee, it made the deduction of TDS mandatory under section 192 of the Act. Thus, it is implied that where an employer does not collect the tips by way of a service charge through its inclusion in the bills issued to its customers and the employees collect the tips from the customers directly, which is gratuitously paid by the customers without any compulsion, the same cannot be brought to tax deduction under section 192 and shall probably escape assessment. Q. Whether TDS is deductible on ESOP? A. Employee stock option Plan (ESOP) is a significant employer-granted benefit which is subject to the perquisite based taxation system as value of benefits and other amenities is regarded as perquisites and it forms part of taxable income. The taxable perquisite will be the difference between the fair market value (FMV) of the shares on the date of exercise of the options less the exercise price or say, Taxable amount = Fair market value Exercise price Perquisite shall be taxable in the hands of the employee only when shares are ALLOTTED TO HIM under ESOPs. Practically there is not much time gap between exercise of the option and share allotment to the employee. The perquisite shall be worked out on the basis of Fair Market Value of ESOPs on the date when employee exercises his option to ESOPs. Hence TDS under section 192 is required to be deducted when the employee exercises the option.