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Tax deduction? Not the accountant's fault

Ameet N Patel, Outlook Money

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July 10, 2006

If you are a salaried person, you are likely to be fretting about your employer deducting large
chunks from your salary as TDS (tax deduction at source). Every year, your employer's
accountant would nag you about tax saving investments made.

Unfair, did you say? It is not entirely so. The employer has his reasons to be officious. Under the
Income Tax Act, it is the duty of an employer to deduct tax from the salary paid to its employee.
Whether the employer is an individual, a partnership firm, a trust or a company, they have to
deduct tax at source from salary. The status of the employer is not relevant.
Now, the IT Act lays down elaborate steps to be followed by an employer while deducting the tax
(popularly known as TDS) from the salaries. There are various constraints on the employer.

To start with, there are deadlines for TDS payment to the government; for issuing the TDS
certificates (Form 16) to the employees; for filing quarterly e-TDS returns, and many more of such
legalities. Plus, there are various penalties and interests that an employer has to pay if there is a
default. These detailed procedures might in part explain why most employers are paranoid when
it comes to TDS.

The Process

To calculate the TDS for each employee, an employer typically follows these steps:

* Estimating the gross salary for the entire year;

* Estimating the exemptions from the salary income;
* Adding any other income, declared by the employee;
* Calculating the amounts of deductions from the salary income based on the declaration given
by the employee;
* Calculating the tax on the net income of the employee;
* Deducting the tax equally over 12 months of the year;
* Paying TDS to the government every month by the 7th of next month, filing e-TDS return
every quarter;
* Issue Form 16 (TDS certificate) to each employee.

Computing salary income: To compute total income under the head of 'income from salaries',
there are various items of income that form part of salary. Salary includes the basic salary,
advance salary, the wages, pension, fees, commissions, bonus, taxable gratuity, leave salary,
leave encashment salary (not otherwise exempt), profits in lieu of salary, taxable house rent
allowance and other taxable allowances.

Not all allowances and perquisites received by an employee are liable to income tax. Some of the
allowances and perquisites are totally exempt from income tax, some are partially exempt, while
others are fully taxable. There are separate limits and conditions for exemptions for various
allowances.

For example, house rent allowance (HRA), leave travel allowance (LTA), medical
reimbursements, conveyance allowance each have a different limit and a different set of rules. An
employer has to apply each set of rules and limits before deciding what is exempt and what is
not.

Tax to be evenly deducted: What is important for an employee to understand is that the employer
is supposed to deduct tax equally over the entire 12 months. Thus, if the total tax to be deducted
from the salary for the year is Rs 12,000, then the employer is supposed to deduct Rs 1,000
every month and pay that to the government. If he fails in this, he is penalised.

TDS on other income: A salaried person is also liable to pay income tax on income from other
sources like interest, capital gains and rental income. These are computed under different
sections of the Income Tax Act. An employee has the option of declaring his other income to the
employer, so that the tax on that income can also get deducted from the salary income. By doing
so, the employee can avoid the formalities of paying advance tax (which would have to be paid if
the tax is not deducted at source).

Deductions allowed: After the gross salary is calculated and the exemptions given, the deductions
under Section 16 of the IT Act have to be made. Earlier, employees were entitled to standard
deduction. Now, that is no longer available. The only deduction remaining is dues paid as
professional tax. The balance figure is the amount of taxable salary.
From the taxable salary, the employer can then reduce the deductions permissible under Chapter
VI-A of the Income Tax Act. Simply put, he will allow the following deductions:

* Under Section 80C: for the various tax saving investments like PPF, life insurance premium,
among others.
* Under Section 80CCC: for investments in pension schemes by life insurers.
* Under Section 80D: for mediclaim premium.
* Under Section 80DD: expenses incurred for medical treatment or amount deposited under
any scheme framed by the LIC [Get Quote]/UTI approved insurer/administrator, for a dependant
with ordinary disability or severe disability.
* Under Section 80E: interest on loans for education.
* Under Section 80GG: for house rent paid.
* Under Section 80U: a deduction of Rs 50,000 in respect of a person who at any time during
the previous year is certified by a medical authority to be a person with a disability.

Another important deduction that an employer is allowed to make from the income pertains to the
interest on housing loans up to a maximum of Rs 1.5 lakh per year. Of course, for this, just as for
other deductions, the employee would have to furnish proof to the employer. It may be noted that
there are limits laid down in the Income Tax Act for each of these sections.

Deductions not allowed: One important point to be noted here is that although a taxpayer may be
entitled to several deductions from his income for the purpose of TDS from salary, the employer
cannot reduce all the deductions.

He can give credit only for those deductions that are mentioned in the annual circular issued by
the government. Thus, a taxpayer may have given a donation to say, CRY and for this, he would
be entitled to deduction under Section 80G. However, while calculating TDS from salary, the
employer is not allowed to take this into consideration. As far as donations are concerned, an
employer is allowed to take into consideration only donations given to the Prime Minister's Relief
Fund and a few other similar donations.

The employer has to then calculate the tax payable on this income and deduct this tax in equal
monthly installments. Tax is to be deducted by the employer at the time of payment of salary or at
the time of credit of the salary whichever is earlier. Tax will be deducted only if the total income of
the employee exceeds the threshold limit of Rs 1 lakh in case of male employees, Rs 1.35 lakh in
case of female employees and Rs 1.85 lakh in the case of senior citizens.

One-time payments: In some situations, one-time payments are made during the year -- for
example, bonus, incentives, joining bonus, and the like. The tax payable on such an amount
would be deducted immediately. For example, if an employee is in the top tax bracket (that is 30
per cent) and his income is more than Rs 10 lakh, and gets a Diwali bonus of Rs 1 lakh, then the
employer would deduct Rs 33,660 (Rs 30,000 as tax and Rs 3,000 as surcharge at 10 per cent
on the tax and Rs 660 as education cess at 2 per cent on the tax plus surcharge) from the
bonus/increment and pay the net amount to him.

If the employer fails to deduct the whole or any part of the TDS, then he shall be liable to pay
simple interest at 12 per cent on the amount not deducted or short deducted.

The Timing

After the tax is deducted, the employer has to pay it to the government within 7 days from the end
of the month. At the end of the year, the employer has to issue the salary certificate to the
employee. While doing this, the employer has to quote the correct permanent account number
(PAN) of the employee in the certificate. If the correct PAN is not quoted or if the same is not
quoted at all then the employer is penalised.
So if you were thinking that the nosy accountants in your office were too eager to hack your
salary to pay to the government, you have to give them the benefit of doubt. Deducting tax from
salary is as painful, if not more, for the employer as it is to the employee.

The author is a member of the Bombay Chartered Accountants' Society. www.bcasonline.org

taxworry.com

Sixth Pay Commission Arrears Payments: Can You

Claim Relief From Tax?
Labels: Salary
Sixth pay commission recommendation have been accepted by the
Government with some modification and enhancement. As a result of
implementation of new pay from 1 January 2006 , government
employees will get arrears of pay. Click Fastest Sixth Pay Commission Salary
& Arrears Calculator. to compute your arrears for different years

As per the government notification, in the FY 2008-09, 40 % of the

arrears will be disbursed whereas 60 % will be disbursed in FY 2009-
2010. Therefore, the tax liability of central government employees for
FY 2008-09, is going to increase . It means that government will take
back a portion of your arrears cake.

The point to consider is that the arrears of salary will be comprised of

Four financial years.
1. FY 2005-06 (January 2006 to March 2006)

2. FY 2006-07 (April 2006 to March 2007 )

3. FY 2007-08 (April to March 2008)

4. Fy 2008-09 (April 2008 to August 2009)

Income Tax Relief

Since the arrears of salary as a result of pay commission comprise of

years other than current year(FY 2008-09) , there may be cases of
higher tax liability on account of receipt of money of back years. To
give relief in such cases, Income Tax Act provides relief u/s 89 which
says as under
89. Where an assessee is in receipt of a sum in the nature of salary,
being paid in arrears or in advance or is in receipt, in any one
financial year, of salary for more than twelve months or a payment
which under the provisions of clause (3) of section 17 is a profit in lieu
of salary, or is in receipt of a sum in the nature of family pension as
defined in the Explanation to clause (iia) of section 57, being paid in
arrears, due to which his total income is assessed at a rate higher than
that at which it would otherwise have been assessed, the Assessing
Officer shall, on an application made to him in this behalf, grant such
relief as may be prescribed.
I have put a spreadsheet calculator by which you can compute the
relief u/s 89 if at all available to you. Following important consideration
is required for proper computation.