INTRODUCTION
1. The Indian Income Tax Act provides for chargeability of tax on the total income of a person on an annual basis. The quantum of tax determined as per the statutory provisions is payable as :
a) Advance Tax
b) Self Assessment Tax
c) Tax Deducted at Source (TDS)
d) Tax Collected at Source
e) Tax on Regular Assessment
Tax deducted at source (TDS), as the very name implies aims at collection of revenue at the very source of income. It is essentially an indirect method of collecting tax which combines the concepts of “pay as you earn” and “collect as it is being earned.” Its significance to the government lies in the fact that it prepones the collection of tax, ensures a regular source of revenue, provides for a greater reach and wider base for tax. At the same time, to the tax payer, it distributes the incidence of tax and provides for a simple and convenient mode of payment. The concept of TDS requires that the person on whom responsibility has been cast, is to deduct tax at the appropriate rates, from payments of specific nature which are being made to a specified recipient. The deducted sum is required to be deposited to the credit of the Central Government. The recipient from whose income tax has been deducted at source, gets the
credit of the amount deducted in his personal assessment on the basis of the certificate issued by the deductor. While the statute provides for deduction of tax at source on a variety of payments of different nature, in this booklet, an attempt is being made to discuss various provisions relevant only to the salaried class of taxpayers.
OVER VIEW OF THE TDS PROVISIONS
2.1 Introduction :
Section 192 of the I.T.Act, 1961 provides that every person responsible for paying any income which is chargeable under the head ‘salary’, shall deduct income tax on the estimated income of the assessee under the head salaries. The tax is required to be calculated at the average rate of income tax as computed on the
basis of the rates in force. The deduction is to be made at the time of the actual payment. However, no tax is required to be deducted at source, unless the estimated salary income exceeds the maximum amount not chargeable to tax applicable in case of an individual during the relevant financial year. The tax once deducted is required to be deposited in government account and a certificate of deduction of tax at source (also referred as Form No.16) is to be issued to the employee. This certificate is to be furnished by the employee with his income tax return after which he gets the credit of the TDS in his personal income tax assessment. Finally, the employer/deductor is required to prepare and file quarterly statements in form No.24Q with the Income-tax Department.
2.2 Who is to deduct tax
The statute requires deduction of tax at source from the income under the head salary. As such the existence of “employer-employee” relationship is the “sine-qua-non” for taxing a particular receipt under
the head salaries. Such a relationship is said to exist when the employee not only works under the direct control and supervision of his employer but also is subject to the right of the employer to control the
manner in which he carries out the instructions. Thus the law essentially requires the deduction of tax when;
(a) Payment is made by the employer to the employee.
(b) The payment is in the nature of salary and
(c) The income under the head salaries is above the maximum amount not chargeable to tax.
For the various categories of employers, the persons responsible for making payment under the head salaries and for deduction of tax are as below:
In the case of,
1. Central/State Government/P.S.U - The designated drawing & disbursing officers.
2. Private & Public Companies - The company itself as also the principal officer thereof.
3. Firm - The managing partners/partner of the firm.
4. HUF - Karta of the HUF
5. Proprietorship concern - The proprietor of the said concern.
6. Trusts - Managing trustees thereof.
“As per sub section 4 of Sec 192, the trustees of a recognised provident fund are required to deduct tax at source at the time of making payment of the accumulated balance due to an employee. The TDS is to be made in a case where sub-rule(1) of rule 9 of part - A of Fourth Schedule of the Act applies and the deduction is to be made as per rule 10 of part A of Fourth Schedule.”
In case of a company, it is to be noted, that though the company may designate an officer /employee to make payments on the behalf of the company, still the statutory responsibility to deduct tax at source rests with the company and its principal officer thereof. In respect of companies, the I .T. Act Section 2(35) has specified principal officer to mean:
(a) Secretary, Treasurer, Manager or agent of the company.
(b) Any person connected with the management or administration of the company or upon whom the assessing officer has served the notice of his intention to treat him as a principal officer.
2.3 TDS on simultaneous employment with more than one employer or on change of employment
Sub-Section 2 of Section 192 provides that where a person is simultaneously employed with more than one employer, he may furnish the particulars of salary payments and TDS to the employer of his choice. Similarly, on change of employment the particulars of salary and TDS of earlier employment may be furnished to the subsequent employer. These particulars are to be furnished in Form 12 B in accordance with Rule 26A of the I.T.Rules. The employer on receipt of such information is required to take into account the particulars of salary and TDS and then deduct tax at source considering the aggregate salary from all sources.
2.4 When is tax to be deducted
Section 192 casts the responsibility on the employer, of tax deduction at source, at the time of actual payment of salary to the employee. Unlike the provisions of TDS, pertaining to payments other than salary where the obligation to deduct tax arises at the time of credit or payment, which ever is earlier, the responsibility to deduct tax from salaries arises only at the time of payment. Thus, when advance salary and arrears of salary has been paid, the employer has to take the same into account while computing
the tax deductible.
2.5 Rate of deduction of tax
As per Section 192, the employer is required to deduct tax at source on the amount payable at the average rate of income tax. This is to be computed on the basis of rates in force for the financial year in which payment is made. The Finance Act of each financial year specifies the rates in force for deduction of tax at source. For F.Y.2011-2012 rate of TDS is specified in Part-3, Schedule of Finance Act 2011.
2.5.1 Surcharge and cess on tax
The amount of income tax computed as per rates specified above is to be reduced by the amount of rebate of income tax calculated under chapter VIII A of the I.T. Act 1961 (in case of individuals, HUF, AOP & BOI). The income tax so arrived at is to be increased by 3% education cess and there would be no surcharge on that .
2.5.2 Average rate of deduction
The statute enjoins the employer to compute the tax liability of the employee on the basis of the rates in force and to deduct the tax at the average rate computed on the basis of the same. Thus, the employer is required to compute at the beginning of the financial year, the total salary income payable to an employee during the financial year. Further, the employer should also take into account any other income as reported by the employee. After considering the incomes exempt, deductions and relief, the tax liability of the employee should be determined on the basis of the rates in force for the financial year. Every month, 1/12 of this net tax liability as computed above is required to be deducted.
2.5.3 Payment of tax by employer on non monetary perquisite
W.e.f. 1.6.2002 the employer has an option to pay the tax on the non monetary perquisite given to the employee. Sections 192(1A) & 192 (1B) of the Income Tax Act, enable the employer at his option, to make payment of the entire tax or a part of the tax due on non monetary perquisites. The tax payable is to be determined at the average rate of the income tax computed on the basis of rates in force and the payment will have to be made when such tax was otherwise deductible, i.e. at the time of payment of income chargeable under the head salaries, to the employee. Further, the tax so paid shall be deemed to be the TDS made from the salary of the employee. However as per proviso to section 198, this tax paid
will not be deemed to be income of the employee.
2.5.4 Revision of estimate of tax liability
As per Sub-Section 3 of Section 192 a deductor can make adjustments for any excess or shortfall in the deduction of tax already made during the financial year, in the subsequent deductions. For instance, in the case where payment of advance salary, arrears of salary, or increase of salary, commission, bonus, etc. has taken place, the tax liability of the employee will increase. Deduction of tax at source is accordingly required to be increased. Similarly, if the employee makes certain investments which qualify for deduction or rebate and furnishes the required proof which reduces the tax liability, then the employer can accordingly reduce the quantum of TDS.
2.5.5 Deduction at a lower rate or non-deduction of tax
Section 197 enables a tax payer to make an application to his assessing Officer for deduction of tax at a lower rate or non deduction of tax. The application has to be made in Form No.13 (vide Rule 28(1)). If the Assessing Officer is satisfied that the total income of a tax payer justifies the deduction of income tax at any lower rate or no deduction of income tax, he may issue a certificate in Form No. 15AA (relevant Rule 28AA) providing for deduction of tax at lower rate or no deduction of tax.
The certificate is valid only for the assessment year as specified therein. On expiry of the validity period, a fresh application may be made. A certificate is issued directly to the person responsible for deducting tax/DDO with a copy to the applicant. In absence of such a certificate from the employee, the employer should deduct income tax on salary payable at normal rates (Circular No.147 dt.28- 10-1974).
2.5.6 TDS where the salary paid is net of tax
Where the employee enters into an agreement or an arrangement as per which the tax chargeable on the income is borne by the employer then for the purpose of deduction of tax, the income is to be increased to such an amount as would, after deduction of tax thereon be equal to the net amount payable as per the
agreement or arrangement (Section 195A). However, this provision is not applicable where the employer has made payment of tax on non-monetary perquisites as provided in section 192(1A).
2.5.7 Refund of TDS
In case of excess deduction of tax at source, claim of refund of such excess TDS can be made by the deductor. The excess amount is refundable as per procedure laid down for refund of TDS vide Circular No.285 dt.21-10-1980.
The difference between the actual payment made by the deductor and the tax deducted at source or deductible, whichever is more will be treated as the excess payment made. This amount is to be first adjusted against any existing tax liability under any of the Direct Tax Acts. After meeting such liability, the balance amount is to be refunded.
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