outlookmoney.com: Defending Accountant's = Nag

If you are a=20 salaried person, you are likely to be fretting = about=20 your employer deducting large chunks from your = salary as=20 TDS. Every year, your employer's accountant = would nag=20 you about tax saving investments made. Unfair, = did you=20 say? It is not entirely so. The employer has his = reasons=20 to be =20 officious. Under=20 the Income Tax Act, it is the duty of an = employer to=20 deduct tax from the salary paid to its employee. = Whether=20 the employer is an individual, a partnership = firm, a=20 trust or a company, they have to deduct tax at = source=20 from salary. The status of the employer is not=20 relevant.

Deducting tax at source = is as=20 painful for the employer as it is for the = employee.=20

Now, the IT=20 Act lays down elaborate steps to be followed by = an=20 employer while deducting the tax (popularly = known as=20 TDS) from the salaries. There are various = constraints on=20 the employer. To start with, there are deadlines = for TDS=20 payment to the government; for issuing the TDS=20 certificates (Form 16) to the employees; for = filing=20 quarterly e-TDS returns, and many more of such=20 legalities. Plus, there are various penalties = and=20 interests that an employer has to pay if there = is a=20 default. These detailed procedures might in part = explain=20 why most employers are paranoid when it comes to = TDS.=20

The Process=20

To calculate=20 the TDS for each employee, an employer typically = follows=20 these steps:

Estimating=20 the gross salary for the entire year;=20
Estimating=20 the exemptions from the salary income;=20
Adding any=20 other income, declared by the employee;=20
Calculating=20 the amounts of deductions from the salary = income based=20 on the declaration given by the employee; =
Calculating=20 the tax on the net income of the = employee;=20
Deducting=20 the tax equally over 12 months of the = year;=20
Paying TDS=20 to the government every month by the 7th of = next=20 month, filing e-TDS return every quarter;=20
Issue Form=20 16 (TDS certificate) to each employee.=20

Computing=20 salary income. To compute total income under = the=20 head of 'income from salaries', there are = various items=20 of income that form part of salary. Salary = includes the=20 basic salary, advance salary, the wages, = pension, fees,=20 commissions, bonus, taxable gratuity, leave = salary,=20 leave encashment salary (not otherwise exempt), = profits=20 in lieu of salary, taxable house rent allowance = and=20 other taxable allowances.

Not all=20 allowances and perquisites received by an = employee are=20 liable to income tax. Some of the allowances and = perquisites are totally exempt from income tax, = some are=20 partially exempt, while others are fully = taxable. There=20 are separate limits and conditions for = exemptions for=20 various allowances. For example, house rent = allowance=20 (HRA), leave travel allowance (LTA), medical=20 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=20 before deciding what is exempt and what is = not.=20

Tax to be=20 evenly deducted. What is important for an = employee=20 to understand is that the employer is supposed = to deduct=20 tax equally over the entire 12 months. Thus, if = the=20 total tax to be deducted from the salary for the = year is=20 Rs 12,000, then the employer is supposed to = deduct Rs=20 1,000 every month and pay that to the = government. If he=20 fails in this, he is penalised. =

TDS on=20 other income. A salaried person is also = liable to=20 pay income tax on income from other sources like = interest, capital gains and rental income. These = are=20 computed under different sections of the Income = Tax Act.=20 An employee has the option of declaring his = other income=20 to the employer, so that the tax on that income = can also=20 get deducted from the salary income. By doing = so, the=20 employee can avoid the formalities of paying = advance tax=20 (which would have to be paid if the tax is not = deducted=20 at source).

Deductions=20 allowed. After the gross salary is = calculated and=20 the exemptions given, the deductions under = Section 16 of=20 the IT Act have to be made. Earlier, employees = were=20 entitled to standard deduction. Now, that is no = longer=20 available. The only deduction remaining is dues = paid as=20 professional tax. The balance figure is the = amount of=20 taxable salary.

From the=20 taxable salary, the employer can then reduce the = deductions permissible under Chapter VI-A of the = Income=20 Tax Act. Simply put, he will allow the following = deductions:

Under=20 Section 80C: for the various tax saving=20 investments like PPF, life insurance premium, = among=20 others.
Under=20 Section 80CCC: for investments in pension = schemes=20 by life insurers.
Under=20 Section 80D: for mediclaim premium.=20
Under=20 Section 80DD: expenses incurred for = medical=20 treatment or amount deposited under any scheme = framed=20 by the LIC/UTI approved insurer/administrator, = for a=20 dependant with ordinary disability or severe=20 disability.
Under=20 Section 80E: interest on loans for = education.=20
Under=20 Section 80GG: for house rent paid.=20
Under=20 Section 80U: a deduction of Rs 50,000 in = respect=20 of a person who at any time during the = previous year=20 is certified by a medical authority to be a = person=20 with a disability. =

Another=20 important deduction that an employer is allowed = to make=20 from the income pertains to the interest on = housing=20 loans up to a maximum of Rs 1.5 lakh per year. = Of=20 course, for this, just as for other deductions, = the=20 employee would have to furnish proof to the = employer. It=20 may be noted that there are limits laid down in = the=20 Income Tax Act for each of these sections.=20

Deductions=20 not allowed. One important point to be noted = here is=20 that although a taxpayer may be entitled to = several=20 deductions from his income for the purpose of = TDS from=20 salary, the employer cannot reduce all the = deductions.=20 He can give credit only for those deductions = that are=20 mentioned in the annual circular issued by the=20 government. Thus, a taxpayer may have given a = donation=20 to say, CRY and for this, he would be entitled = to=20 deduction under Section 80G. However, while = calculating=20 TDS from salary, the employer is not allowed to = take=20 this into consideration. As far as donations are = concerned, an employer is allowed to take into=20 consideration only donations given to the Prime=20 Minister's Relief Fund and a few other similar=20 donations.

The employer=20 has to then calculate the tax payable on this = income and=20 deduct this tax in equal monthly installments. = Tax is to=20 be deducted by the employer at the time of = payment of=20 salary or at the time of credit of the salary = whichever=20 is earlier. Tax will be deducted only if the = total=20 income of the employee exceeds the threshold = limit of Rs=20 1 lakh in case of male employees, Rs 1.35 lakh = in case=20 of female employees and Rs 1.85 lakh in the case = of=20 senior citizens.

One-time=20 payments: In some situations, one-time = payments are=20 made during the year=97for example, bonus, = incentives,=20 joining bonus, and the like. The tax payable on = such an=20 amount would be deducted immediately. For = example, if an=20 employee is in the top tax bracket (that is 30 = per cent)=20 and his income is more than Rs 10 lakh, and gets = a=20 Diwali bonus of Rs 1 lakh, then the employer = would=20 deduct Rs 33,660 (Rs 30,000 as tax and Rs 3,000 = as=20 surcharge at 10 per cent on the tax and Rs 660 = as=20 education cess at 2 per cent on the tax plus = surcharge)=20 from the bonus/increment and pay the net amount = to him.=20 If the employer fails to deduct the whole or any = part of=20 the TDS, then he shall be liable to pay simple = interest=20 at 12 per cent on the amount not deducted or = short=20 deducted.

The Timing=20

After the tax=20 is deducted, the employer has to pay it to the=20 government within 7 days from the end of the = month. At=20 the end of the year, the employer has to issue = the=20 salary certificate to the employee. While doing = this,=20 the employer has to quote the correct permanent = account=20 number (PAN) of the employee in the certificate. = If the=20 correct PAN is not quoted or if the same is not = quoted=20 at all then the employer is penalised. So if you = were=20 thinking that the nosy accountants in your = office were=20 too eager to hack your salary to pay to the = government,=20 you have to give them the benefit of doubt. = Deducting=20 tax from salary is as painful, if not more, for = the=20 employer as it is to the employee.=20

The author is a member of the Bombay = Chartered=20 Accountants' Society.
www.bcasonline.org =20 =