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TDS on Salaries

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 :

  1. Advance Tax
  2. Self Assessment Tax
  3. Tax Deducted at Source (TDS)
  4. Tax Collected at Source
  5. Tax on Regular Assessment

Tax deducted at source (TDS) 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.

TDS on Salary

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. The particulars of this certificate are to be furnished by the employee in his income tax return after which he gets the credit of the TDS in his personal income tax assessment. The employer/deductor is required to prepare and file statements of Tax Deducted at Source on prescribed format(s) to the Income-tax Department.

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;
  1. Payment is made by the employer to the employee.
  2. The payment is in the nature of salary and
  3. The income under the head salaries is above the maximum amount not chargeable to tax.

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:

  1. Secretary, Treasurer, Manager or agent of the company.
  2. Any person connected with the management or administration of the company upon whom the assessing officer has served the notice of his intention to treat him as a principal officer.

TDS on simultaneous employment with more than one employer or on change of employment

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 such salary and TDS and then deduct tax at source considering the aggregate salary from all sources.

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. Thus, when advance salary and arrears of salary are paid, the employer has to take the same into account while computing the tax deductible.

Rate of deduction of tax

As per Section 192, 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, rebate 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 is required to be deducted.

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.

Challan of Payment

Where a deduction is made by or on behalf of the Government, the amount is to be credited in the manner specified. In case of other deductors, the deposition of TDS is to be made vide challan No.ITNS 281. The deductor must ensure that the details like employer's name and address, PAN, TAN, the Assessing Officer having jurisdiction, the amount of tax, the date of payment, the salary from which TDS has been done and the tax which is being paid, are correctly filled. Where TDS is credited to Government account through book adjustments, care should be taken by the DDOs to ensure that the correct amount of income tax is reflected therein.

Issue of T.D.S. Certificate

Every person deducting tax at source is required as per Section 203 to furnish a certificate to the payee to the effect that tax has been deducted alongwith certain other particulars. This certificate, usually called the TDS certificate, has to be furnished within a period of one month from the end of the relevant financial year. Even the banks deducting tax at the time of payment of pension are required to issue such certificates. In case of employees receiving salary income including pension, the certificate has to be issued in form No.16. The certificate is to be issued in the deductor's own stationery. However, there is no obligation to issue TDS certificate in case of tax at source is not deducted /deductible by virtue of claims of exemptions/ deductions.

Issue of duplicate certificate

Where the original TDS certificate is lost, the employee can approach the employer for issue of a duplicate TDS certificate. The employer may issue a duplicate certificate on a plain paper giving the necessary details as contained in Form No.16(Relevant Rule-31(4)).

Tax Deduction Number TAN

T.A.N. or tax deduction account number is a unique number alloted to the deductor of tax at source for the purpose of identification of every deductor. Every person deducting tax at source is required as per Section 203A to apply to the assessing officer for allotment of TAN. The application has to be made in duplicate in form 49B within one month from the end of the month in which tax was deducted at source(Rule 114A). Such application has to be either furnished to the AO specifically assigned the function of allotment of TAN by the CCIT/CIT or in any other case to the AO having jurisdiction to assess the applicant.

Frequently Asked Questions

I have not received TDS certificate from my employer. Can I claim TDS deducted from my salary?
Yes. The claim can be made in your return. Department however will raise a demand which will not be enforced on you but on your employer.
If the employer does not deduct tax and employee also does not pay his due tax, who will be held responsible for tax payment?
The ultimate responsibility to pay tax rests on the person who has earned income. If the employee deposits such tax then the employer will be liable for interest and penalty for failure to deduct tax.
In case the deductee comes back stating that the original TDS certificate is lost, whether a duplicate certificate can be issued?
Yes. The deductor will have to issue the certificate in a plain paper giving necessary details of deduction and remittance.

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The visitors may visit the web site of Income Tax Department for resolving their doubts or for clarifications.