Updated : July 26, 2024Mastering TDS on Salary: A Comprehensive Guide to Section 192 of the Income Tax Act
Overview : In India, Section 192 of the Income Tax Act requires that every employer, while paying salary to its employee, deducts the applicable withholding tax from their salary, popularly known as TDS on salaries. This blog covers the legal aspect, critical timelines, and the process of complying with the TDS deducted from salary payments in detail. The article further discusses the TDS deposit obligations, filing of return of TDS, and penalties for non-compliance. The information in this article would benefit employers by meeting their statutory obligation and demystifying several questions the employee may have about TDS.
Introduction
Section 192 of the Income Tax Act (the “Act”) governs the provisions relating to the deduction of tax from salary payments by the employer and related obligations such as timely deposit of deducted TDS, filing of quarterly TDS returns, and furnishing of Form 16 to the employees. The idea of TDS deduction is to bring efficiency in tax collection, wherein the tax is deducted when the income accrues to the employees, maintaining a consistent flow of tax receipts to the government.
The employer is responsible for collecting Income tax as TDS when paying salary in equated instalments, month on month. The employer is required to assess the employee’s annual tax liability from the salary income (head of income) after considering all tax exemptions and benefits to which the employee is entitled based on investments in tax-saving instruments such as LIC, Mediclaim, etc. In other words, the employer is obligated to run a full computation of income tax payable by each of his employees at the beginning of the financial year based on the investment projections or declaration by the employees in the prescribed form 12BB and in or around the last quarter of the financial year, based on the verified investments or eligible expenses under section 80C to 80U and also after considering the exempt tax provisions u/s. 10 such as HRA, etc.
Understanding Section 192 is crucial for companies (Employers) and employees. It helps them understand the legal requirement of statutory deduction by the employer, the timing of TDS Deduction, the obligation on the employer to deposit the deducted TDS within the 7th day of the next month, filing of quarterly TDS Returns/statements, and after that issuance of Form 16 by the employers to the employees.
What is Section 192 under the Income Tax Act?
TDS from salaries is regulated under Section 192 of the Act, wherein the employer estimates the annual taxable income of the employee. If it results in Tax Payable, then the employer deducts the tax on a monthly basis in equated instalments. Please note that the calculation of employee taxable income and the TDS to be deducted has to be done every month based on the actual salary paid. The key aspects include the following.
- Calculation of Employee Tax Liability.
- Subtract TDS from monthly salary.
- Payment of TDS must be made before the 7th day of next month.
- Filing of quarterly TDS Return for the TDS deducted & Paid
Who Must Deduct TDS Under Section 192?
TDS on salary is the employer’s responsibility under section 192 of the Act. This legislation applies equally to the public sector and the Private sector. The TDS provisions also apply in a similar manner to non-profit entities/NGOs, and it is the same. Here is an indicative list of business types that come under the purview of TDS. The respective employer must follow the provisions of TDS.
- Government Departments & Public Sector Units
- All types of Companies
- LLP & Partnership Firms
- Sole Proprietorship Firms
- Trusts, Societies, associations (NGO)
- Branch, Liaison or Project Office of Foreign Companies
When is TDS on Salary Deducted Under Section 192?
The employer’s liability to deduct the TDS arises on every salary payout based on the assessment of the concerned employee’s tax liability. The TDS is to be deducted while making the payment and on a due basis. This implies tax is withheld when the employer pays the wage, whether early, on time, or late. If the wage exceeds the basic exemption level, TDS will be deducted even without a PAN card.
- Consideration of Tax-Saving Investments: Generally, employees are asked to submit statements of their intended tax-exemption investments and expenditures during the year at the beginning of the Financial Year. The employers consider these while determining the estimated quantum of annual tax they are liable to pay alongside the monthly TDS.
- Pro-rata Basis for New Employees: When a new employee joins in the middle of any financial year, the TDS calculation is from the said joining date for the remaining months only. However, while computing the TDS liability, the current employer will have to consider the salary received by the employee from the previous employer during the past financial year.
- Adjustments Throughout the Year: In the course of the year, it may be necessary to review and make changes to how TDS is computed and that due to the following factors:
- Salary revisions or promotions
- Incentives Payouts
- Bonus Payouts
- Deductions in actual salary payments
- Change in the employer declarations
- Year-End Reconciliation: At the end of the year, especially in the last quarter of the financial year, from January to March, employers do a final reconciliation. They make sure that the overall amount of TDS done corresponds to the specific tax liability of the employee by the end of service and new tax-saving investments.
- Relief Under Section 89(1): If an employee receives arrears/advance salary and is, therefore, taxed in a higher tax slab, he can avail of Section 89(1) relief. Employers must take this into account when calculating the TDS.
How is TDS on Salary Calculated Under Section 192?
The first step that has to be followed to arrive at the TDS on salary is to find out the assessable value of the employee’s salary or his estimated gross income of the year, including his basic wages, allowances, perks, bonuses, etc. They are to then take into account any other sources of income, especially those declared by the employee, like rentals. After that, the employer should subtract other allowable deductions under section 24 of the Act to arrive at the estimated taxable income, like the investment in important saving instruments like PPF or NSC. The employer is supposed to obtain this information from the employee, and the formal way of doing this is through form 12BB.
The next step the employer should take after computing the taxable income is to multiply the income by the tax rates depending on the tax brackets to arrive at the total tax amount payable. The total of the above tax liability is then divided by the number of months that are still left in the financial year to get the monthly TDS figure. For instance, predict the total tax amount for the fiscal year, which would be INR 1,17,000, and if there are exactly 12 months left, then the monthly TDS could be estimated to be 9750; i.e., INR 1,17,000 / 12.
There are other factors to consider mostly in relation to the TDS calculation, including tax-saving investments or deductions that the employee intends to make throughout the fiscal year. If the employee wants to show such investment through Form 12BB, the employer should include them to avoid over-adjustment of the TDS.
For instance, where an employee has more than one employer, he or she is free to submit details of salary and TDS Deductions in Form 12B to any of the employers. It will then be the responsibility of this employer to arrive at the gross salary and then minus TDS. If the employee shifts his employer during the fiscal year, he can submit Form 12B containing information about prior employment to the new employer, who shall assess pay and TDS for the remaining period.
While computing the TDS, employers are supposed to pay the amount deducted from the government’s credit within the time limit, which differs depending on whether the employer is a government department. If not complied with, TDS provisions lead to penalties, interest, and disallowance of expenses.
What are the TDS Deposit Requirements?
The deductor has to pay the TDS amount deducted to the government account before the 7th of the succeeding month. For instance, the TDS deducted in the month of April must be deposited before that, which is the 7th of May. Namely, if the deposit is made in March, then the deadline is until 30 April. Late TDS deposit attracts interest of 1.5% per month or part of the month.
- Use of Challan 281: TDS deposit is being made through Challan no 281 which is the official challan for TDS. It is required to prepare a distinct challan for every kind of tax and mention the code number (like 100 for advance tax, 300 for TDS). The challan amount to be paid mentioned in the statement should tally with the amount deposited through that challan.
- Verification of Challan Details: It is also obligatory for the deductor to ensure each of the CIN details filed by the banks to TIN to be incorporated in the TDS statement.
- The total TDS deposited for each deducted group must be properly shown on the TDS statement.
What are the Consequences of Non-Compliance?
Non-compliance with the TDS Provisions has adverse consequences, including interest or penalty. Employers should pay close attention to the prescribed compliance with the TDS provisions and, if necessary, engage the services of tax professionals to take care of the TDS Compliance. Here is a list of common non-compliance.
- Non-Deduction or Short Deduction of TDS: An interest of 1% is payable per month or part thereof on the non-deduction or short-deducted amount of the TDS.
- Delay in deposit of TDS: If the deductor, employer, in case of TDS on salary, fails to deposit the TDS deducted to the credit of the Income Tax Department within its due date (7th day of next month), then an interest of 1.5% per month or part of the month is payable for such delayed payment.
- Delay in filing of TDS Return: Penalty of ₹200 per day of delay
- Failure to file the TDS Return: Penalty between ₹10,000 to ₹1,00,000/-
- Failure to Issue Form 16: The due date is typically 15th June; delay in issuance of Form 16 is punishable with a fine of ₹100 for each day of delay.
Conclusion
Thus, understanding salary TDS, specifically through Section 192 of the Income Tax Act, is crucial to India’s taxation framework. It sustains tax income and keeps workers happier with consistent deductions. Employers must compute TDS, deduct & remit and the tax so collected accurately. Adherence to TDS provisions are important because failure to do so attracts penalties that might be costly. The provision of section 192 aids in collection of taxes, enhances financial teamwork and assists in the regularisation of the domestic economy.
