Deduction at source from salary

T. Banusekar

TAX deduction at source from salary has always been the major contributor to the exchequer.

The burden of collecting the tax from the employees is shifted from the Government to the employer. Every year, the Central Board of Direct Taxes comes out with a circular explaining the various provisions relating to the deduction of tax at source from salaries.

The last Circular No. 798, dated October 30, 2000 [246 ITR 68 (St.)], enumerates the provisions relating to deduction of tax at source from salaries for the financial year 2000-2001. Tax Talk, for the benefit of employees and drawing and disbursing officers, explains some of the more important provisions set out in the circular.

Scheme of deduction

Every person who is responsible for paying any sum, which is chargeable to tax under the head `Salaries', is liable to deduct tax at the time of payment of such salary. Tax is to be calculated at the appropriate rates and is to be deducted in 12 equal instalments over the year. No tax will, however be deducted at source unless the estimated salary income including the value of perquisites for the financial year exceeds Rs 50,000 (after standard deduction).

If an individual is working under more than one employer, or has changed from one employer to another, the employer of the employee's choice shall deduct tax from the aggregate salary including the salary from the previous or other employer. The employee, in such cases, shall furnish to the present or chosen employer, the particulars relating to his salary income and the tax deducted if any by the previous or other employer.

The employee may furnish particulars of income under any other head to the employer in Form 12C. However, such income shall not be a loss under any head except a loss under the head `Income from House Property' for the same financial year.

The employer in such cases shall take into account the loss from House Property for working out the amount of tax to be deducted at source. The employer can make adjustments for any excess or shortfall in the deduction of tax already made during the financial year, in the subsequent deductions during that financial year itself.

The employee may, if he wants a lower or no deduction of tax at source from salary, make an application in Form 13 to his assessing officer. The assessing officer may if satisfied that the total income of the assessee justifies the deduction of tax at lower rate or no deduction of tax, issue an appropriate certificate to that effect. The employer, while deducting tax at source, should take cognisance of the certificate.

Chargeable under salaries

Salary includes any sum paid by an employer or a former employer or on behalf of an employer or former employer, which generally may be of the following nature

*Wages

*Fees

*Commission

*Perquisites

*Advance or arrears of salary

*Profits in lieu of or in addition to salary

*Annuity or pension

*Gratuity, encashment of leave and other retirement benefits

*Contribution to Recognised Provident Fund (RPF) by an employer in excess of 12 per cent

*Interest credited to RPF in excess of 12 per cent of the balance to the credit of the employee.

Any salary bonus commission or remuneration received by a partner of a firm from the firm is not chargeable to tax under the head `Salaries'.

The value of any benefit or amenity provided or granted free of cost or at concessional rate by the employer to an employee shall be regarded as a perquisite for the purpose of estimation of income under the head `Salaries' for the financial year. However, these facilities shall not be treated as perquisites in the hands of employees (not being a Director of the company or a person having substantial interest in the company) whose income under the head `Salaries' excluding non-monetary payment does not exceed Rs 24,000. Employee Stock Options and vehicle provided by an employer for journey by the employee from his residence to his office or other place of work are not regarded as perquisites

Exemptions: Some of the exemptions available in respect of income earned under the head `Salaries' are discussed below:

Leave travel concession: The value of any travel concession or assistance received by an employee from his employer or former employer for himself and his family in connection with his proceeding on leave to any place in India is exempt from tax subject to certain conditions. The amount exempt under this provision can in no case exceed the amount actually spent by the employee.

`Family', for this purpose, means:

a) the spouse and children; and

b) parents, brothers and sisters of the individual wholly or mainly dependent on that individual.

Number of trips: The exemption is available in respect of two journeys performed in a block of four calendar years commencing from calendar year 1986. Where an individual does not use such travel concession or assistance during any block of four calendar years, the value of travel concession or assistance first availed during first calendar year immediately succeeding block of four calendar years shall be eligible for exemption. This exemption shall be in addition to the exemption that will be available in respect of two journeys for the succeeding block.

House rent allowance: House rent allowance is exempt from tax to the extent of the least of the following

(a) The actual amount of such allowance received by an employee in respect of the relevant period.

(b) Rent paid less 10 per cent of the salary.

(c) Where such accommodation is situated in Mumbai, Kolkata, Delhi or Chennai, 50 per cent of the salary (40 per cent of salary for any other place)

`Salary' for this purpose means the basic salary and includes dearness allowance if the terms of employment so provide but excludes all other allowances and perquisites.

Medical allowance: The following expenses incurred by an employer towards medical treatment of an employee or any member of his family is exempt

(a) The value of any medical treatment provided in any hospital maintained by the employer.

(b) Any sum paid by the employer in respect of any expenditure on medical treatment

(i) in any hospital maintained by the Government or local authority or any other hospital approved by the Government for the purpose of any medical treatment of its employees.

(ii) in respect of any prescribed diseases or ailment in any hospital approved by the Chief Commissioner. The employee in such cases shall attach with return of income a certificate from the hospital specifying the disease or ailment for which medical treatment was required and the receipt for the amount paid to the hospital.

(c) Premium paid/reimbursement by the employer in respect of medical insurance premium. (d) Reimbursement by the employer of the amount spent by the employee in obtaining the medical treatment from any doctor not exceeding in the aggregate Rs 15,000 in a year.

(e) As regards medical treatment abroad

(i) Actual medical expenditure of the patient and stay abroad of the patient and one attendant subject to the condition that these will be exempt only to the extent permitted by the Reserve Bank of India, and

(ii) the expenditure on travel of the patient and one attendant is exempt only in the case of an employee whose gross total income, as computed before including the said expenditure does not exceed Rs 2,00,000.

Certain other allowances: (i) Children's education allowance -- Rs 100 per month per child up to a maximum of two children

(ii) Allowance granted to meet the hostel expenditure on his child -- Rs 300 per month per child up to a maximum of two children, and

(iii) Transport allowance to meet expenditure for commuting from his house to place of duty -- Rs 800 per month (Rs 1,600, in the case of blind or orthopedically handicapped).

A continuation of this article will be published in `Tax Talk' dated February 18.

(The author is a Chennai-based practising chartered accountant.

Business Line invites queries on personal taxation issues to this column. They will be answered in the first Sunday's issue of Business Line every month. Queries may be addressed to Tax Talk, Business Line, Kasturi Buildings, 859, Anna Salai, Chennai 600002, or by e-mail to vaidy@thehindu.co.in