Section 192 of the Income Tax Act, 1961, is a crucial provision for both employers and employees as it governs the deduction of tax at source (TDS) on salary. It mandates that every employer who pays a salary exceeding the basic exemption limit must deduct TDS before making the payment to the employee. This section ensures that tax is collected at the source, reducing the burden of lump-sum payments at the end of the fiscal year for the employee and aiding the government in tax collection.
Who is Required to Deduct TDS Under Section 192?
TDS under Section 192 must be deducted by a wide range of employers, including:
- Companies (private or public)
- Individuals
- Hindu Undivided Families (HUFs)
- Trusts
- Partnership firms
- Co-operative societies
When is TDS Deducted?
TDS is deducted at the time of actual payment of the salary, not during its accrual. This means that tax will be deducted when the employer pays the salary, whether it is paid in advance, on time, or in arrears (late payment). If an employee’s estimated salary does not exceed the basic exemption limit, no TDS will be deducted. This rule applies even to those who do not have a Permanent Account Number (PAN).
Basic Exemption Limits
The basic exemption limits under the old tax regime, based on age, are as follows:
- Below 60 years: ₹2.5 lakh
- Between 60 and 80 years: ₹3 lakh
- Above 80 years: ₹5 lakh
Under the new tax regime, the basic exemption limit for all individuals, irrespective of age, is ₹3 lakh.
Calculating TDS on Salary
How to Calculate Taxable Income for an Employee
Step 1: Estimate Salary
- The employer starts by estimating your total salary for the year. This includes your basic pay, allowances (like HRA, LTA, meal coupons), bonuses, commissions, and any salary from a previous job.
Step 2: Calculate Exemptions
- Next, the employer figures out what parts of your salary are exempt from tax. This can include things like HRA, travel expenses, and children’s education allowances. They also subtract professional tax, entertainment allowance, and a standard deduction of ₹50,000.
Step 3: Determine Taxable Salary
- The employer subtracts these exemptions from your total salary to find out how much of your salary is taxable.
Step 4: Add Other Incomes
- If you have other incomes, like rent from a property or interest from bank deposits, these are added to your taxable salary. If you have a home loan, the interest you pay can reduce your taxable income.
Step 5: Subtract Investments
- Finally, the employer subtracts any investments you’ve made that qualify for tax deductions, like PPF, EPF, ELSS mutual funds, and life insurance premiums. This gives your total taxable income.
Tax Regimes
- New Tax Regime (Default from FY 2023-24): This is the default option. It has lower tax rates but fewer exemptions and deductions.
- Old Tax Regime: You can choose this if you prefer. It has higher tax rates but allows more exemptions and deductions. You need to inform your employer if you want to opt for this.
TDS (Tax Deducted at Source)
- Rate of TDS: There is no fixed rate for TDS under Section 192. It’s based on the income tax slab rates for the year.
- Choosing Tax Regime: At the start of the year, you can choose between the old and new tax regimes. If you do not choose, the new regime is applied by default.
- Monthly Deduction: The employer calculates your total tax for the year and divides it by the number of months you will be working to figure out how much TDS to deduct each month.
Adjustments
- If there is any excess or deficit in the TDS deducted earlier, the employer will adjust it in the remaining months of the financial year.
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Examples of TDS Calculation
Let us consider a few scenarios to understand how TDS is calculated under Section 192:
Scenario 1: Employee Below 60 Years with Salary Above ₹2.5 Lakh
An employee under 60 years of age with an annual salary of ₹4 lakh would exceed the basic exemption limit of ₹2.5 lakh. The employer would calculate the tax liability on the ₹1.5 lakh exceeding the exemption limit and deduct TDS accordingly.
Step-by-Step TDS Calculation
- Annual Salary: ₹4,00,000
- Basic Exemption Limit: ₹2,50,000
- Taxable Income:
- Subtract the basic exemption limit and standard deduction from the annual salary.
- ₹4,00,000 – ₹2,50,000 -50,000 = ₹1,00,000
- Tax Calculation:
- Tax on ₹1,00,000 = 5% of ₹1,00,000 = ₹5,000
- Health and Education Cess:
- A 4% cess is added to the tax amount.
- Cess = 4% of ₹5,000 = ₹200
- Total Tax Payable:
- Total tax = ₹5,000 + ₹200 = ₹5,200
Monthly TDS Deduction
To find out how much TDS will be deducted each month:
- Total Tax Payable: ₹5,200
- Number of Months: 12
- Monthly TDS Deduction:
- Monthly TDS = ₹5,200 / 12 ≈ ₹433.33
So, the employer will deduct approximately ₹433.33 as TDS from the employee’s salary each month.
Scenario 2: Senior Citizen with Salary Below ₹3 Lakh
A senior citizen employee between 60 and 80 years with an annual salary of ₹2.8 lakh would not exceed the basic exemption limit of ₹3 lakh. Therefore, no TDS would be deducted.
Step-by-Step TDS Calculation
- Annual Salary: ₹2,80,000
- Basic Exemption Limit for Senior Citizens: ₹3,00,000
- Taxable Income:
- Since the annual salary of ₹2,80,000 is below the basic exemption limit of ₹3,00,000, the taxable income is ₹0.
- Tax Calculation:
- No tax is applicable because the taxable income is ₹0.
If the income exceeds ₹3 lakhs, TDS will be calculated in the same manner as described in Scenario 1
Scenario 3: Salary Paid in Foreign Currency
If an employee is paid in foreign currency, the employer must convert the salary into Indian rupees at the telegraphic transfer buying rate of the State Bank of India as of the date on which tax is required to be deducted, and then calculate TDS.
Step-by-Step TDS Calculation
- Convert Salary to Indian Rupees (INR):
- Suppose the employee’s annual salary is $50,000.
- Assume the telegraphic transfer buying rate of the State Bank of India (SBI) on the date of tax deduction is ₹75 per USD.
- Convert the salary to INR: $50,000 * ₹75 = ₹37,50,000.
- Determine Taxable Income:
- Follow the same steps as for a salary paid in INR to determine the taxable income.
- Let’s assume the basic exemption limit for the employee is ₹2,50,000 (for an employee under 60 years).
- Calculate Taxable Income:
- Annual Salary in INR: ₹37,50,000
- Basic Exemption Limit: ₹2,50,000
- Taxable Income: ₹37,50,000 – ₹2,50,000 = ₹35,00,000
- Income Tax Slabs for FY 2023-24 (Old Regime):
- Up to ₹2,50,000: No tax
- ₹2,50,001 to ₹5,00,000: 5%
- ₹5,00,001 to ₹10,00,000: 20%
- Above ₹10,00,000: 30%
- Tax Calculation:
- Tax on ₹2,50,001 to ₹5,00,000: 5% of ₹2,50,000 = ₹12,500
- Tax on ₹5,00,001 to ₹10,00,000: 20% of ₹5,00,000 = ₹1,00,000
- Tax on ₹10,00,001 to ₹35,00,000: 30% of ₹25,00,000 = ₹7,50,000
- Total Tax: ₹12,500 + ₹1,00,000 + ₹7,50,000 = ₹8,62,500
- Health and Education Cess:
- Cess: 4% of ₹8,62,500 = ₹34,500
- Total Tax Payable:
- Total Tax: ₹8,62,500 + ₹34,500 = ₹8,97,000
Monthly TDS Deduction
To find out how much TDS will be deducted each month:
- Total Tax Payable: ₹8,97,000
- Number of Months: 12
- Monthly TDS Deduction:
- Monthly TDS: ₹8,97,000 / 12 = ₹74,750
So, the employer will deduct approximately ₹74,750 as TDS from the employee’s salary each month.
Penalties and Fines for Non-Deduction of TDS by Employer
For Employers
- Interest on Non-Deduction or Non-Payment of TDS (Section 201(1A)):
- Non-Deduction: If the employer fails to deduct TDS, they must pay interest at 1% per month from the date the tax was supposed to be deducted until the actual date of deduction.
- Non-Payment: If the employer deducts TDS but fails to deposit it with the government, they must pay interest at 1.5% per month from the date of deduction until the date of payment.
- Penalty for Failure to Deduct or Pay TDS (Section 271C):
- The employer may face a penalty equal to the amount of TDS they failed to deduct or pay.
- Prosecution (Section 276B):
- If the employer fails to pay the deducted TDS to the government, they can be prosecuted, which may result in imprisonment for a term ranging from 3 months to 7 years, along with a fine.
- Disallowance of Expenditure (Section 40(a)(ia)):
- If TDS is not deducted or not deposited, 30% of the expenditure on which TDS was supposed to be deducted will be disallowed as a deduction while computing the employer’s taxable income.
For Employees
- Liability to Pay Tax:
- If the employer does not deduct TDS, the employee is still liable to pay the income tax due on their salary.
3 Points to be Noted by Employee’s
Form 16
Form 16 is a TDS certificate issued by your employer. It serves as proof that tax has been deducted from your salary and deposited with the government. Here’s a quick overview:
Part A: Contains details like the employer’s and employee’s PAN, TAN, and summary of tax deducted and deposited quarterly.
Part B: Provides a detailed breakup of your salary, deductions under Chapter VI A (like 80C, 80D), and tax computation45.
Section 89
Section 89 of the Income Tax Act provides relief to taxpayers who receive salary arrears or advance salary. This relief is designed to mitigate the additional tax burden that might arise due to the receipt of past income in the current year. Essentially, it ensures that you don’t end up paying higher taxes just because you received a lump sum payment that pertains to previous years1.
Form 10E
To claim relief under Section 89, you need to file Form 10E. This form is mandatory and must be submitted online through the Income Tax Department’s e-filing portal.
Key Points to Remember
- Mandatory Filing: If you don’t file Form 10E, you won’t be able to claim the relief under Section 89, even if you mention it in your Income Tax Return (ITR).
- Timely Submission: It’s advisable to file Form 10E before filing your ITR to ensure smooth processing of your claim.
