The sections 192 to 196 of Income Tax Act, directs “Any person responsible for paying any income chargeable to tax” to deduct income-tax thereon at the rates specified respectively.
While making the payment of Salary, deductor should consider the following and deduct correct TDS from the payment being made.
- Calculate the annual Approximate/Actual Salary
- Calculate the Exact Taxable Salary amount Paid/Payable till current month for the financial year.
- Calculate the approximate salary that will be paid for rest of the FY, assuming the current month salary for rest of the year salary.
- Add any other income reported by the Assessee [Employee].
- Deduct if any Loss declared by the Employee, from the annual taxable salary. Note that, only House property loss (interest in case of Self Occupied House Property) should be considered.
- Deduct the allowed deductions declared by employee under Section 80C, 80D, 80G, etc.
- Calculate the Income Tax, Surcharge and cess on the net Income, as per the “Rates in Force”
- Deduct if any rebate U/s 88E or Relief U/s 89. (explain the heads)
- Keeping it as total tax, now deduct the TDS made till last month from it.
- Divide the net TDS by “Remaining number of months in the FY, including current month”.
- Deduct this amount from employees Salary
A deductor accordingly, should follow the below points while making/preparing each payment.
- Categorizing each payment to relevant “type of Payment” or “Section”.
- Check that the payment is not a payment is being done to Government, Reserve Bank, certain corporations established under Central Act, or Mutual Funds. [comes under Section 196]
- Refer the Threshold limit for such section or Type of Payment.
- Refer the Rate of Tax
- Check the Assessee [party] has not submitted his declaration under Section 197A for non-deduction of TDS. [Only for payment of Interest (Securities and Other than securities), Dividends and Interest on NSC, Viz: sections 194, 194A, 193, 194EE]
- Check the Assessee [party] has not submitted a certificate by Assessing Officer under Section 197 for non-deduction of TDS or deduction at a Lower Rate.
- Check the relevant rate of TDS under respective type of payment [sections 193 to 196]
- Get the effective rate TDS, including Surcharge and Cess [if any].
- Deduct the amount as per the effective rate of TDS from the amount being paid.
Consequences of not making Tax deduction:
If Deductor fails to deduct the “whole or any part of the tax” as TDS, then,
- Any payment made as interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services, or amounts payable to a contractor or sub-contractor, on which TDS is deductible and such TDS has not been deducted or after deduction, has not been paid during the previous year [or within appropriate time limit], such amount will be added-back to the income chargeable to tax.
- Simple interest will be payable at 1% per month on the amount of tax [TDS] from the date on which such tax was deductible to the date on which such tax is actually paid. Such interest should be paid before furnishing the quarterly statement for respective quarter. [Refer Section 201(1A)]
- Attracts penalty, which is equal to the amount of tax which such person failed to deduct. There can also be some additional penalty imposable Joint Commissioner. [Refer Section 271C]