TDS on Salary

TDS ON SALARY and Rebate U/s 87A

Any person responsible for paying income chargeable in the hands of recipient as ‘Salaries’ shall make TDS u/s 192  of the Income Tax Act, 1961.  The article discusses some basic aspects of the provisions of the said section. The basic conditions that attract compliance of Sec. 192 are;

i. The relation between payer and payee must be that of an employer and an employee

ii. The payment is in the nature of ‘salary’

Who is the person responsible?

Let’s first evaluate the definition person as per Act. It includes following:

i. Individual

ii. Firm

iii. Company

iv. HUF

v. AOP, BOI (whether it has profit motive or not)

vi.Any other artificial judicial person

vii. Local Authority

The person responsible to pay salary to the employees is the person responsible to make TDS u/s 192. However, this doesn’t mean that a person of accounts / finance department paying salary to employees on behalf of the company is a responsible person. If a person of such department is paying salary on behalf of the company, person responsible to make TDS is the company itself and principal officers’ thereof. [British Airways v. CIT (1991) 54 Taxman 470 (cal.)]

However, in case of employees of Central or State Govt. respective distributing officer is the person responsible for making TDS.

When to make TDS?

Most of the sections dealing with TDS provisions require the payer to make TDS at the time of credit or payment, whichever is earlier. However, Sec. 192 is one of such section, which requires making TDS at the time of payment of salary. This means one need not to make TDS at the time of passing entry in the books of accounts, TDS is to be made only when salary is actually paid.

Eg. A firm XYZ enterprise passes a journal entry at the end of every month for salary to employees, for that month, in the books of accounts. However, actual payment is made to the employees in the first week of the next month except for the month of March where salary is paid at the month end. Suppose, Entry of salaries for the month of April, 2014 is passed on 30.04.2014 however actual payment is made on 05.05.2014. In this case TDS is required to be made on 05.05.2014 and not on 30.04.2014.

What amount is to be considered for TDS?

TDS is to be made by the employer from the amount paid to the employee as salary. The term salary includes various allowances and perquisites. Some allowances and perquisites given by the employer to employees are exempt, either fully or partly, subject to some conditions laid by the provisions of the Act.

Further, if any employee who was previously employed with another employer during the FY and has given declaration of salary received from previous employer and TDS on that, it also has to be considered by the current employer.

In addition to this if any employee has also given declaration regarding his any other income viz. Income from house property or interest income then that is also required to be taken care of by the employer.

Is it possible to increase or decrease TDS amount during the year?

Employer while making TDS, has to consider many things like salary structure,allowances given and its taxability, perquisites and its taxability, declarations given by the employee for other incomes and investments for claiming deductions under chapter VI-A. It may happen that during the financial year, employees receives any unstructured benefit from the employer due to any scheme or award given by the employer or some employees who were not eligible to get exemption for some allowances earlier may become eligible later (eg. HRA) or employee may not be able to give proof for the investment declared or vice versa. In all such cases, it may happen that employer has to increase or decrease the amount of the tax that is monthly deducted from employee’s salary. It may also happen that TDS was not made from an employee’s salary for whole year as his income was below taxable limit considering his investment declaration. However, in the last month he couldn’t give the proofs for that and TDS is required to be made in that month for whole year.

The question may arise is what if adjustment is required to be made later to reduce or increase TDS amount? Is the employer liable to pay interest under section 201? In case while making payment of salary, TDS was made short and later employer paid the difference amount, can he recover that amount from employee? Here is the answer;

Section 192(1) of the Act contemplates deduction of tax at the time of payment while section 201 (1A) deals with the situation when deduction is not made. In such situation, section 192 (3) comes to the rescue of the employer. Section 192 (3) of the Act permits the person responsible, to deduct tax, to make the adjustments by increasing or decreasing the TDS amount. It not only allows adjusting by increase or decreasing in TDS amounts, it also authorizes adjustment in case of total failure of making TDS during the financial year. As nowhere it is mentioned that section 192(3) shall be read separately, it is part of section 192 only and has to be read with sub-section (1) of section 192. [CIT v. Enron Expat Services Inc. (2010) 194 Taxman 70 (Uttarakhand)]

The adjustment of TDS amount during the financial year is always allowed considering section 192 (3) however it is not allowed to give refund of excess deduction to one employee out of deduction of another employee. Adjustment is permissible with reference to the estimated income of ‘the assessee’ i.e. one employee and not all employees taken together. [Shriram Pistons & Rings Ltd. v. ITO (2000) 73 ITD 30 (Delhi Tri.)]

Section 192(1) nowhere mentions that each monthly installment of TDS should exactly 1/12 of the total tax deductible for the year, as the adjustment by way of increasing or decreasing TDS amount which is authorized by section 192(3) will otherwise have no meaning.  Interest is leviable only if there is a short fall in the total TDS for the year. [Vinsons v. Third ITO (2004) 89 ITD 267 (Mum. Tri.), ITO v. Cadila Laboratories (P) Ltd (1996) 56 TTJ (Ahd. Trib) 156]

On the contrary, Ahmedabad tribunal in the case of Madhya Gujarat Vij co. Ltd v. ITO (2011) 133 ITD 89/14 taxmann.com 156 held that what is required to be seen by the AO in respect to such shortfall or failure in making TDS by employer is whether, while making payment of salary to employees, there was bona fide belief in making the lesser deduction in a particular month and it was made good immediately after noticing the deficiency. Section 192(3) no doubt allows adjustment but it doesn’t mean that employer can resort to lump sum deduction during the financial year and to make adjustment at year end. If so done, AO can charge interest by calculating monthly deficiency being difference between what was required to be deducted and what is actually deducted.  

CA Neil Ganatra