Link between Income Tax, and TDS
It is an employer's responsibility to deduct employees' Income Tax. The employer must deduct the applicable tax during the processing of employees' salary. The employer pays the tax to the Income Tax department. This tax is then deducted from the employee's salary. The tax deducted by the employer is called TDS (Tax deducted at source).
eTDS stands for electronic Tax Deducted at Source. From July 2004 onward, employers need to file the various Income Tax returns in an electronic format. The paper formats of the returns are no longer accepted.
Digital Signature for Form 16
To address the challenge of physically generating, signing, and distributing a large number of Form 16, the Income Tax department has now allowed organizations to generate Form 16 and sign them digitally. These documents are called Digitally Signed Form 16. After the introduction of this facility, it is not needed to print and sign Form 16.
Form 24Q is a statement/ report that you need to generate quarterly in every financial year. This statement contains information of all employees who have a taxable income, the tax that has been deducted every month, and whether the deducted tax is paid to the IT department. This statement needs to be generated and filed with the Income Tax department. The statement needs to be generated in an e-format i.e. as a file in a format specified by the IT department. This is also commonly referred to as eTDS Returns.
eTDS File Format
The eTDS files should be validated using the file validation utility FVU. This format can vary every year. The eTDS file format contains the following information:
- Name of the software that is used for generating eTDS returns.
- Information on the category of the deductor i.e. organization doing the tax deduction.
- Some additional fields that are applicable to Government (public sector) organizations.
Income Tax Computation
Indian Income Tax laws are one of the most complicated in the entire world. We will try to give you an overview of income tax computation.
The IT for an employee is calculated on an annual (yearly) basis. This is called as Financial Year. The year begins on April 1st and ends on March 31st of the subsequent year. For example April 2019 to March 2020. Income Tax is broadly calculated as follows:
- The Income for a year is calculated (this is the actual income paid to an employee).
- The Perquisites are added to this income (this is the notional value of the Perquisites or benefits given to an employee).
- Next, the government-allowed Exemptions are calculated and deducted from the income.
- Further, the Profession Tax is deducted from the income.
- The balance income at this stage is termed as Income chargeable under head Salaries.
- Any other income declared by the employee is added to Income chargeable under head Salaries. Any losses are deducted too.
- Next, deductions in terms of Medical Claim Premiums, Savings in LIC, Bonds, and others (referred to as Chapter 6A Deductions) are deducted from the income.
- The balance income is called as Taxable Income.
- On this income, tax is calculated based on the slabs prescribed.
Detailed explanations are provided as follows:
Income for the Year
- A Financial Year is the period from April to March of next year. For example, if you are in July 2019 then the tax (financial) year is the period from April 2019 to March 2020.
- Income for the year consists of 2 kinds, Monthly or Regular Earnings and one-time or Other Earnings.
- Monthly Earnings consists of all amounts paid to the employee every month. This generally consists of Basic, DA, HRA, Conveyance, Special Allowance, Personal Pay, etc.
- Other Earnings consists of all components that are not paid on a regular basis but are one-time payments. This includes components such as Performance Incentive, Bonus, Sales Incentive, Taxable Reimbursements, etc.
Income for Income Tax calculations are calculated on an annual basis (yearly). The amounts that are actually paid and mentioned in the payroll are considered as income. To this, we add the income that is expected to be paid to the employee. This is called Projected Income. For example, if you are in the month of June then the actual payout for April, May, and June are considered. To this, we add the projected income (projection) from July to March.
Please note that the amount is calculated on an annual basis. The deductions are done monthly.
- Projection means that the income of the current month is assumed to be the monthly income until the end of the financial year, i.e. current month's income is projected until the end of the financial year. For example, if the employee's Basic salary is 3000 in June, then the Basic salary in July, August, etc. up to March is assumed to be 3000 per month. The same logic applies to other monthly components. The summation of all these components for the financial year is the Regular Earnings.
- The amount that is projected may not always be the amount paid in that month. Take the example of Basic salary, which is 3000. If in a month, a person has a one day LOP then his Basic paid will be Rs. 2900. In this case, we need to project 3000 and not 2900.
- Perquisites or Perks are the benefits given to an employee instead of actual cash. Here no cash salary is paid, but a notional value is added to the taxable income of the employee. Some common Perquisites and their explanations are given as follows:
- If a company provides housing to the employee or rent for a house instead of paying an HRA (House Rent Allowance), then a House Perquisite needs to be calculated and added to the Taxable Income.
- The actual method involves a calculation based on the actual rent paid for the house or FRV (Fair Rental Value) and the employee's city of stay is in a metro or non-metro city.
- HRA and House Perquisite are mutually exclusive components i.e. if an employee is getting HRA, then House Perquisite is not calculated and vice verse.
- Vehicle Perquisite is calculated when the company either provides a vehicle to the employee or pays rent for the vehicle used by the employee for company purposes.
- Vehicle Perquisite is based on the type of vehicle (above or below 1600cc) and whether the employee employs a driver whose salary is also claimed from the company.
- The calculated amount is added to the taxable income of the employee as Vehicle Perquisite.
Assets at Residence
- If a company provides assets to an employee, then a Perquisite for the Assets at Residence needs to be calculated. These assets generally include