Link between Income Tax, and TDS
It is an employer's responsibility to deduct its employees' Income Tax. The employer must deduct the applicable tax and then process their during the processing of employees' salary. The employer pays the tax on behalf of its employees 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 on 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 2. 128. 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 1, 2009, 2019 to March 31, 20102020. 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 2009 2019 then the tax (financial) year is the period from April 2009 2019 to March 20102020.
- 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 1200cc1600cc) 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 White Goods (TV, Fridge, Washing Machine, Furniture, A/C, etc).
- The calculated amount is added to the taxable income of the employee as Perquisite on Assets at Residence.
- If a company provides Lunch to its employees, then a Perquisite for the Lunch so provided needs to be calculated.
ExemptionsOn the income that is paid to an employee, certain exemptions can be claimed. Claiming an exemption will result in the taxable income of the employee being reduced. The following exemptions are calculated for employees based on the selected regime:
House Rent Exemption (HRA Exemption)
- An employee can claim an exemption towards house rent if he is living in rented accommodation. This is called House Rent Exemption. The exemption is calculated as follows:
- 40% of the total Basic. (This will be 50% in case the employee is living in a metro).
- Total HRA.
- Annual Rent paid in excess of 10% of Basic. ( Rent Paid - 10% of Basic).
- The least of the above 3 will be taken as the exemption.
- If an employee has to avail HRA Exemption, then he/she has to provide proof of rent paid. This will be in the form of rent receipts.
- In case an employee has stayed in a rented accommodation only for part of a year, then the exemption will be given only for the HRA received in that period. Exemptions will only be calculated for the month the rents have been paid.
- Standard Exemption is Standard Deduction is newly introduced by the Income-tax department. This standard deduction of Rs 50,000 is a sum total of transport allowance (Rs 19,200) and medical reimbursement (Rs 15,000). Transport allowance and medical reimbursement exemptions are no longer separately available.
LTA Exemption or Leave Travel Allowance Exemption
- An employee can claim an exemption based on the money spent during a tour with family. This is called LTA Exemption.
- LTA exemption can be claimed twice during a block of 4 years.
- There is no upper limit on the exemption that can be claimed.
- All the amount received by the employee under LTA can be claimed as an exemption provided the same has been spent.
- There are various rules for the calculation of exemption amounts.
- An employee can claim an exemption on the expenses incurred toward providing education for up to two dependent children. This is called Education Exemption.
Kindly note that the exemptions are calculated for employees based on the selected regime.
- The government allows the entire Profession Tax paid by the employee to be deducted from the taxable income of the employee.
Income Chargeable under the head Salaries
- The income that remains after deduction of the exemptions and Profession Tax is called Income chargeable under the head Salaries.
- Income under head Salaries = Actual Income + Projected Income + Perquisites - Exemptions - Profession Tax.
- To the salary income, you will then add any other income that is declared by the employee. This could be an interest income or any other income.
- An important element that is commonly used here is the Loss on House Property. If an employee is repaying a housing loan, then the interest paid on that loan can be reduced from the salary income of the employee. This is put as negative income and adding this to the Salaries reduces the salary income.
Gross Total Income
- The amount that is computed when the Other Income is added to the Salaries is called Gross Total Income.
Chapter 6 Deduction
From the Gross Total Income, the investments made by the employee under various approved funds and payments done for Mediclaim, etc can be deducted. These deductions are called Chapter 6 Deductions. There are various sections under which an employee can claim a deduction. The most common are 80C, 80D, 80G, and 80CCC. Following are some of the sections and various items under each section:
- 80C pertains to investments made under PF, PPF, NSS, Post Office Savings schemes, LIC Premiums, etc.
- 80D pertains to premiums paid for Medical Insurance.
- 80DD pertains to amounts spent on Medical Treatments.
- 80E pertains to interest paid on Education loans.
- 80EEA pertains to Additional interest on housing loan borrowed as on 1st Apr 2019.
- 80EEB pertains to Interest on Electric Vehicle borrowed as on 1st Apr 2019.
- Aggregate amount deductible under section 80C shall not exceed one lakh and fifty thousand rupees.
- Aggregate amount deductible under the three sections, i.e. 80C, 80CCC, and 80CCD shall not exceed one lakh and fifty thousand rupees.
- The total of all amounts deductible under Chapter 6 is summed up and removed from the Gross Total Income.
- This amount is called as Taxable Income. This amount is always rounded off to the nearest 10 rupees.
Kindly note that the Income-tax slab rates, exemptions and deductions vary every year based on the budget. Read our article on Budget changes 2020-2021 to know more.
Income Tax payable
Income Tax is calculated on the Taxable Income.
- Income Tax is computed on a slab basis.
- On the income tax, depending on various rules and policies in effect, Surcharge and Cess will be calculated.
- The sum of the Income Tax, Cess, and Surcharge is called the Total Tax payable.
Tax Deduction at Source (TDS)
- The income tax payable is an annual amount i.e. it is the amount to be paid for an entire financial year.
- Deduction of this income tax from the income paid to the employee is the responsibility of the employer. The employer needs to do this deduction.
- This deduction is called as Tax Deducted at Source or TDS.
- Usually, the employer will compute the total tax. From this tax, the amount of tax already paid will be deducted. The balance amount is divided by the number of remaining months in the financial year and the tax is deducted in equal instalments.
- This is shown as an Income Tax deduction in the payslip of the employee.
Various reports to be generated as an employer
As an employer, you need to generate and file the following reports:
- Monthly Income Tax Report: This is the total amount that you have deducted from each employee. This amount needs to be paid under a Tax Challan to the Income Tax Department.
- Form 24Q: This is a report that needs to be generated every quarter. This gives information on all the amounts paid to your employee, tax that you have deducted, and the tax that you have paid. A quarter is a 3 month period starting from April of every year.
- Form 24: This report needs to be generated once a year. This is consolidated information of all amounts paid to an employee, tax deducted. and tax paid.
- Form 16 and Form 12BA: This report needs to be generated and given to the employees once a year. This contains complete information on all the salaries paid to the individual employees along with information on Perquisites, Exemptions, Deductions, and Tax calculations. This is given either when an employee leaves the company or at the end of the Financial Year.