TDS on Salary and Provident Fund [Section 192 and 192A]

Section 192: TDS on Salary:

Section 192 provides for deduction of tax by every person responsible for paying any income chargeable to tax under the head ‘Salaries’. Every person here means the deductee can be either resident or non-resident. TDS shall be deducted only at the time payment of such salary. TDS shall be deducted on slab rate calculated at average rate of Income Tax in the previous year.

Manner of Deduction:

The income tax (TDS rate) is required to be calculated at the average rate, considering the rates applicable for the relevant financial year in which the payment is made. This calculation is based on the estimated total income of the assessee. The employee needs to inform the employer about the decision to opt for an alternative tax regime under section 115BAC.

Average rate of income-tax means the rate arrived at by dividing the amount of income- tax calculated on the total income, by such total income.

Option to choose tax regime

With effect from Assessment Year 2024-25, the income tax for an employee`s total income will be calculated based on the rates outlined in section 115BAC(1A). However, certain conditions must be met, including refraining from availing specified exemptions and deductions. The new tax regime provided in section 115BAC is the default tax regime applicable, inter alia, to an individual.

However, under section 115BAC(6), an employee may exercise an option to opt out of this tax regime. So earlier, the old regime used to be default scheme, and to opt for new regime i.e., section 115BAC, employees were required to intimate employers in advance. However, w.e.f. A.Y. 2024-25, new scheme under section 115BAC is default scheme.

Employers, as deductors, are required to collect information from employees with income under section 192 regarding their chosen tax regime. Each employee must inform the employer of their intended tax regime for each year. Upon receiving this intimation, the deductor (employer) will calculate the total income and deduct tax at source accordingly based on the chosen option.

In cases where an employee fails to provide the intimation, it will be assumed that the employee remains in the default tax regime and has not opted out of the new tax regime. Consequently, the employer will deduct tax at source on income under section 192 according to the rates specified in section 115BAC(1A).

Employers, as deductors, are required to collect information from employees with income under section 192 regarding their chosen tax regime. Each employee must inform the employer of their intended tax regime for each year. Upon receiving this intimation, the deductor (employer) will calculate the total income and deduct tax at source accordingly based on the chosen option.

In cases where an employee fails to provide the intimation, it will be assumed that the employee remains in the default tax regime and has not opted out of the new tax regime. Consequently, the employer will deduct tax at source on income under section 192 according to the rates specified in section 115BAC(1A).

It`s important to note that the intimation process does not constitute the exercise of the option under section 115BAC(6). The individual must separately exercise this option in accordance with the provisions of that section [Circular No. 4/2023 dated 5.4.2023]. It simply means that irrespective of regime under which TDS is calculated and deducted, the deductee (employee) have option to choose regime to pay taxes at the time of filing the return.

TDS on non-monetary perquisites [Section 192(1A) and (1B)]:

These sections provide that the employer may pay this tax, at his option, in lieu of deduction of tax at source from salary payable to the employee. Such tax will have to be worked out at the average rate applicable to aggregate salary income of the employee and payment of tax will have to be made every month along with tax deducted at source on monetary payment of salary, allowances etc.

TDS on Sweat equity provided to employees by eligible startups:

If an employer is an eligible startup as defined in section 80-IAC and provides a perquisite to an employee in the form of specified securities or sweat equity shares either at no cost or at a reduced rate, they must deduct or remit tax on the value of this perquisite within 14 days from the earliest of the following events:

• After the lapse of 48 months from the conclusion of the pertinent assessment year.

• The date on which the employee sells such specified securities or sweat equity shares.

• The date the employee no longer serves as an employee for the employer who granted these shares.

The tax deduction or payment should be based on the prevailing rates for the financial year during which the specified securities or sweat equity shares are allocated or transferred. Also, the value of perquisite shall be value of shares provided if provided free of cost or concession amount if provided at concessional rate.

TDS in case of assessee having multiple employers in a single F.Y.

If an assessee is employed by multiple employers simultaneously or takes up a job with a new employer during the financial year after resigning or retiring from a previous job, the assessee should provide details of income under the head "Salaries," including due or received amounts and tax deductions, to the current employer. The subsequent employer is then responsible for considering this information and deducting the remaining tax payable on the employee`s overall remuneration from all employers for the relevant financial year.

Income of other heads to be considered by Employer for calculating average tax rate

If a taxpayer has salary income along with other taxable income for the financial year, they may provide the employer with the following details:

1. Information about other income and details of any tax deducted under another provision.

2. Details of any loss under the head `Income from house property` if the assessee has informed the employer about the intention to opt out of the default tax regime under section 115BAC(1A). The employer should consider these particulars when calculating the tax deductible at source.

Furnishing of a statement of particulars of perquisites or profits in lieu of salary by the employer to the employee:

Section 192(2C) stipulates that the employer is obligated to provide the employee with a statement in Form No. 12BA, presenting accurate and comprehensive details of perquisites or profits in lieu of salary granted to the employee and their corresponding values. This statement must adhere to the prescribed format and method. It`s important to note that this requirement is applicable only when the salary paid or payable to an employee exceeds Rs. 1,50,000. For other employees, the details of perquisites or profits in lieu of salary will be included in Form 16 itself.

TDS under this section on Tips received by waiters:

ITC Limited Gurgaon vs Commissioner of I.T. (TDS) Delhi on 26 April, 2016 [Supreme Court] [2016] 155 TAXLOK.COM (IT) 357 (SC):

The tip amount paid by the employer to the employees has no connection to the employment contract. Tips are received by the employer in a fiduciary capacity, acting as a trustee for payments received from customers, which are then disbursed to employees for the services provided. The payment of tips does not involve any reference to the employment contract. The argument that there is an indirect reference to the employment contract is rejected, as the payments received by employees have no connection to the employment contract; rather, they originate from customers, with the employer acting as a conduit in a fiduciary role between the two.

Section 192A: TDS on Premature withdrawal from Employees Provident Fund:

Section 192A stipulates that a tax deduction at a rate of 10% shall be applied to premature taxable withdrawals from the Employees` Provident Fund Scheme. This means that if an employee has an accumulated balance in a recognized provident fund, and this amount becomes part of their total income due to specific conditions mentioned in Rule 8 of Part A of the Fourth Schedule not being met, then the trustees of the Employees Provident Fund Scheme, 1952, or any authorized individual under this scheme responsible for disbursing the accumulated balance to employees, must deduct income tax at a rate of 10% before making the payment.

TDS shall be deducted at the time of payment. If employee does not furnish his PAN, TDS shall be deducted at Maximum Marginal Rate. Although, no tax deduction is to be made under this section, if the amount of such payment or aggregate amount of such payment to the payee is less than Rs. 50,000.

So basically, TDS is to be deducted in case withdrawal of provident fund is taxable. If withdrawal is out of statutory provident fund is fully exempt, if withdrawal is out of recognized provident fund, it is taxable if certain condition provided in Part A of the Fourth Schedule to the Income-tax Act, 1961 are fulfilled. And withdrawal from unrecognized provident fund is always taxable.

Part A of the Fourth Schedule to the Income-tax Act, 1961, outlines the provisions related to Recognized Provident Funds (RPFs). According to the existing provisions stated in Rule 8 of Part A of the Fourth Schedule, the withdrawal of an accumulated balance by an employee from the RPF is currently exempt from taxation.

In order to discourage premature withdrawal and encourage long-term savings, if an employee chooses to withdraw before completing continuous service of five years (except in cases of termination due to ill health, contraction or discontinuance of business, cessation of employment, etc.) and decides not to transfer the accumulated balance to a new employer, the withdrawal will be subject to taxation.