TDS deduction by Employer as per New Regime legally permissible?

[NEERAJ BANSAL]

Recently, CBDT has issued Circular No C1 of 2020 dated 13.04.2020 clarifying deduction of tax by employer as per new regime at the option of the employee. Let’s discuss the legal provisions regarding deduction of tax by employers and answer the following questions:

1. Whether the Circular complies with the provisions of the Income-tax Act, 1961 (‘the Act’)?
2. Whether the Circular is beneficial in nature?
3. Whether the Circular should be complied with?

Legal Provisions-

Section 192 of the Act mandates deduction of tax by employer from the Salary paid to the employees. The rate at which deduction is to be made is provided under sub-section (1) which reads as under:

“Any person responsible for paying any income chargeable under the head "Salaries" shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year.”

As per the provision the deduction is to be made at rates in force for the financial year. Rate or rates in force is defined u/s 2(37A) of the Act. The relevant clause reads as under:

“(i) for the purposes of calculating income-tax under the first proviso to sub-section (5) of section 132, or computing the income-tax chargeable under sub-section (4) of section 172 or sub-section (2) of section 174 or section 175 or sub-section (2) of section 176 or deducting income-tax under section 192 from income chargeable under the head "Salaries" or computation of the "advance tax" payable under Chapter XVII-C in a case not falling under section 115A or section 115B or section 115BB or section 115BBB or section 115E or section 164 or section 164A or section 167B, the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year, and for the purposes of computation of the "advance tax" payable under Chapter XVII-C in a case falling under section 115A or section 115B or section 115BB or section 115BBB or section 115E or section 164 or section 164A or section 167B, the rate or rates specified in section 115A or section 115B or section 115BB or section 115BBB or section 115E or section 164 or section 164A or section 167B, as the case may be, or the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year, whichever is applicable ;”                                            (emphasis supplied)

The Finance Act, 2020 for the present financial year provides for rates for deducting Income-tax from the Income chargeable under the head ‘Salaries’. Slab rates have been provided for deducting income-tax which is to be increased by Surcharge and Cess as applicable. Following slab rates have been prescribed:

1. For individuals not covered by item (II) and (III) below

1	where the total income does not exceed ₹ 2,50,000	Nil
2	where the total income exceeds ₹ 2,50,000 but does not exceed ₹ 5,00,000	5 per cent. of the amount by which the total income exceeds ₹ 2,50,000
3	where the total income exceeds ₹ 5,00,000 but does not exceed ₹ 10,00,000	₹ 12,500 plus 20 per cent. of the amount by which the total income exceeds ₹ 5,00,000
4	where the total income exceeds ₹ 10,00,000	₹ 1,12,500 plus 30 per cent. of the amount by which the total income exceeds ₹ 10,00,000

2. For individuals, resident in India, who is of the age of sixty years or more but less than eighty years at any time during the previous year

1	where the total income does not exceed ₹ 3,00,000	Nil
2	where the total income exceeds ₹ 3,00,000 but does not exceed ₹ 5,00,000	5 per cent. of the amount by which the total income exceeds ₹ 3,00,000
3	where the total income exceeds ₹ 5,00,000 but does not exceed ₹ 10,00,000	₹ 10,000 plus 20 per cent. of the amount by which the total income exceeds ₹ 5,00,000
4	where the total income exceeds ₹ 10,00,000	₹ 1,10,000 plus 30 per cent. of the amount by which the total income exceeds ₹ 10,00,000

3. For individuals, resident in India, who is of the age of eighty years at any time during the previous year

1	where the total income does not exceed ₹ 5,00,000	Nil
2	where the total income exceeds ₹ 5,00,000 but does not exceed ₹ 10,00,000	20 per cent. of the amount by which the total income exceeds ₹ 5,00,000
3	where the total income exceeds ₹ 10,00,000	₹ 1,00,000 plus 30 per cent. of the amount by which the total income exceeds ₹ 10,00,000

Answers to the queries raised above-

1. Finance Act, 2020 provides for rates of deducting income-tax and Section 115BAC is not covered therein. Thus, the circular issued as such violates the provisions of the Act. CBDT should not have issued such a circular.
2. It can be said that the circular provides benefit to employees but has put additional compliance burden on the employers. Employers will have to be take additional declaration from every employee and work out deduction accordingly, if the circular is to be followed. Definitely, no ease of doing business. It can be said that the circular issued is beneficial to the larger section of the society.
3. Any circular issued which is against the provisions of law is bad and need not be complied with. As stated above, the circular seems violating provisions of the Act. It is a settled law that any circular issued is binding on the department and if the same is beneficial, the circular can be followed and advantage can be taken. But, in the present case the circular issued is not beneficial for everyone. It is putting additional burden on the employers. Decision will have to be taken whether to follow the circular or not.