Instructions for deduction of tax at source from salaries during financial year 1971-72 at the rates specified in Part III of First Schedule to Finance (No. 2) Bill, 1971 - Income Tax - 60/1971

Circular no. 60 Dated 5/6/1971 FINANCIAL YEAR 1971-72 Instructions for deduction of tax at source from salaries during financial year 1971-72 at the rates specified in Part III of First Schedule to Finance (No. 2) Bill, 1971 1. I am directed to invite a reference to this Ministry's letter of even number dated 16-3-1971 on the subject of deduction of income-tax from salaries paid during the year 1971-72. The Fi nance (No. 2) Bill introduced in the Parliament on May 28, 1971, inter alia, prescribes the rates at which income-tax has to be deducted during the financial year 1971-72 from income chargeable under the head "Salaries". These rates will be applicable to deduction of tax from salaries paid or payable on or after April 1, 1971; the authorities responsible for deduction of tax at source from "Salaries" in the remaining part of the year will have to make necessary adjustments therein to cover the short fall, if any, in the earlier deductions this year. An extract from Paragraph A of Part III of the First Schedule to the Finance (No. 2) Bill, 1971, insofar as it relates to levy of income-tax on "salaries" is enclosed herewith incorporating also an Explana tory Note [Annex I]. It is requested that pending the passing of the Finance (No. 2) Bill, 1971, deductions of tax from "salaries" may be made during the financial year 1971-72, according to the rates in the said Schedule. Three typical examples of calcula tions are given in Annex II. 2. The substance of main provisions in the law insofar as they relate to income from "salaries" on which tax is to be deducted at source during the financial year 1971-72, is given hereunder : (1) No tax will be deductible at source in any case unless the estimated salary income for the financial year exceeds Rs. 5,000. (2) While computing the taxable income, the disbursing officers should allow a deduction of the whole of the first Rs. 1,000, 50 per cent of the next Rs. 4,000 and 40 per cent of the balance of the qualifying amount of payments towards life insurance premia, contributions to provident fund and deposits in a 10-year account or 15-year account under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959. The qualifying amount of these items taken together will be limited to 30 per cent of the estimated "salary" [after the deduction, if any, for profession tax, etc., referred to in item (5) and for expenditure on travelling re ferred to in item (7) hereinbelow] or Rs. 20,000 whichever is less. (3) The total income computed in accordance with the provisions of the Act should be rounded off to the nearest multiple of ten rupees by ignoring the fraction which is less than five rupees and increasing the fraction which amounts to five rupees or more, to ten rupees. The net amount of tax deductible should be simi larly rounded off to the nearest rupee. (4) No deduction should be made from the salary income in respect of any donations for charitable purposes. The tax relief on such donations will have to be claimed by the taxpayer separately at the time of the finalisation of the assessment. However, in cases where contributions to the National Defence Fund, Jawaharlal Nehru Memorial Fund or the Prime Minister's Drought Relief Fund are made by deduction from the pay bills, 55 per cent of such contributions may be deducted in computing the taxable income of the employee. Care should be taken to see that the aggregate of such contributions for the year is not less than Rs. 250. Dis bursing officers should show the total contributions in the remarks column of the return under section 206. (5) In cases where deductions are claimed on account of tax on professions, trades, callings or employments levied under any State or Provincial Act, the same may be allowed from the total income for purposes of deduction of tax at source on production of proof by the assessee before the disbursing officer. The adjustment in this behalf in the tax deductible at source may be made in the last month. (6) No deduction should be made from the salary income in respect of any expenditure on the purchase of books and other publica tions; such expenditure has to be claimed by the taxpayer at the time of finalisation of the assessment. (7) The Income-tax Act, 1961 provides for standard deductions in the case of salaried taxpayers in respect of expenditure on trav elling for the purposes of employment, provided they are not in receipt of a conveyance allowance. The amounts of these standard deductions, as proposed by the Finance (No. 2) bill, 1971 are given below : Category of taxpayers Amount of standard deduction for each calendar month or part thereof comprised in the period of employment or during which the conveyance has been used for the purpose of employment Rs. 1. Taxpayers owning motor cars 200 2. Taxpayers owning motor cycles, scooters or other mopeds 75 3. Taxpayers other than those referred to at item (1) and (2) 50 In the case of taxpayers owning cars, motor cycles, scooters or other mopeds, the standard deduction is admissible only if the conveyance is registered in the employee's name and not in the name of any other person even though such employee may claim to have purchased it from his own funds. [Each employee claiming such deduction will furnish to the disbursing authority a certif icate that the conveyance is registered in his own name.] The standard deduction of Rs. 50 per month is admissible to such of the salaried taxpayers who do not own any conveyance as also to those who own a bicycle or any other conveyance, not being a motor car, motor cycle, scooter or other moped; for such an employee to be eligible for this deduction, it is not necessary to establish that he had actually incurred any expenditure on travelling for the purposes of his employment. The deduction of the appropriate amount for expenditure should be allowed in calculating the tax to be deducted at source from the salary income. The standard deductions mentioned above will not be available to an employee who is in receipt of a conveyance allowance whether as such or as part of his salary. (8) In the case of an employee in receipt of a conveyance allow ance, the disbursing officer may exclude from the salary of the employee that part of the conveyance allowance which is equal to the amount that was treated as exempt under section 10(14) by the Income-tax Officer in the last completed assessment of the em ployee. For this purpose, the employee concerned should furnish to the disbursing authority a declaration as to the amount of the conveyance allowance which was treated as exempt from tax in his last completed income-tax assessment specifying also the year to which such assessment relates. (9) Attention is also invited to section 276B, wherein it is provided that if a person without reasonable cause or excuse fails to deduct or after deducting fails to pay the tax as re quired under the provisions of Chapter XVII-B he shall be punisha ble with rigorous imprisonment for a term which may extend to six months, and shall also be liable to fine which shall be not less than a sum calculated at the rate of fifteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. 3. If any changes are made in the Finance (No. 2) Bill, 1971 before it is passed into law, the same will be communicated to you in due course. Circular : No. 60 [F. No. 275/38/71-ITJ], dated 5-6-1971. ANNEX I - EXTRACT FROM PART III OF FIRST SCHEDULE TO FINANCE (NO. 2) BILL, 1971 Paragraph A In the case of every individual or Hindu undivided family or unregistered firm or other association of persons or body of individuals, whether incorporated or not, or every artificial juridical person referred to in sub-clause (vii) of clause (31) of section 2 of the Income-tax Act, not being a case to which any other Paragraph of this Part applies : Rates of income-tax (1) where the total income does not exceed Rs. 5,000 Nil ; (2) where the total income exceeds Rs. 5,000 but does not exceed Rs. 10,000 10 per cent of the amount by which the total income exceeds Rs. 5,000; (3) where the total income exceeds Rs. 10,000 but does not exceed Rs. 15,000 Rs. 500 plus 17 per cent of the amount amount by which the total income exceeds Rs. 10,000; (4) where the total income exceeds Rs. 15,000 but does not exceed Rs. 20,000 Rs. 1,350 plus 23 per cent of the amount by which the total income exceeds Rs. 15,000; (5) where the total income exceeds Rs. 20,000 but does not exceed Rs. 25,000 Rs. 2,500 plus 30 per cent of the amount by which the total income exceeds Rs. 20,000; (6) where the total income exceeds Rs. 25,000 but does not exceed Rs. 30,000 Rs. 4,000 plus 40 per cent of the amount by which the total income exceeds Rs. 25,000; (7) where the total income exceeds Rs. 30,000 but does not exceed Rs. 40,000 Rs. 6,000 plus 50 per cent of the amount by which the total income exceeds Rs. 30,000; (8) where the total income exceeds Rs. 40,000 but does not exceed Rs. 60,000 Rs. 11,000 plus 60 per cent of the amount by which the total income exceeds Rs. 40,000; (9) where the total income exceeds Rs. 60,000 but does not exceed Rs. 80,000 Rs. 23,000 plus 70 per cent of the amount by which the total income exceeds Rs. 60,000; (10) where the total income exceeds Rs. 80,000 but does not exceed Rs. 1,00,000 Rs. 37,000 plus 75 per cent of the amount by which the total income exceeds Rs. 80,000; (11) where the total income exceeds Rs. 1,00,000 but does not exceed Rs. 2,00,000 Rs. 52,000 plus 80 per cent of the amount by which the total income exceeds Rs. 1,00,000; (12) where the total income exceeds Rs. 2,00,000 Rs. 1,32,000 plus 85 per cent of the amount by which the total income exceeds Rs. 2,00,000 : Provided that for the purposes of this Paragraph in the case of Hindu undivided family which at any time during the previous year relevant to the assessment year commencing on the 1st day of April, 1972, satisfies either of the following two conditions, namely : (a) that it has at least two members entitled to claim partition who are not less than eighteen years of age, or (b) that it has at least two members entitled to claim partition who are not lineally descended one from the other and who are not lineally descended from any other living member of the family : (i) no income-tax shall be payable on a total income not exceeding Rs. 7,000; (ii) where the total income exceeds Rs. 7,000 but does not exceed Rs. 7,660 the income-tax payable thereon shall not exceed forty per cent of the amount by which the total income exceeds Rs. 7,000. The amount of income-tax computed in accordance with the preced ing provisions of this Paragraph shall be increased by a sur charge for purposes of the Union calculated at the following rates, viz : (a) in a case where the total income does not exceed Rs. 15,000 10 per cent; (b) in any other case 15 per cent: Provided that the amount of surcharge payable shall, in no case exceed the aggregate of the following sums, namely : (i) an amount calculated at the rate of 10 per cent on the amount of Income-tax on an income of Rs. 15,000, if such income had been the total income; and (ii) 40 per cent of the amount by which the total income exceeds Rs. 15,000. Explanatory Note The operation of the above-noted marginal relief provision in respect of surcharge may be illustrated by the following examples : Example A Total income Rs. 15,100 Income-tax Rs. 1,373 (Rs. 1,350 plus 23 per cent of Rs. 100) Surcharge leviable : - at the flat rate of 15 per cent Rs. 205.95 (15 per cent of Rs. 1,373) - under the proviso Rs. 175 (Rs. 135, being 10 per cent of Rs. 1,350 which is the tax on a total income of Rs. 15,000 Plus Rs. 40, being 40 per cent of the amount by which the total income exceeds Rs. 15,000) As the surcharge calculated under the proviso is lower, the surcharge leviable in this case will be Rs. 175 only. Example B Total income Rs. 15,200 Income-tax on Rs. 15,200 Rs. 1,396 (Rs. 1,350 + 23 per cent of Rs. 200) Surcharge leviable : - at the flat rate of 15 per cent Rs. 209.40 (15 per cent of Rs. 1,396) - under the proviso Rs. 215.00 (Rs. 135 + Rs. 80, being 40 per cent of Rs. 200) As the surcharge calculated at the flat rate of 15 per cent is lower, the surcharge leviable will be Rs. 209.40. The marginal relief provision will not, therefore, apply at this level, or above it. ANNEX II - TYPICAL EXAMPLES OF INCOME-TAX CALCULATION Example I Rs. 1. Total salary income 9,500 2. Contributions to general provident fund 720 3. Payment towards life insurance premia 500 1,220 [The employee does not own a motor car, motor cycle, scooter or other moped.] 4. Total salary income 9,500 5. Deduct : Standard deduction in respect of expenditure on travelling at Rs. 50 p.m. 600 8,900 6. Deduct : Whole of the first Rs. 1,000 and 50 per cent of the balance of the qualifying contributions towards general provident fund and life insurance premia (Rs. 1,000 plus 50 per cent of Rs. 220) 1,110 7. Taxable income 7,790 8. Income-tax payable on Rs. 7,790, i.e., at 10 per cent on Rs. 2,790 279.00 9. Union surcharge at 10 per cent on income-tax 27.90 10. Total tax payable 306.90 Rounded off to 307.00 Example II 1. Total salary income 17,825 2. Contribution to general provident fund 1,200 3. Payment towards life insurance premia 1,600 2,800 [The employee has a scooter registered in his name and uses it for the purpose of employment. He was on leave from 5th August to 3rd October during the year] 4. Total salary income 17,825 5. Deduct : Standard deduction at Rs. 75 p.m. for 11 months (since he was on leave for the full calendar month of September, no standard deduction is admissible for one month; full deduction will be admissible for months of August and Octo ber during part of which he was on leave) 825 17,000 6. Deduct : Whole of the first Rs. 1,000 and 50 per cent of the balance qualifying contributions towards general provident fund and life insurance premia (Rs. 1,000 plus 50 per cent of Rs. 1,800) 1,900 7. Taxable income 15,100 8. Income-tax on Rs. 15,100 (Rs. 1,350 plus 23 per cent of Rs. 100) 1,373 9. Union surcharge [at 15 per cent of Rs. 1,373 works out to Rs. 205.95 but limited to Rs. 175 [Rs. 135 being 10 per cent of Rs. 1,350 which is the tax on a total income of Rs. 15,000] plus Rs. 40 being 40 per cent of amount by which the total income exceeds Rs. 15,000] 175 10. Total tax payable 1,548 Example III 1. Total salary income 28,088 2. Contribution to general provident fund 3,500 3. Payment towards life insurance premia 6,275 9,775 4. Profession tax 138 [The employee has a car in the last eleven months of the year registered in his name and uses it for purposes of employment] 5. Total salary income Rs. 28,088 6. Deduct : - Profession tax 138 - Standard deduction in respect of expenditure on traveling at Rs. 200 for 11 months and at Rs. 50 for one month 2,250 2,388 25,700 7. Deduction on account of contributions towards general provi-dent fund and life insurance premia. Paid Rs. 9,775 in all but limited to 30 per cent of Rs. 25,700, i.e., Rs. 7,710 - on the first Rs. 1,000 (full) 1,000 - on the next Rs. 4,000 at 50 per cent 2,000 - on the balance Rs. 2,710 at Rs. 40 per cent 1,084 4,084 8. Taxable income 21,616 Rounded off to 21,620 9. Income-tax on Rs. 21,620 (Rs. 2,500 plus 30 per cent of Rs. 1,620) 2,986.00 10. Union surcharge at 15 per cent 447.90 11. Total tax payable 3,433.90 Rounded off to 3,433.90