Instructions for deduction of tax at source from salary during financial year 1974-75 at the rates specified in Part III of First Schedule to Finance Bill, 1974 - Income Tax - 131/1974

Circular No. 131 Dated 18/3/1974 FINANCIAL YEAR 1974-75 Instructions for deduction of tax at source from salary during financial year 1974-75 at the rates specified in Part III of First Schedule to Finance Bill, 1974 1. I am directed to invite a reference to this Ministry's Circu lar No. 107 [F. No. 275/57/73-ITJ], dated 7-3-1973 on the subject of deduction of income-tax from salaries paid during the year 1973-74. The Finance Bill introduced in the Parliament on February 28, 1974, inter alia, prescribes the rates at which income-tax has to be deducted during the financial year 1974-75 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, 1974. An extract of Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the Finance Bill, 1974, insofar as it relates to levy of income-tax on "salaries" is enclosed [ Annex I ]. It is requested that pending the passing of the Finance Bill, 1974, deduction of tax from "salaries" may be made during the financial year 1974-75 according to the rates in the said Schedule. Three typical exam ples of calculations are given in Annex II. 2. The substance of the 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 1974-75 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. 6,000. ( 2 ) The Income-tax (Amendment) Rules, 1974, notified by the Central Board of Direct Taxes on February 28, 1974, have made certain modifications in the provisions relating to the valuation of perquisites by way of free residential accommodation and motor cars provided by employers to their employees. The salient fea tures of the new provisions have been explained in the Board's Circular No. 130, dated 16-3-1974. The new provisions take effect from April 2, 1974 and will, therefore, have to be taken into account for the purposes of computing the estimated salary income of employees for the purposes of deduction of tax at source during the financial year 1974-75. ( 3 ) The taxable salary is to be computed after providing a stand ard deduction in respect of expenditure incidental to employment. The standard deduction is to be allowed in an amount equal to 20 per cent of the salary up to Rs. 10,000 and 10 per cent of the salary in excess thereof, subject to maximum of Rs. 3,500. For the purpose, the term "salary" will include fees, commission, perquisites or profits in lieu of or in addition to salary, but will not include any payments received by the employees which are specifically exempt from tax under clauses ( 10 ), ( 10A ), ( 11 ), ( 12 ) and ( 13A ) of section 10. Thus, house rent allowance which is exempt under section 10( 13A ) of the Income-tax Act will not be taken into account for the purposes of computing the amount of the standard deduction. It may be noted that the standard deduc tion on the above basis is to be allowed irrespective of whether any expenditure incidental to employment is actually incurred by the employee or not. This deduction will, however, not be admis sible in the case of retired pensioners who have not been in employment at any time during the financial year 1974-75. In the case of persons who retire from service in the course of the financial year 1974-75, the standard deduction will be calculated only with reference to the salary derived from employment during the financial year without taking into account the pension re ceived by the employee. Further, the standard deduction will be limited to Rs. 1,000 only in cases ( a ) where the employee is in receipt of a conveyance allowance, or ( b ) where he is provided with any motor car, motor cycle, scooter or other moped by his employer (for use otherwise than wholly or exclusively in the performance of his duties) or where he is allowed the use of any one or more motor cars (otherwise than wholly or exclusively in the performance of his duties) out of a pool of motor cars owned or hired by the employer. In this connection, it may be noted that the use of a motor car by the employee for the purpose of going from his residence to the place where the duties of employ ment are to be performed or from such place back to his resi dence will not be regarded as use of the motor car in the per formance of his duties. ( 4 ) While computing the taxable income, the disbursing officers should allow a deduction of the whole of the first Rs. 2,000, 50 per cent of the next Rs. 3,000 and 40 per cent of the balance of the qualifying amount of payments towards life insurance premia, contributions to provident fund, contributions for participation in the Unit-linked Insurance Plan, 1971 made under section 19(1)( cc ) of the Unit Trust of India Act, 1963 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 in respect of expenditure incidental to the employment of the assessee referred to in item (3) above] or Rs. 20,000, whichever is less. ( 5 ) 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 similarly rounded off to the nearest rupees. ( 6 ) 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 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. ( 7 ) 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 XVIIB 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 in which such tax was deductible to the date on which such tax is actually paid. Circular : No. 131 [F. No. 275/36/74-ITJ], dated 18-3-1974 . ANNEX I - EXTRACT FROM PART III OF FIRST SCHEDULE TO FINANCE BILL, 1974 Paragraph A Sub-Paragraph I 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 persons referred to in sub-clause ( vii ) of clause ( 31 ) of section 2 of the Income-tax Act, not being a case to which Sub-Paragraph II of this Paragraph or any other Paragraph of this Part applies — Rates of income-tax ( 1 ) where the total income does not exceed Rs. 6,000 Nil ; ( 2 ) where the total income exceeds Rs. 6,000 but does not exceed Rs. 10,000 12 per cent of the amount by which the total income exceeds Rs. 6,000; ( 3 ) where the total income exceeds Rs. 10,000 but does not exceed Rs. 15,000 Rs. 480 plus 15 per cent of the 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. 1,230 plus 20 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. 2,230 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. 3,730 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. 50,000 Rs. 5,730 plus 50 per cent of the amount by which the total income exceeds Rs. 30,000; ( 8 ) where the total income exceeds Rs. 50,000 but does not exceed Rs. 70,000 Rs. 15,730 plus 60 per cent of the amount by which the total income exceeds Rs. 50,000; ( 9 ) where the total income exceeds Rs. 70,000 Rs. 27,730 plus 70 per cent of the amount by which the total income exceeds Rs. 70,000 : Surcharge on income-tax The amount of income-tax computed in accordance with the preced ing provisions of this Sub-paragraph shall be increased by a surcharge for purposes of the Union calculated at the rate of ten per cent of such income-tax. 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 premium 500 1,220 4. Total salary income 9,500 5. Deduct : Standard deduction of 20 per cent of salary in respect of of expenditure incidental to the employment 1,900 7,600 6. Deduct : Whole of the qualifying contributions towards general provident fund and life insurance premia 1,220 7. Taxable income 6,380 8. Income-tax payable on Rs. 6,380, i.e., at 12 per cent on Rs. 380 45.60 9. Union surcharge at 10 per cent on income-tax 4.56 10. Total tax payable 50.16 Rounded off to 50.00 Example II 1. Total salary income 18,325 2. Contributions to general provident fund 1,200 3. Payment towards life insurance premia 1,600 2,800 4. Total salary income 18,325.00 5. Deduct : Standard deduction in respect of expenditure incidental to employment at Rs. 2,000 plus 10 per cent of the amount by which salary exceeds Rs. 10,000 2,832.50 15,492.50 6. Deduct : Whole of the first Rs. 2,000 and 50 per cent of the balance qualifying contributions towards general provident fund and life insurance premia (Rs. 2,000 plus 50 per cent of Rs. 800) 2,400.00 7. Taxable income 13,092.50 Rounded off to 13,090.00 8. Income-tax on Rs. 13,090 (Rs. 480 plus 15 per cent of Rs. 3,090) 943.50 9. Union surcharge at 10 per cent 94.35 10. Total tax payable 1,037.85 Rounded off to 1,038.00 Example III 1. Total salary income 28,588 2. Contributions to general provident fund 3,500 3. Payment towards life insurance premium. [The employee is in receipt of a conveyance allowance of Rs. 200 per month from his employer] 6,275 9,775 4. Total salary income 28,588 5. Deduct : Standard deduction in respect of expenditure incidental to employment restricted to Rs. 1,000 1,000 27,588 6. Deduction on account of contributions towards general provident fund and life insurance premia paid, Rs. 9,775 in all but limited to 30 per cent of Rs. 27,588, i.e., Rs. 8,276.40 - on the first Rs. 2000 (full) Rs. 2,000.00 - on the next Rs. 3000 at 50 per cent Rs. 1,500.00 - on the balance Rs. 3,276.40 at 40 per cent Rs. 1,310.56 4,810.56 7. Taxable income 22,777.44 Rounded off to 22,780.00 8. Income-tax on Rs. 22,780 (Rs. 2,230 plus 30 per cent of Rs. 2,780) 3,064.00 9. Union surcharge at 10 per cent 306.40 10. Total tax payable 3,370.40 Rounded off to 3,370.00