Deduction of tax at source-Income-tax deduction from salaries during 1976-77 - Income Tax - 195/1976

Deduction of tax at source-Income-tax deduction from salaries during 1976-77. Circular No. 195 Dated 25/3/1976 From Shri K.R. Raghavan, Director, (Department of Revenue Banking), Government of India. To All State Governments, Sir, Subject: Deduction of tax at source-Income-tax deduction from salaries during 1976-77. I am directed to invite a reference to this Ministry's Circular No.161* See [1975] 101 ITR (St.) 130. (F.No.275/12/75-ITJ) dated the 22nd March, 1975 and 176 See [1975] 101 ITR (St.) 130 (F.No. 275/12/75-ITJ) dated 16th August, 1975, on the subject of deduction of income-tax from salaries paid during the year 1975-76. The Finance Bill introduced in Parliament on the 15th March, 1976, inter alia, prescribes the rates at which income-tax has to be deducted during the financial year 1976-77 from income chargeable under the head "Salaries". These rates will be applicable to deduction of tax from the salaries paid or payable on or after the 1st April, 1976. An extract of Sub-paragraph I of Paragraph A of Part III of the First Schedule to the Finance Bill, 1976, in so far as it relates to levy of income-tax on "Salaries" is enclosed (Annexure I). It is requested that pending the passing of the Finance Bill, 1976, deduction of tax from "Salaries" may be made during the financial year 1976-77 according to the rates in the said Schedule. Three typical examples of calculations are given in Annexure II. 2. The substance of the main provisions in the law in so far as they relate to income from "Salaries" on which tax is to be deducted at source during the financial year 1976-77 is given hereunder:- (i) No tax will be deductible at source in any case unless the estimated salary income for the financial year exceeds Rs.8,000. (ii) The value of the perquisites by way of free residential accommodation and motor cars provided by employers to their employees shall be determined under rule 3 of the Income-tax Rules, 1962, and it shall be taken into account for the purposes of computing the estimated salary income of the employees for the purposes of deduction of tax at source during the financial year 1976-77. (iii) For the purpose of computing the total income of an employee the amount credited to his ledger account in the Additional Dearness Allowance Deposit Account under the provisions of Additional Emoluments (Compulsory Deposit) Act, 1974, shall not be included in his total income of the previous year in which it is so credited but so much of the amount as is repaid to him shall be liable to be included in his total income of the previous year in which it is repaid as already explained in this Ministry's Circular No. 182 See [1975] 101 ITR (St) (F.No.275/12/75-ITJ) dated 28-10-1975. The amount repaid will include an element of interest also. While the repayment of principal sum will be regarded as salary paid during the relevant financial year and assessed to tax accordingly, the interest element will qualify for exemption under section 80L of the Income-tax Act, 1961. (iv) The amount of deposit made by a tax payer under the Compulsory Deposit Scheme (Income-tax payers) Act, 1974, is not allowable as deduction in computing his taxable income. Accordingly, such deposit has to be ignored for the purposes of determining the amount of income-tax deductible at source. (v) Under section 15 of the Income-tax Act, 1961, the taxable salary is to be computed after providing a standard deduction in respect of expenditure, incidental to employment. The standard deduction is to be allowed in an amount equal to 20% of the salary upto Rs.10,000 and 10% of the salary in excess thereof, subject to a maximum of Rs. 3,500. For this 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 employee which are specifically exempt from tax under clauses (10), (10A), (10B), (11), (12) and (13A) of section 10 of the Income-tax Act. 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 deduction 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 admissible in the case of retired pensioners who have not been in employment at any time during the financial year 1976-77. In the case of persons who retire from service in the course of the financial year 1976-77, the standard deduction will be calculated only with reference to the salary derived from employment during that financial year without taking into account the pension received 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 employees for the purposes of going from his residence to the place where the duties of employment are to be performed or from such place back to his residence will not be regarded as use of the motor car in the performance of his duties. (vi) Under section 80C of the Income-tax Act, 1961, while computing the taxable income, the disbursing officers should allow a deduction of the whole of the first Rs.4,000, 50% of the next Rs.6,000 and 40% 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-years Account or 15-years Account under the Post Office Savings Bank (Cumulative Time Deposit) Rules, 1959. It may be mentioned that the monetary ceiling limit in respect of contributions to recognised provident funds laid down in clause (d) of sub-section (2) of section 80C of the Income-tax Act, as qualifying for tax relief is proposed to be raised from Rs.8,000 to Rs.10,000 through the Finance Bill, 1976. The qualifying amount of these items taken together will be limited to 30% of the estimated "salary" (after the deduction in respect of expenditure incidental to the employment of the assessee referred to in item (v)) or Rs.20,000 whichever is less. (vii) Section 80FF of the Income-tax Act, 1961, provides for deduction in respect of the expenditure incurred by a person on higher education of his dependant children, brother or sister. The deduction is admissible only in the case of Indian citizens whose "gross total income" does not exceed Rs.12,000. Where the said dependant of the taxpayer is studying for a degree or post-graduate course in medicine (including surgery and obstetrics), architecture, engineering, technology or business management, a deduction of Rs.1,000 and where the dependant is studying for a diploma course in these subjects or for any other degree or post-graduate course, a deduction of Rs.500 for each dependant is to be allowed. In cases where the taxpayer has incurred expenditure on the education of more than two dependants, the deduction under the proposed provision will be allowed at the above rates with reference to two such dependants as may be chosen by him. It may be noted that deduction at this rate is to be allowed irrespective of the actual amount spent by the assessee provided some amount is spent by the assessee on such education. The benefit of this deduction can be allowed at the stage of deduction of tax at source on the assessee's furnishing a certificate to the effect that he has incurred expenditure during the previous year out of his income chargeable to tax on full time education of his child (ren), brother or sister wholly or mainly dependent on him and also declaring the nature of the course for which they are studying. (viii) Under section 10(13A) of the Income-tax Act, 1961, any special allowance specifically granted to an assessee by his employer to meet expenditure actually incurred on payment of rent (by whichever name called) in respect of residential accommodation occupied by the assessee is exempt from income-tax to the extent (not exceeding Rs.400 p.m.) as may be prescribed having regard to the area or place in which such accommodation is situated and other relevant consideration. Rule 2A of the Income-tax Rules, 1962, prescribed the limits in respect of the amount which is not to be included in the total income of the assessee for the purpose of section 10(13A) of the Income-tax Act. It has to be noted that only the expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the assessee, subject to limits laid down in rule 2A, qualifies for exemption from income-tax. Thus, House Rent Allowance granted to a employee who is residing in a house/flat owned by him is not exempt from income-tax. The disbursing authorities should satisfy themselves in this regard by insisting on production of evidence of actual payment of rent before excluding the House Rent Allowance from the taxable income of the employee. (ix) No deduction should be made from the salary income in respect of any donations for charitable purposes. The tax relief on such donations admissible under section 80G of the Income-tax Act 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, the Prime Minister's Drought Relief Fund, or the Prime Minister's National Relief Fund are made 50% 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. Disbursing Officers should show the total contributions in the remarks column of the return under section 206 of the Income-tax Act, 1961. (x) 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 or more, to ten rupees. The net amount of tax deductible should be similarly rounded off to the nearest rupee. (xi) 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 required under the provisions of Chapter XVIIB of the Income-tax Act, 1961, he shall be punishable: (i) in a case where the amount of tax which he has failed to deduct or pay exceeds one hundred thousand rupees, with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine; (ii) in any other case, with rigorous imprisonment for a term which shall not be less than three months but which may extend to three years and with fine. 3. If any changes are made in the Finance Bill, 1976, before it is passed into law, the same will be communicated to you in due course. 4. These instructions may please be brought to the notice of all disbursing officers and State Undertakings under the control of the State Government. Yours faithfully, (Sd.) K.R. Raghavan, Director Deptt. of Revenue and Banking, Government of India.