Deduction of tax at source-Income-tax deduction from salaries during the financial year 1985-86 under section 192 of the Income-tax Act, 1961 - Income Tax - 429/1985

Deduction of tax at source-Income-tax deduction from salaries during the financial year 1985-86 under section 192 of the Income-tax Act, 1961 Circular No.429 Dated 8/8/1985 From Shri B. Nagarajan, Secretary, Central Board of Direct Taxes. To All State Governments (including Administrations of Union Territories). Sir, Subject: Deduction of tax at source-Income-tax deduction from salaries during the financial year 1985-86 under section 192 of the Income-tax Act, 1961. I am directed to invite a reference to this Ministry's Circular No. 388 [F. No. 275/13/84-IT(B)] dated the 16th July, 1984 [(1984) 148 ITR (St.) 15] and Circular No. 407 [F. No. 275/13/84-IT(B)] dated the 1st February, 1985 [(1985) 151 ITR (St.) 49], wherein the rates of income-tax deduction during the financial year 1984-85 from the payment of income-tax chargeable under the head "Salaries" under section 192 of the Income-tax Act, 1961, were intimated. 2. Sub-section (1) of the said section provides that the person responsible for paying any income chargeable under the head "Salaries" shall, at the time of making 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 for that financial year. The provisions of sub-section (3) are intended for making adjustments of excess or shortfalls of inadvertent nature and/or due to unforeseen circumstances. Thus, the aggregate tax calculated on the estimated income divided by twelve and rounded off to the nearest rupee is required to be deducted from the monthly salary. 3. In the Finance Act, 1985, some modifications have been made. An extract of Sub-Paragraph I of Paragraph A of Part III of the First Schedule is at Annexure-I. 4. The substance of the main provisions of law in so far as they relate to income chargeable under the head "Salaries" on which tax is to be deducted at source during the financial year 1985-86 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. 18,000. Some typical examples of calculation are at Annexure-II. (ii) The value of perquisites by way of free or concessional residential accommodation, or motor cars provided by employers to their employees, shall be determined under rule 3 of the Income-tax Rules, 1962. Further, the value of other benefits or amenities provided free of cost or at concessional rates to the employees, like supply of gas, electric energy, water for house-hold consumption, educational facilities, etc., should also be taken into account, for the purpose of computing the estimated salary income of the employees during the current financial year (example II at Annexure-II illustrates computation of some such perquisites). As regards colliery allowance it is to be noted that only the excess over Rs. 100 per month or 50% of the actual colliery allowance paid by Coal India Limited, whichever is more, is to be treated as perquisite and the balance amount on account of the payment of said allowance may be allowed to be deducted while computing income under the head "Salaries" for the purpose of deduction of tax at source. (iii) Exemption in computing total income- (a) Clause (10) of section 10 provides exemption of death-cum-retirement gratuity from inclusion in computing total income. The Government have issued a Notification bearing No. 537(E) dated 1-7-1985,* raising the limit of Rs. 36,000 mentioned in sub-clause (iii) of clause (10) of section 10 of the Income-tax Act, 1961, to Rs. 50,000 for all the three purposes for which the said limit has been mentioned in the provisions of the said clause. (b) Sub-clause (1) of clause (10AA) of section 10 provides for exemption of any payment received by an employee as cash equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement on superannuation or otherwise; and (c) In the case of any employee other than an employee of the Central or State Government, any payment of the nature referred to in sub-clause (i) of clause (10AA) of section 10 is to be excluded in computing the total income subject to the provisions of sub-clause (ii) of the said clause (10AA). (iv) The amount repaid to an employee from the Additional Dearness Allowance Deposit Account under the provisions of the Additional Emoluments (Compulsory Deposit) Act, 1974, shall be liable to be included in his total income of the previous year in which it is repaid as already explained in the Ministry's Circular No. 182 (F. No. 275/12/75-IT(J) dated 28-10-1975 [printed at [1975] 101 ITR (St.) 130]. 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 qualifies for deduction in accordance with section 80L of the Income-tax Act, 1961. (v) Under section 10(10B), as amended by section 4 of the Finance Act, 1985, with effect from 1-4-1986, any compensation received by a workman under the Industrial Disputes Act, 1947 (14 of 1947), or under any other Act or Rules, orders or notifications issued thereunder or under any standing orders or under any award, contract of service or otherwise, at the time of retrenchment is exempt from the payment of income-tax; the amount exempt under these provisions shall not exceed: (i) An amount calculated in accordance with the provisions of clause (b) of section 25F of the Industrial Disputes Act, 1947; or (ii) Fifty thousand rupees, whichever is less. However, these limits shall not apply in respect of any compensation received by a workman in accordance with any scheme which the Central Government may, having regard to the need for extending special protection to the workmen in the undertaking to which such scheme applies and other relevant circumstances, approve in this behalf. (vi) Under section 10(13A) of the Income-tax Act, 1961, any special allowance specifically granted to an assessee by his employer to meet expenditure incurred on payment of rent (by whatever 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 considerations. Rules 2A of the Income-tax Rules, 1962, prescribes 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 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 the limits laid down in rule 2A, qualifies for exemption from income-tax. Thus, house rent allowance granted to an 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 house rent allowance from the total income of the employee. (vii) (a) Under section 16 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), the taxable salary is to be computed after providing standard deduction. The standard deduction is to be allowed of an amount equal to 25% of the salary subject to a maximum of Rs. 6,000. 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 payment received by the employees which are specifically exempt from tax under clauses (10), (10A), (10AA), (10B), (11), (12) and (13A) of section 10 of the Act. Thus, house rent allowance to the extent exempt under section 10(13A) of the Act will not be taken into account for the purpose of computing the amount of the standard deduction. It is to be noted that 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 be available also to persons drawing pension during the current financial year at the same rates and subject to the same ceiling as to the employees in actual service. However, the standard deduction will be limited to Rs. 1,000 only in cases, (i) where the employee is provided with any motor car, motor cycle, scooter or other moped by his employer for use otherwise than wholly and exclusively in the performance of his duties, or (ii) where he is allowed the use of any one or more motor cars, out of a pool of motor cars owned or hired by the employer otherwise than wholly and exclusively in the performance of his duties. The use of any vehicle provided by the employer for journey by the employee from his residence to his office or other place of work as also from office or other place of work to his residence shall not be regarded as use of such vehicles otherwise than wholly and exclusively in the performance of his duties. (b) Para 4 of Circular No. 407, dated 1-2-1985+ read with Circular No. 408, dated 8-2-1985,** may be treated as withdrawn in view of section 6(c) of the Finance Act, 1985. (c) In respect of salary paid during the financial year 1985-86, the value of any benefit or amenity granted or provided free of cost or at concessional rate by an employer to an employee (not being a director of the company or a person who has substantial interest in the company) is not regarded as a perquisite received by the employee, unless the employee's income under the head "Salaries", exclusive of the value of any benefits or amenities not provided for by way of monetary payment exceeds Rs. 24,000. In cases where salary is received from more than one employer, the aggregate salary from these employers will have to be taken into account for the purpose. (viii) (a) Under section 80C of the Act, while computing the taxable income, the disbursing officers should allow deduction of the whole of the first Rs. 6,000, 50% of the next Rs. 6,000 and 40% of the balance of the qualifying amount of payment towards life insurance premium, contributions to provident fund (including contributions to Public Provident Fund constituted under the Public Provident Fund Act, 1968), contributions for participation in the Unit-linked Insurance Plan, 1971, made under section 19(1)(CC) of the Unit Trust of India Act, 1963, deposits in a 10-year account or 15-year account under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959, and subscription to the National Savings Certificates (VI Issue) and the National Saving Certificates (VII Issue). The interest on National Savings Certificate VI Issue is deemed to be reinvested and, therefore, the holder thereof is entitled to the benefits of section 80C. (b) In respect of contributions to "recognised provident funds", there is another monetary ceiling limit laid down in clause (d) of sub-section (2) of section 80C of the Income-tax Act, 1961, in that the employees' own contribution to his individual account in the fund will not exceed 1/5th of his salary during the financial year or Rs. 10,000, whichever is less. "Salary" for this purpose would include dearness allowance if the terms of the employment so provide but will exclude all other allowance or perquisites. The expression "recognised provident fund" has been defined in section 2(38) of the Act to mean a provident fund which has been and continues to be recognised by the Commissioner in accordance with the Rules contained in Part A of the Fourth Schedule to the Act and includes a provident fund established under a scheme framed under the Employees' Provident Funds Act, 1952. (c) The additional monetary ceiling of 1/5th of salary or Rs. 10,000, whichever is less, will not be applicable to the contributions to the provident funds referred to in sub-clauses (iii) and (iv) of clause (a) of sub-section (2) of section 80C. Such provident funds are:- A. Government Provident Fund and Railways Provident Fund; B. Provident Funds established by such local authorities and institutions as are mentioned in the Schedule to the Provident Funds Act, 1925, and those notified by the Government from time to time under section 8(3) of that Act; and C. Any provident fund set up by the Central Government and notified by it in the Official Gazette-Public Provident Fund set up under the Public Provident Fund Act, 1968, is an example of such a Fund. d. Under clause (b) of sub-section (2) of section 80C, where the assessee is a Hindu undivided family, the deduction is allowable in respect of- (i) any sum paid in the previous year by the assessee out of its income chargeable to tax- (1) to effect or to keep in force an insurance on the life of any member of the family; or (2) as a contribution to any provident fund referred to in sub-clause (iv) of clause (a), where such contribution is to an account standing in the name of any member of the family; or (ii) any sum deposited in the previous year by the assessee out of its income chargeable to tax in a ten-year account or a fifteen-year account under the Post Office Savings Bank (Cumulative Time Deposit) Rules, 1959, as amended from time to time, where such sums are deposited in an account standing in the name of any member of the family. (e) The aggregate of the sums referred to in (a) and (d) above which qualifies for the purpose of computing the deduction under section 80C shall not exceed:- (i) in the case of any individual being an author, playwright, artist, musician, actor or sportsman (including an athlete), sixty thousand rupees; (ii) in the case of any other individual or a Hindu undivided family or any such association of persons or a body of individuals as is referred to in clause (g) of sub-section (2), forty thousand rupees. (ix) No deduction should be made from the salary income in respect of any donations for charitable purposes. The tax relief on such donations as admissible under section 80G of the Act 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, the Prime Minister's Drought Relief Fund, the National Children's Fund or the Indira Gandhi Memorial Trust are made, 50 per cent. of such contributions may be deducted in computing the total income of the employee. Under section 80G of the Act as amended by section 18 of the Finance Act, 1985, the donation to the Prime Minister's National Relief Fund will be eligible for hundred per cent. deduction which would be effective from April 1, 1986, and would, accordingly, apply in relation to the assessment year 1986-87. Thus, deduction in this respect may be allowed while computing the total income for the purpose of deduction of income-tax at source for financial year 1985-86. Deduction will not be admissible where the aggregate of all contributions for the year is less than Rs. 250. (x) Under section 80GG of the Act, an assessee is entitled to a deduction in respect of house rent paid by him for his own residence at the places specified under rule 11B of the Income-tax Rules, 1962. Such deduction is permissible subject to the following conditions:- (a) the assessee has not been in receipt of any house rent allowance specifically granted to him which qualifies for exemption under section 10(13A) of the Act; (b) he will be entitled to a deduction in respect of house rent paid by him in excess of 10 per cent. of his total income, subject to a ceiling of 15 per cent. thereof or Rs. 400 per month, whichever is less. The total income for working out these percentages will be computed before making any deductions under section 80GG; (c) the assessee does not own; (i) any residential accommodation himself or by his spouse or minor child or where such assessee is a member of a Hindu undivided family, by such family, at the place where he ordinarily resides or performs duties of his office or carries on his business or profession; or (ii) at any other place, any residential accommodation being accommodation in the occupation of the assessee, the value of which is to be determined under clause (i) or, as the case may be, clause (ii) of sub-section (2) of section 23; and (d) the accommodation occupied by him for the purpose of his own residence is situated in any of the following places namely:- (i) Agra, Ahmedabad, Allahabad, Amritsar, Bangalore, Bhopal, Calcutta, Coimbatore, Delhi, Faridabad, Gwalior, (Lashkar), Hyderabad, Indore, Jabalpore, Jaipur, Kanpur, Lucknow, Ludhiana City, Madurai, Nagpur, Patna, Pune (Poona), Srinagar, Surat, Vadodra (Baroda) or Varanasi (Banaras) or the Urban agglomeration of each of such places; and (ii) Bombay, Calicut, Cochin, Ghaziabad, Hubli-Dharwar, Madras, Solapur, Trivandrum or Vishakhapatnam. EXPLANATION: "Urban Agglomeration" in relation to a place means the area for the time being included in the urban agglomeration of such place for the purpose of grant of house rent allowance by the Central Government to its employees under the orders issued by it from time to time in this regard. The dispursing authorities should satisfy themselves that all the conditions mentioned above are satisfied before such deduction is allowed by them to the assessees. They should also satisfy themselves in this regard by insisting on production of evidence of actual payment of rent. (xi) Section 10(14) of the Act provides for exemption from income-tax of any special allowance or benefit, not being in the nature of an entertainment allowance or other perquisite within the meaning of clause (2) of section 17 specially granted to the employee to meet the expenses actually incurred wholly, necessarily and exclusively in the performance of the duties of an office or employment of profit. In view of this provision, disbursing authorities have been authorised, vide Board's Circular No. 196 (F. 275/29/76-IT (J) dated the 31st March, 1976 [printed at [1976] 103 ITR (St.) 38-39], not to deduct tax at source from conveyance allowance granted to an employee to the extent it is exempt under the said section. It has been stated herein, that the employee in receipt of conveyance allowance would have to furnish the necessary certificate before the disbursing authority in support of the fact, that the conveyance allowance is only a reimbursement of expenses laid out wholly, necessarily and exclusively in the performance of the duties of an office or employment of profit. The satisfaction of the disbursing authorities would still be liable for scrutiny, by the Income-tax Officer during regular assessment proceeding before him. The disbursing authority is also required to endorse a certificate in terms of section 10(14) on the tax deduction certificate issued under section 203 of the Act. In this connection, attention is invited to the Explanation to clause (14) of section 10 which clarifies that any allowance granted to the assessee to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at the place where he ordinarily resides shall not be regarded for purposes of that clause as a special allowance granted to meet expenses wholly, necessarily and exclusively incurred in the performance of such duties. This may be kept in view while deciding whether any expenditure from the special allowance has been actually incurred, and, if so, the extent to which it has been incurred to meet the expenses wholly, necessarily and exclusively in the performance of the duties of an office or employment of profit. (xii) Section 80RRA provides that where the gross total income of an individual who is a citizen of India, includes any remuneration received by him in foreign currency from any employer (i.e., a foreign employer or an Indian concern) for any services rendered by him outside India, 50 per cent. of such remuneration will be deducted in computing the taxable income. It also provides that where the assessee renders continuous service abroad for more than 36 months, the remuneration received by him for any period of service after the expiry of the said 36 months will not qualify for any deduction. In the case of an employee of the Central Government or any State Government or a person who was, immediately before taking up the service outside India, in the employment of the Central Government or any State Government, the deduction will be allowed only if the service of the employee is sponsored by the Central Government. In the case of any other individual, the deduction will be allowed only if he is a "technician" and the terms and conditions of his service outside India are approved for the purpose of the said section by the Central Government or the prescribed authority. It is pertinent to note that the deduction is to be allowed with reference to the remuneration received by the individual in foreign currency for services rendered outside India. Thus, if the remuneration is paid to the Indian Technician, etc., partly in Indian currency and partly in foreign currency, the amount paid in Indian currency will not be taken into account for purposes of deduction under section 80 RRA. Likewise, if a part of the remuneration, although paid in foreign currency, relates to services rendered in India, then such part of the remuneration will also not qualify for deduction under section 80 RRA. The expression "foreign employer" has been defined in Explanation (b) to section 80 RRA to mean, (i) the Government of a foreign State; or (ii) a foreign enterprise; or (iii) any association or body established outside India. While allowing the deduction under this section, documentary evidence should be obtained on the following points:- (i) in the case of an individual who is in the employment of the Central Government or any State Government, the fact of his service having been sponsored by the Central Government; (ii) in the case of any other individual being a technician, the fact of the terms and conditions of his service outside India having been approved in this behalf by the Central Government (Ministry of Finance, Department of Revenue, Foreign Tax Division, New Delhi). (It should also be ensured that the deduction is allowed with reference to the remuneration received in foreign currency in respect of the period of service outside India. The fact that deduction is admissible only in relation to the first 36 months of continuous service outside India should also be kept in view). (xiii) Under section 80U: "(1) in computing the total income of an individual, being a resident who, as at the end of the previous year- (i) is totally blind, or (ii) is subject to or suffers from a permanent physical disability (other than blindness) being permanent physical disability, specified in the rules made in this behalf by the Board, and which has the effect of reducing substantially his capacity to engage in a gainful employment or occupation, there shall be allowed a deduction of a sum of ten thousand rupees: Provided that such individual produces before the Income-tax Officer, in respect of the first assessment year for which deduction is claimed under this section- (a) in a case referred to in clause (i), a certificate as to his total blindness from a registered medical practitioner being an oculist; and (b) in a case referred to in clause (ii), a certificate as to the permanent physical disability referred to in the said clause from a registered medical practitioner." 2. The Board has by Notification No. S.O. 529(E), dated 17-7-1985,* specified the physical disabilities which will be reckoned as permanent physical disabilities for purposes of deduction under this section. According to the said Notification, a permanent physical disability shall be regarded as a permanent physical disability for purposes of clause (ii) of sub-section (1) of section 80U, if it falls in any one of the categories specified below, namely:- (a) permanent physical disability of more than 50 per cent. in one limb, or (b) permanent physical disability of more than 60 per cent. in two or more limbs; (c) permanent deafness with hearing impairment of 71 decibels and above; or (d) permanent and total loss of voice. The deduction of Rs. 10,000 from the total income is allowed by the employer subject to the production of a certificate from the ITO in favour of the employer as laid down in this Ministry's Circular No. 272, dated 26-5-1980 [printed at [1980] 124 ITR (St.) 3]. The certificate once issued will continue to be in force till it is withdrawn by the ITO. (xiv) 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 rupee. (xv) Section 201 provides:- "(1) if any such person and in the cases referred to in section 194 the principal officer or the company of which he is principal officer does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax: Provided that no penalty shall be charged under section 221 from such person, principal officer or company unless the Income-tax Officer is satisfied that such person or principal officer or company, as the case may be, has without good and sufficient reasons failed to deduct and pay the tax. (1A) Without prejudice to the provisions of sub-section (1), if any such person, principal officer or company as is referred to in that sub-section does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest at 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. (2) Where the tax has not been paid as aforesaid after it is deducted, the amount of tax together with the amount of simple interest thereon referred to in sub-section (1A) shall be a charge upon all the assets of a person or the company, as the case may be, referred to in sub-section (1)." (xvi) Attention is also invited to section 276B, where 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 XVII-B 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; and (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. 5. While making the payment of tax deducted at source to the credit of the Central Government, it may kindly be ensured that the correct amount of income-tax and surcharge is recorded in the relevant challan. It may also be ensured that the right type of challan is used. The relevant challan for making payment of tax deducted at source from salaries is No. 9, with "Blue Colour Band". Where the amount of tax deducted at source is credited to the Central Government through Book adjustment, care should be taken to ensure that the correct amount of income-tax is reflected therein. 6. These instructions are not exhaustive and are issued only with a view to helping the employers to understand the various relevant provisions. Wherever, there is a difference of opinion, a reference should always be made to the provisions of the Income-tax Act and the relevant Finance Act through which the changes in the tax structure are made. 7. These instructions may please be brought to the notice of all disbursing officers and State Undertakings under the control of the State Governments. 8. In case any assistance is required, the ITO concerned and/or the Local Public Relations Officer may be approached for the same, who will, if necessary, obtain the orders of higher authorities in the matter. 9. Copies of this Circular are available with the Director of Inspection (Research Statistics and Public Relations), 6th Floor, Mayur Bhavan, Connaught Circus, New Delhi-110001. Yours faithfully, (Sd.) B. Nagarajan, Secretary, Central Board of Direct Taxes. * See [1985] 155 ITR (St.) 40. + See [1985] 151 ITR (St.) 49. ** See [1985] 152 ITR (St.) 201.