Deduction admissible u/s 80C allowed from the net-of-tax salaries. - Income Tax - 932/CBDT

INSTRUCTION NO. 932/CBDT Dated : March 4, 1976 Section(s) Referred: 80C Statute: Income - Tax Act, 1961 Recently, at the instance of the Board, a study of the procedure for grossing up net-of-tax salaries received by some employees was undertaken by the Director of Inspection (R S). The Study revealed that in the case of some foreign employees of foreign agencies in India, who were in receipt of net-of-tax salaries, the deduction admissible u/s 80C was allowed from the net-of-tax salaries received by them before grossing it up. For example, if the salary net-of-tax is Rs. 40,000 and the 80C deduction is Rs. 2,000 then Rs. 40,000 is first reduced to Rs. 38,000 and then grossed up for purposes of determining the tax due. 2. The correct procedure for grossing up of net-of-tax salaries would be to gross up the net salary of Rs. 40,000 first and then allow the 80C deduction from it, and then work out the tax. This is so because of the definition of gross total income contained in section 80B(5) which defines gross total income as total income computed in accordance with the provisions of the Income-tax Act, 1961 before allowing any deduction under Chapter VI-A or under section 280-O. Computation of total income when the salary is paid net-of-tax would include grossing up of the salary or determining the tax payable and only after including the amount of tax the gross total income would be determined. It will, therefore, be clear that no deduction under Chapter VI-A or 280-O is to be allowed from net-of-tax salaries before it is grossed up to arrive at the gross total income. 3. This may be brought to the notice of all the officers working in your charge.