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CLARIFICATION ON TAX DEDUCTED AT SOURCE ON ARREARS OF SALARY

No. 402/92/2006-MC (46 of 2008)

Government of India/ Ministry of Finance

Department of Revenue

Central Board of Direct Taxes

***

New Delhi, the 30th September 2008

PRESS RELEASE

Clarification regarding tax deduction at source on arrears of salary paid to government servants on account of implementation of the recommendations of Sixth Central Pay Commission

The Implementation Cell of the Department of Expenditure, Ministry of Finance vide its

Office Order F. No. 1/1/2008-IC dated 30th August, 2008 has stated at Para 2(v)

“Bills may be drawn separately in respect of the arrears of pay and allowances for the period from January 1, 2006 to August 31, 2008. The aggregate arrears, computed after deduction of subscription at enhanced rates of GPF and NPS with reference to the revised pay, may be paid in two installments, the first installment being restricted to 40% of the aggregate arrears. DDOs/PAOs will ensure that action is taken simultaneously in regard to Government’s contribution towards enhanced subscription. Orders in regard to the payment of the second installment of arrears will be issued separately.”

.2. A number of representations have been received by Central Board of Direct Taxes

(CBDT) seeking clarification as to whether TDS need to be deducted on 40% of arrear to be paid during 2008-09 or on the entire arrear payable to the government servant. The matter has been examined by the CBDT and the issue is clarified as under:-

Salary is as defined under Section 15 of Income Tax Act, 1961:-

(a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not;

(b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him;

(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year.

3. It is clear from the Office Memorandum issued by the Department of Expenditure that

60% of the pay arrears neither fall in the category of due nor are allowed. Moreover, Section 192 of Income Tax Act’61, inter alia, requires any person responsible for paying any income chargeable under the head “Salaries” to deduct income tax on the amount payable at the stipulated rate at the time of payment. Therefore it is clarified that income tax at source would be deducted u/s 192 only from the arrears of salary actually paid during FY 2008-09. On the balance, tax would be deducted during the financial year in which these pay arrears are actually paid.

4. The above clarification has been issued by the CBDT vide Circular No.9/2008

[F.No.275/192/2008-IT(B)] dated 29th September, 2008. (For more visit ITax site)]

INCOME TAX – AN OVERVIEW- I

QUICK LOOK

• Income tax is levied on the ‘total income’ of the assessee.
• Income of the ‘previous year’ is taxed in the ‘assessment year.’
• Income is classified into and computed under five categories called ‘heads of income.’
• The basic scheme of income tax is the principle ‘pay as you earn.’
• One must pay his taxes in advance and by the due dates, in the prescribed percentages.
• Deferment in the payment of advance tax would result in the payment of interest.

The income tax basic scheme is explained in brief as:

• Income tax is levied on the ‘total income’ of the assessable entity which is computed under the provisions of the Act.
• The income which are pertaining to the ‘previous year’ is taxed, but in the ‘assessment year.’
• Income tax is charged at the rates being fixed for the year by the annual Finance Act. But the liability to pay the tax is based on the principle ‘pay as you earn.’

Also check Taxable Heads of Income for the definition of

Salary, wages, pension, allowance, etc.

Pay as you Earn

A person is not allowed to wait until 31 March to pay his/her taxes. The Income Tax Act has the provision of ‘pay as you earn.’ This does not pinch a tax payer at the end of the year making a lump sum payment. Such payments are done during the previous year in the form of ‘TDS’, ‘TCS’

and ‘advance tax.’

TDS (Tax deducted at source)

This tax is deducted at the source from the income of the employee by the employer or the payer and paid to the government. It includes salary, interest, commission and contract fees, rent, professional fees, etc. This type of deduction is popularly known as TDS.

Such tax is subject to certain limits and certain conditions.

TDS has to be deducted in respect of payment of income is by way of interest on a term (fixed) deposit in a bank/ co- operative bank & with housing finance company, TDS at 10% +Surcharge (if any) + education cess at 2% + higher secondary education cess at 1%i.e. a total of 10.3% will be deducted at the time of credit or at the time of payment, whichever is earlier. TDS has to deducted if amt exceeds Rs.5000/- up to 31/05/2007 and Rs.10,000/- from 1^st June 2007.

No TDS would be deducted if amt of interest is up to Rs.5000/- up to 31/05/2007 & Rs.10000/- from 1^st June 2007 (per financial year, per branch)

In case of senior citizen, if he/she estimates that the tax on the income is nil, Form No.15H duly filled and signed is to be submitted in duplicate to the bank. So, no TDS will be deducted. If the total income is less than the threshold limit, Form No.15G (for other than Sr. citizens) is to be submitted to the payer to prevent TDS from such interest. The recipient may apply to the Assessing Officer (A.O) in Form 13 and obtain a certificate authorizing the payer to deduct tax at lower rates or no TDS. If Debenture interest is paid by an A/c payee cheque & does not exceed Rs.25000/- & in case of only notified securities no TDS would be deducted.

TCS (Tax collected at source)

Unlike tax deducted at source, TCS is collected by a seller of certain specified goods at the specified rates on the purchase of the goods and it is remitted to the treasury on behalf of the buyer. In the same way, a person granting a lease or licensee in a parking lot, toll-plaza, etc. collects the taxes at the specified rates as tax paid on behalf of the lessee.

Advance Tax

Advance Tax is paid by the income earner during the previous year. The computing of the liability of advance tax is done by estimating the ‘total income’ for the year, calculating the surcharge and taking into consideration the rebate that will be available. The advance tax is required to be paid in three installments.

Schedule of Advance Tax:
A	On or before 15 September	Not less than 30% of advance tax.
B	On or before 15 December	Not less than 60% of advance tax as reduced by amount paid earlier.
C	On of before 15 March	Full advance tax as reduced by the amount or amounts if any, paid in earlier instalments.

If the assessee does not pays the advance tax as described above, an interest of 1% is charged per month for 3 months for the deferment of advance tax installments.

If the total amount of advance tax is not paid on or before 15 March, an interest of 1% is charged

for one month.

Further, if the total advance tax paid is less than 90% of the advance tax payable, the interest at 1% per month is charged for the shortfall in the advance tax paid for the period commencing from 1 April of the assessment year and ending on the date of payment or assessment, whichever is earlier.