Salary TDS Provisions and Proofs to be given to Employer

Objective of this article is to explain various provisions tax savings / planning under income tax for salaried persons and documents they need to provide to their employers to enable exemptions / tax deductions by the employer

Multiple Employments - Section 192(2)

An employee who is employed with more than one employer during a financial year should provide to his present employer details of salary earned, tax deduted during his previous employment. 

Documents to be submitted to employer

1. Duly filled in Form 12B duly signed by the employee
2. If possible, Form 16 provided by the previous employer till the time the employee was in service with the previous employer (as additional proof

Loss from House Property (section 22 - 24) - (Let out Property)

If an house is let out (not occupied by the employee) then exemption can be claimed under this section if there is a loss from house property income.  The formula for calculating loss from house income is as follows (an example of Rs.10,000 per month rent, interest paid during the year is Rs.2,55,000 & municipal / water taxes paid is Rs.9,675)

                Actual Rent Received or Annual Value                                            1,20,000
   Less :  30%  of Actual Rent received or Annual Value                                    36,000
   Less :  Interest on capital borrowed for purposes of construction /
                                                                                           repair                      2,55,000
   Less :  Municipal / water taxes paid for the house                                             9,675

                Loss Under House Property                                                              1,80,675

This loss will be recognised by the employer and taken for tax deduction accordingly.

Documents to be submitted to employer

1. Details of full address of the property
2. Details of loan along with copy of loan / interest payment certificate from the bank / financial institution from which loan is availed
3. Details of Annual rent / municipal taxes (copy of receipts)
4. A self signed declaration with the following words: I, …………………. (name of the assesse), do declare that what is stated above is true to the best of my information and belief.  

Interest on Self occupied house

If housing loan is taken on or after 1.4.1999 for construction or acquiring of a residential unit then a deduction upto maximum of Rs.1,50,000 is allowable on interest on such housing loan.   This is not available in case loan is taken for purpose of repair or renovation of an existing residential house.  The following points are worth noting

1. This deduction is available only after completion certificate is obtained from the builder and regular EMI is commenced by the financial institution
2. All Pre-EMI's can be shown as deduction in 5 equal instalments (5 years) commencing from the year in which the construction is completed

Documents to be submitted to employer

1. Details of loan along with copy of loan / interest payment certificate from the bank / financial institution from which loan is availed - clearly detailing the amount of interest paid on the housing loan

Medical Allowance - Section 17(2)(v)

Medical expenditure incurred by an employee for himself or any member of his family (who are his dependents) shall be exempted to a maximum extent of Rs.15,000 in a year

Documents to be submitted to employer

1. Medical bills pertaining to the relevant financial year and in the name of the employee or any member of the family (who are dependents)

Leave Travel Allowance - Section 10(5) - Rule 2B

 

Expenses incurred on travel for proceeding on leave to any place in India is exempt provided employer pays him a specific allowance to this regard or can allocate a portion of the salary to this allowance.  The following are the conditions to avail of this exemptions from income tax.

1. Cost of the travel is restricted to Economy Air Fare by the shortest route
2. If travelled by any other mode than Air, then exemption is restricted to cost of First Class Air Conditioned fair by the shortest route
3. The exemption can be claimed in respect of two journeys in a block of four years
4. This exemption can be claimed only for expenses incurred on family.  Family is defined as Spouse, Children, Parents, Brothers and Sisters wholly dependent of the individual

Documents to be submitted to employer

1. Proof of Travel - Tickets etc
2. Proof of availing leave to prove that the employee travelled
3. If travel by Car / Taxi then as a corroborative evidence Toll Bills, Parking bills etc.

House Rent Allowance - Section 10(13A) - Rule 2A

HRA exemption is restricted to the least of the following

1. Actual HRA Received by the employee
2. 40% of salary - Salary means Basic + Dearness allowance.  (50% of salary if the rented accommodation is situated in Delhi, Mumbai, Kolkata or Chennai)
3. Actual Rent Paid in excess of 10% of salary (Salary means Basic + Dearness Allowance)

Documents to be provided to employer

1. Proof of Rent Paid - Rent Receipt (not required to provide if monthly rent is less than Rs,3,000)
2. Rent receipt should be stamped with revenue stamp and duly signed by the landlord
3. If rent exceeds Rs.1,80,000 per annum then the PAN number of the landlord should be mentioned in the rent receipt.  If the landlord does not have a PAN then a declaration to the effect that no PAN number is available should be taken from the landlord along with the name and address of the landlord

Deductions under Chapter VIA

Deductions under Section 80C

Exemption under 80C is restricted to Rs.1,00,000 and it covers the following.

Payment towards insurance Premium

Payment of insurance premium (including ULIP's) to keep in force an insurance to cover the life of the individual or spouse of the individual or any dependent child of the individual.

It may be clarified that the amount of premium so allowed on the insurance policy is subject to a maximum limit of 20% of the actual sum assured (ie) if sum assured value for a policy is Rs.2,00,000 then the premium allowed per year under section 80C for this policy will be maximum Rs.40,000 or actual premium paid.

Documents to be submitted to employer

1. Receipt of premium paid
2. Proof of sum assured (if available in Premium receipt above not required seperately)

Contribution to Public Providend Fund

Contribution to any Providend fund set up by the Central Government and notified accordingly. 

Documents to be submitted to employer

1. Receipt of contribution made
2. In case of Passbook entry copy is submitted, to submit originals for verification and return

Deposit in Savings Certificates

Deposit in savings certificates as defined under section 2(c) of the Government Saving Certificate Act, 1959.  Currently the Government has notified National Savings Certificate VIIIth issue.

Documents to be submitted to employer

1. Copy of the savings certificate in the name of the individual or spouse or children of the individual who are dependent on the individual

Deposit in Mutual Funds

Deposit in units of any mutual fund referred to in Clause 23(D) of section 10.  The Centre has notified that the deposit should be made in an "Equity Linked Savings Scheme"

Documents to be submitted to employer

1. Proof of investment in designated mutual funds

Repayment of loan borrowed for purpose of construction of residential house property

Deduction will be allowed on repayment of housing loan availed by an employee from any bank or reputed financial institution.  For the purpose of this deduction expenses incurred on Stamp Duty, registration fees and other expenses incurred on transfer of property is also exempt in the year of transfer.  Note - no other expenses will be allowed for deduction under this clause regarding house property.

Documents to be submitted to employer

1. Copy of payment certificate from the financial institution clearly mentioning the principal and interest repayments.

Tuition Fees of Children

Tuition Fees for any two children incurred whether at the time of admission or thereafter, paid to any university, college, school or other educational institution situated in India for the purpose of full time education.  Full time education includes play-school activities, pre-nursery and nursery classes.  Also note payment in nature of development fees, donations or capitation fees or fees of similar nature are not allowed as exemption.

Documents to be submitted to employer

1. Children's fees receipts - copy

Fixed Term Deposit

Investment in a term deposit for a fixed period of not less than 5 years with a scheduled bank.  Please take care to invest only in banks and schemes of the banks which are covered under "Bank Term Deposit Scheme, 2006"

Documents to be submitted to employer

1. Copy of the deposit receipt

Other deductions (more than Rs.1,00,000

Contribution to New Pension Scheme - Section 80CCD

Contribution made by an Employer into the New Pension Scheme (NPS) is exempt subject to a maximum of 10% of employee's salary (Salary defined to include Basic + Dearness Allowance).  The Employer should deduct from the employee salary NPS and deposit the same in Tier 1 account of the employee to enable the employee to avail this benefit.  This benefit overrules the limit of Rs.1,00,000 of section 80CCE. 

Document to be provided to employer

1. The law here is that employer should deduct and pay into NPS account, so proof is available with the employer himself similar to Providend Fund (PF) deduction

Contribution to Infrastructure bond - Section 80CCF

This section is extended for financial year 2011-12 and may not be continued for subsequent years.  Under this section investment of maximum Rs.20,000 in specified long term infrastructure bonds as notified by Central Government is exempted. 

Document to be provided to employer

1. Copy of infrastructure bond
2. If demat account copy of transaction statement of demat account

Medical Insurance Premium - Section 80D

No Cash Payment is allowed for this premium (ie) payment for medical insurance premium should be by "other than cash" mode to avail exemption under this section.  The deduction allowed for medical insurance premium is 2 fold.

1. Premium paid on medical insurance of family of assessee for an amount of Rs.15,000
2. Premium paid on medical insurance of parents of assessee for an amount of Rs.15,000.  If the parents are senior citizens (more than 60 years) then the exemption allowed is maximum of Rs.20,000 instead of Rs.15,000.

Document to be provided to employer

1. Copy of medical insurance premium paid
2. Copy of policy to prove that it is a Health / Mediclaim policy

Medical treatment of a dependent with disability - Section 80DD

Deduction is provided for Rs.50,000 towards medical treatment, and if treatment is for persons with severe disability then deduction is provided for Rs.1,00,000. 

Documents to be provided to employer

1. Certificate from medical authority in prescribed form

Repayment of Interest on loan taken for higher education - Section 80E

Deduction is allowed for interest on loan taken for purposes of pursuing higher education from any financial institution or Charitable institution.  Deduction is allowed for the individual's education loan or loan for spouse or dependent Children or for a student for whom the assessee is a legal guardian.  This deduction is allowed for 7 years from the year in which the loan is availed or until the loan is fully repaid whichever is earlier. 

Documents to be provided to employer

1. Details of loan and clear specification of interest on the loan

Donations - Section 80G

Generally no deductions should be provided by employer in deducting TDS from salary for purposes of donations under section 80G, the assessee should claim the same in his return.  Only those donations which are deducted by employer for donations and paid by the employer to Prime Minister's Relief fund, the Chief Minister's Relief Fund or the Lieutenant Governor's Relief fund should be deducted from salary

Important Note

The above is only a illustrative list and may not cover all scenario's.  There may be certain instances when the above scenarios may be interpreted differently by taxation authorities.  Please treat this article as a basic guide and seek expert advise for taxation purposes.

Section 206AA - Compulsory quoting of PAN

 

From 1.4.2010 income tax act has inserted section 206AA which makes furnishing of PAN compulsory for all employees in case they are liable for payment of TDS. If the employee fails to produce PAN then the TDS for the employee will be deducted at the higher of the following rate

1. at the rate specified in income tax act
2. at the rate or rates in force
3. at the rate of 20% 

In short, if PAN is not obtained tax will be calculated @ the minimum rate of 20% or higher rate as per tax calculation.  It is advisable to obtain PAN numbers immediately by all employees.

 

The Vodafone verdict - Supreme Court judgement & DTC Provisions

The Supreme Court Judgement in the Vodafone case will have a short life as Direct Tax Code has specific provisions to tax such income.  Delay in implementing Direct Tax code may prompt the Government to amend the Income Tax Act, 1961 as early as during this year budget itself.  This article discusses the Vodafone judgement "as it is" and also tries to understand the provision under DTC.

The much talked about Vodafone verdict has been delivered and the trade heaved a sigh of relief on receipt of a favourable decision.  The sections under question where Section 9(1)(i), Section 195 & Section 163 of the Indian Income Tax Act, 1961.  The following are the main areas of dispute

1. Whether a share transfer involving two off shore entities one of which is registered in a tax haven called "Cayman Islands' is subject to Capital Gains tax in India since the underlying company whose shares are being transferred has assets / business / generates income in India
2. Whether the non-resident being the purchaser of shares liable under section 195 to deduct Capital Gains tax on such transfer as a representative assessee of the seller

Vodafone International Holdings BV (VIH) incorporated in the Netherlands bought shares from Hutchison Telecommunications International Limited (HTIL) registered in Cayman Islands.  The Shares transacted where of Hutchisson Essar Limited which is registered in India and carrying on business in India.

The contention of the tax department in simple words are :

Though the transaction between VIH & HTIL has been transacted overseas but the underlying assets / business of the subject matter company is in India therefore the provisions of section 9(1)(i) are being invoked and the transaction is liable to Capital Gain tax in India.  Further as per section 195 tax is deductable on payment of consideration by VIH as a Representative Assessee as defined under section 163.

Arguments of VIH in simple words are :

The transfer of shares are between two off shore entities beyond the jurisdiction of Indian tax laws, and hence the share transfer cannot be taxed under deeming provisions of section 9(1)(i) and section 195 cannot be invoked against VIH.

The Key observations of Supreme Court are :

1. Principle of "Look At" and not "Look Through" upheld.  Section 9 has a deeming provision for taxation of income.  Section 9 is not a "Look Through" provision but a "Look At" provision
2. There is no transfer of Capital assets transfer which is situated in India
3. Only if the transaction is a sham could tax authorities invoke the "Substance over form" principle or "Piercing the Corporate Veil" test
4. Section 9(1)(i) being a deeming provision can be invoked only in case of - Transfer; existence of a capital asset & situation of such asset in India.  The subject matter in this instance case is "Indirect Transfer" which cannot be deemed as income under section 9(1)(i) as there is no "Direct Transfer"

The Supreme Court further states that Tax Planning is not illegal provided the transaction in not a sham or coloured transaction.  In this instance case the companies incorported in Cayman Islands are there in existence since the last 14 years and cannot be said to be incorporated for the purposes of avoidance of capital gains tax in India. 

The Supreme Court was of the view that since this is not a Sham transaction and the transactions are between two off shore entities there is no jurisdiction for Indian Tax Laws

The was forward - DTC or No DTC

The way forward will be definitely not as per the Supreme Court ruling.  First the Government will come out with an amendment to the Income Tax Act, 1961 (may be even retrospective) to plug this gap as early as this budget. 

The Direct Tax Code 2010 (DTC) - Section 5(4)(g) on Income deemed to accrue in India, has the following provision :

"income from transfer , outside India, of any share  or interest in a foreign company unless at any time in twelve months preceeding the transfer , the fair market value of the assets in India, owned, directly or indirectly, by the company, represent at least fifty per cent of the fair market value of all assets owned by the company"

Clearly the way forward is to tax the Vodafone kind of transactions, and the language of the law is quite clear. 

Summary

In this case Supreme court interpreted the law "as it stands" which is welcome as it brings in consistency in interpreting the law and the trade is quite clear on do's and don'ts under the laws of the land.  Taxation of all business income should be possible and this should not be taken away by poor drafting of tax laws and tax havens.  Government should act swiftly to plug these holes and ensure that revenue is protected.  Caution should be taken in drafting tax laws which should contain clear provisions and not subject to interpretation and consequent litigations.  Clear provisions will enable corporates to be clear on their tax liabilities and plan their strategies around it.

Time of Payment of TDS

Question

Our company had deducted TDS on 31/03/2008 and deposited the same on 31/05/2008.The income tax department issued a demand notice for interest on delayed payment. Is our company  liable to deposit the interest? Sir, guide me on this matter

Answer

As per Rule 30(1)(b)(i)(1) of Income Tax Rules, 1962 TDS can be paid to Government account within 2 months of the expiration of the month in which the credit has been made provided in that month the accounts of the company is being made. (ie) if your accounts are finalised as on 31.3.2008 then you can remit TDS within 2 months from date of such closure which is 31.5.2008. So your payment seems to be in order.

This rule has been amended since 1.4.2010 and Rule 30(2)(a) states that payment has to be made to Government on or before 30th day of April where the income or amount is credited or paid in the month of March.

100% FDI in Single Brand Retail

Department of Industrial Policy & Promotion (DIPP) has issued Press Note No.1 (2012 Series) dated 10.1.2012 through which it allows 100% FDI to be invested in Single Brand Retail.  International companies are now free to invest upto 100% in Single Brand Retail.  The following are the main conditions laid down for this 100% FDI investment

1. Products sold should be of Single Brand only
2. Products should be sold under the same brand internationally
3. The products should be branded during manufacture
4. The foreign investor should be the owner of the brand (not a person paying Royalty for the same)
5. If investment is more than 51% then 30% of the product sourcing should be done only through Indian Small / Cottage industries whose investment does not exceed USD 1 million in Plant & Machinery

Though the conditions stipulated above are quite stringent, there is always scope once the scheme is kicked in there will be further relaxation. 

Currently in Single Brand Retail sector there is not much investment due to the 51% cap, in fact as per statistics provided by Economic Times in its 11 Jan edition in the last three and half years only Rs.196 crores were brought in as FDI in Single Brand Retail, which surely does not talk about success of this scheme.  I also doubt by bringing in the above 5 conditions to run along with 100% FDI in Single Brand Retail there will be substantial flow of FDI.  It will be sometime before both the Government and FDI's get their act together and give this sector a much needed boost

HRA in Tax - Rent Receipts

"Tax Season" for employees have commenced and all of us will be busy calculating our tax liabilities and providing exemption certificates to our employers.  All of you will be aware that for claiming exemption under HRA if we are living in a rented accomodation we have to produce rent receipt from the landlord.  The following are the provisions notified by CBDT vide their Circular No.05/2011 dated 16.08.2011.

1. No requirement to produce rent receipt if rent paid per month is less than Rs.3,000 - but if in case of assessment by the income tax officer, the income tax officer may direct to produce such receipt so it is advisable to get the rent receipt
2. All rent receipts exceeding Rs.15,000 per month or Rs.1,80,000 per annum should contain the PAN number of the landlord.  If the landlord does not have a PAN then the employee should give a declaration that the landlord does not have a PAN and provide in the declaration the details of landlord like his name & address

Centralised Processing of Returns Scheme, 2011

CBDT has notified Centralised Processing of Returns Scheme, 2011 vide Notification No.2/2012 [F.No.142/27/2011-SO(TPL)] dated 4.1.2012.

This schemes details out the entire process of e-filing of income tax returns, acknowledgement of such return & processing of returns in the Centralised Processing Centers.  The scheme also provides procedure for rectification of mistakes on the returns and also provides for issuance of Order Under Section 154 of Income Act, 1961. 

This scheme will provide full clarification to all procedural aspects in relation to e-filing of Income Tax Returns.

Point of Taxation & GTA

Query

At present, we are paying Service tax on GTA on payment basis (i.e.when we are paying the amount to the transporters on due date).  During the audit of Central excise team, they informed us to pay the service tax of GTA on Bills booking basis (i.e. when I will book my bills irrespective of payment made).  Now, I am in confusion, which one is right either payment basis or bills booking basis.

Answer

Rule 7(b) of Point of Taxation, Rules 2011 (as amended vide notification number 25/2011 dated 31.3.2011) states the following

"(b) the persons required to pay tax as recipients under the rules made in this regard in respect of services notified under sub-section (2) of section 68 of the Finance Act, 1994;

shall be the date on which payment is received or made, as the case maybe

Provided further that in case of services referred to in clause (b) where the payment is not made within a period of six months of the date of invoice, the point of taxation shall be determined as if this rule does not exist :"

In short, it means that service tax has to be paid "on payment basis" of GTA bills if payment is made within 6 months from the date of the invoice. If payment is not made within 6 months from the date of invoice then service tax would become payable as if Rule 7(b) does not exist (ie) service tax payment has to be made based on the date of invoice.