November

Incorrect employee Permanent Account Number (PAN) in Form 24Q leads to problems for both the organization and employees. Organizations spend significant time and incur costs in refiling Form 24Q for correcting mistakes made in earlier filings. We typically come across 3 types of incorrect PAN.

1. Structurally invalid PAN: The PAN of an employee does not conform to the PAN structure mandated by the Income Tax Department, i.e. the PAN does not have 10 digits, the fourth digit is not “P” etc. At the time of filing of Form 24Q, FVU files with structurally invalid PAN are rejected and organizations need to make corrections to the PAN before they can file Form 24Q.

2. Structurally valid but incorrect PAN: An employee record may contain the PAN of another person in Form 24Q. This leads to credit of TDS to an incorrect person in Form 26AS. Many employees do not check Form 26AS before filing their annual tax return and simply go by the Form 16 issued by their employer for filing their return. If the employee’s PAN is incorrectly entered in Form 24Q, the Income Tax Department – in response to the tax return filed by the employee – may raise a demand for tax payment from the employee. Consequently, the employee is put to hardship while filing the reply to the Income Tax Department’s demand notice. It is not easy for employees to go behind their organization to get Form 24Q refiled with the correct PAN. If the organization does not refile Form 24Q with the correct PAN of the employee, the Income Tax Department’s demand cannot be satisfactorily closed without the employee making the income tax payment as stated in the demand.

3. Structurally valid, but non-existent PAN: There are instances when a PAN is structurally correct but the PAN may not have been assigned to anyone by the Income Tax Department. Here again, employees may be put to hardship on account of not receiving the TDS credit in their Form 26AS.

Organizations would do well to verify the PAN of their employees prior to filing Form 24Q. The TRACES site now allows organizations to verify PAN of employees one by one. This is not very helpful in case an organization has even 100 employees whose PAN need to be verified. Checking the PAN of each employee one after another can be very arduous.

Currently, the Income Tax Department allows certain authorised entities to verify PAN (through screen, file upload or third-party software APIs) online. Among TDS deductors, only companies are included in this list. Also, there is a fee to be paid for this service. Maybe it is time the department considered allowing all organizations to avail this facility free of cost. After all, if the department can allow verification of a single PAN (through the TRACES site) at any point in time, why not allow verification of multiple PANs in one go? PAN verification prior to filing of Form 24Q can lead to significant time and cost savings to organizations by preventing incorrect PAN from getting into Form 24Q files.

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Section 192 (2B) of the Income Tax Act allows an employee to furnish particulars of income under any head other than “Salaries”  for the same financial year and of any tax deducted at source thereon. In other words, an employer can consider an employee’s other income and the tax deducted at source (TDS) on the other income while calculating TDS on salary.

Section 192 (2B) is presented as follows.

[(2B) Where an assessee who receives any income chargeable under the head “Salaries” has, in addition, any income chargeable under any other head of income (not being a loss under any such head other than the loss under the head “Income from house property”) for the same financial year, he may send to the person responsible for making the payment referred to in sub-section (1) the particulars of—

(a) such other income and of any tax deducted thereon under any other provision of this Chapter;

(b) the loss, if any, under the head “Income from house property”,

in such form and verified in such manner as may be prescribed, and thereupon the person responsible as aforesaid shall take—

(i)  such other income and tax, if any, deducted thereon; and

(ii) the loss, if any, under the head “Income from house property”,

also into account for the purposes of making the deduction under sub- section (1) :

Provided that this sub-section shall not in any case have the effect of reducing the tax deductible except where the loss under the head “Income from house property” has been taken into account, from income under the head “Salaries” below the amount that would be so deductible if the other income and the tax deducted thereon had not been taken into account.]

Conditions for considering Other Income

The following conditions have been imposed by Section 192 in this regard.

1. The employee should submit a declaration under Rule 26B with details of Other Income and TDS on Other Income, to the employer.

2. The employee cannot declare a loss under any “Other Income” other than “Income from House Property.”

3. The addition of TDS on Other Income should not reduce the tax deductible on salary.

The first two conditions are easy to understand. Let us explain the third condition with the help of an example.

An employee receives an annual taxable salary of Rs 250,000 after all deductions. As per the income tax rates prevailing for the financial year 2013-14, the total annual tax on salary, including Education Cess, is Rs 3,090. The employee has Other Income of Rs 200,000 and the TDS deducted on Other Income is Rs 40,000 (20% on Rs 200,000).

The total income including salary and Other Income is Rs 450,000 (Rs 250,000 plus Rs 200,000) for the year and the total tax on Rs 450,000 is Rs 23,690 for the year. Please note that the total tax including Education Cess (Rs 23,690) for the year is less than the TDS of Rs 40,000 deducted on Other Income. Just because the TDS on Other Income is higher than the total annual tax, the employer cannot ignore deducting tax on salary.

According to Section 192, the TDS on Other Income should not have the effect of reducing the tax deductible under the head “Salaries” except where the loss under the head “Income from house property” has been taken into account, and hence the employer will have to deduct Rs 3,090 as TDS on salary.

Entries in Form 24Q and Form 16

Payroll managers can consider TDS on Other Income for the sake of calculating tax on salary. However, from the point of view of issuing Form 16 and filing Form 24Q, TDS on Other Income poses a problem to the employer.

In both Form 16 and Annexure 2 in Form 24Q for the last quarter, the details of Other Income can be displayed, but there is no provision to display details of TDS on Other Income. As a result, in both Form 16 and Form 24Q (fourth quarter), it would look as though there is a shortfall in tax deducted by the employer while in reality it is not the case. Let us take a look at an example to examine this.

An employee receives an annual taxable salary of Rs 250,000 after all deductions in financial year 2013-14. The employee has Other Income of Rs 100,000 and the TDS deducted on Other Income is Rs 10,000 (10% on Rs 100,000).

The total income including salary and Other Income is Rs 3,50,000 (Rs 250,000 plus Rs 100,000) for the year and the total tax on Rs 3,50,000 is Rs 13,390 for the year.

If the employer considers TDS on Other Income and deducts tax on salary accurately, Part B in the Form 16 issued by the employer will have the following amounts.

11. Total Income (8 – 10)	Rs 3,50,000
12. Tax on Total Income	Rs 13,000
13. Add Surcharge	Rs 0
14. Add Education Cess	Rs 390
15. Tax Payable (12+13+14)	Rs 13,390
16. Relief under section 89 (attach details)	Rs 0
17. Tax payable (15-16)	Rs 13,390

 

While the total tax payable is shown as Rs 13,390 in Part B of Form 16, the total tax deducted and remitted (across the 4 quarters) shown in Part A of Form 16 (downloaded from the Traces site) shall be Rs 3,390. The difference of Rs 10,000 between the Tax Payable amount of Rs 13,390 shown in Part B and the total tax deducted/remitted amount of Rs 3,390 shown in Part A is of course on account of the TDS on Other Income (Rs 10,000). The Part A document downloaded from the Traces site contains only the TDS deducted/remitted by the employer and does not include the TDS on Other Income.

There is no provision in Form 16 and Annexure 2 of Form 24Q (fourth quarter) to present TDS on Other income. By taking a look at just Form 24Q (fourth quarter) – in its current format – the Income Tax Department will not be able to figure out whether the difference between the Tax Payable figure in Part B of Form 16 and the Tax deducted/remitted figure in Part A of Form 16 is as a result of a genuine under deduction of tax by the employer or due to TDS on Other Income. In case the Income Tax Department raises a query in this regard, the employer needs to explain that the difference is on account of the TDS figure on Other Income.

The Income Tax Department should consider modifying the format of Form 16 and Annexure 2 of Form 24Q (fourth quarter) to show TDS on Other Income separately. This will ensure that the Tax Payable amount (due to salary) in Part B of Form 16 is equal to Tax deducted/remitted amount in Part A of Form 16.

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Jan 2017 update: The ESI wage ceiling has been enhanced to Rs 21,000 with effect from 01-Jan-2017, please take a look at our blog post here.

Payroll managers are aware that the existing wage limit (as of Nov 2013) for coverage under the ESI Act is Rs 15,000 (Rupees Fifteen Thousand) per month. Also, that once the ESI contribution begins, the contribution should continue until the end of the contribution period (Apr to Sep or Oct to Mar) even if the salary (for the purpose of ESI calculation) increases beyond Rs 15,000 per month during the contribution period.

One of our customers asked us the following question in this regard.

In case the salary goes above Rs 15,000, say to Rs 17,000, during the contribution period, should we calculate ESI on the actual salary (Rs 17,000) or should the salary be restricted to Rs 15,000 for ESI calculation?

Many payroll managers mistakenly believe that salary, when it goes above Rs 15,000 during the contribution period, should be restricted to Rs 15,000 for the purpose of ESI calculation. The logic is that since salary for ESI coverage limit is Rs 15,000 per month, there is no need to calculate ESI on any amount above Rs 15,000. We find many payroll managers being incorrectly informed on this.

The ESI department has adequately clarified that during the contribution period ESI should be calculated on total ESI salary and the salary should not be restricted to Rs 15,000 in case the salary goes above Rs 15,000. In other words, if the total ESI salary is Rs 17,000, ESI deduction and contribution should be calculated on Rs 17,000 and not on Rs 15,000. Payroll managers should note that employees get additional benefits on the ESI amount calculated on salary above Rs 15,000.

In one of its publications, the ESI department has cleared the air on this issue.

An employee whose wages crosses the prescribed ceiling limit in any month at anytime after commencement of the contribution period, continue to be an employee till the end of that contribution period. Though there is a wage ceiling limit for coverage of an employee, there is no ceiling limit in the definition of wages for payment of contribution. Hence contribution is payable on the total wages without any ceiling limit.

Payroll managers would do well to follow the ESI department’s directive in this regard.

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