July

Organizations typically accept investment declarations (for tax saving) from employees at the beginning of a tax year and expect employees to submit proof of investments only towards the end of the year or at the time of final settlement calculation in case of employees leaving the organization before the end of the year. It is our job, as a payroll service provider, to ensure that there are no instances of under-deduction of tax on salary in our customer organizations. Consequently, we are concerned about what we call “high risk” investment declarations made by employees in our customer organizations.

High risk declarations

Currently, the Income Tax Act restricts the extent of deduction available under sections such as 80C and 80D. For example, the total deduction available under section 80C cannot exceed Rs. 1.5 lakh per annum. However, the law does not provide for any limit on deductions available under the following sections.

1. Section 24 – Deduction in respect of housing loan interest on let-out property
2. Section 80E – Deduction in respect of interest on loan taken for higher education
3. Section 80G – Deduction in respect of donations to certain funds, etc.

We refer to declarations under the above sections as high risk declarations since such declarations can potentially reduce the taxable income of an employee to as low as zero. For example, if the taxable salary of an employee is Rs. 10 lakh per annum, and if the employee submits Rs. 10 lakh as investment declaration under Section 80E, his or her taxable income will drop to zero. In case this (80E declaration) turns out to be an incorrect declaration and the employee is unable to produce documentary proof to substantiate the declaration, there may be a significant increase in the employee’s income tax at the end of the year or during settlement. This can also lead to short deduction of income tax.

Incorrect investment declarations under sections such as 80C too can lead to under deduction of tax. However, frivolous declarations under sections 24, 80E, and 80G can be particularly challenging to payroll managers given the greater extent of under deduction of tax which is theoretically possible. Payroll managers will do well to keep themselves informed on high risk declarations made by employees.

Reporting on high risk declarations

As a payroll service provider, we submit periodic reports which carry details of high risk declarations to our customers. The reports contain the names of employees and the amounts they have submitted under sections 24, 80E, and 80G. Of course, there may be genuine declarations made by employees under sections 24, 80E and 80G, and it would be incorrect to assume that any declaration under these sections is a high risk declaration. We therefore apply a threshold limit while identifying declarations as high risk under each of the sections.

1. 1. Section 24 – Housing loan interest on let-out property

We report amounts which exceed 35% of the gross salary of the employee. From our experience, we believe that any housing loan interest amount (let-out property) which is more than 35% of the gross salary could be an incorrect declaration.

For let-out property, employees need to declare the annual rental value for their property. We also include annual rent amounts (declared as income by employees) which are less than Rs. 36,000 per annum in the report. We find many employees making incorrect declarations (such as Rs. 1) for annual rental value amounts. If the declared annual rental value is less than Rs. 36,000 per annum, we request payroll managers in our customer organizations to check with the employees on the correctness of the annual rental value submitted.

1. 1. Section 80E – Deduction in respect of interest on loan taken for higher education

We present interest (on higher education loan) amounts which exceed 5% of the gross salary of the employee. Again, there is nothing sacrosanct about the 5% cut-off. It could as well be 4% or 6%.

1. 1. Section 80G – Deduction in respect of donations to certain funds, etc.

We report all declarations made under Section 80G to customers. As per a circular from the Income Tax Department, only declarations on contributions made to notified government funds such as the Prime Minister’s Relief Fund can be routed through the employer. We find many employees submitting details of contributions made to private charities to employers and such declarations getting rejected at the time of proof verification.

Employees should submit information on contributions made to private charities in their tax return and seek refund, if applicable, from the Income Tax Department.

Keep a constant eye on high risk declarations

If you are responsible for tax compliance in your organization, please consider generating periodic reports on high risk declarations made by your employees from your payroll software. If you have outsourced your payroll, please seek reports from your payroll vendor in this regard. You can consider checking with the employees presented in the report on whether the declarations are correct or not. In case of any mistake, please request employees to modify their investment declarations. Also, please advise your employees that incorrect declarations could lead to a significant increase in tax deduction towards the end of the year or at the time of final settlement. Needless to say, incorrect TDS deduction is both time consuming and expensive to deal with.

Read more

As you are aware, the Union Budget for FY 2014-15 was tabled in the Parliament by the Finance Minister of India on 10-Jul-2014. There are some changes to the computation of tax on salary which payroll managers need to consider for FY 2014-15.

1. Changes in tax rates

The revised tax rates for salaried employees (aged 60 years and below) for FY 2014-15 are as follows.

Total Income for the Year in Rs.	Tax Rate in %
Up to 2,50,000	Nil
2,50,001 to 5,00,000	10
5,00,001 to 10,00,000	20
Above 10,00,000	30

The revised tax rates for salaried employees (aged above 60 years but below 80 years) for FY 2014-15 are as follows.

Total Income for the Year in Rs.	Tax Rate in %
Up to 3,00,000	Nil
3,00,001 to 5,00,000	10
5,00,001 to 10,00,000	20
Above 10,00,000	30

2. Increase in deduction under Section 80C

The deduction under 80C (Life insurance premium, PPF, investment in National Savings Certificate, interest from notified bank deposits, principal repayment on housing loan, etc.) was restricted to Rs.1 lakh in 2013-14. The same has been increased to Rs. 1.5 lakh for 2014-15.

Consequent to the change in section 80C, section 80CCE has been amended so as to raise the
limit of aggregate deduction under sections 80C, 80CCC and 80CCD from Rs. 1 lakh to Rs.1.5 lakh.

3. Increase in deduction under Section 24 – Interest on housing loan

The tax deduction on housing loan interest payment (for a self occupied property) was restricted to Rs. 1.5 lakh per annum in FY 2013-14. For the year 2014-15, the limit has been increased to Rs. 2 lakh.

There is no reference to Section 80EE in the Finance Bill for FY 2014-15. Hence, the carry forward of unutilized tax deduction for first time owners of residential property, if applicable, is available for FY 2014-15.

Note:
1. The Education Cess stays at 3%.
2. In case the total taxable income goes beyond Rs. 1 crore in the year, a surcharge of 10% (subject to marginal relief) is to be deducted – as it was in FY 2013-14.

What about the tax credit of up to Rs. 2,000?

We have received queries from payroll managers regarding the availability of Rs. 2,000 tax credit in FY 2014-15. The Financial Bill tabled in the Parliament does not provide for the removal of tax credit under Section 87A. Hence, the tax credit of Rs. 2,000 is available for FY 2014-15 as long as the total income does not exceed Rs. 5 lakh for the year.

How about some reforms?

Now that the new government has presented the first budget of its term, it is probably time that the government turned its attention to simplifying the administration of tax on salary. The current procedures are needlessly complex and procedurally cumbersome for employers. Here are some suggestions:

a. Make TDS on salary similar to TDS on other payments. Employers could be asked to deduct a standard rate (say, 10%) and the primary responsibility of payment of tax on salary could be placed on employees.

b. Stop asking employers to verify the proof of investment while providing tax benefits to employees. Employers expend significant efforts each year in scrutinizing the documents submitted by employees. Surely, organizations are better off focussing on their business transactions rather than working as an extension of the Income Tax Department.

c. Do away with or simplify calculation of some of the tax exemptions. We have talked about the complexity related to calculation of exemptions such as those on Leave Travel Allowance in earlier posts.

d. Do away with quarterly return (Form 24Q) and instead ask employers to submit the break-up of TDS on salary along with the PAN of individual employees at the time of monthly TDS remittance (similar to providing employee-wise breakup of Provident Fund amounts in the PF challan).

Read more

The Government of Maharashtra has introduced changes to Profession Tax rates effective 01-July-2014. The revised tax slabs for salaried employees in Maharashtra are as follows.

Salary for the month in Rs	Profession Tax for the month in Rs
Less than or equal to 7,500	Nil
7,501 to 10,000	175
10,001 and above	200 per month except for February (Rs 300 for February)

You can view the amendment notification here.

Read more