September

As a payroll service provider, we verify the supporting documents submitted by employees when they seek tax benefit. If an employee seeks deduction under Section 24 of the Income Tax Act, for the housing loan interest, we typically seek a certificate from the bank/financial institution which presents the loan principal and interest schedule for the year, property construction completion certificate from the builder or employee declaration to that effect, proof of property ownership, etc. What we do not seek from the employee is proof of loan interest payment by way of, say, bank passbook copy.

Is proof of loan interest payment not important?

An employee need not have paid the interest to the bank/financial institution in order to claim tax benefit under Section 24. We find that many payroll managers are under the mistaken notion that an employee should have made the interest payment and the employer should be verifying the same by checking the bank passbook etc. as proof of interest payment.

The employer needs to verify only the total interest payable (not paid), by checking the loan statement from the bank/financial institution. As long as an employee has a valid housing loan, he can claim tax benefit on the interest for the year, whether or not he makes the interest payment to the bank/financial institution.

Why? Because Section 24 says so.

As per Section 24 of the Income Tax Act:

(b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital:

Provided further that where the property referred to in the first proviso is acquired or constructed with capital borrowed on or after the 1st day of April, 1999 and such acquisition or construction is completed within three years from the end of the financial year in which capital was borrowed, the amount of deduction under this clause shall not exceed ⁹[two lakh rupees].

As you can see from the above, Section 24 refers to interest “payable” and not the interest actually paid by an employee. The amount of annual interest payable can be considered for deduction every year. It does not matter whether the interest has been actually paid or not paid during the year.

Circular No. 363, dated 24.06.1983

The Income Tax Department issued a circular (No. 363) in 1983 which deals with an issue pertaining to housing loans provided to central government employees. As per the House Building Advance Rules of the Central Government of India, the recovery of the principal (on housing loan provided to government employees) is made first in not more than 180 monthly installments and then interest is subsequently recovered in not more than 60 installments. This means that while interest on housing loan accrues in the first 180 installments, the deduction/payment of the accrued interest starts only after 180 months.

The circular clarifies that in the period (say, the 1st year of the loan) when interest accrues but is not paid, the benefit under Section 24 is available. According to the circular:

Since the word used is ‘payable’, deduction under section 24(1) (vi ) would be on the basis of accrual of interest which would start running from the date of the drawal of the advance.

House property loan interest, accrued but not deducted/paid, is somewhat unique to loan provided by the government. Employees, when they take a housing loan for property acquisition/construction from banks/financial institutions, will need to pay interest as soon as it falls due. However, even when employees do not pay interest on time, they can claim tax benefit if the interest payment falls due in the year.

Applicability of the circular to non-government employees

While the circular answers a specific question on loans offered by the Central Government, its pronouncement on the matter of interest payable versus paid should be construed as being applicable to all assessees and not just the Central Government employees. Section 24 of the Income Tax Act applies equally to all assessees and there is nothing in law which states that a different text for Section 24 should be used for private sector employees.

This issue has also been settled by the court. In the case of CIT v. Devendra Brothers & Co. 200 ITR 146, the Allahabad High Court has stated that as long as the interest in respect of the housing loan has fallen due, the amount of interest whether it is paid or not would be a permissible deduction. According to the judgement, “if the amount of interest sought to be deducted had fallen due or a liability in that regard had been incurred in the previous years relevant to the assessment year in question, whether factually the amount of interest is paid or not, it is a permissible deduction” under the Income Tax Act in computing the income chargeable to tax under the head “Income from house property”.

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The Income Tax Department notified a new format, comprising Part A and Part B, for Form 16 in 2013. As you would be aware, Part A comes from the TRACES site while Part B is created by the employer. There are salary and tax details in both Part A and Part B. Even after 2 years since the new format was introduced, we find many payroll managers not being clear about the basis of salary and tax figures in Part A and Part B of Form 16.

Part A of Form 16

Any employer who deducts tax on salary needs to file what is called Form 24Q, the quarterly return which presents the salary paid to an employee and the tax deducted/remitted for each employee each quarter. Annexure I of Form 24Q presents the deductee wise (employee wise) details of the salary paid (in the column with the heading “Amount Paid or Credited”) and the tax deducted for each employee (in the column with the heading “Total TDS (Total of columns 321 and 322)”).

If an organization runs monthly payroll, and an employee has salary and tax deduction for all the 3 months in a quarter, annexure I of Form 24Q should contain the salary paid to and the tax deducted from each employee (as per employee PAN) for each month in the quarter. This means that each employee who receives salary for all the months in a quarter should have at least 3 rows against his PAN in Form 24Q.

Now, what is meant by “Amount Paid or Credited” in Annexure I of Form 24Q?

The Income Tax Department has not specified the exact meaning of the above term anywhere. Organizations have understood the term as referring to the gross pay paid to an employee each month.

Once a Form 24Q is filed, the tax department updates Form 26AS of an employee with the salary and tax details presented in Annexure I of Form 24Q. In addition, the tax department uses Annexure I information to populate Part A of Form 16 which is downloaded from the TRACES site after Form 24Q for the last quarter is filed.

An extract from Part A of Form 16 is as follows:

The salary (Amount paid/credited) and tax amounts (Amount of tax deducted) in the above are from Annexure I of Form 24Q filed each quarter.

Part B of Form 16

The Form 24Q filed for the last quarter (Jan to Mar) of a tax year should contain data in both Annexure I and Annexure II (in contrast, Form 24Q for the first 3 quarters contains data only in Annexure I and Annexure II is left blank). Data in Annexure I of Form 24Q (last quarter) gets into Part A of Form 16 while Annexure II data contains the total salary paid, tax exemptions/deductions claimed and the TDS for the year. The Annexure II data is what the Income Tax Department considers for verifying the annual tax liability on an employee’s salary. Also, the Annexure II data should match with the salary, tax exemption and TDS information provided in Part B of Form 16 issued to employees.

An extract from Part B of Form 16 is as follows:

Should amounts in Part A and Part B match?

Ideally, the total tax amount shown under “Amount of tax deducted” in Part A of Form 16 should match with the tax amount shown against “Tax payable” (total of Income Tax, Surcharge and Education Cess) in Part B. If the tax figures do not match between Part A and Part B, we can conclude that there has been either under or over deduction of tax from an employee’s salary.

What about the salary figures between Part A and Part B?

Many payroll managers argue that the salary figures in Part A and Part B should match, in addition to the tax figures. We are of the view that this is incorrect. The salary figures between Part A and Part B need not match for the following reasons.

1. An employee may not feature in Form 24Q of all 4 quarters.

According to the Income Tax Department, an employee need not feature in Form 24Q until there is a tax deduction. However, once there is a tax deduction for an employee, the employee should feature in Form 24Q, pertaining to the quarter in which the tax deduction occurs, and continue to feature in Form 24Q until the last quarter. For example, if an employee has no tax deduction in April, May and June months, the employer need not show the employee in Annexure I of Form 24Q of the first quarter. If the employee has tax deduction in June, the employer has to feature the employee in Form 24Q of the second, third and fourth quarters – even if the employee does not have any tax deduction after June until the end of the year.

In the above example, the total salary amount shown in Part A of Form 16 issued to the employee will be the sum of salary paid to the employee from June to March. In contrast, the salary figure in Part B of Form 16 shall be the total salary paid to the employee from April to March.

Here is the Part A of an employee who does not feature in the first quarter Form 24Q because of zero tax in the first quarter.

As you can see, there are no salary and tax amounts for Q1 and the employee’s total salary of Rs 595,450 reflects the salary of only 3 quarters. In contrast, the salary shown in Part B shall be higher than Rs 595,450 (on account of the salary for the first quarter getting included).

2. Perquisite values are not typically shown in the salary amounts shown in Part A.

The salary amount shown in Part B includes values of perquisites provided to employees while Part A may not contain the same. For example, perquisite value of interest free loans provided to employees is included in the salary amount shown in Part B of Form 16 while the “Amount paid/credited” in Part A does not include the perquisite value.

3. Some tax free reimbursements may not be shown in Part B.

Some organizations include fully non-taxable reimbursements (such as telephone bill reimbursement) in Part A while leaving out such reimbursements in Part B.

The Income Tax Department has stated that the total salary amount across Annexure I (Part A salary figure) of the 4 Form 24Q files in a year need not match with the total salary amount shown in Annexure II (Part B salary figure) of the fourth quarter Form 24Q.

In other words, salary amounts between Part A and Part B of Form 16 need not be equal.

An alert in the tax return utility

The Income Tax Department has introduced an alert in its tax return utility this year (AY 2015-16). In the return utility there is a tab titled “Income Details” in which assessees should enter the income from salaries.

If an employee has worked with just one employer throughout the year, he should be entering (against “B1” in the the above) an amount which should be the same as the “Income Chargeable Under the Head Salaries” presented in Part B of Form 16 issued by his employer.

In the return utility there is another tab called “Tax Details” in which the department presents the salary and tax details as per Part A of Form 16.

The figure under “Income Under Salary” in the above is the total Part A salary amount.

If the “Income from Salary” figure in the “Income Details” tab is less than 90% of the salary presented under the “Tax Details” tab, the return utility displays the following alert message.

Given that this alert is as a result of a comparison of Part A and Part B salary figures, the question that begs an answer is as follows:

Does the alert mean that Part A and Part B salary figures should be equal?

The answer is no for the following reasons.

1. The Part B salary figure entered in the return utility is after Section 10 exemptions (such as the House Rent Allowance exemption) and hence the figure cannot be equal to the Part A figure unless there is zero Section 10 exemptions.

2. The alert gets triggered only if the Part B salary is less than 90% of Part A salary. In case the Part B salary is more than 90% of Part A salary, there is no alert. Hence, the alert should not be construed as indicating that the Part A and Part B salary figures should be equal.

In our view, the alert simply serves as reminder to the assessee to re-check the numbers for the purpose of ensuring accuracy. If all the figures are correct, an assessee can click “OK” on the alert screen and submit the return even if the Part B amount is less than 90% of the Part A amount.

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