2020

Hinote Systems - Outsourced Payroll Services & Online Payroll Software :2020
byT E Gautham

Reduction in statutory rate of EPF contribution for May, June, and July 2020

The Government of India, as part of the Atmanirbhar Bharat package for pandemic relief, has reduced the statutory rate of PF contribution from 12% to 10% for the wage months of May, June and July 2020. Please see the gazette notification (S.O. 1513(E)) issued by the Ministry of Labour and Employment here.

Note: A reading of the gazette notification alone is inadequate to get an understanding how the PF rate rate has been reduced to 10% for the months of May, June and July 2020. You need to read the gazette notification along with an earlier order (S.O. 320(E), dated 9th April, 1997) referred to in the gazette notification and Section 6 of the EPF Act, in order to get a comprehensive understanding of the legal basis of the rate reduction.

Your organization can opt for one of the 3 options in this regard for May, June, July 2020 payroll.

Option 1: Continue with the existing rate of contribution (@ 12%) for both employee and employer contributions.

If you chooses this option, there will be no change in the PF contribution and deduction for the wage months of May, June and July 2020. The PF department has allowed employers to retain the current rate of 12% for May, July and July 2020. Please see question number 12 in the FAQ document published by the PF department here.

Option 2: Implement the reduced rate of 10% for both employee and employer contributions.

  1. Impact on employer contribution: The reduction amount, pertaining to 2% of employer PF contribution, can be paid to the employees by way of a taxable salary component in order to maintain the cost-to-company amount.
  2. Impact on employee contribution: There will be a reduction in PF deduction in the salary of employees. If any of your employees has opted  for a voluntary higher deduction, you can retain the same.

Option 3: Apply different rates for employer and employee contribution.

As explained in Q 12 of the FAQ document, the option of higher rate of contribution, say, 12%, can be chosen only for employee contribution or employer contribution. For example, the employee contribution can be reduced to 10% while the employer contribution can be retained at 12% and vice versa.

The PF department has stated that :

  • Certain organizations, such as those eligible for the PMGKY benefit, are excluded from this order.
  • Organizations need to remit the PF dues at reduced rate (if they opt for the same) through the monthly PF-ECR.
  • There is no change in the EPF administrative charges and EDLI contributions.
  • The reduced rate of EPF contributions to 10% will not reduce the pension contributions or benefits.

 

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byT E Gautham

Simplified Tax Regime – a Circular from the Income Tax Department

The Government of India has introduced Section 115BAC in the Income Tax Act (with effect from tax year 2020-21), which allows you to opt for lower tax rates at which your salary can be taxed. The lower tax rates are specified under what is referred to as the “Simplified Tax Regime”. The below table presents the tax rates for your information.

Total Annual Income (Rs) Simplified Regime (%) Old Regime (%)
Up to 2,50,000 Nil Nil
2,50,001 to 5,00,000 5 5
5,00,001 to 7,50,000 10 20
7,50,001 to 10,00,000 15 20
10,00,001 to 12,50,000 20 30
12,50,001 to 15,00,000 25 30
Above 15,00,000 30 30

You can choose either the “Simplified Regime” or the “Old Regime” for FY 2020-21. If you opt for lower tax rates (Simplified Regime) you will have to forego pretty much all the exemptions/losses/deductions which are available otherwise. For example, under the Simplified Regime, no benefits are available under Section 80C (Life insurance premium, etc.), Section 80D (Mediclaim premium), Section 80E (Interest on education loan), House Rent Allowance, Leave Travel Allowance, other allowances, Standard Deduction, losses on house property on account of home loan interest, etc. This means that you would lose almost all the tax benefits which are available by way of exemptions/deductions, if you opt for lower tax rates (Simplified Regime).

In case you wish to claim deductions/exemptions, the existing tax rates and slabs (Old Regime in the above table) will continue to apply.

How should you make the choice between the Simplified Regime and the Old Regime?

To state the obvious, you should choose that regime which minimizes your annual tax liability. That in turn would depend on your gross salary and your investment declaration.

A Circular Issued by the Income Tax Department

The Income Tax Department, by way of a circular dated 13-Apr-2020, has clarified on certain issues related to the selection of the tax regime by employees. The key points in the circular are as follows.

a. The tax regime, once chosen, cannot be modified during the year

An employee cannot change the tax regime for the year once they make a choice and inform the employer of the same. For example, if an employee decides to opt for the Simplified Tax Regime and informs their employer of the same, the employer will have to use the Simplified Tax Regime for that employee until the end of the year.

Hence, if you are an employee, please choose the tax regime carefully.

b. A different tax regime can be chosen at the time of filing the tax return

As an employee, you can specify a tax regime in your tax return which is different from what you have communicated to your employer. For example, if you opt for the Simplified Tax Regime for the purpose of calculating tax (deducted by your employer) on your salary, you can, while filing your tax return, can opt for the Old Regime and calculate your income tax for the year accordingly.  

c. What if an employee does not communicate the choice of tax regime to the employer?

As per the circular, the employer should deduct tax as per the Old Regime in case an employee does not communicate the choice of tax regime to the employer.

d. In case an employee has income assessable under “Profits and Gains of Business or Profession”..

Please note that if you have income assessable under “Profits and Gains of Business or Profession” in addition to salary income, you cannot change the tax regime even in the subsequent years until you cease to have income assessable under Profits and Gains of Business or Profession.


In case you work for a Hinote customer organization..

Once you enter your investment declaration online, HRWorks calculates tax under both regimes and displays the same. You can then select the regime which is most beneficial (the least tax option) to you. In the screenshot below, you can see that HRWorks has calculated tax under both regimes. In the below example, the employee should select the “Old Regime” which is the lower tax option.

 

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byT E Gautham

Budget FY 2020-21 – Tax on Salary

The Union Budget for FY 2020-21 was tabled in the Parliament by the Finance Minister of India on 01-Feb-2020. Here are the key proposals related to computation of tax on salary which payroll managers need to consider for FY 2020-21, effective 01-Apr-2020.

Introduction of lower tax slabs

The Finance Minister has introduced Section 115BAC, which allows employees to opt for lower tax rates subject to their foregoing certain exemptions/losses/deductions. In case, an employee wishes to claim deductions/exemptions, the existing tax rates and slabs will continue to apply.

The tax slabs under the new regime and the current regime are as follows.

Total Annual Income (Rs) New Regime (%) Current Regime (%)
Up to 2,50,000 Nil Nil
2,50,001 to 5,00,000 5 5
5,00,001 to 7,50,000 10 20
7,50,001 to 10,00,000 15 20
10,00,001 to 12,50,000 20 30
12,50,001 to 15,00,000 25 30
Above 15,00,000 30 30

How should an employee make the choice between the current and the new tax slabs?

Let us assume that an employee’s gross salary is Rs 12,60,000 per annum. If the employee does not seek deductions/exemptions, their taxable salary shall be Rs 12,60,000 and hence they would fall under the 25% slab in the new tax regime (see the above table) as against the 30% bracket in the current tax slabs. In this case, the employee is better off choosing the new tax regime.

In case the employee is eligible to avail, say Rs 3,00,000 in tax benefits by way of exemptions/deductions, their taxable salary under the old regime shall be Rs 9,60,000, which falls under the 20% bracket in the old regime. Hence, the employee, in such a case, is better off choosing the old regime.

Employees, after considering their gross salary and the available exemptions/deductions, should calculate their total tax liability under both regimes and choose that which would be beneficial to them.

Benefits which are not available under the new tax regime

In case an employee opts for the lower tax rates, the below exemptions and deductions will not be available (as per section 115BAC) for consideration while computing the taxable income.

  1. House Rent Allowance exemption under section 10(13A).
  2. Tax exemption for Leave Travel Assistance available under section 10(5).
  3. Deductions under Chapter VIA – this includes section 80C deductions such as life insurance premium payments, which are among the most availed by employees. Deduction in respect of employers’ contribution to NPS under section 80CCD(2) is available under the new tax regime.
  4. Specific allowances under section 10(14) to be prescribed by the Income Tax Department.
  5. Standard deduction and professional tax deduction under section 16.
  6. Housing loan benefit – Interest paid on housing loan under section 24(b) on self-occupied property and losses under the head “house property”.

Employees need to exercise the option between the current tax regime and the new tax regime prior to filing their return for the year. In case an employee has business income, then the employee should stick to the tax regime they opt for until the year they cease to have business income.

Please request your employees to specify their choice with regard to the tax regime they wish to be considered under and deduct tax on their salary accordingly.

Section 80EEA – First time home buyer

The benefit of Rs 1,50,000 on interest payment towards housing loan taken by first home buyers is now available for loans sanctioned until 31-March-2021.

TDS in case of no PAN

Section 206AA has been modified to 5% instead of 20% in case of an employee not furnishing the PAN.

Modification to Section 17

Any amount or the aggregate of amounts of any contribution, in excess of Rs 7,50,000, made to the account of the employer by the employer–– (a) in a recognised provident fund; (b) in the scheme referred to in sub-section (1) of section 80CCD; and 10 (c) in an approved superannuation fund, shall be considered as taxable income.

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