The Income Tax Department has issued the “TDS on Salary” circular for FY 2014-15.
http://www.incometaxindia.gov.in/communications/circular/circular17_2014.pdf
Please ensure that all tasks (income tax deduction, investment proof scrutiny, etc.) related to salary TDS compliance in your organization for FY 2014-15 are carried out as per the circular.
Article 276(2) of the Constitution of India, which empowers state government authorities to levy Professional Tax (PT), restricts levy of PT on a person by a government authority (such as a city corporation) to a maximum of Rs 2,500 per annum.
Article 276(2) –
The total amount payable in respect of any one person to the State or to any one municipality, district board, local board or other local authority in the State by way of taxes on professions, trades, callings and employments shall not exceed two thousand and five hundred rupees per annum.
We find some government authorities levying PT in excess of Rs 2,500 per annum. For example, the Coimbatore City Municipal Corporation (since Apr 2014) levies Rs 1,268 as the half-yearly PT if an employee earns more than Rs 75,000 in a half-year. In other words, if an employee in Coimbatore earns more than Rs 150,000 in a year, he ends up paying Rs 2,536 (Rs 1,268 x 2) as PT each year. This is in excess of Rs 2,500 per annum.
We wonder if this is a violation of Article 276(2) of the Constitution of India.
Section 16(iii) of the Income Tax Act states that the tax on employment (Professional Tax) within the meaning of article 276(2) of the Constitution of India, leviable by or under any law, shall be allowed as a deduction in computing the income under the head “Salaries.” In other words, the salary paid to an employee may be reduced by the PT amount for the calculation of the taxable salary.
Since Section 16(iii) refers to article 276(2), can we argue that any PT deducted in excess of Rs 2,500 by a single government authority (like the Coimbatore example above), cannot be considered for tax deduction by employers?
What is the maximum deduction available for the interest payment on a housing loan for a self-occupied house property (as of FY 2014-15)?
Section 24 of the Income Tax Act provides for deductions on income from house property for the purpose of tax calculation. According to Section 24, where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital shall be a deduction subject to the following conditions (for a self-occupied property).
The maximum deduction shall be Rs 2 lakh if –
a. the property is acquired or constructed with capital borrowed on or after 01-April-1999, and
b. such acquisition or construction is completed within three years from the end of the financial year in which the capital was borrowed.
If the above conditions are not satisfied, the maximum deduction shall be restricted to Rs 30,000.
The maximum deduction shall be Rs 30,000 if –
a. the property is acquired or constructed with capital borrowed before 01-April-1999.
or
b. if the capital is borrowed on or after April 1, 1999 for reconstruction, repairs or renewals of a house property. Please note that this condition refers to reconstruction and repair and not construction or acquisition of the house property.
or
b. the property is acquired or constructed with capital borrowed on or after 01-April-1999 and such acquisition or construction is not completed within three years from the end of the financial year in which capital was borrowed.
In order to avail the maximum benefit of Rs 2 lakh, the assessee should have borrowed the housing loan on or after 01-Apr-1999 and the construction/acquisition should have been completed within 3 years from the end of the financial year in which the loan was borrowed.
However, the law does not explicitly state which year should be considered as the year of loan borrowal if the loan is taken across installments spread over more than one financial year.
For example, if the first installment of a housing loan is taken on 01-Apr-2008 and the last installment of the loan is taken on 31-Mar-2013, and the construction of the house property is completed in the financial year 2014-15, can the assessee claim the maximum deduction of Rs 2 lakh in FY 2014-15 if this is a self-occupied property?
The construction of the property is completed well within 3 years from the financial year in which the last installment falls. However, if the date of the first installment is considered as the loan disbursement date, the property cannot be construed to have been constructed within 3 years. So, how does one determine the year of loan borrowal?
Since the loan can be said to have been fully disbursed only after the last installment, one could consider the year of the last installment as the loan disbursal year for the purpose of tax calculation.
There are instances when there could be more than one housing loan taken for construction/acquisition of a property. In such cases, the law is silent on how the deduction on account of interest should be arrived at.
For example, let us assume that an assessee takes a housing loan and starts construction. Halfway during construction, the assessee takes another loan to complete construction. Let us also assume that the construction is completed after 3 years from the end of the financial year in which the first loan was borrowed while from the perspective of the second loan, the construction is completed within 3 years.
In the above case, there are two possibilities with regard to the deduction:
1. If the first loan is considered, the maximum deduction available shall be Rs 30,000.
2. If the second loan is considered, the maximum deduction available shall be Rs 2 lakh.
There is no clarity in law on which of the above loans should be considered for deduction when the assessee calculates the income from house property. We wonder if the assessee can make the choice as per her discretion.
While calculating capital gains tax on sale of a house property, can we consider the housing loan interest as a cost of acquisition?
This is a question we received recently from a reader of this blog. The argument is that one takes a housing loan and pays interest on the loan only for the purpose of acquiring the house property. Hence, when the property is sold, shouldn’t interest payment be considered as a cost of acquisition?
Section 24 of the Income Tax Act, explicitly allows us to consider interest on housing loan as a deduction while calculating income from house property. But what about while calculating capital gains tax? The law permits reduction of capital gains by adding certain expenses to the cost of acquisition of a house property. Can interest be considered for this?
Sections 48, 49 and 55 of the Income Tax Act specify issues related to the cost of acquisition of a capital asset while calculating capital gains. However, these sections do not explicitly state whether interest on housing loan can be considered as cost of acquisition for the purpose of calculating capital gains when a house property is sold.
We have a couple of case laws in which legal authorities have declared that interest can be considered as cost of acquisition in case of property acquisition.
a. CIT Vs. K. Raja Gopala Rao (2001 252 ITR 459 Mad)
This case concerns sale of a hotel property and the court declared that the interest on capital borrowed for the purpose of acquisition of the property shall be considered as cost of acquisition.
Payment of consideration for the sale indisputably having been made with the borrowed funds, the borrowing directly related to the acquisition and, interest paid thereon would form part of the cost of acquisition.
b. CIT Vs. Sri Hariram Hotels (P.) Ltd. (2010 229 CTR 455 Kar)
The Tribunal after hearing the parties and having considered the case of the assessee held that out of the borrowed loan from the directors, the property has been acquired and any interest paid thereon would also be accounted towards the cost of acquisition of the asset.
Let us say a person buys a house property on borrowed capital and uses the interest paid on capital as a deduction while calculating income from house property. When the person sells the house property, he uses interest as a cost of aquisition in order to reduce the capital gains tax liability. Is this not a case of double deduction?
A judgement delivered by a Chennai Tribunal (ACIT v C.Ramabrahmam) in 2012, states that a person can claim benefit under both Section 24 and Section 48.
After perusing the above said provisions, we are of the opinion that deduction under section 24(b) and computation of capital gains under section 48 of the “Act” are altogether covered by different heads of income i.e., income from ‘house property’ and ‘capital gains’. Further, a perusal of both the provisions makes it unambiguous that none of them excludes operative of the other. In other words, a deduction under section 24(b) is claimed when concerned assessee declares income from ‘house property’, whereas, the cost of the same asset is taken into consideration when it is sold and capital gains are computed under section 48. We do not have even a slightest doubt that the interest in question is indeed an expenditure in acquiring the asset. Since both provisions are altogether different, the assessee in the instant case is certainly entitled to include the interest amount at the time of computing capital gains under section 48 of the “Act”.
There is a small issue related to considering interest as a cost of acquisition while calculating capital gains. If the interest amount is paid across years on account of the loan schedule, how does one look at indexation? Should interest amounts paid across years be simply added up to arrive at the total cost of acquisition?
There does not seem to be any explicit reference to this in any of the judicial pronouncements on this issue.
Professional Tax (also referred to as Profession Tax) is a tax on income levied by state government authorities in India. If an organization operates in a state which has legislated levy of Profession Tax, it is bound to deduct Professional Tax from its employees’ salary and remit the same to the relevant state government authority within the specified statutory deadline. Currently, Professional Tax is levied in only some states and union territories in India.
Article 276 in the Constitution of India empowers states to levy taxes on professions, trades, callings and employments. According to Article 276:
“Notwithstanding anything in article 246, no law of the Legislature of a State relating to taxes for the benefit of the State or of a municipality, district board, local board or other local authority therein in respect of professions, trades, callings or employments shall be invalid on the ground that it relates to a tax on income.”
Professional Tax or Profession Tax is more formally referred to as “tax on professions, trades, callings and employments” by state governments. The Income Tax authorities (Section 16 (iii) of the Income Tax Act, 1961) refer to Professional Tax as “tax on employment.” Professional Tax features as item no. 60 in the State List under the Seventh Schedule of the Constitution of India.
Article 276(2) mandates the maximum amount of Profession Tax which can be levied by state governments in a year. Currently, the Professional Tax levied cannot exceed Rs. 2,500 per person per annum.
Article 276(2) –
The total amount payable in respect of any one person to the State or to any one municipality, district board, local board or other local authority in the State by way of taxes on professions, trades, callings and employments shall not exceed two thousand and five hundred rupees per annum.
Article 276(2) states that the maximum Professional Tax payable to the “state or to any one municipality…” shall not exceed Rs. 2,500 per year. Surely, the term “state” is overarching and includes municipalities and other state authorities. We wonder what was the need to refer to “municipality, district board..” in the text of article 276(2). Given that each state levies Professional Tax through a designated body, it can be assumed that an individual is not liable to pay more than Rs. 2,500 per annum as Professional Tax to a state.
An employee in Chennai earns a salary Rs. 1 lakh per month and is liable to pay Rs. 1095 as Professional Tax to the Corporation of Chennai (the levying authority) every six months (Apr to Sep and Oct to Mar). In July 14, the employee resigns his job in Company A and moves to Company B located in Chennai. Company A deducts Professional Tax of Rs.1095 (for the salary it pays for Apr 14 to Jun14). Company B deducts Rs.1095 as Professional Tax (for the salary it pays for Jul14 to Sep 14) and further expects to deduct Rs. 1095 as Professional Tax for the salary it is likely to pay for Oct 14 to Mar 14). On account of Company B deducting Rs 1095 as Professional Tax for the period Jul 14 to Sep 14, the employee ends up paying Rs. 3,285 as the Professional Tax for 2014-15. This is well above the Rs. 2,500 limit as mandated by article 276(2) of the Constitution of India.
Can the employee, on the basis of article 276(2), make a case to Company B that they should not be deducting Professional Tax of Rs. 1095 for the salary he receives for Jul 14 to Sep 14?
While the employee has a case, employers typically do not consider the Professional Tax deducted by other employers within the same Professional Tax deduction period while calculating Professional Tax on an employee’s salary. Employers argue that there is no official mechanism to validate information on Professional Tax deducted by an employee’s previous employer(s).
Authorities such as the Corporation of Chennai do not track individual employees with a unique identifier (such as PAN or Aadhaar number). Consequently, such authorities receive more than Rs. 2,500 per annum as Professional Tax from a single employee in some instances, particularly when employees move from one employer to another within the same Professional Tax period.
Section 16(iii) of the Income Tax Act, 1961, states that “the tax on employment (Professional Tax) within the meaning of article 276(2) of the Constitution of India, leviable by or under any law, shall also be allowed as a deduction in computing the income under the head “Salaries.”
To the extent of Professional Tax, the salary of an employee may be reduced while arriving at the taxable salary of the employee.
The Provident Fund (PF) department, in its circular dated 28-Aug-2014, has notified the wage ceiling enhancement to Rs 15,000 per month from Rs 6,500 per month, effective 01-Sep-2014. Please ensure that PF deduction and contribution are calculated as per the new wage ceiling of Rs 15,000 from Sep 2014 onwards.
In other words,
a. If the PF wage of an employee is more than Rs 15,000 per month:
The minimum mandatory PF contribution (and deduction) shall be Rs 1,800 per month (12% of Rs 15,000).
b. If the PF wage of an employee is less than Rs 15,000 per month:
The minimum mandatory PF contribution (and deduction) shall be 12% of the actual PF wage.
If any of your employees has been out of the PF net so far on account of their having been receiving PF wage of more than Rs 6,500 per month, such employees will now come within the ambit of PF if their PF wage is now is less than or equal to Rs 15,000 per month.
Please note that the new PF wage ceiling could impact the compensation cost incurred by your organization on account of the increase in employer PF contribution. The employees’ take home pay too could get impacted.
You can read about the basis of PF calculations here.
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.
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.
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.
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.
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.
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%.
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.
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.
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.
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 |
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.
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.
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.
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).
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.
In addition to remitting Profession tax (PT), companies – conducting business transactions in Chennai – need to pay what is known as Company Tax to the Corporation of Chennai every six month. We find many companies being unaware that there is something called Company Tax to be paid. According to estimates published by the Corporation of Chennai, there are over 25,000 companies that do not remit Company Tax. A large number of companies do not pay Company Tax probably out of sheer ignorance.
The corporation of Chennai is empowered to levy Company Tax as per Section 110 of The Chennai City Municipal Corporation Act, 1919. Every company (Private Limited and otherwise) which operates within the city of Chennai in any half year for not less than 60 days in aggregate shall pay Company Tax every half year to the Corporation of Chennai. The Company Tax is liable to be paid twice (half yearly – Apr to Sep and Oct to Mar) in a financial year.
Calculation of Company Tax is based on the paid up capital of a company. Currently (Mar 2014), the Company Tax is calculated as per the below slabs.
| Paid up capital of the company | Company Tax for the half year in Rs |
| Less than Rs 1 lakh | 100 |
| Rs 1 lakh & more but less than Rs 2 lakh | 200 |
| Rs 2 lakh & more but less than Rs 3 lakh | 300 |
| Rs 3 lakh & more but less than Rs 5 lakh | 400 |
| Rs 5 lakh & more but less than Rs 10 lakh | 500 |
| Rs 10 lakh & more | 1000 |
Please ensure that your company remits Company Tax to the Corporation of Chennai every 6 months.
It is time consuming and tiring to stand in long winding queues in Rippon Building for remitting PT and Company Tax. The Corporation has enabled online payment of Property Tax. Likewise the Corporation should consider creating a facility for online remittance of PT and Company Tax sooner than later.
