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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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Let us face it: payroll management is a thankless job. When was the last time you thanked payroll folks in your organization for crediting your salary on time or calculating your income tax or provident fund deduction accurately? Running a payroll organization is like running an electric utility. No consumer thanks the power company when they receive uninterrupted power supply. Let there be a power outage even for a second, you will instantly hear consumers swearing at the power company.

Just because the payroll function is underappreciated does not mean that the function is unimportant. Payroll mistakes can be very expensive – both in monetary and non-monetary terms. Incorrect payroll calculations and delays in executing payroll tasks can lead to cash loss, fines from statutory authorities, audit qualifications, and employee dissatisfaction. Payroll today is at the crossroads of HR, Finance, and Statutory Compliance functions in an organization and is increasingly coming of age as a standalone function. Given that the employee cost is the single largest item in many organizations’ expense list, companies are hiring payroll professionals not only for routine administrative tasks related to payroll and compliance, but also for strategic tasks such as compensation design, reward and recognition planning, and budget and business plan preparation. As a payroll software and service provider with some understanding of the payroll industry, we can say with confidence that high quality payroll professionals are not available in plenty.

Just what are the traits of a high quality payroll professional? What should recruiters look for while hiring people for the payroll function?

1. Analytical skills

Payroll can be taught but intelligence cannot be. A good payroll professional is analytical and has the ability to synthesize facts, make hypotheses and arrive at sound conclusions. Whenever we meet candidates while hiring for payroll operations at Hinote, we evaluate the problem solving skills of the person. Pose some logical/numerical riddles and see if the person shows the enthusiasm to solve it. Check the soundness of the person’s approach to arriving at the solution as much as the solution itself.

1. You are given a 5 litre water jug and a 3 litre water jug. There is a tap from which you can get as much water as you wish. Can you give me exactly 4 litres of water?

Go ahead, give it a shot. This is a very easy riddle to solve.  Hint: Watch the movie Die Hard 3 for the answer.

2. Can you write a nested IF function in a spreadsheet software to calculate Profession Tax as per the slabs specified by the Chennai Corporation? Enter any six-monthly salary figure in a cell and get the Profession Tax figure in another cell by using the nested IF function.

3. If you are given a net pay figure, can you work backward to arrive at the gross pay after making assumptions for statutory deductions?

Even if you have a high quality payroll software at your disposal, you will still need to do some offline calculations in a spreadsheet software at times in order to do quality checks. If you are not a numbers person, payroll is not the profession for you. Payroll professionals may have to implement complex business rules imposed by their organization for the purpose of pay calculation. Unless they are analytical and have the capability to think through the logic, they may implement such business rules incorrectly, leading to wrong pay calculations.

2. Knowledge of statutory compliance

We come across many payroll professionals who do not have adequate knowledge of payroll practices and the statutes governing payroll. Unfortunately, many payroll professionals reduce payroll to just uploading some HR data onto a software and downloading some reports for the consumption of the finance or the HR team. Ask them a basic question about how or why certain calculations are done, you would receive unconvincing answers. A payroll professional should have sound knowledge of key statutes such as the Income Tax Act, PF Act, ESI Act, Payment of Bonus Act etc. in terms of calculations, filings,  and deadlines.

1. Do you know how to calculate Provident Fund arrear deduction as per the PF Act?

2. Can you please explain how loss of pay impacts statutory bonus calculation as per Section 13 of the Payment of Bonus Act?

3. Please explain the deductions available for income from house property as per Section 24 of the Income Tax Act.

4. Can you help the HR team in your organization in making compensation structuring tax efficient?

Knowledge of statutes also means keeping abreast of important case laws in the statutes governing payroll.

3. Communication skills

We cannot overstate the importance of communication skills for a payroll professional. There may be occasions when payroll personnel, even those who are not very senior, may have to explain calculations to very senior managers – including heads of finance, HR and even the CEO – in their organization. A payroll person can easily lose credibility in the eyes of the other stakeholders if his communication skills are not up to the mark.

There may also be occasions when a payroll person may have to explain statutory deductions to employees whose knowledge of statutes may be negligible. Good payroll professionals are never condescending or impatient but instead are empathetic to their colleagues who seek their help. For example, a higher income tax deduction in a month, even if it is fully as per law, leads to a reduction in net pay and consequently an employee may feel uncomfortable about the same. It is the job of the payroll professional to provide the reasons behind the increase in tax deduction to the employee in order to convince him of the need for the same. People skills and diplomacy can help a payroll professional handle tough situations which involve irate employees.

4. Process orientation

An important determinant of payroll efficiency is the extent to which payroll personnel are committed to process discipline.

Great payroll professionals:

• Work on the basis of a well defined payroll calendar which specifies dates and time limits for monthly attendance closure, receipt of payroll inputs, submission of payroll reports and completion of statutory formalities. In short, payroll professionals should worry as much about timeliness as about accuracy.
• Insist working only on the basis of duly authorized company policies.
• Seek authorization in writing for payroll inputs in case of exceptions.
• Store and submit all supporting documents such as receipts and approval emails in case of payroll audits or statutory inspections.

5. Diligence

Commitment to accuracy is paramount in payroll. Mistakes can happen even if the payroll team uses a great payroll software. The payroll process should be designed in such a fashion that even when mistakes happen, they are identified before payroll finalization. Good payroll professionals create extensive checklists for payroll output verification and go through the points in the checklist each month diligently.

The payroll quality process should:

1. Check if payroll output reflects the input accurately.
2. Check if periodic statutory compliance requirements are met.
3. Verify payroll reports by looking at reconciliation reports which present data for the current month vis-à-vis last month.
4. Ensure that all relevant reports are correctly updated whenever a new head of pay or deduction is created.

Great payroll professionals never shortchange quality checks due to time constraint.

6. Ability to work under pressure

A payroll professional should be prepared to face delays in arrival of inputs and consequently work under tight deadlines. For example, how many times have we seen delays in compensation revision decisions, and despite delays in inputs, payroll professionals having to ensure that payroll output is delivered on time. Even in organizations which have clear-cut deadlines for payroll tasks, there will be occasional last minute rush. Great payroll professionals work to tight deadlines without compromising on output quality.

7. Commitment to confidentiality

No amount of non-disclosure agreements, security systems, security certifications etc. can help if a payroll professional is careless about maintaining data confidentiality. Haven’t we all seen emails going to wrong recipients due to usage of the auto-complete feature in email software or because of the sender clicking the “reply all” button by mistake? A payroll professional should treat both employee and employer information with utmost care and ensure that information does not reach unauthorized recipients.

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Compensation structuring with a view to minimizing tax in the hands of employees is not a bad thing. However, we find a number of organizations not adhering to the Income Tax Act while including allowances and reimbursements in their employees’ salary structure. A typical practice adopted by many organizations is to define a portion of the compensation as “variable” or “flexi” and not tax such components as long as employees submit supporting bills in proof of certain expenses having been incurred. The typical heads of pay we come across in this regard include Petrol Reimbursement, Uniform Allowance, Books and Periodicals Reimbursement, Professional Development Allowance, Grooming Allowance, and Soft Furnishing Allowance. The list goes on, limited only by the creativity of payroll managers in coming up with names for heads of pay. While we have no problem with organizations creating new heads of pay or having flexible pay components, we are concerned that some payroll managers may be committing mistakes with regard to the tax treatment of such heads of pay.

Let us take a look at some examples of heads of pay which are not taxed as per the Income Tax Act in some organizations.

1. Petrol / Fuel Reimbursement

Many organizations provide tax free compensation under this head as long as employees submit petrol/diesel bills. Senior managers in some organizations receive thousands of Rupees each month under this head. Many payroll managers are not aware that there are documentation requirements to be met if any amount is paid tax free under this head.

There is no direct reference to petrol/fuel reimbursement in the income tax law. Rule 3 of the Income Tax Rules, which pertains to valuation of perquisites, provides guidelines on how to tax an amount paid to employees for the purpose of meeting the “running and maintenance charges” of their motor car or other vehicles. The term running and maintenance charges includes expenses incurred on petrol/diesel.

According to Rule 3, for any payment made for meeting the running and maintenance expenses of an employee’s vehicle to be fully tax free, the following conditions should be met.

a. If fuel reimbursement is sought for an employee’s vehicle, it is imperative that the employee owns the vehicle and as part of documentation, the employer should store a copy of the vehicle’s documents (such as the RC book). In case the vehicle is provided by the employer (owned or leased), the supporting ownership or lease document should be maintained.

b. The vehicle should be used wholly and exclusively for official purposes and the employer should give a certificate to the effect that the expenditure was incurred wholly and exclusively for the performance of official duties. In other words, if the employee uses the vehicle for personal purposes, even if partly, the fuel expenses reimbursed shall not be tax free.

c. The employer should maintain complete details of journey undertaken for official purpose which may include date of journey, destination, mileage, and the amount of expenditure incurred. In other words, the employer should maintain a travel log book at the individual employee level and be able to justify that the expenses reimbursed were incurred only for official purposes.

As per Rule 3, submission of fuel bills alone is not adequate for making the reimbursement amounts non-taxable. We find many organizations not adhering to the income tax rules (stated above) in this regard.

2. Uniform Allowance

According to Rule 2BB of the Income Tax Rules, “any allowance granted to meet the expenditure incurred on the purchase or maintenance of uniform for wear during the performance of the duties of an office or employment of profit” is tax free. Many organizations ignore the term uniform and make payments under this head tax free as long as employees submit some clothing bills.  This, in our view, is not in line with Rule 2BB. The term uniform refers to the distinctive clothing worn by members of the same organization. In case an organization does not have the practice of asking its employees to wear uniform to work, the organization cannot have a tax free head of pay called Uniform Allowance.

3. Books and Periodicals Reimbursement

There is no direct reference to books or periodicals in Rule 2BB of the Income Tax Rules. Many organizations reimburse employees the money they spend on buying books and periodicals under this head of pay. Payroll managers argue that employees need to keep abreast with the latest happenings relating to their profession and hence spending money on books and periodicals is justified. While the Income Tax Department would have no objection to employees keeping themselves abreast of the developments around them by reading books and periodicals, it could well object to making the payment tax free.

We can add many more heads of pay (which are commonly adopted by organizations) to the above, the taxation of which is not strictly in line with law.

Avoid liberal interpretation of law

Whenever you decide to create a head of pay which is tax free, please ensure that the taxation of the head of pay is as per Section 10(14) of the Income Tax Act, Rule 2BB and Rule 3 of the Income Tax Rules which refer to tax free allowances and valuation of perquisites. Section 10(14)(i) states that any “special allowance or benefit, not being in the nature of a perquisite within the meaning of clause (2) of section17, specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office” can be tax free. We find payroll managers taking refuge under this section and arguing that some of the allowances and reimbursements (such as Books and Periodicals Reimbursement) are not to be taxed because such expenses are required for the performance of official duties. For example, in case of Books and Periodicals Reimbursement, unless one can establish that the books or the periodicals can be established to be “wholly, necessarily and exclusively” required for official work, the reimbursement cannot be tax free. We find employees submitting bills for daily newspapers and generic news magazines which are readily accepted by many organizations. Surely, a daily newspaper cannot be stated to be “wholly, necessarily and exclusively” required for official work.

In short, we suggest that payroll managers do not take liberties which are not explicitly provided by law.

Keeping it outside of payroll does not matter

A payroll manager once informed us that he keeps the payments under certain heads of pay (such as fuel reimbursement) outside of payroll and the monthly salary register since he wanted to keep it tax free. It is quite strange that some payroll managers believe that if a payment is kept outside monthly payroll process, the payment can be made tax free. The Income Tax Department does not recognize the formality of payroll processing. Whenever a salary payment is made to an employee, whether within or outside of payroll, payroll managers should ensure that the tax calculation is as per the Income Tax Act. If a tax free payment does not have a clear-cut basis in the Income Tax Act, there is a likelihood that it may be construed as tax evasion by the Income Tax Department.

Make sure that the documentation is complete

Finally, please ensure that you collect all the required documents for tax free allowances and reimbursements from employees. Please make a salary payment tax free only after a careful scrutiny of the bills submitted by employees. Please ensure that all the required underlying documents (bills etc.) are stored carefully. In case of any queries from the Income Tax Department, you will need to submit the documents to the department while justifying the reasons for tax free payouts.

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Recently, we received a question from an organization known to us.

Should we be calculating Service Tax on notice period recovery when we run final settlement for resigned employees?

In case you are wondering how on earth there can be any service tax implication on payroll processing, let us examine the background to this question.

Our take

We are of the opinion that notice period recovery should not be subjected to service tax. Section 65B (44) of the Finance Act, 1994, which defines the term “service,” explicitly excludes “provision of service by an employee to the employer in the course of or in relation to his employment.” The notice period recovery is a part of an employment contract between an employer and an employee which is outside the purview of service tax applicability. The payment is on account of an employee not meeting certain conditions related to the employment contract. We opine that notice period recovery is in the nature of a penalty/fine and hence cannot be looked at as a consideration for any service. Application of the definition of declared service in the context of an employment contract is not appropriate.

There does not seem to be any circular from the Service Tax Department or case law on this. We have not come across any demand raised by the Service Tax department in this regard. Some organizations seem to be of the view that in order to play it safe it is better to deduct and remit service tax on notice period recovery. In order to put an end to needless speculation, it would be good if the Service Tax Department comes out with a communication clearly specifying its stance on this.

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Recently, we received a question from an HR manager, “Do we pay salary for the total number of calendar days in a month or only for the working days, after deducting the number of Sundays and other holidays in a month?”

Of course, organizations pay the same salary each month to an employee who works the entire month. The number of days for which salary is calculated in a month becomes relevant when an employee is paid only for a part of a month – in the first month of service, if the employee does not join the organization on the first day or in the last month of service, if the employee does not work until the last day of the month. The number of days for which salary is paid is relevant even in case of loss pay.

For example, if the monthly gross salary of an employee is Rs 30,000 and the employee joins an organization on 31st May, should his salary for May (for one day of work) be Rs 30,000/31 (calendar day basis) or should it be Rs 30,000/30 or Rs 30,000/26 (on a fixed number of days basis)?

If the monthly gross salary of an employee is Rs 30,000 and the employee has loss of pay for 2 days in May, should the loss of pay value be Rs (30,000/31) x 2 (calendar day basis) or should it be Rs (30,000/30) x 2 or Rs (30,000/26) x 2 (on a fixed number of days basis)?

The question, at a fundamental level, is: What should be the base days for salary calculation?

We find organizations in India adopting different bases for pay calculation.

1. Calendar days

This is probably the most widely adopted basis. In the calendar-day basis, the per-day pay is calculated as the total salary for the month divided by the total number of calendar days.

For example, if the total monthly salary of an employee is Rs 30,000, and if the employee joins an organization on September 21, the employee will be paid Rs 10,000 for the 10 days in September. Since September has 30 calendar days, the per-day pay is calculated as Rs 30,000/30 = Rs 1,000.

For the first or the last month of service, an employee – depending on whether he or she joins or leaves the organization in a 30 day or a 31 day month – will receive different pay amounts for the same number of service days. In the above example, if the same employee joins the organization on October 22 (instead of September 21) and works for 10 days in October, he or she would receive only Rs 9,677 (after rounding off) in October. Since October has 31 days, the per-day pay is calculated as Rs 30,000/31 = Rs 967.74.

2. Calendar days adjusted for Sundays

This is a variant of the Calendar day basis. In this method, the pay per day is calculated as the total salary for the month divided by the total number of calendar days minus Sundays.

For example, let us assume that an employee joins an organization in September which happens to have 4 Sundays. If the employee’s total monthly salary is Rs 26,000, and if the employee joins on September 21, he or she will be paid Rs 10,000 for the 10 days in September. Since September has 26 base days (30 minus 4 Sundays), the per-day pay is calculated as Rs 26,000/26 = Rs 1,000.

Some organizations add holidays to the total number of Sundays in order to arrive at the base days for the month. In other words, the total number of days for which salary is calculated each month varies from one month to another depending on the number of calendar days, Sundays, and other holidays.

3. Fixed number of days, such as 26 or 30

In some organizations, the per-day pay is calculated as the total salary for the month divided by a fixed number of days, such as 26 or 30.

If an organization uses 26 as the fixed number of base days each month, an employee who joins on September 21 and whose monthly salary is Rs 26,000, will get paid Rs 10,000 for the 10 days in September; the per-day pay is calculated as Rs 26,000/26 = Rs 1,000.

In the fixed days method, an employee, whether he joins or leaves the organization in a 30 day or a 31 day month, will get the same pay amount for the same number of pay days. In the above example, if the employee joins the organization on October 22 (instead of September 21), he would be paid the same amount of Rs 10,000 (for 10 service days) since both September and October are 26-day months from the point of view of payroll.

Of course, the discussion on days for which salary is paid is relevant only for employees who have to be paid for less than a month – due to loss of pay or in their first or last month of service. For employees who have to be paid full salary for the month, the base days are of no consequence.

Given that organizations follow different base days for pay calculation, is there is a particular method which can be said to be statutorily and logically correct?

What do the statutes say regarding base days?

The key statutes which refer to salary payment are The Payment of Wages Act, 1936, The Industrial Disputes Act, 1947, The Payment of Gratuity Act, 1972, The Shops and Establishment Act, and The Factories Act, 1948.

Surprisingly, none of the statutes except The Payment of Gratuity Act directly specify how many base days exist in a month. The Payment of Gratuity Act states that the number of base days in a month shall be 26 for the purpose of gratuity calculation.

The Industrial Disputes Act, which deals with issues such as retrenchment salary, defines the term “average pay,” in case of monthly paid workman, as the average of the wages payable “in the 3 complete calendar months.” There is no explicit reference to how the per-day salary should be calculated.

According to the Minimum Wages Act, the minimum rates of wages may be fixed by wage-periods, namely, by the hour, by the day, by the month, or by such other larger wage-period as may be prescribed. In addition, “where such rates are fixed by the day or by the month, the manner of calculating wages for a month or for a day, as the case may be, may be indicated.” Here again, there is no reference to how the per-day wage should be calculated.

The Factories Act states that each worker shall have one day off (Sunday or any one of the three days immediately before or after Sunday) each week. However, the Act is silent on whether the weekly holiday should be a paid holiday or not. Hence, it follows that if the weekly holiday is a paid holiday, then the organization shall calculate the per-day pay on the basis of the calendar days in the month. If the weekly holiday is not considered to be a paid holiday, then the total base days in a month shall be the total number of calendar days in the month minus the total number of Sundays or any other weekly off days. For example, if there are 4 Sundays (weekly off days) in September and October, the total base days in September shall be 26 (30 minus 4) and the total base days in October shall be 27 (31 minus 4).

The Shops and Establishment Act, legislated by the states in India, specify that employees should be given weekly holidays. According to the Tamil Nadu Shops and Establishment Act, “Every person employed in an establishment shall be allowed in each week a holiday of one whole day.” Further, “No deduction shall be made from the wages of any person employed in an establishment on account of any day or part of a day on which a holiday has been allowed.” The Karnataka Shops and Commercial Establishment Act too requires that employees be provided one day off each week and no wage deduction shall be done for the weekly holiday.

As far as the Shops and Establishment Act and the Factories Act- the 2 statutes which govern the majority of the organizations in India – are concerned, it can be concluded that the base days for monthly salary calculation shall either be the calendar days in a month or the number of calendar days after deducting the number of weekly off days.

Other statutes which govern sectors such as mines (The Mines Act 1952), plantations (The Plantations Labour Act, 1951), and transportation sector (The Motor Transport Workers Act, 1961) can also be referred to in this regard.

A fixed number of days (such as 26 or 30) as base days

The use of a fixed number of days such as 26 or 30 each month leads to inconsistencies in salary calculation and organizations should consider avoiding this method. Here is an illustration to describe the problem with calculating per-day salary on the basis of 26 days.

Let us assume that the monthly salary for an employee is Rs 26,000, which works out to Rs 1,000 per day (Rs 26,000/26). For employees who join the organization in the month of October (which has 31 calendar days) the salary calculation shall be as follows.

For those who join in early October, the number of days paid must be as per the number of days not worked in October. For example, employees who join on October 1 will have zero “not worked” days and hence will get paid Rs 26,000 as salary. Employees joining on October 2 will have 1 “not worked” day and hence will get paid Rs 25,000 as salary and so on. The “not worked” days logic will not work till the end of the month since as per this logic anyone who joins on the 27th of October will have 26 “not worked” days and hence will receive Rs 0 as salary.

For those who join towards the end of the month, one should use “worked” days instead of “not worked” days for salary calculation. For example, employees who join on October 31 will get salary for 1 day (Rs 1,000), employees joining on October 30 will get salary for two days (Rs 2,000) and so on.

The problem in using a fixed number of days such as 26 as the base days for pay calculation is that at some point in time during the month the payroll manager should switch from the “not worked days” basis to the “worked days” basis, and whenever the switch is made, there will be a problem of logical inconsistency. With regard to our above example, let us assume that the switch is made on October 16. A simple calculation shows that an employee who joins on October 15 will get paid Rs 12,000 as salary for the month of October (on the basis of the “not worked days” method) and another employee who joins one day later on October 16 will get paid Rs 16,000 (on the basis of the “worked days” method) – please see the table below. Needless to say, this is illogical and not fair to the employee who works for more number of days.

The table below presents salary calculations for employees who join on different dates in October for a monthly salary of Rs 26,000. The organization calculates salary on the basis of 26 days each month.

N W Days (in the Calculation Method column) refers to “Not Worked” days

Date of Joining	Base Days	Calculation Method	Not Worked Days	Salary Days	Salary (Rs)		Calculation Method	Worked Days	Salary (Rs)
1	26	N W days	0	26	26000		Worked days	31	26000
2	26	N W days	1	25	25000		Worked days	30	26000
3	26	N W days	2	24	24000		Worked days	29	26000
4	26	N W days	3	23	23000		Worked days	28	26000
5	26	N W days	4	22	22000		Worked days	27	26000
6	26	N W days	5	21	21000		Worked days	26	26000
7	26	N W days	6	20	20000		Worked days	25	25000
8	26	N W days	7	19	19000		Worked days	24	24000
9	26	N W days	8	18	18000		Worked days	23	23000
10	26	N W days	9	17	17000		Worked days	22	22000
11	26	N W days	10	16	16000		Worked days	21	21000
12	26	N W days	11	15	15000		Worked days	20	20000
13	26	N W days	12	14	14000		Worked days	19	19000
14	26	N W days	13	13	13000		Worked days	18	18000
15	26	N W days	14	12	12000		Worked days	17	17000
16	26	N W days	15	11	11000		Worked days	16	16000
17	26	N W days	16	10	10000		Worked days	15	15000
18	26	N W days	17	9	9000		Worked days	14	14000
19	26	N W days	18	8	8000		Worked days	13	13000
20	26	N W days	19	7	7000		Worked days	12	12000
21	26	N W days	20	6	6000		Worked days	11	11000
22	26	N W days	21	5	5000		Worked days	10	10000
23	26	N W days	22	4	4000		Worked days	9	9000
24	26	N W days	23	3	3000		Worked days	8	8000
25	26	N W days	24	2	2000		Worked days	7	7000
26	26	N W days	25	1	1000		Worked days	6	6000
27	26	N W days	26	0	0		Worked days	5	5000
28	26	N W days	27	-1	-1000		Worked days	4	4000
29	26	N W days	28	-2	-2000		Worked days	3	3000
30	26	N W days	29	-3	-3000		Worked days	2	2000
31	26	N W days	30	-4	-4000		Worked days	1	1000

The above problem exists – whether the base days are 26 or 30 days – for salary calculation in the first or last month of service when an employee works for less than full month, and in case of loss of pay. The problem ceases to exist only when the calendar day basis or its variant is used for pay calculation.

Let us take a look at a numerical example which shows that a company, by following the 30-day calculation, could be overpaying its new joinees or exiting employees in a 31-day month.

An employee (new joinee or exiting employee), whose monthly gross pay is Rs 30,000, works for 10 days in the month of July (31-day month). The per-day salary in July as per company’s calculation is Rs 1000 (Rs 30,000/30 days). Hence, the company would pay the employee Rs 10,000 as salary (for 10 days) in July. If the company were to follow the calendar day logic, the per-day salary in July shall be Rs 967.74 (Rs 30,000/31 days) and hence for 10 days, the company shall be paying only Rs 9,677 (instead of Rs 10,000) in July.

There are more 31-day months (7) than 30-day months (4) in a calendar year. The “overpayment” will happen in 7 months (31-day months) in a calendar year.

Arguments in favor of the fixed-days method are fallacious. A typical argument we hear in favour of the fixed-days method is as follows.

Let us maintain consistency across 30 and 31 day months. Whether an employee joins on September 21 or October 22 (and hence works for 10 days) they should be paid the same salary.

Given the Gregorian calendar system, organizations which make monthly salary payments have chosen to pay the same amount as salary whether it is a 28 or 30 or 31 day month. What about consistency there?

We wonder how organizations that follow the fixed days logic resolve the problem inherent in the method. Or maybe they don’t, and just pay employees whatever salary amount comes out of applying this method.

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Effective April 2015, the state authorities in Karnataka and Maharashtra have introduced amendments to Profession Tax.

Karnataka

1. Profession Tax exemption to senior citizens who have attained age of 60 years.
2. Profession Tax exemption to persons drawing salary/wages less than Rs. 15,000 in a month.

Source: http://ctax.kar.nic.in/latestupdates/ctd0001.pdf (Please refer to III PROFESSION TAX)

Maharashtra

No deduction of Profession Tax in case of female employees whose monthly gross pay is equal to or less than Rs. 10,000/-.

Source: http://www.mahavat.gov.in/Mahavat/MyFold/DOWNLOADS/NOTIFICATIONS/KNOW_NOTIFI_PTA/KNOW_NOTIFI_PTA_04_30_15_3_4_48PM.pdf (Please refer to Chapter III)

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State Bank of India (SBI) has published the reference lending rates for the purpose of loan perquisite calculation for the financial year 2015-16. You can find the SBI rates as on 01-Apr-2015 here.

SBI’s loan product called “Xpress Credit” corresponds to personal loans provided by employers to their employees. There are 3 categories of reference rates under this loan – Full Check-off, Partial Check-off, and No Check-off. The term Check-off, in this context, refers to the system whereby the employer regularly deducts a portion of an employee’s salary and makes payments towards loan repayment. If the loan repayment from an employee happens entirely by way of salary deduction (and not by the employee paying by cheque/cash outside of salary deduction), the Full Check-off rates should be considered for perquisite calculation.

For 2015-16, SBI has published a range of rates for the 3 categories (Full, Partial, and No Check-off). It is not clear how employers should interpret the range provided. For example, the reference rate range for the “Full Check-off” category is as follows:

Full Check-off: 300 bps – 350 bps above Base Rate i.e., 13.00 % p.a. – 13.50% p.a.

If an employer provides a personal loan at 0% interest rate and the loan deduction happens entirely by way of deduction from salary, should the employer consider 13% or 13.5% as the reference rate? It would be useful if the Income Tax Department provides a clarification on how employers should interpret the range of reference loan rates published by SBI.

You can read about how to calculate perquisite value on loan provided to employees in this blog post.

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A new tax year has begun and it is time to start implementing the budget proposals related to tax on salary. As you are aware, the Union Budget for FY 2015-16 was tabled in the Parliament by the Finance Minister of India on 28-Feb-2015. Here are the key proposals related to computation of tax on salary which payroll managers need to consider for FY 2015-16.

1. The tax slabs remain the same.

The tax rates for salaried employees (below 60 years of age) for FY 2015-16 shall be the same as those for FY 2014-15.

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 tax rates for salaried employees (aged 60 years and above but below 80 years) for FY 2015-16 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

Note:
1. The Education cess including Higher Education cess stays at 3%.
2. Tax relief under Section 87A – the tax credit of Rs 2,000 is available for FY 2015-16 as long as the total income does not exceed Rs 5 lakh for the year.

2. Increase in surcharge.

In case the total taxable income goes beyond Rs 1 crore in the year, a surcharge of 12% (subject to marginal relief) is to be deducted – the surcharge was 10% in FY 2014-15.

3. Deduction under Section 80C.

The maximum deduction under 80C (Life insurance premium, PPF, investment in National Savings Certificate, interest from notified bank deposits, principal repayment on housing loan, etc.) stays at Rs 1.5 lakh for 2015-16. Deposit made in the Sukanya Samriddhi Yojana Account by a parent or a legal guardian of a girl child has been included in the list of Section 80C deductions.

4. Deduction under Section 80CCC.

The maximum deduction under 80CCC (Deposits in pension fund) has been increased to Rs 1.5 lakh for 2015-16.

5. Deduction under Section 80CCD.

80CCD(1) – The maximum deduction available for an employee on account of his or her contribution to National Pension System (NPS) is Rs 1,50,000 or 10% of employee salary (Basic plus Dearness Allowance), whichever is lesser.

80CCD(1B) – Additional deduction (over and above deduction under 80CCD(1)) up to Rs 50,000.

80CCD(2) – Employer contribution to NPS – The maximum deduction available is 10% of employee salary. Salary means Basic plus Dearness Allowance.

Note:
1. As per Section 80CCE, the aggregate deduction under sections 80C, 80CCC and 80CCD(1) cannot exceed Rs 1.5 lakh per annum.
2. The total deduction under Section 80C, 80CCC, 80CCD(1) and 80 CCD(1B) cannot exceed Rs 2 lakh per annum.
3. Any deduction under Section 80CCD(2) is outside of the above limit.

6. Deduction under Section 80D – Medical insurance premium.

1. Employee, spouse, and dependent children (no senior citizens): The maximum available deduction is Rs 25,000 per annum.

2. Employee, spouse, and dependent children (even if there is one senior citizen): The maximum available deduction is Rs 30,000 per annum.

3. Parents of the employee (no senior citizens): The maximum available deduction is Rs 25,000 per annum.

4. Parents of the employee (even if there is one senior citizen): The maximum available deduction is Rs 30,000 per annum.

Note:
1. Senior citizen means an individual resident in India who is of the age of sixty years or more at any time during the year.

2. The limit for the employee, spouse and dependent children and that for the parents of the employee are separate. For example, if an employee incurs Rs 25,000 towards medical insurance premium for himself and Rs 25,000 towards medical insurance premium for his parents, the total deduction available under Section 80D is Rs 50,000.

What about deduction available for expense incurred for preventive health checkup?
The benefit available for expenses incurred for preventive health checkup continues (maximum of Rs 5,000). This falls within the overall limit of Rs 25,000 or Rs 30,000 (as the case may be).

7. Deduction under Section 80DD – Maintenance/medical treatment of disabled dependent.

1. Ordinary disability: Rs 75,000.

2. Severe disability: Rs 125,000.

8. Deduction under Section 80DDB – Medical treatment for specified diseases.

1. Junior citizen: Rs 40,000 (Maximum deduction).

2. Senior citizen (60 years or more but less than 80 years): Rs 60,000 (Maximum deduction).

3. Very senior citizen (80 years or more): Rs 80,000 (Maximum deduction)

The government has relaxed the norm with respect to production of proof of medical treatment. From 2015-16, an employee who seeks this benefit can submit a medical certificate from a specialist who may or may not be working in a government hospital.

9. Deduction under Section 80U – Deduction in case of an employee with disability.

1. Ordinary disability: Rs 75,000.

2. Severe disability: Rs 125,000.

10. Exemption under Section 10 (14) (Rule 2BB) – Transport Allowance.

The exemption limit has been enhanced to Rs 1,600 per month. You could consider revising the salary structure of your employees to make the amount paid under transport allowance at least Rs 1,600 per month.

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As per a recent gazette notification issued by the government of Tamil Nadu, the Labour Welfare Fund (LWF) contribution has been increased as follows.

Employee Contribution: Rs 10 per annum
Employer Contribution: Rs 20 per annum

The increase in LWF contribution is effective January 2015. You can view the gazette notification here.

Please ensure that you deduct LWF from your employees’ salary as per the new rate, in both payroll and settlement processing, from January 2015 onwards.

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I draw your attention to Point e under “Certain essential points regarding the…..” in section 4.6.1 in the salary TDS circular for FY 2014-15.

http://www.incometaxindia.gov.in/communications/circular/circular17_2014.pdf

This point seems to state that the total taxable income should be displayed, without it being rounded off to the nearest 10 rupees, in Form 24Q4 (annexure II) and tax should be calculated accordingly. Please see the example provided in the circular.

This seems to be in conflict with Section 288A which provides for rounding off of the total income to the nearest 10 rupees.

Also, the last sentence of Section 9.1 (d) in the same circular states that the income should be rounded off to the nearest 10 rupees. In other words, Section 9.1 (d) in the circular seems to be in conflict with Point e (in the same circular) referred to at the beginning of this post.

It would help if the Income Tax Department provides a clarification on this.

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