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Considering employees’ other income while calculating TDS on salary

Section 192 (2B) of the Income Tax Act allows an employee to furnish particulars of income under any head other than “Salaries”  for the same financial year and of any tax deducted at source thereon. In other words, an employer can consider an employee’s other income and the tax deducted at source (TDS) on the other income while calculating TDS on salary.

Section 192 (2B) is presented as follows.

[(2B) Where an assessee who receives any income chargeable under the head “Salaries” has, in addition, any income chargeable under any other head of income (not being a loss under any such head other than the loss under the head “Income from house property”) for the same financial year, he may send to the person responsible for making the payment referred to in sub-section (1) the particulars of—

(a) such other income and of any tax deducted thereon under any other provision of this Chapter;

(b) the loss, if any, under the head “Income from house property”,

in such form and verified in such manner as may be prescribed, and thereupon the person responsible as aforesaid shall take—

(i)  such other income and tax, if any, deducted thereon; and

(ii) the loss, if any, under the head “Income from house property”,

also into account for the purposes of making the deduction under sub- section (1) :

Provided that this sub-section shall not in any case have the effect of reducing the tax deductible except where the loss under the head “Income from house property” has been taken into account, from income under the head “Salaries” below the amount that would be so deductible if the other income and the tax deducted thereon had not been taken into account.]

Conditions for considering Other Income

The following conditions have been imposed by Section 192 in this regard.

1. The employee should submit a declaration under Rule 26B with details of Other Income and TDS on Other Income, to the employer.

2. The employee cannot declare a loss under any “Other Income” other than “Income from House Property.”

3. The addition of TDS on Other Income should not reduce the tax deductible on salary.

The first two conditions are easy to understand. Let us explain the third condition with the help of an example.

An employee receives an annual taxable salary of Rs 250,000 after all deductions. As per the income tax rates prevailing for the financial year 2013-14, the total annual tax on salary, including Education Cess, is Rs 3,090. The employee has Other Income of Rs 200,000 and the TDS deducted on Other Income is Rs 40,000 (20% on Rs 200,000).

The total income including salary and Other Income is Rs 450,000 (Rs 250,000 plus Rs 200,000) for the year and the total tax on Rs 450,000 is Rs 23,690 for the year. Please note that the total tax including Education Cess (Rs 23,690) for the year is less than the TDS of Rs 40,000 deducted on Other Income. Just because the TDS on Other Income is higher than the total annual tax, the employer cannot ignore deducting tax on salary.

According to Section 192, the TDS on Other Income should not have the effect of reducing the tax deductible under the head “Salaries” except where the loss under the head “Income from house property” has been taken into account, and hence the employer will have to deduct Rs 3,090 as TDS on salary.

Entries in Form 24Q and Form 16

Payroll managers can consider TDS on Other Income for the sake of calculating tax on salary. However, from the point of view of issuing Form 16 and filing Form 24Q, TDS on Other Income poses a problem to the employer.

In both Form 16 and Annexure 2 in Form 24Q for the last quarter, the details of Other Income can be displayed, but there is no provision to display details of TDS on Other Income. As a result, in both Form 16 and Form 24Q (fourth quarter), it would look as though there is a shortfall in tax deducted by the employer while in reality it is not the case. Let us take a look at an example to examine this.

An employee receives an annual taxable salary of Rs 250,000 after all deductions in financial year 2013-14. The employee has Other Income of Rs 100,000 and the TDS deducted on Other Income is Rs 10,000 (10% on Rs 100,000).

The total income including salary and Other Income is Rs 3,50,000 (Rs 250,000 plus Rs 100,000) for the year and the total tax on Rs 3,50,000 is Rs 13,390 for the year.

If the employer considers TDS on Other Income and deducts tax on salary accurately, Part B in the Form 16 issued by the employer will have the following amounts.

While the total tax payable is shown as Rs 13,390 in Part B of Form 16, the total tax deducted and remitted (across the 4 quarters) shown in Part A of Form 16 (downloaded from the Traces site) shall be Rs 3,390. The difference of Rs 10,000 between the Tax Payable amount of Rs 13,390 shown in Part B and the total tax deducted/remitted amount of Rs 3,390 shown in Part A is of course on account of the TDS on Other Income (Rs 10,000). The Part A document downloaded from the Traces site contains only the TDS deducted/remitted by the employer and does not include the TDS on Other Income.

There is no provision in Form 16 and Annexure 2 of Form 24Q (fourth quarter) to present TDS on Other income. By taking a look at just Form 24Q (fourth quarter) – in its current format – the Income Tax Department will not be able to figure out whether the difference between the Tax Payable figure in Part B of Form 16 and the Tax deducted/remitted figure in Part A of Form 16 is as a result of a genuine under deduction of tax by the employer or due to TDS on Other Income. In case the Income Tax Department raises a query in this regard, the employer needs to explain that the difference is on account of the TDS figure on Other Income.

The Income Tax Department should consider modifying the format of Form 16 and Annexure 2 of Form 24Q (fourth quarter) to show TDS on Other Income separately. This will ensure that the Tax Payable amount (due to salary) in Part B of Form 16 is equal to Tax deducted/remitted amount in Part A of Form 16.