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Issuing Form 16 to zero tax employees

Someone asked us a question on Form 16 recently.

In case an employee has no tax liability and hence no tax is deducted from the employee’s salary, can/should the employer issue Form 16 to the employee?

The typical answers we come across are as follows.

a. Form 16 cannot be issued to an employee with zero tax. This is because Form 16 can be generated only if tax is deducted from an employee’s salary.

b. Part A of Form 16 cannot be issued while Part B alone can be issued.

Both the above answers are wrong.

The question has 2 parts – whether an employer can issue Form 16 to a zero tax employee and whether an employer should issue Form 16 to a zero tax employee.

Can Form 16 be issued?

A Form 16 comprises 2 parts – Part A (downloaded from the TRACES site) and Part B (prepared by the organization issuing Form 16). Any organization can create Part B. However, for Part A to be available on the TRACES site, an organization has to include the employee record (including zero tax employees) in Annexure II of the fourth quarter (Jan – Mar) Form 24Q.  You would be aware that Part A also contains information on salary paid to an employee and the tax deducted from an employee’s salary for each of the 4 quarters. Hence, for the salary and tax figures to appear in Part A, the employee record should also feature in Annexure I of Form 24Q. In fact, the employee record need not feature in Annexure I in Form 24Q of all quarters. Please note that if the employee record features in Annexure I of only one Form 24Q and Annexure II of the fourth quarter of Form 24Q, his Part A will be available for download on the TRACES site. Just that the fields (in Part A) pertaining to salary and tax amounts for the quarters in which the employee record is not included in Annexure I will be shown as blanks.

Once Part A is downloaded from the TRACES site, the organization can create Form B, and issue the signed Form 16 to a zero tax employee.

Here is a screenshot of Part A for an employee with no TDS.

So, can Form 16 be issued to a zero tax employee? Of course, it can be issued!

Should Form 16 be issued?

As per the diktat issued by the Income Tax Department, an organization need not include an employee record in Form 24Q until the quarter any tax is deducted from the employee’s salary. Once tax is deducted in a quarter, the employee should feature in Form 24Q for that quarter and the subsequent quarters until end of the year as long as the employee receives salary, even if no tax deducted in any of the subsequent quarters. Let us explain this with examples.

An employee works for the entire year and receives salary for all the 12 months.

1. Tax deducted in the first quarter.

The employee should feature in Form 24Q of all 4 quarters.

2. Tax deducted in the third quarter; no tax in the first 2 quarters.

The employee should definitely feature in Form 24Q of third and fourth quarters. The employer can choose to include or exclude the employee in Form 24Q for the first and second quarters.

3. No tax deducted in all four quarters.

The employer, at their discretion, can choose to include or exclude the employee record in Form 24Q.

So, should Form 16 be issued to a zero tax employee? It is up to the employer.

Since it is not mandatory for zero tax (for the whole year) employees to feature in Form 24Q, many employers do not issue Form 16 to zero TDS employees. However, there are also many employers who issue Form 16 (with both Part A and Part B) to zero TDS employees.

A word on the department’s diktat

We wonder why the Income Department does not insist on employers including zero tax employees in Form 24Q. Form 24Q presents not only tax figures but also salary figures. There can be instances where the Income Tax Department may never get to know instances of tax evasion because of this.

For example, let us assume that an employee works for 2 employers in the year 2016-17 and receives Rs 2.4 lakh from each employer. Both the employers do not deduct tax since the employee receives a salary which is in the zero tax bracket and both the employers decide not to include the employee record in their Form 24Q filings for the year.

This is a case where an employee receives Rs 4.8 lakh in a year and is liable to pay a certain tax. Since the employers do not show the employee record in their Form 24Q filings, the Income Tax Department will never get to know the salary of the employee. If the employee does not pay the tax by himself and file his tax return, the Income Tax Department may never be able to levy tax on the employee’s salary.

The whole process of Form 24Q needs a revamp. But that is a topic for another day.