If you are a business owner with regular staff on your payroll, you are bound by Section 192 of the Income Tax Act, 1961 to deduct income tax at source on the estimated income of the employee(s) under the head ‘salaries’.
When is TDS applicable?
• Payment is made by you to your employee
• The payment is in the nature of salary and
• The income under the head salaries is above the maximum amount not chargeable to tax
When is tax to be deducted?
You, as the employer, at the time of actual payment of salary to the employee, have to deduct the tax at source. When advance salary and arrears of salary has been paid, you have to take the same into account while computing the tax-deductible.
The rate of deduction of tax
Tax is to be deducted at source on the amount payable at the average rate of income tax. This is to be computed on the basis of rates in force for the financial year in which payment is made. The Finance Act of each financial year specifies the rates in force for deduction of tax at source. For F.Y.2012-2013 rate of TDS is specified in Part-3.
Schedule of Finance Act 2012 Average rate of deduction
Compute at the beginning of the financial year, the total salary income payable to an employee during the financial year. Also take into accountancy other income as reported by the employee. After considering the incomes exempt, deductions and relief, the tax liability of the employee should be determined on the basis of the rates in force for the financial year. Every month, 1/12 of this net tax liability computed above is required to be deducted.
Deposit of tax in Government account
The tax so deducted from your employees’ salaries should be deposited to the credit of the Central Government in any of the branches of RBI, SBI or any authorized bank within:
• Before 30th day of April where income or amount is credited or paid in the month of March
• In other cases, payment has to be made within 7 days from the end of the month in which deduction is made or Income Tax is due
• In special cases with the prior approval of joint Commissioner of Income Tax, TDS can be deposited quarterly, i.e. by 7th of July for the quarter ending 30th of June, by 7th of October for the quarter ending 30th September, by 7th of January for the quarter ending 30th of December and by 30th of April for the quarter ending 31st of March. The payment can be made either in cheque or cash or draft drawn on local banks.
Issue of T.D.S. Certificate
You need to furnish a certificate to your employee to the effect that tax has been deducted along with certain other particulars. These certificates usually called the TDS certificate or Form No.16. The certificates to be issued in your own stationery.
Remember, the Income Tax Act provides for penalties for defaults in respect of deduction of TDS and deposits thereof into the Central Government account. The law is even stricter in case the TDS has been deducted but not deposited into Government account in the prescribed manner.
In such a case, besides penalties, the law provides even for prosecution. Therefore, as a business owner, it is imperative that you are well conversant with the provisions relating to Tax Deduction at Source on Employee Salaries.