Circular No 20/2020 (“the Circular”) was issued on 3rd December 2020 to provide procedures to be followed by employers for deducting Income tax (TDS) from the salary income of the Employee for Financial Year (F.Y.) 2020-21 relevant to Assessment Year (A.Y.) 2021-22 under section 192 of the Income tax Act, 1961 (“the Act”).

The guidelines/instructions laid down in the Circular are not exhaustive and in case of any doubt, reference may be made to the relevant provisions of the Act or the Income tax Rules 1962 (“the Rules”).

Here is a summary of the detailed Circular:

Rate of Tax:

The Circular notifies the rate of tax to be applied (depending upon the age of the Employee) to calculate Income tax of an individual on the income chargeable under the head “Salaries”. The tax so calculated is increased by applicable surcharges, if any, and Health and Education Cess. The tax on income under the head “Salaries” is to be calculated at the applicable rate or 20%, whichever is higher, as prescribed u/s. 206AA, in case of non-furnishing of Permanent Account Number (PAN) or Aadhar by the Employee. The Circular reiterates the allowability of Aadhar instead of PAN, in line with the Budget 2020 announcements, as valid compliance for the purpose of Section 206AA of the Act.

Finance Act 2020 had prescribed the choice of two alternate rates of tax i.e., old tax regime and the new tax regime for Individuals, as per their discretion. As such, an Individual / Assessee has the option to choose between the Old Regime i.e., Normal rate of tax or New regime i.e., Concessional rate of tax prescribed u/s. 115BAC of the Act, whichever is more beneficial to them.

Section 115BAC is an optional provision applicable to Individual and HUF, providing a concessional rate of tax, subject to the condition that the total income of the assessee shall be computed without specified exemptions or deductions, set off a loss or additional depreciation.

Further, in case of a person having income from business and profession, he would be required to exercise the option in the prescribed manner on or before the due date specified u/s. 139(1) of the Act. Such an option, once exercised, shall be applicable to all subsequent assessment years. However, the option once exercised can be withdrawn only once and such person shall never be eligible to exercise the option again unless such person ceases to have income from business and profession.

CBDT Circular No C1/2020, dated April 13, 2020 required an employee to intimate to his employer about the option he wishes to exercise between the old and the new tax regime, during each previous year and accordingly the Employer was required to calculate tax on the income of the employee. However, if no such intimation was given by the employee, the employer would have to make the TDS deduction without considering provisions of Section 115BAC. The intimation so made shall be only for the purposes of TDS during the previous year and cannot be modified during the year.

Method of Tax Calculation on Salary and Perquisite:

The Circular requires an employer to determine the estimated annual income under the head “Salaries” and calculate income tax on the same, by applying the applicable tax rate, based on the option chosen by the employee, as discussed above. The tax is to be then deducted at the applicable rate at the time of payment of salary to the employee.

No tax is to be deducted if the estimated salary income, including perquisite, does not exceed the basic exemption limit as provided by the Finance Act, 2020.

Also, the employer has been given an option to pay tax on the non-monetary perquisites given to the employee. To calculate tax on non-monetary perquisites, the Circular directs the employer to calculate the ‘average rate of tax’ and apply the said rate on the non-monetary perquisites to calculate tax on the same. The tax so paid by the employer based on the said calculation would be deemed as the TDS made from the salary of the employee.

As per Section 192(1C), an ‘eligible start-up’ as referred to in section 80-IAC, responsible for paying any income in the nature of perquisite u/s. 17(2)(vi) [Employee stock option plan or sweat equity shares] relevant to A.Y. 2021-22 or thereafter, is required to deduct or pay tax on such income within 14 days –

  1. After the expiry of 48 months from the end of the relevant A.Y.; or
  2. From the date of sale of specified security or sweat equity share by the assessee; or
  3. From the date of the assessee ceasing to be an employee,

whichever is the earliest, based on rates in force for the financial year in which the said specified security or sweat equity share is allotted or transferred.

More than one Employer:

In the case of more than one employer, the Circular requires the employer to deduct TDS on the aggregate income, including the salary received from former/another employer. The current employer is under the obligation to obtain details of income under the head “Salaries” due or received from former/other employer and deduct tax on the aggregate of such amount. The current employer is required to obtain such detail from the employee in writing and duly verified by the former/other employer.

Salary paid in Advance or Arrears:

In case of Salary paid in Advance or Arrears, the employee is entitled to claim relief u/s. 89 of the Act. The employee is required to furnish such particulars in Form No. 10E, duly verified by him, to the person responsible for deducting TDS and upon receipt of such information, the Employer is required to compute the said relief.

Income from other head:

The employer is required to consider the details of any other income submitted by the employee for the purpose of calculating the tax on salary. However, in case of loss, only loss under the head “Income from House Property” up to a maximum of Rs. 200,000 in a year can be considered and any other loss is to be ignored.

The employee is required to submit information regarding the computation of income and evidence of payment of interest under the head “Income from House Property” in Form 12BB.

(Notification No 36/2019 dated April 12, 2019, allows an employer to report only Income under the head “Income from House Property” and “Income from other sources”. Hence, any income under the head “Income from Business and Profession” and “Capital Gains” has to be ignored for the purpose of calculating TDS under the head “Salaries”)

Adjustment for excess or shortfall of deduction:

Section 192(3) of the Act allows the employer to adjust the shortfall or excess of tax deducted for any month in the subsequent months of the same financial year. There is no compulsion to deduct tax equally over the 12 months period.

Salary Paid in Foreign Currency:

In case of salary paid in foreign currency, the value of salary must be calculated by applying the “Telegraphic transfer buying rate”, prevailing on the date on which tax is required to be deducted at source, for the conversion of such currency and tax is to be calculated on the said converted value.

Person Responsible for deducting tax and their duties:

The Circular reiterates the provisions regarding the responsibility of the employer to deduct tax from the salary and emphasizes on timely deposit of TDS with the Central Government, furnishing of TDS return and the issue of Form 16, within the due dates as tabulated below:

The Circular also reminds about the penal consequences in cases of failure in payment of TDS, filing of TDS return, issuing certificate, or furnishing incorrect information, as prescribed in the Act.

  • TDS deducted for the month is to be deposited by the 7th of the subsequent month and 30th April of the subsequent financial year for the month of March in case of Non-Government Employer.
  • Interest @ 1% p.m. or part of the month is payable for non-deduction of TDS, from the date of which such tax was deductible up to the date of actual deduction.
  • Interest @ 1.5% p.m. or part of the month is payable for delayed payment of TDS from the date on which tax is deducted up to the actual date of payment of tax.
  • Delay in filing TDS return attracts penalty of Rs. 200 per day u/s. 234E, up to a maximum of the amount of TDS for the relevant quarter.
  • Penalty of Rs, 10,000 which may extend to Rs. 1,00,000 u/s. 271H for failure in furnishing statements or furnishing incorrect statements.

In case the employee has submitted a lower deduction certificate obtained from the income tax authorities, the employer is directed to deduct TDS at the rate mentioned in the certificate or deduct no TDS in the case of NIL rate, instead of the applicable tax rates.

TDS on Income from Pension:

In the case of pensioners who receive a pension from nationalized banks, not being family pension paid to the spouse, the instruction contained in this Circular would apply in a similar manner as they apply to salary income and TDS will be computed in the same manner as applicable in case of salary income. Further, all branches of the banks are bound u/s. 203 to issue a certificate of TDS in form 16 to the pensioners.

Refund of TDS in case of Non-Residents where TDS is borne by Employer:

Salary payment to non-residents for services rendered in India is regarded as income earned in India and is accordingly taxable in India. In cases where the non-resident is tax equalised and Indian taxes are borne by the employer, if any refund becomes due to the employee after he has already left India, by way of any order and the employee has no bank account in India, then the refund can be issued to the employer as the tax has been borne by it (Circular No 707 dated 11-07-1995).

On a separate note, in the case of non-residents, the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment, is to be regarded as income earned in India.

Computation of Income under the head “Salaries”:

Whereas the first half of the Circular deals with clarifications regarding tax calculation, procedural requirements and penal consequences, the latter part explains the computation mechanism provided under the provisions of the Act. The Circular reiterates the definition of Salary, Perquisite and Profit in Lieu of Salary. It also explains the computation methodology for determining the value of perquisite and to tax the same.

Para 5.3.16 of the Circular states that in the case of assessee opting for concessional tax regime under section 115BAC the assessee shall be entitled to exemption only in respect of the following allowances:

  • Transport allowance granted to an employee who is blind or deaf or dumb or orthopaedically handicapped;
  • Allowance granted to meet the cost of travel on tour or on transfer;
  • Allowance granted on tour or period of a journey to meet ordinary daily wages incurred by an employee on account of absence from his normal place of duty;
  • Conveyance allowance in the performance of duties.

Proof of Deduction and Proof of Claim for LTA Exemption:

The Circular re-emphasizes that any deduction shall be allowed only after obtaining the necessary proof or evidence of investment and expenditure as claimed by the employee in Form 12BB.

The Circular also reiterates the position that the employer shall be obliged to obtain evidence in respect of the claim of exemption for leave travel concession (LTC) before allowing the said exemption. All the relevant details along with proof shall be obtained in Form 12BB.

Due to the ongoing pandemic and nationwide lockdown resulting in disruption in transport services, employees have been unable to avail LTC. In view of this and with an intent to boost consumer demand the Government has, vide Press Release dated 29th October 2020 announced a relief package both for Government and private sector employees to avail LTC exemption. The said relief expands the scope of LTC exemption to include the purchase of specified goods/services (during the period 12th October 2020 to 31st March 2021) worth three times the fare for availing the one time leave.

HRA Exemption and Rent Payment:

The employer shall ensure to collect the PAN / Aadhar of the Landlord before allowing the claim for HRA exemption in cases where the rent exceeds Rs. 1,00,000 during the year.

In the case of an 80GG deduction claimed by the employee, the employer must obtain relevant information as required in Form 10BA, irrespective of the aggregate, before allowing the deduction.

Deduction U/CH VIA:

The Circular has reproduced all the exemptions and deduction under CH-VIA which are available to an employee and that needs to be considered while calculating TDS under the head “Salaries”.

With respect to deduction u/s. 80TTA and 80TTB, the same would be allowed only to the extent of income reported by the employer in Form 12BB, subject to the prescribed limit specified in the relevant section.

We have tried to provide a summary of the key provisions in the Circular. For detailed reading, Click here: Circular No 20/2020 dated 03-12-2020.