Income Tax Deduction from Salaries during the financial year 2021-22: Circular No. 4/22

Reference is invited to Circular No. 20/2020 dated 03.12.2020 ‘whereby the rates of deduction of income-tax from the payment of income under the head “Salaries” under Section 192 of the Income-tax Act, 1961 (hereinafter ‘the Act), during the financial year 2020-21, were intimated. The present Circular contains the rates of deduction of Income-tax from the payment of income chargeable under the head “Salaries” during the financial year 2021-22 and explains certain related provisions of the Act and Income-tax Rules. 1962 (hereinafter the Rules). All the sections and rules referred to are of Income-tax Act. 196 1 and Income-tax Rules, 1962 respectively unless otherwise specified. The relevant Acts, Rules. Forms and Notifications are available at the website of the Income Tax Department.

As per section 192 (I ) of the Act, any person responsible for paying any income chargeable under the head “Salaries” shall, at the time of payment, deduct income tax on the amount payable at the average rate of income tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under the head of Salary income for that financial year.

The section also provides that a person responsible for paying any income chargeable under the head “Salaries” shall furnish to the person to whom such payment is made a statement giving correct and complete particulars of perquisites or profits in lieu of salary provided to him and the value thereof.

Definition of “salary”, “perquisite” and ” profit in lieu of salary” (section 17)

What is the salary?

As per section 15 of the Act, the following incomes are chargeable to income tax under the head “Salaries”-

(a) any salary due from an employer or a former employer to an assessee in the previous year. whether paid or not;

(b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him;

(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income tax for any earlier previous year.

As per section 17 of the Act Salary includes the following:i) wages;
ii) any annuity or pension;
iii) any gratuity;
iv) any fees, commissions. perquisites or profits in lieu of or in addition to any salary or
wages;
v) any advance of salary;
VI) any payment received by an employee in respect of any period of leave not availed of by him;
vii) the portion of the annual accretion to the balance at the credit of an employee participating in a recognized provident fund. to the extent to which it is chargeable to tax under rule 6 of Part A of the Fourth Schedule;
a) contributions made by the employer to the account of the employee in a recognized provident fund in excess of 12% of the salary of the employee, and
b) interest credited on the balance to the credit of the employee in so far as it is allowed at a rate exceeding such rate as may be fixed by the Central Government by notification in the Official Gazette;

viii)the contribution made by the Central Government or any other employer to the account of the employee under the New Pension Scheme as notified vide Notification F.N. Sn 12003- ECB&PR dated 22.1 2.2003 (enclosed as Annexure VII) referred to in section 80CCD (para 5.5.3 of this Circular);

ix) the aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) of rule II of Part A of the Fourth Schedule of the Act in case of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under sub-rule (4) thereof.

It may be noted that since salary includes pension, tax at source would have to be deducted from pension also, unless otherwise so required. However, no tax is required to be deducted from the commuted portion of the pension to the extent exempt under section 10 (IGA).

Family Pension is chargeable to tax under the head “Income from other sources” and not under the head “Salaries”. Therefore. provisions of section 192 of the Act are not applicable. Hence, DOOs are not required to deduct TDS on a family pension paid to the person.

What is a Perquisite?

As per Section 17(2) of the Act, perquisites include:
i) The value of rent-free accommodation provided to the employee by his employer;

ii) The value of any concession in the matter of rent in respect of any accommodation provided to the employee by his employer;

iii) The value of any benefit or amenity granted or provided free of cost or at a concessional rate in any of the following cases:
a) By a company to an employee who is a director of such company;
b) By a company to an employee who has a substantial interest in the company;
c) By an employer (including a company) to an employee, who is not covered by (a) or (b) above and whose income under the head “Salaries” (whether due from or paid or allowed by, one or more employers), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds Rs.50, OOO/-.

[What constitutes concession in the matter of rent has been prescribed in Explanations I to 4 below section 17(2)(ii) of the Act.]

iv) Any sum paid by the employer in respect of any obligation which would otherwise have been payable by the assessee.

v) Any slim payable by the employer. whether directly or through a fund, other than a recognized provident fund or an approved superannuation fund, or other specified funds u/s 17, to effect an assurance on the life of an assessee or to effect a contract for an annuity.

vi) The value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at a concessional rate to the employee. For this purpose,

(a) “specified security” means the securities as defined in section 2(h) of the
Securities Contracts (Regulation) Act, 1956 and, where employees’ stock option has been granted under any plan or scheme, therefore, includes the securities offered under such plan or scheme;
(b) ” sweat equity shares” means equity shares issued by a company to its
employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called;
(c) the value of any specified security or sweat equity shares shall be fair to the market value of the specified security or sweat equity shares, as the case may be, on the date on which the option is exercised by the assessee as reduced by the amount actually paid by, or recovered from the assessee in respect of such security or shares;
(d) “fair market value” means the value determined in accordance with the method as may be prescribed (refer to Rule 3(9) of the IT Rules);
(e) “Option” means a right but not an obligation granted 10 an employee to apply for the specified security or sweat equity shares at a predetermined price;

(vii) the amount or the aggregate of amounts of any contribution made to the account of the assessee by the employer-
(a) in a recognized provident fund;
(b) in the scheme referred to in sub-section (1) of section 8QCCD; and
(c) in an approved superannuation fund,
to the extent, it exceeds seven lakh and fifty thousand rupees in a previous year;

(viia) the annual accretion by way of interest, dividend, or any other amount of similar nature during the previous year to the balance at the credit of the fund or scheme referred to in clause

(vii) above to the extent it relates to the contribution referred to in the said clause which is included in total income; and

(viii) the value of any other fringe benefit or amenity as prescribed in Rule 3.

What is profit in lieu of salary?

As per Section 17(2) of the Act. ‘Profits in lieu of salary’ include:

I. the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto;

II. any payment (other than any payment referred to in clauses (10), (10A), (10B), (11), (12) (I 3) or (13A) of section 10) due to or received by an assessee from an employer or a former employer or from a provident or other funds, to the extent to which it does not consist of contributions by the assessee or interest on such contributions or any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.

“Keyman insurance policy” shall have the same meaning as assigned to it in section 10(/10D):
Ill. any amount due to or received, whether in a lump sum or otherwise, by any assessee from any person-
(A) before his joining any employment with that person; or
(B) after cessation of his employment with that person.

RATES OF INCOME-TAX AS PER FINANCE ACT, 2021

As per the Finance Act, 2021, the rates of income tax for the FY 2021-22 (i.e. Assessment Year 2022-23) are as follows:

Rates of tax

A. Normal Rates of tax: In the case of every individual other than the Individuals referred to in para (B) and (C) below:

B. Rates of tax for every Individual, being a resident in India, who is of the age of sixty years or more but less than eighty years at any time during the financial year:

C. In the case of every individual, being a resident in India. who is or the age or eighty years or more at any time during the financial year :