Double Income No Kids (DINK) Couples
Tax Profile Series # 2 Tax Saved Rs 46,904 Ravi aged 39 years and Jayashree aged 35 years are a “DINK” couple residing at Koramangala in Bangalore. Their’s is a double income household with no kids. Ravi works as a marketing manager with an MNC and Jayashree works as a Software Engineer with an MNC. From a financial standpoint, they enjoy a good collective income, a very comfortable lifestyle, and good savings as well. Ravi’s Annual Cost to Company (CTC) is Rs 25 Lakhs and Jayashree’s Annual CTC is Rs 12 Lakhs. The Annual CTC is inclusive of the following benefits: Rs 25,000 p.a paid towards Medical & Life Insurance paid by the employer inclusive of insurance for their parents. Gratuity @ 4.81% of Basic Salary Food Coupons of Rs 26,400 p.a. They live in a rented apartment close to their workplaces and pay a monthly rent of Rs 30,000 per month(Out of this Ravi pays Rs 20,000 while Jayashree pays Rs 10,000). Ravi earns a rental income of Rs 20,000 per month from a let-out property that he had purchased when he was single and pays Municipal taxes of Rs 10,000 p.a. To fund the house purchase, he had taken a Home Loan from SBI for which the estimated principal repayment comes to Rs 1.8 Lakhs and Interest comes to Rs 60,000/- in FY 2020-21. Jayashree sold some of her mutual funds due to the decline in the stock market which she had purchased in June 2015 and has made a Long- term capital gain on sale of equity mutual funds amounting to Rs 2 Lakhs in April 2020. Jayshree has Bank Fixed Deposits on which she is estimated to receive an interest income of Rs 1 Lakh during FY 2020-21. Their Tax dilemma! Due to the change in the tax law of there being two tax regimes to make a choice from, the HR Managers of both Ravi and Jayashree’s company’s are demanding from them to make a Tax declaration of opting either for the New regime or the Old Regime, which they have no clue about. Ravi and Jayashree being clueless on tax or any of the regimes decide to seek professional help. Ravi’s childhood friend Venkatesh is a CA. Venkatesh seeks Ravi’s and Jayashree’s Appointment letter, payslips, rent paid, Housing Loan repayment Certificates, Interest estimation, and all other information. Venkatesh takes a day and thereafter pronounces to Ravi and Jayashree – Take the Old Regime. He then presents to them the tax comparison: Old Tax Regime: New Tax Regime: Ravi and Jayashree with Venkatesh’s help were convinced that they can now declare to their HR Manager’s the options that they were choosing. He was picking on the Old Tax Regime since he would avoid an annual tax of Rs 28,829 and have a higher net take-home of Rs 28,829 compared to the new regime. She was picking on the Old Tax Regime since she would avoid an annual tax of Rs 18,075 and have a higher net take-home of Rs 18,075 compared to the new regime provided an additional tax investment of Rs92,400 is made in 5 years Fixed Deposit with SBI. Therefore as a DINK, they would save taxes by Rs 46,904 with this dual strategy of Old Regime for both of them.
PF Scheme – It’s Features & Benefits
As an employee who is working in a corporate set-up there are several things that one would like to know about the Employee Provident Fund (EPF). This Blog attempts to discuss the features and Benefits of Employee Provident fund Scheme as a Fixed Savings instrument in terms of Applicability, Contributions, Return, Risks, Lock-in period, Liquidity, Tax Benefits, Voluntary PF and highlights the recent relief measures that the government has announced considering the current Covid-19 pandemic. Applicability It covers every establishment in which 20 or more persons are employed and certain organizations are covered, subject to certain conditions and exemptions even if they employ less than 20 persons each. As per the rules in EPF, an employee whose ‘pay’ is more than Rs 15,000 a month at the time of joining, is not eligible and is called non-eligible employee. Employees drawing less than Rs 15,000 per month must mandatorily become members of the EPF Scheme. However, an employee who is drawing a ‘pay’ above the prescribed limit (currently Rs 15,000) can become a member if he and his employer agree. Contribution Amount For Salaried individuals, the monthly contribution towards the Employee’s Provident Fund (EPF) remains the only forced savings mechanism. Every month 12% of the (Basic salary+ Dearness Allowance) along with a matching contribution by the employer flows into the EPF account. For an employee drawing more than Rs 15,000 per month, it would mean that an employee can opt for a maximum deduction of Rs 1,800 (12% of Rs 15,000) instead of 12% of the (Basic salary+ Dearness Allowance). From the employer’s contribution, 8.33% goes into a pension vehicle—the Employee’s Pension Scheme (EPS) but it is calculated on Rs 15,000 a month and 3.67% towards the EPF. So for every employee with basic pay equal to Rs 15,000 or more, the diversion is Rs 1,250 each month into EPS. If the basic pay is less than Rs 15000 per month, then 8.33% of that full amount will go into EPS. Additionally, the employer also pays 0.5% of Basic Salary towards Employee’s Deposit Linked Insurance Scheme (EDLI) or a max of Rs 75/- per employee per month, 0.01% towards EDLI handling Charges and 0.65% towards EPF Administrative Charges. Employees Deposit Linked Insurance Scheme (EDLI) is an insurance cover provided by the EPFO (Employees Provident Fund Organisation) for private sector salaried employees. The registered nominee receives a lump-sum payment in the event of the death of the person insured, during the period of the service. The maximum pay-out that the nominee receives under EDLI is capped at Rs 6 Lakhs. COVID-19 Due to the COVID-19 pandemic, Government of India has provided the following relaxations: The EPF contributions for May, June, and July have been reduced to 10% instead of 12% for Non-government organizations. Under the Pradhan Mantri Garib Kalyan Yojana, ( PMGKY) Government of India will pay the employer and employee contribution to EPF account of employees from March to June 2020 (Now extended up to August 2020) for establishments with up to 100 employees and where 90% of those employees draw a salary of less than Rs 15,000 per month. The Government has provided liquidity support of Rs 2,500 Crores for the same – Refer (https://www.resolveindia.com/blog/covid-19-lockdown-financial-relief-to-small-business-3-months-pf-subsidy/) for further details. The intention of this change seems to be to ensure liquidity support to the businesses and to safeguard the employment and its continuity for lower-paid employees during the COVID-19 crisis period. Voluntary Provident Fund (VPF) Contributions The VPF is an extension of the EPF that allows the subscriber to invest beyond the 12% threshold while providing the same tax benefits and return. While the PPF carries an investment limit of Rs 1.5 lakh per annum, there is no such restriction on VPF. Besides, unlike PPF returns that fluctuate in line with 10-year government bonds yield, the interest rate on VPF is the same as that of the EPF. Though hiking the PF Contribution would mean lesser net take-home pay, it would be suitable for those employees who are closer to retirement and those who are in the higher-income earning bracket since it fetches a higher return than other fixed return instruments providing for more financial stability later. Young savers would be better off opting for a higher equity component through the NPS or equity funds rather than enhancing their debt allocation through VPF. Returns EPF is currently offering an interest rate of 8.5% for Financial Year 2019-20 which is higher than fixed return tax saving investment instruments like PPF and National Savings Certificate which presently are offering a return of 7.1% (7.9% up to FY 2019-20) and 6.8% respectively. The rates of return are the highest in the current scenario with the highest safety as compared to even the Debt mutual funds. Interest is credited to the member’s account on the Monthly running balances. Risks EPF is a government-backed retirement savings scheme that offers a guaranteed risk- free rate of return Lock-in Period EPF is locked in Up to retirement except for special circumstances as covered below where they can be withdrawn prematurely. Liquidity The subscribers will have access to their EPF account at the time of retirement from an organization or their nominees receive the same in the event of their untimely death. According to the EPF Act, for claiming the final PF settlement, one has to retire from service after attaining 55 years of age. The total EPF balance includes the employee’s contribution and that of the employer, along with the accrued interest. There is, however, a window to partially withdraw the amount for those nearing retirement. Anyone over 54 can withdraw up to 90 percent of the accumulated balance with interest. Scenarios of Premature withdrawal The money in the EPF account can be withdrawn prematurely as a non- refundable advance prior to the retirement of the following conditions are fulfilled: With effect from December 6, 2018, the employees can withdraw 75% of their PF money after remaining unemployed for 1 month and balance 25% after he is out of employment for
Young Professional – Single
Tax Profile Series #1 Karishma, hails from Bokaro, aged 27 years, works in an MNC as a Senior Software Engineer at Mumbai. Her annual Cost to Company (CTC) is Rs 12 Lakhs. Karishma along with two of her college mates has taken a 2-bedroom apartment on rent in Bandra. The monthly rent is Rs 45,000/- and her share works to Rs 15,000/. The living and transportation expenses average Rs 15,000. She also sends Rs 10,000 per month to her parents to financially support them. Her monthly cash outflow is about Rs 40,000/-. Karishma’s Tax dilemma! Her HR Manager is demanding Karishma to make a Tax declaration of the New regime or Old Regime, which she has no idea of. Her financial goal is to minimize her tax outgo of Rs 25,000/- per annum and build her savings kitty as she comes from a middle-class upbringing. Karishma being clueless on tax or any regimes decides to text her friend Ashish, a CA in Delhi for help. Ashish seeks her Appointment letter, payslips, Rent paid, and all other information. He takes a day and thereafter pronounces to Karishma – Take the Old Regime. He then presents to her the comparison: Old Regime New Regime Now that Karishma with Ashish’s help was convinced that she can now declare to HR Manager that she was picking on the Old Tax Regime and would avoid an annual tax of Rs 28,080 and have a higher net take-home of Rs 28,080 and would need to make an additional tax investment of Rs 80,000.
Salaried Tax Payers – More disclosures Expected – ITR 1
The last 5 years have seen an almost doubling of the Income Taxpayers in the country. From about 34 million to 67 million taxpayers in Financial Year 2017-18 or Assessment year 2018-19. Of these 67 million, about 32 million are the Salaried class constituting about 32 million, at 48%. This is about 2% of our population or about 10% of households on the assumption that there is only one taxpayer in each household. Nevertheless, it is the salaried class which is the single largest group of taxpayers in the country and ITR 1 form is what they file their returns in. This ITR 1 form has recently been modified seeking additional disclosures. Some Key Reliefs! The Finance budget has brought some relief such as enhanced deductions, increased tax rebate or no tax up to an income of Rs. 500,000 or where two houses can be claimed as self-occupied property etc are being given to providing some tax relief to the taxpayers. From the ease of tax administration, e-filing has become mandatory for all taxpayers with some exceptions. Until last year, individuals having income up to 5 lakhs were exempt from online filing. No more paper filing is allowed except for super senior citizens. The Finance Minister in his budget speech promised a refund in 24 hours. Time would tell if this 24-hour refund happens in reality. New ITR 1 Form The new ITR 1 Form, also called Sahaj is applicable for salaried individuals having an income up to Rs 50 lacs per annum which comprises of Salaries, One House Property, and income under the head Other Income. The intent in revising the ITR 1 and seeking additional disclosures is mainly to have details of exempt allowances and standard deductions as it has been observed that many salaried taxpayers are fudging their House Rent Allowance exemptions, likewise on Leave Travel Allowances, etc. The last date for filing the ITR 1 is 31st July 2019. Itemized changes in Disclosures Under the head Salary Income The new form provides for a standard deduction of Rs. 40,000. In lieu of medical and transport allowance, flat deduction of 40,000 can be availed by all employees without submission of bills. Under the head – Income from House Property: The option of deemed let out property is included in the new form. From the financial year 2019-2020, an assessee can claim two houses as self-occupied. This is not applicable for the financial year 2018-19. Up to, last year, only one could be claimed as self-occupied, the benefit is now extended to two houses. If any arrears of rent is received during the year, the same has to be disclosed separately in the return net off standard deduction. Earlier, no separate disclosure was required. Under the head – Income from other sources: The taxpayer will now have to give the bifurcation of income from other sources into interest on a savings account, interest on bank deposits, post office deposits, interest on income tax refund, family pension, etc. The intention of such classification of interest income is perhaps to monitor the 80TTA deduction which is available up to Rs. 10,000 only on interest income on savings account and not on time deposits and prevent its misuse. Deductions under Chapter VI-A: 80G & 80GGA: With respect to donations made to charitable institutions, relief fund, rural development, scientific research, the taxpayer has to state the mode of donation – whether it was made in cash or otherwise. Donations made in cash exceeding certain limits .i.e., Rs. 2,000 under section 80G and Rs. 10,000 under section 80GGA cannot be claimed as a deduction. Inclusion of mode of donation is to keep a tab on cash expense. 80TTB: Deduction up to Rs. 50,000 is available from the financial year 2018-19 to senior citizens on deposit interest. Directors and Shareholders of unlisted companies – There are some categories of taxpayers who are now precluded from filing an ITR 1 Form. For example Directors and taxpayers having investments in unlisted equity shares, they are now required to file either ITR – 2 or ITR – 3 depending on whether they have business income or not. Directors have to provide details of the company in which they hold directorship such as name and PAN of the company, whether the company is listed or not, Director Identification Number. As regards, holders of unlisted shares, particulars of investment – the name of the company, number and original cost of shares, purchase or transfer of shares during the year, etc.. has to be furnished in the return. This is a very significant change which will help the government in cracking down the ghost directors and shell companies. The taxmen can now corroborate the information in the return with corporate data and spot discrepancies. Not Ordinarily Resident – Tax Payers Earlier, residents but not ordinarily residents in India were allowed to file ITR – 1. Now, they will have to file either ITR – 2 or ITR – 3. Additionally, taxpayers have to specify the duration of their stay in India. As taxability of income depends on the residential status of the individual, it is important for the government and individuals to determine the residential status and its correctness. Revised Form 16 in line with the new ITR 1 Form: In line with the revised forms, the tax department has also modified the format of TDS certificate .i.e., Form 16 which will have all the necessary details to fill ITR 1. The new format is applicable from May 12, 2019, onwards. The revised format will provide a detailed break up of salary, exempt allowances, and deductions. Basis the revised Form 16, ITR – 1 has to be filled in. For break up of interest income from Savings account and deposits, taxpayers can approach a bank and obtain interest certificate. The taxpayers should collate data well in advance to meet the reporting requirements of the new ITR forms Potential Issues Form 16 is the basic document which is used by salaried to
Salaried Employees – How to optimize your taxes
The salaried class of taxpayers, mostly the middle class are the most tax regulated in our society. Employers would not like to infringe on the tax withholding obligations, salary payments require to be made through banking channels, whereby both earnings and taxes have traceability. Therefore, salaried employees must be abreast of all the tax rules to optimize their taxes and this blog attempts to outline the tax-saving alternatives and what can influence decision making. Estimate Taxable Income, Savings Declarations & TDS Taxes on salaries are paid to the Government through Employer affecting tax withholdings from monthly salaries, generally referred to as TDS. This monthly TDS is derived from the estimated taxable income of the employee, which in turn is a combination of his estimated salary and his tax deductibles. These saving declarations may comprise of various tax beneficial payments covered viz Insurance premia, Social Security contributions like PF, NPS, etc under Chapter VIA of the Income Tax Act, estimated expenditure under certain tax-exempt allowances like House Rent Allowance (HRA), Leave Travel Allowance (LTC), certain perquisites, etc. Read More: Income-Tax-Calculator-FY-2019-20 When will I need to declare savings? Employees should declare saving declarations at the beginning of the financial year or on joining a new company so that an estimate of TDS is done as accurately as possible by your Employer. Read more at: Submit investment declaration to your employer on time to avoid excess TDS What Tax rules that Salaried need to know The more relevant tax law that Salaried employees need to be familiar with is A) Income from the head Salaries B) Allowances and Exemptions viz HRA, LTA, Leave Encashment, Gratuity, Children Education Allowance C) Perquisites viz Company House, Company Car, Driver, ESOP D) Income from House Property and Interest on Housing Loan E) Bank Interest under the head Income from Other Sources. F) Deductions under Chapter VI-A. Request a Demo for Payroll Services Deductions under Chapter VIA Chapter VI A, lists a variety of Financial Instruments, Social Security Contributions, Insurance premia, and some special circumstances of the taxpayer to afford him a tax relief viz supporting a family member with a disability or serious ailments, each of which has specific rules to claim deduction apart from an overall limit. Section 80C – Payments made to specific purposes : Payments made for specific purposes as listed can be claimed as a deduction up to a maximum of Rs.150,000 from Gross Total Income. In this list, it will be meaningful to segregate those items where the Employee may have no discretion as he is part of the company system. While there are many others where due to his individual circumstance or discretion can avail of other items of deduction. Non Discretionary Contributions’ There are mainly two items of non-discretionary deductions. They are : Employee’s share of PF Contribution, Employee’s contribution to Group Superannuation Scheme Should, the Employees contribution exceed Rs 1.50 lacs then he may have no more any incentive to avail of any other deduction item in 80C. Discretionary and Specific circumstances based deductions : It is this discretionary category of deductions, where a salaried employee needs to figure out what to do. What influences his decision making. It’s a combination of various parameters, financial goals, lifestyle, retirement plan, anticipated risks, and contingencies. Social Security Schemes: The purpose of these investments could be to provide insurance cover to the life of self & family members or to provide long term social security benefit to self and family members. Read More, Social security schemes in India Life Insurance Premium– Premium paid for Self, Spouse and children can be claimed as a deduction. Amounts deposited in annuity plan of LIC or any other insurer for a pension from a fund referred to in Section 10(23AAB) or sum paid to purchase a deferred annuity or Unit-linked Insurance Plan (ULIP) can be claimed as deduction under this section. Payments towards Parents/in-law’s insurance premiums cannot be claimed for this purpose. An important point to be noted is that if the policy is issued on or prior to March 31, 2012, annual premium up to a maximum of 20% of the sum assured becomes deductible. For insurance policies issued on or after April 1, 2012, annual premium up to a maximum of 10% of the sum assured is tax-deductible. Public Provident Fund (PPF) PPF becomes an option for employees in small organizations who are not covered under PF Scheme. Deposits can be claimed under this category. Payments made for PPF accounts of Spouse and Minor Children can also be claimed as a deduction. Sukanya Samriddhi Yojana (SSY) is a small deposit scheme for the girl child launched as a part of the ‘Beti Bachao Beti Padhao’ campaign. Interest in this Scheme is at 1% percent, which is tax-free and the deposit is a permissible deduction under section 80 C. It is to be noted that there is a dual tax deductible available in this scheme. A Sukanya Samriddhi Account can be opened any time after the birth of a girl till she turns 10, with a minimum deposit of Rs 250 (Earlier it was Rs 1,000). In subsequent years, a minimum of Rs 250 and a maximum of Rs 1.5 lakh can be deposited during the ongoing financial year. The account will remain operative for 21 years from the date of its opening or till the marriage of the girl after she turns 18. To meet the requirement of her higher education expenses, partial withdrawal of 50 percent of the corpus is allowed after she turns 18. Financial Instruments – Fixed deposits/bonds – These instruments are useful to those who would like to make savings, get a tax deduction on it and have a fixed medium-term plan without making a longer-term commitment. These are Deposits in Infrastructure bonds/debentures, Notified bonds of NABARD, Senior Citizen Savings Schemes, Five years tax-free fixed deposit with Banks, Five-year time deposits with a post office, National Savings Certificate (NSC), National Savings Scheme (NSS) would fall under this category. Investments in the
A tricky journey – Claiming Leave Travel Concession in India
Leave Travel Concession is one of the most popular but tricky benefits available to employees in claiming exemptions under taxable salary income Valuation of LTA Exemption The amount exempt under Section 10(5) of the Income-tax Act is the value of any travel concession or assistance received or due to the assessee: from his employer for himself and his family with his proceeding on leave to any place in India from his employer or former employer for himself and his family in connection with his proceeding to any place in India after retirement from service or after termination of his service. Read More, Don’t forget to claim your LTA tax exemption this year Family, in relation to an individual means the spouse and children of the individual (exemption available only in respect of two children born after 1st October 1998, no restriction on the number of children born before 1st October 1998) the parents, brother, and sisters of the individual who is wholly or mainly dependent on him Block Period and restrictions on the number of Journeys – Only 2 journeys in a block of 4 years is exempt. The exemption is available in respect of 2 journeys performed in a block of 4 calendar years commencing from 1986. The latest block is: 2006-2009 (i.e., January 1, 2006, to December 31, 2009) 2010-2013 (i.e., January 1, 2010, to December 31, 2013) 2014-2017 (i.e., January 1, 2014, to December 31, 2017) 2018-2021 (i.e., January 1, 2018, to December 31, 2021) Carry-over concession – If an employee has not availed travel concession or assistance during any of the specified four-year block periods on one of the two permitted occasions (or on both occasions), the exemption can be claimed in the first calendar year of the next block (but in respect of only one journey). This is known as “Carry-over concession”. In such a case, the exemption so availed will not be counted for the purpose of claiming the future exemptions allowable in respect of 2 journeys in the subsequent block. For example, the employee has not availed LTA benefit at least once in the block of 2006-2009, he can claim the carry-over concession in the calendar year 2010. If he claims the LTA benefit in 2010, this will not be counted for the purpose of exemptions in the block 2010-2013. i.e., the employee can claim LTA on 2 journeys performed in 2010-2013 irrespective of whether he claimed the carryover benefit in 2010 for the block of 2006-2009. Request a Demo for Expense The quantum of the exemption – it is limited to the actual expenses incurred on the journey. The exemption is strictly limited to expenses on airfare, rail fare, bus fare only. No other expenses, like scooter charges at both-ends, porterage expenses during the journey and lodging/boarding expenses will qualify for the exemption. Click Here Resolve Leave Circuitous Route – Where the journey is performed by a circuitous route, the exemption is limited to what is admissible by the shortest route. Likewise, where the journey is performed in a circular form touching different places, the exemption will be limited to what is admissible for the journey from the place of origin to the farthest point reached, by the shortest route. Best Real-time Leave Records Conditions for Exemption The exemption is subject to the following conditions (as per Rule 2B) Different situations Amount of exemption Where Journey is performed by air Amount of air economy fare of the National Carrier by the shortest route or the amount spent, whichever is less. Where Journey is performed by air Amount of air economy fare of the National Carrier by the shortest route or the amount spent, whichever is less. Where Journey is performed by rail Amount of air-conditioned first class rail fare by the shortest route or the amount spent, whichever is less Where the places of origin of journey and destination are connected by rail and journey is performed by any other mode of transport Amount of air-conditioned first class rail fare by the shortest route or the amount spent, whichever is less Where are places of origin of journey and destination (or part thereof) are not connected by rail Where a recognized public transport exists Where no recognized public transport system exists First class or deluxe class fare by the shortest route or the amount spent, whichever is less Air-conditioned first class rail fare by the shortest route (as if the journey had been performed by rail) or the amount actually spent, whichever is less Read More, LTA – Leave Travel Allowance – Rules, Exemption for Claiming Other important points to note LTA cannot be claimed for travel performed before joining the company LTA cannot be claimed for foreign travel If husband and wife both are working, they cannot claim LTA for the same trip as a common expense cannot be eligible for double reimbursement. They should plan the trips in such a way that both put together can claim LTA benefit for 4 trips in a block of 4 years The employee must accompany with family for claiming LTA. Trips by family alone cannot be allowed. Trips are performed using cars owned by Govt. agencies such as ITDC, KSTDC or any local bodies are allowed. Else, the air-conditioned first class rail fare by the shortest route, as if the journey is performed by rail or the amount actually spent, whichever is lower is allowed. There is no maximum limit on claiming LTA provided it is incurred on travel within India and for self and family members. However, generally, companies in their HR policies specify the maximum limit Proof of travel is not required to be provided to the employer as per recent Supreme Court decision LTA can be performed on holidays or on leave days or any combination of both. However, few companies specify the minimum number of leaves to be taken for claiming LTA, in order to discourage fictitious claims. If the employer for any reason disallows the LTA claim, the employee
A triple whammy! Income Tax & Delay in Statutory Payments
There are various types of welfare schemes, some Statutory & some Voluntary viz Provident Funds, Gratuity Funds, Superannuation Funds, etc. which are to protect and enhance the welfare, protection of employees for their retirements or untimely death of employees. Companies carry an onerous obligation of compliance under these regulatory frameworks. This article attempts to detail the Income Tax implications of any delays in remitting the Employers and/or Employees contributions to the respective Statutory Authorities as distinct from the interest, penal or criminal exposures under the respective labour enactments. Three Risks Businesses require to contribute say 12% of the Basic Salary in the case of PF as Employers contribution. The Employee may make a matching contribution of 12% of his salary, which is Employee Contribution. The Employee contribution typically is a Salary cost in the books of accounts of a business being recovered from his salary. While Employers contribution is shown separately as an additional expense as such in the Profit & Loss account of the company. The responsibility of an employer as regards the Employee Contribution is very onerous and fiduciary in nature. Any delay in such payments to the authorities exposes the employer to THREE risks. A). An applicable action under the respective labour Law which may either be interest, penalty or criminal action. B). Failure to pay Employee Contribution under the Income-tax Act gets deemed as an additional Income on which the Tax liability gets determined. C). Even in the event of the Employer making the payment post the prescribed period, such delayed employee contributions do not get recognized as eligible business expenses even in the years of payment. Illustration A simple illustration would explain the issue. For e.g, A Company has 20 employees with a total Gross Basic salary of Rs 2 lacs a month. Employee and Employer PF contribution being Rs. 24,000/- each would aggregate to Rs 48,000/-. Now for the month of February 2011, the company is expected to make a payment of Rs 48,000/- on or before March 15th, 2011 with the PF dept with a grace period of 5 days hence the outer time limit being March 20th, 2011. Should the company pay the contributions on March 25th, 2011? Even this 5-day delay has serious tax implications as explained in the following paragraphs. Click Income Tax on Salaries Budget Impact for FY 2013-14 Deemed Taxable Income For the purpose of computation of business income under Income Tax Act, 1956, Income includes any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees’ State Insurance Act, 1948, or any other fund for the welfare of such employees (Sec. 2 (24)(x)); Deduction of Employee PF Contribution tantamount to the assessee receiving monies from his employees. Hence, any sum received by an employer from his employees as employees’ contribution to the following is treated as “Income” of the employer for the purpose of computation of business income: 1. Employees’ contribution to any provident fund (recognized or unrecognized) 2. Employees’ contribution to a superannuation fund 3. Employees’ contribution to any fund set up under the provisions of the Employees’ State Insurance Act, 1948 4. Employees’ contribution to any other fund for the welfare of employees. Thus in the given example, the employee’s contribution to PF of Rs.24,000 would be assumed as deemed income under Sec.2(24)(x) of the Income Tax Act and has a tax liability. Deduction in respect of the above ‘Income’ received by the employer is allowed only if such sum is credited by the employer to the employee’s account in the relevant fund on or before the ‘due date’ (Sec.36(1)(VA). Notwithstanding If the remittance of employees’ contribution to provident fund is not made within ‘due date’, the deduction under sec.36(1)(VA) is not available even if- 1. salary is actually paid to employees before the ‘due date’, or 2. employees’ contribution to provident fund is paid within the previous year; 3. employer’s contribution to provident fund is deductible under sec.43B on the basis of payment made on or before the due date of submission of return of income For the purpose of Sec.36(1)(VA), ‘due date’ means the date by which the assessee is required, as an employer, to credit such contribution to the employee’s account in the relevant fund under the provisions of any law or term of contract of service or otherwise. If such contribution is paid by the due date but within the grace period, the same will be deemed to have been paid within due date. In the above example, the deduction for payment of Rs.24,000 would not be allowed since the payment was to have been made before 20th March 2011 and therefore not met the conditions of Sec.36(1)(VA). Hence, this would increase the business income of the Company by Rs.24,000 and the company would be required to pay taxes at 30.9%, equivalent to Rs.7,416 on the delayed payment of employees contribution to PF. Employer’s contribution is welfare schemes and allowed as expenses underSec.43B of Income Tax Act and these contributions are allowed as expenses if such payments are made before filing the income tax returns or in the year in which such payments are made to the department. Hence, the tax liability would increase if the employer’s contribution is not made before filing IT return but deduction would be given in the year of payment, which results in a cash flow issue as for as tax payments are concerned. It may be noted that this benefit is not available for employee’s contribution to provident fund, where the deduction is not available even if the payment made after the due date. It can be concluded that in order to avoid higher tax liability on employees contribution to welfare funds, great care should be taken at least for payment of employees’ contribution to PF, ESI, Superannuation fund or any other staff welfare schemes within due date. Else not only being a defaulter, but you
Income Tax on Salaries Budget Impact for FY 2013-14
Salaries Budget Impact Following are the Budget changes during 2013-14, which would impact the Income-tax computations under Salary income. 1.No change in Income tax slab – Tax credit for income up to Rs.5 Lakhs Even though there is no change in the Income-tax Slab, there has been a tax credit of Rs.2,000/- for income up to Rs.5 lakhs to be shown as Rebate u/s 87A. Example a) If an employee taxable income is said Rs.2,30,000/-. In such a case, the tax liability for the employee would Rs.3,000/- on the income of Rs.30,000/-. Out of the tax liability of Rs.3,000/-, since this employee income is less than Rs.5 lakh, an additional rebate of Rs.2,000/- will be reduced from the total tax liability u/s 87A b) If an employee taxable income is said Rs.6,00,000/-, in such case employee will get no rebate as his total taxable income is above Rs.5 lakhs. 2. Surcharge of 10% on the taxable income above Rs.1 crore Employees whose taxable income is above Rs.1 crore now need to pay additional tax as Surcharge which is at 10% on the tax which is higher when computed above Rs.1 Crore. 3. Additional deduction u/s 80EE – Interest on Housing Loan for First-time buyers Good news for first-time house buyers during the Financial year 2013-14. Employees who are planning to buy House during the current FY will get an additional deduction of Rs.1,00,00/- in addition to the Interest on housing Loan u/s 24 (b). Read More Blog, A triple whammy! Income Tax & Delay in Statutory Payments However, employees need to full fill the following conditions The loan has to be taken from the Financial Institutes only Date of Loan sanction should be between current Financial year i.e., 1st April 2013 to 31st March 14. Loan sanctioned amount for purchase of House Property should not be above Rs.25 lakhs The total value of the House property should not cross Rs.40 lakhs Employees should not be owning any other Residential property as on the date of loan sanction. If the employee fails to fulfill any one of the above condition, he/she would not be eligible for the above additional deduction. 4. Life Insurance Premium: Section 80C of the Income Tax Act currently allows a deduction on premium paid on Life Insurance Policy only if the annual premium paid is less than 10% of the sum assured. Budget Impact – For persons with disability or severe disability or suffering from diseases or ailments specified in the Income Tax Act, the limit of 10% has been increased to 15%. Therefore, for such persons, if the annual premium paid is up to 15% of the sum assured, the same can be availed as a deduction under the Rs.1 lakh tax limit under section 80C. 5. Rajiv Gandhi Equity Savings Scheme (RGESS): Section 80CCG allows for a tax deduction of a maximum of Rs 25,000 on the amount invested in equity shares under the Rajiv Gandhi Equity Savings Scheme (RGESS) provided the taxable income of the person is less than Rs 10 lakh Also Read, Should you invest in RGESS for tax saving? Budget Impact – Now those earning income up to Rs.12 lakh will be eligible for deduction under RGESS. Also, the new provision will allow the investor exemption for notan only direct investment in equity shares but also if the investment is made in the scheme of participating equity mutual fund schemes. Also, the tax deduction of 50% of the amount invested, subject to a maximum of Rs 25,000, has been extended to three years instead of the current one-year. Read Blog, A tricky journey – Claiming Leave Travel Concession in India This means that those eligible for deduction under this scheme can continue to invest up to Rs.50,000 per annum in equity or equity mutual funds for three consecutive years and avail an additional deduction of Rs.25,000 each year over and above the Rs.1 lakh deduction available under section 80C 6.Donation: Section 80G of the Income-tax Act that provides for exemption of any amount given as a donation to specified institutions will now also include National Children Fund. Any amount donated to this fund will result in 100% reduction of the amount so donated. Also read, Taxing agricultural income – The age-old conundrum