Every year CBDT issues a circular giving guidelines to be followed by employers in computing tax to be deducted at source from salary. Following are to be taken into consideration while computing taxable salary for the purpose of deduction of tax at source:—
1. Salary includes wages, fees, bonus, commission, allowances, perquisites, advance or arrears of salary, profits in lieu of or in addition to salary or wages, annuity or pension, gratuity, leave encashment, etc. to the extent these are not exempt. It also includes employers contribution to recognised provident fund which is in excess of 12% of salary of employee and interest credited to recognised provident fund which is in excess of the limit specified. Further, it includes any contribution made by the Central Government to the account of an employee under the notified New Pension Scheme.
2. It has to be noted that only the expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the assessee subject to the limits laid down in rule 2A, qualifies for exemption from income-tax. Thus, house rent allowance granted to an employee who is residing in a house / flat owned by him is not exempt from income-tax. The disbursing authorities should satisfy themselves in this regard by insisting on production of evidence of actual payment of rent before excluding the house rent allowance or any portion thereof from the total income of the employee.
Though incurring actual expenditure on payment of rent is a pre-requisite for claiming deduction under section 10(13A), it has been decided as an administrative measure that salaried employees drawing house rent allowance up to Rs. 3,000 p.m. will be exempted from production of rent receipt. It may, however, be noted that this concession is only for the purpose of tax-deduction at source, and, in the regular assessment of the employee, the Assessing Officer will be free to make such enquiry as he deems fit for the purpose of satisfying himself that the employee has incurred actual expenditure on payment of rent.
3. The value of all taxable perquisites under section 17 like free or concessional residential accommodation, any benefit or amenity granted or provided free of cost or at concessional rate to certain employees vi:., supply of gas, electricity, servant. etc. and value of prescribed fringe benefits and amenities is to be taken into account. Further it will also include the following:
(a) value of any specified security or sweat equity share allotted or transferred by the employer or former employer free of cost or at concessional rate to the employee.
(b) the amount of any contribution to an approved superannuation fund by the employer in respect of the assessee to the extent it exceeds Rs. 1,50,000.
4. Aggregation of salary received from more than one employer during the year.
5. Deductions from salary permissible under section 16 i.e. entertainment allowance and professional tax (Standard deduction under section 16(ia) will also be allowed w.e.f. A.Y. 2019-20).
6. The employer shall allow the deductions under sections 80C (maximum Rs. 1,50,000), 80CCC, 80CCD (subject to maximum of Rs. 1,50,000 (exclusive of contribution made by the employer to the new pension scheme) as per section 80CCE), deduction of Rs. 50,000 as additional contribution under sections 80CCD(1B). 80CCG, 80D, 80DD, 80DDB, 80E, 80GG, 80GGA, 80TTA and 80U before calculating the tax on the income. Deduction under section 80G will not generally be allowed by the employer.
The tax relief on such donations as admissible under section 80G of the Act, will have to be claimed by the tax payer in the return of income. However, in cases where employees make donations to the Prime Minister's National Relief Fund, the Chief Minister's Relief Fund or the Lieutenant Governor's Relief Fund through their respective employers, it is not possible for such funds to issue separate certificate to every such employee in respect of donations made to such funds as contributions made to these funds are in the form of a consolidated cheque An employee who makes donations towards these funds is eligible to claim deduction under section 80G. It is, hereby, clarified that the claim in respect of such donations as indicated above will be admissible under section 80G on the basis of the certificate issued by the Drawing and Disbursing Officer (DDO) / Employer in this behalf.
No deduction under section 80G is allowable in case of amount of donation if exceeds Rs. 2,000 unless the amount is paid by any mode other than cash.
7. Rebate of the tax payable or Rs. 12,500 , whichever is less, is allowable in case of an individual having total income up to Rs. 5,00,000 [Section 87A]
8. After allowing the above deductions the taxable income should be computed and rounded off to the nearest multiple of Rs. 10. It may be noted that the deductions will be allowed provided proof of the same is submitted by the employee to the employer. The tax will be calculated at the rates applicable for that financial year, keeping in view the age and gender of the employee subject to the provisions of section 206AA.
9. The amount of tax payable so arrived at shall be increased by surcharge if applicable and by health and education cess (H&EC) @ 4% to arrive at the total tax payable.
10. The amount of tax as arrived at para 8 should be deducted every month in equal instalments. Any excess or deficit arising out of any previous deduction can be adjusted by increasing or decreasing the amount of subsequent deductions during the same financial year.