INTRODUCTION
Since before the arrival of the first colonists, income taxes have been a common idea. It is regarded as a tax that a citizen pays to the state, based on their income and the profits of their businesses. The state uses the money it receives from taxes for a variety of things, such as providing public services, building infrastructure, paying for the military and other forms of defense, and providing subsidies. The Income Tax Act of 1961 is a sophisticated and extensive statute that covers all of the different laws and rules that govern how the country administers its tax system. Income tax is levied, handled by, collected from, and collected by the Indian government. According to Section 4 of the Indian Income Tax Act, income tax will be assessed for the corresponding assessment year based on each person’s total previous-year income at the rates set out by the Finance Act. As the name suggests, tax deducted at source (TDS) aims to collect money right from the source of income. It combines the ideas of “pay as you earn” and “collect as it is being earned,” and is essentially an indirect method of “collecting tax.” It is important to the government because it gets ready for tax collection, guarantees a steady stream of income, and gives taxes a wider base and greater reach.
In addition, it offers the taxpayer a straightforward and practical method of payment while also distributing the tax’s incidence. The person receiving the income is typically responsible for paying income tax. However, the government makes sure that income tax is taken out of your payments in advance using provisions known as ‘Tax Deducted at Source.’ The net sum is given to the income recipient (after reducing TDS). The recipient will include the gross amount in his income and subtract the TDS amount from his overall tax obligation. The sum already withheld and paid on the recipient’s behalf is accepted as payment in full. The mentioned provisions are used to fulfill the recipient’s tax obligations. As a taxpayer, it is our responsibility to declare the amount of income we have earned and paid taxes on in our income tax return.
According to Section 192 of the Income Tax Act of 1961, anyone responsible for paying any income that is chargeable under the head ‘salary’ must deduct income tax from the assessee’s anticipated income under the head salary. The tax must be computed at the average income tax rate based on the rates currently in effect. The deduction must be made at the time of the actual payment. However, unless the estimated salary income exceeds the maximum amount exempt from the tax that applies to an individual during the relevant financial year, no tax is required to be withheld at the source. Once the tax has been deducted, it must be deposited in a government account, and the employee must be given a certificate of tax deducted at the source (also known as Form No. 16). The employee must include this certificate with his income tax return to receive the TDS credit on their income tax assessment.
Lastly, the employer/deductor must complete Form No. 24Q, Quarterly Statements, and submit it to the Income-tax Department. Salary is said to be the remuneration received by or accruing to an individual for service rendered as a result of an express or implied contract. The statute gives an inclusive but not exhaustive definition of salary. As per Sec. 17(1), salary includes therein-
- Wages
- Annuity or pension
- Gratuity
- fees, commission, perquisites, or profits in lieu of salary
- Advance salary
- Receipt from provident fund
- Contribution of the employer to a recognized provident fund in excess of the prescribed limit
- Leave encashment
- compensation as a result of variation of service contract etc.
- Government contribution to a pension scheme.
The law mandates that tax be withheld at source from earnings covered by the head salary. As a result, the existence of an employer-employee relationship is a requirement before a specific receipt can be taxed as a head salary. When an employee is subject to the employer’s right to direct how he carries out instructions in addition to working under his direct control and supervision, this type of relationship is said to exist. Therefore, the law essentially mandates the deduction of tax in the following situations: (a) When the employer pays the employee. The income under the head salaries is above the maximum amount not subject to tax, (b) the payment is in the nature of a salary, and (c) the payment has been made. Both payment and deduction of tax are in the hands of the employer.
Even if an individual or HUF is not subject to a tax audit, payments made by them that total more than Rs 50,000 per month must be TDS-deducted at a rate of 5%. Furthermore, individuals and HUF required to deduct TDS at 5% are exempt from applying for TAN. Your employer deducts TDS at the corresponding income tax slab rates. Banks deduct TDS at a rate of 10%. If they don’t have your PAN information, they may also deduct 20%. The income tax Act specifies the TDS rates for the majority of payments, and the payer deducts TDS based on these rates. If your total taxable income is less than the taxable limit and you provide your employer with investment proof (to claim deductions), you are not required to pay any tax. There should be no TDS deducted from your income as a result.
TDS on payment of pension– It has been clarified by CBDT vide circular No. 761 dt. 13/01/98 that in the case of pensioners receiving pension through nationalized banks, provisions of TDS are applicable in the same manner as they apply to the salary income.
TDS on Retirement Benefits: According to section 17, retirement benefits that an employee receives are taxable under the heading salaries as ‘profits in lieu of salaries’. As a result, they are subject to the TDS provisions outlined in Section 192 and other pertinent sections. As a result, when an employee retires, the employer must compute the TDS while taking these factors into account. However, some of these retirement benefits are either fully or partially exempt from taxation under Section 10.
COMPARISON OF GOVERNMENT EMPLOYEES AND PRIVATE SECTOR EMPLOYEES
Rent-Free Accommodation (Unfurnished): It is a benefit that the employee receives from their employer. A prerequisite is simply a non-financial or in-kind benefit provided to an employee. According to the Act’s provisions, these are taxable in the employee’s hands.
- Government Employees: The taxable value of the benefit shall be the License Fees as determined by the Government for the allotment of houses. The License fee is quite nominal.
- Other Employees: House is owned by the Employer. The following shall be the taxable value of the perquisite-
- If the Population exceeds 25 Lakhs, then 15% of salary.
- If the Population ranges between 10-25 Lakhs, then 10% of salary.
- In any other case, 7.5% of salary.
House is taken on lease or rent by the employer: The taxable value of perquisite shall be irrespective of the population. it shall be Actual Rent & 15% of salary whichever is lower.
- Gratuity:
- Government Employees: The amount of Gratuity received is fully exempt from tax.
- Other Employees: The Exemption shall be a minimum of the three:
- Actual Gratuity Received.
- Rs. 1,00,000(Likely to increased to Rs. 20,00,000).
- 15/26*Last drawn salary* Completed year of service or part thereof.
- Pension:
- Government Employees: Fully Exempt.
- Other Employees:
- Non- Government Employees in receipt of Gratuity: Only 1/3rd of the full value of the commuted pension is exempt from tax. So, technically you are required to pay tax on 2/3rd of the value of the commuted pension.
- Non-Government Employees not in receipt of Gratuity: Only 1/2nd of the full value of the commuted pension is exempt from tax. Here, you are required to pay tax on half of the value of the commuted pension.
| Basis of Difference | Government Employees | Non-government Employees |
| Entertainment Allowance | Lower of below is allowed as a deduction: 1/5th of salary, or, Rs. 5000 | Fully-taxable. No deduction is allowed |
| Rent-free Accommodation (Unfurnished) | The nominal License fee shall be taxable value. | Certain Percentages of salary shall be taxable value. |
| Foreign allowances or perquisites | Exempt | Not Exempt |
CONCLUSION
The numerous tax benefits enjoyed by the government employee could be one of the reasons which give them an edge over the non-government employee. Tax deducted at Source (TDS), as the name implies, aims to collect money directly from the source of income. It is essentially an indirect way of “collecting tax,” combining the concepts of “pay as you earn” and “collect as it is being earned.” It is crucial to the government because it prepares for tax collection, ensures a consistent income stream, and expands the base and scope of taxes. It also distributes the tax’s incidence while providing the taxpayer with a simple and useful method of payment. Taxes on income are typically paid by the individual receiving the income. However, using a feature known as “Tax Deducted,” the government ensures that income tax is deducted from your payments in advance.
This article is written by Sanskar Garg, a last-year student at the School of Law, Devi Ahilya University, Indore.