Employee Taxes

An employee is liable to pay taxes on the salary earned by him/her. For income to be regarded as ‘salary,’ it is imperative to have an employer-employee relationship. The income under the head ‘salary’ is liable to tax either on a receipt basis or accrual basis, whichever event is earlier. It would also include arrears of salary.

Components of salaries mainly include basic salary, fees, commission, bonus, retirement benefits, a contribution to social security over the specified limits, allowances, perquisites, etc.

Perquisites are benefits provided in-kind and would, inter alia, include rent-free accommodation, interest- free loans or subsidized loans, provision of movable assets for use or transfer of such assets to the employees at a subsidized cost, free or concessional education, provision of motor cars, provision of domestic help, club membership, etc. The Finance Act 2020, in the case of start-up employers, has provided to defer the time limit to deposit TDS on Employee Stock Option Plans to within 14 days from the expiry of 48 months from the end of the relevant assessment year or the date of sale of such ESOP shares or the date on which the assessee ceases to be an employee.

The ITA also provides for several exemptions and deductions while computing income under the head ‘salaries.’ These, among other things, include professional taxes paid, house rent allowance subject to specified limits and conditions, etc.

Furthermore, the Finance Act, 2019, has increased a standard deduction to INR 50,000 to replace the earlier transport allowance and medical reimbursements. The mechanism of calculating the exempt allowances is based on Rules. However, the quantum of deduction and/or exemption is not very significant, and most of the limits specified in the ITA/Rules have outlived their utility.

Employers are required to compulsorily withhold tax on taxable salary if income exceeds the minimum exemption limit. Tax is to be withheld at an average rate based on the estimated income of the employee for the whole year at the time of actual payment of salary every month. While calculating the estimated income of the employee, the applicable deductions and exemptions are also considered.