The guidelines/instructions laid down in the Circular are not exhaustive and in case of any doubt, reference may be made to the relevant provisions of the Act or the Income tax Rules 1962 (“the Rules”).

Here is a summary of the detailed Circular:

Rate of Tax:

The Circular notifies the rate of tax to be applied (depending upon the age of the Employee) to calculate Income tax of an individual on the income chargeable under the head “Salaries”. The tax so calculated is increased by applicable surcharges, if any, and Health and Education Cess. The tax on income under the head “Salaries” is to be calculated at the applicable rate or 20%, whichever is higher, as prescribed u/s. 206AA, in case of non-furnishing of Permanent Account Number (PAN) or Aadhar by the Employee. The Circular reiterates the allowability of Aadhar instead of PAN, in line with the Budget 2020 announcements, as valid compliance for the purpose of Section 206AA of the Act.

Finance Act 2020 had prescribed the choice of two alternate rates of tax i.e., old tax regime and the new tax regime for Individuals, as per their discretion. As such, an Individual / Assessee has the option to choose between the Old Regime i.e., Normal rate of tax or New regime i.e., Concessional rate of tax prescribed u/s. 115BAC of the Act, whichever is more beneficial to them.

Section 115BAC is an optional provision applicable to Individual and HUF, providing a concessional rate of tax, subject to the condition that the total income of the assessee shall be computed without specified exemptions or deductions, set off a loss or additional depreciation.

Further, in case of a person having income from business and profession, he would be required to exercise the option in the prescribed manner on or before the due date specified u/s. 139(1) of the Act. Such an option, once exercised, shall be applicable to all subsequent assessment years. However, the option once exercised can be withdrawn only once and such person shall never be eligible to exercise the option again unless such person ceases to have income from business and profession.

CBDT Circular No C1/2020, dated April 13, 2020 required an employee to intimate to his employer about the option he wishes to exercise between the old and the new tax regime, during each previous year and accordingly the Employer was required to calculate tax on the income of the employee. However, if no such intimation was given by the employee, the employer would have to make the TDS deduction without considering provisions of Section 115BAC. The intimation so made shall be only for the purposes of TDS during the previous year and cannot be modified during the year.

Method of Tax Calculation on Salary and Perquisite:

The Circular requires an employer to determine the estimated annual income under the head “Salaries” and calculate income tax on the same, by applying the applicable tax rate, based on the option chosen by the employee, as discussed above. The tax is to be then deducted at the applicable rate at the time of payment of salary to the employee.

No tax is to be deducted if the estimated salary income, including perquisite, does not exceed the basic exemption limit as provided by the Finance Act, 2020.

Also, the employer has been given an option to pay tax on the non-monetary perquisites given to the employee. To calculate tax on non-monetary perquisites, the Circular directs the employer to calculate the ‘average rate of tax’ and apply the said rate on the non-monetary perquisites to calculate tax on the same. The tax so paid by the employer based on the said calculation would be deemed as the TDS made from the salary of the employee.

As per Section 192(1C), an ‘eligible start-up’ as referred to in section 80-IAC, responsible for paying any income in the nature of perquisite u/s. 17(2)(vi) [Employee stock option plan or sweat equity shares] relevant to A.Y. 2021-22 or thereafter, is required to deduct or pay tax on such income within 14 days –

1. After the expiry of 48 months from the end of the relevant A.Y.; or
2. From the date of sale of specified security or sweat equity share by the assessee; or
3. From the date of the assessee ceasing to be an employee,

whichever is the earliest, based on rates in force for the financial year in which the said specified security or sweat equity share is allotted or transferred.

More than one Employer:

In the case of more than one employer, the Circular requires the employer to deduct TDS on the aggregate income, including the salary received from former/another employer. The current employer is under the obligation to obtain details of income under the head “Salaries” due or received from former/other employer and deduct tax on the aggregate of such amount. The current employer is required to obtain such detail from the employee in writing and duly verified by the former/other employer.

Salary paid in Advance or Arrears:

In case of Salary paid in Advance or Arrears, the employee is entitled to claim relief u/s. 89 of the Act. The employee is required to furnish such particulars in Form No. 10E, duly verified by him, to the person responsible for deducting TDS and upon receipt of such information, the Employer is required to compute the said relief.

Income from other head:

The employer is required to consider the details of any other income submitted by the employee for the purpose of calculating the tax on salary. However, in case of loss, only loss under the head “Income from House Property” up to a maximum of Rs. 200,000 in a year can be considered and any other loss is to be ignored.

The employee is required to submit information regarding the computation of income and evidence of payment of interest under the head “Income from House Property” in Form 12BB.

(Notification No 36/2019 dated April 12, 2019, allows an employer to report only Income under the head “Income from House Property” and “Income from other sources”. Hence, any income under the head “Income from Business and Profession” and “Capital Gains” has to be ignored for the purpose of calculating TDS under the head “Salaries”)

Adjustment for excess or shortfall of deduction:

Section 192(3) of the Act allows the employer to adjust the shortfall or excess of tax deducted for any month in the subsequent months of the same financial year. There is no compulsion to deduct tax equally over the 12 months period.

Salary Paid in Foreign Currency:

In case of salary paid in foreign currency, the value of salary must be calculated by applying the “Telegraphic transfer buying rate”, prevailing on the date on which tax is required to be deducted at source, for the conversion of such currency and tax is to be calculated on the said converted value.

Person Responsible for deducting tax and their duties:

The Circular reiterates the provisions regarding the responsibility of the employer to deduct tax from the salary and emphasizes on timely deposit of TDS with the Central Government, furnishing of TDS return and the issue of Form 16, within the due dates as tabulated below: