Instructions for deduction of tax at source from salary during financial year 1975-76 at the rates specified in Part III of First Schedule to Finance Bill, 1975 and Finance (Amendment) Act, 1975 - Income Tax - 161/1975

Circular No 161 Dated 22/3/1975 FINANCIAL YEAR 1975-76 Instructions for deduction of tax at source from salary during financial year 1975-76 at the rates specified in Part III of First Schedule to Finance Bill, 1975 and Finance (Amendment) Act, 1975 CLARIFICATION 1 1. I am directed to invite a reference to this Ministry's Circu lar No. 131 [F. No. 275/36/74-ITJ], dated 18-3-1974 on the subject of deduction of income-tax from salaries paid during the year 1974-75. The Finance Bill introduced in the Parliament on February 28, 1975, inter alia, prescribes the rates at which income-tax has to be deducted during the financial year 1975-76 from income chargeable under the head "Salaries". These rates will be applicable to deduction of tax from salaries paid or payable on or after April 1, 1975. An extract of Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the Finance bill, 1975, insofar as it relates to levy of income-tax on "salaries" is enclosed [Annex 1]1. It is requested that pending the passing of the Finance Bill, 1975, deduction of tax from "salaries" may be made during the financial year 1975-76 accord ing to the rates in the said Schedule. Three typical examples of calculations are given in Annex II. 2. The substance of the main provisions in the law insofar as they relate to income from "salaries" on which tax is to be deducted at source during the financial year 1975-76 is given hereunder : (1) No tax will be deductible at source in any case unless the estimated salary income for the financial year exceeds Rs. 6,000. (2) The Income-tax (Amendment) Rules, 1974 and the Income-tax (Third Amendment) Rules, 1974 notified by the Central Board of Direct Taxes on February 28, 1974 and September 21, 1974 respec tively have made certain modifications in the provisions relating to the valuation of the perquisites by way of free residential accommodation and motor cars provided by employers to their employees. The salient features of the new provisions have been explained in Board's Circular No. 130, dated 16-3-1974 and Circu lar No. 150, dated 19-11-1974. These provisions shall be taken into account for the purposes of computing the estimated salary income of employees for the purposes of deduction of tax at source during the financial year 1975-76. (3) For the purpose of computing the total income of an employee the amount credited to his ledger account in the Additional Wages Deposit Account or the Additional Dearness Allowance Deposit Account under the provisions of Additional Emoluments (Compulsory Deposit) Act, 1974 shall not be included in his total income of the previous year in which it is so credited; but so much of the amount as is repaid to him shall be liable to be included in his total income of the previous year in which it is repaid. (4) The amount of deposit made by a taxpayer under the Compulsory Deposit (Income-tax Payers) Scheme, 1974 is not allowable as deduction in computing his taxable income. Accordingly, such deposit has to be ignored for the purposes of determining the amount of income-tax deductible at source. (5) The taxable salary is to be computed after providing a stand ard deduction in respect of expenditure incidental to employment. The standard deduction is to be allowed in an amount equal to 20 per cent of the salary up to Rs. 10,000 and 10 per cent of the salary in excess thereof, subject to a maximum of Rs. 3,500. For this purpose the term "salary" will include fees, commission, perquisites or profits in lieu of or in addition to salary, but will not include any payments received by the employee which are specifically exempt from tax under clauses (10), (10A), (10B) [regarding retrenchment compensation proposed to be inserted by the Finance Bill, 1975], (11), (12) and (13A) of section 10. Thus, house rent allowance which is exempt under section 10(13A) will not be taken into account for the purposes of computing the amount of the standard deduction. It may be noted that the stand ard deduction on the above basis is to be allowed irrespective of whether any expenditure incidental to employment is actually incurred by the employee or not. This deduction will, however, not be admissible in the case of retired pensioners who have not been in employment at any time during the financial year 1975-76. In the case of persons who retire from service in the course of the financial year 1975-76, the standard deduction will be calcu lated only with reference to the salary derived from employment during the financial year without taking into account the pension received by the employee. Further, the standard deduction will be limited to Rs. 1,000 only in cases (a) where the employee is in receipt of a conveyance allowance, or (b) where he is provided with any motor car, motor cycle, scooter or other moped by his employer (for use otherwise than wholly or exclusively in the performance of his duties) or where he is allowed the use of any one or more motor cars (otherwise than wholly or exclusively in the performance of his duties) out of a pool of motor cars owned or hired by the employer. In this connection, it may be noted that the use of a motor car by the employees for the purposes of going from his residence to the place where the duties of employ ment are to be performed or from such place back to his residence will not be regarded as use of the motor car in the performance of his duties. (6) While computing the taxable income, the disbursing officers should allow a deduction of the whole of the first Rs. 4,000, 50 per cent of the next Rs. 6,000 and 40 per cent of the balance of the qualifying amount of payments towards life insurance premia, contributions to provident fund, contributions for participation in the Unit-linked Insurance Plan, 1971 made under section 19(1)(cc) of the Unit Trust of India Act, 1963 and deposits in a 10-year Account or 15-year Account under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959. The qualifying amount of these items taken together will be limited to 30 per cent of the estimated "salary" [after the deduction in respect of expenditure incidental to the employment of the assessee referred to in item (5) above] or Rs. 20,000, whichever is less. (7) With a view of providing tax relief to middle class families who incur expenditure on higher education of their dependent children, the Finance Bill, 1975 proposes to make a provision in the Income-tax Act for allowing a deduction in respect of such expenditure. As per the proposed provision the deduction will be allowed only in the case of Indian citizens whose "gross total income" does not exceed Rs. 12,000. Where the child of the tax payer is studying for a degree or post-graduate course in medi cine (including surgery and obstetrics), architecture, engineer ing or technology, a deduction of Rs. 1,000 and where the child is studying for diploma course in these subjects or for any other degree or post-graduate course, a deduction of Rs. 500 for each child will be allowed. In cases where the taxpayer has incurred expenditure on the education of more than two children, the deduction under the proposed provision will be allowed at the above rates with reference to two such children as may be chosen by him. It may be noted that deduction at this rate is to be allowed irrespective of the actual amount spent by the assessee provided some amount is spent by the assessee on such education. The benefit of this deduction can be allowed at the stage of deduction of tax at source on the assessee's furnishing a certif icate to the effect that he has incurred expenditure during the previous year out of his income chargeable to tax on full time education of his child(ren) wholly or mainly dependent on him and also declaring the nature of the course for which the child or children are studying. (8) In pursuance of the recommendation made by the Third Pay Commission the ceiling limit in respect of house rent allowance payable to Government employees has been raised from Rs. 300 p.m. to Rs. 400 p.m. As a logical corollary to this, the ceiling limit of Rs. 300 p.m. laid down in section 10(13A) for exemption of house rent allowance from income-tax is proposed to be raised to Rs. 400 p.m. by the Finance Bill, 1975. The proposed amendment will take effect from 1-4-1975 and will accordingly apply in relation to the assessment year 1975-76 and subsequent years. (9) The Finance Bill, 1975 seeks to make retrospective amendment in section 10(14) with effect from April 1, 1962 (the date from which the Act came into force) to clarify that any allowance [other than house rent allowance which is exempt from income-tax under section 10(13A) granted to a person to meet his personal expenses at the place where the duties are ordinarily performed or at the place where he ordinarily resides will not be regarded, for the purpose of section 10(14) a special allowance granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties. The proposed amendment is with a view to getting over the difficulty arising from the interpretation placed by the Bombay High Court on the provision of section 10(14) in the case of CIT v. D.R. Phathak [1975] 99 ITR 14 declaring Compensatory (City) Allowance exempt from income-tax under section 10(14). As a result of the proposed amendment, Compensatory (City) Allowance would continue to be taxed. (10) No deduction should be made from the salary income in re spect of any donations for charitable purposes. The tax relief on such donations will have to be claimed by the taxpayer separately at the time of the finalisation of the assessment. However, in cases where contributions to the National Defence Fund, Jawahar lal Nehru Memorial Fund or the Prime Minister's Drought Relief Fund are made by deduction from the pay-bills 55 per cent of such contributions may be deducted in computing the taxable income of the employee. Care should be taken to see that the aggregate of such contributions for the year is not less than Rs. 250. Dis bursing Officers should show the total contributions in the remarks column of the return under section 206. (11) The total income computed in accordance with the provisions of the Act should be rounded off to the nearest multiple of ten rupees by ignoring the fraction which is less than five rupees and increasing the fraction which amounts to five rupees or more, to ten rupees. The net amount of tax deductible should be simi larly rounded off to the nearest rupee. (12) Attention is also invited to section 276B, wherein it is provided that if a person without reasonable cause or excuse fails to deduct or after deducting fails to pay the tax as required under the provisions of Chapter XVII-B, he shall be punishable with rigorous imprisonment for a term which may extend to six months, and shall also be liable to fine which shall be not less than a sum calculated at the rate of fifteen per cent per annum on the amount of such tax from the date on which such tax was de ductible to the date on which such tax is actually paid. 3. If any changes are made in the Finance Bill, 1975 before it is passed into law the same will be communicated to you in due course. Circular : No. 161 [F. No. 275/12/75-ITJ], dated 22-3-1975. CLARIFICATION 2 Attention is invited to para 2(7) of this Ministry's Circular No. 161, dated 22-3-1975 [Clarification 1] relating to tax relief in regard to expenditure incurred on higher education of dependent children. The Finance Act, 1975 (as finally enacted) has extended the scope of this benefit. Deduction under section 80FF will be available not only in respect of expenditure incurred on the higher education of dependent children but also in respect of such expenditure incurred on any brother or sister of the assessee wholly or mainly dependent on him and extends to a course in business management in addition to that in medicine, architecture, engineering and technology. Further to what has been indicated in para 2(7) of this Ministry's Circular No. 161, dated 23-3-1975, an assessee will be entitled to the higher deduction of Rs. 1,000 in respect of a dependent studying for a degree or post-graduate course in business management and a deduction of Rs. 500 in respect of a dependent studying for diploma course in business management. However, where the asses see has incurred expenditure on the higher education of more than two dependents, the deduction will be allowed only in respect of two such dependents as may be chosen by him. Circular : No. 166 [F. No. 275/12/75-ITJ], dated 9-6-1975. CLARIFICATION 3 1. Attention is invited to para 2(3) of this Ministry's Circular No. 161, dated 22-3-1975 [Clarification 1] on the above subject, which lays down that for the purpose of computing the total income of an employee, the amount credited to his ledger account in the Additional Wages Deposit Account or the Additional Dear ness Allowance Deposit Account under the provisions of Additional Emoluments (Compulsory Deposit) Act, 1974 shall not be included in his total income of the previous year in which it is so cred ited but so much of the amount as is repaid to him shall be liable to be included in his total income of the previous year in which it is repaid. Section 8(2) of the Additional Emoluments (Compulsory Deposit) Act, 1974 provides that for the purposes of computing, under the Income-tax Act, 1961, the total income of an employee, the amount repaid to him under this Act shall be deemed to be salary paid to him in arrears and the provisions of sub-section (1) of section 89 shall apply accordingly. 2. The amounts credited to the ledger account of an employee in the Additional Wages Deposit Account have become repayable after July 7, 1975 (i.e., after expiry of one year from the appointed day), under section 9(1)(a) of the Additional Emoluments (Compul sory Deposit) Act, 1974. Therefore, on such repayments tax has to be deducted at source in accordance with the instructions con tained in this Ministry's Circular No. 161 [F. No. 275/12/75-ITJ], dated 22-3-1975 as amended by Circular No. 176 [F. No. 275/12/75-ITJ], dated 16-8-1975 [printed here as Clarifications 1 and 4]. Circular : No. 182 [F. No. 275/12/75-ITJ], dated 28-10-1975. CLARIFICATION 4 1. Attention is invited to paragraph 1 of Circular No. 161, dated 22-3-1975 [Clarification 1] enclosing an extract of Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the Finance Bill, 1975 giving the rates for deduction of income-tax from salaries during the financial year 1975-76. 2. The Finance (Amendment) Act, 1975, which received the assent of the President on July 31, 1975, has, inter alia, replaced Paragraph A of Part III of the First Schedule to the Finance Act, 1975. Under the new rate schedule, the rate of income-tax on the first slab of income up to Rs. 8,000 (as against Rs. 6,000 previ ously) has been fixed at nil and the rate on the new slab of Rs. 8,001—15,000 at 17 per cent. The rates of tax on the slabs of income beyond Rs. 15,000 remain unchanged. An extract of the new Sub-Paragraph I of Paragraph A of Part III of the First Schedule is enclosed as Annex I. 3. It is requested that deduction of income-tax may be made during the financial year 1975-76 according to the rates in the new schedule. In this connection, it may be noted that it is permissible under section 192(3) to reduce (or increase) the amount of tax to be deducted at source for the purpose of adjust ing any excess (or deficiency) arising out of any previous deduc tion (or failure to deduct it) during the financial year. 4. Three typical examples of calculations on the basis of the new provisions are given for guidance in Annex II. 5. It may please be noted that with the raising of the exemption limit from Rs. 6,000 to Rs. 8,000, no tax is deductible at source unless the estimated salary income of a person during the finan cial year 1975-76 is likely to exceed Rs. 8,000. Circular : No. 176 [F. No. 275/12/75-ITJ], dated 16-8-1975. ANNEX I - EXTRACT FROM PART III OF FIRST SCHEDULE TO FINANCE (AMENDMENT) ACT, 1975 Paragraph A Sub-Paragraph I In the case of every individual or Hindu undivided family or unregistered firm or other association of persons or body of individuals, whether incorporated or not, or every artificial juridical person referred to in sub-clause (vii) of clause (31) of section 2 of the Income-tax Act, not being a case to which Sub-Paragraph II of this Paragraph or any other Paragraph of this Part applies : Rates of income-tax (1) where the total income does not exceed Rs. 8,000 Nil; (2) where the total income exceeds Rs. 8,000 but does not exceed Rs. 15,000 17 per cent of the amount by which the total income exceeds Rs. 8,000; (3) where the total income exceeds Rs. 15,000 but does not exceed Rs. 20,000 Rs. 1,190 plus 20 per cent of the amount by which the total income exceeds Rs. 15,000; (4) where the total income exceeds Rs. 20,000 but does not exceed Rs. 25,000 Rs. 2,190 plus 30 per cent of the amount by which the total income exceeds Rs. 20,000; (5) where the total income exceeds Rs. 25,000 but does not exceed Rs. 30,000 Rs. 3,690 plus 40 per cent of the amount by which the total income exceeds Rs. 25,000; (6) where the total income exceeds Rs. 30,000 but does not exceed Rs. 50,000 Rs. 5,690 plus 50 per cent of the amount by which the total income exceeds Rs. 30,000; (7) where the total income exceeds Rs. 50,000 but does not exceed Rs. 70,000 Rs. 15,690 plus 60 per cent of the amount by which the total income exceeds Rs. 50,000; (8) where the total income exceeds Rs. 70,000 Rs. 27,690 plus 70 per cent of the amount by which the total income exceeds Rs. 70,000; Surcharge on income-tax The amount of income-tax computed in accordance with the preced ing provisions of this Sub-paragraph shall be increased by a surcharge for purpose of the Union calculated at the rate of ten per cent of such income-tax. ANNEX II - TYPICAL EXAMPLES OF INCOME-TAX CALCULATION Example I Rs. 1. Total salary income (including Rs. 180) deposited under the Additional Emoluments (Compulsory Deposit) Act, 1974 9,680 2. Contributions to general provident fund 720 3. Payment towards life insurance premia 500 1,230 4. Total salary income 9,680 5. Deduct : Amount deposited under the Additional Emolu ments (Compulsory Deposit) Act, 1974 180 9,500 6. Deduct : Standard deduction 20 per cent of salary in respect of expenditure incidental to employment 1,900 7,600 7. Deduct : Whole of the qualifying contributions towards general provident fund and life insurance premia 1,220 8. Taxable income 6,380 9. Income-tax payable on Rs 6,380 Nil Example II 1. Total salary income (including Rs. 240) deposited under the Additional Emoluments (Compulsory Deposit) Act, 1974 18,565 2. Contributions to general provident fund 1,200 3. Payment towards life insurance premia 1,600 2,800 4. Total salary income 18,565 5. Deduct : Amount deposited under the Additional Emolu ments (Compulsory Deposit) Act, 1974 240 18,325 6. Deduct : Standard deduction in respect of expenditure incidental to employment at Rs. 2,000 plus 10 per cent of the amount by which salary exceeds Rs. 10,000 2,832.50 15,492.50 7. Deduct : Whole of the Rs. 2,800 qualifying contribu tions towards general provident fund and life insurance premia 2,800.00 8. Taxable income 12,692.50 Rounded off to 12,690.00 9. Income-tax on Rs. 12,690 [i.e., at 17 per cent on Rs. 4,690] 797.30 10. Union surcharge at 10 per cent 79.73 11. Total tax payable 877.03 Rounded off to 877.00 Example III 1. Total salary income (including Rs. 451) deposited under the Additional Emoluments (Compulsory Deposit) Act, 1974 29,039 2. Contribution to general provident fund 3,500 3. Payments towards life insurance premia [The employee is in receipt of a conveyance allowance of Rs. 200 per month from his employer] 6,275 9,775 4. Total salary income 29,039 5. Deduct : Amount deposited under the Additional Emolu ments (Compulsory Deposit) Act, 1974 451 28,588 6. Deduct : Standard deduction in respect of expenditure inciden- tal to employment restricted to Rs. 1,000 1,000 27,588 7. Deduction on account of contributions towards general provident fund and life insurance premia. Paid Rs. 9,775 in all but limited to 30 per cent of Rs. 27,588 i.e., Rs. 8,276.40 - on the first Rs. 4,000 (full) Rs. 4,000.00 - on the next Rs. 4,276.40 at 50 per cent Rs. 2,138.20 6,138.20 8. Taxable income 21,449.80 Rounded off to 21,450.00 9. Income-tax on Rs. 21,450 [Rs. 2,190 plus 30 per cent of Rs. 1,450] 2,625.00 10. Union surcharge at 10 per cent 262.50 11. Total tax payable 2,887.50 Rounded off to 2,888.00