Tax Deduction Dilemma: Can Employers Deduct Taxes Before March 31 Without Proof?

Hi, I am Namrata Joshi. I have a query. I have taken the declarations from the employees of my company in June 2018. Now, I have given a deadline of 31st January for the employees to submit the proof of their investments as per the declarations they submitted. Some employees are requesting time until 31st March to submit their investment proof.

Tax Deduction Query

In this scenario, as an employer, can we deduct tax from their salary in January, February, and March? Is there any Supreme Court ruling to justify that an employer has the right to deduct tax from an employee's salary before 31st March?

Understanding TDS Obligations for Employers and Employees

Deducting TDS on an estimated basis is the legal responsibility of the employer, treated as advance tax. For the convenience of employees, projected tax liability is calculated in the first quarter itself, and monthly TDS is implemented. Employees, in their own interest, should submit their declarations with copies of proof of investments, house rent paid, and other receipts like rental income, interest, and dividends well in time. This allows employers to make projections during December and plan proportionate monthly TDS during the last quarter, i.e., January, February, and March, ensuring TDS on the total taxable income of an employee is effected and remitted. This enables employees to avoid interest on the delay in remitting advance tax as much as possible. When this does not happen or is not fully taken care of, employees may face hardship to meet compliance deadlines before the 31st of March. It is the responsibility of the employer to account for TDS of every employee subjected to tax and drawing taxable income. This responsibility is imposed on employers under Sec. 192 of the IT Act.

Employer's Responsibilities Under the Income-Tax Act

The Income-Tax Act imposes the responsibility on the employer for tax deduction at the source (TDS) on salary at the time of payment to employees whose salary income exceeds the maximum amount not chargeable to tax. The employer must deduct TDS on salary at the average rate of income tax and deposit the same with the government within the prescribed time. Additionally, the employer must file withholding tax returns and issue TDS certificates to the employees. Various penalties are levied on the employer in case of default, making the entire procedure equally painful for employers.

Employee's Role in TDS Compliance

So, you must have started realizing that the grass on the other side is not as green as you thought. Although TDS is solely the obligation of the employer, if as an employee you are aware of a TDS default, you may also be held responsible. If your total income exceeds the maximum amount not chargeable to tax and no TDS is being deducted by the employer, you are obligated to pay tax through the advance tax route.

Calculating Your Tax Liability

You should estimate your total income for the year, including salary, house property, interest income, etc. Relevant deductions applicable to each source of income, such as eligible investments and interest on housing loans, should be considered to calculate the taxable income. Calculate the tax payable based on the applicable tax rates. Once you have determined the gross tax liability, subtract the amount of TDS suffered or likely to be suffered on the above income. If the balance tax payable exceeds Rs 10,000, you must comply with the advance tax provisions. The full amount becomes payable as advance tax in four installments on or before June 15th, September 15th, December 15th, and March 15th during the financial year. If you miss the advance tax installments, taxes can also be deposited as self-assessment tax post April 1 (after the end of the financial year). If the employer has defaulted in TDS, it becomes your responsibility to deposit taxes through advance tax or self-assessment tax as ultimately, taxes are to be deposited on your income as an individual employee drawing taxable income.

Consequences of Non-Compliance

Failure to deposit taxes could lead to income concealment on your part, resulting in a penalty equivalent to 100-300% of the tax amount not deposited. There are also interest implications, but judicial precedents indicate that if taxes were required to be deposited through TDS and have not been done, the recipient of income is not required to pay interest.

Before you plan your month-end celebrations, just glance through your pay stub. Instead of creating a fuss over the tax figure, be thankful to your employer for taking care of your taxes and saving you from a lot of hassles.

The attached documents will provide you with the required information on TDS and relevant issues.

I have already taken the declaration form from employees and have been deducting TDS every month based on the declaration submitted by the employee. But now I have asked them to furnish proof of investment. They are asking me to give a deadline by the end of March. Can I allow that?

Extending the Deadline to the End of March: Implications for Employers and Employees

Extending the deadline to the end of March will pose problems for both the employer and employees. When the deadline is extended so far, there will be no time to recover TDS and remit it in March itself. This means that the obligations are not being complied with. The long and short of TDS is to estimate the tax, recover it through TDS, and remit it before 31st March. If the deadline is extended until 31st March, there is a risk that the tax could be remitted in April, which would attract overdue interest. Therefore, those requesting this extension should be informed that they will be doing it at their own risk and cost because there will be no room to account for savings for the year ending on 31st March within that same month.

It has to be accounted for in April, which becomes the subsequent year, and therefore the employer cannot take it into consideration. Hence, there is no point in asking for an extension until 31st March. Perhaps, if you process the salary for March in the first week of April, the subsequent month, someone may question why it can't be accounted for. However, it should be noted that IT/TDS for the entire year has to be recovered and remitted before 31st March, failing which the employee has to remit it on their own with interest. The employer bears no responsibility for such instances.

At best, you can consider agreeing to an extension until the date of processing your payroll, at maximum. To overcome these difficulties, many employers close their attendance records somewhere in mid-March instead of from 1st March to 31st March. For example, attendance is computed from 19th February to 20th March (one full month), and then the payroll is processed. This way, they can remit the TDS before 31st March. This practice is followed for all months.

Hi Namrata,

I do not understand where the problem lies for deduction if an employee fails to comply with the requirements. The company is authorized to deduct the quantum of tax based on the employee's income compared to his tax-saving savings. If one has paid extra on TDS, it can be returned by the IT Department upon filing the IT return.

Please let me know if you need further clarification.