Income tax and obligations of employers with respect to tax laws

The 1961 Income-tax Act has made the income of a person chargeable to tax in India. Employers bear the responsibility for withholding 'tax deducted at source' (TDS) on salaries paid to the employees whose annual income exceeds the maximum threshold exempted from taxation.

The two types of tax regimes that are available to individual taxpayers in India are the old tax regime and the new tax regime. The old tax regime represents the conventional income tax structure, whereas the new tax regime was introduced in 2020 with the objective to simplify the tax system and lighten the tax burden on individual taxpayers.

A salaried individual is required to choose between old and new tax regime every financial year. Once the tax regime is finalized, it cannot be changed during the financial year. The employer deducts taxes from salaries based on the chosen tax regime from April onwards. However, another tax regime can be chosen at the time of filing the income tax return.

To make an informed decision between the two regimes, individuals should consider and compare the tax exemptions and deductions available under the old and new tax regimes to determine which regime has the lower tax liability. Whichever option the individual chooses must be communicated to the employer to deduct TDS from salary.

Income tax structure (Old tax regime effective from FY 2023-24)

Resident senior citizens (i.e., age 60 years and above) and resident super senior citizens (i.e., age 80 and above) are exempted from tax if their income is up to INR 3,00,000 and INR 5,00,000 respectively.

Surcharge rates are applicable if total income exceeds specified limits:

Health and Education Cess: Health and Education Cess is levied at the rate of 4 percent on the amount of income tax plus surcharge.

Rebate under section 87A of the Income-tax Act: A resident individual (whose net income does not exceed INR 5,00,000) can avail rebate under section 87A. This rebate is deducted from income tax before calculating education cess and is limited to 100 percent of income tax or INR 12,500, whichever is less.

Income tax structure (New tax regime effective from FY 2023-24)

Health and Education Cess: Health and Education Cess is levied at the rate of 4 percent on the amount of income-tax plus surcharge.

Rebate section 87A of the Income-tax Act: A resident individual (whose net income does not exceed INR 7,00,000) can avail rebate under section 87A. This rebate is deducted from income tax before calculating education cess and is limited to 100 percent of income tax or INR 25,000, whichever is less.

Comparison between the most common deductions and exemptions available under the new and the old tax regime

Employer's obligation

As per section 192 of Income-tax Act, the employer is required to deduct TDS on the amount payable at the average rate of income tax. To fulfill this obligation, employers initiate the process by determining the total salary income that will be payable to an employee throughout the financial year. After evaluating the income exemptions, additional income, and eligible tax-saving investments, which an employee provides to their employer for tax deduction purposes, the tax liability of the employee should be calculated based on the applicable tax rates for the given year. Every month, 1/12 of this net tax liability, as computed above, is required to be deducted from the employee's salary.

The employer is also required to deposit the TDS in the Government account within the prescribed time and format as per Section 200 of the Income-tax Act.

Employers need to file quarterly statements of TDS (Form 24Q) with the Income Tax Department. These statements contain details of TDS deductions made from employees' salaries and must be filed on time. Employers are required to verify the Permanent Account Number (PAN) of their employees and ensure its correctness before filing TDS returns.

Every employer is required to furnish a certificate to the employee to the effect that tax has been deducted along with certain other particulars. Salaried employees are entitled to be issued the certificate in Form No.16.

Penalties

Where the employer has failed to deduct tax, they are liable to pay interest. Where the employer has deducted the tax at source but has failed to deposit wholly or partly, they will be treated as assessee in default and liable to pay interest.

Other obligations

Employers also have obligations to deduct and remit contributions towards the following, if applicable to the entity:

• Employee Provident Scheme (EPF): Mandatory for organization employing a minimum of 20 employees, EPF is a retirement benefits scheme managed by EPFO (Employee Provident Fund Organization).
• Labour Welfare Fund (LWF): Governed by state authorities, LWF is a statutory contribution that varies based on wages earned and employee designation. It is not applicable to all categories of employees.
• Employees State Insurance (ESI): It is a social security scheme and health insurance scheme that would protect interest of workers in contingencies such as sickness, maternity, disability, or death due to employment injury resulting in loss of wages or earning capacity. It is managed by the Employee State Insurance Corporation (ESIC). It functions according to the rules and regulations stipulated in the ESI Act, 1948. ESIC is an autonomous body and comes under the central government's Ministry of Labor and Employment.

Also, the employer needs to deduct professional tax from the employee's salary and remit the same to the state government if professional tax is applicable to the entity. Professional tax applies to various professions, trades, and employment and is levied based on the income.