Why does your salary have so many deductions?
Every salaried employee waits for that day of the month when the salary gets credited to his account and is furious every time at the employer for deducting amounts in the name of taxes. It is easy to blame the employer but if you look closer the employer is not at fault and is himself under the knife if the deductions are not paid to the government in time. Getting furious won’t solve the problem but knowing more will definitely make you aware of your situation and communicate the employer if you can reduce these deductions. Let’s discuss more about these deductions and how you can reduce them:
TDS eats up a major chunk of the salary if your basic salary crosses the taxable limit for that particular financial year. TDS on salaries was introduced to make sure salaried personnel also pay their tax on time and as the income is mostly fixed the income tax is also fixed as long as there are no other sources of income such as rent etc. where you will have to pay more tax while filing the ITR. This provision makes it a compulsion for the employer to deduct the tax while making the payment itself and deposit it with the central government reducing any chances of the employees default on the payment of tax. TDS also makes it a requirement for individuals to file the income tax returns and claim for refunds based on the exemptions allowable under the Income Tax act thus regularising the organized employment sector.
The TDS tax rate is generally 10% on the basic salary after deductions allowable under the income tax act. In order to make sure you are charges the least TDS it is necessary to disclose the following information with the employer so that they deduct the same from the basic salary and reduce the TDS deducted.
Information to disclose to the employer:
- Investments under 80C, 80D, 80U, etc. and all other applicable sections in order to obtain deductions
Information to check if the employer is deducting from basic salary before TDS:
- House Rent Allowance
- Conveyance or Transport allowance
- Medical allowance
- Uniform allowance
- Deduction under section 24(a) for self-occupied House Property
Always remember to collect the Form-16 as a proof of TDS deposited against your PAN. If the employer.
If the employer does not deduct the TDS and deposit the same with the income tax department he faces heavy fines and penalties elaborated as follows:
- Not allowed to consider expense deductible under TDS as expenditure under the Income Tax Act while filing the Income Tax Returns
- Payable of Interest at rate of 1% for TDS not deducted and 1 ½ % for TDS deducted but not paid
- Penalty equal to the amount of Tax for no deduction and non-payment of TDS
- Prosecution and punishment from 3 months to 7 years rigorous imprisonment with fine
Profession tax is charged by the state governments and the rate or amount of profession tax differs from state to state. The maximum amount charged in any state for a financial year is Rs. 2500/-. Currently only 8 states in India charge professional tax and those states are: Maharashtra, New Delhi, Karnataka, West Bengal, Madhya Pradesh, Tamil Nadu, Andhra Pradesh and Gujarat. So if you are working for any company having their registered address not in any of the states above you shall not be charged professional tax.
Upon non deduction of professional tax and non-payment of the same to the state governments the employer faces heavy fines and penalties depending upon the amount of default and the state.
Employee Provident Fund (EPF)
Employee Provident Fund is a savings scheme introduced by the central government in which a certain share is deducted from the employee’s salary, a share is added from the employer and is then deposited into the employees provident fund account which he can withdraw at maturity or upon certain circumstances laid down by the provident fund act. This act was introduced to ensure savings by all the sections of the society specially addressing the needs of salaried people who contribute to the maximum of the population. The rate of EPF to be deducted by the employer from the employee’s salary is 12% of the basic salary and 10% where the number of total employees is less than 20. The employer share is usually fixed at 8.33% along with EDLI contribution and administrative charges.
If the employer does not deduct EPF and deposit the same with the EPFO then there is additional interest charged along with the due amount. These interest rates vary from 5% p.a. for less than 2 months, to 25% p.a. for more than 6 months.
ESIC is applicable for all employees upto Rs. 15,000/- of monthly basic salary and is governed by state governments. It is applicable under all states and is like a social security scheme in order for mishaps faced by the employees. The rate of ESIC rate is 1.75% of employee’s contribution and 4.75% paid by the employers calculated on the basic salary of the employee. If an employee is drawing less then Rs. 100/day as a wage then he is exempt from being deducted his share but the employer has to contribute his share nevertheless. Every employee should cross check the salary sheet for making sure the right deductions are made to the salary slip.
Under the ESIC act it is mandatory for an employer to register under the ESIC scheme within 15 days of applicability. Non deduction and payment of ESIC is punishable offence under section IPC 406 and hence the employer has to do the same.
It is always advisable to know the right deductions are made if not avoid them. The employer cannot be stopped from making these deductions but with right awareness it can be checked if the correct amount is being deducted or not.