Home > Income Tax, Payroll, Statutory Compliance > Section 206AA: Calculation of TDS on salary

Section 206AA: Calculation of TDS on salary

In the previous post, we talked about Section 206AA and its applicability to TDS on salary. Let us examine how to calculate TDS on salary as per this section.

According to Section 206AA, if a deductee (employee) does not furnish a valid Permanent Account Number to the deductor (employer) then:

tax shall be deducted at the higher of the following rates, namely:—

(i)  at the rate specified in the relevant provision of this Act; or

(ii)  at the rate or rates in force; or

(iii)  at the rate of twenty per cent.

Calculation of TDS on non-salary payments as per Section 206AA is quite straightforward; if the prevailing TDS rate is less than 20% then deduct TDS at 20% else deduct TDS at the prevailing rate.

With regard to TDS on salary, there is more than one way of calculating TDS on account of Section 206AA. This is because TDS on salary is calculated not at a flat rate but on the basis of a combination of tax rates in different income slabs. The question is what slab rate should 20% be compared with. Unfortunately, the Income Tax Department has not specified the method of TDS deduction under Section 206AA. It would be useful if the Income Tax department provides supporting text and numerical examples every time a notification, which has an impact on tax calculation, is issued.

Here is a method, which according to us, goes well with the letter and spirit of Section 206AA.

1. Determine the amount of taxable income after all exemptions and deductions for the year.

2. Apply tax rates as per the following income slabs and calculate the annual tax.

Annual taxable salary (Rs.) Rate (%)
Up to 160,000 (Male employee) 0
Up to 190,000 (Female employee) 0
1,60,001 – 5,00,000 20
5,00,001 – 8,00,000 20
8,00,001 upwards 30

You may have noticed that we have replaced 10% with 20% for the Rs. 1,60,001 – Rs. 5,00,000 income slab in the above table.

By applying the above rates, we can ensure that the TDS on salary is calculated at 20% or higher–as mandated by Section 206AA.

3. Calculate the monthly tax amount and deduct the same from the employee’s pay.

Example: A male employee without a valid PAN has a taxable income of Rs. 190,000 after all exemptions and deductions.

Total annual TDS on account of Section 206AA: Rs. 6,000 (i.e. Rs. 30,000 x 20%).

In this case the employee is in the 10% slab. Please disregard the 10% rate and apply tax at 20%. Use the resulting annual tax amount to determine the monthly tax to be deducted.

Presentation of the TDS amount in Form 16

Please note that Section 206AA pertains only to TDS to be deducted and not the actual tax liability of an employee. The Form 16 issued to employees should present both the actual tax liability (calculated by applying the tax rates as per income slabs) of the employees and the (higher) TDS amount deducted on account of applying the 20% rate.

If the employee in the example (stated above) does not furnish PAN till the end of the year, his Form 16 shall present a tax refund as follows.

1. Total taxable income: Rs. 190,000

2. Total tax for the year: Rs. 3,000

3. TDS deducted: Rs. 6,000

4. Refund: Rs. 3,000

What if an employee has income from previous employment and other income?

Income from previous employment and other income should be considered for calculation of taxable income. However, the rate of 20%, if applicable, should be used for the sake of TDS calculation.

What if an employee submits a valid PAN in the middle of the year?

Whenever an employee submits a valid PAN, stop applying Section 206AA for calculating TDS on salary for the employee.

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  1. Parthasarathy
    June 17, 2010 at 6:50 pm

    I agree with the above presentation. But it looks like an assessee can get away without applying for PAN simply by paying a higher tax initally and getting a refund later. This may be a small cost to pay for some.

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