As per an article published in March 2011 CA Journal of the Institute, as per Sec.206AA, Tax has to be deducted at source from payment made as salary to employees - EVEN IF HIS SALARY FOR THE YEAR IS BELOW THE EXEMPTION LIMIT.
The logic goes that Sec.206AA reads "Notwithstanding anything contained to the contrary..." & so as per the section, TDS be deducted at higher of the specified rates or @ 20% in case the PAN is not furnished to the payer.
The author of the article, who is also our peer, is of the view that, TDS be deducted on the salary payment even if its below the taxable limit because the rate specified for BELOW TAXABLE INCOME is NIL. And so, the higher rate is 20%.
So my question is - Does Sec.206AA apply to salary payments to employees who do not cross the basic exemption limit of 160000,190000 or 240000 as the case may be? Should TDS be deducted if such employee fails to furnish his PAN to the payer?
3. Section 192 of the Income-tax Act,1961: broad scheme of tax deduction at source from “salaries”.
3.1Method of Tax Calculation - Every person who is responsible for paying any income chargeable under the head “Salaries” shall deduct income-tax on the estimated income of the assessee under the head “Salaries” for the financial year 2010-11. The income-tax is required to be calculated on the basis of the rates given above subject to provisions of section 206AA of the Income-tax Act and shall be deducted at the time of each payment. No tax will, however, be required to be deducted at source in any case unless the estimated salary income including the value of perquisites, for the financial year exceeds Rs. 1,60,000 or Rs. 1,90,000 or Rs. 2,40,000, as the case may be, depending upon the gender and age of the employee. (Some typical examples of computation of tax are given at Annexure-I).
4.8 Section 206AA.
4.8-1 Finance Act (No. 2) 2009, w.e.f. 1-4-2010 has inserted section 206AA in the Income-tax Act which makes furnishing of PAN by the employee compulsory in case of payments liable to TDS. If employee (deductee) fails to furnish his/her PAN to the deductor, the deductor shall make TDS at a higher of the following rates :
(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.
4.8-2 The deductor has to determine the tax amount in all the three conditions and apply the higher rate of TDS. This section applies to any person entitled to receive any sum or income or amount, on which tax is deductible under Chapter XVII-B of Income-tax Act. As Chapter XVII-B covers all payments including salaries, salaries are also covered by section 206AA. In case of salaries there can be following situations :
(a) Where the income of the employee computed for TDS under section 192 is below taxable limit.
(b) Where the income of the employee computed for TDS under section 192 is above taxable limit.
In first situation, as the tax is not liable to be deducted no tax will be deducted. In the second case, if PAN is not furnished by the employee, the deductor will calculate the average rate of income-tax based on rates in force as provided in section 192. If the tax so calculated is below 20 per cent, deduction of tax will be made at the rate of 20 per cent and in case the average rate exceeds 20 per cent, tax is to be deducted at the average rate. Education cess @ 2 per cent and Secondary and Higher Education Cess @ 1 per cent is not to be deducted, in case the TDS is deducted at 20 per cent under section 206AA of the Income-tax Act.
Annexure-I
Example-1
For Assessment Year 2011-12
Calculation of Income-tax in the case of a male employee having gross salary income of:
28 March 2011
see this link for better presentation https://www.caclubindia.com/forum/no-tds-to-be-deducted-u-s-206aa-from-salary-below-limit-137168.asp
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