TDS Recovery of Employees who do not have PAN Numbers

An expert opinion by Dr. Vinod K. Singhania

Some of our employees may not have PANs, Under section 206AA. Tax is deductible at a minimum rate of 20 per cent as per their slabs. Know the quantum of TDS under section 192 in the following cases
1. In some cases, salary income is just Rs. 10,000 per month (Rs. 1,20,000 per annum). It is less than Rs. 1,60,000. Should we deduct tax at the rate of 20 per cent?
2. In some cases, salary is more than Rs. 1,60,000 but after deductions under Chapter VI-A, the resulting income is below Rs. 1,60,000. Is it necessary to deduct tax under section 206AA in such cases? In such cases, tax is deductible at the rate of 20 per cent or 20.6 per cent of the total payment or of taxable salary exceeding Rs. 1,60,000.
3. In the case of some foreign nationals working for our company (but not having PAN), salary income is more than Rs. 25,00,000 per annum. The normal tax rate is more than 20 per cent. Is it possible to deduct tax at the rate of 20 per cent or 20.6 per cent by applying the provisions of section 206AA.

Tax is deductible under section 192 as follows –
1.Find out estimated taxable salary.
2.Include other incomes disclosed by income. Losses cannot be disclosed except loss from house property.
3.Give deductions under Chapter VI-A.
4.Find out taxable income.
5.Find out normal tax (by applying slab rate of 0% up to Rs. 1,60,000, 10% between Rs. 1,60,000 and Rs. 5,00,000, 20% between Rs. 5,00,000 to Rs. 8,00,000 and 30% above Rs. 8,00,000). Add education cess at the rate of 3%.
6.Find out tax for the purpose of section 206AA at the rate of 20% of taxable salary (i.e., estimated taxable salary after deducting house property loss and
deductions under Chapter VI-A). There is no provision to add education cess in the ca
se of section 206AA.

If the employee has not intimated his PAN, tax deductible under section 192 will be either the amount computed under Step 5 or Step 6, whichever is more. This rule is applicable in all cases narrated by you in your query.

Specific questions raised in the query –

1.Even if, taxable salary income (i.e., after allowing deductions under Chapter VI-A) is lower than exemption limit, tax will be deductible at the rate of 20%, if the employee does not intimate his PAN. If an employee (not intimating PAN) gets Rs. 10,000 per month (suppose there is no deduction), his taxable salary income is Rs. 1,20,000 and tax deductible will be Rs. 24,000. It is incorrect to state that in such case taxable income is zero (as it is below the exemption limit) and tax should not be deducted under section 206AA.

2.As stated earlier, taxable income would be calculated after allowing deductions under Chapter VI-A. Even if such income is below Rs. 1,60,000, tax will be deducted at the rate of 20% under section 206AA if PAN is not intimated by the employee.

3.If normal rate is higher than 20%, tax will be deducted at the normal rate. For instance, if taxable salary income is Rs. 25,00,000, normal tax will be Rs. 6,22,120. Normal tax rate will be 24.88% (i.e., Rs. 6,22,120 ÷ Rs. 25,00,000). Tax will be deducted at the normal rate. In such a case, section 206AA will not have any role to play, even if recipient has not intimated his PAN to the payer.

Dr.Vinod.K.Singhania