Of late PAN (Permanent Account Number) has gained a lot of significance not only as proof of identification for various purposes but also for keeping a track of financial records including tax liabilities.
Some persons are under the impression that the person whose income is taxable only needs to have a PAN. This is not true. Even if your income is not taxable and so not required to file your income tax return still it is in your interest to have a PAN number to save on the taxes, which are deducted at source as [TDS].
So let us discuss how important is the Permanent Account Number for the rate at which [TDS] will be deducted before any income is credited or paid to you?
The income tax laws require a payer to deduct Income Tax popularly known as TDS before the various amount in the nature of income like rent, interest, commission, salary, contractor charges etc are either credited to your account or paid to you.
There are minimum threshold limits upto which the specified payers are not required to deduct the tax while paying you and there are different rates of taxes prescribed for tax deduction.
Let us first consider the items of incomes which are subject to [TDS] and the rate at which TDS is deducted:.
The bank has to deduct tax at source if the aggregate amount of interest to be credited in your account during a financial year is expected to exceed Rs. 10,000. For interest incomes other than bank interest, the threshold limit for TDS purpose is Rs. 5,000. The payer of interest income is required to deduct 10% tax on the total interest to be credited during the year when the interest amount for the year exceeds the threshold limit above.
The threshold limit for rental payments is Rs. 1.80 lacs. In case the total rent payable to you during the financial year is expected to cross the limit of 1.80 lacs, the payer of the rent has to deduct the tax. The TDS rate is is 2% for machinery, plant or equipment and 10% in case of land, building, furniture and fixtures. This is applicable in case the person paying you rent is engaged in business or profession and his accounts have been audited during the preceding year. From 1st April 2017 even the non business payers of rent will have to deduct tax if the amount of rent exceeds Rs. 50,000/- in a month at 5% of the rent.
If you are rendering any professional or technical services, the person to whom you provide your services will deduct 10% TDS if the total payment by him exceeds Rs. 30,000 in a financial year.
Contracts for carrying out job works:
In case you are engaged in executing any contracts, the TDS rate is 1% of the value of the contract. In case the value of individual contract exceeds Rs. 30,000/- or the aggregate value of the contracts during the year crosses an amount of Rs. 75,000 in a year.
Your employer is required to deduct TDS if the net salary is more than the amount of basic exemption limit after making various deductions like HRA, LTA and interest on home loan for self-occupied property. Deductions for various contribution/investments like PF and NSC etc. are also considered by your employer. However in case the net salary after all these deductions is below the basic exemption limit, no tax is deductible. However if it exceeds the basic exemption limit, the tax is calculated on the salary income for the whole year. The tax is calculated on the average rate of tax applicable on month on month basis. Since there is no rate of tax prescribed for TDS on salary, individual’s salary slab is the basis for this. However you need to provide PAN details to your employer for this purpose.
Duty of the person receiving the income:
If you are entitled to receive any income on which TDS is deductible, you should provide the details of your PAN to the payer of such income. But if you fail to provide the details of your PAN to them they will have to deduct the 20% TDS which is generally higher than the rates of TDS provided under the law. So instead of just 1%, 2%, 5% or 10% the payer of the income will have to deduct tax 20%. This becomes very painful particularly when you are engaged as su contractor and the applicable rate is just 1% or for rental of machinery, equipment etc. where the applicable rate is 2%.
Even in case of salary, even if you do not have taxable salary, the employer is obliged to deduct tax at source @ 20% even though no tax is payable on your salary income. There is no threshold exemption limit prescribed under the income tax laws for the purpose of TDS like in case of other payments like rent, interest, professional income etc. Therefore even in cases where the salary income does not exceed the minimum tax limit, if one goes strictly by the language used by the law, the employer is duty bound to take into consideration the highest rate of 20% for deducting tax from salary even from the first cheque.
This provision has wide ramification as this will cover all those who are employed but do not have Permanent Account Number. This might not have been the intention of the law but this is the consequence of the existing provisions. As a result it will cover lot of employees and employers in the TDS net till suitable amendment in the law is carried out to give effect to the correct intention of the law makers. So what does this mean? You are supposed to deduct [TDS] from the amount which you pay to your maid servant or the driver if he/she does not furnish the PAN to you.
What should you do?
Even if you are studying and are about to join the work force, it is in your interest to obtain a PAN in order to avoid the shock of higher deduction of TDS. Do not try to play smart by furnishing fake PAN to the payer of yours just to avoid higher deduction of income tax because this act may entail a penalty of Rs. 10,000 besides 20% TDS. This is also very important in case you are a retired person and intend to submit form no. 15 G or 15 H for no deduction of tax by the bank, in case you do not mention your PAN on these forms, the bank will deduct 20% tax instead of the rate applicable of 10%.
So do not waste any more time and make an application for Permanent Account Numbers in case you do not have PAN and furnish correct PAN in case you already have one to avoid the shock of higher deduction as the payer is not supposed to communicate to you that he is deducting tax at 20% on the income payable to you.
(The author is a CA, CS and CFP. He can be reached at jainbalwant at gmail.com and @jainbalwant)