What happens to your taxes

Salary is the amount received by an employee from the employer on a monthly basis. The employee and employer sign a contract where the salary is mentioned with other components. A salary is composed of various components which can be monetary or non-monetary in nature.

As per the Income Tax Act 1961, the employer needs to deduct TDS from an employee’s salary and deposit the amount into the government account. There are different tax slabs according to the employee’s salary, which determines their tax liability. However, at times, an employee’s salary may not come through in a timely manner, especially is they work for a start-up or a newly formed business.

So, the burning question is this: what happens to an employee’s tax liability if their salary is delayed?

So, legally, there are two sections - section15 and section 192 under the Income Tax Act, 1961 - that focus on this issue.

Let’s take an example: Let us assume that Neha resigns from her post in December, and her salary for December 2018 & January 2019 is paid in April 2019. Since the payment was made in April, in which year would her salary be eligible to be taxed?

Let’s start with Section 15. According to Section 15 of the Income Tax Act 1961, an individual’s salary should be taxed as soon as it adds, even if it is not paid in that month. So, according to this section, the income tax on Neha’s salary for December 2018 & January 2019 should be calculated as per the tax slab of the year 2018-19 and added to the total salary income of the year 2018-19.

Whereas Section 192 of the Income Tax Act 1961, assigns the duty of TDS at the time of actual payment of salary to the employer. The duty to deduct tax from salaries occurs only at the time of payment. As we see, Section 192 focuses on the timing of tax deduction; the amount of deduction itself should be only as per Section 15.

In our example, tax on a salary of December 2018 and January 2019 should be calculated based on the tax rates in the fiscal year 2018-19, even if the salary is paid in April 2019.

So, it is concluded that in the example we are reviewing, for the salary of December and January, the TDS shall be deducted and remitted to the Income Tax Department immediately. As we see that this is in line with Section 192, and this guarantees compliance with Section 15.