So, the burning question is this:
What happens to an employee’s tax liability if their salary is delayed?
Legally, there are two Sections – Section 15 and Section 192 under the Income Tax Act, 1961 - that focus on this issue
Both Sections describes as under:-
According to Section 15 of the Income Tax Act, the following income shall be chargeable to income tax under the head “Salaries”—
(a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not;
(b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him;
(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year.
Section 15 states that salary should be taxed whenever it is due or paid, whichever is earlier. For example, let us assume that an organization pays salary to its employees on the first day of each month for the month which ended the previous day. One could then state that the salary for a month falls due on the last day of the month while the date of payment is the first day of the next month. As per Section 15, the salary should be taxed on the basis of the tax rates prevailing on the last day of the month, which is the date of salary accrual.
Now let us take a look at Section 192 which states the rules for tax deducted at source (TDS).
According to section 192 (1) Any person responsible for paying any income chargeable under the head “Salaries” shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year.
Section 192 states that TDS on salary shall be deductible at the time of salary payment and the TDS amount shall be “computed on the basis of the rates in force for the financial year in which the payment is made.”
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, the point of taxation in case of an individual’s salary should be due or receipt whichever is earlier. So, according to this section, the income tax on Neha’s salary for December 2018 and 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, as per Section 15 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.However, as per Section 192 of the Income Tax Act, 1961 TDS on salary pertaining to the month of December 2018 and January 2019 which is paid in April 2019, should be deducted on payment basis in April 2019.
There a clear cut conflict between Section 192 and Section 15 regarding point of tax deduction. However as a general practice, generally taxation on salary arises on due or receipt whichever is earlier basis.
Is one required to pay advance tax if their salary is overdue yet unpaid?
As a general practice salary is subject to taxes in the hands of the individual on a due or receipt basis, depending on which occurs first. However, the employer is responsible for withholding tax from salaries at the time of payment. Therefore, in a literal sense, even if a salary is not paid, it is still subject to taxation on the part of the employee because the employer has not deducted taxes from it; therefore, it is the employees' obligation to pay advance tax on any unpaid salaries. In the event that the employer chooses to pay later in the fiscal year and deduct taxes, a refund may be available. By estimating the TDS, it is wise to postpone the advance tax until the end of the year in this situation. In the event that no TDS is ultimately deducted, interest will be due.
Does the Income Tax Act provide any relief for people who have lost their jobs?
There is no particular section that permits a tax deduction just due to job loss. However, subject to the restrictions and conditions outlined in the Act, the employee may be able to claim certain exemptions in relation to sums that he received at the time of full and final settlement, such as:
- Leave encashment under Section 10(10AA)
- Gratuity under Section 10(10)
- Retrenchment compensation under Section 10(10B)
- Provident fund withdrawals under Section 10(12), and
- Payments received under a VRS scheme under Section 10(10C).