Individual Income Tax in India
Businesses in India are required to withhold Individual Income Tax (IIT) from an employee’s salary on a monthly basis. During the first seven days of each month, employers must deposit the deducted tax from the previous month with the central government. The only exception to this rule involves the month of March, during which tax deducted may be deposited on or before April 30th.
Employers are required to withhold tax on various payments including rent, interest, dividend, royalty, and service income. In this sense, the compliance requirements for employers are more complex in India than in any of the other countries explored. Businesses should actively coordinate with employees to understand the details of supplementary income they are receiving and make the relevant calculations and submission of tax before deducting them from the salary.
Quarterly withholding tax return statements must also be submitted by the 15th of the month following the end of a quarter to the central government reporting the tax deducted at source during the quarter. Failure to meet either this deadline or the monthly IIT deposit deadline can result in both interest and penalties being imposed on a company.
Annual Declaration of Employee Income
In addition to withholding IIT monthly, businesses must issue an annual certificate within two months from the end of the tax year to employees regarding the amount of tax deducted at the source of income. All employees must be registered with tax authorities via a Permanent Account Number (PAN), which must be quoted on all relevant correspondence with tax authorities.
As explained above, an employee should declare income from other sources to their employer in order to facilitate the calculation of tax deduction at source (TDS). An employer can consider income declared by an employee only if the TDS calculated on salary plus other income declared is more than the TDS on salary only.
This article is an excerpt from the January and February 2014 issue of Asia Briefing Magazine, titled “Payroll Processing Across Asia.” In this issue of Asia Briefing Magazine, we provide a country-by-country introduction to how payroll and social insurance systems work in China, Hong Kong, Vietnam, India and Singapore. We also compare three distinct models companies use to manage their payroll across various countries with external vendors, and explain the differences among three main models: country-by-country, managed, and integrated models while highlighting some benefits and drawbacks of each.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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