Salary due is taxable for employee even if not paid: Aarti Raote, Deloitte India

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Published: May 19, 2020 2:21:43 PM

FE Online caught up with Aarti Raote, Partner, Deloitte India, for her views on how the Covid-19 crisis will impact the affected employees' tax outgo and how should they deal with the current situation.

Covid-19, corona virus crisis, impact of covid-19 crisis on pay cuts, job losses, salary delays, reimbursements, income tax, tax outgo There is no specific provision that allows any tax deduction purely because one has lost one’s job.

Salary cuts and layoffs usually become a norm in times of any financial or economic meltdown. And the same thing is being witnessed amid the Coronavirus crisis as that has created an atmosphere of disruption and uncertainty for businesses. As this pandemic has raised the spectre of job losses, salary cuts and salary delays even during its initial days, that has left almost everyone worried, particularly those working in the private sector, and many employees are finding it difficult to understand how will they get impacted by this crisis going ahead and how to minimise its impact on their take-home pay. Sanjeev Sinha caught up with Aarti Raote, Partner, Deloitte India, for her views on how the current crisis will impact the affected employees’ tax outgo and how should they deal with the current situation. Excerpts:

Hit hard by the Covid-19 pandemic and nationwide lockdown, employees in a host of organisations today are facing salary cuts, salary delays and leave without pay, apart from layoffs on a large scale. How do you see this? How will this trend impact employees and what can or should they do to minimise its impact?

COVID-19 has been declared a pandemic by the World Health Organization and the situation has created an atmosphere of disruption and uncertainty for businesses. The losses to industries such as airlines, retail, travel and hotel are visible, but there are others who are bearing an indirect impact also. As such one of the key priorities for all companies is to conserve cash and ensure continuity. This has led employers to implement pay cuts and salary deferrals for employees. Many employers are exploring issuance of non-cash compensation like ESOPs and Long Term incentive plans to tide over the immediate cash crunch, but at the same time be fair to employees who will benefit in the future with gains when business bounces back.

Lots of employees also get reimbursements as part of their salary. However, since they are not going out, dining or doing other things, they can’t claim, say, entertainment or transport allowances. Or even if these allowances are given, then they may have to pay tax on them. So, will one’s tax liability go up due to no claim on reimbursements? How will this be treated for tax purposes and what can employees do to minimize the tax outgo?

Allowances are taxable unless specifically exempted. Certain allowances such as conveyance allowance and per diems are exempt from tax to the extent spent by the employee. If the allowances are not spent, they are taxable. The current situation is an unprecedented one where employees are forced to work from home and it is not possible for them to spend these allowances for the designated purpose. Given this situation, the allowances will attract tax.

If salary is due but not paid, then is one required to pay advance tax?

Salary is taxable in the hands of the employee on due or receipt basis, whichever is earlier, whereas, the employer is liable to deduct tax on salary at the time of payment. Hence, strictly speaking, salary that is due is taxable for the employee even if it is not paid, and since the employer has not paid the TDS thereon and technically it is the employees’ responsibility to pay advance tax on that. There may be a possibility that the employer may pay later during the financial year and deduct taxes, in which case there would be a refund possibility. In such case, it is advisable to defer the advance tax till end of the year by forecasting the TDS. If no TDS is deducted ultimately, then interest will be payable.

In case of leave without pay, how will employees be affected?

Leave without pay means employees book leave and no salary is accrued / due on these leave days. In a normal scenario this happens when the employee has exhausted his leave balance for the year. In the context of the lockdown, if an employer requires its employees book leave without pay, it means that the employee neither works not will he be paid any salary for those days.

Many employees are also losing job. Can those, who have lost their job, claim relief under some section of the Income Tax Act?

There is no specific provision that allows any tax deduction purely because one has lost one’s job. However, the employee can claim certain exemptions in respect of amounts received by him at the time of full and final settlement, such as leave encashment (section 10(10AA)), gratuity (section 10(10)), retrenchment compensation (Section 10(10B)), provident fund withdrawals (section 10(12)) and payments received under a VRS scheme (Section 10(10C)), subject to limits and conditions specified in the Act.

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