Unpaid withholding tax on salary: What Every Employee Must Know

What are the rules regarding the deduction and deposit of the withholding tax on salary (TDS) for employers?

It is a mandatory requirement under the Income-tax act’1961 (“act”/"Indian domestic tax law") to deduct TDS on the salary income by the employer as per section 192 of the act. The deduction is based on the estimated income of the employee for the year. Further, the employer is also responsible for deducting and depositing TDS as per section 200 of the act. The employer has to deposit the TDS deducted by the 7th of the next month following the month in TDS is deducted. Also, the employer is required to file a TDS return quarterly.

What are the legal repercussions for the employer who fails to deposit TDS on time?

The employer is liable to pay interest on the delayed TDS amount under section 201 for the period of delay. The Income-tax Officer has the power to impose a penalty on the employer under Section 271C of the act as for failure to deduct or deposit TDS. Whereas, In cases of willful failure to deposit TDS, another section 276B also provides for prosecution, which may result in imprisonment and a fine. However, with the changes announced in the Union Budget 2024, There is an amendment in section 276B to exempt an employer from prosecution if the TDS payment for a quarter is made on or before the due date for filing the TDS return for that quarter. This aims to provide relief to employers who may face genuine delays in depositing TDS but ensure timely compliance with filing requirements.

How can an employee verify if their TDS has been deposited by their employer? What steps should an employee take if they discover that their TDS has not been deposited?

It is advisable to look at the payslips carefully especially the TDS deducted amount so that at the end of the year, the employee can check form 26AS which is a consolidated tax statement that shows all TDS deducted against the employee's PAN. An employee can view it online through the income tax e-filing portal after logging in. Besides, an employee should receive Form 16 from the employer and cross-check the TDS shown there with the TDS deductions shown in payslips and Form 26AS.

An employee should immediately reach out to the employer for clarification and request the deposit of differential TDS in case of any discrepancy. He should keep payslips, form 26AS, and form 16 with him for defending his TDS credits admissibility at the time of filing his tax return.

Can an employee be held liable for the unpaid TDS amount? What are the immediate implications for an employee if their employer fails to deposit the TDS deducted from their salary?

Section 205 of the act, states that the employee should not be held responsible for the deposit of TDS by the employer. As per the Delhi High Court Judgment in the case of Sanjay Sudan, the court ruled in favor of an employee who had tax deducted from their salary by Kingfisher Airlines, their employer. The airline failed to deposit this deducted tax with the government.

The court stated that it's not the employee's responsibility to pay taxes that have already been deducted from their income, even if the employer didn't deposit it. Also, CBDT Instructions dated Jun?1, 2015, are worthy of note that since the Act places a bar on direct demand against the employee, the same cannot be enforced coercively.

How does the non-deposit of TDS affect an employee's income tax return filing?

?The non-deposit of TDS by the employer can significantly impact an employee's income tax return filing in the following ways:

1. Form 26AS is a consolidated annual tax statement that reflects the taxes deducted on the employee’s behalf. If the employer has not deposited the TDS, it won't reflect in Form 26AS. This creates a mismatch between the TDS claimed in the employee’s return and the actual tax deposited with the government by the employer.
2. This mismatch can trigger a notice from the income tax department, questioning the discrepancy and potentially leading to additional scrutiny.
3. Claiming the credit for the TDS that was deducted but not deposited becomes difficult. This could result in a higher tax liability.
4. Tax refunds might get delayed or denied due to the mismatch.

What is the process for rectifying the TDS discrepancy in an employee's Form 26AS?

One should carefully review his Form 26AS and cross-check the TDS details (amount, employer’s PAN, etc.) with the information mentioned in Form 16 received from the employer. In case of any mismatches or inconsistencies in the TDS amounts or other details, he should inform the employer. Common discrepancies include incorrect TDS amounts, missing TDS entries, duplicate entries, or errors in PAN/TAN details.

The employer is responsible for correcting the TDS return by filing a correction statement or a revised TDS return with the Income Tax Department. They need to rectify the error by either correcting the incorrect information, adding missing TDS details, or deleting duplicate entries.

After your employer has filed the corrected return, allow some time (usually a few weeks) for the changes to reflect in Form 26AS. Check Form 26AS again to verify if the discrepancy has been resolved and if the correct TDS details are now displayed.

Can an employee claim a refund or compensation for any penalties or interest incurred due to non-deposit of TDS by the employer?

The Indian Income-tax law does not explicitly provide for employee compensation in such cases where TDS is not deposited by the employer. The employee may seek legal recourse to explore options for recovering losses due to the employer's negligence. This could involve filing a civil suit against the employer. The employee could also try to negotiate with the employer for compensation for any financial losses incurred due to the non-deposit of TDS.

Are there any specific sections of the Income Tax Act that employees should be aware of in cases where TDS is not deposited?

An employee should be aware of the following sections under the Income-tax act’1961 (“act”) in cases where TDS is not deposited by the employer

1. Section 205: This section clarifies that even if the employer fails to deposit the TDS, the employee is not held liable for the tax amount.

2. Section 191: This section outlines who is responsible for deducting TDS (the employer) and under what circumstances TDS should be deducted.

3. Section 271C: This section stipulates the penalty that can be levied on the employer for not depositing TDS on time. The penalty can be equal to the amount of TDS not deposited.

4. Section 276B: This section defines the punishment for the offense of non-payment of TDS. The employer can be imprisoned for a term of three months to seven years, along with a fine. However, with the changes announced in the Union Budget 2024, There is an amendment in section 276B to exempt an employer from prosecution if the TDS payment for a quarter is made on or before the due date for filing the TDS return for that quarter.

5. Section 200: This section mandates that any person responsible for deducting tax at source (TDS) must pay that amount to the credit of the Central Government within the prescribed time limit. Non-compliance with this provision makes the deductor liable for penalties.

6. Section 201: This section reinforces the liability of the deductor. If TDS is not paid to the government, the deductor is deemed to be an assessee in default in respect of the TDS amount.

7. Section 201(1A): If the deductor fails to deposit TDS on time, they become liable to pay interest on the amount due. The interest rate is 1.5% per month or part of the month, calculated from the date on which the tax was deducted to the date on tax is actually paid.

The author was also quoted in money control on the same issue - ITR Filling 2024: What you need to do when your employer does not deposit TDS with I-T Dept (https://www.moneycontrol.com/news/business/personal-finance/what-you-need-to-do-when-your-employer-does-not-deposit-tds-with-i-t-dept-12782671.html)

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