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Employers to deduct 20% salary if employees do not furnish PAN & Aadhar

January 25: The Central Board of Direct Taxes (CBDT) has announced that, if a person has not submitted his or her PAN and Aadhaar details then the employer can deduct 20% of the employee’s salary as a part of Tax Deducted at Source (TDS). In its 86-page page circular, it reads “Section 206 AA in the Act makes furnishing of PAN or Aadhaar number, as the case may be, by the employee compulsory in case of receipt of any sum or income of amount, on which tax is deductible.”

This new norm, which came into effect on January 16, will be applicable on those earning Rs 2.5 lakh per annum. With this rule, the CBDT aims to keep a close eye on TDS (Tax Deducted at Source) payments and revenue earned via this segment, which amounted to around 37 per cent of the total direct tax collection in FY19. The idea behind brining in this rule is to closely monitor the TDS payments and revenue that is earned by this segment.

In case an employee fails to furnish his/her Aadhaar/PAN details, the employer, as per the circular, can collect TDS as per the highest among the following rates:

• the rate specified in the relevant provision of the Income Tax Act
• rate or rates in force
• at a rate of 20%

However, employees will be exempted from paying health and education cess at 4% in case the deduction is made at a higher rate. In case, income is less than Rs 2.5 lakh per year, no tax will be deducted.

After several deductions, if your salary attracts around 20 percent tax, then the TDS rate of 20 percent will apply. If your salary attracts a 30 percent tax rate, then your employer will divide the average tax rate, that is, the total tax liability of the employee by the total annual income. If the average tax rate becomes 20 percent, then TDS will be 20 percent.