The start of this new financial year requires additional effort from tax payers, as they need to be vigilant about their tax deduction at source (TDS).
For some years now, there have been efforts made to ensure a particular procedure is followed for TDS and this includes disclosing the permanent account number (PAN).
Starting April 1, the punishment has been changed to a higher tax deduction for those who do not disclose PAN.
Tax at varied rates is deducted for various incomes and then the net payment is made to the beneficiary. The nature of income or earning, the person or entity receiving the income, determine the rate at which the tax is deducted.
For instance, when a bank pays interest in excess of Rs 10,000 to an individual at a single branch, the tax is deducted at source from the interest earned. The individual will take a tax cut at the rate of 10 per cent plus an education cess.
As per the new guidelines applicable from financial year 2011, if a deposit holder does not provide the PAN, there is an obligation on the bank to deduct 20 per cent from the interest he earned, that is, double the rate applicable under normal circumstance.
Here are some cases where the tax burden can suddenly jump higher for an individual. For better, easier understanding, the education cess is not taken into account.
Many times, an individual has the PAN but does not disclose it. Like in case of a professional who has worked for, say, Rs 35,000. This could be a one-off service to a new client and in such a case, the PAN might not have been provided at the time of payment.
In this case, the entity making the payment would ensure that instead of 10 per cent, the tax is deducted at 20 per cent for not getting the person's PAN. As a result, the individual's net pay for his service is reduced to Rs 28,000.
Such a situation is likely with a large one-off transaction or even when the person does not normally come under the taxable limit. But, due to some extra payment, the tax is deducted at a higher rate.
Senior citizens are likely to get trapped in the higher TDS situation because they often have deposits with a bank or have invested in Government of India bonds, where the interest earned is more than Rs 10,000.
Since the elderly have a basic exemption limit of Rs 2.4 lakh, their earnings may not come under the taxable limit. In that case, they can submit Form15H with the bank and avoid the TDS. However, if they fill the form but fail to mention the PAN, then they could be slapped with a tax deducted of 20 per cent instead of zero tax.
Usually, families have some deposits or bonds in the name of some members, even if they are unemployed like housewives. They have some deposits or government bonds in their name. Since, they are not working and do not fall under any tax bracket, they can submit Form 15G to the bank and avoid TDS. But, if they fail to provide the PAN in the form, they will be liable for a 20 per cent tax deduction at source.
There are often procedures adopted for various business dealings. One of it being quoting a PAN.
Often, when the mistake is realised, efforts are made to stop usage of the old number and replacing it with the correct one. In such a situation, could lead to authorities considering there was no PAN provided. Hence, the beneficiary could face a higher tax deduction.
For example, if there is a rent of Rs 20,000 paid per month to an individual, then the TDS on the amount would be 10 per cent. However, due to a wrong PAN disclosure, there could be some delay in conveying the correct number and in the interim, the tax could be deducted at the higher end.
The worst situation is when an individual has provided his PAN to the concerned authorities. But, the there is a mistake committed by the authority. This could lead to either considering the number is misplaced or it is not given. Therefore, the deduction made is at a higher rate.
Example: The rate of tax deduction when a contractor is an individual is one per cent. If the authorities commit mistake with the person's PAN, he will be slapped a higher tax outgo of 20 per cent. The difference will be huge, having a serious impact on the beneficiary.
WHAT TO DO
In sum, actual work begins even before the payment is made, because the PAN has to be conveyed to the payer. One condition in the new guidelines says the PAN has to be quoted in all correspondence, bills and vouchers exchanged between the deductor and the deductee, which will ensure the number is available with the concerned authorities.
Suppose a higher tax is deducted at source. The total tax to be paid would not increase, instead the individual will have to look for adjusting the deducted tax amount. For some people, this will take place only at the time of filing tax return, especially for a salaried people who might not have any additional tax burden to adjust the deducted amount. In such a situation, the tax return will show that a refund is due but this will take place only at the end of the financial year.
There can be quicker action if the individual has to pay some advance tax and this would be the case for professionals, salaried individuals with additional or other income. In this case, the adjustment will come earlier because they will pay the reduced amount of advance tax on the income after adjusting for the higher TDS made and hence need not wait till the year-end.
The writer is a certified financial planner.