Employees might soon get 20 per cent less salary if they fail to provide Permanent Account Number (PAN) or Aadhaar number to their respective employers. The new rule of the Central Board of Direct Taxes (CBDT) — the apex direct tax
policy-making body — will apply to all employees whose salary is above the threshold of Rs 2.5 lakh a year.

The latest guidelines kicked in from January 16, aim to monitor the tax deducted at source (TDS) payments and revenue earned from this category, which accounts for 37 per cent of the total direct tax collection during financial year 2018-19, according to a report in the Business Standard newspaper.

The CBDT, in an 86-page latest circular, has made it mandatory for employees to provide PAN or 12-digit Aadhaar number under Section 206AA of the Income Tax Act.

“Section 206AA 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 or amount, on which tax is deductible,” mentioned the circular.

It further added that if an employee fails to give her PAN or Aadhaar number, the employer has been responsible to cut TDS at the rate attracted by the employee's salary or 20 per cent or more. However, it also stated that in case if the salary is below the taxable limit, no tax will be deducted.

The employer has to deduct TSD at the rate of 20 per cent if an employee’s salary attracts up to 20 per cent tax after various tax deductions. If it attracts 30 per cent tax rate, the employer will calculate the average tax based on the employee’s total tax liability divided by total income. If the average tax rate comes up to 20 per cent, the TDS will be 20 per cent. Otherwise, higher TDS at the average rate will apply.

If tax is deducted at a higher rate, the employee will not have to pay health and education cess at the rate of 4 per cent. The CBDT states that since the requirement of giving TDS certificate has been removed, it is difficult to give credit on tax deduction in the absence of PAN or Aadhaar. Therefore, employers have been asked to give all employees’ correct PAN or Aadhaar in Form 24Q (for tax deducted from salaries).

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