The ongoing coronavirus crisis has led many companies to cut salaries of staff due to lack of income. In cases where employers have enforced pay cuts, taxes paid by these employees should reduce in accordance with the salary they receive. However, in some instances employees could end up paying taxes on their original cost to company (CTC) agreed earlier.
As per income tax laws, an individual is liable to pay income tax on the salary amount due as per CTC, irrespective of the fact that the salary is received or not.
“If the salary
Failing this will mean that taxes will be payable as per CTC.
“Taxes on salary very much depend on how the pay cut is administered and the documentation around it,” explains Aarti Raote, Partner, Deloitte India.
It is necessary to distinguish between salary reduction and deferment.
“Deferred salary though not received, becomes due to the employee in the current financial year and hence it is taxable at the hands of the employee. Reduced salary, on the other hand, is neither due nor payable to the employee and hence, would not be taxable at the hands of employee,” explains Naveen Wadhwa of Taxmann.
So, if somebody has faced a pay cut, the tax liability should be based on the net amount received by the employee.
Amit Maheshwari, Tax Partner, AKM Global, a consulting firm, suggests that employees should ensure their reduced salary is concretely evidenced through a revision in the appointment letter and pay slip.
Moreover, in some cases employers can change the terms of employment and implement pay cuts.
“Such reduced salary will not be taxable in the hands of employees because the employee will have no right to demand such reduced salary," opines Gopal Bohra, Partner, NA Shah Associates.
First Published: IST