Get Ready To Face Higher Tax On Salary If PAN Or Aadhaar Is Not Submitted To Employer

Employees who fail to furnish their Permanent Account Number ( PAN ) or Aadhaar number to their employers may face a 20% reduction in salary , as per the recent directive from the Central Board of Direct Taxes (CBDT), the principal authority for direct tax policies. This rule applies to employees earning above Rs 2.5 lakh annually.

The guidelines that kicked in from January' 24 , 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

Outlined in an 86-page circular, the CBDT mandates employees to provide either PAN or the 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.

The CBDT has clarified that if an employee fails to provide their PAN or Aadhaar number, the employer is obliged to deduct Tax Deducted at Source (TDS) at a rate corresponding to the employee's salary or at 20% or higher. However, if the salary falls below the taxable threshold, no tax deduction will be made.

When an employee's salary attracts up to a 20% tax rate after various deductions, the employer must deduct TDS at a 20% rate. If the salary attracts a 30% tax rate, the employer must calculate the average tax based on the employee's total tax liability divided by total income. If the average tax rate is 20%, TDS will be deducted at that rate. Otherwise, a higher TDS rate based on the average will apply.

In cases where tax is deducted at a higher rate, the employee will be exempt from paying the 4% health and education cess. Since the requirement for a TDS certificate has been eliminated, the CBDT notes difficulty in providing tax deduction credit in the absence of PAN or Aadhaar. Hence, employers are instructed to ensure accurate PAN or Aadhaar details for all employees in Form 24Q (for tax deducted from salaries).