Whether tax payable has been grossed up as per section 393(10) of the Act ! Income Tax Act 2025
Under Section 393(10) of the Income-tax Act, 2025, the concept of “grossing up” applies when a payer and a payee have an agreement where the payer agrees to bear the tax burden on the income being paid to the recipient.
This means the payee is promised a specific “tax-free” net amount, and the payer pays the Tax Deducted at Source (TDS) out of their own pocket rather than deducting it from the payee’s promised amount.
The Rule: If the tax chargeable on the recipient’s income is borne by the payer, the law mandates that for the purpose of deducting tax, the income must be increased (grossed up) to a higher amount. This higher gross amount is calculated so that, once the applicable TDS is deducted from it, the remaining balance exactly equals the net amount agreed to be paid to the recipient. (Note: This rule applies to all such payments except those specifically covered under section 392(2)(a), which generally deals with certain salary/employer provisions. When filing remittance forms like Form 144, the payer must explicitly declare whether the amount was grossed up under this section).
Practical Example of Grossing Up as per section 393(10) of the Income Tax Act 2025
The Scenario: An Indian Company X (Payer) hires a foreign consultant, Mr. Y (Payee), for technical services. They agree on a fee of ₹ 90,000 net. The contract explicitly states that Company X will bear all Indian withholding taxes (TDS) so that Mr. Y receives exactly ₹ 90,000 in his bank account. Let’s assume the applicable TDS rate for this service under the Act is 10%.
The Problem (Without Grossing Up): If Company X simply calculates 10% on the ₹ 90,000 fee, the TDS would be ₹ 9,000. But if they report the income as ₹ 90,000 and pay ₹ 9,000 to the government, it legally implies Mr. Y only earned ₹ 90,000 before taxes, which is factually incorrect because Company X is absorbing his tax cost, which is an additional benefit to Mr. Y.
The Solution (With Grossing Up under Section 393(10)): To find the legally correct “Gross Income,” Company X must use a grossing-up formula:
- Formula: Net Amount / (100% – TDS Rate%)
- Calculation: ₹ 90,000 / (100% – 10%) = ₹ 90,000 / 90% = ₹ 1,00,000
The Outcome:
- Gross Income: The legally recognized income for Mr. Y is now ₹ 1,00,000.
- TDS Calculation: The 10% TDS is calculated on this grossed-up amount (10% of ₹ 1,00,000 = ₹ 10,000).
- Net Payment: When the ₹ 10,000 tax is deducted from the ₹ 1,00,000 gross income, exactly ₹ 90,000 is left, which is the net amount transferred to Mr. Y.
- Company X deposits ₹ 10,000 to the government and marks “Yes” for grossing up under Section 393(10) when filing their forms.
Refer Section 393 Income Tax Act 2025 Tax to be deducted at source.