TDS on Salary for FY 2024-25 AY 2025-26 CBDT Circular No 3/2025 Dated 20.02.2025
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Key Points
- Circular No. 03-2025 provides guidelines for income-tax deduction from salaries for the financial year 2024-25 under Section 192 of the Income-tax Act, 1961.
- It includes updates like new tax slabs, increased leave encashment exemption to ₹25 lakh, and special provisions for the Agniveer Corpus Fund
- Contributions to the Agniveer Corpus Fund by both employees and the Central Government are fully tax-deductible.
Overview
Circular No. 03-2025, issued by the Income Tax Department of India, is a detailed guide for employers on how to deduct tax at source (TDS) from employees’ salaries during the financial year 2024-25 (April 1, 2024, to March 31, 2025). This circular incorporates recent amendments from the Finance (No.2) Act, 2024, Finance (No.1) Act, 2024, and Finance Act, 2023, ensuring compliance with the latest tax laws.
Key Updates
- Tax Slabs and Rebates: Under the new tax regime, income up to ₹3,00,000 is tax-free, with rates increasing up to 30% for income above ₹15,00,000. A rebate under Section 87A makes income up to ₹7 lakh tax-free for eligible individuals.
- Leave Encashment: The exemption limit for leave encashment at retirement for non-government employees has increased to ₹25 lakh, providing significant relief.
- Agniveer Corpus Fund: Contributions to this fund by Agniveers and the Central Government are fully tax-deductible, a new provision supporting the Agnipath Scheme.
This circular is crucial for employers to ensure correct TDS deductions and for employees to understand their tax liabilities.
Comprehensive Analysis of Circular No. 03-2025: Income-Tax Deduction from Salaries for FY 2024-25
Circular No. 03-2025, dated February 20, 2025, and issued by the Central Board of Direct Taxes (CBDT) under the Income Tax Department of India, provides comprehensive guidelines for tax deduction at source (TDS) on salaries under Section 192 of the Income-tax Act, 1961, for the financial year 2024-25 (corresponding to the assessment year 2025-26). This circular is pivotal for employers and employees alike, incorporating recent legislative amendments and offering clarity on tax compliance. The following analysis details the process, findings, and implications based on available data and online resources, including X posts and official website references.
Background and Context
Detailed Content of Circular No. 03-2025
The summary of the following key components, organized into sections for clarity:
1. Scope and Applicability
- The circular provides guidelines for TDS on salaries under Section 192 for FY 2024-25, incorporating amendments from the Finance (No.2) Act, 2024, Finance (No.1) Act, 2024, and Finance Act, 2023. This ensures alignment with recent legislative changes affecting salary taxation.
2. Key Amendments and Updates
The circular addresses several updates, detailed as follows:
A. Salary and Perquisites
- Definition of Salary (Section 17(1)): Expanded to include the Central Government’s contribution to the Agniveer Corpus Fund under the Agnipath Scheme, a notable inclusion for defense personnel.
- Definition of Perquisites (Section 17(2)): Now includes rent-free and concessionary accommodation provided by employers, broadening the taxable perquisite scope.
B. Surcharge Rates (Old Tax Regime)
The surcharge rates under the old tax regime, applicable for higher income brackets, are as follows:
Income Range | Surcharge Rate |
|---|---|
Exceeding ₹50 lakh up to ₹1 crore | 10% |
Exceeding ₹1 crore up to ₹2 crore | 15% |
Exceeding ₹2 crore up to ₹5 crore (excluding dividends & certain capital gains) | 25% |
Exceeding ₹5 crore (excluding dividends & certain capital gains) | 37% |
Exceeding ₹2 crore, including dividends & certain capital gains | 15% |
These rates ensure progressive taxation for high-income earners under the old regime.
C. New Tax Regime (Section 115BAC)
The new tax regime, now the default for individuals, HUF, AOP, BOI, or Artificial Juridical Persons as per the Finance Act 2024, features the following slabs:
Income Range | Tax Rate |
|---|---|
Up to ₹3,00,000 | 0% |
₹3,00,001 – ₹7,00,000 | 5% |
₹7,00,001 – ₹10,00,000 | 10% |
₹10,00,001 – ₹12,00,000 | 15% |
₹12,00,001 – ₹15,00,000 | 20% |
Above ₹15,00,000 | 30% |
- A rebate under Section 87A is available for taxable income up to ₹7 lakh, making the tax liability zero for eligible individuals.
- Deductions are limited, with exceptions for employer contributions to the National Pension System (NPS) under Section 80CCD(2) and contributions to the Agniveer Corpus Fund under Section 80CCH.
D. Tax Deduction Rules (Section 192)
- Employees can declare additional income or losses, such as house property loss, to their employer for TDS computation, allowing for a more accurate tax deduction.
- Employers must consider TDS deducted or collected under other provisions before computing TDS on salaries, ensuring comprehensive tax compliance.
E. Forms and Compliance Updates
- Form 16 and Form 24Q: Updated to replace “Education Cess” with “Health & Education Cess” for clarity.
- A new column has been added for tax deducted or collected under other sections, enhancing reporting accuracy.
F. Valuation of Perquisites (Accommodation)
The valuation of accommodation perquisites is detailed as follows:
Accommodation Type | Valuation Rule |
|---|---|
Employer-owned, >40 lakh population city | 10% of salary |
Employer-owned, 15–40 lakh population city | 7.5% of salary |
Employer-owned, other areas | 5% of salary |
Rented by employer | Lower of actual rent paid by employer or 10% of salary |
This ensures consistent valuation for tax purposes.
G. Leave Encashment Exemption Increased
- For non-government employees, the exemption limit on leave encashment at retirement has increased to ₹25 lakh, up from previous limits, providing significant tax relief.
H. Agniveer Corpus Fund (Section 80CCH)
- Contributions by Agniveers to the Agniveer Corpus Fund are fully tax-deductible, supporting the Agnipath Scheme.
- The Central Government’s matching contribution is also fully tax-deductible, a surprising detail highlighting government support for defense personnel.
I. Penalties for TDS Defaults
- Failure to deduct or deposit TDS under Section 271C incurs a penalty equal to the unpaid TDS amount.
- Failure to deposit TDS to the government under Section 276B is punishable with imprisonment ranging from 3 months to 7 years and a fine, with relief from prosecution if deposited before the TDS return filing due date.
3. Instructions for Employers
- Employers must ensure correct TDS deductions based on employee declarations, referring to official Finance Acts, Rules, and Notifications for clarifications. This ensures compliance and minimizes disputes.
Implications and Recommendations
This circular is crucial for employers to update their TDS processes for FY 2024-25, particularly with changes like the increased leave encashment exemption and Agniveer Corpus Fund provisions. Employees, especially those under the new tax regime, benefit from understanding zero tax up to ₹7 lakh and limited deductions. Tax professionals should refer to the official PDF