Withholding Tax – What is Form W-4, Withholding Tax Rate & Tax Due Date

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What is Withholding Tax?

Withholding Tax is an amount which is deducted by the employer in advance from the earnings of an employee such as wages, bonuses, commission, pension and pay to the central government as a credit to the Income-tax liability under the Income-tax Act, 1961. In India, the central government is liable and manage the tax liability for every residential and non-residential Indian. Though not everyone is supposed to pay Withholding tax because there are certain criteria that one needs to meet to pay the withheld amount such as conditions and withholding tax rate is different for the residents and non-residential Indians and Pay structure also varies for everyone as per the pre-decided slabs by the central government and Income tax department. These slabs change every financial year considering the countries economic situation.

The amount deducted from one’s salary is a credit against the tax liability of the individual for the next or current year. Individuals who have their businesses don’t pay the withholding tax. It cannot be deducted from the dividends and capital gains. Withholding tax is deducted at the source of income generated but in advance and not during the payment. The Payer or employer is responsible for deducting the withholding tax before making the payment to the employee. It is also known as Retention Tax. 

Now, here we can understand your confusion because many of you are comparing it to the TDS (Tax Deducted at Source). We also know that they both sound similar but there are a few basic difference such as:

Withholding tax is deducted in advance and not during the payment, unlike TDS. 

It is the responsibility of the payer or employer to deduct and deposit the amount for individuals to the central government of India.

Withheld amount act as a tax credit for the current year of every taxpayer and if the withheld amount is more than the tax payable at the end of the year, the employee can file for an Income tax return.

Withholding tax is a liability on the employer and not on the employee.

In the case of making payment to a non-residential Indian Withholding tax plays an important role. The amount withheld from their earnings is useful while charging the TDS at the end of the year and can be paid as their tax liability. The employer must charge the withholding tax from non-residential Indians under the Income-tax section 195.

Why Withholding Tax is Important?

There are three significant advantages of charging the Withholding or Retaining tax. Let us find out what they are exactly and how they help.

We all know the taxes are nothing but the income or revenue of the government which they further use in the development of the nation. Most people and entities pay tax at the end of the Accounting year. But Withholding tax is an early revenue for the government which they utilize at various projects and keeps the work in progress.

The second advantage of charging Withholding tax is getting rid of the headache and hefty calculations while paying the Income-tax. Withholding tax is the responsibility of the employer or a payer and not the employee. An employer is supposed to deduct the amount according to the pay structure of the individual at the time and source of income is generated and deposit it. Unlike other taxes, where the payee has to make the payments. It is also the responsibility of the employer to withhold the accurate amount only from the earnings of every individual.

Last but not least, charging Withholding tax minimizes the possibility of tax evasion. Especially in the case of non-resident Indian’s(NRI’s) when an NRI is not responsible for paying the tax the employer will deduct the accurate amount according to the pay structure. If the Withholding amount is more than the actual tax payable, an individual can file for a return.

What is the Withholding Tax Rate?

Withholding tax varies for resident and non-resident Indians. Individuals and Companies pay different Withholding tax rates as per the Income-tax Act.

  • The withholding tax rate is 20% for the dividends paid by domestic companies.
  • There is no tax on the royalties
  • For technical services, 10% tax is charged
  • Individuals Withholding tax rate is 30%
  • Companies Withholding tax rate on income is 40%
  • On other services, 10% is charged

If you are using Marg HrXpert software for companies or Individuals you don’t have to remember all the tax rates and the changes in the employees withholding certificate as our software will do that automatically for every month and a quarter and save you from all the lengthy and complicated calculations.

What is the Due Date of Withholding Tax?

Withholding tax is supposed to pay on the seventh of every month the Withholding tax is deducted except in March. The due date for the Withholding tax in March is 30th April. Though you can file for the quarterly return for every employee against the accurate tax payable. In case the payment of Withholding tax is delayed or not paid to the government. The payer has to pay the penalty or late fee as decided by the Income Tax department. The penalty can be different for every individual and company.

According to the new amendment on 1st April 2010 by the Central government of India, all the non-residential entities whether individual or company must apply for the PAN card. Without a PAN card, the withholding tax will be higher than expected and they cannot even apply for a tax return or file the application for lowering the Withholding Tax rate. It is now mandatory for all the NRI Individuals and entities who make money by offering their services in India to have a PAN card.

What is Form W-4?

Form W-4 is also known as the Employee’s Withholding Certificate. Form W-4 is provided by the employer to its employee where the employee fills out the necessary information such as Name, Address, PAN card and Aadhaar card details. It is a very important certificate and needs to be filled in carefully as it decides how much withholding tax your employer will deduct from your income and deposit it to the central government of India or the Income Tax Department.

The Form W-4 is provided by the employer to their employees quarterly and they need to fill out their personal information, name of the multiple jobs if any, spouse work information, and some other information including allowances to reduce the Withholding tax rate. 

In 2020, there is a major change in the Form W-4 instead of declaring allowances to lower the Withholding tax rate now individuals need to claim the dependents and other deductions if applicable. This has made the process of calculating Withholding tax more difficult than ever for both employees and employers.

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