Tax deducted is income received.
396.
The following sums shall be deemed as income received for the purposes of computing the income of an assessee—
- (a) amount deducted under this Chapter; and
- (b) income-tax paid outside India by way of deduction in respect of which an assessee is allowed a credit against the tax payable under this Act, except tax paid under section 392(2)(a) and tax deducted as per section 393(3) (Table: Sl. No. 5).
Explanation
Section Summary:
Section 396 clarifies that certain amounts deducted or paid as taxes are to be treated as income received by the taxpayer. This ensures that these amounts are included in the computation of the taxpayer's total income for tax purposes. The section specifically applies to tax deducted under the Income Tax Act and income-tax paid outside India, provided the taxpayer is eligible for a credit against their Indian tax liability.
Key Changes:
- Inclusion of Tax Deductions as Income: This section explicitly states that tax deducted (e.g., TDS) and foreign tax payments eligible for credit are treated as income received by the taxpayer. This is a clarification rather than a new rule, but it reinforces the treatment of such amounts in income computation.
- Exclusions: Tax paid under Section 392(2)(a) and tax deducted under Section 393(3) (Table: Sl. No. 5) are excluded from being treated as income received.
Practical Implications:
- For Taxpayers: Taxpayers must include TDS amounts and eligible foreign tax payments in their total income when filing returns. This ensures accurate computation of taxable income and avoids discrepancies.
- For Businesses: Businesses must ensure that TDS deducted from payments (e.g., salaries, contractor payments) is reflected as part of the recipient's income.
- For Compliance: Taxpayers claiming foreign tax credits must ensure that the foreign tax paid is included in their income computation, except for the excluded categories.
Critical Concepts:
- Deemed Income: Amounts deducted or paid as taxes are "deemed" to be income received, meaning they are treated as part of the taxpayer's income even if not directly received.
- Foreign Tax Credit: Taxpayers can claim a credit for taxes paid outside India against their Indian tax liability, but the foreign tax paid must still be included in their income.
- Exclusions: Tax paid under Section 392(2)(a) and tax deducted under Section 393(3) (Table: Sl. No. 5) are not treated as income received.
Compliance Steps:
- Include TDS in Income: Ensure that all TDS amounts deducted from income (e.g., salary, interest, professional fees) are included in the total income computation.
- Report Foreign Tax Payments: If claiming a foreign tax credit, include the foreign tax paid as part of income, except for the excluded categories.
- Maintain Documentation: Keep records of TDS certificates (Form 16/16A) and foreign tax payment receipts to substantiate claims.
Examples:
- TDS on Salary: If an employee earns ₹10 lakhs and ₹1 lakh is deducted as TDS, the employee must include the full ₹10 lakhs (not ₹9 lakhs) as income. The ₹1 lakh TDS is treated as income received.
- Foreign Tax Credit: A taxpayer earns ₹5 lakhs from a foreign source and pays ₹50,000 as foreign tax. The taxpayer must include ₹5 lakhs in their income and can claim a credit for ₹50,000 against their Indian tax liability. The ₹50,000 foreign tax is treated as income received.
This section ensures that tax deductions and foreign tax payments are properly accounted for in income computation, maintaining consistency and accuracy in tax filings.