Indemnity.

518

Every person deducting, retaining, or paying any tax in pursuance of this Act in respect of an income belonging to another person shall be indemnified for the deduction, retention, or payment thereof.

Explanation

Section Summary:

Section 518 of the Income Tax Act provides indemnity (legal protection) to any person who deducts, retains, or pays tax on behalf of another person. This means that if someone is legally required to withhold or pay tax on income that belongs to someone else, they are protected from any claims or liabilities arising from such actions, as long as they comply with the law.

Key Changes:

This section is not a new provision but a continuation of the principle of indemnity that existed in prior versions of the Income Tax Act. It reaffirms the protection for individuals or entities acting as tax deductors or payers on behalf of others.

Practical Implications:

• For Tax Deductors (e.g., employers, banks, etc.): If you are required to deduct tax at source (TDS) or pay tax on behalf of someone else (e.g., an employee or contractor), you are legally protected from any claims by the taxpayer for the amount deducted or paid, provided you acted in accordance with the law.
• For Taxpayers: If tax is deducted or paid on your behalf, you cannot hold the deductor liable for the tax amount, as long as the deductor followed the rules.

Critical Concepts:

• Indemnity: Legal protection against claims or liabilities. In this context, it means the deductor is shielded from being sued or held responsible for the tax amount deducted or paid.
• Tax Deduction at Source (TDS): A mechanism where tax is deducted by the payer (e.g., employer, bank) before the income is paid to the recipient (e.g., employee, interest earner).

Compliance Steps:

1. For Deductors: Ensure that tax is deducted or paid in accordance with the Income Tax Act and relevant TDS provisions. Maintain proper documentation of the deductions or payments made.
2. For Taxpayers: Verify that the tax deducted or paid on your behalf is correctly reflected in your Form 26AS or AIS (Annual Information Statement) and matches your income records.

Examples:

• Scenario 1: An employer deducts TDS from an employee’s salary. The employee later disputes the deduction, claiming it was incorrect. Under Section 518, the employer is protected from liability as long as the TDS was deducted in compliance with the law.
• Scenario 2: A bank deducts TDS on interest earned by a depositor. The depositor cannot sue the bank for the deducted amount, provided the bank followed the TDS rules.

This section ensures that those who comply with tax deduction or payment obligations are not unfairly penalized or held liable for fulfilling their legal duties.