TDS on Salary FY 2024-25: Key Updates from CBDT Circular No. 3/2025 dated 20.02.2025
Key Highlights:
Circular No. 03/2025 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.
- It includes significant
updates such as:
- Revised tax slabs under the new tax regime.
- Increase in leave
encashment exemption limit to ₹25 lakh.
- Special provisions for the Agniveer Corpus Fund, making contributions by both employees and the government fully tax-deductible.
Overview of Circular No. 03/2025
Issued by
the Income Tax Department of India, this circular serves as a detailed
guide for employers regarding the correct TDS deduction from employees'
salaries for FY 2024-25 (April 1, 2024, to March 31, 2025). It
incorporates recent amendments from:
- Finance (No. 2) Act, 2024
- Finance (No. 1) Act, 2024
- Finance Act, 2023
This ensures that salary taxation aligns with the latest legislative changes.
Key Updates in the Circular:
1. Tax Slabs and Rebates
- Under the new tax regime,
income up to ₹3,00,000 is tax-free, with rates progressively 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 taxpayers.
2. Leave Encashment Exemption
- The exemption limit for leave
encashment upon retirement for non-government employees has
been raised to ₹25 lakh, offering significant tax relief.
3. Agniveer Corpus Fund – Section 80CCH
- Contributions made by Agniveers
to the Agniveer Corpus Fund are fully tax-deductible.
- The Central Government’s matching contribution is also tax-deductible, strengthening financial benefits for Agniveers under the Agnipath Scheme.
Comprehensive Analysis of Circular No. 03/2025
This
circular is essential for both employers and employees, detailing the
process of tax deduction at source (TDS) on salaries. Below is a section-wise
breakdown of its key provisions:
1. Scope and Applicability
- The circular applies to TDS
on salaries under Section 192 for FY 2024-25 and includes
updates from recent Finance Acts to align salary taxation with new
policies.
2. Key Amendments and Updates
A. Salary and Perquisites
- Definition of Salary
(Section 17(1)):
Now includes Central Government contributions to the Agniveer
Corpus Fund.
- Definition of Perquisites
(Section 17(2)):
Expanded to include rent-free/concessionary accommodation provided
by employers.
B. Surcharge Rates (Old Tax Regime)
The
surcharge rates under the old tax regime are as follows:
|
Income Range |
Surcharge Rate |
|
₹50
lakh – ₹1 crore |
10% |
|
₹1
crore – ₹2 crore |
15% |
|
₹2
crore – ₹5 crore (excluding dividends & certain capital gains) |
25% |
|
Above
₹5 crore (excluding dividends & certain capital gains) |
37% |
|
Above
₹2 crore (including dividends & certain capital gains) |
15% |
C. New Tax Regime (Section 115BAC) – Now Default Option
The new
tax regime is now the default for individuals, HUFs, AOPs, BOIs, and
Artificial Juridical Persons. The tax slabs are as follows:
|
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% |
- Section 87A rebate makes income up to ₹7
lakh tax-free.
- Limited deductions are available, but
contributions to:
- National Pension System
(NPS) under Section 80CCD(2)
- Agniveer Corpus Fund under
Section 80CCH
- Are still allowed.
D. TDS Deduction Rules (Section 192)
- Employees can declare
additional income/losses (e.g., house property loss) for accurate TDS
calculation.
- Employers must account for TDS deducted/collected under other provisions before computing TDS on salaries.
E. Forms and Compliance Updates
- Form 16 & Form 24Q: Now explicitly mention “Health
& Education Cess” instead of “Education Cess.”
- New column added for TDS deducted under other sections to improve reporting accuracy.
F. Valuation of Perquisites (Accommodation)
|
Accommodation Type |
Valuation Rule |
|
Employer-owned
(City > 40 lakh population) |
10% of
salary |
|
Employer-owned
(City 15–40 lakh population) |
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 |
G. Increased Leave Encashment Exemption
- The exemption for leave encashment at retirement for non-government employees has been raised from ₹3 lakh to ₹25 lakh.
H. Agniveer Corpus Fund (Section 80CCH)
- Employee contributions are fully tax-deductible.
- Government matching contributions are also fully tax-deductible.
I. Penalties for TDS Defaults
- Failure to deduct/deposit
TDS
(Section 271C) = Penalty equal to the unpaid TDS amount.
- Failure to deposit TDS under
Section 276B:
- Punishable by 3 months
to 7 years of imprisonment and a fine.
- No prosecution if deposited before TDS return filing due date.
3. Instructions for Employers
- Employers must ensure
accurate TDS deduction based on employee declarations.
- It is crucial to refer to official Finance Acts, Rules, and Notifications for compliance.
Implications & Recommendations
- Employers must update TDS processes
based on the latest tax regulations, particularly with the increased
leave encashment exemption and Agniveer Corpus Fund provisions.
- Employees should understand how the
new tax regime impacts them, especially zero tax up to ₹7 lakh and limited
deductions.
- Tax professionals should refer to the official
CBDT circular PDF for full compliance details.