TDS on Salary FY 2024-25: Key Updates from CBDT Circular No. 3/2025 dated 20.02.2025

 TDS on Salary FY 2024-25: Key Updates from CBDT Circular No. 3/2025 dated 20.02.2025

TDS-on-Salary-FY-2024-25:-Key-Updates-from-CBDT-Circular-No.-3/2025-dated-20.02.2025



CBDT Circular No. 3/2025 for FY 2024-25 AY 2025-26 contains redefined guidelines concerning TDS on salary. The circular provides a new set of provisions to facilitate adherence by employers in calculating and deducting tax at source from salary payments. It contains new processes to reflect the revision made to the tax slabs and exemptions applicable to individual taxpayers. The circular advises that, before computing taxable income, employers must check salary components, allowances, and deductions. It also emphasizes enhanced due diligence to avoid penalties, along with record-keeping requirements and early submission of TDS returns to avoid procedural errors. The circular elaborates on improved computation methods as per the recent amendments to tax laws. In short, CBDT Circular No 3/2025 is a mandatory directive to both employers and tax professionals in the management of salary deductions perfectly and clear tax collection. An employer must thus read the circular carefully so he could conform to all the newly stipulated provisions. This circular ensures a smooth, efficient, and timely tax administration.

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.

Rajveer Singh

Tax Law Page, led by Rajveer Singh, simplifies Tax Laws with 19+ years of expertise, offering insights, compliance strategies, and practical solutions.

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