Due to the COVID-19 outbreak, business and jobs have been impacted. Many have lost jobs or have experienced a cut in their salary as companies look to save overall costs from a sudden fall in income.
If you have also been informed of pay cut at your place of work, you should make sure that such the change has been reflected in your cost-to-company (CTC) as well. This is because your income tax liability will not change if your CTC does not reflect the change in the take-home salary.
According to Section 15 of the Income Tax Act, salary is taxable on the basis of salary due or received, whichever is earlier. In case there is a pay cut or a delay in payment, irrespective of how much amount you may have received, you will be taxed on the basis of the amount shown in the salary slip and its components.
It is important, therefore, according to tax experts that your official records show any cuts in components of their salary like HRA (house rent allowance) or basic pay.
Firstly, it is important to get clarification from your employer if your salary has reduced or is it just that the payment of salary has been deferred. Deferred salary, even if not received, is due to be received for a certain year, say 2020-21, and is therefore taxed for the financial year 2020-21. The employee will have the right to demand such payment due to them for their service.
On the other hand, if the salary has been cut, the salary slip and the CTC will also be reduced. This difference between the salary you used to receive and the revised pay is not due to be paid to the employee and is therefore not taxable in the hands of the employee.
Tax experts have advised to make sure that such a cut is reflected in your salary slip and also with a formal revision in the appointment letter (written recognition of the change in salary from the employer).
If such a revision in appointment letter is not made by the employer, your Form 16 will show a different gross salary received than your appointment letter and could lead to a problem at the time of tax assessment by the authorities. It is because the income tax assessment officer will consider the appointment letter or appraisal letter (that your receive in case of a revision in CTC) than what you have actually received from the employer will be considered to ascertain your income tax dues.
Also, note that only the fixed component of your CTC, which is due to you, will be liable for tax implications. Any variable pay, such as a performance bonus, will not be liable for tax unless it has been made due to you.