The Central Board of Direct Taxes (CBDT) has issued a circular introducing significant changes to tax deducted at source (TDS) from salaries, refining perquisite taxation and expanding the leave encashment exemption for non-government employees.

The circular, applicable for the financial year 2024-25, consolidates amendments from the Finance Acts of 2023 and 2024, aiming to streamline employer compliance and provide greater clarity on tax obligations.

The circular formally establishes that TDS must be deducted on perquisites provided in kind, a provision introduced in the Finance Act, 2023. Employers failing to deduct tax on such perquisites will face a penalty equal to the tax not deducted. However, an amendment under the Finance Act, 2024, provides relief—penalties and prosecution will not apply if employers remit the tax before filing the quarterly TDS statement.

“The circular consolidates key changes such as tax slab rates, deduction thresholds, exemptions, and compliance requirements, offering a structured reference for employers,” said Amit Maheshwari, tax partner at AKM Global. He noted that previous amendments were dispersed across various sections, making compliance cumbersome.

The circular confirms surcharge rates under the old tax regime: 10 per cent for income between ₹50 lakh and ₹1 crore; 15 per cent for income between ₹1 crore and ₹2 crore; 25 per cent for income between ₹2 crore and ₹5 crore, except for dividends and capital gains, which are capped at 15 per cent and 37 per cent surcharge continues for income exceeding ₹5 crore.

The maximum exemption for leave encashment at retirement for non-government employees has been increased to ₹25 lakh, benefiting higher-income earners.

The circular redefines the valuation of perquisites and introduces specific exemptions for contributions to the Agniveer Corpus Fund under the Agnipath Scheme.

The circular mandates changes to Form 16 and Form 24Q, improving salary-related TDS reporting. Effective July 1, 2023, and further revised on October 15, 2024, these modifications introduce stricter verification processes and enhanced transparency, particularly for employees with multiple employers.

Employers failing to deduct or deposit TDS will face penalties under Section 271C, amounting to 100 per cent of the unpaid tax. Additionally, delayed remittance may lead to imprisonment ranging from 3 months to 7 years under Section 276B, reinforcing the urgency of timely compliance.

Rajat Mohan, senior partner at AMRG & Associates, emphasised that these revisions would reduce TDS-related disputes and ensure a more transparent payroll compliance system. “This circular strengthens employer accountability and provides clearer tax deduction guidelines, making tax administration more structured and predictable,” he said.