Income Tax Deduction at Source for Off-cycle Payment
Tax computation of off-cycle payment will happen through INBTD Payroll function.
So if we want to deduct tax on offcycle payment then we have to configure INBTD accordingly. It is not necessary that system will deduct tax only on bonus, it can be any offcycle payment. I will explain with Leave Encashment payment in offcycle run.
Function (INBTD) has the following parameters:
Parameter 1 :
This parameter determines the bonus calculation method for an off-cycle payroll run. There are five calculation methods available for bonus calculations. They are as follows:
BON1 : The function computes tax at a standard rate, which is applicable across the organization.
BON2 : The function computes tax at the marginal rate of tax (excluding surcharge) of an employee, before the payment of bonus.
BON3: The function computes tax at the marginal rate of tax (including surcharge) of an employee, before the payment of bonus.
BON4: The function computes tax at the marginal rate of tax (excluding surcharge), of an individual employee, after the payment of bonus.
BON5: The function computes tax at the marginal rate of tax (including surcharge) of an individual employee, after the payment of bonus.
The parameter 2 for the function is for Tax Code. In the SAP system, the standard Tax Code for bonus is SBON. You can however, maintain your own Tax Codes for bonus.
For example, if you want to dedcut tax on offcycle payment of Leave encashment then need to maintain tax code for Leave encashment . If the wage type is not a Leave encashment wage type, the function will not deduct any tax from the bonus payment.
You need to maintain the bonus wage type in the table view V_T7INA9, and the tax code for bonus in the table view V_T7INT9.
The parameter 3 will check the deductible tax on the off-cycle bonus payment and limits the same to the tax liability of the employee. If the value is X in the paramenter, the function checks for and limits the tax deductible on the off-cycle bonus.
If you do not maintain the value as X for the Param 3, the function will compute the Tax Deductible at Source for the off-cycle bonus payment, without checking the tax liability.
Prerequisites for the tax deduction in offcycle payment:
1. In the Gross to Net Calculation – India schema (INN1), maintain the
value of the first and the second parameter for the Income Tax
Deduction at Source for OffCycle Bonus Payment payroll function
2. Maintain bonus wage types in the table view Taxability of wage types
(V_T7INT9), against the Tax Code.
3. For each Pay Scale Grouping for Allowances, maintain the bonus wage
type(s) in the table view Reimbursement allowances perks –
eligibility and calculation (V_T7INA9).
4. Maintain a value for the Bonus Payment – TDS % constant (BNTDS), in
the table view Payroll Constants (V_T511K).
If there were no regular payroll runs for an employee before the off-cycle run for bonus, the function will calculate tax only when the value of the parameter is BON1, BON4 or BON5. For the parameters BON2 and BON3, no tax deductions take place.
If there were no regular payroll runs for an employee in the current financial year, and you run the off-cycle run for bonus, the function will take the tax rate for BON2 and BON3 from the last payroll result of the last financial year.
Calculation with example:
1. Tax deducted till January 2015 = 4000
2. Total tax liability including offcycle payment = 20000
3. The net tax liability of the employee = 16000 ( Total tax liability – tax deducted so far )
4. Tax deductible @ 30% on bonus = 18000
5. If we will maintain X in parameter 3 then the function will limit the deducted tax to 16000
6. Tax to be deducted- Parameter 3 of the function INBTD determines
the limit on the tax deduction:
– As the parameter 3, in this example,has the value X, the function limits the tax to be deducted to the net tax liability of 16000
– If we will not maintain X in the parameter 3 of the function INBTD, the tax to be deducted will be 18000
See the below screen shot of copied schema of INN1 in Indian payroll scenario: