After a gap of 12 years, the employees of Mumbai-based public sector undertakings may have to bear the burden of additional tax.

The income tax department has moved the Bombay high court to vacate a stay on an old circular issued by the ministry of finance to deduct tax on their house rent allowance.

As per the circular issued in 1994, all PSUs, including banks, were directed to add 20 per cent of HRA paid to their employees to their total taxable income. The bank employees' union had then filed a plea and subsequently obtained a stay.

The issue is pending with the court since then. The department is of the view that as per the circular, 20 per cent of HRA needs to be added to the salary and deducted by the organisation as tax deducted at source. This would be done as per section 17(2) of the Income Tax Act.

If the judgment comes in favour of the department, it may be applicable with retrospective effect which will turn out to be a huge burden for the staff, said a banking source.

Currently, the case is on between the income tax department and employees union of public sector banks and Mahanagar Telephone Nigam Ltd [Get Quote]. A fresh petition was filed by the department seeking vacation of the stay and expedited hearing to arrive at a final decision.