JOIN USWhen you switch jobs, pay attention to tax due
If most of your income is only from salary, your taxes are taken care of by TDS (Tax Deducted at Source). But many taxpayers who change their jobs during the year, end up with a tax due in their returns. This can be very perplexing for most of us; we believe our employers deduct TDS before paying us, then why do tax dues arise in such cases?
There is no way for your second (or third) employer to know the salary earned by you from previous jobs. But your employer is bound by law to deduct TDS before paying salary. TDS on salary is deducted by first allowing minimum exemption of Rs 2.5 lakh and applying tax slabs to the remaining income. While your first employer may have already allowed the minimum exemption, your next employer may have allowed it too. Or if your total income from the first employer is less than Rs 2.5 lakh, he won’t deduct any tax. In such a case, unless you inform your second employer, he will again exempt Rs 2.5 lakh from your income.
Your second employer does not have details of the tax slab you belong to. This can lead to your income getting taxed at an incorrect rate. Your salary may be taxed at 10 per cent or 20 per cent while you may belong to a higher slab. After allowing Rs 2.5 lakh as minimum exemption, the next Rs 2.5 lakh has to be taxed at 10 per cent. Income in excess of Rs 5 lakh is taxed at 20 per cent. And any income beyond Rs 10 lakh is taxed at 30 per cent.
Aggregate two salaries
For slabs to be applied correctly, the income from the two employers must be aggregated. Suppose your salary from each employer is less than Rs 10 lakh, but exceeds Rs 10 lakh in aggregate. Your second employer doesn’t know this and deducts TDS at 20 per cent. However, income in excess of Rs 10 lakh must be taxed at 30 per cent. In such a case you are bound to see a tax due in your return. Aggregation of incomes can bump up your slab.
Usually employers ask in advance about tax deductions that you want to claim. Your monthly payout is calculated keeping your deductions into consideration. If you do not submit proofs for these deductions at the year end and do not claim them, you will see some tax due at the year end. You may have missed disclosing certain deductions to your employers or may not have submitted proofs on time. If there is a tax due because of not being able to claim a section 80 deduction; don’t worry, as these can be claimed in your return directly.
Deductions under section 80 such as 80C, 80D on health insurance, 80E for interest on education loan, can be claimed directly in your tax return. The proofs for these investments are not required to be submitted at the time of filing or return or to the tax department. Do remember to maintain these proofs safely. An assessing office might ask for them later.
The demands of a new job can prevent us from submitting our rent receipts, medical reimbursement expenses and other proofs in time. This may lead to your employer deducting tax on HRA and LTA in the absence of proofs. It’s important to note that HRA can be claimed in your tax return too. You need to calculate the exempt portion of HRA and deduct it from your total taxable salary. However, exemption for LTA cannot be claimed in your tax return directly and proofs must be submitted to your employer.
Do make sure you collect your Form 16 from your previous employer. Preparing your tax return is much easier when you have this form. If tax has been deducted by your employer, he must provide a Form 16 to you, even though you have changed jobs.
Two Form 16s are likely to result in a tax due at the time of return filing. If there is tax due, interest under section 234B and 234C may also be applicable. If you have changed jobs this financial year, do make it a point to disclose your previous salary to your new employer. You can use Form 12B to make this disclosure. Also, inform your new employer about deductions you want to claim, re-submit rent receipts and rent agreements. This will save your from any last minute surprises when you are filing your tax return in 2016.
(Preeti Khurana is a Chartered Accountant and Chief Editor at www.cleartax.in, a tax efiling website for individuals and businesses.)