If you are thinking that the tax-saving season had ended on March 31, 2019, and it’s time to push tax-related affairs to the back burner, you might be taking a wrong step. For salaried individuals, the month of April is crucial as it decides how much monthly take-home pay one will get from their jobs all through the year after adjusting for taxes.
Right at the beginning of the new financial year 2019-20, the employees are being asked by the employer or the accounts department to submit an Investment Declaration. In such a declaration, the employees have to declare the various tax-saving options that they will resort to during the FY. Before the end of the same FY sometime in January or February, the employers will ask for the actual proof of investments.
Why do employers ask for declarations
“TDS has to be deducted by any person who is responsible for paying any income chargeable under head ‘Salaries’ at the time of payment. TDS has to be deducted on the estimated income of an employee at the average rate of Income-tax computed on the basis of rates in force for that financial year,” says Heena Arora, Finance & Marketing Head, All India ITR.
Some tax saving options come under Section 80C of the Income Tax Act, 1961 such as PPF, ELSS which are investment oriented while few others like tuition fees or principal repayment on home loans are outflows or expenses. According to Heena, “ The employer shall take into consideration the following exemptions and deductions for the purpose of TDS calculation:
a) Exemptions covered under Section 10 (HRA, Conveyance Allowance, other allowances or perquisites exempt from tax, etc.)
b) Deductions allowed under Chapter VI-A (Section 80C to 80U)”
The employees need to furnish a declaration indicating amount under any of these tax savers. For example, if the employee is going to invest Rs 80,000 in ELSS anytime before the end of FY 2020, the same can be mentioned in the Investment Declaration.
In addition, there are other deductions such as Section 80D ( for the premium paid towards health insurance), Section 24 ( for interest paid in home loan for a self-occupied property) etc. Further, the Investment Declaration also asks for HRA details if one is living on rent.
Similarly, if you have already made or will be making any tax saving investment or expenses during the FY 2019-20, it may be furnished in the Investment Declaration to be submitted to the employer. Based on such declarations, your employer will deduct taxes from your income.
The maximum tax benefit under section 80C that can be availed is Rs 1.5 lakh in a year. Similarly, the caps exist for section 80D and Section 24 and other deductions. Remember, this tax deducted at source (TDS) by your employer will be based entirely on your declaration and will apply on a monthly basis.
What if one doesn’t submit
If one doesn’t submit the Investment Declaration, the benefit under various deductions are not taken into account and accordingly, the income is fully subject to tax. “In cases wherein the employee fails to declare his Investment details to the employer at the beginning of the financial year, the employer shall deduct his TDS on the gross salary hence deducting more TDS than applicable. This results in an incorrect deduction of TDS thus making the employer bear more tax than applicable on him,” says Heena.
However, that does not mean, this tax liability from salary income is final. Any tax deducted by the employer may be claimed by the taxpayer while filing an income tax return in the relevant assessment year if tax benefits have been availed. If the employer had deducted more tax, it will get refunded by the tax department.
At times, employees submit the form by maximising the eligible amount under each available deduction. But then, at the time submitting actual proofs fail to match their declared amount. “In case the actual investment at the end of the FY is less than what was declared, the employee has to declare the actual amount while filing his Income Tax Return and hence shall be liable to pay tax if applicable,” says Heena.
The employer, in such a case, deducts a higher TDS in the last 1-2 months of the FY. The flip-side of such an approach is that the take-home pay during the last two months could be considerably less.