As a Tax Consulting Firm, we have come across many clients (Salaried individuals) coming to us with their Form 16 issued by their employer, at the fag end of the Income Tax Return (ITR) filing season i.e., around 31st July. When we go through the same, in most cases we find that the client has to pay a lot of taxes, but if the client would have come to us before the end of the financial year i.e., before 31st March, they would have saved a lot in tax by proper planning and investing, which becomes impossible after the financial year end and thus they have to pay a huge amount in taxes which they would have saved if properly planned.
In this blog we would like to bring to your knowledge two important scenarios, where if proper planning is done, lot of taxes would be saved:
1. Proper utilization of Section. 80C deduction:
As most of you are aware, Section 80C provides a deduction of up to Rs. 1,50,000 when you make specified payments. The payments include LIC premium, tuition fees, deposit in Sukanya Samriddhi Account, principal portion of housing loan repayment, PPF contribution, etc., But many individuals fail to take the full benefit out of this section. Our recommendation would be, know your share of PF contribution (if deducted from your salary), because it forms part of section 80C deduction and for the remaining amount to the extend of Rs. 1,50,000 make specified payments as per your requirements to avail the maximum benefit. For example, if you share of PF contribution is Rs. 21,600, you have covered only Rs. 21,600 of Rs. 1,50,000. So, you can make specified payments of up to Rs. 1,28,400 (1,50,000-21,600) to avail the maximum benefit of section 80C.
2. Change in employer/ Job switching:
One of the important cases which leads to higher tax payment at the time of ITR filing is not taking proper care with respect to taxation while switching between employers. Income tax will be computed for an entire financial year under consideration and the deduction like standard deduction of Rs. 50,000 and chapter VI-A deduction which includes section 80C deduction are allowable only one time during a financial year. To put it simple, say, you received salary from 3 different employers during a financial year, you cannot avail Rs. 1,50,000 (50,000×3) as your standard deduction, where as you can only avail Rs. 50,000 irrespective of the number of employers you have worked with during the financial year. The same holds good for chapter VI-A deductions as well.
But the mistake than happens during job switching is that, each of the employer computes the income tax liability individually without taking into consideration the salary earned by the employee from other companies during the same financial year. Which leads to calculation of income tax with lower income and high deduction, which in turn leads to wrong calculation of income tax liability. But while filing the ITR at the end, we need to consider salary earned from all the employers and avail deductions only once. Now, the tax liability heavily increases against which there would be no/less TDS deductions from the employers, as a result the employee gets burdened with the tax payment along with interest at the time of filing the ITR.
To understand the discussion better, let us take an simple example, Say Mr. X worked with A Ltd. from 1st April 2021 till 30th September 2021 and he earned a salary of Rs. 5,40,000. The income tax computation done by A Ltd. is as follows: Salary Rs. 5,40,000 – Standard Deduction Rs. 50,000 = Total Income Rs. 4,90,000. Since the amount is less than Rs. 5,00,000 Mr. X gets a rebate and hence no tax is payable. As a result, A Ltd. does not deduct any TDS from Mr. X.
Now, on 1st October 2021 Mr. X switched his job from A Ltd. to B Ltd. where he worked from 1st October 2021 to 31st March 2022. He earned a salary of Rs. 5,40,000 here as well. Assume that B Ltd. failed to consider the salary earned by Mr. X with his previous employer A Ltd. and computed the income tax liability in a fresh manner, again the total income works out to Rs. 4,90,000 and Mr. X would get a rebate and as a result B Ltd. also does not deduct TDS.
But at the time of ITR Filing, Mr. X’s total income will be calculated as follows: Salary from A Ltd. – Rs. 5,40,000 + Salary from B Ltd. – Rs. 5,40,000 – Standard Deduction Rs. 50,000 = Total Income – Rs. 10,30,000. Now, the income tax payable as per the rates for FY: 2021-22 is Rs. 1,26,360, also Mr. X have to pay interest for not paying advance taxes. Since, both his employers have not deducted TDS the entire tax liability along with a huge interest needs to be paid by Mr. X at the time of filing ITR.
This kind of situation can be avoided by proper intimation of income earned from the previous employer by the employee to his current employer. If this is done the current employer will factor in the salary earned by the employee from the previous employer and compute the income tax liability and deduct requisite TDS from the employee’s salary.
We hope that you found this article useful.
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