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What TDS means to you

Surabhi Marwah explains the implications of tax deduction at source for the salaried employee.

Print Edition: July 10, 2008

Get these from your employer

The employer issues Form 16/16AA for tax deducted at source against salary income.

Form 16AA is issued if the employee's salary is less than Rs 1.5 lakh, he does not have any income in the nature of business income, capital gains or agricultural income, and there has been no tax deducted at source from his income.

Form 12BA, which is also issued to the employee, is a statement showing the value of perquisites, profits in lieu of salary and other benefits.

The Indian tax laws require employers to deduct tax on the salary payments made by them each month and deposit the tax with the government treasury by the seventh of the following month. As part of this, the employer is required to estimate the annual income of each employee and make adjustments for onetime payments such as bonus in the month of payout.

In computing the taxes to be withheld, the employer also considers a deduction for any “loss under house property”, which means any mortgage interest paid on a property occupied by the individual or one that has been let out by him. While there is a cap of Rs 1.5 lakh for self-occupied or vacant property (which is ready for possession), there is no cap for a property let out.

To illustrate, assume Ashok has taken a loan for a flat in Mumbai and is paying Rs 5 lakh as annual interest. If Ashok moves into this flat (or if the flat is ready but cannot be occupied by Ashok), he will be allowed to set off Rs 1.5 lakh from his salary income for that year. However, if the flat was let out, the entire Rs 5 lakh would be allowed to be set off from the rental income. Any loss would be allowed as a deduction from his salary income.

When the deduction is being calculated, the employer is also required to allow tax relief under Section 80C of the Income Tax Act for investments made by the employee in life insurance, PPF etc (subject to a cap of Rs 1 lakh). Deductions are also allowed for medical insurance premium paid by the employee (cap of Rs 35,000 for payment by an individual for self, family and senior citizen parents), as well as donations made to specified institutions, if a declaration to this effect is submitted to the employer.

The employee must submit the declaration regarding any loss from house property or investments for tax relief at the beginning of the financial year. Documents providing proof of such declarations must be submitted to the employer towards the end of the financial year.

Of course, if the employee’s income is not in the tax bracket (announced annually in the Finance Bill) there is no question of tax being deducted. In some cases, taxpayers whose annual income is not chargeable to tax can obtain a nowithholding/low-withholding tax order from the tax department. If this is provided to the employer, there is no tax deducted at source. However, this is more relevant to globally mobile individuals who may not be taxable in India owing to the Double Tax Avoidance Agreements between India and the country of deputation, but may be subject to withholding tax by virtue of salary paid in India.

Given that job-hopping is not uncommon these days, an individual who has switched jobs should make a declaration to the current employer regarding the deductions and exemptions claimed by him during his previous employment. If such a declaration is not made, the employee may find that he owes taxes to the government, which will have to be paid along with penal interest.

Here’s how it works. If the first employer has deducted a lower amount of tax taking into account the entire deduction of Rs 1 lakh available under Section 80C and the second employer also allows this deduction, the employee will owe tax to the government.

There may also be a situation where the previous employer had not withheld any taxes from the employee’s income, the amount being less than the threshold amount for tax. However, this income, when clubbed with the salary drawn from the current employer, would be taxable. In such cases, to avoid any tax or penal interest levy (after the close of the financial year), the employee should declare to his current employer such salary details and request them to take these into account while calculating the tax to be withheld.

If the employee fails to submit declarations on time, the employer might deduct more tax than necessary. However, the good news is that this money can be recovered by filing a tax return. The TDS certificate submitted by the employer to the employee before the close of the year will show the tax withheld at source, which, if computed without taking into consideration various declarations, will be higher. A refund can be claimed for the excess tax withheld.

Irrespective of whether a refund is due or not, all taxpayers must file a return of income with respect to his salary income and other streams of income, before the prescribed due date, which is currently 31 July 2008. (Tax returns filed on or by July 31 will be with respect to the income for the period 1 April 2007 to 31 March 2008).

Physical TDS certificates issued by the employer are no longer required to be annexed with the tax returns and the taxes deposited by the employer on behalf of an individual will be tracked by the revenue department through the individual’s PAN.

 

Surabhi Marwah is a senior tax professional with Ernst & Young.

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