Income Tax Return 2024: What happens if you don’t submit investment proofs within the deadline?

It's that time of the year when you must submit relevant investment proofs to avail deductions and reduce taxes withheld by the employer. While at the beginning of the financial year we inform the employer about the proposed declaration related to investments, based on which Tax Deducted at Source (TDS) is deducted for the first three quarters, it is crucial to note that in the last quarter (January to March), employees must furnish proofs of these investments to their employers. 

TDS is a system where tax is deducted at the point of origin of income. In the context of employment, employers deduct TDS from employees' salaries and deposit it with the government on behalf of the employee.

But what happens if investments proofs are not submitted by the deadline or are scheduled for later in February or March? “In case the investment is scheduled in February or March, an employee may ask the employer for a second window to accept the said proofs. If the necessary investment proofs are not submitted within the stipulated time, it will lead to higher tax withholding on the salary income,” said Yeeshu Sehgal, Head of Tax Market at AKM Global, a tax and consulting firm.

Neeraj Agarwala, Partner at Nangia Andersen India, said, “In general, employers allow employees until the end of the financial year, which concludes on March 31, to furnish all necessary proofs. The calculation of Tax Deducted at Source (TDS) for the months leading up to February relies on the investment declarations made by the employee. However, for the month of March, TDS is computed based on the investment proofs submitted and approved by the employer. Neglecting to provide these investment proofs may result in a higher TDS deduction during March.”

Expenditures made after March 31 are not deemed eligible for deduction in the ongoing financial year. Therefore, individuals should plan their expenses and investments strategically, ensuring that they submit the required proofs before this deadline to qualify for the deductions.

Can an employer deduct TDS even if an employee conveys that they will make investments in the coming months? “An employer is responsible for deducting TDS from an employee's salary, even if the employee conveys that they will submit on the due date in the coming months. An employer may deduct TDS based on the declarations submitted by employees in the first 2-3 quarters of the financial year. However, an employee will be required to submit actual proofs during the last quarter, and the final withholding shall be based on the actual proofs. The responsibility for deducting taxes and depositing them with the government lies primarily with the employer. If an employee fails to provide the necessary investment proofs within the stipulated time, the employer is required to deduct TDS at a higher rate, as applicable. The obligation to deduct TDS is not contingent on the future submission of investment proofs,” said Sehgal.

Declaration is different from investment proof. At the commencement of the financial year, an employee provides a declaration, outlining all deductions they anticipate claiming throughout the fiscal year. However, by the fiscal year's end, specifically March 31, employees must furnish investment proofs to the employer, validating the deductions declared at the start of the financial year.

In case investment proofs are not submitted on time, employees have the option to incorporate eligible deductions directly into their income tax return, seeking a refund for any surplus TDS deducted by the employer due to the non-submission of investment proof. “Notably, an exception applies to leave travel allowance, as its deduction is solely managed by the employer. Yet, choosing to bypass submission to the employer and directly claiming deductions in the income tax return heightens the probability of a tax query from the income tax department. In such instances, employees must submit all relevant proofs directly to the income tax department,” said Agarwala.