What TDS means to you
June 26, 2008
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.
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.