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Tuesday, October 18, 2016

Job Change and Tax Implications



Tax tips for job changes

From correct deduction of TDS to payment of advance tax, here's how to deal with various taxation issues that may arise when you switch jobs.

Vandana R has just sailed through three tough rounds of inter views to land the excit ing job of project lead, big data analytics. The sprawling campus of the MNC (let's call it Company B), which she will join next week, looks inviting. Her salary has been doubled and she has been given a managerial role with more responsibilities.

There is a hitch though. For jumping ship early, she will have to return her `5 lakh sign-up bonus to her former employer (Company A). Amidst all the excitement, taxes are the last thing on Vandana's mind. But there are complex tax issues facing her, and others in similar situations.

Salary received from two employers in same year

Vandana joined Company B on 1 September, in the middle of the financial year 2016-17.

At Company A, she earned a salary of `65,000 per month. A hike to `1.30 lakh per month automatically puts her in the highest tax bracket of 30.90%.

Company A would have calculated the tax to be deducted at source (TDS) based on her entire taxable income for 2016-17. It would have taken into account her proposed investments in eligible saving instruments under Section 80C. After arriving at the tax liability for the year, it would have determined the TDS to be deducted each month. Company B, on the other hand, would typically take cognisance of Vandana's income from her joining date (for the seven month period from 1 September 2016 to 31 March 2017). It could also consider the deduction under Section 80C, which the previous employer has already factored in.

If Company B does not consider her past records, the TDS deducted by her new employer will be much lower than what her tax liability ought to be, taking into consideration her entire taxable income for the year. Vandana will have to bear the additional tax liability (as TDS is lower than her liability) plus penal interest (see chart).

To avoid TDS shortfall

To avoid the shortfall in Vandana's tax obligations, (as a result of which she will have to pay penal interest), she ought to inform Company B of her previous income and the exemptions already considered by Company A, plus the tax already deducted at source.

Vandana should ideally furnish Form 12B to Company B, which would contain details of previous salary, taxable perquisites, Section 80C deduction considered and the tax already deducted.

While furnishing Form 12B is not mandatory, it is a better option. The other alternative is for the employee to calculate her final tax liability and meet the gap in shortfall of TDS by paying advance taxes.

If the employee does not disclose salary received from the former employer to new employer, any shortfall in TDS will need to be paid by the employee from his own pocket with interest, if applicable.

Advance tax & penal interest

If Company B is not given the requisite details, advance taxes can be paid by Vandana to meet the TDS shortfall. Advance tax is payable in four instalments. Up to 15% of the estimated tax must be paid by 15 June, up to 45% by 15 September, up to 75% by 15 December and up to 100% by 15 March. If not, a 1% interest per month is charged on the shortfall, under Section 234C of the Income Tax (I-T) Act, until the next instalment, which falls due after three months.

Vandana's tax liability, after all the TDS cuts is `72,530. As the first instalment of advance tax falls due on 15 September, she could pay `32,640 (45%) by this date. If she doesn't, then she has to pay interest at 1% for three months, until 15 December. The interest works out to `980. If the advance tax instalments continue to remain unpaid, the interest component will keep cascading.

Further, she would be liable to pay interest of `326 in any case on the shortfall of `10,880 in respect of the first instalment of 15%, which was due on 15 June, even though she changed jobs after that.

Irrespective of whether advance tax has been paid or not, if the total advance tax paid (including TDS) is less than 90% of the tax liability at the end of the financial year (in this case, March 2017), then the interest under Section 234B is payable. This is calculated at the rate of 1% a month and is payable on the shortfall from 1 April 2017 till the month in which she files returns and makes the payment.

Non-payment of advance tax attracts interest of 1% per month, which is not deductible for tax purposes. The effective rate of interest is therefore higher, depending on the slab you are in. It is advisable to discharge your advance tax liability in time.

Repayment of sign-up bonus

Vandana was selected during a campus placement. As she was a topper, Company A paid her a handsome sign-up bonus of `5 lakh on the understanding that she would work for the company for three years. As she is quitting within two years, she has to return that amount. Though Company B is compensating her, the amount received from Company B will be considered her salary income and tax will be deducted at source.

Now since the `5 lakh was part of Vandana's taxable income during the year in which she received it and she is now being forced to repay it, will she be able to deduct it from her income for 2016-17?

The Income Tax Act doesn't explicitly provide for deduction from income on repayment of sign-up bonus to the previous employer. The Income Tax Appellate Tribunal, which adjudicates tax disputes, in its recent order dated 6 May (in the case of SSN Ravi vs Assistant Commissioner of I-T) also held likewise.

Salary in lieu of notice period

Employment contracts typically provide for payment of salary in lieu of the notice period, payable by the company if services are being terminated, or by the resigning employee.

As Company B requires Vandana to join by 1 September, she will not be able to serve the entire two month notice period and will have to cough a month's salary as payment in lieu of notice period from her own pocket. She will not be allowed any deduction from her taxable income for such repayment. If she is compensated by an equivalent amount by her new employer, it will be part of her salary vis-à-vis the new employer, who will deduct TDS.

If you have worked for 5 years Eligibility for gratuity:

This is payable only if you have completed a continuous tenure of at least five years. For non-government employees, the maximum tax exemp tion is the least of

(i) actual gratuity received;

(ii) `10 lakh;

(iii) 15 days salary for each completed year of service or part thereof.

The `10 lakh ceiling is a life-time exemption. It will be reduced from any exemption that you may have claimed earlier.

Transfer of EPF:

Any withdrawal from the EPF is not taxable if you have rendered five years of continuous service. It is best to transfer your existing EPF to your new employer. For this purpose, all that the new employer is required to do is verify the Universal Account Number. Such a transfer is not taxable and is treated as continuity of service.

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