Typically, in the month of April, being the start of the new financial year 2017-18, salaried employees are asked by their employers to send 'investment declaration statement'.
The most popular and frequently used deductions are allowed under section 80C of the Income Tax Act, 1961. Few others sections for tax benefit are section 80D, section 24(b), section 80EE, section G amongst others.
Based on the salary income and the investment declaration statement, the employer will estimate the taxable income and start deducting tax on a monthly basis in the form of tax deducted at source (TDS) before paying it to the employee.
If the income from the salary of an employee is more than the exempted limit, the employer will deduct TDS. According to Dr. Suresh Surana, Founder, RSM Astute Consulting , "Every employer is required to deduct income-tax on the estimated income of the employee. The estimated income is computed in the beginning of the financial year considering the Tax Declaration Statement provided by the employee."
On what is TDS based upon
The employees are asked to furnish the tax declaration statement, indicating the proposed investments for deductions (Section 80C etc) that they wish to undertake during the year. The TDS deduction happens after taking into account any such declarations by the employee. Such declarations are typically asked by employers in the beginning of the financial year.
"TDS liability is calculated on the said estimated income for the whole year at the average rate of income tax (i.e. on pro rata basis) which is based on the rates in force for the financial year in which payment is made. The Finance Act of each financial year specifies the rates in force for deduction of tax at source which is basically the slab rate," says Dr. Surana
Here's a stepwise modalities from Dr. Surana for TDS in case of employees:
a) First compute gross salary (including all fixed & estimated variable components) allowing all deductions / exemptions based on Investment declaration for the whole year
b) Add income from all other heads as reported by employee
c) Deduct loss from House Property
d) This will be the amount of total income of the employee on which income tax is required to be deducted.
e) Calculate Income-tax on such income based on slab rate along with the surcharge and cess as applicable.
f) Every month, 1/12th of the amount of tax as arrived at (e) shall be deducted.
g) Any excess or deficit arising out of any earlier deduction can be adjusted by increasing or decreasing the amount of subsequent deductions during the same financial year.
Actual TDS deductions
In the last three months of the FY, the employer asks for actual documentary proof of the investment declaration made by employees. This helps the employer to start deducting TDS on the basis of actual investments. If the tax already deducted by one's employer is in excess and cannot be adjusted in the last 2-3 months of the FY, any such excess TDS will reflect in Form 16 and the refund will have to be claimed by the employee from the I-T Department.
Where does TDS get reflected?
As an employee, one would like to check if correct TDS has been deducted and submitted by the employer to the government. For this one has to visit the website TRACES, which is a web-based application of the Income-tax Department. It enables a PAN holder to register and view tax credit (Form 26AS) online which is updated on a near real-time basis. Dr. Surana says, "An employee can verify from time to time, his TDS (which has been deducted by the employer) in Form26AS from the TRACES website. The facility of accessing Form 26AS is available to a PAN holder having a net banking account with any of authorized banks." But make sure that your PAN is mapped to your bank account to access form 26AS from Internet banking.
At times, the actual amount of TDS and TDS credit in Form 26AS may differ due to reasons like non-furnishing of TDS details to the I-T Department by the employer, linking the tax deducted to an incorrect PAN, etc
And importantly, is the employer making a timely transfer of the TDS to the government? "The employer is required to deposit the tax deducted within 7 days of next month and for the month of March, tax shall be deposited by 30 April of the next financial year, informs Dr. Surana.
For deducting lower TDS
In case an employee wants no deduction of TDS or deduction at a lower rate, it is still possible. The assessing officer can be approached for a obtaining a certificate from tax authorities and then furnish the same to the employer. "The certificate is granted to the employee only where the tax authority (based on the application in Form No.13) is satisfied that the total income of employee justifies the deduction of income tax at any lower rate. This certificate is generally valid for 1 year," informs Dr. Surana.
Income in addition to salary income
Unless the employee informs the employer of any other income, say from interest on fixed deposits, any rental income etc, the employer is going to deduct TDS based solely on the salary income. Rather than waiting to pay tax on such other income later, the employer may be informed. "In case he has other income besides salary income, he has the option either to inform his employer about his additional income who will accordingly deduct TDS on such income or to pay advance tax if his tax liability is Rs. 10,000 or more. In case of failure, he may be liable for penal interest for delaying payment of tax to the Government, says Dr. Surana.
Watchouts
At times, the employee fails to make the required investments well before the last date for submitting the actual evidence to the employer. "It may happen that an employee makes a last-minute investment and thus is unable to furnish investment proof on time (as per employer's policy) and as a result employer deducts higher of TDS. In such case, the employee should note that he can legitimately claim a deduction based on such investment proof at the time of filing his tax return. In this way, he can claim excess amount deducted as refund, if any, informs Dr. Surana.
Also, some employees could be interested in availing deduction under section 80G on donations. However, tax benefits on such eligible donations can be availed only at the time of filing IT returns as employers generally do not accept them for TDS estimation.
Conclusion
After submitting the actual proof of investments to the employer, it's important to keep them safe as the IT department may ask for them. During the Income-tax assessment, if it happens anytime, employee may be asked to produce them before the tax authorities.
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