Switched jobs? Make sure you file your return right.

May 9 2016,

Have you wondered why your tax outgo shoots up each time you switch jobs? It could be because of a huge salary jump but chances are high that you may be making a cardinal error while declaring your investments or filing your tax returns. While some may think having two Form 16s means just adding the figures and filing the returns, it''s not that simple. More so, if the two companies follow different salary break-ups and income-tax calculation practice. 

Things can get even more complicated if you had forgotten to submit your investment declarations and reimbursement bills with your previous employer. Or, submitted duplicate declarations with both the employers. The Form 16 handed out to you, in these cases, may not show the correct figures and the tax breaks you are eligible for. You will have to cross-check the numbers and re-evaluate your tax liability, which may take some time. With the tax-filing deadline closing in -- less than three months to go -- it''s time you do your paperwork right. Pore over these points before filing your returns. 

Duplicate investment declaration: If you have declared the same investments with your current and previous employer, and forgot to share your old salary details with the new employer, you have to recalculate your tax liability. None of the employers will have complete information about your years earnings and there is a high chance of duplication of deductions benefits as well. Although the tax department has recently notified a standard investment declaration, Form 12BB, it may not rule out such a mistake since it has no reference to the investment declaration made to the previous employer. 

While it won''t have an effect on deductions like HRA or LTA that are linked to your employment term, you will end up getting double benefits for other personal investments and expenses such as home loan deductions and investments under Section 80C. Both your employers will underestimate your taxable income and deduct less tax than you are required to pay. The duplicate benefits have to be rolled back and you will have to pay the balance tax either as an advance self- assessment tax at the time of filing taxes. "The employee may have to pay the balance taxes with the applicable interest under Section 234C, and under Section 234B at the rate of 1% per month for delay and non-payment of advance taxes," says Vaibhav Sankla, Director, H&R Block. 

Non-submission of proofs for allowances: The proofs for a particular year''s investments are usually submitted during the last quarter of the financial year. Most forget or miss the submission deadline for HRA, medical allowance and LTA proofs with the previous employer. While HRA deduction benefits can be directly claimed while filing your tax returns, unfortunately, you can not carryforward your LTA and medical allowances. They will become taxable and would have to be added to your income before you calculate your liability. 

Leave encashment: If you adjusted your earned leaves against your notice period, you need not worry. However, if you cashed your leave, then you need to check how your previous employer has taxed it. The tax treatment differs from company to company as the law is ''open to interpretation''. Under section 10(10AA), leave encashment received at the time of retirement or superannuation or otherwise is exempt from income tax. Companies have different views on how the word ''otherwise'' should be interpreted.


"Some companies view that leave encashment payable at the time when an employee leaves is tax exempt as the employee has retired by resignation, and the words ''or otherwise'' cover such cases. Others have a more conservative interpretation and believe that the words ''or otherwise'' should be read in context with superannuation, and therefore such exemption is not provided," explains Sankla. Experts believe that in cases where leave encashment received at the time of leaving a job is made taxable by the employer, the employee can claim exemption while filing his return. 

Notice pay: If you failed to serve your notice period, the company usually deducts a notice pay -- basic salary for a month or two -- depending on the company policy on notice period. The taxability of this has always been debated. Section 16 of the I-T Act, which provides for deduction from salaries, does not specifically provide for a deduction for notice pay recovery. Basis that many companies may not net the taxable salary by deducting the notice pay and reflect only the gross salary in Form 16. 

"Sometimes, when the notice pay is borne by the new employer, it gets included in the Form 16 as income and appropriate TDS is deducted," says Archit Gupta, Founder and CEO, ClearTax.in. However, in both cases, it is a negative income (or not a real income) and should not be included in your taxable income. "If someone did not earn the money, how could you pay tax on it," says Sankla. Check your Form 16s carefully. If your employer has already made the adjustments and deducted the amount from your total salary, there will be no tax implication. However, if they have not, do remember to deduct the notice pay from your income while filing the return. 

Withdrawing EPF: EPF withdrawals are fully tax exempt if the amount is withdrawn after five years of continuous service. If you withdraw earlier than that, your employer will deduct TDS at 10%. However, there is a catch here. "In calculating the five-year term, the period served with any older employment is included only if the EPF balance was transferred to the last employer''s EPF account," says Gupta. 

Meaning, even if you have been contributing to an EPF account for the past five or more years, unless you had transferred the balance to the account you are withdrawing from, the previous years won''t be counted. For instance, say, you had a four-year EPF account with an old employer while the EPF account you are withdrawing from is only one-year old. If you were wise to transfer the old balance, there will be no tax liability. However, in case you did not, withdrawal from both the accounts will be fully taxable.

Source: The Economic Times

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