Declare tax benefits to new employer

The tax-filing season is on in full swing. In case of a salaried person, the employer cuts tax depending on his salary and the investments he has made. However, if you have shifted jobs during the year, the process becomes more complicated. In this case, it is important for the new employer to know the deductions done by the previous employer.

Otherwise, while filing returns, you may have to pay additional tax. Homi Mistry, tax partner, Deloitte, Haskins & Sells, said, “If you do not inform the new company about your previous salary and the tax deducted at source there, the new employer will deduct taxes according to the applicable tax slabs, which will be less than what you are supposed to pay.”

Let’s understand this with an example. Take for example a 35-year-old woman who was receiving Rs 5 lakh (monthly take home = Rs 41,666) from company A. (To keep the calculation simple, it is assumed that the entire salary amount is being taxed according to existing income tax slabs).

After making Rs 1 lakh investments under Section 80C, she is eligible to be taxed on Rs 4 lakh. This would be:
Up to Rs 1.9 lakh = zero
Rs 1.9-3 lakh = 10 per cent (Rs 11,000)
Rs 3-4 lakh = 20 per cent (Rs 20,000)
Her total tax liability = Rs 31,000 a year + 3 per cent education cess = Rs 31,930 (monthly tax = Rs 2,661).

Now, suppose that she changes jobs after six months and moves to Company B, where her gross salary is Rs 6 lakh. If she has not declared her earlier tax deductions, Company B will also give her the benefit of deductions under Section 80C (Rs 1 lakh). Using the same calculation as above, her new tax liability (including education cess) is Rs 52,530 (monthly tax = Rs 4,377).

In both these organisations, she is availing of Section 80C benefits. Suppose that in Company B, she declares that she has received benefits under Section 80C. In this case, her entire income will be taxed. Consequently, the new liability will be Rs 73,130 (monthly tax = Rs 6,094). In other words, the additional tax liability for the year will be around Rs 10,300.

Another way of calculating this would be:
Earnings in company A = Rs 41,666 *6 = Rs 249,996
Earnings in Company B = Rs 50,000*6 = Rs 300,000
Total income = Rs 549,996
Less Rs 1 lakh under 80C
Taxable income = Rs 449,996
Taxation:
Up to Rs 1.9 lakh = zero
Rs 1.9-3 lakh = 10 per cent or Rs 11,330
Rs 3 lakh to Rs 449,996 = 20 per cent or Rs 30,899
Total tax = Rs 42,229
Additional liability = Rs 10,299

“If the person were to get double exemption of Rs 1 lakh under Section 80C, the tax liability will fall. While filing returns, the employee may find that the liability is higher,” said Kausik Mukherjee, executive director, tax and regulatory practices, PricewaterhouseCoopers. Of course, these anomalies will be taken into account while filing returns.

However, to avoid unnecessary hassles while filing returns, it is best that one starts the process well in advance. If someone fails to pay the outstanding amount by the end of the year, there will be an interest of 1 per cent per month in retrospect under Section 234 (B) and Section 234 (C) of the Income Tax Act.