Give new declaration for lower tax deduction

After Budget move on income tax, employers will recalculate your liability once the Finance Bill is passed

The direct tax announcements in Budget 2014-15 will ensure that in the next few months, individuals and their employers will remain busy recalculating their new income tax liability.

Self-employed individuals won’t be significantly impacted by the new rules. These entities pay taxes either at source (TDS) or as advance tax. Given there has been no change in TDS rules, the same rate will continue. That means if one earns a consultancy fee, the TDS on this will remain 10 per cent.

As for advance tax, the first instalment for individuals goes out on September 15, by when the Finance Bill is likely to be approved. So, self-employed persons can calculate their liability based on the new rules and the TDS paid and, accordingly, pay the advance tax. Companies will be impacted, as they pay the first advance tax instalment on June 15.

The Budget had increased the basic exemption limit for individuals (aged less than 60) to Rs 2.5 lakh from Rs 2 lakh. The investment limit under Section 80C was increased to Rs 1.5 lakh from Rs 1 lakh; one can invest up to Rs 1.5 lakh in Public Provident Fund. Also, home loan borrowers can claim deduction on interest repayment of up to Rs 2 lakh, against Rs 1.5 lakh earlier.

Vaibhav Sankla, director at tax consultancy firm H&R Block, says, “The new rules will apply only when Finance Bill 2014-15 gets a go-ahead in both the Lok Sabha and the Rajya Sabha, assuming there aren’t any likely modifications. Till that time, employers will compute your tax liability at the previous tax rates.” Some modifications are expected on the new tax laws announced for debt mutual funds.

Typically, employers calculate the tax liability of their employees on the basis of the investment declaration given by the employees. The taxes are computed after taking deductions into account and the sum is deducted from the employees’ salaries in 12 instalments. Experts expect the Finance Bill to be approved in both Houses of Parliament by August. That means till July, most salaried individuals are likely to pay tax at the earlier income tax rates. In the meanwhile, most employers are expected to update their payroll software. Once the new tax rules come into effect, companies should communicate this to their employees and ask for new investment declarations, says Sankla.

Gautam Nayak, partner at CNK and Associates LLP, says, “The company will then recalculate the tax liability of the employees and adjust the extra taxes paid in the previous months of the financial year.” For instance, if your income tax liability under the previous rules was Rs 24,000 a year, or Rs 2,000 a month, and under the new rule, your tax liability will be reduced to Rs 12,000 a year, you’ve paid Rs 4,000 extra till July. This amount will have to be adjusted through the remaining eight months of 2014-15. So, when a company deducts tax from an employee’s salary in August, it will deduct only Rs 500, not Rs 1,000.

If an individual has zero-tax liability under the new rule, but had to pay tax under the previous norms, they will have to claim refund for the tax paid when they file returns for 2014-15 in July 2015. This will also be true for those who’ve paid higher taxes, despite the adjustment.