At the beginning of each financial year, employers request a declaration of investments from their employees and also ask them if they know where they will be likely to invest in an effort to save tax. The main reason as to why employers seek this information from their employees is to ascertain how much their total taxable income following deductions through Section 80C of the Income Tax Act, medical bills, home loans and HRA will be. Collecting this information makes it easier for the employer deduct a set amount of TDS every month.
Most employees tend to tense up at the very thought of declaring their investments as they often feel that they must make investments in the same order as declared to their employer, but this is not true. Employees must simply invest the amount of money declared to their employers into the tax saving instrument of their choice.
For instance, if an employee had declared that they will invest Rs.70,000 in an LIC policy in addition to Rs.50,000 in a tax saving mutual fund, their overall investment will amount to Rs.1.2 lacs. The employer will subtract Rs.1.2 lacs from the employee’s projected annual income and determine the employer’s net taxable income to figure out how much tax must be paid at year’s end. Upon dividing the figure by 12, the monthly figure can be calculated and the amount can then be deducted from the employer’s salary each month. When the employer requests a proof of the employee’s investments during the month of December or January, they will recalculate the particulars to ensure that the data provided by the employee at the beginning of the year matches the data in the proof submitted towards the end of the year.
Scenarios Arising out of Declaration of Investments:
Case 1: Amount invested is less that the amount declared by the employer:
If an employee wasn’t able to invest the amount of money as declared, or if an employee was not in a position to furnish the documents to their employers within the specified time frame, the employer will likely presume that their estimation of the employee’s tax saving is not accurate. It also means that the employer is paying lesser tax as the employee owes a higher amount towards tax as they likely have less tax saving investments. In such cases, the employer has no choice but to recalculate the employee’s tax liability before adjusting it accordingly within the following one or two months’ salary (February / March), meaning that the employer will receive a lower salary in the last one or two months of the financial year.
However, if an employee is able to make investments for tax saving, he / she should declare the same when filing returns. A tax refund must also be requested from the Income Tax department. If for any reason whatsoever, the employer does not deduct the tax from the employee’s previous month’s salary, the tax will be directly owed by the employee to the government. A situation such as this can also arise if the employee has another source of income which has not been accounted for by the employer. In such cases, the employee will have to pay the tax directly to the government. This can be done online through Challan 280 on the official website of the Income Tax department. The returns can then be filed at the end of the year.
Case 2: Amount invested is equal to the amount declared by the employee:
In case an employee invests the exact amount as declared at the beginning of the financial year, the taxable income of the employee will be the same as calculated by the employer. It also means that the tax paid by the employee was the same as the amount owed to the IT department. In such cases, the employee will simply have to file the income tax returns at the end of the year. Unless the employee earns income from other sources, filing returns should be relatively easy.
Case 3: Amount invested is more than amount declared by the employee:
In case an employee has only declared investments worth Rs.60,000, but actually invested Rs.1.2 lacs into tax saving investment options, it means that the employee has saved more tax. But the employer, at the same time, has been subtracting the tax with the assumption that the declaration was made for only Rs.60,000, meaning that the employer has been paying more tax than needed to the government on the behalf of the employee. In such cases, the employee will be eligible for a tax refund and the same can be requested for at the time of filing returns. Usually, it makes sense to declare the maximum possible investments at the start of the year so that your employer will ensure that less tax is paid as you are doing your bit to facilitate maximum tax saving.