Employees are required to submit a tax declaration to the employer in order to avail various tax benefits. Read more about what is included in the tax declaration and why you need to provide the same.
At the beginning of every financial year, employees are asked for details on their investments, insurance policies, home loan, house rent, education loan, etc. Employees are required to give these details to the employer so that he can arrive at the annual tax liability of the employee.
As an employee, this annual exercise helps you to do tax planning for the financial year. Based on the declaration made by you, your employer will calculate the tax to be deducted during the entire year (Tax Deducted at Source). Your employer will deduct TDS from your salary and deposit it with the Income Tax Department. The tax declaration is not limited only to investments and expenses. It also includes any other source of income which you might have, like profit from the sale of a property.
Most employers would ask for the proof of investments or the supporting documents to be submitted in the month of January or February or March of each financial year. The submissions must be realistic, and you have to declare what is necessary. Employers may set their cut-off dates for submission of tax declaration. It is advised to the employees to submit the tax declaration well in time to avoid excess tax deduction. Make sure that your PAN information is correctly mentioned in the form to ensure that the TDS deducted by your employer is accurately reflected against your PAN.
Here are some of the common elements of an investment declaration made to employers.
Investments and expenses: Investments made in ELSS mutual funds, life insurance policies, PPF, NSC, 5-year tax-saving FDs, etc. qualify for tax deduction from total gross income under Section 80C of the Income Tax Act, 1961. The tuition fees paid for your school going children also gets the deduction benefit under Section 80C.
Housing loan principal and interest: You may ask your home loan lender to issue a statement showing the break-up of the principal amount and the interest component of your EMI paid during the entire financial year. This will help you to declare the amount of tax benefit that you can claim against your home loan principal and interest repayment. The principal amount paid towards home loan repayment qualifies for tax benefit under Section 80C. And the interest paid against the home loan is helpful to save tax under Section 24 of the Income Tax Act.
Some employers may ask for possession certificate to avail reduction in tax payable. Hence, declare only if you have the required documents to claim the tax relief. Further, the date of the loan taken and the date of home possession is mandatory to avail the tax benefit.
Mediclaim premium: Premium paid towards health insurance policy qualifies for tax benefit under Section 80D of the Income Tax Act, 1961. If you have a Mediclaim policy, declare the premium amount. On the premium paid towards self, spouse, parents and children, the maximum deduction that can be availed is Rs. 25,000 a year for individuals not above 60 years. The premium paid by individual towards health insurance policy for a senior citizen parent, the maximum deduction can be availed is Rs. 50,000 a year. This brings the entire deductible amount to Rs. 75,000.
New Pension Scheme: The amount invested in NPS provides an additional deduction within the maximum limit of Rs. 50,000 per year, and is allowed for tax benefits under Section 80CCD (1B).
House rent allowances: To claim HRA relief, the PAN details of the landlord is mandatory. This condition does not apply to individuals whose house rent is less than or equal to Rs. 1 lakh per annum. There is a limit on HRA and this exemption is linked to your salary.
Why do employers ask for a declaration?
Any individual or entity who is responsible for paying any income chargeable under "Salaries" head at the time of payment, is required to deduct TDS. TDS is deducted on the estimated income of the employee at the average rate of income tax as per the rates in force for a particular financial year.
Some tax saving investment options of Section 80C such as PPF, ELSS which are investment-oriented, whereas others like tuition fees of principal repayment of home loan are expenses or outflows. The employer should consider the following deductions and exemptions for TDS calculation purpose.
Exemptions included under Section 10 (House rent allowance, other allowances or perquisites are exempted from the tax).
Deductions covered under Section 80C to 80U.
The employees need to submit a tax declaration mentioning the amount under any of these tax saving sections. For instance, if the employee is going to invest Rs. 1,20,000 in ELSS any time before the end of the financial year 2020, the same can be mentioned in the tax declaration.
The maximum tax benefit that can be availed under Section 80C is Rs. 1.5 lakh in a year. Similarly, the maximum limit exists for Section 80D and Section 24 and other deductions also. It is important to note that TDS will be based entirely on tax declaration made by you and will apply on a monthly basis.
What should you do?
The tax-saving investments made by you during the financial year can be different from those mentioned above. However, the deduction from taxable income will be given only on the basis of the actual evidence submitted by you, and not based on the proposed declaration made at the start of the financial year. It is important to keep documentary evidence of each investment and expense made. By doing this, you will be able to furnish them to your employer at the end of the financial year.
What if one doesn't submit a tax declaration?
If one doesn’t submit the tax declaration, the tax benefits under various deductions are not taken into account. Hence, the income earned by the employee is fully taxable. In cases, wherein employees fail to declare investment details to the employer at the start of the financial year, the employer shall deduct TDS on the gross salary of the employee. This may result in employer deducting more TDS than applicable.
However, this tax liability from the salary of employees is not final. Any tax deducted by the employer can be claimed by the employee while filing the income tax return in the relevant assessment year. If the employer has deducted more TDS than applicable, it will get refunded to the taxpayer by the Income Tax Department.