Tax Liability While Switching Jobs

Date : 10-6-2016

When and employee changes job in a financial year once or more than once then he faces a common problem of extra tax deduction at year end. Financial year is the period starting 1st April and ending 31st March every year. Employees have a common a common question why my tax got deducted even though TDS was deducted in my previous company, why do i have to pay extra tax when it is already paid. To clear these doubts a little understanding of few terms and the method of computation of total income under the Income Tax Act, 1961 needs to be understood.

1. Total Income

Total income of a person consists of the following heads as mentioned in the Income Tax Act, 1961
a) Income from Salary
b) Income form House Property
c) Profit and Gain from Business and Profession
d) Capital Gains
e) Income form Other Sources

Income earned during the financial year from each head is totalled to compute the total income of a person. While filling the return details of all the head of income is to be mentioned. An employee usually deals with following deals with these two heads Income form House Property and Income from Other Sources other than Income from Salary which is the main source of income.

2. Total Salary

A common problem which arise among salaried employees is about total salary. As per the employee total salary is what he/she gets from the employer, but as per Income Tax Act it means the total salary earned during the 12 months of a year from all the employers combined together and not what is earned from a single employer. For example Mr. X was employed for 9 months with one company and for next 3 months with another company. Then his income will be computed taking into account salary earned from both the companies and not just one company.

3. Income from House Property and Other Sources

Salaried person usually takes a home loan for purchasing a flat or building a house for which he gets deduction under head Income from House Property for the principal and interest paid and usually loss is computed rather than Income from House Property. Now, if assuming that a deduction of Rs.60,000 is available under this head and the employee submits this detail to first employer and then to the next employer, then it is very much possible that the total deduction allowed will be Rs.1,20,000 and not Rs.60,000 while filling the return by referring to Form 16 issued by both the employers. This way he might get additional deduction of Rs.60,000 but this is allowed. Only once deduction of Rs.60,000 is available for all employers and not for each employer individually. When this mistake will be reversed a tax difference is bound to arise.
(This is based on assumption that employee does not have any rental income from house property and loan is taken for purchasing the house property)

4. Deductions

This is the main point where most mistakes are done. Usually the employee submits the detail of his savings to first company suppose Rs.105,000 for a period of 9 months and now again when he changes the job and moves to new company he makes additional saving of Rs.50,000 and submits the details of his saving to new company as Rs.1,55,000 (105000+50000).

Previous company deducts tax after providing deduction of Rs.105,000 and the new company after providing deduction of Rs.1,50,000 (Total saving Rs.155000 but limited to Rs.150000 under Section 80C).

Here tax difference is definitely going to arise when the deduction is allowed for 2,55,000 (i.e. 105,000 in first company and 1,50,000 in next company) and not just Rs.1,50,000 which should be actually allowed.

Mostly the new employer omits taking into account all the details of the previous employer from Form 16 submitted by the employee and this mistake happens usually. New employer issues Form 16 of employee for the period he/she worked with him rather than taking into account the details of previous employment and incorporating the same in new Form16.

Remedy

Always keep in mind the following points while changing job:

1. Submit Form 16 to new employer and ask to incorporate all the details of previous employment.

2. Self compute total salary for 12 months period, taking into account, salary earned from all the employers changed during the year.

3. Deduct loss from house property only once.

4. Allow deduction under Section 80C upto Rs. 150000 only once from total income.

5. Compute tax as per the current available slabs and compare with the tax deducted by your employer. In case of difference get the correction done or else difficulty arises at the time of filing of return. Delay in correction may lead to levy of interest as well as additional tax may have to be deposited at the last moment which is a painful exercise when last date for filing of return reaches.