Employers are required to deduct tax for salaried individuals as per the applicable slab rates after estimating their taxable income for the financial year. The taxable income is estimated generally at the start of the financial year basis the declaration submitted by employees about their income other than salary and tax savings investments. On receiving such declarations, the tax is calculated according to the estimated taxable income after considering the employee's additional incomes and tax-saving deductions.
As we are approaching the financial year end, the employers would be requesting the actual proofs of income/ investment declaration from employees between December-February. Accordingly, the income-tax calculation would be updated basis the validation of authentic proofs provided by employees. However, some of the key areas for consideration for employers and employees are stated below:
I. What are the steps to tax filing for these organisations?
The key responsibility of the finance and payroll team of employers is to design the effective process of collecting proofs against the declaration for truing up the taxes at the end of the financial year. Typically, in the month of December to February, organisations ask their employees to submit proofs/receipts or further declarations for the remaining months.
Step 1: Planning: The organisation should have a predefined process of collecting and verifying the proofs of investment. They must roll out internal emails to all employees to apprise them about the deadline/process to submit the proofs.
Step 2: Collection of Proofs: The proofs need to be collected from employees during the defined timeline. The employees should submit their investment proof forms and supporting documents through an Employee Portal platform provided by employers or in hard copies to their employers.
Step 3: Queries Resolutions: The organisation should have automated processes designed to help employees in submitting the proofs and attend to queries raised by them in case they face any difficulty in submitting proofs.
Step 4: Verification of proofs and truing up of taxes: The final step is the crucial step for an employer wherein they are required to verify the completeness and correctness of proofs as per the guidelines laid down by tax department. The tax department also issues TDS circulars every year for the ease of employers. Accordingly, the taxes will be trued up and the balance tax will be deducted from the employee’s salary for the remaining months.
Step 5: Filing of TDS Return and Generating Form 16: Post completion of the above processes, employers are required to file the 4th quarter withholding tax return wherein they report the gross salary, deductions, tax withheld, PAN of Landlord/ home loan lender etc.
II. What proof of investments needs to be submitted?
The declaration is not restricted only to investments/expenditures like LIC premium, expenditure for medical, ELSS etc. It also extends to declaring the other source income which may be an estimated figure related to saving bank interest income, dividend income etc. Also, loan details on account of repayment of house loans must be provided to employers in case any housing loan is availed by an employee. This information will form the basis for computing the taxes and the same is divided into 12 months to be withheld from the monthly salary.
The various proofs are discussed below:
- House Rent Allowance (HRA) Exemption: Employees who wanted to claim HRA exemption should submit the monthly rent receipts, rent agreement and wherein rent payment is more than INR 1,00,000 the PAN of the landlord is mandatory.
- Investment and expenses: Employees can provide the receipts for investments which qualify for deduction under section 80C of the Income Tax Act, 1961 such as ELSS, tax saving mutual fund, tuition fee, Public Provident Fund (PPF), NSC, Sukanya Samriddhi Scheme, 5-year tax saving fixed deposit, principal repayment of housing loan etc.
- Housing Loan Repayment: Employees are required to submit a final housing loan interest certificate for the particular financial year to claim the deduction for payment of interest on housing loan.
- Mediclaim Premium: Premium paid towards health insurance qualifies for tax benefit under section 80D of the Income Tax Act and tax receipts pertaining to the same are required to be submitted to the employer.
- Leave Travel Concessions or Allowance (LTA/LTC): Salaried employees also need to submit travel-related expenditure (domestic travel) proofs to their employers if they want to claim tax deductions on LTA/LTC.
III. When to submit?
The final proofs are required to be submitted to substantiate the deductions claimed in the declaration as per timelines defined by the employer. In case an employee misses out to submit the claim, he/ she has the option to declare the same in his/ her India tax return.
IV. What are the things to keep in mind when filing taxes?
- Organisations should have automated and organised software tools for finance and payroll teams. Also, hassle-free employee self-declaration portal and facility for uploading proofs must be provided to employees.
- The employers must verify the details of proofs very carefully while accepting the same since employees may provide supporting documents that may not be accurate or might have incomplete information.
- The details in quarter 4 withholding tax return should be populated carefully since the same will form the basis for generating the Form 16. Employees will file their personal income tax return based on Form 16 and also details will be auto-populated in tax return based on details furnished in Form 16.
The process of collecting proofs is an important process and the pre-planning/defined process will help employers to complete the process hassle-free.