Form 16 is the certificate issued by an employer in India providing a summary of the salary paid to an employee during the year and the taxes withheld on such salary. It is also popularly known as TDS certificate on Salary where TDS implies tax deducted at source.
The Income tax Act, 1961 (the Act) prescribes the employer’s obligation with respect to issue of the Form 16, including the timelines for issue, format in which the details are to be disclosed, etc. It is essential that employers take note of these provisions to ensure timely and accurate compliances with respect to the tax TDS on such salary.
It is also important for individuals in employment to understand the contents of the Form 16 so that any discrepancy in the Form 16 issued by his/ her employer with respect to salary or TDS can be intimated to the employer. Form 16 is an important document required for filing the personal income tax return. Besides, many times various authorities or institutions also ask for Form 16 for various purposes like personal and housing loans etc.
Generally, the new employer also asks individuals to submit Form 16 issued by the previous employer as a part of the onboarding process which helps the next employer compute the correct tax liability.
Let us understand the statutory requirements and salient features related to the Form 16.
Employer’s Obligation to Issue Form 16
As per provisions under the Act, an employer is required to withhold tax i.e. deduct tax at source(TDS) at the time of payment of salary to employees. It is important to note that an employer is under an obligation to deduct tax at source only in those cases where the employee has a tax liability.
- There could be many situations where an employee’s gross salary is below the basic exemption limit and therefore there is no tax liability.
- There could also be cases where the gross salary is above the basic exemption limit, but the actual tax liability is “nil” due to the employee being eligible for various tax deductions/ exemptions.
Therefore, a question arises whether the employer has any obligation under the Act to issue a Form 16 even in cases where there is no tax liability and therefore no TDS during the year.
The Act provides that an employer is mandatorily required to issue a Form 16 where there is a TDS on salary paid to the employee during the year.
However, practically, many employers follow the practice of voluntarily issuing Form 16 even to those employees where there is no TDS during the year. This serves as a consolidated statement of total salary paid during the year which the employee can retain for their records.
Employers are required to issue the Form 16 by 15th of June after the financial year in which the salary income was paid and tax deducted. For example, the Form 16 for Financial Year 2021-22 is required to be issued by June 15, 2022.
Details To Be Furnished in Form 16
The information to be furnished to employees in Form 16 by an employer is divided into two parts:
- Part A: provides a summary of salary paid/credited and TDS thereon during the financial year in respect of the employee
- Part B: provides details of salary paid and any other income disclosed by the employee to the employer, eligible tax deductions, total tax liability and TDS during the year
Let us look at the detailed information to be reported by employer in Part A and Part B of the Form 16
Part A of Form 16
Part A of the Form 16 comprises of the following information:
- Employee’s personal information: Name, address and PAN card.
- Employer’s details: Name, address, PAN, TAN, TDS officer details.
- Assessment Year (AY): This refers to the year in which the income is getting assessed, i.e., the year following the end of the Financial Year. For instance, in case of income earned between 1 April 2021 and 31 March 2022 i.e. Financial Year 2021-22, the Assessment Year would be 2022-23.
- Time period: The period for which the taxpayer was employed with the employer or the organization in the concerned financial year.
- Summary of the salary paid / credited to the employee and TDS thereon on a quarterly basis
- Month-wise amount towards TDS along with challan details for deposit of TDS into government treasury (date of deposit, BSR Code of the Bank branch where deposited, Tax challan serial number)
- Details of the employer’s authorised person responsible for TDS.
Form 16: Part B
Apart from the employee and employer details as provide under Part A, the following information is disclosed in Part B of the Form 16:
- Salary earned during the year: This shows the total salary received by an employee, further divided into various components such as Basic salary, Leave Travel Allowance (LTA), Leave Encashment, House Rent Allowance (HRA), bonus, etc.
- Tax exemptions: Certain allowances such as HRA, Children education allowance, LTA are eligible for tax exemption and the amount allowed as exempt is disclosed in Part B.
- Deductions from income: The deduction for eligible investments/ expenses under various provisions under the Act are disclosed in this section. This includes deduction for contribution/ payments towards Employee Provident Fund, Public Provident Fund (PPF), Pension Plans, premium for Life Insurance policies, Tax Saving Mutual Funds, medical insurance premium, interest on education loan, repayment of principal component of housing loan, etc.In other words, the popular deductions claimed by an employee under Section 80C, 80D, etc. are to be disclosed in this section.
- Tax liability: Part B also discloses the total tax liability, including surcharge, education cess, applicable on the net taxable income.
In addition to Form 16, an employer is also required to furnish a statement in Form 12BA which provides the details of perquisites, other fringe benefits, any amenities, and profits in lieu of salary provided to the employee during the year. This includes employer owned or leased cars, stock options, accommodation owned by the employer, etc.
In case an individual has worked with more than one employer during the financial year, each of the employers will issue Form 16 for the period for which the individual was employed. However, it is advisable that the employee should disclose the details of salary paid by the previous employer and the same can be included by the current employer for calculating and depositing TDS.
Details of salary from previous employer are disclosed in Part B of the Form 16.
Review of Form 16 and Reconciliation with Form 26 AS
Employees should review their Form 16 as soon as it is issued to ensure that the salary and TDS appearing in the Form 16 is accurate. In case of any discrepancy, the same should be notified to the employer immediately so that the employer can make the corrections. The employer reports details of salary and TDS to the tax department on a quarterly basis and the same is captured in the Form 26 which can be viewed by logging into the individual’s income-tax e-filing portal.
It is important that the TDS amount in Form 16 and Form 26AS match so that the tax department can give the credit of this amount while processing the tax return filed by the employee.
Implications For Employer For Not Issuing Form 16
In case an employer is unable to issue the Form 16 within the due date, the employer would be liable to pay a penalty of INR 500 per day of default till the issue of the Form.
An employee may also approach the assessing officer (AO), under whose jurisdiction s/he has to file the tax return and file a written complaint against the defaulting employer. Based on the complaint, the AO may take appropriate action or initiate penalty proceedings against the employer.
The due date for filing the tax returns for FY 2021-22 is July 31, 2022 in case of most individuals who primarily have income from salary. Many employers would have already issued the Form 16 and others would be in the process of doing the same.
It would be a good idea to review the Form 16 and highlight any discrepancy to the employer immediately so that corrections can be made. This would also help ensure that the tax return is completed and filed within the due dates.
This article was originally published on Forbes.