The previous employer (Company A), would normally calculate TDS on the basis of the entire taxable income of the employee for that particular financial year. It will also consider the proposed investment in saving instruments eligible under section 80-C which includes provident fund contribution. After arriving at the tax liability for the year, Company A will determine the TDS to be deducted each month from the employee’s salary.
The new employer (Company B), on the other hand, will generally take cognizance of the employee’s income from the date of joining. It can also re-consider various tax deductions (such as those available under section 80C), which have already been covered by the previous employer. The end result may be that TDS deducted by Company B will be much less than the tax liability of the employee. ,
The table below shows how such shortfalls arise where each employer deducts tax at source considering only the salary paid by him. as can be seen both Company A and Company B has also considered the full eligible amount of standard deduction and tax deducted under section 80C.
Need to reduce tax burden on employees:
Bombay Chartered Accountants Society (BCAS), has submitted in its pre-budget memorandum: “Due to less deduction due to change of employment by the employer, additional tax has to be paid at times by the employee in the form of self-assessment tax.” This professional association adds, “Interest under sections 234B and 234C for short deduction or delay in payment, due to failure to deduct on the part of the employer, should not be charged from the employees.”
An employee who has switched jobs should ideally submit Form 12B to the new employer. This form contains details of past salary, taxable perquisites, section 80C deduction and tax already deducted.
“The problem with the present process of submission of Form 12B is that the option to do so lies with the employee, many of whom are not aware of the existence of this form. The new employer should consider this only when the employee submits the form,” explains Gautam Nayak, Member of the Taxation Committee at BCAS and Tax Partner at CNK & Associates.
“Most of the employees are not aware of the problem of reduction in tax and interest thereon, which arises due to consideration of principal exemption, standard deduction and deduction for investment under section 80C by both the employers. Therefore, unless the employer insists on submission of the form, the employees pay interest thereon. TDS shortfall In the year of employment change.”
Advance tax is payable in four installments. Up to 15% of the estimated tax will have to be paid by 15th June, up to 45% by 15th September, up to 75% by 15th December and up to 100% by 15th March. If not, 1% interest per month is charged on the shortfall under section 234C of the Income Tax (IT) Act, till the next installment, which becomes due after three months.
Whether advance tax has been paid or not, interest is also payable under section 234B if the total advance tax (including TDS) paid is less than 90% of the tax liability at the end of the financial year. It is calculated at the rate of 1% per month and is payable on the shortfall from 1st April (beginning of the financial year) to the month in which the employee files and pays his Income Tax (IT) return.
Nayak suggested, “This issue can be resolved by reduction of advance tax in the year in which the employee changes employer (to the extent that it involves such a small TDS), by recovery of interest u/s 234B and 234C.” ”
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