Come April and you must be wondering why your accounts department wants you to submit your tax-saving investment proposals in the first month of the new financial year itself. While your employer may be right in doing so, some organisations are too rigid and expect you to submit the proof of the proposed investments by October. Such a strict stance on the part of the employers surely causes a lot of discomfort among employees.
Why the hurry?
The income tax act puts the responsibility on the employer to deduct tax at the time of payment of salary to the employees every month and deposit the tax with the government before the seventh day of the following month. The TDS rules are very strict and the employer faces stringent penal provisions for non-deduction or non-deposition of tax. Employers also have to file the TDS returns at the end of every quarter of a financial year.
While calculating the tax liability of an employee, the employer has to make an estimate of the employee’s full-year income based on the salary for the month of April.
So, the employers ask for declaration of the tax saving investment proposals from employees in April itself so that they can adjust their annual taxable salary income according to the investments proposed and deduct the tax accordingly.
The monthly TDS is then adjusted for the monthly variation in the employee’s salary income, such as any arrear payment, pay without leave and so on.
Thus, after you submit your tax saving investment proposals, the employer starts deducting taxes from your monthly salary.
If you fail to invest the amount you had proposed in the declaration made in April, the employer will have to recover the shortfall in tax deducted from the salaries in the remaining months of the financial year. Now, since you get the salary for the month of March in April of the the next financial year, the employer has to deduct your actual tax liability from your salary in February (which you get in March).
Thus, ideally any shortfall in TDS collection by an employer from an employee has to be recovered in full while paying the salary for the month of February (that is, in March).
Arguably, January should be the deadline for submitting the proofs for all tax saving investments so that the employer can recover any shortfall in TDS collection from February’s salary.
Employers who set an early deadline argue that if the tax is recovered from the last month’s salary, it will be harsh on both the employees and the employers in case the former fails to comply with the proposed investments. While the employee’s salary may get substantially reduced after paying the increased tax liability, one month’s salary may not be sufficient for the employer to make up for the TDS shortfall.
However, this argument is not tenable for setting an early deadline for submission of proof of tax saving investments. This is because, even if an employee doesn’t make any tax saving investment despite proposing to invest Rs 1 lakh, he/she will have to pay, say, an additional Rs 30,900 (when the tax is calculated at the highest rate of 30 per cent) in tax for the full year.
So, even when an employer sets the January deadline for submission of proof of tax-saving investments, it has got two month’s salary in hand to recover the Rs 30,900 shortfall in TDS from the employee.
Thus, it is clear that the payroll departments set an early deadline for submission of proof of tax-saving investments because they simply don’t want to clutter their year-end accounts preparation and reconciliation works.
What employees can do?
You must first clearly understand what are the provisions to save tax in the financial year in question. For example, your EPF contribution for the full year is eligible for deduction from your annual salary income. If you have children, their tuition fees (up to two children) qualify for deduction.
Consider such other committed expenditures, such as life insurance and medical insurance premium, housing loans. Calculate the sum total of all such committed expenditure that qualify for tax deduction and list them in your tax saving investment proposals.
If you are still falling short of the maximum limit eligible for deduction, propose to invest only the amount that is required to fulfil the requirement.
Is frontloading bad?
Investing early during a year is not always bad. In fact, by doing so you can stay invested for a longer time than putting in your money hurriedly at the last moment to save tax. However, submitting the investment proof early becomes a problem in certain cases.
For example, suppose you have a home loan on a floating rate basis. The interest rate may change after October and the EMI payment may actually go up. In that case, you may not be able to claim deduction on the higher interest outgo towards home loan except for claiming it at the time of filing your income tax return.
For tax saving instruments such as PPF, SCSS and NSC, the interest rates are announced before the beginning of a financial year. So, an early investment in these instruments will actually prove good because you will earn more interest.
An early investment in a medical insurance is also prudent because your risk coverage starts as and when you buy such a policy. Same is the case for a life insurance policy.
When it comes to investment in equity-related instruments, go for systematic investment plans and start investing early. You can submit the proof of actual investment early and can also reap the benefit of staying invested longer.
What is the other option?
If you feel your employer is too rigid on TDS collection and early deadlines for submission of investment proofs, you have the option to let the employer deduct full taxes at source while you do your tax planning and investments at your own convenience.
During the time of filing income tax return, you can claim the refund of excess tax deducted by the employer. However, you shall have to keep the documents safely with you in case the income tax department makes any query.
The income tax department these days ensures quick refund of tax.