Advance income tax while leaving/ switching firm

TDS / TCS 715 views 3 replies

Ansh

Banker

26 Points Posted on 26 April 2012

Hi all,

I had a query regarding tds while switching firms.

For eg.

The current salary of an employee is Rs. 10k basic + Rs. 5k HRA + medical benefits per month.

The emplpoyee has a PPF account to which he will pay lets say Rs. 15k during the financial year. The employee wants to quit his job and will get paid only for two months - lets say April and May. Later he might find an alternate job in other firm. It is reasonable to assume that the person might not receive any salary for a month during which he would shift to maybe another town and start finding alternate job.

Now, what I have heard is that according to a law, for advance tax calculation (which is deducted on a monthly basis from the salary) it is assumed that the employee will be paid Rs. 10k +5k throughout the year. However, since the person would be leaving the firm, this 5k HRA exemption wont be applicable since the wont be providing rent receipts for all the months to the current firm after he leaves in May. So the basic salary from June is computed as Rs. 10+5= 15k and his monthly tax is computed on same. But this way, the employee wont be able to claim any HRA exemption for Tax, to the extent that his tax liablitity might approx. double. Of course, once the person gets another job, depending on his salary (new basic plus HRA), he might be able to get the benefit of extra tax paid during April and May by paying less tax from the time he joins another firm.

What I am confused about is-

1) Should the current firm calculate tax based on the premise that he will continue to receive the same salary for rest of the year, even though actually the firm wont pay him salary once he leaves the job?

2) Even if the firm assumes that the salary is paid for 12 months, is it fine to delete the HRA component from June onwards and add it to the basic salary, devoiding the employee of any tax benefits on HRA, on the premise that the employee wont be producing any rent receipt for the remaining months?

3) Even the medical benefit of Rs. 1,250 be added to basic since employee wont be providing the current firm medical bills which would be available only month wise?

4) What about PPF, insurance and other tax deductable investments that the employee has planned. Would they be considered while calculating tax?

Awaiting response.

Thank you

Replies (3)

Ansh

Banker

26 Points Posted on 27 April 2012

Please reply. This is a bit urgent

Anupreksha Thote

285 Points Posted on 27 April 2012

As per law, every organisation has to estimate employees annual income in april and should accordingly deduct tax monthly..While estimating annual income of employee, organisation can consider every benefit which employee is entitled to as per Income Tax Act..

If an employee leaves organisation in between the year, organisation has to calculate his tax liability till month he is assosicated with tht org..that means calculate actual tax liability of employee..you can consider all tax benefits entitled to employee while calculating actual tax liability and file TDs Return.

Collect proofs of all investment made by employee which benefit has been aloowed to employee while calculating actual tax liability.

Adjust his final months tds amount as per actual tax calculation..

Hope this answers your query..kindly revert if any further clarification is required..

Ansh

Banker

26 Points Posted on 27 April 2012

Originally posted by : Anu
	As per law, every organisation has to estimate employees annual income in april and should accordingly deduct tax monthly..While estimating annual income of employee, organisation can consider every benefit which employee is entitled to as per Income Tax Act.. If an employee leaves organisation in between the year, organisation has to calculate his tax liability till month he is assosicated with tht org..that means calculate actual tax liability of employee..you can consider all tax benefits entitled to employee while calculating actual tax liability and file TDs Return. Collect proofs of all investment made by employee which benefit has been aloowed to employee while calculating actual tax liability. Adjust his final months tds amount as per actual tax calculation.. Hope this answers your query..kindly revert if any further clarification is required..

If the employee leaves in lets say May- Then he wont be able to submit all investment related proofs because he might be making those investments at end of the year. Also if he has a loan then instalments are monthly, so he can submit proof only from April - May.

And I know tds would be cut only for month of April- May for the employee. But this monthly tds is based on salary for 12 months right? Let us take same example- Salary is 10+5= 15. Tax is on 15*12= Rs. 180

Let us say based on all HRA deduction, interest on education loan and insurance etc., the total tax liability comes to Rs. 12 p.a.

So tds comes to Rs. 1 pm

Now, if the employee wants to leave the firm, since he wont be making investments in April and submitting proofs, it is safe for the employer to assume zero benefit on that and tds shoots up to let us say Rs. 1.5 pm

Now, should the employer also assume no interest would be paid on education loan?

Also, since no documents for rent would be given to the current employer for rent as well, the employer would like to assume that rent paid is zero in which care the HRA deduction becomes zero and hence my monthly tds shootts up to Rs. 2 pm.

Is it the correct approach???