Moving jobs in the middle of the year? Here is how you can avoid a tax shock
When Raghav switched his job from a leading digital marketing agency to a global consultancy, it came with a much higher salary, a new role, and bigger responsibilities. He took the challenge head-on and by the end of the financial year had settled into the job well.
However, he got a shock at the time of income tax filling when he was asked to pay a huge amount as an additional tax. He couldn’t understand why this happened as both his employers cut tax from his salary throughout the year. Not having any option, he grudgingly paid the money.
Well, Raghav is not the only one to face such a situation! Most professionals, who change jobs during the year, do not pay attention to the tax implication that arises with the move and find them shelling out a big amount at the year-end.
But this doesn’t have to be this way. In this blog, we explain how to avoid this hassle.
Double Deductions are the Primary Reasons
Most of us never pay attention to disclosing our previous salaries, tax already paid, and deductions claimed in the last organization to our new employer. And when we do not submit these details, this is what happens:
- Exemption limit of ₹ 2.5 lakhs is counted by both employers
- Double-counting of Section 80C tax benefits
Here is an example that explains how this double deduction leads to inaccuracy in your tax computation and how can you avoid them:
- Let’s say you worked in your previous organization at a before tax (gross) monthly salary of ₹ 68,000 and your 80C declarations were ₹ 55,000. Your last working day was June 30, 2019.
- Now when you joined a new organization on July 01, 2019, your monthly salary is ₹ 92,000 and your final investments under Section 80C are ₹ 90,000.
Let’s see how both the employers will calculate and deduct your tax.
The Table below Mentions Separate Calculation by Both the Employers:
Here is What Happened?
When you didn’t provide your last salary and TDS details, your new employer took the standard deductions and exemption limit to calculate your tax. Whereas, the last employer has already granted these two exemptions while calculating your tax.
And when both the incomes are put together and the double counting is corrected, you suddenly see a big tax liability.
However, with Form 12B you can disclose the above tax deductions to your new employer to avoid paying penalties on the extra tax exemptions that were given to you.
Form 12B — The Solution to this Problem
Luckily, there is a way to avoid this and it is simple. When you leave your previous organization make sure that you ask for Form 12B. If they aren’t able to or they don’t give it to you, you can download it from the income tax official website and fill it up looking at your salary slip. And, when you are at your new workplace, you can submit this Form 12B to the new employer.
Form 12B contains all the key information like your employers’ PAN and TAN details, salary paid to you, the tax deducted, professional tax paid on your behalf, etc. Based on the information provided in this form your new employer can work out on your tax deductions for the remaining months of the financial year.
Another advantage is that at the end of the year, you will get a consolidated Form 16 from your current employer. In the case you don’t submit these details, both your past and the current employer will give you Form 16 and you will need to reconcile them. So, you save a lot of time.
Income tax laws can be really confusing and most of us don’t pay attention to taxes until the end of the year. However, if you have changed or are looking to change jobs in the middle of the year, it is imperative you give some time to figuring out your taxes. It will help you avoid a big one-time tax payment at the year-end.
Disclaimer: The above calculations are for illustration purpose only. The tax would involve 4% Cess as per the recent income tax rules.
Originally published at https://www.etmoney.com.