Important Keyword: Form 12BB, Form 16, Form 26AS, Salary Income, Tax Savings & Deductions.
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Tax consequences of switching Jobs during the year
Switching jobs mid-year can indeed have tax implications that individuals should be aware of. Here are some key considerations:
Last Drawn Salary and Deductions:
- When switching jobs, individuals should communicate their last drawn salary and deductions claimed to their new employer.
- Providing this information helps the new employer calculate the appropriate tax deductions and ensures accurate reporting of income.
Tax Implications:
- Changing jobs may affect the tax liability for the financial year.
- The income earned from each job during the year must be considered for tax calculations.
- Individuals should ensure that tax deductions and exemptions are correctly applied to avoid under or overpayment of taxes.
Form 16 and Tax Documents:
- Individuals should collect Form 16 or equivalent tax documents from both previous and current employers.
- These documents provide details of income earned, tax deducted, and exemptions claimed from each employer during the financial year.
Income from Other Sources:
- If income is received from multiple sources during the year, such as interest income, rental income, or freelance work, it should be accurately reported in the income tax return.
Tax Planning:
- Tax planning strategies may vary based on changes in income and deductions.
- Individuals may need to adjust their tax-saving investments or deductions based on their new income and financial circumstances.
Tax Consequences of Switching Jobs
Higher tax bracket due to switching jobs
Indeed, transitioning to a new job with a higher salary can push individuals into a higher tax bracket, resulting in a significant increase in tax liability. Here’s how individuals can address this issue:
Assessing Tax Bracket:
- Individuals should carefully evaluate their new salary and tax implications to determine if they are moving into a higher tax bracket.
- Understanding the new tax bracket helps individuals anticipate the impact on their tax liability.
Communicating with Employer:
- It’s essential to communicate with the new employer about the potential increase in tax liability due to the higher salary.
- Individuals can request the employer to adjust the tax deductions (TDS) accordingly to avoid underpayment of taxes.
Tax Planning:
- If transitioning to a higher tax bracket, individuals may consider tax planning strategies to mitigate the impact.
- Exploring options such as tax-saving investments, deductions, and exemptions can help reduce the overall tax burden.
Reviewing Pay Structure:
- Individuals can discuss with their employer the possibility of structuring the pay in a tax-efficient manner.
- Opting for components such as reimbursements, allowances, or tax-free perks can help optimize the tax position.
Consulting a Tax Advisor:
- Seeking guidance from a tax advisor or financial planner can provide valuable insights into managing tax implications effectively.
- A tax advisor can help individuals navigate complex tax situations and optimize tax-saving opportunities.
Furnishing Form 12BB with the previous salary details
When you embark on a new job journey, your employer may request Form 12BB, a document crucial for outlining your previous salary details and TDS deductions. This form serves as the foundation for your new employer to determine TDS deductions for the remaining financial year.
Here’s a simplified guide to navigating Form 12BB:
Gathering Previous Salary Details:
- Begin by gathering essential documents from your previous employer, including salary slips and Form 16.
- Ensure you have accurate records of your basic salary, allowances, perquisites, and any deductions claimed.
Reporting TDS Deductions:
- Provide comprehensive information about TDS deductions made by your previous employer on your salary income.
- Be diligent in documenting TDS deductions related to various salary components such as basic salary, allowances, and bonuses.
Verification and Accuracy:
- Prioritize double-checking all entries in Form 12BB to ensure precision and completeness.
- Verify that the information you provide aligns seamlessly with the salary statements and TDS certificates from your previous employer.
Communication with New Employer:
- Maintain open communication with your new employer regarding any discrepancies or additional details concerning your salary and TDS deductions.
- Transparency with your new employer fosters understanding and facilitates accurate adjustments of TDS deductions for the remainder of the financial year.
Consultation with Tax Advisor:
- Seek guidance from a tax advisor or financial expert if you encounter uncertainties or complexities while completing Form 12BB.
- A tax advisor can offer valuable insights into tax implications and ensure compliance with regulatory standards.
Submission and Record-Keeping:
- Submit your completed Form 12BB to your new employer within the designated timeframe.
- Retain a copy of Form 12BB for your personal records, maintaining a comprehensive record of your financial transactions.
Take a copy of Form 16 from the previous employer
Remember to obtain a copy of Form 16 from your previous employer. While the final Form 16 is typically issued after the conclusion of the financial year, you’ll receive an interim Form 16 from your former employer, containing vital information such as salary details and TDS deductions.
This interim Form 16 serves as a valuable resource when completing Form 12BB for submission to your new employer. By cross-referencing the details provided in the interim Form 16 with your other financial records, you ensure accuracy and completeness in Form 12BB.
Here’s why securing an interim Form 16 is essential:
Timely Submission: With an interim Form 16 in hand, you can promptly submit Form 12BB to your new employer, facilitating seamless integration into the payroll system.
Accurate Reporting: The interim Form 16 provides comprehensive insights into your salary income and TDS deductions, enabling you to accurately report these details in Form 12BB.
Smooth Transition: By proactively obtaining an interim Form 16, you streamline the transition process between employers, minimizing potential delays or discrepancies in TDS deductions.
Compliance Assurance: Access to an interim Form 16 ensures compliance with regulatory requirements, as it contains verified information pertaining to your income and tax deductions.
Document Retention: Retain a copy of the interim Form 16 for your records, serving as a valuable reference for future tax-related inquiries or audits.
Avoid claiming Deductions twice
Ensure that you claim tax-saving deductions and exemptions just once. Submitting Form 12BB to your new employer can help prevent any duplication of claims. Verify that you only claim deductions that were not previously availed during your earlier employment.
If you neglected to submit Form 12BB, you may need to assess whether you owe any Advance Tax or Self-Assessment Tax. If your new employer failed to consider the TDS and deductions from your previous employer, you might find yourself liable for additional tax, along with interest penalties. This could result in tax liabilities even after both employers have deducted TDS.
Let’s illustrate this with an example:
Dinesh changed jobs in the financial year 2018-19. Here are his salary and TDS details:
- Salary from the previous employer: INR 5,00,000
- TDS deducted by the previous employer: INR 30,000
- Salary from the new employer: INR 8,00,000
- TDS deducted by the new employer: INR 60,000
In this scenario, if Dinesh did not submit Form 12BB to his new employer, the new employer may not have considered the TDS deducted by the previous employer. As a result, Dinesh might owe additional tax, potentially incurring interest penalties as well.
| Particulars | Income from ABC ltd (in INR) | Income from XYZ ltd (in INR) | Actual tax liability (in INR) |
|---|---|---|---|
| Income from Salary | 5,00,000 (April-September) | 7,00,000 (October-March) | 12,00,000 |
| Less: Basic Exemption Limit | (2,50,000) | (2,50,000) | (2,50,000) |
| Taxable Income | 2,50,000 | 4,50,000 | 6,50,000 |
| Tax Liability | 0 | 10,400 | 44,200 |
| Monthly TDS deducted by the employer | 0 | 1733 for six months | |
| Total TDS deposited by the employer | 0 | 10,400 | 10,400 |
| Tax liability at the year-end | 44,200 | ||
| TDS shortfall | 33,800 |
In conclusion, Dinesh’s situation highlights the importance of managing tax implications when switching jobs mid-year.
- Higher Tax Bracket: Despite earning within the 20% tax bracket individually, Dinesh’s combined income from both employers places him in a higher tax bracket. This can lead to unexpected tax liabilities.
- Double Deductions: Both employers deducted TDS based on the basic exemption limit of INR 2,50,000, resulting in a shortfall of INR 33,800 in Dinesh’s tax payments. This shortfall may accrue interest penalties unless addressed promptly.
To mitigate such issues, it’s crucial to accurately communicate previous employment details—including salary, allowances, and deductions claimed—to your new employer. This can be achieved by submitting Form 12BB or an interim Form 16. Providing this information empowers your new employer to calculate TDS accurately, ensuring compliance with tax regulations and avoiding potential tax shortfalls and penalties.
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Official Income Tax Return filing website: https://incometaxindia.gov.in/
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