a) Left job?
b) Are you planning to switch jobs?
c) Have you only recently moved into an exciting new career?
Many of us for one or other reason change or leave job be it for career advancement, better pay or personal reasons. But have you ever analyzed why your tax outflow goes up each time you switch jobs? Well this article attempts to provide you an insight into the facts to consider while switching jobs as well as tips to help you avoid hassles that come with career moves.
When you leave your existing employer, the following things become essential:
- Collect Form 16 from previous employer
Get a Form 16 copy from your previous employer. While the final Form 16 may only be available after the end of the financial year, your previous employer will issue to you an interim Form 16 giving all the requisite details. This includes salary paid, TDS deducted and paid into government account. This forms the basis for you to fill up Form 12B which you need to submit to your new employer. This is necessary to ensure that investment declarations, home loan deductions and other tax exemptions are not considered twice.
- The Parting cheque
Usually the final settlement includes the following amounts:
a. Unpaid salary
As per income tax law, salary is due when accrued, not only when received. When you resign, the last salary is paid out to you as part of your full and final settlement. This salary may be delayed if there are pending settlements in terms of advances. However, your salary will be taxed based on accrued basis and not on receipt basis. Thus if you resigned in December and the last salary has not been paid till March, you still need to show it in your tax returns as the salary has been accrued though not paid.
b. Salary in lieu of notice period
As per the terms of employment, the company can remove an employee from job after giving a notice. If the company wants to remove him by an immediate effect, then the company has to pay him salary for the notice period. Salary in lieu of notice period is charged to tax on receipt basis.
c. Allowances
If you change your job before the deadline to submit documentary proof for claiming the allowances you are eligible for, your annual house rent and medical or conveyance allowances could lose the tax-free status. This is because your previous employer will pay it along with the final settlement amount. If you have not submitted rent receipts and bills, the sum will be taxed as normal income. So, make sure you submit rent receipts and other documents before you put in your papers. If you fail to give the rent receipt, you can claim HRA ex emption when you file the return.
d. Notice Pay
The employee has to serve the notice period as per the Company policy. If you failed to serve your notice period, the company usually makes a recovery of notice pay from the full and final settlement. Since you do not earn this pay, you are not required to pay tax on it. Check your Form 16. If Form-16 is issued without deducting the notice pay recovered from gross salary, do remember to deduct the notice pay from your income while filing the return.
e. Leave encashment
You have the option to serve the notice period or you can also get it reduced by adjusting your earned leaves against your notice period. However, if you cashed your leave, then you need to check how your previous employer has taxed it. The legal position (Sec10(10AA) is as follows:
| S.No | Leave encashment timing | Govt. Employees | Non-Govt Employees |
|---|---|---|---|
| 1 | During period of service | Fully taxable | Fully taxable |
| 2 | At the time of retirement or separation (other than on account of Termination) | Fully exempt | Exemption is least of the following: 1) Rs 3,00,000 2) Leave encashment amount actually received 3) 10 months’ salary (on the basis of average salary of last 10 months ) * 4) Cash equivalent to leave to the credit of employee at time of retirement ** |
| 3 | At the time of termination | Fully taxable | Fully taxable |
f. Recovery of joining bonus
In case you have signed an agreement with the Employer not to leave job before a stipulated period and you are paid a joining bonus contingent on this basis, the previous employer is entitled to recover the same. The amount received is charged to tax under salaries as profits in lieu of salary and hence TDS would have been deducted. Do remember to claim the tax deducted on the bonus amount in your return.
g. Gratuity
As per section 10(10)(ii), exemption in respect of gratuity received by a non-Government employee is available subject to limits specified therein.
h. Leave travel allowance
Some companies pay LTA as a fixed monthly amount while some pay it on submission of bills as a reimbursement. In the latter case, you usually receive the CTC component of LTA to the extent unavailed at the time of full and final settlement which becomes taxable with previous employer.
According to the leave travel allowance (LTA) rules, travel expenses for you and your family can be claimed for two return journeys in a block of four years. This means that tax exemption can be claimed only twice, irrespective of the number of companies you were employed with during those four years. So, you can carry forward unused LTA for the purposes of tax from your previous employer to the next within the same block, but must retain the proof of travel to claim LTA.
i. Processing of PF transfer forms / PF settlement
When you change jobs, an important decision is whether you should transfer the PF or withdraw the PF accumulated during your previous employment. Since Provident Fund is a long term saving, it is always advisable to transfer the PF to your new employer. More importantly, you need to remember that PF withdrawn before a period of 5 years is taxed as income in the year it is redeemed. This will add to your tax burden and hence you need to make your choice intelligently. Refer more on PF with our article on http://taxingtax.com/need-know-employees-provident-fund/171/
3. Check all documents before you exit
Remember to take the following documents at the time of final goodbye to the previous employer:
- Salary slips
- Full and final settlement statement
- No Dues certificate
- Form16
- Relieving letter,
- Form 19 and Form 10C for PF withdrawal.
When you join the new employer, do ensure the following things:
- Declare your salary income from previous employer to the new employer
Any employee joining an organization is required to submit Form 12B to the employer. This includes the PAN and TAN of the previous employer, details of salary paid, details of TDS deducted and professional tax paid by the previous employer. The Form 12B needs to be filled carefully as it will form the basis on which your new employer will deduct taxes in the remaining months of the financial year. This will enable your new employer to work out how much of taxes are actually payable by you and work out your monthly deduction accordingly.
If the new employer has no clue about your income from old employer, he may end up giving you the minimum exemption again or apply slab rates incorrectly. When you’ll finally consolidate your incomes – you may end up seeing a tax payable, since exemption was granted twice some income may not have been taxed properly.
- Disclose the following documents to your new employer
While you will be providing salary information, do remember to share the following details as well –
- Rent details like rent agreement, rent receipts, to continue to claim HRA exemption
- Interest on home loan and house property income details
- Medical Expenses already claimed from the Rs 15,000 eligibility
- Section 80 Deductions – investments, expenses or payments made in this regard.
Although besides salary one can take care of claiming deduction while filing return too – however, it’s always wise to disclose these details to your employer so tax on these incomes is deducted and deposited timely.
- Be watchful on your monthly TDS
An individual has to see to it that the old salary, as declared, has actually been taken into account for the TDS calculations by the new employer. The best way to keep track is by keeping a tab on monthly TDS in the new company. If it drops substantially below the previous TDS amount, the scope for trouble widens. Also, the tax forecast statements, if provided by the employer, can also be checked from time to time.
- Be proactive
Self-manage your liability with the help of a tax consultant and pay advance tax if required to reduce or eliminate interest liability.
Hope you find the article useful. Post in your queries if any.
Source: www.incometaxindia.gov.in
