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ShareJammu: If you have changed jobs during this financial year -- or are planning to do so -- it would be prudent to declare the income from your old job to your new employer.
Take this case of a friend of mine. In late July this year, a few days before the last day of filing taxes, this friend, who had changed jobs during financial year 2008-09 (the period between April 1, 2008 and March 31, 2009), came to me to have his income-tax returns filed.
For the first five months of 2008-09 (from April 1, 2008 to August 31, 2008) he had worked for one company and for the remaining seven, (i.e. September 1, 2008 to March 31, 2009) he had worked for another.
After the end of the financial year, both organisations issued him the mandatory Form 16. He came to me with both forms to have his returns filed.
While running the numbers, I realised that he still needs to pay a tax of Rs86,108 more, which, of course, was a shock to him.
First, let us have a look at his summarised Form 16, as issued by both employers:
Form 16, first job
Taxable salary: 3,50,000
Deductions under Section 80C: Employees provident fund (12% of basic salary of Rs30,000 per month): 18,000
Taxable income: 3,32,000
Tax on income up to Rs1.5 lakh: 0
Between Rs1.5 lakh and Rs 3 lakh (@ 10%)15,000
Over Rs3 lakh (@ 20%) 6,400
Total tax: 21,400
Education cess @ 3%: 642
Amount payable: 22,042
Form 16, second job
Taxable salary: 7,00,000
Deductions under Section 80C:Employees provident fund (12% ofbasic salary of Rs50,000 per month): 42,000
Principal repaid on home loan:60,000
Total:1,02,000
Total deduction allowed 1,00,000
Deduction for interest paid on home loan: 45,000
Taxable income: 5,55,000
Tax on income up to Rs1.5 lakh:0
Between Rs1.5 lakh and Rs 3 lakh (@ 10%):15,000
Between Rs3 lakh and Rs 5 lakh (@ 20%):40,000
Over Rs5 lakh (@ 30%): 16,500
Total tax: 71,500
Education Cess @ 3%: 2,145
Amount payable: 73,645
These were the inputs my friend provided me with. Using them, his tax return worked out
as follows:
Taxable salary: 10,50,000
Deductions under Section 80C: 1,00,000
Deduction for interest paid on home loan: 45,000
Final taxable income: 9,05,000
Tax on income up to Rs 1.5 lakh:0
Between Rs1.5 lakh and Rs 3 lakh (@ 10%):15,000
Between Rs3 lakh and Rs 5 lakh (@ 20%):40,000
Over Rs5 lakh @ 30%: 1,21,500
Total tax: 1,76,500
Education Cess @ 3% 5,295
Total tax payable:1,81,795
Tax paid (as reflected in Form 16s) 95,687
Balance amount due: 86,108
Thus, his total tax liability on the income earned for financial year 2008-09 stands at Rs1,81,795.
The tax deducted by both employers stands at Rs95,687.
This means a tax payment of Rs 86,108 was due. When I showed my friend the numbers, he was rattled. He couldn't believe that such a humungous amount of tax still needed to be paid.
Why was the tax outstanding so huge?
Two reasons -- The first, of course, is that his second organisation did not take into account his income in his previous job while deducting tax every month.
And when his income from both companies was added, a good portion of his income for the year fell into the highest tax bracket of 30%.
That increased his tax outstanding hugely.
The other reason is that both his organisations made separate deductions for Section 80C.
The first organisation deducted Rs18,000, whereas the second deducted Rs 1 lakh, taking the overall deduction to Rs1.18 lakh.
However, the overall deduction allowed under Section 80C is limited to Rs 1 lakh.
And this had to be adjusted while filing his income-tax returns.
The next question: Why did this happen?
Answer: Because my friend did not declare the income from his first job while taking on his second job. He should have informed the human resources department at his second company of the income he had already earned during the course of the year.He should have also informed them of the tax that had been deducted, and the amount of Section 80C deduction he had already claimed at his first job.
This would have allowed his second company to cut the right amount of tax every month, and he wouldn't have ended up with the huge tax liability he has now.
It need not be said that arranging for Rs86,000 at one go is much more difficult than paying it over a period of seven months.
The moral of the story? Next time you change jobs, make sure you inform your new company of the money you made -- and the taxes you paid -- at your last job.
