Tax consequences of switching Jobs during the year
People change jobs for higher salaries, better prospects, better exposure etc. Taxes is one of the concerns for those who change jobs mid year. Communicating your last drawn salary and deductions claimed, can solve half of your problems. So let’s go through some important aspects which you need to keep in mind while switching jobs.
You earn salary when it accrues, and not only when you receive
To understand this better, let’s say Hari left his job in January 2016. However, he did not receive his salary from his ex employer until 31st March 2016. Even though Hari has not received his salary, he still needs to show it in his return. So make sure to take into account all your salaries for a Financial year, even though you have not received the same during that financial year.
Higher tax bracket due to switching jobs
You also need to check if the new job is putting you in a higher tax bracket for the particular financial year. Let’s say if you are currently in the 20% tax bracket and the increased salary will take you into 30% tax bracket. This could mean a substantially higher tax outgo. Which you need to communicate to your employer and ask them to deduct your monthly TDS accordingly.
Take a copy of Form 16 from previous employer
Don’t forget to take a copy of FORM 16 from your previous employer. Even though the final FORM 16 may only be available to you after the end of the financial year, you will receive an interim Form 16 from your previous employer including details of salary paid, TDS deducted and paid into government account. Which will help you to fill up Form 12B which you need to submit to your new employer.
Be careful while furnishing Form 12B
Once you join the new employer, he will ask you to submit Form 12B. Which is basically the information of previous employer and details of salary paid by him and TDS deducted and paid by him. One needs to be extra careful while filling Form 12B as it will be the basis on which your employer will deduct TDS in the remaining month of the financial year.
Avoid claiming exemptions/deductions twice
An important thing to consider when you are changing jobs in the middle of the year is to make sure that deductions and exemptions regarding tax liability are claimed only once. You can avoid this situation by submitting Form 12BB to your new employer. Just make sure that you claim only those deductions which you did not claim during earlier employment.
If you were unable to submit Form 12BB then you may have to check whether you are liable to pay any self assessment tax or not. If your new employer has not taken care of old employer tax details and/or deductions claimed, you might end up owing tax along with some interest penalty. In that case, you will have to pay tax by filing Challan 280.
Let’s take an example to understand:
Mr. D switched job during FY 2015-16. Here are his salary and TDS details.
|Correct way to|
calculate tax liability
|Income from Salary||Rs. 4,00,000 (April-September)||Rs. 5,00,000 (October-March)||Rs. 9,00,000|
Basic Exemption Limit
|(Rs. 2,50,000)||(Rs. 2,50,000)||(Rs. 2,50,000)|
|Taxable Income||Rs. 1,50,000||Rs. 2,50,000||Rs. 6,50,000|
|Tax Liability||Rs. 15,000||Rs. 25,000||Rs. 1,05,000|
| Monthly TDS deducted by the employer||Rs. 2,500 for 6 months|| Rs. 4166 for six months|
| Total TDS deposited by employer||Rs. 15,000||Rs. 25,000||Rs. 40,000|
|Tax liability at the year end||Rs. 1,05,000|
|TDS shortfall|| Rs. 65,000|
As you can see, the total tax liability when you add up both the salary incomes comes to Rs. 1,05,000. However the total TDS deposited by both the employers is Rs. 40,000 only. As a result, there is a shortfall of Rs. 65,000 which Mr. D will have to pay with interest penalty before he files his Income Tax Return.
To put it simply, you need to communicate your previous employment details (salary, allowance, deductions claimed etc) accurately to your new employer. This would enable him to calculate TDS accurately. You will be able to avoid paying tax along with interest penalty at the time of filing return.
Frequently Asked Questions
1. What to do if TDS is not properly deducted by employer?
You can either request your employer to rectify the error, or you can pay the Advance Tax or Self Assessment Tax