Budget 2022: Consequences for TDS shortfall are borne by the employee who has switched jobs

(This story originally appeared in on Jan 13, 2022)

MUMBAI: A job-hop could result in the employee having to pay (penal) interest owing to a shortfall in the tax deducted at source (TDS) against salary, which has not been covered by the new employer.

The previous employer (Company A), will typically calculate the TDS based on the employee’s entire taxable income for that particular financial year. It will also take into consideration the proposed investments in eligible saving instruments under section 80-C which include provident fund contributions. After arriving at the tax liability for the year, Company A will determine the TDS to be deducted each month from an employee’s salary.

On the other hand, the new employer (Company B), will typically take cognisance of the employee’s income from the date of joining. It could also consider again in full the various tax deductions (such as those available under section 80C) that the previous employer has already factored in. The end result could be that the TDS deducted by Company B will be much lower than the employee’s tax liability.

The table below, illustrates how such shortfall arises where each employer deducts tax at source, considering only the salary paid by it. As can be seen both Company A and Company B have considered the entire eligible amount of standard deduction and also the tax deduction under section 80C.

Need for easing the tax burden on the employees:
The Bombay Chartered Accountants’ Society (BCAS), in its pre-budget memorandum, has submitted: “Because of short deduction by the employer on account of change of employment, many times the excess tax has to be paid in form of self-assessment tax by the employee.” This professional association adds, “Interest under sections 234B and 234C for short deduction or deferment in payment, should not be charged to employees, on account of failure of deduction on the part of the employer.”

The employee who has switched jobs, should ideally furnish Form 12B to the new employer. This form contains details of the previous salary, taxable perquisites, Section 80C deduction considered and the tax already deducted.

“The problem with the existing procedure of furnishing Form 12B is that the option to do so lies with the employee, many of whom lack knowledge of the existence of this form. The new employer has to consider it only if the employee furnishes the form,” points out Gautam Nayak, member of the taxation committee at BCAS and tax partner at CNK & Associates.

“Most employees are not aware of the problem of shortfall in tax and interest thereon, arising due to consideration of the basic exemption, standard deduction and deduction for investments under section 80C by both employers. Hence, unless the employer insists on their furnishing of the form, employees ending up paying interest on the TDS shortfall in the year of change of employment.”

Advance tax is payable in four instalments. Up to 15% of the estimated tax must be paid by 15 June, up to 45% by 15 September, up to 75% by 15 December and up to 100% by 15 March. If not, a 1% interest per month is charged on the shortfall, under Section 234C of the Income Tax (I-T) Act, until the next instalment, which falls due after three months.

Irrespective of whether advance tax has been paid or not, if the total advance tax paid (including TDS) is less than 90% of the tax liability at the end of the financial year, then the interest under Section 234B is also payable. This is calculated at the rate of 1% a month and is payable on the shortfall from 1 April (the beginning of the financial year) till the month in which the employee files his/her Income-tax (I-T) return and makes the payment.

“This issue can be resolved by exempting shortfall in advance tax in the year in which the employee changes employers (to the extent that it consists of such short TDS), from the levy of interest under sections 234B and 234C,” suggests Nayak.

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