All employers in India are required to deduct tax from their employees’ salaries. They might deduct more or less if the employees fail to submit the right investment proof. Therefore, all employees must submit proof of investment so their employers can calculate and deduct the right tax amount for the financial year.
In a recent edition of our Parichay webinar, CA Anurag Jain, Co-founder and Partner, ByTheBook Consulting LLP, answered the common and crucial questions on Proof of Investment (POI). The session received an overwhelming response from the attendees.
This blog post features the highlights of the conversation. We have also added some additional information based on our research. We hope you’ll find them helpful. If you want to hear it directly from the expert, you may listen to the recording after reading.
What is the difference between exemption and deduction?
Exemption: As per the Indian tax legislation, an exemption is an income that is not treated as taxable income. House rent allowance (HRA), paid by an employer, is an example. When a salaried employee pays rent to a landlord, a part of it becomes exempted. The amount of exemption is dependent on the city (metro or non-metro) in which the employee resides, and the submitted rent payment proof.
Deduction: A deduction is an amount that is treated as a deduction from an employee's taxable income. Eligible savings instruments and donations fall into this category. These deductions are made during payroll processing and help reduce an employee's net taxable income.
What is the difference between an investment declaration and proof of investment?
Investment declaration: An investment declaration is made when an employee joins a new organisation or during the beginning of the financial year. Submitted via Form 12BB, a declaration consists of the proposed investments and expenditures in the current financial year. These qualify for certain deductions and exemptions.
Proof of investment: In the month of January or February, every employee is asked to submit proof of the investments that were planned and made. The payroll department computes the final tax liability for the year and makes the necessary adjustments. The earlier computation would have been based on the investment declaration, which is only an estimated figure.
What are the most common savings investment schemes?
There are aggressive investors and conservative investors. The choice of instruments depends on the investor's risk-taking mentality, expected rate of return and the investment plan made earlier. Furnished below are some of the popular schemes.
Provident Fund: Mandatory for organisations with 20 or more employees, Provident Fund is a government-run scheme with assured returns. The interest rate is in the range of 8.1% to 8.5%. It is fully exempted from income tax if certain conditions are met.
National Pension Scheme(NPS): NPS is a retirement savings scheme with lesser loading and admin charges. This instrument is not fully exempted from tax as of now. But the government has been making amendments to the provisions of the scheme.
National Savings Certificate (NSC): This is a fixed-return savings bond that can be opened at any post office. It offers a 6.8% interest with a 5-year lock-in period. Available only to Indian citizens, NSC is similar to a mutual fund.
Postal Savings Scheme: Offering an interest of 4%‒9% per annum, postal savings schemes are ideal for those who want a safe investment option. There are different types of tax savings schemes offered by the postal department.
Unit-linked Insurance Scheme: It is one scheme that provides the benefit of a long-term investment and a life insurance policy. It offers the provision to make withdrawals after a specified lock-in period. The different types of ULIP address the needs of different types of investors.
Insurance Scheme: A common tax-saving instrument, an insurance scheme is usually intended to protect the future of family members in the event of the death of the insured person. There are also schemes that cover medical exigencies and disabilities.
What are some of the common mistakes in investment-proof submission?
Some people delay the submission of POI and wait till the last minute. Sometimes, they misplace the original documents. This results in last-minute stress and errors. Also, the organisation finds it difficult to handle the sudden surge in the volume of requests and data. Even the server might throw up an error due to the heavy load. Therefore, employees must complete the submission as soon as HR opens the POI window.
Is it mandatory for employees to report their additional income?
There is no mandatory requirement for employees to furnish the details about all their earnings and expenses. But the organisation cannot accurately calculate the final tax liability without these details.
What happens if an employee does not submit any proof of investment?
Some employees may not be ready with the documents, and the organisation might have closed the POI submission window. In this case, the employees can submit the same at the time of IT return filing. Since the employer might have already deducted the TDS, the employee can claim a refund of excess tax by providing the bank account details.
Is there a deduction in the interest paid on a car loan?
If an employee takes a loan to buy an electric car, there is a tax deduction on the interest paid on the EMI. The income tax legislation allows a deduction of up to a maximum of INR 50,000 in this case.
Can an employer avoid the deduction of tax from an employee's salary?
No, that's not permitted. As per the law, employers have to deduct tax (TDS) from an employee's salary and pay the amount to the government within seven days from the end of the month.
Is it compulsory to consider the income of an employee's previous employer?
It is not mandatory but recommended. If the previous income is not divulged, the employee is likely to pay a higher tax amount. Hence, employees must furnish the details, so the current employer can factor that in and work out the final tax liability accurately.
Watch the recording of the entire webinar
