Why Job Changes Can Lead to Higher Tax Liability?

Sachin Jain — Wed, 21 Aug 2024 07:59:54 +0000

Changing jobs brings new opportunities as well as challenges, especially financial ones. A common issue we've seen in this year's ITR filings is that clients with multiple Form 16s end up with higher tax liabilities. This isn't due to job changes themselves but because both the previous and new employers may under-deduct TDS, resulting in more in-hand salary than expected. Consequently, you'll need to pay the additional tax, along with interest, when filing your ITR. Let's understand this scenario in detail

Understanding Form 16

Form 16 is a certificate issued by an employer detailing the total amount of salary paid to an employee and the tax deducted at source (TDS) on that salary. It is crucial for filing your income tax return (ITR) as it serves as proof of the taxes you’ve already paid.

The Problem with Multiple Form 16s

When you change jobs within a financial year, you receive a Form 16 from each employer. While each employer deducts TDS based on the salary paid during their tenure, they may not account for your total income for the entire year. This can lead to under-deduction of TDS.

Here’s why this happens:

Different Employers, Different TDS Calculations: Each employer calculates TDS based on the salary they pay you, assuming that you will stay with them for the entire financial year. If you switch jobs, the new employer starts the calculation afresh without considering the income from the previous employer.
Standard Deduction and Tax Slabs: Both employers give you the benefit of standard deduction and apply tax slabs as if the salary they are paying is your only income for the year. This can result in a lower TDS being deducted than what is actually required.

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Example Scenario

Let’s say you worked with Company A from April to September and then joined Company B from October to March. Both companies deduct TDS considering their respective payment periods. However, your total income for the year is the sum of salaries from both companies. Since each company doesn’t have a complete picture, TDS might be deducted at a lower rate than necessary.

Consequences of Under-Deducted TDS

Higher Tax Liability at Year-End: When you file your ITR, you may find that you owe additional taxes because the TDS deducted was insufficient.

Interest and Penalties: Under Section 234B and Section 234C of the Income Tax Act, you may have to pay interest on the unpaid tax liability due to under-deducted TDS.

How to Manage Multiple Form 16s

Inform Your New Employer: When you join a new company, inform them about your previous employment and provide them with details of your previous salary and TDS. This will help them calculate TDS more accurately.

Submit Form 12B: You can submit Form 12B to your new employer, which contains details of your income from the previous employer. This ensures that your new employer deducts TDS considering your total income for the financial year.

Review Your Form 26AS: Form 26AS is a consolidated statement of your tax deducted and deposited. Regularly review this form to ensure that TDS has been correctly credited to your account.

Estimate Your Total Income: Calculate your estimated total income for the financial year and determine the approximate tax liability. Compare this with the TDS deducted by both employers and pay any advance tax, if required, to avoid interest and penalties.

Conclusion

While job changes can offer great career growth, they also bring financial responsibilities, especially when it comes to managing taxes. By being proactive and ensuring accurate TDS deductions, you can avoid the shock of a higher tax liability at the end of the financial year

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