Closure of the financial year is almost knocking on the doors and people are already scurrying to get their tax papers in order. All through the year we invest money in various financial instruments to help us save tax. While filing our tax returns, it's important to submit the relevant proof of investment.
Personal income tax, in India, is based on the "pay as you earn" concept. There's a compulsory withholding of taxes deducted from the salary paid to each employee. This is known as the tax deducted at source (TDS), covered under section 192 of Indian Income Tax Act (1961). The requirement for submission of proofs for relevant exemptions/deductions, are also set out under the same section. Every year, Central Board of Direct Taxes releases the TDS circular that specifies the investments eligible for deduction.
Here are the things that you must know before submitting proof of investment for tax saving.
1. Financial year
The financial years begins on 1 April every year and closes on 31 March the next year. The government has given four months time to every individual to collect their data and file tax returns before 31 July.
2. Income tax investment declaration
If your annual income is more than Rs. 2,50,000, then you have to produce declaration of your income tax to your employer. The declaration is a statement that you have to submit at the beginning of every year. It's about the various investments you intend to claim as tax benefits. These usually include health and/or life insurance premium, annual investments made in Public Provident Funds (PPFs), buying National Savings Certificates (NSCs), equity linked savings scheme mutual funds, rent receipts for House Rent Allowance (HRA) etc.
3. The regulations, and pros and cons
It's important to know about the investments that help to save tax and to what extent. Besides medical reimbursement, other expenses like traveling and house rent allowances are also eligible for tax exemptions. Employers start collecting the proof of investments in December and January to verify declarations made by you. The verification takes about two-three months and is usually completed by March every year.
4. What if you fail to furnish the proof?
Payment of a higher income tax is the immediate implication if you don't produce your proof of investments. The extra tax payable is often equal to a few months salary and that's a hefty amount if you are at a higher pay band. To claim Leave Travel Allowance (LTA), you have to produce travel receipts and copy of train tickets and boarding passes. Similarly, for home loan reimbursements, you have to produce relevant receipts. None of these expenses are admissible for deductions if you can't show proper proof.
5. Sharing of bank and FD interest helps
Sharing of bank interest, capital gains accrued from mutual funds and/or stock market investment, recurring and fixed deposit interest earned during the year, rental income or any other type of income with your employee, helps to prove your tax savings. It allows the employer to get a better idea of your taxable salary and subtract your income more accurately. Sharing such information also helps to avoid penalties that may come up for not paying the advance tax before the due date. You can also avoid payment of additional tax at the end of the financial year. This is because the tax will be almost equally distributed all through the year.
6. You don't need to declare your investments
Keep in mind that an investment declaration doesn't mean disclosing the actual investment. You can change the amount and mode of investment while actually paying the money for it. For instance, you may have declared Rs. 25,000 as investment towards your PPF at the beginning of the year. But at the time of actual investment, you can invest any amount, subject to the minimum threshold.
7. Proposed investments
You may declare the investments you are about to make for February and March. Depending on the disclosure, your employer will go on to process the TDS. You have to declare that you will invest money according to your proposal within the next two months.
Naval Goel is Founder & CEO PolicyX.com