As you all are aware the financial year, which starts from 1st April and ends on 31st March of every year is round the corner. And those who are in employment must have received communication from their employers to submit their investment proofs for the year 2015-16. Let us understand this process and how you can save taxes with the help of investment declaration to your employer: –
What is Investment Declaration?
As you must be aware that that your employer is required to deduct income tax on your salary income on a monthly basis and the same needs to be deposited with the government. For calculating your taxable salary, your employer need to know tax savings investments made by you u/s 80C like Life insurance premium/tuition fees/Home Loan Principal, NSCs, PF, PPF, Mutual Funds ELSS, Tax Savings FDs etc. and also other sections like 80D/8DD/80DDB/80E. Apart from that you are also entitled to claim benefit for LTA, HRA, interest on your home loans and Reimbursements of Medical expenses etc.
How it works?
At the start of every financial year, your employer asks you to submit a “declaration” of your proposed (existing) investments/options as mentioned above, so that your net taxable salary can be calculated and there by tax will be deducted and you get the net in hand every month.
Do you need to submit any proofs at the time of Declaration?
Please note that this declaration does not require you to submit any actual proofs, which will be generated only at a later stage once you make a particular investment. All you need to do is to plan your tax savings in advance in terms of how much is your obligatory/ongoing existing investments like PF, insurance premiums, tuition fees etc. so that you can plan to invest the shortfall if any and declare the same. Let’s take an example of section 80C, wherein you can invest or claim benefits up to Rs. 1,50,000/- towards various options as mentioned above. And by default the said limit gets partly covered by your existing ongoing PF which is say Rs. 25,000/- and life insurance premium say Rs. 15,000/- and PPF contribution say Rs. 10,000/- apart from the tuition fees for your children which is say Rs. 50,000/-. So your actual investment/contribution for a particular financial year will be Rs. 1,00,000/- (25,000+15,000+10,000+50,000) as against the limit of Rs. 1,50,000/-.
Now at the time of declaration, you know that you still need to invest additional Rs. 50,000/- to optimize your total tax savings and which can be invested say in tax saving mutual funds schemes. You can go ahead and submit a declaration that you “WILL” be investing in all the above mentioned items, this activity does not require you to submit actual proofs because it is just the start of the financial year, you only need to “Declare” that you will be investing in various 80C options, paying off rent to claim HRAs or claiming interest on your home loans.
What is Final Submission of Actual Proofs?
During the months starting from December to January your employer will ask you to provide actual proofs against your earlier declaration so that they can verify and finalise your tax computation. So you need to submit them all the copies/receipts/statements/proofs as against your declaration.
Do you need to invest in the same options as per your declaration?
Please note that your investments need not be exactly same as per your declaration. For example in your declaration, you might have mentioned that you will be investing in PPF or life insurance but rather at the end you might have invested in a mutual funds ELSS or your home loan principal amount itself is more than Rs. 1,50,000/- then in that case if you provide actual proofs of these investments which are different than your declaration, then also you will be eligible to claim the tax benefits. Your employer will take those in to account and calculate & finalise your tax liability.
What If you could not submit investment proofs?
If you could not submit investments proofs in time either because you have actually not invested the money as required or due to certain reasons even though you had invested but you could not upload or submit the proofs to your employer. In this case, your employer will recalculate tax liability and will adjust the additional tax in the remaining months of January or February to March.
Do you lose the benefit in case you didn’t submit the proofs to employer?
This is one of a biggest myth that if you don’t submit proofs to your employer then you lose all the tax benefits; No, you don’t. You can still claim the benefits of your investments by filing your tax returns and claiming a refund. But you should always make sure that you submit this in time to avoid going through claiming it via refund, which unnecessarily delays the entire process.
Let us understand it with the help of an example: –
Smita draws a yearly salary of say Rs. 10,00,000/- and have already declared to her employer about her proposed investment of Rs 1,50,000/- under 80C.
Her employer based on her declaration calculates her tax liability on the net taxable income which is Rs. 8,50,000/- (10L-1.5L) and assuming that she does not have any other exemptions or deductions to claim, this will become her net taxable income on which the total income tax as due for the entire year will be say Rs. 95,000/- (approx.). Now this 95,000/- will be divided in to twelve months, which comes to approx Rs. 8,000/- which her employer will deposit every month to the government
Now at the time of actual submission of proofs say in December, Smita could not submit the proofs because she could not invest the entire amount as declared. Now her employer will recalculate her tax liability and she needs to pay the additional tax which will get adjusted from her salary in the ensuing months.
But Smita did invest the entire amount before the end of march but by then her employer had already deducted tax without considering the benefit of this particular investment. But she can still get the benefit of this investment by claiming for refund at the time of filing her return.
But make sure that you plan your taxes in advance and do invest in time so that you can save more and avoid the hassle of claiming refund at a later stage.