The tax return season has started. Over the past year, many people have faced certain unprecedented situations such as salary cuts, salary shifts and job losses due to the pandemic. These have had an impact on their income. Many people withdrew their savings to meet their immediate cash needs. The government has also made certain changes to tax rules to provide some relief for taxpayers. For example, a tax-free withdrawal from the employee pension fund (EPF) was made possible. This withdrawal is tax-free, but must be shown in the income tax return (ITR). There are also other aspects to be considered when submitting the ITR for this financial year.
Tax liability can be higher in the event of a wage deferral: Due to Covid-19, many people have faced salary delays, apart from salary cuts and job losses. Therefore, if salaries are deferred, you need to make sure that you are paying the correct amount of tax on your salary.
As a rule, employees do not take care of the tax deduction, as the employer does this for them. However, there is one anomaly in tax law that may result in you paying lower taxes or your employer deducting less. This can lead to a decision or a sanction by the tax office. So first, let’s understand the tax law surrounding salary taxation.
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“Under the Income Tax Act, salary income is due or received, whichever comes first, while the employer must deduct TDS (withholding tax) at the time of payment,” said Tarun Kumar, a Delhi-based auditor.
Assuming the employer deferred the salary for March and paid it in April, i.e. in the next financial year, the tax for this was due in March. Since employees are also subject to input tax, they must be taxed even though the employer deducts TDS from the salary payment.
“If the employer has not deducted tax on part of the salary because its payment has been deferred, the employee is obliged to pay advance tax or self-assessment tax on this part. because the salary is taxable. Failure to comply will result in interest and penalties, ”said Kumar. The TDS deducted by the employer in the next financial year for the deferred part can be claimed as a refund.
That being said, if you cut your wages, make sure that it’s reflected on every part of your payroll and that you get a revised contract. As in the case of a mismatch in the tax deduction or tax amount, this can be presented to the tax office as evidence. “If the CTC is revised (reduced or increased), this should also be reflected in the payroll. All salary components such as base salary and allowances should be adjusted accordingly, ”said Kumar.
Show free income: Last year, when many people faced financial difficulties, they withdrew money from their account with the pension fund. The government allowed workers to withdraw non-repayable advances from their account with the provident fund. In addition, a second advance payment for such EPF withdrawal was allowed.
In accordance with such withdrawals, the EPF member may take a non-refundable advance of three months of the base wage and maternity allowances or up to 75% of the amount due to the member, whichever is the lower. Such withdrawals are tax-free. However, the taxpayer must show them in the ITR. “The ‘FAQs on EPF Advances to Fight the Covid-19 Pandemic’ published by EPFO have specifically excluded such an advance / withdrawal by stating that ‘Income tax is not levied on any advance made in the Under the EPF system ‘. Accordingly, the amount of such a payout can be declared as ‘exempt income’ in the ITR, “said Suresh Surana, founder of RSM India.
In addition, under certain conditions, a person can withdraw a pension, which has tax implications depending on the length of employment of the person. You should appropriately report such cash flows in the ITR.
Allowances are fully taxable: Many employers have paid or reimbursed the employee a lump sum due to home office conditions if he has spent money on the purchase of furniture. Any such payment by the employer to the employee is fully taxable.
“Not many employers have deducted TDS from such payments. However, these allowances or refunds are fully taxable. Therefore, if an employee has received such an allowance or reimbursement of invoices, he should ensure that this is indicated on Form 16; otherwise he / she should pay tax on it, “said Shailesh Kumar, Partner, Nangia & Co. LLP.
View the financial aid received for Covid-19 in ITR: According to the government’s newly announced aid measure, any financial aid an employee receives for Covid treatment from their employer or another person is tax-free for FY21 and the following years. Such exempt income is generally reported under the “Exempt Income” section of the ITR. However, final guidance on this is awaited.
So if you are filing or planning to submit the ITR for the FY21, make sure to avoid such mistakes.
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