Every year, salaried professionals/employees have to submit investment proofs so that their employer deducts the correct amount of TDS (Tax Deducted at Source). Employers in India are required to cut TDS every year and they might deduct more or less tax than necessary if the correct investment proofs are not given.
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Why do Employers Deduct TDS
Employers in India are required to deduct TDS from salary as per the applicable slab of the employee. They are required to compute the tax liability of the employee and deduct tax accordingly. For example, if an employee has an income of Rs 5 lakh and is not claiming any deductions, the employer would deduct a tax of Rs 12,500 (at the applicable 5% slab). However if the employee has saved Rs 50,000 in a PPF account, the tax to be deducted falls to Rs 10,000.
Read more about Income Tax & the Latest Income Tax Slab Rates
What if My Employer has Deducted the Wrong Amount of TDS?
If the employer deducts more TDS than is required, you can only claim the excess amount back by filing a refund claim in your Income Tax Return (ITR). If the employer deducts less TDS than required, you have to pay the difference before filing your income tax return on 31st July of each year. However in order to avoid interest on late payment, you should ideally pay this difference by 31st March (end of the financial year).
Why is My Salary Being Drastically Reduced in February/March?
Many employers give employees time till February or March to make their tax-saving investments and submit proof of the same. If such proofs are not submitted, the employer is required to assume that you have made no tax-saving investments and deduct tax accordingly. Hence your employer may cut a larger amount from your February or March paycheck.
What are the Tax-Saving Options Available
Standard Deduction: All employees get a standard deduction of Rs 50,000 per year . This was earlier given in the form of conveyance allowance and medical expenses reimbursement. However Budget 2018 did away with these specific provisions. No bills need to be submitted to the employer to get the benefit of standard deduction.
Tax-Saving Investments
Employees are given a host of tax-saving investment options under Section 80C of the Income Tax Act, 1961 up to Rs 1.5 lakh per annum. The most common ones are as follows:
1. PPF: Investment in Public Provident Fund (PPF) up to Rs 1.5 lakh per annum gets you a tax deduction. The current PPF interest rate is 7.1%. PPF interest is exempt from tax.
Investment Proof: Submit a copy of your PPF passbook to your employer. If you do not have a passbook, you can submit a printout or image of your online PPF statement. You can access this statement through Net Banking in most major banks or by visiting the bank branch.
2. EPF: EPF contributions are tax deductible up to Rs 1.5 lakh per annum under Section 80C. The EPF interest rate for FY 2022-23 is 8.15%. EPF interest is exempt from tax.
Investment Proof: Contribution to EPF or Employees Provident Fund is mandatory and done through the employer. Your employer will already have details of your EPF contributions. However if asked, you can submit a print-out of your EPF passbook.
3. ELSS Mutual Funds: Investment in ELSS or tax-saving funds gets a tax deduction up to Rs 1.5 lakh under Section 80C of the Income Tax Act, 1961. The returns of ELSS funds over the past 5 years have averaged at 16% (as of 3rd Jan 2019). Returns on ELSS funds over Rs 1 lakh are taxed at 10% (long term capital gains tax).
Investment Proof: You can get investment proof for mutual fund investments by getting your statements from your distributor. Alternatively you can get a consolidated email statement for all your mutual fund investments, including your ELSS funds emailed to your inbox. This facility is jointly offered by all the Registrar and Transfer Agents (RTAs) for mutual funds. You simply need to enter your email ID and PAN.
4. Tax-saver fixed deposit: Investing in a 5-year tax-saving fixed deposit will get you a tax deduction under Section 80C. The FD rates vary from one bank to another but are currently around 5.75%-9.6%. Interest on such FDs is taxable.
Investment Proof: Simply submit a copy of your FD receipt or print out your FD receipt/statement from your bank website (net banking).
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5. Insurance Policy: Life Insurance Premiums are tax-deductible up to Rs 1.5 lakh per annum under Section 80C. The returns on insurance policies or ULIPs are not taxable and the maturity amount is not taxable, as long as the life insurance cover is at least 10 times your annual premium.
Investment Proof: You can submit a copy of your policy document and acknowledgments/receipts from the life insurance company recording the payment of life insurance premiums.
Read more: Other Tax-Saving Investments/Post Office Investment Schemes
HRA: In addition to the common investment proofs mentioned above, you can also claim a deduction for rent if you are paying rent. You can claim this if you receive HRA (House Rent Allowance) and also to a lower extent if you don’t receive HRA (by taking the benefit of Section 80GG).
In respect of HRA you get a deduction on the lower of:
50% of your salary if you live in a metro, 40% of salary if you live in a non-metro city
Actual Rent Paid – 10% of Salary
Actual HRA received
If you don’t receive HRA, you can still claim deduction on rent paid up to Rs 60,000 per annum under Section 80GG.
Read more about House Rent Allowance/HRA
Investment Proof: You need to submit monthly rent receipts. If you have a leave-and-license agreement with your landlord, you can submit receipts showing payment of license fee. If you are claiming a deduction of less than Rs 1 lakh, the landlord’s PAN does not have to be submitted. However, if it is more than Rs 1 lakh, the landlord’s PAN has to be submitted.
FAQs
Q. What are the limitations of 80C?
The maximum deduction that can be availed under Section 80C of the Income Tax Act is Rs. 1.5 lakh in a year from the taxpayer’s total income. Only individuals and HUFs can avail the benefit of this deduction. Partnership firms, companies and LLPs cannot avail the benefit of this deduction.
Q. Do I need to submit investment proofs while filing returns?
No, you are required to submit your investment proofs to your employer as per the deadline set by them.
Q. How do I submit an investment declaration?
An investment declaration needs to be made on Form 12BB and has to be submitted to your employer at the end of the financial year.
Read more about Form 12BB