Employers are requesting employees to provide evidence of their investments during the year to avoid higher tax deductions from their salary. Recent changes in income tax laws, effective from April 1, 2023, require salaried individuals to be aware of these changes and determine if they need to submit investment proof to prevent higher TDS from their salary.
Employees Need to Submit Investment Records
The necessity to provide investment proof to avoid increased tax deductions depends on the chosen tax regime and company policy regarding tax regime switching. Another factor is- if it is allowed under the company policy that you can switch the tax regime- from new to old or vice versa from what you opted for in April 2023.
Employees usually don’t need to submit any documents for investment proposals in April, when employers ask. However, the finance department sends emails requesting proof of investments, in the last three months of the financial year.
Additionally, declarations can save individuals from TDS generally till the first 3 quarters of the FY which is till December, but starting with the last quarter of the FY in January, companies require actual proof to support the declaration. Deductions from January onwards are based on both actual investments and expenses (supported by proof) and provisional investments and expenses for the remaining part of the last quarter, until March 31.
The new tax regime has been set as the default option, requiring individuals to specifically opt for the old tax system. Failure to do so will result in salary taxes being deducted based on the new tax regime.
What if a Person Selects the OTR Regime?
The old tax regime provides many tax deductions and exemptions, including house rent allowance (HRA), leave travel allowance (LTA), and deductions under Sections 80C, 80D, 80CCD(1b), 80CCD(2), and others.
Therefore, if someone selects the old tax system between January and March 2024, they must provide investment documents to prevent higher tax deductions from their earnings. The type of proof required depends on the claimed tax exemptions and deductions.
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For instance, to claim HRA exemption for rent paid during the year, an employee must present a rent agreement and rent receipts. If the yearly paid rent is more than Rs 1 lakh, the landlord’s PAN is mandatory.
Likewise, to claim Section 80C deductions, employees need to provide documents of declared investments and expenditures. This includes premium receipts for life insurance policies, statements from mutual fund houses for ELSS investments, and the passbook of the Public Provident Fund. Other eligible expenditures under Section 80C include home loan statements indicating the principal amount repaid in a year and fee receipts for tuition fees paid for two children.
In order to avail of LTA exemption, it is necessary to possess flight and/or train tickets. Tax professionals advise salaried individuals to claim LTA exemption through their employers, as there is ambiguity in income tax laws regarding the eligibility of such exemption when filing the income tax return.
Regarding HRA, the tax exemption can be claimed either through the employer or by submitting the ITR.
What Would Happen if a Person Selected NTR Regime?
Failing to respond to the employer will result in TDS on salary being deducted based on the new tax regime. If an individual previously opted for the old tax system but fails to provide the required proof by the employer’s specified due date, TDS will be deducted according to the old tax system. When the employer asks an individual to switch from the old tax regime (previously opted) to the new tax regime (currently opted), there will be no need to submit investment documents.
Unlike the old tax regime, the new tax system only provides two deductions for salaried employees: the usual deduction of Rs 50,000 and Section 80CCD (2) deduction.
The standard deduction of Rs 50,000 is a direct deduction applicable to salary and pension income. No documents must be submitted to the employer to claim this standard deduction.
Starting from FY 2023-24, the employer automatically considers the standard deduction from salary income while calculating the taxes to be deducted under the new tax regime. The standard deduction is also available under the old tax regime.
Section 80CCD (2) applies to the employer’s contribution to the employee’s NPS Tier-I account. In this case, the employer deposits money into the employee’s NPS account, so additional documents as investment proof are usually not required by the employer.
No other deductions are provided to salaried individuals as per the new tax regime. To come under the criteria for higher deductions and exemptions beyond the standard deduction and 80CCD(2), certain conditions must be met.
Deadline for Submitting an Investment Record as Valid Proof
The deadline for submitting investment proof varies, but most organizations expect the evidence to be submitted by March 15. If the submitted documents are not as per the selected tax regime, the employer will deduct a higher TDS on salary income until the actual documents or investment declaration is furnished.
None of the essential investment documents need to be submitted to the income tax department when ITR filing. Companies are responsible for deducting accordingly as they are receiving these documents.
Old tax regimes require individuals to pay tax based on the tax slab to which they fall, whereas new tax regimes have lower tax rates but no exemptions. Choosing the right tax regime will help you save more on your taxes and suit your financial situation.
Section 80C of the Income Tax Act, 1961 allows you to make tax-saving investments to avoid higher income taxes. You can easily compare your new and old tax regimes, import and export data, and create tax challans with SAG Infotech Gen Income Tax Software. Additionally, ensure that all the tax deductions made by your employer are by Income Tax regulations by keeping a record of them. Then, you won’t have to pay higher income taxes and you will be able to save some money as well.
Recent Amendments in I-T from 1st April 2023
From April 1, 2023, there have been several changes in income tax regulations to make the new tax regime more appealing than the old tax regime. The amendments include:
- Reducing the income tax slabs from six to five,
- Increasing the basic exemption limit from Rs 2.5 lakh to Rs 3 lakh (an increase of Rs 50,000),
- Raising the income tax rebate, which means zero tax is payable under the new tax regime if the taxable income does not exceed Rs 7 lakh in a financial year,
- Introducing a standard deduction of Rs 50,000 from salary income under the new tax regime,
- Reducing the highest surcharge rate from 37% to 25%, benefiting individuals earning more than Rs 5 crore annually, who were previously obligated to pay a surcharge of 37% regardless of the tax regime,
- Making the new tax regime the default option unless the taxpayer specifically chooses the old regime.
Income Department’s View on TDS on Salary
TDS on salary income is governed by Section 192 of the Income-tax Act, which means employers are responsible for deducting and depositing taxes before carrying out the salary payments.
Based on the modifications in the Income-tax Act, the Central Board of Direct Taxes (CBDT) issued a circular on April 5, 2023, providing guidelines of companies should deduct TDS on salaries for the ongoing financial year.
Nevertheless, the notification does not mention whether an employee can switch tax regimes during the financial year. According to tax experts, the possibility of changing the two tax regimes relies on the company’s policy.
What If the Deducted Tax from Salary Exceeds?
If the investment declaration or documents are not submitted by the initial deadline, the employer will deduct excess TDS when paying the salary. In such cases, any excess tax deducted will be reflected in Form 16. The individual will then need to claim an income tax refund while ITR filing to recover the excess amount.
