“Don’t claim wrongful deductions and exemption,” said a recent full-page advertisement taken out by the income tax department. The timing of this advertisement is particularly relevant, considering it coincides with the period employers typically request employees to submit authentic proofs of expenses and investments eligible for deductions under various sections of the Income-tax Act, 1961. You would remember that at the beginning of a financial year, you submit a declaration outlining the planned investments and expected expenses eligible for deductions. The time to submit the supporting documents for that plan of yours has now come.
From the beginning of the financial year, TDS (tax deducted at source) is calculated based on the declaration you provided. However, typically in the last three months of the fiscal, TDS will be recalculated and adjustments made in the salary for the remaining months. If you fail to submit the relevant proof of investment, a higher TDS could be deducted , making it crucial to take this process seriously to avoid unnecessary deductions.
Once TDS is deducted, it can only be reclaimed through the filing of a return.
Let's check out where such corroboration needs to be shared, where they are not required, and the consequences of missing the proof submission, and also exploring whether deductions can still be claimed.
Where proof is not required
Almost all deductions and exemptions require the submission of paperwork to support them. However, some are available to all eligible employees, while others are processed through employers, relieving employees of the need to provide documentary testimony. “Typically, employees must provide evidence of their investments or expenses to avail of corresponding deductions. Nevertheless, for the standard deduction of Rs 50,000, no supporting documents are necessary. This deduction is accessible to all employees receiving income from salary,” said Neeraj Agarwala, partner at accountancy firm Nangia Andersen India.
In addition to this, deductions for contributions to the employees’ provident fund and the National Pension System and others, which are directly transferred by the employer from the salary, do not necessitate any documentation from the employee.
Where proofs are a must
Apart from the exceptions mentioned earlier, all other deductions mandate the provision of supporting documents as evidence of investments or expenses. Agarwala explains that this encompasses deductions for house rent allowance (HRA), leave travel allowance (LTA), interest on housing loan, children’s tuition fees, invoices for preventive health check-ups, life insurance premiums, and more.
Mistakes to avoid
A common mistake made by employees is failing to submit the necessary paperwork on time. “In such instances, the employer may overlook the deductions while calculating the TDS liability, potentially resulting in additional TDS deductions from the employee's account,” said Agarwala.
That doesn’t, however, mean that your money is lost forever. You still have the opportunity to claim it back by filing your income tax return (ITR), after which the refund process will be initiated. But it's important to note that the return of the deducted amount may take several months. Remember, employees can still include these expenses in their ITR and seek a refund for any excess TDS deducted.
When it comes to LTA, there’s a small catch. Agarwala explains that deductions like LTA are facilitated only by the employer. “Failing to submit documents to the employer and directly claiming them in the ITR raises the likelihood of a tax query from the income tax department,” he said.
Another common occurrence is submitting incomplete documents, leading to the employer not considering the deduction claims. For instance, to claim HRA, employers typically request the submission of a rent agreement, rent receipts, evidence of applicable TDS deduction, and the landlord’s or landlady’s PAN. “The specific documents needed for claiming a deduction can vary among employers and depend on company policies. Consequently, employees should be attentive to their employer's documentation requirements and ensure the submission of all necessary documents to successfully claim the deductions,” said Agarwala.
Sometimes, employees also make mistakes in mentioning or providing the correct amount or details to the employer. Yeeshu Sehgal, head of tax market, AKM Global, a tax and consulting firm, said that often, “the documents submitted may not encompass all the information regarding deductions and exemptions that employees wish to reflect when filing their tax returns. This could include instances where the provided documents are incomplete or do not exactly reflect the deduction the employees intend to claim.”
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How to provide proofs for investments and expenses scheduled for last three months
Generally, employers provide employees time up to March 31, i.e., the end of the financial year, to submit all applicable proofs. Consequently, individuals should strategically plan their expenses and investments to ensure they can claim deductions by submitting the necessary confirmations before this deadline. Any expenditure incurred after March 31 is not considered eligible for deduction in the current financial year.
“All investments would be approved on an actual proof basis. Investment proof window can be reopened on the request of employees in March before processing the payroll. For example, companies can give a deadline of March 10 or 15 to make payment and share the investment proofs by then,” said Sehgal.
Another approach is to provide documents indicating that the payment is scheduled in the remaining months of the fiscal. For instance, in the case of an insurance policy, you can share premium due intimation, last year's payment receipts, or policy documents that reflect the due date. Similarly, for mutual fund schemes, sharing the account statement reflecting the upcoming instalments can be useful. It's important to note that while this method can help in deferring TDS, you must submit the actual proof before the end of the financial year to facilitate the necessary adjustments in the March salary.
Last but not least, refrain from making fraudulent claims for tax deductions. The I-T department utilises advanced technologies such as AI scanners to identify fake deductions and unreported income. Concealing income or claiming deductions without proper documentation can result in an income tax notice, which may result in additional penalty and interest on evaded tax.
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