How to deal with taxation issues when you switch jobs

Salary received from two employers in same financial year

It would have taken into account her proposed investments under Section 80C.After arriving at the tax liability for the year, it would have determined the TDS to be deducted each month. It could also consider the deduction under Section 80C, which the previous employer has already factored in.

If Company B does not consider her past records, the TDS deducted by her new employer will be much lower than what her tax liability ought to be, taking into consideration her entire taxable income for the year. Vandana will have to bear the additional tax liability (as TDS is lower than her liability) plus penal interest.taxation on job change

To avoid TDS shortfall

Form 12B is not mandatory, but it is a better option. The other alternative is for the employee to calculate her final tax liability and meet the gap in shortfall of TDS by paying advance taxes.

If the employee does not disclose salary received from the former employer to new employer, any shortfall in TDS will need to be paid by the employee from his own pocket with interest, if applicable.

Advance tax & penal interest

Irrespective of whether advance tax has been paid or not, if the total advance tax paid (including TDS) is less than 90% of the tax liability at the end of the financial year (March 2017), then the interest under Section 234B is payable. This is calculated at the rate of 1% a month and is payable on the shortfall from 1 April 2017 till the month in which employee files returns and makes the payment. Non-payment of advance tax attracts interest of 1% a month, which is not deductible for tax purposes. The effective rate of interest is therefore higher, depending on the slab you are in. It is advisable to discharge your advance tax liability in time.

Repayment of sign-up bonus

The Income Tax Act doesn’t explicitly provide for deduction from income on repayment of sign-up bonus to previous employer.The Income Tax Appellate Tribunal in a recent order also held likewise.

Salary in lieu of notice period

Employment contracts typically provide for payment of salary in lieu of the notice period, payable by the company if services are being terminated, or by the resigning employee.

Employee will not be allowed any deduction from her taxable income for such repayment. If he/she is compensated by an equivalent amount by her new employer, it will be part of her salary vis-à-vis the new employer, who will deduct TDS.

If you have worked for 5 years

Eligibility for gratuity: This is payable only if you have completed a continuous tenure of at least five years. For non-government employees, the maximum tax exemption is the least of (i) actual gratuity received; (ii) `10 lakh; (iii) 15 days salary for each completed year of service or part thereof. The `10 lakh ceiling is a life-time exemption. It will be reduced from any exemption that you may have claimed earlier.

Transfer of EPF:

Any withdrawal from the EPF is not taxable if you have rendered five years of continuous service. It is best to transfer your existing EPF to your new employer. For this purpose, all that the new employer is required to do is verify the Universal Account Number. Such a transfer is not taxable and is treated as continuity of service.

(Case study is illustrative)

Views Expressed in this blog is taken from Times of India Article [as source indicated] with slight modification in text content.

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