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How to Avoid Tax Penalties While Moving a Job in the Middle of the Year?

24-June-2021 |

Every individual has a dream to pursue a better career with increased job responsibilities and higher pay. It is more exciting and offers an opportunity to grow, make smart investment decisions and get financially independent with time. However, the one aspect that does not change is, of course, the income tax* payment. Well, when you switch your job in the middle of the year, you naturally pay less attention to the tax implications. And, it might invite penalties later when you file your ITR. So, here is a detail about tax when changing jobs.

 

 

Changing Jobs Income Tax Implications

When you switch jobs in the middle of a financial year, you might end up paying an additional tax* due to double deductions. So, what do double deductions mean?

Tax benefits in the form of deductions and exemptions apply to your total gross income. For instance, a sum of ₹2,50,000 is exempt from your total gross income, and investments made under Section 80C qualify for tax deductions up to ₹1,50,000. When you move to a new organisation, you might not disclose your salary, tax paid, and other deductions claimed in the previous organisation. In such cases, the exemption limit and the deductions under Section 80C gets considered twice, leading to double counting.

 

 

Here Is An Example.

Let us consider an example for a better understanding. Mr Karthik worked in an organisation with a monthly salary of ₹72,000 and declarations under Section 80C as ₹90,000. He had major savings made on a life insurance plan such as the term insurance policy, and the premium paid qualified for tax deduction under Section 80C. His last working date was July 31, 2019.

He moved to a new organisation and resumed work on August 1, 2019. His new salary is ₹90,000, and investments considered under Section 80C are ₹1,10,000. The increase in deduction is attributed to the top-up done on the term insurance plan premium based on increasing family commitments. At this point, it is important to mention that our Tata AIA life insurance policy provides such top-up benefits, different payout options such as the lump sum or regular income based on the policyholder's preference, and a lower premium rate for women. An increase in protection is also attributed to increased tax savings if done appropriately.

So, let us consider how the tax calculation for job change in the same financial year is done by both the employers and the related financial implications. The income tax is calculated based on the old tax regime.

 

Previous Company - Last Date of Working July 31

Amount(₹)

Monthly salary

72000

Total Annual Income

864000

Standard deduction

50000

Net salary

814000

Less deductions under Section 80C

90000

Taxable income

724000

Annual tax

57300

Monthly Tax deduction

4775

Total tax deducted in 4 months

19100

 

 

New Company - Joining Date of August 1

Amount(₹)

Monthly salary

90000

Total Income for 8 Months

720000

Standard deduction

50000

Net salary

670000

Less deductions under Section 80C

110000

Taxable income

560000

Annual tax

24500

Monthly Tax deduction

2041.67

Total tax deducted for 8 months

16333

 

The total tax paid is ₹35,433.

 

Tax Calculation by the New Organisation

 

Particulars

Amount(₹)

Total Annual Income

1008000

Standard deduction

50000

Net salary

958000

Less deductions under Section 80C

110000

Taxable income

848000

Annual tax liability

82100

 

Therefore, the total tax liability is ₹82,100 which is different from ₹35,433 based on changed job work and rate of tax.

Mr Karthik did not provide the last salary and TDS details to the new employer. Therefore, the new employer considered the exemption limit and the standard deduction, which the previous employer already considered while calculating tax. So, when the double-counting is corrected and the annual income from both employers is added, the total tax liability seems to be higher.

Therefore, such differences in calculation and payment cause penalties for the additional tax benefits provided to Mr Karthik. 

 

 

How To Avoid Tax Penalties?

While the problem associated with double counting seems complicated, the solution is pretty much simple! Mr Karthik should have just got Form 12B from the previous employer. It is a document that discloses the tax deductions made to the new employer. However, suppose the previous employer does not provide it. In that case, it can be downloaded from the Income Tax official website and filled manually using the information available on the monthly salary payslip.

Form 12B compiles all the key information such as the employer details, salary paid, tax deducted at source, professional tax, etc. This information will form the basis of income tax calculation for your new employer for the remaining months in the financial year. Also, in such cases, the new employer will provide a consolidated Form 16. Therefore, if you don't produce Form 12B to your new employer, you will get two different Form 16 that you must reconcile later while filing ITR.

 

 

Conclusion

When you decide to switch your job and move to a different organisation, you look into the changing responsibilities, salary hike, allowances, and other contributions. However, you must consider transferring the information related to your tax payment also from your previous employer to your new employer to avoid tax penalties later. The solution to arising tax implications is to get Form 12B from your previous employer and produce it to your new employer on joining the new organisation. It takes some effort but saves a lot of time!


L&C/Advt/2022/Feb/0239

 

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TATA AIA Life Insurance Co. Ltd will send you updates on your policy, new products & services, insurance solutions or related information. Select here to opt-in.

Looking to get a new plan? 

Connect with us now

+91

TATA AIA Life Insurance Co. Ltd will send you updates on your policy, new products & services, insurance solutions or related information. Select here to opt-in.

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Understanding Deductions Under 80C
Read More
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Read More
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Read More
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