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

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