At the beginning of the financial year, the salaried need to fill up a declaration form and give to their respective companies. This declaration form provides the snapshot of all the necessary investment that the salaried person proposes to undertake during the year.
Based on this statement, companies give tax relief. However, this often is an intimidating paper for a lot of people, especially because it mentions various sections of the Income Tax Act that people are not familiar with.But filling up this form is a necessity because the individual gets salary on a net basis, that is, after deduction of provident fund amount and income tax. There is a specific way your company calculate the tax liability.
The employer first looks at the deductions under different sections that the person is eligible for.
The employer deducts the investments, along with the provident fund to reach the taxable salary. Depending on the income tax slab, your company calculates the tax liability for the year and deducts it every month from the salary.
This is the reason why at the start of the financial year, the employer asks employees to show the tax-saving investments they will be making during the year.
Towards the end of the financial year, the employee has to submit proof of these investments. In case, a person is not able to produce required receipts and statements, a lumpsum tax is deducted.
This time when you get the income tax declaration from your HR department, keep the following things in mind.
What it coversThe first thing the employee has to ensure is that all the areas eligible for tax benefits have been covered in the investment declaration. Just because it is called an investment declaration, does not mean it will only include the Rs 1-lakh deduction available under Section 80C.
Even the medical insurance premium paid by the employee will be covered and this comes under Section 80D. Similarly, if there is a donation made, this needs to be mentioned to get the tax benefit under Section 80G.
Finally, if you have an ongoing housing loan, for which you pay an equated monthly installment, then both the interest as well as repayment of the capital should be considered for the investment declaration.
Once the basic coverage is ensured, it is time to shift attention to an area newly introduced this year. In many cases, the employer keeps using the old format of the form, whereby some new changes do not find a place.
To avoid it this year, the employee must know that for the financial year 2010-11, there is an additional benefit in the form of an extra deduction of Rs 20,000 available for investments in infrastructure bonds. This benefit is over and above the Rs 1 lakh benefit under Section 80C.
Provident fundIndividuals also need to understand that they should ensure inclusion of the amount deducted under the provident fund head. The investment declaration form may not have the space to mention the contribution made to the provident fund (PF). However, it is vital that the investor includes this for his own understanding and calculations.
This is important because, the PF is also part of deductions available under Section 80C. If, say, a person's PF contribution each year is Rs 30,000, he will only need to make other investments worth Rs 70,000 only, to exhaust the limit available. The inclusion of PF in the calculation also means the employee is able to allocate the available funds in the best possible manner.
A lot of time and effort is spent by the employee towards looking at the various investment options that can give the desired amount of tax benefit. However, what the employee also needs to know is that completion of the investment effort also takes place in a proper manner. Else, the benefit that seems to be coming in at the start of the financial year will be reversed at a later date.
The writer is a certified financial planner.