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Why compile tax-saving investment proofs?
December, 11th 2015

During December or January, employers usually start asking employees to submit documentary proofs of investments and expenses that qualify for tax deduction and exemption under various sections of Income tax Act, 1961. This is in respect of the investment declaration made by the employee at the beginning of the financial year, to the employer. The purpose of asking for proof is to verify whether the investments and expenses have been carried out as was declared or with any changes.

Often, employees fail to submit the relevant proofs, either because they have not made the investments or they do not have the necessary documents. Besides that, what an employee had declared may be different from what she invested in. All these may result in an increase or decrease in the tax payer’s tax liability, which needs to be adjusted by the employer during the remaining months of the financial year.

Why the proof matters

An employer asks for investment and expenses declaration and proofs to avoid unnecessary collection of tax and then paying it to the tax department, only for the employee to ask for a refund later.

Based on your declaration and the investments that qualify for deductions and exemptions, your employer deducts tax on your salary every month. “The first thing an employee should know is that her employer is supposed to deduct income tax on a monthly basis and deposit it with the government by the seventh day of the following month,” said Suraj Nangia, partner, Nangia & Co, a chartered accountancy firm.

What happens if proofs are not submitted?

“When an employee fails to submit investment proofs as declared by her initially, an employer becomes obliged to take into account only the actual amount of investments and expenditure incurred and re-compute her taxable income and tax liability,” said Suresh Surana, founder, RSM Astute Consulting Group, an auditing and accounting firm.

Ideally, one should have done most, if not all, tax-saving investments by now. Doing so and giving the proof for it helps you avoid unnecessary payment of tax deducted at source (TDS) from your income. For instance, if you fail to invest, say, Rs.1 lakh (before the deadline to submit the proofs) in an instrument that qualifies for deduction under section 80C of the Act (maximum limit is Rs.1.5 lakh), your tax liability will go up by Rs.30,900 if you fall in the highest tax bracket. Similarly, for a person in the 20% tax bracket, the tax liability will go up by Rs.20,600, and by Rs.10,300 for someone in the 10% bracket (this is including cess of 3%).

What’s more, this tax will get deducted from your salary in the remaining months of the financial year.

“The cutoff date for considering investment proofs of an employee for the purpose of TDS on salary income varies across organisations,” said Surana.

While your employer may set a deadline for you to submit the documents, according to the income tax rules, you are free to invest till end of the financial year.

“Non-submission of investment proofs to the employer would not nullify the tax benefit as long as the employee has actually made the investments before the financial year ends on 31 March,” said Nangia.

If you invest after the deadline to submit proofs to the employer has passed, you will have to reclaim the benefit of tax deduction while filing your tax returns. “If in certain circumstances an employee is not able to submit the details of her exemptions or deductions to her employer in a time bound manner, she can claim them at the time of filing of income tax return. Any excess tax deducted can be claimed as refund then,” said Nangia.

Remaining period

Investing or spreading your investments through the year helps in managing cash flow and diversifying risk. However, since one usually needs to submit the tax-saving investment proofs by December or January, it is not possible to provide proof of investments and expenses scheduled for the last two months of the financial year (February and March). Some employers consider investments that an employee would make in these months. For this, the employee needs to give a declaration and some supportive documents. For instance, if you are investing in an equity-linked savings scheme (ELSS) through a systematic investment plan (SIP), you can provide a fund statement that shows previous SIPs and your stated commitment. For insurance, you could show premium receipts of last year. For house rent allowance, you could show earlier rent receipts. The employer may ask you to submit these again in March.

If someone is not able to submit the rent receipts to the employer and thus not avail house rent allowance (HRA) exemption benefit, she can do so while filing her income tax return (ITR). “However, the employee should make sure that her terms of employment provide for HRA and other allowances before claiming exemptions in her personal tax return,” said Surana. While you are not required to submit or attach any proof of investment or expenses along with your ITR, make sure you retain copies of these. In case of scrutiny, an assessing officer may demand for proofs to be furnished.

If you don’t give proof to your employer, you can still claim tax deduction while filing your ITR. But certain expenses cannot be claimed with ITR. “Exemptions such as leave travel allowance (LTA) must be claimed through the employer,” said Nangia.

According to income tax rules, LTA can be claimed twice in a four-year block (current block is 2014-2018). “If someone missed claiming it this year, she can either carry forward this benefit to the next year or claim exemption for fresh travel next year,” said Nangia. But this can be done only if the employee submits the required travel bills to the employer.

Similarly, tax exemption for medical allowance can be claimed only by submitting bills to the employer; else, applicable tax on the medical allowance will be applied and the remaining amount will be given to you at the end of each financial year.

Mint Money take

It is better to make all your tax-saving investments before the last date of submitting proofs with your employer. If you don’t do this, and are, thus, unable to give documentary evidence of the investments, the employer will assume that you have not made the investment and adjust the TDS in the remaining months. So, in that short period you will have to manage not only investment and expense commitments (say, SIP instalment or insurance premium) but also the additional TDS. Moreover, once appropriate TDS is deducted, you don’t have to worry about paying outstanding taxes and interest on them while filing your tax return. And, you will not have to wait for refunds from the tax department.

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