Why you should declare investments

The salary of the first month of this financial year (FY) is due in some days, and you may have already got that mail asking you to give investments declaration for the year. While pushing the mail to the bin may be tempting, it can cost you. Sure, you can get back the extra tax you paid, but that will only happen when you file a tax return and ask for a refund. 

But before you fill up that form, it’s better to understand how your salary is taxed and what these deductions are.

When is TDS deducted?

To make the tax collection process simpler, the income tax department has laid down rules for the payer, asking them to deduct a certain amount as tax when a payment is made. The rate at which TDS has to be deducted differs based on the source of income. For instance, if the source of income is salary, TDS is deducted according to the applicable slab rate to the employee. 

No tax is to be deducted, if your taxable income (salary) is less than the maximum amount not chargeable to tax, according to the current tax slab rules. Taxable income is calculated after factoring in deductions. In other words, no TDS has to be deducted by the employer if the taxable salary is up to Rs2.5 lakh for an individual below the age of 60 years, Rs3 lakh for senior citizens (between the age of 60 and 80 years) and Rs5 lakh for very senior citizens who are 80 years and above. Once taxable income crosses the basic threshold limit, appropriate slab rate applies.

Investments and expenses

Investments declaration helps your employer know the expenses you incur and investments you have made or plan to make during a financial year. 

Many expenses qualify for deductions—for instance, rent, children’s tuition fees, repayment of education loan, and health insurance premium.

Investments in instruments like equity-linked savings schemes (ELSS), Public Provident Fund (PPF), Sukanya Samriddhi Account, National Savings Certificates (NSC) and so on also qualify.

You need to declare these planned investments or expenses so that your employer can consider them while calculating your taxable income to deduct TDS. 

Here’s an example. Suppose an individual has an estimated salary income of Rs6 lakh for FY 2018-19. If she does not make any declaration or invest, her tax liability would be Rs33,800, which the employer will deduct over the next 12 months from the salary. However, in case she gives a declaration of investments to the tune of Rs1.5 lakh in the instruments that qualify for deduction under section 80C of the Act and another declaration of Rs25,000 to buy a health insurance policy, her taxable income will come down by Rs1.75 lakh to Rs4.25 lakh. Consequently, her tax liability will come down to Rs9,100, and the employer will have to deduct TDS accordingly every month.

Declaring investments

Investment declaration is only a roadmap of what you plan to invest. But at the end of the financial year, you will be required to submit the actual proof of investments and expenses. 

Employers are required to collect proof of investments and expenses, like rent receipts, mutual fund statements, insurance premium receipts and so on to validate the deduction claimed by employee at the beginning of the financial year. It is not necessary that your investments have to be exactly the same as your declaration. For instance, in your declaration, you might have mentioned that you will be investing Rs1 lakh in ELSS and Rs25,000 in PPF under Section 80C, but you can instead invest Rs50,000 in ELSS, Rs25,000 in PPF, Rs25,000 in NSC and pay a life insurance premium of Rs25,000 under the same section. In such a situation, your employer will take into account actual proof submitted instead of what was declared and calculate your tax liability accordingly. But ensure that the new investments come under the same basket of deductions. 

A well-planned strategy will help you make investments as declared without disturbing your cash flow. Spread your investments throughout the year, rather than waiting till the last month.