Wednesday, July 13, 2011

Form 16 De-Mystified

If you are a Salaried Employee of some company in India, by now you must have got your Form 16 from your employer. It is now time to file the return. Though many of you may know what the purpose of the Form 16 is and how to file the tax returns, not many of us know the details of what is present in the form 16 and how to understand the various contents of the form 16.

The purpose of this article is to explain the same so that, we can all understand what the Form 16 is and help us understand our financial status better.

Before we Begin: Details of Indian Income Tax, Sections under which you can save tax can all be found by “Clicking Here”. We have already covered it in great detail in one of our earlier posts.

What is this Form 16?

It is certificate issued by the employer to employee stating the details of income earned and the tax deducted on his behalf and paid to the government. Every employee who is subjected to TDS is supposed to receive their Form 16 from his/her employers. As per the government regulations, there are certain deadlines by which you must receive your Form 16 but in many cases employers don’t hand out the form 16’s on time. Nonetheless, as long as we get the form 16 at least a month before the tax-filing deadline, we must be good.

Point to be Remember:

• No Form 16 is required if TDS is not deducted from salary by your employer
• If TDS is deducted by banks to the pension holder, banks should also issue Form 16. For interest income the bank issues form 16A

Now that we know what the Form 16 is, let us go through the components of a Form 16.

The Components of a Typical Form 16 Document:

PAN

PAN stands for a Permanent Account Number which is a 10 digit alpha-numeric code generated by the Income Tax Department of India. The tax department has made it mandatory for everyone (including NRIs, PIOs & Companies) who wishes to conduct any type of investments and financial transactions in India. Carrying business, filing or paying taxes, investing in India, buying a property, opening a bank or demat account, etc. now require a PAN number. Since details of tax paid by individuals are all linked to their respective PAN Card Numbers, the PAN is the first and foremost information that can be found in any Form 16.

No Two Individuals will have the same PAN Number.

TAN

TAN or Tax Deduction and Collection Account Number is a 10 digit alpha numeric number required to be obtained by all persons/companies who are responsible for deducting or collecting tax. TAN numbers are also unique to companies. Just like the PAN Number, no two companies will have the same TAN Number.

Gross Salary

It refers to total of an employee’s regular remuneration including allowances, overtime pay, Commissions, and bonuses, and any other amounts that were paid by the company and most importantly before any deductions are made.

Perquisites

Perquisite is an additional benefit provided by the employer to the employee in addition to the salary or wages. Many of you may be aware of the term “Perk”. This is a more finance oriented term but it means the same as “Perks”

Ex: Free Accommodation, Loans at a Subsidized Rate etc.

Profits in lieu of Salary

Profit in Lieu of Salary is a part of the salary income, thus it is taxable under the head income from salary. It is any payment made to employees in lieu of salary.

This actually means any payment due to or received by employee from his employer or former employer at or in connection with the termination of employment or due to modification in terms and conditions relating thereto.

For example, Gratuity, Commuted value of pension, Retrenchment Compensation etc. received or due to be received to the extent which is not exempt, and which it does not consist of contribution made by the employee, or interest thereon will be taxable as profit in lieu of salary.

Allowance

Allowance is a payment made by employer to an employee to enable the employee to meet certain cost of expenditure incurred on behalf of the employer. This generally forms the part of the employee’s taxable income.


There are many different allowances that are part of an individual’s salary and will be covered in the Form 16. Some of them are:

1. Medical Allowance
2. House Rent Allowance
3. Conveyance Allowance
4. Etc.


Deductions

Government encourages certain type of savings – mostly long term savings for your retirement – and therefore offers you tax breaks on such savings. These tax breaks are nothing but deductions allowed from the gross total income by means of Section 80C or 80DDB.

Surcharge

Surcharge has been abolished for Personal income tax in the financial year 2009-10. Though you may have seen this in your previous Form 16’s it will not be in this years or subsequent year Form 16’s.

Education Cess

Education cess is a contribution made towards the Secondary and Higher Education development in the economy. All taxes in India are subject to an education cess, which is 3% of the total tax payable.

Relief u/s 89

Relief is granted to individuals when salary is paid in arrears in a lump sum.
For example, Salary (received in arrears/advance, family pension received in arrears, retirement benefits such as gratuity, commuted pension, VRS and retrenchment compensation)


These were the most important components of a Form 16. You can go through your personal Form 16 and post comments on this post if you have any further questions!!!

10 comments:

  1. Hi, one of my relative is a retired school headmaster. He is getting pension from the government last 5 years. How he can file IT returns online? What are the steps he needs to follow?

    ReplyDelete
  2. @ Rajaguru

    If the bank deducts TDS then I think the bank will give the form 16.

    Else, he needs an income earned statement or an equivalent statement. I am not sure of how a pensioner will get it, but your relative can try the bank that credits his pension or the regional pension office.

    Another important point to note is - does his total pension go above 2.4 lakhs in a year? If not, he need not file returns.

    ReplyDelete
  3. Hi, my salary for the last finical year was less than 5,00,000 and do i need to file tax returns? What is the proof for Nil tax?

    ReplyDelete
  4. @Anonymous

    Please read the previous post with title Bad news for Salaried employees. It was written just for ppl like you :)

    Hope you find what info u were looking for in that article

    ReplyDelete
  5. I have changed two companies in a year. So will this block me to file my ITR online..?

    ReplyDelete
  6. @ Rajaguru
    I think online filing will be difficult in case of multiple form 16's. You would have got mutiple form 16 docs from each of your employers right? in that case i would suggest you contact an auditor and file your returns.

    ReplyDelete
  7. Hi. Is it mandatory that I need to file IT returns every quarter or Is it ok if I pay the IT once in a year(aggregating all the 4 quarters)? Please give me inputs

    ReplyDelete
    Replies
    1. Hi Sudeep,
      Are you a salaried employee or a businessman? For salaried persons the form 16 is given only once a year and so, they can file tax returns only once. However, their total tax liability will be calculated up front and deducted as TDS (Tax Deducted @ Source) by their employer every month and paid to the government.

      If you are a businessman, you too need to make your tax calculations and remit part of your tax liabilities regularly (monthly or once a quarter - you can get the exact advise from your chartered accountant/auditor) and file the tax returns once ever year.

      All businessmen use accountants/auditors to handle their tax matters and hence they would be better suited to advise on business tax matters. I can only advise in a concrete manner for individual tax matters - for salaried employees.

      Anand

      Delete
    2. Thanx for the info Anand. I am a salaried employee. So, when would I get Form 16 of 2012-13?

      Delete
    3. It differs from company to company Sudeep. Usually the forms will be distributed in May or June of 2013 for the financial year 2012-13. You can check with the finance department of your company for the exact dates or check with your seniors/colleagues about the usual dates.

      Anand

      Delete

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