We live in a world where aspiring Indians are constantly looking for opportunities to enhance their income, which has led to job switching being a norm today.
People change jobs for a variety of reasons, ranging from higher income to higher perks to a better designation. In the midst of all the excitement pertaining to your job change, you must not ignore the all-important tax angle.
There are five critical aspects of tax you need to manage when you change jobs.
Declaration of your past income to your prospective employer
If you join a new job in April, then your tax challenges are automatically addressed, although jobs changes rarely happen that way. If you switch jobs in the middle of the financial year, then you need to make a clear disclosure of all payments received from your past employer to your prospective employer.
Your prospective employer will then take a consolidated view of your full year income and the investment declarations and then decide on your monthly tax deduction. Today, all your income can be mapped through your PAN and captured by Form 26. Make it a point to disclose all sources of income.
Submit all tax-saving documents to your employer
This problem is more acute if you join a new company in the middle of the year. You may have given a certain declaration to your previous employer and also submitted proofs of investment. Ensure that all these submissions are replicated to the new employer also. The prospective employer will deduct tax based on the information made available. As such, ensure that all declarations and actual evidence of investments are submitted on time.
Impact of joining bonus and severance pay
These are two different issues. Joining bonus is paid at the time of joining, subject to your continuation for a minimum period of time. If you breach that agreement, you will be required to refund the proportionate sum to your employer. In that case, any TDS that the previous employer may have deducted on the joining bonus paid can be claimed by you as a refund. Ensure that you submit these details to your new employer.
Severance pay is normally paid to senior officials to prevent them from taking up competitive jobs. This pay, however, is treated as a regular income and taxed at your normal rates. You must disclose these details to your new employer.
Provident fund and gratuity receipts
If you thought provident fund (PF) and gratuity were tax-free items that you need not worry about, think again.
If you are just shifting your PF account from an old employer to a new employer, then there will not be any tax implications. However, if you are withdrawing your PF before completing five years with your previous employer, then the PF withdrawal is taxable in your hands.
Also, gratuity is exempt up to Rs20 lakh effective April 2018. Gratuity received above that limit is taxable in your hands in the year of receipt.
You need to disclose these to your prospective employer.
File tax returns with two Form 16s for the year
There are three important things to remember here.
While Form 16 is issued at the end of the financial year, you can collect the Form 16 from your employer at the time of resignation and submit it to your prospective employer.
Secondly, when filing tax returns, you can use two Form 16s to file returns, which is the practice.
Lastly, ensure that you reconcile your old Form 16 with a Form 26, which is readily available on the Income Tax website.
These small steps can go a long way in smoothening your career-transitioning process.