Income Tax Returns: Dummy’s guide to Form 16

It’s that time of the year when employees across the country grapple with filing their taxes and figuring out whether they owe the government money or whether, if they are fortunate, the government owes them money. The first step is getting a Form 16 from your employer, if you are salaried, or a Form 16(A) if you are on contract or if you are a vendor. These two documents are a map to your income, taxes and exemptions. Here’s a dummy’s guide on what to look out for in the Form 16 and Form 16(A).

WHAT ARE THESE FORMS FOR?

Why these forms are important: Since it is proof of income, along with your income tax returns, a Form 16 or 16(A) can be used for applying for loans, particularly home loans. Since home loans have a longer tenure than most other loans, the Form 16 allows the bank to assess your income and earning potential.

When do I get these forms?: It is ideally supposed to be given to employees in the month of April immediately following the assessment year, but is typically given out in May or June after a company has closed its books. The deadline for filing taxes is July 31 so make sure you have your Form 16 well in advance.

What if I also have income from non-work investments?: If you are getting income from bank deposits or other investments such as securities, that institution will deduct tax at source and issue you a Form 16(A). This also must be filed along with your regular Form 16 or 16(A).

FOR SALARIED EMPLOYEES

What is the Form 16?: The Form 16 is mandatory for filing tax returns in India. It lists your income for the previous financial year, your tax liabilities and your tax exemptions. It also gives the PAN (Permanent Account Number) and TAN (Tax deduction and collection Account Number) numbers of your employer, who deducts tax at source (your pay slip). It also gives your salary for the entire assessment period, or the duration of your stay with the company in that financial year. In India, a financial year starts on April 1 and ends on March 31 of the next year.

Also, if a company does not have a TAN number, it cannot deduct taxes at source and can’t issue a Form 16.

The Form 16 has a lot of sections!: It’s not that complicated. The Form 16 breaks up your gross income into various categories, including income from sources other than your day job. There are various sub-heads in the Form 16 that break down your income. For salaried individuals, the key categories are the 80(c), 80(d), 80(e) and Section 10. Here’s a quick guide.

80(c): You must list all your tax-exempt investments such as insurance, mutual funds, provident funds, etc. This has an annual cap of Rs 1,00,000 i.e. you are allowed to invest up to Rs 1 lakh every year that will not be subject to tax. Make sure you mention all these to get the exemptions.

80(d): Medical/health insurance premium is exempt up to Rs35,000. The first Rs15,000 in premium must be for yourself and your dependants. You can claim an additional exemption of Rs15,000 as health insurance premium for parents. If they are senior citizens, this limit is increased to Rs 20,000 since insurance companies typically charge a higher premium for older persons.

80(e): This section deals with education loans and provides exemptions on interest paid towards the same. This is valid only for the individual and this facility is valid for up to a maximum of eight years

Section 10: House rent allowance and leave travel allowance are also partially tax exempt. House rent is exempt when if a) it matches the HRA amount from the employer, or b) the rent amount paid in excess of 10 per cent of your salary; or 50 per cent of your basic salary (for metros). For non-metros, it is 40 per cent. The lowest number of these three categories is used as the exemption amount of your actual house rent.

LTA is exempt only against presentation of travel bills. However, you can only claim LTA twice every four years; the current four-year block is 2010 -2013 (calendar years). Also, only domestic travel for self and dependants is exempt, provided you are also travelling with the group.

Professional Tax: This is listed on your Form 16 as ‘Tax on Employment’. This runs to a flat amount of Rs 2,500 a year for most professionals. Most Indian states have this tax, but please check if it applies in your state or not.

Perks: There is a separate page on your Form 16 for Perquisites (perks) and whether they are being deducted. This differs from company to company, since some firms may pay for perks in full, or partially. The filer must accordingly put in his contribution of tax or if some items are exempt. Some items such as vehicle maintenance, driver’s salary and petrol bill, and Sodexho coupons are exempt under this section. However, this is usually not a substantial amount.

FOR CONSULTANTS/VENDORS/CONTRACT EMPLOYEES

What is Form 16(A)?: If you are a consultant or a vendor, or a contract worker/retainer, you get a Form 16(A) in lieu of the Form 16. Under this system, even if you fall into the 30 per cent tax deduction slab, you are only charged a flat 10 per cent tax at source and it is up to you to show the rest of your income as taxable or not.

How do I file my own taxes with the Form 16(A): Depending on what expenses you show, this form can actually end up beneficial to you in the form of returns. Since you are a consultant or vendor, you can basically claim various tax exemptions as business expenses. This will include business promotion, advertising, house rent (see Section 10 above), hardware (such as laptops for your office), stationery, books, travel expenses, petrol, telephone, electricity office maintenance, and up to 15 per cent of the depreciation value of the vehicle used for business purposes, and up to 60 per cent of depreciated value of a computer.

Additionally, you can claim exemptions of up to Rs 1,00,000 on your investments.

You can also claim up to Rs35,000 exemption as medical premium under Section 80(d). Medical expenses of up to Rs15,000 are exempt against bills. You can also show other valid business expenses such as an office assistant and/or driver, certain office expenses. Up to Rs 5,000 can be claimed as exemption under capital expenses.

That sounds too good to be true!: It is. If your net profit is less than 10 per cent of your income because of all the expenses you have shown, be prepared for a surprise audit by the tax authorities. Their reasoning is that if your net profit is less than 10 per cent of income, your business is not a viable one and you are likely scamming. So, don’t get greedy and try to write off everything.