Life-changing Events

In a majority of cases, people quit a job that pays them less to take up one that fetches them a higher salary. They also tend to make this change in the middle of a financial year (F.Y.) rather than at the beginning or towards the end. This affects the amount of taxes that will be deducted at source (TDS) by the new employer.

When you change your job, and if your salary structure changes (which is usually the case), two different sets of calculations come into play - one for each employer. If your new job pays you more, almost certainly you will need to plan your investments in such a way as to minimize your taxable income and therefore, your tax liability.

The most common problem faced by salaried employees is that in the last two or three months of the F.Y, a huge amount of tax is deducted at source by the company, resulting in very little take-home pay. Sometimes it becomes difficult to pay the bills, let alone save aside for the rainy day. Let us see how...

At the start of a F.Y, the employer asks you to declare investments you plan to make during the course of the year, including repayment of any home loan. Let's say you have declared your proposed investments to the old company and resigned mid-way through the year. When you join the new company, you will again be required to give an investment declaration. If you do not inform them that you gave your old company the details, the new employer will not get the correct picture and you will end up getting a double benefit every month, but lose a huge amount in TDS towards the end of the F.Y.

There are two ways to do so. One way is to ensure that you do not declare the same investment details to your new employer that you gave your old company. This will enable the new employer to calculate your tax deductible at source (TDS) correctly. The other way is to hand over a copy of your full and final settlement from the old company to your new employer. This will give them a complete picture of your salary and TDS and enable them to deduct just the right amount of tax every month, as per your investment declaration.

Plan your investments early, declare them appropriately and follow through by actually investing and keeping a record of the same. Make sure you submit the proofs well in time so that your employer deducts only as much tax as is necessary. A little, timely care can save you a lot of effort later in the year.

The first thing is that the equated monthly installment (EMI) has to be calculated and this is the figure that is paid each month by the person to the institution from which the loan is taken. The EMI has to be broken down into interest payment and principal repayment. This distinction is important because the tax benefits are different for both these kind of payments. For the amount that is repaid as interest each year an amount upto Rs 1.5 lakh is allowed as a deduction from the income of the person. This repayment thus serves as a beneficial facto in the process of tax calculation.

The repayment of the principal also has a tax benefit and the amount here is part of the Rs 1 lakh limit that is allowed a s a deduction under section 80C along with other specific investments.