As we step into the new year, it’s time for employees to submit their investment proofs, a crucial step in the payroll processing cycle. In India, employees typically declare their tax-saving investments twice a year — once at the start of the financial year and then by January.
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The initial declaration outlines the tax-saving plans, while the latter involves submitting proof of executing those plans.
If such proofs are not submitted, the employer is required to assume that employees have made no tax-saving investments and deduct tax accordingly. Hence, the employer may cut a larger amount from January, February or March salaries.
Tailoring tax savings
Tax savings are intricately tied to the investments one declares. Depending on whether one opts for the old or new tax regime, various components are factored in differently:
Old tax regime: The house rent allowance (HRA), housing loan interest, and other tax-saving components are computed based on the actual proofs submitted from January 2024 onward.
New tax regime: Under this, certain exemptions like let-out property income and NPS u/s 80CCD(2) are available, while deductions for housing interest, rent exemption, and others are not applicable.
Tax-saving options demystified
All employees get a standard deduction of ₹50,000 per year. Apart from this, the Income Tax Act provides numerous avenues for tax savings. Some options include:
Tax-saving fixed deposit: Offers deductions up to ₹1.5 lakh per annum under Section 80C.
Public Provident Fund (PPF): Long-term investment qualifying for deductions under Section 80C.
National Savings Certificate (NSC): Government saving bond for tax savings under Section 80C.
National Pension Scheme (NPS): Offers exemptions under section 80 CCD (1).
Understanding tax-saving sections
Various sections within the Income Tax Act enable individuals to save taxes through strategic investments:
Section 80C: Allows deductions up to ₹1.5 lakh for specific investments and expenses.
Section 80 CCD: Offers an additional deduction of ₹50,000 on NPS investments.
Section 80 EEA: Grants deductions for interest payments on affordable housing schemes.
The roadmap to investment proof submission
Submitting investment proofs involves providing documents confirming that investments were made as declared. This is vital for the finance and payroll teams to calculate income tax, deduct TDS, and finalise salary disbursement.
For PPF investment, employees can submit a copy of their PPF passbook to their employer. If they do not have a passbook, they can submit a printout or image of the online PPF statement.
For Employees Provident Fund (EPF), the employer will already have details of the EPF contributions. In case of ELSS, employees can get investment proof by getting mutual fund statements from their distributor. Alternatively, they can get a consolidated email statement for all the mutual fund investments, including ELSS funds, emailed to their inbox.
On the other hand, employees can submit a copy of their FD receipt or print out their FD receipt/statement from the bank website for submitting tax-saving FD proof.
In case of life insurance, policyholders can submit a copy of their policy document and acknowledgments/receipts from the life insurance company recording the payment of life insurance premiums.
In case of HRA, employees need to submit monthly rent receipts. If employees are claiming a deduction of less than ₹1 lakh, the landlord’s PAN does not have to be submitted. However, if it is more than ₹1 lakh, the landlord’s PAN has to be submitted.
(Edited by : Shoma Bhattacharjee)
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