All about Form 16 – TDS form

Introduction

In this article, we will see key things you need to know about form 16. If you are a salaried employee, and your company deducts tax from your salary, then Form 16 is one of the most important documents you will need when you file your tax returns. Lets discuss what is Form 16, why it is required and about its components.

We have already discussed what is tax deducted at source (TDS) in detail in our earlier article.

Everything You Need To Know About Form 16

What is Form 16?

• Form 16 is a Salary TDS certificate issued under section 203 of the Income tax Act on the deduction of tax by the employer from an employee’s salary and deposit of the same with the government.
• Thus, Form 16 is a certificate issued to salaried individuals from their employer when he deducts tax from the employee salary. In simple words, it is an acknowledgement which states your deducted tax has been deposited with the income tax department.
• This certificate contains details of the amount of tax deducted at source (TDS) on salary by your employer along with the salary breakup for the financial year.
• As per the Income Tax Act, every employer, at the time of paying salaries, is required to deduct Tax (or TDS – Tax deducted at source), which is computed on the basis of the income tax slab rates in force for that financial year. Companies usually calculate the tax payable by the employee, on the basis of the forecasted earnings and investment declarations made by the employee at the beginning or during the course of the year.
• The TDS, so deducted, by the organization or employer is deposited with the Income Tax department and the Form 16 in turn is a proof of the same. Employers need to issue the Form 16 to their employees on or before 31^st May of the financial year immediately following the financial year in which the income was paid and tax deducted.

Why Form 16 is required – Importance

1. Filing ITR : Form 16 serves as source document during filing of Income Tax Return as it comprises of the details about income, deductions, tax calculated and TDS as per the Income Tax Rules.
2. Backup proof for TDS : It serves as in important document for claiming credit of Tax deducted by employer and you might require it to produce before Income Tax Authorities if you don’t get credit of TDS properly. Thus it should be retained as backup proof for TDS. 
3. Loan Application : Many banks and financial institutions demand Form 16 for verification of the person’s credentials while applying for loans.
4. Visa Application : Form 16 is needed while processing visas. It is an authentication certificate for income proof. Thus, we require it to attach with visa application.

Components of Form 16

The form has to two parts: Part A and Part B.  These components of Form 16 will help us understand the tax paid, probable tax refund and better tax planning.

Part A

• Part A of Form 16 comprises of the details of tax deducted at source on salary and deposited in the government’s account. It is generated and downloaded from the TRACES portal by the employer. 
• Part A of Form 16 includes the following:
  1. Personal Information of Employer as well as Employee : Name and address of the Employer, PAN (Permanent Account Number) and TAN of Employer, PAN of the Employee. This information assist the Income Tax Department to keep a track of money flow from our own as well as our employer’s account.
  2. The Assessment Year (AY) : It refers to the year in which the income is getting assessed. The year in which the taxpayer needs to work on the tax return processes. For example, for the income earned between 1 April 2018 and 31 March 2019, the Assessment Year will be 2019-20.
  3. The time period for which the individual was employed with the employer in the concerned Financial Year
  4. Summary of the salary paid and the tax deducted at source (TDS) and deposited with the Income Tax Department
  5. Date of Tax Deduction from salary and tax deposit in the government account
  6. Acknowledgment Number of the TDS Payment

Part B

• Part B is a consolidated statement covering details regarding salary paid, any other income as disclosed by the employee to his/her organization, amount of tax paid and tax due, if any.
• It represents the information in a comprehensive and orderly manner stating the income earned by the employee along with the exemptions and deductions applicable thereon, in the prescribed format. Employee details such as name and PAN are mentioned even in Part B.
• Part B contains following information :
  1. Total Salary Received : Salary structure is further broken down into different components such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), Leave Encashment, Gratuity and others.
  2. Exemptions Allowed : As per Sec (10) of Income Tax Act, 1961 such as allowances given to employees for Conveyance, Housing rent (HRA), Children education and hostel expenditure, medical, etc.
  3. Gross Income : This is the sum of the salary income as received from the employer and any other income declared by the employee such as income earned from house/property etc. Details regarding other income need to be shared by the employee with the employer during the phase of investment proof submission.
  4. Deductions From Salary :
     • Section 80 C / 80 CCC / 80 CCD  includes contributions made towards instruments or schemes such as Public Provident Fund (PPF), Life Insurance policies, tax saving mutual funds (ELSS), pension, Sukanya Samriddhi among others. The maximum limit for the same is Rs.1.5 Lakh.
     • Deductions under other sections such as 80D (premium paid towards health insurance or Mediclaim), 80E (interest payment on education loan), 80G (donations), deductions for disability and other applicable sections are provided. The details for all these deductions need to be submitted by the employee along with the necessary supporting documents to the employer.
  5. Net Taxable Salary : Total deductions are aggregated under “Chapter IV-A” and reduced from the gross income to calculate the taxable income. Your tax liability is calculated on this amount.
  6. Education Cess and surcharges if any
  7. Rebate under Section 87, if applicable
  8. Relief under Section 89, if any
  9. Total amount of tax payable on income
  10. Tax deducted and the balance tax due or refund applicable

Other Important Points

• If TDS is not deducted, then it is not mandatory to issue Form 16 to the employee.
• If the organisation does not possess the TAN, it is not entitled to deduct TDS. Thus, in this situation, the organization will not give Form 16.
• If you are self-employed, then you cannot acquire form 16. In this situation, it is vital for you to submit ITR and show it as your income proof.

Summary

• Form 16 is a certificate issued by an employer, certifying that the TDS is deducted from the salary of the employee and deposited with the government.
• The employer is required to issue Form 16 on or before 31 May of the assessment year. Besides, the employer issues Form 16 if there is a mid-year change of job. 
• Form 16 helps in filing IT returns, is used as proof of income, for loan assessment and sanctioning, attached along with visa application, etc. 

What is Tax Deducted at Source? How Does it work?

Introduction

TDS stands for ‘Tax Deducted at Source’. TDS was introduced to collect tax at the source from where an individual’s income is generated. Lets discuss about TDS in detail.

TDS (Tax Deducted at Source)

What is TDS ?

• Tax Deducted at Source ie. TDS was introduced to collect tax at the source from where an individual’s income is generated. 
• The government uses TDS as a tool to collect tax in order to minimize tax evasion by taxing the income (partially or wholly) at the time it is generated rather than at a later date. 
• TDS is applicable on the various incomes such as salaries, bonus, interest received on bank deposits, interest on securities, commission received, rent or purchase of a property etc. 
• TDS is not applicable to all incomes and persons for all transactions. Different rates of TDS have been prescribed by the Income Tax Act for different payments and different categories of recipients.
• For example, payment of redemption proceeds by a debt mutual fund to a resident individual is not subject to TDS but for a Non-resident Indian is subject to TDS. 

Example

• Let us take an example of TDS assuming the nature of payment is professional fees on which specified rate is 10%.
• Suppose Yadnya Ltd makes a payment of Rs.50,000/- towards professional fees to Mr. Rahil, then Yadnya Ltd shall deduct a tax of Rs.5,000/- i.e. 10% of Rs.50,000/- and make a net payment of Rs.45,000/- (50,000/- deducted by Rs.5,000/-) to Mr. Rahil.
• The amount of 5,000/- deducted by Yadnya Ltd will be directly deposited to the credit of the government and it will issue a certificate to Mr. Rahil stating the same.

Objectives of TDS

TDS follows the “pay as your earn” concept. Its basic objectives are as follows :

1. Tax Deducted at Source facilitates the sharing of the tax collection responsibility between the deductor and the government, ensuring a regular inflow of cash to the latter.
2. It enables salaried individuals to pay taxes in easy installments each month, thus preventing them from the burden of lump sum tax payments.
3. TDS empowers the government to receive the necessary funds all year round which aids it in running the country smoothly.
4. It ensures that the tax net is spread wide enough and prevents tax evasion.

How Does TDS Work?

• TDS works on the concept that every person making specified type of payments to any person shall deduct tax at the rates prescribed in the Income Tax Act at source and deposit the same into the government’s account. 
• The person who is making the payment is responsible for deducting the tax and depositing the same with government. This person is known as ‘deductor’. On the other hand, the person who receives the payment after the tax deduction is called ‘deductee’.
• Form 26AS is a statement which shows the amount of tax deducted and deposited in a person’s name/PAN.  Therefore, an individual can view/check the TDS from incomes paid to him by viewing this Form 26AS.
• Each deductor is also duty bound to issue a TDS certificate certifying how much amount is deducted in the deductee’s name and deposited with the government. 
• Thus, The entity making a payment (which is subject to TDS) deducts a certain percentage of the amount paid, as tax and pays the balance to the recipient. The recipient also gets a certificate from the deductor stating the amount of TDS. The deductee can claim this TDS amount as tax paid by him (i.e. the deductee) for the financial year in which it is deducted. 
• The deductor is duty bound to deposit the TDS with the government. Once deposited this amount reflects in the Form 26AS of individual deductee on the TRACES website linked to the income tax department’s e-filing website. 

TDS Rates As per FY2018-19 (AY2019-20)

• One must note that TDS on specified transactions is deducted only when the value of payment is above the specified threshold level. No TDS will be deducted if the value does not cross the specified level. 
• Different threshold levels are specified by the Income Tax department for different payments such as salaries, interest received on bank deposits and as well as securities, commission received etc. 
• The details regarding TDS rates of different nature of payments and corresponding sections, their respective threshold limits and payee type are mentioned in the above table.

TDS Deduction Exemptions

TDS is exempted from the payment of interest from the following cases :

• Payments in favor of RBI, or towards the central government
• Banking companies
• Financial corporations formed under the finance bill of union government or any state
• Income Tax refund
• Direct taxes interest payment
• LIC, UTI and investments in co-operative societies
• Interests earned in recurring deposit or any savings account held with any commercial banks or cooperative societies
• Interest earned on Indira Vikas Patra (IVP), NSC or KVP
• Interest earned on NRE account
• Any institutions notified as Nil TDS organization

Summary

• Tax Deducted at Source (TDS) is a system of taxation where the person/entity responsible for making specific payments deducts the applicable tax before the payment is credited to the receiver. 
• TDS is applicable on the various incomes such as salaries, bonus, interest received on bank deposits, interest on securities, commission received, rent or purchase of a property etc. 

What Does Financial Freedom Mean To You?

Introduction

India is celebrating its 72nd Independence Day tomorrow on 15^th August 2019. So Lets discuss about what is financial freedom or financial independence from personal finance perspective. What Does Financial Freedom Mean To You?

What is Financial Freedom?

• As we all know, India got the freedom on 15^th August 1947. This freedom was an outcome of sacrifices made by great leaders.
• In the same context, for investors, financial freedom will come at the cost of years of savings and tactical investments to create wealth.
• Financial independence is about taking ownership of your finances. You have a dependable cash flow that allows you to live the life you want. You aren’t worrying about how you’ll pay your bills or sudden expenses. And you aren’t burdened with a pile of debt.
• It’s about recognizing that you need more money to pay down debt and maybe increasing your income with a side hustle – we’ll get to that in just a minute. It’s also about planning your long-term financial situation by actively saving for a rainy day or retirement.

Key Features of Financial Freedom vs Debt

What Does Financial Freedom Mean To You?

• How about you being able to celebrate your own Independence Day or your Financial Independence Day to be more precise.
• What Does Financial Freedom Mean To You? Does earning a big salary mean financial Freedom? In spite of having a high salary, why people many a times feel cash strapped when some emergency strikes? 
• The answer is simple for those who understand the difference between income and wealth, and how to create it manage to be financially independent.
• Also we need to value money for what it is and look at the money positively as an investment or savings than as a expense.
• Income is merely the flow of money that enables you to meet your day to day expenses, provide for your living, some leisure and wants to be able to survive.
• Whereas wealth is an outcome of what you do with the income and how well you accumulate and improve your financial strength to be able to sustain for a long term.

Financial Independence and Investing

• According to financial goals or objectives, Investing is the right way to achieve financial independence.
• Apart from the traditional investment options, experts are of the view that equities alone can get you the financial independence.
• Investing is not a one-time activity but more of a continuous process. The investment methodology will be different when you start investing in your 20’s and will change when you turn 40 and later on towards your retirement age, above 60’s.

Conclusion

In short, financial freedom is when you don’t have any kind of financial stress or any worries. Your investments are in the right place and are in a position working hard for you.

How the Changes in Life Insurance Policies Impact You?

Introduction

The Insurance Regulatory and Development Authority of India (IRDAI) has recently announced the new rules for Life Insurance Policies. Lets see how these changes in life insurance policies will affect buyers.

New Rules For Life Insurance Policies

Life insurance products are undergoing major changes which are mostly to the benefit of policyholders. IRDAI has released the new rules for life insurance policies. Lets discuss the updated regulations :

1.Life Cover in Ulips

• As far as life cover in the ULIPs front is concerned, the minimum cover offered was 10 times the annual premium earlier. Now, this minimum life cover in ULIPs is going to come down to 7 times from 10 times to those under 45.
• At present, insurers have to offer a minimum cover of 10 times the annual premium to those under 45 and 7 times to those over 45. For policyholders who are not keen on the protection element, smaller cover will mean lower mortality charges. 
• A higher proportion of premiums will be directed towards investments. However, one should note the important point that to maximise tax benefits under Section 80C and 10(10D), the life policy has to offer a cover of at least 10 times the annual premium. For policies with 7 times cover multiple, tax breaks under 10(10D) would not be applicable.

2.Maximum Lump sum Withdrawal

• The maximum withdrawal allowed at maturity under pension plans has been increased from one third to 60%.
• However, this will not bring insurance pension plans at par with the National Pension System (NPS). In NPS, the 60% withdrawal allowed at maturity is tax free.
• In pension plans, 60% withdrawal is allowed now but withdrawal of up to one third of the corpus would be tax-free, anything above that is taxable.

3.Minimum term for acquiring surrender value in traditional plans

• Now, you are not required wait 3 years for your policy to acquire a guaranteed surrender value. Surrender value is the amount you will receive if you decide to exit prematurely.
• Irrespective of premium paying terms, policies will now acquire the minimum guaranteed surrender value if they have paid at least 2 years’ premiums now, against 3 years earlier for policies with a premium paying term of over 10 years.

4. Freedom to choose annuity provider

• Annuity is regular, guaranteed pension income payable to the policyholder from the date of vesting till death.
• In the new rules, Annuity purchase conditions, too, have been liberalised. Currently, a policyholder has no choice but to purchase annuities at maturity from the insurer who has issued deferred pension plan.
• But now, policyholders can approach insurers offering higher rates for 50% of the corpus. Thus, Open market for the option of purchasing annuity, up to 50% of the investible corpus would be a key change.
• In earlier condition, a lack of competition used to hurt policyholder interests, as they cannot shop around for higher annuity rates. However, the Relaxation of this restriction will allow policyholders greater flexibility to seek better rates 

5. Flexibility in asset allocation in pension Ulips

• As of now, insurers have to give a guarantee at the vesting date. Here,guarantee means insurers have to invest largely in debt products and are not able to generate higher returns.
• But now, this is optional and policyholders can now decide whether they want assured returns or not. Those in the younger age brackets who can stomach risks and afford to stay invested over the long-term can choose to deploy funds in equity. 
• The change that is likely to make the maximum impact pertains to unitlinked pension segment, which lost steam after insistence on guarantees and purchase of annuities from the insurer who issued the deferred pension plan.

6. Direct premium payment for Ulip riders 

• Currently, Premiums for riders like accident or disability benefit accounted for by cancelling units.
• According to the new rules, direct premium paymeny for ULIPs riders is introduced. Direct premium payment means a larger proportion of base Ulip premium is invested.
• Also, the regulations also provide policyholders the flexibility to reduce their premium after the 5th policy year.
• Being long-term products, insurance premiums have to be serviced annually and any financial crunch around the premium paying date can result in policy lapsation. Instead, now you can reduce your premiums by 50% and still keep the policy in force. 

7.Extended Revival Period

• Revival period is the period offered by insurers to revive the policy after you missed paying the premiums after the policy lapses and also during the grace period.
• The revival period has been increased to 3 years in case of ULIPs and 5 years in case of non-linked products from 2 years.
• The extension in the revival period will provide you a wider window to revive their policy. Also, with the increase in duration, you will get some flexibility in policy premium payment.

Important Money Lessons from Barack Obama, Former US President

Introduction

Today, Barack Hussein Obama, the 44th President of the United States, is celebrating his 58th birthday. So, in this article, we will throw a light on important money lessons we can learn from Barack Obama, Former US President.

Important Money Lessons From Barack Obama

About Barack Obama

• Barack Hussein Obama served as the 44th president of the United States from 2009 to 2017. A member of the Democratic Party, he was the first African American to be elected to the presidency.
• Obama as a world leader does strike a different chord with us Indians. It may be because of his pedigree as a self-made man, much like our Prime Minister Narendra Modi.
• Unlike other world leaders who have typically preached from a pulpit, Obama is a man of the soil. He is at home in Asian nations like ours for he is someone who has seen struggle up close and personal and fought his way to the top fair and square.
• This is perhaps the one reason that endears him to us as a nation for most of us in this country are far from being born with a silver spoon in our mouths.

Here are a few important money lessons that we can learn from Barack Obama, former US President. These lessons will surely help us manage our money better.

Which are those Money Lessons From Barack Obama?

1. BE ATTENTIVE and Listen up hard

• One of the reasons that Obama strikes a chord whenever he gives a speech is because he is a great public speaker. To be a good public speaker, one has to begin by being a good listener. Obama is a man who believes communication is a two way street. And for all his major successes, he has attributed credit to those who have inspired him.
• Similarly, when you want to invest in the stock markets, you must keep your eyes and ears open to soak up all the information around you, so that you can decode the information that is relevant to you.
• Try and follow the successful investors, but do not copy them blindly. Be inspired from them and if you must apply their techniques, adjust them to your benefit.

2.Have A Clear and CoNsistent Vision

• ‘Change’ was vision of Obama. Right from the time he was relatively unknown and made speeches in the Democratic National Convention, he hinged his speeches on his a single word vision ‘change’. This was to become the fulcrum of his presidential campaign and ultimately brought him victory, not once but twice !!
• Similarly, when you begin your investment journey, you must have a clear financial plan, to begin with. Have your goals chalked out clearly and invest with focused as well as committed determination to meet them. There will temptations to fluctuate at times, but do not give in to them. Because meeting your financial goals will help not only you but your family in the long run.

3.Take Tough Decisions When the Need Arises

• Barrack Obama took over as the President of the United States in 2009, at a time when it was going through one of the worst financial crises it had seen. So he had to take some tough decisions to get the economy back on track. However, even under pressure, he was firm on his decisions and carried out his actions in a manner that he thought was best for his country.
• Similarly, when it comes to your portfolio, there will be times when you will be called upon to take some tough actions. More often, macro economic conditions will determine what actions you need to take. (A detailed analysis of India’s Macro Economic Indicators is done by us and is published on our Finplan website.)
• At such times you must not discourage or prevent yourself. You should take those decisions to trim or reshuffle your portfolio. Thus, you should balance your portfolio accordingly to allocate your assets towards more gainful investments.
• These decisions will not be the easiest to take, but you must have the confidence to go through with them.

4.Pay off your debts as aggressively as you can

• Obama has often acknowledged that it had taken him a good thirteen years to pay off his law school loans. He graduated from the Law School at Havard in 1991 and it was only in 2004 that he paid of his loans fully.
• So, To students or recent graduates the lesson is clear.
• Do not ramp up or step up your lifestyle as soon as you graduate from school. As a rule of thumb one should take off 50% of their after-tax increase in pay every time they get a raise to pay off debt. The remaining should be invested to get the best inflation-adjusted returns.
• Instead of getting jealous when you see people driving around in snazzy cars, tell yourself it’s more important to be debt free than spend money on materialistic things that you think will make you happy.

Conclusion

Thus as you can see, we as common people may not be able to comprehend the politics of world leaders, but we can sure be inspired from the way they conduct themselves and apply them to our personal lives.