What is Form 16 – Components & Importance

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.