Most of us are aware of Form 16 given by our employers before April 30th each year that give details of the income earned, and tax deducted at source and paid to the government. This certificate proves useful in filing income tax returns. In addition banks also issuing Form 16 and Form16A to pension holders and those that earn interest income, with no Form 16 required when TDS is not deducted from salary. Knowing about Form 16 helps us to be a well-informed taxpayer and do better tax planning.
The 13 components of Form 16 are:
PAN that stands for Permanent Account Number, a 10 digit alpha-numeric code that is generated by the Income Tax Department of India. It is mandatory for everyone- NRI, PIO & companies that wishes to conduct business, file and pay taxes, invest, buy and sell property, open a demat or bank account to have this number in India. The need
TAN is best known as Tax Deduction and Collection Account Number is another mandatory 10 digit alpha-numeric number that is very necessary for all persons and companies that are responsible for collecting taxes. It proves useful to note that this number is unique in case of different companies.
Gross salary, the common term used in practice includes all regular incomes in an employee’s remuneration. It would include allowances, overtime pay, commissions, and bonuses, with all other amounts before the deductions are made.
It is best to know that perquisites are just additional benefits in addition to the fixed salaries. Known popularly as perks this term could include rent free accommodation, loans at subsidized rates and others.
Profits in lieu of salary are just payments given instead of salary that is given by at or in connection with retrenchment or termination of employment. This item forms a part of taxable income and includes gratuity, commuted value of pension, retrenchment compensation. However the contribution made by the employee or interest thereon is not taxed.
Next allowances in Form 16 are certain payments made or allotted to employees for bearing of certain expenses. It could include allowances like medical allowances, and travel allowances that are generally taxable in the hands of the employees.
House rent allowance or HRA In Form 16 refers to a special allowance paid to employees to meet the cost of housing. There is tax exemption on HRA and it is limited to the least of either the HRA received from employer, or rent paid in excess of 10% of the salary, or 50% of salary in metropolitan cities and 40% in other cities. The term salary here includes basic, dearness allowance and other commissions put together, this exemption not available to those that do not pay rent.
It is best to understand conveyance allowance as an allowance paid to an employee to meet commuting expenses between his/her home and place of work. There is a maximum exemption of Rs.800, with a special provision for an orthopedically handicapped employee until 1600.
The term medical allowance paid for medical treatments and medicines is fully taxable. However reimbursement of medical expenses against submission of bills could get you a maximum exemption of 15000 annually.
The allowance received to employees for entertainment services or entertainment allowance is allowed as a deduction for government employees. However in other cases one can avail of deduction as a least of actual allowance received, or 1/5th of salary excluding all other allowances and perquisites or 5000.
Deductions as in Form 16 is given as an incentive given by the government to invest in certain long term savings schemes. This includes long term savings for retirement, insurance schemes and others that give tax breaks.
All taxes in India are subject to an education cess that is 3% of total tax payable. This contribution is made towards the Secondary and Higher Education development in the Indian economy.
It is lastly important to understand the relief granted to employees when salary is paid in arrears in a lump sum best known as Relief u/s 89. This includes salaries received in arrears/advance, family pension received in arrears, retirement benefits such as gratuity, commuted pension, VRS and retrenchment compensation.
Understanding your form 16 helps you in many ways like planning for taxes, filing your income tax and so on.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.
