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Double tax benefit when an employee changes job

The issue

An employee changes job in the middle of a year and submits his investment details (for tax saving) to the company he joins. The employee seeks benefits under Section 24 (interest on housing loan), Section 80C etc. of the Income Tax Act, from the new employer. The employee, while in his earlier company, too availed benefits under Section 24, 80C etc. for the year. Will the company which he joins be providing him with a “double” tax benefit if it were to consider benefits under sections such as 24 and 80C?

This is a question we received recently from the Chief Financial Officer (CFO) of a company we know. It looks as though payroll managers and CFOs are worried that they may be providing excessive tax benefits to employees who join their organization in the middle of a year.

In order to ensure that they do not give “double” tax benefit to employees, some payroll managers argue that they should reduce the interest (on housing loan) amount (Section 24) and life insurance premium amount (Section 80C) to the extent of an employee’s service period with their organization in a particular year. For example, if an employee submits that he would be paying Rs 1 lakh as interest on his housing loan for the year and works with the company for 6 months, say, from October to March, the company would consider only Rs 50,000 (which is Rs 1 lakh adjusted for the 6 month period of employment) towards tax benefit while calculating TDS on salary for the employee.

So, should an employer be worried about providing a double tax benefit to an employee who works for a part of a year?

The short answer is, “no.” There is no question of an employer providing a double benefit to an employee by considering the employee’s entire annual interest (on housing loan) amount or the annual life insurance premium amount.

What does the law say?

Let us take a look at Section 24 to explain this – our reasoning below applies to sections 80C, 80D etc. as well.

Section 192 (2B) of the Income Tax Act clearly specifies that employees, for the purpose of tax deduction, may submit details of income from house property (including loss from house property, if any) in a financial year to their employer.

Interest deduction under Section 24 of the Income Tax Act pertains to income from house property for a previous year and has nothing with the period of employment in the year or the income from salary received during the period of employment in a year. Employees can submit information related to their income from house property (and the interest deduction details) to their employer for timely tax remittance. There is nothing in Section 192 or in any other section which links interest deduction with period of employment. When an employer calculates salary TDS for a year, he should calculate the Income from House Property (after considering interest deduction) for the whole year even if an employee has worked only for a part of the year with the employer.

Section 192 imposes no restrictions on the tax benefit — under sections such as 80C, 24 etc. — that can be provided when an employee moves from one organization to another.

In fact, one could argue that considering income or interest deduction on house property for a part of a year (on the basis of the period of employment) would not be in line with Section 192 since such a thing could lead to over or under-deduction of tax despite the employee submitting information for the entire year. Consequently, the employee could be put to inconvenience with regard to timely tax payment.

Let us take a look at a case where linking housing loan interest with the period of employment could lead to problems.

For a live employee, we consider the housing loan interest of an employee and calculate TDS for the entire year in April itself. Let us assume that the employee leaves abruptly in September end and submits the housing loan interest certificate as part of the exit formalities. If we were to consider housing loan interest proportionately only until September, we could see an under-deduction of tax since we would be abruptly reducing the housing loan interest benefit by half while calculating TDS during settlement. This is not what the law mandates. This problem would occur not just for exiting employees but also for new joinees who join an organization in the middle of a year. For new joinees we may be over-deducting tax if we do not consider the housing loan interest for the entire year.

As an aside, you may be aware that for the purpose of tax calculation we need to consider only the home loan interest payable for the year. In fact, an employee need not even have paid any interest in a year in order to claim the benefit as per Section 24. Also, the timing of interest payment has nothing to do with the period of employment in a year.

Apportioning benefits under 80C etc. deductions across employers, in case of multiple employers within a year, too is not correct.

The treatment of 80C etc. deductions is similar to interest deduction on housing loan as described in the previous paragraphs. All these deductions are for a year and have nothing to do with the period of employment with a particular employer. Section 80C does not allow an employer to apportion 80C amounts as per the period of employment.

What about the issue of double benefit?

Here is an actual question we received recently.

The Form-16 is meant to reflect the taxable income of an employee. By showing deductions for home loan interest and 80C deduction in both the Form 16s (issued by the 2 employer), is the taxable income for the year not getting understated?

Some people seem to be under the impression that if the annual figures of 80C amounts and interest on housing loan are considered by 2 employers in a year, there could be a case of double benefit to an employee. This is totally without any basis.

When an employee submits Form 12B (previous employment information) to his employer, the employer should consider the salary income before the housing loan interest and 80C etc. deductions from the first employer. In other words, the top line salary (after Section 10 exemptions) from the first employer should be added to the top line salary of the second employer when the second employer calculates TDS. The second employer should consider the tax deducted by the first employer and the employee’s investment declaration for the year. Whether the TDS calculated by the first employer is correct or incorrect is immaterial to the second employer as long as the second employer calculates tax correctly with the information he has at his disposal.

Since the second employer considers only the top line salary (before any deduction) from the first employer and applies deductions under sections 24, 80C etc. only once, there is no double benefit to the employee.

One can do a simple test to check if there is any double benefit (and hence under-deduction of tax) to an employee who works in 2 organizations in a year. Calculate the tax liability for the year (by creating a simple Excel sheet for tax calculation) without looking at the Form 16 tax numbers and check if the tax amount you have arrived at is the same as the total tax across the 2 Form 16s. If the tax amount you calculate matches with the Form 16 tax numbers (taking into account Form 16 from both organizations) you can conclude that the numbers in Form 16 are correct. If there is double benefit, the tax you calculate would be higher than the total of the tax amounts in the 2 Form 16s.

If the annual housing loan interest amount is shown in 2 Form 16s, it does not mean that the employee has paid/will pay the total of 2 interest amounts for the year. Form 16 should be read at the level of an individual employer and deductions shown in the 2 Form 16s cannot be added up.

What about Section 10 exemptions such as HRA exemption?

Should the second employer provide House Rent Allowance exemption on the basis of the rent paid during the employee’s stint with the organization (part of the year) or full-year rent?

The House Rent Allowance (HRA) exemption should be provided only for the period the employee is with the organization and hence only the rent paid during the period of employment should be considered. This is because HRA exemption is tied to the head of pay called House Rent Allowance which is paid only for the employee’s service duration with the organization. We cannot provide exemption on a head of pay (HRA, in this case) when it is not paid to an employee (i.e. after he leaves the employment). The rent amount as a factor under Section 10(13A) is tied to the period of HRA received. For example, when HRA is paid for the period Apr to Sep, the HRA exemption can be calculated only for that period and hence rent (as a factor for HRA exemption calculation) for that period alone can be considered.

In summary, Section 10 exemptions (such as those on HRA and Leave Travel Allowance) are organization specific while deductions such as housing loan interest and 80C amounts are financial year specific.

Instances of excessive tax benefits

There can be instances of excessive tax benefits when an employee moves from one employer to another and does not submit Form 12B (previous employment salary and tax) information to the new employer. For example, in FY 2015-16, an employee receives a taxable salary of Rs 2 lakh from the first employer and Rs 2 lakh from the second employer. The first employer does not deduct any tax from the employee’s salary since the salary paid to the employee is in the 0% slab. The employee does not submit Form 12B to the second employer, and as a result, the second employer does not deduct any tax since the salary paid to the employee is in the 0% slab.

For the year, the total taxable salary received by the employee is Rs 4 lakh which is in the 10% slab while both the employers have not deducted any tax. Clearly, the employee receives an excessive tax benefit in this case. However, both the employers have complied with Section 192 and calculated TDS correctly, and hence cannot be faulted. The employee should take the blame for not revealing the previous employment income to the second employer.