The call from the accounts office or HR seeking details on tax savings committed for the current fiscal year is one that most employees despise. The employee investment declaration determines how much of their taxes will be deducted and when they must submit proof to receive the reduced tax deduction benefit. In such cases, Form 12BB comes to their aid. The Central Board of Direct Taxes, or CBDT, has prescribed a form for salaried individuals to use for investment declaration.

Previously, there was no standard form for makings, but with the introduction of Form 12BB on June 1, 2016, the process has been standardized. Employers deduct TDS from employees’ salaries if their earnings exceed the taxable limit. Employees usually declare their investments in January and February to avoid TDS deduction.

After the Finance Act of 2015, which introduced section 192(2D) of the Income-tax Act of 1961 (the Act), the person responsible for making salary payments (employer) was required to collect the necessary evidence or proof in the prescribed form and manner to allow any claim for any deduction and/or tax-saving investments.

 Why is investment declaration important?

  • According to the law, a company is required to deduct a charge at source from a worker’s assessed pay consistently.
  • Before Union Budget 2020, the Income Tax Act allowed employees to guarantee certain costs and ventures while lowering their taxation rate.
  • The public authority presented another assessment system in Union Budget 2020, with lower charge pieces but fewer exclusions and allowances.
  • Nonetheless, workers are permitted to consider and select the best system based on their pay.
  • Workers must make charge confirmations and calculate their expense liabilities to select the best option.
  • Managers can deduct annual expenses from employees’ salaries once the decision has been made.

 Common mistakes while submitting investment declaration

Financial Preparation

The employee declares investment at the start of the fiscal year, in April or May, and investment proof is submitted at the end of the fiscal year, in December, January, and February of each year. Generally, the employee is unable to invest following the declaration to save tax.

As a result, financial planning should be done at the start of the year so that employees can manage their expenses on investment declaration and actual proof. Then, at the end of the year, there will be no mismatch between the declaration and actual, and no additional tax burden in January, February, and March.

Copy of the investment proof

Employees must keep photocopies of investment proof for themselves as well as their employers, and these photocopies of actual proof must be kept for seven years after submission.

This is due to the possibility of the income tax department issuing a scrutiny notice for the previous seven years. It will save time and effort for the employee to provide the relevant material to the income tax department if all of the documents are readily available.

Invoices or reimbursement bills

Employees must follow company guidelines to submit reimbursement bills and be eligible for tax exemption on certain salary components. If the employee fails to do so, the same salary component will be taxable and will be taxed by the company.

 Investment in the Future

The deadline for submitting Income Tax Investment Proof to the employer is January 15th. There is a chance that the employee will have to make additional investments later, in February or March. In this case, the employee must file a future declaration with the employer detailing all such future investments. The employer considers them for tax deduction purposes based on employee declaration. As a result, an employee should submit a declaration so that their employer can consider them. Otherwise, they will miss out on the tax break.

 Avoid the last-minute rush

A minor error or omission in the submission of Income Tax Investment Proof may result in a significant delay – the employee should take this process seriously. Normally, an employer gives at least 30 days to complete this exercise, but, as with income tax returns, up to 80% of employees often submit on the last day. Employees must allow enough time for the payroll team to review proofs. In the event of an error or mistake, they will have enough time to notify the employee and correct the situation.

Incorrectly filed tax returns will cause a slew of headaches and problems.

This is not what we desire. Please avoid the aforementioned errors. If you are unsure about filing your return on your own, please seek professional assistance. To maintain mental peace, it is preferable to file returns correctly and on time.

How to provide a tax file declaration to your employer?

Employers request an investment declaration from their salaried employees at the start of each fiscal year. A tax file declaration is essentially a list of all the tax-saving investments that an employee intends to make during the fiscal year in question. Even if he or she does not agree to all of these declarations, the employer should be informed.

Employers request this information to determine their employees’ tax liability. This is calculated using deductions from Section 80C of the Income Tax Act, home loans, medical bills, and HRA. Collecting these details at the start of the year makes it easier for the employer to deduct Tax at Source (TDS) every month. TDS is governed by Section 192 of the Income Tax Act of 1961, which requires employers to withhold taxes when paying salaries.

It is natural for employees to become tense at the prospect of declaring their investments because they are unsure whether they will be able to fulfill them or not. The important thing to remember is that employees must invest the entire amount declared in the permitted investments, regardless of where they invest. Because the tax deduction is low, the higher the amount of investment, the higher the in-hand salary each month for the employee.

To claim tax-saving benefits or rebates on investments and expenses, a salaried employee must submit Form 12BB to his or her employer. Generally, Form 12BB must be submitted at the end of the fiscal year.

Making Investment Declarations

The investment declaration at the beginning of the year is merely a road map of the amount you intend to invest during the year. During December and January, your employer will request that you submit documents as proof of these investments, which were stated in the investment declaration at the beginning of the year.

The areas where Investment Declaration can be made includes

  • Home loan interest

Every year, you may be paying a significant amount of interest on your home loan. Aside from declaring the lender’s name, address, and PAN on Form 12BB, you may be required to submit the provisional interest certificate, which specifies the principal amount for the year and the interest break-up on a provisional basis. The lending bank or financial institution must provide this provisional interest certificate.

  • House rent allowance

You may be able to claim the landlord’s house rent. The only information needed is the owner’s name, address, and PAN.

  • Leave travel concession or allowance

A leave travel concession, also known as a leave travel allowance, is paid to a salaried employee as part of their salary package and is only valid for domestic travel. Salaried employees must also provide proof of travel-related expenses to their employers to claim a tax deduction for LTA/LTC. Form 12BB should include the total amount claimed as well as the number of documents submitted.

  • Mediclaim premium

The premium you pay for health insurance is tax-deductible under Section 80D of the Income Tax Act. Make sure to include the premium amount in your tax return. The amount declared in your investment declaration at the start of the year should correspond to the amount invested at the end of the year.

  • Section 80C deductions

Premiums paid for a life insurance policy or investments made in tax-saving mutual funds may be claimed as a deduction.

Section 80CCD- It includes NPS contributions.

Section 80E – Education loan interest.

Section 80G: Donations to the government or specific organizations (mostly NGOs).

What happens if you don’t report your tax investments on time?

If you miss your deadline to declare your investments, even by a few days, your employer may over-calculate your tax liability and deduct the extra tax due from your next month’s salary. Even if you pay extra tax, your ITR will take care of it. However, make sure to include your investments in your income tax return.

Spend some time developing a well-thought-out strategy that will allow you to make the necessary investments without disrupting your cash flow. Monthly payment investment plans relieve financial stress, especially at the end of the year.

Make certain that your returns are filed on time and that you make significant investments. Furthermore, make it a point to file your tax return to protect your hard-earned salary from any unexpected deductions.

Missed deadlines and late filling can result in complications. Thus, we advise you to seek professional help for investment declaration. For your investment declaration, you can take help from Topsource Worldwide, they provide reliable and correct filling services that will not cause any complications to you.

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Published On: December 21st, 2021Last Updated: June 16th, 2022

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About the Author: Sachin Disa

Sachin heads the India Payroll business unit and is responsible for global sales into India, India domestic sales and delivery, and local finance support in India. Sachin has over 17 years of experience with the company, his previous roles include head of UK payroll operations, head of accounting support services, head of sales in India and VP of finance.