What is Form 16

Form 16 becomes quite a topic of discussion in all office campuses during the tax filing season. Though we know that Form 16 is for tax filing, many of us still find it hard to understand the components of Form 16 while filing the return. Understanding Form 16 is the key to better tax planning.

If, after taking about form 16 the entire day in office, you wonder what it actually is while returning home, then this is the answer for you.

Form 16: Form 16 is the certificate issued by the employer to employee stating the details of income earned and the tax deducted on your behalf and paid to the government. Every employee who is subjected to TDS is supposed to receive their Form 16 by April 30 every year. However many employers issue it post this deadline.

Important points to be noted:

• No Form 16 is required if TDS is not deducted from salary
• If TDS is deducted by banks to the pension holder, banks should also issue Form 16. For interest income, the bank issues form 16A

Components of Form 16:

Form 16 can be said to be comprised of some real major components. These are discussed briefly so that next time while filing for tax, you know exactly what you are filling in.

PAN

PAN stands for Permanent Account Number, which is a 10 digit alpha-numeric code generated by the Income Tax Department of India. The tax department has made it mandatory for everyone (including NRIs, PIOs & Companies) who wishes to indulge in any type of investments or financial transactions in India. Carrying on business, filing or paying taxes, investing in India, buying a property, opening a bank or demat account, etc. now require a PAN number.

TAN

TAN or Tax Deduction and Collection Account Number is a 10 digit alpha numeric number, required to be obtained by all persons/companies who are responsible for deducting or collecting tax. TAN nos. are also unique to companies.

Gross salary

Gross salary refers to the employee’s total remuneration including allowances, over time pay, Commissions, and bonuses, and any other amounts before any deductions are made.

Perquisites

Perquisites are nothing but the perks you enjoy. It is the additional benefit provided by the employer to the employee in addition to the salary or wages provided.

For example, Rent Free accommodation, Loans at a subsidized rates to employees etc.

Profits in lieu of Salary

Profit in Lieu of Salary is a part of the salary income, thus it is taxable under the head ‘Income from salary’. It is any payment made to employees in lieu of salary. This means any payment due to, or received by employee from his employer (or former employer) at or in connection with the termination of employment or due to modification in terms and conditions relating thereto.

Example: Gratuity, Commuted value of pension, Retrenchment Compensation etc. received or due to be received to the extent which is not exempt, and which it does not consist of contribution made by the employee, or interest thereon will be taxable as profit in lieu of salary.

Allowance

Allowance is a payment made by employer to an employee to enable him/her to meet certain cost of expenditure incurred on behalf of the employer, expenses which he/she may not have underwent otherwise. This generally forms the part of the employee’s taxable income.

Example: – Medical Allowance, Travel Allowance etc.

Some of the most important allowances that you will come across in Form 16 are :

1) HRA (House Rent Allowance) :

HRA is a special allowance given to an employee to meet his rent expenses. It is exempt from tax to the extent of least of the following:

a) HRA received from employer

b) Rent Paid in excess of 10% of the salary

c) 40% or 50% of the Salary (50 % in case of an individual belongs to metropolitan cities like Mumbai, Delhi, Chennai, Kolkata for all others it is 40%).

Note:

Salary for HRA calculations: Basic+ DA+ Commission (Paid as a fixed percentage of sales)

(Above exemption is only available on actual payment of rent).

For example, Let us understand this with an example. Say, you live in Hyderabad and your salary structure for a month is as follows:

Basic – Rs 12,000

HRA – Rs 5,000

Other taxable allowances – Rs 2,000

Monthly rental expenses – Rs. 7,000

Now, HRA will be exempt to the extent of the least of:

Rs 4,800 (40% of salary for non-metro); or

Rs 5,000 (HRA received); or

Rs 5,800 (excess of rent paid over 10 per cent of salary, i.e. (7000-(10% of 12,000)

HRA exemption will be the least of the above i.e. 4,800.

2) Conveyance allowance

Conveyance allowance is usually paid for the welfare of the employees to compensate for the expenses they bear while commuting to office every day. Conveyance allowance is exempt to the extent of Rs. 800. An orthopedically handicapped employee enjoys a higher exemption of Rs. 1,600

3) Medical allowance

Medical allowance is paid by the company to cater the amount spends by employee on medical treatment and medicines. Medical allowance can be paid out monthly or yearly. Medical allowance is a fully taxable component of the salary. However, if you receive reimbursement of medical expenses against submission of bills, such reimbursement is tax free up to Rs. 15000 per year.

4) Entertainment Allowance

Entertainment allowance is imparted to employees to enable them to avail entertainment services. Deduction on entertainment allowance is only is allowed to government employees. The amount of deduction allowed is to the extent of least of the following -

• Rs. 5,000 (OR)
• 1/5th or 20% of the salary (excluding all other allowances benefit or any other perquisites)

5) Deductions

Government encourages certain type of savings -mostly long term savings for your retirement – and therefore offers you tax breaks on such savings. These tax breaks are nothing but deductions allowed from the gross total income (Chapter VI A).

6) Education Cess

Education cess is a contribution made towards the Secondary and Higher Education development in the economy. All taxes in India are subject to an education cess, which is 3% of the total tax payable.

7) Relief u/s 89

Relief is granted to individuals when salary is paid in arrears in a lump sum.

For example, Salary (received in arrears/advance, family pension received in arrears, retirement benefits such as gratuity, commuted pension, VRS and retrenchment compensation)

With all the knowledge imparted in this article, you are now well harnessed to file your taxes with proper knowledge and confidence.