IT Declaration: What is Income Tax Declaration (ITD)?
Updated: Sep 28
The IT declaration is a formal statement sent by the employees to their employer, specifying the investments and deductible expenses for the coming financial year. This is an important exercise, as it provides the opportunity to request employers to determine TDS after consideration of all declarations so that employees are not overtaxed during the year. From house rent allowance to insurance premiums, and other investment plans, knowing how to use the ITD effectively will go a long way in impacting your financial health.
This article is intended to equip you with all the necessary insights to allow you reap maximum benefits from your IT Declaration.
Table of content
IT Declaration: What is Income Tax Declaration (ITD)?
The IT declaration is a very important document for any employee in India. Submitted to the employer, it forms part of the payroll and tax deduction process under the TDS system. In this regard, the said declaration also benefits both the employer and employee through efficient management of the tax liabilities of employees in advance through possible deductions, rather than solely at the time of filing the annual ITR. This declaration is therefore important as it helps to:
Lower Monthly Tax Burden: Employees can reduce the amount of tax deducted every month by declaring investments that have a chance of getting deducted from their taxes.
Spreading Tax Payments: This helps employees manage liquidity better by not facing a large tax payment at the end of the financial year, instead having the tax payments spread out over the year.
Avoiding Excess TDS: Avoid the hassle of claiming a tax refund at the end of the year by appropriate adjustment of tax deducted at source based on planned tax-saving investments.
Who Needs to Submit an IT Declaration?
An IT declaration is to be filed by the salaried employees who expect claims for a myriad of tax deductions and exemptions that would hold for an ensuing financial year. This mostly comprises employees who:
Intent to Claim Deductions: All such persons who intend to make certain investments or expenditures which are eligible for tax deductions under various sections of the Income Tax Act, 1961, such as Section 80C (investments in PF, life insurance, tuition fees), Section 80D (health insurance premiums), and so on.
Receive House Rent Allowance (HRA): Declare rental expenses by employees who pay rent for claiming HRA and seeking tax benefits against the same.
Pay Home Loan Interest: Declaration by employees servicing a home loan and desiring to claim deductions on the interest component under Section 24.
Incur Eligible Expenses: Education of children, medical treatment of self or dependants, donations to eligible charities, and so on, are covered under different sections of the tax laws.
Components of an IT Declaration
The IT declaration submitted by employees to their employers, is a very important document in managing TDS. It contains the following critical components that bring out possible deductions and tax-saving investments that an employer would consider while making appropriate changes to monthly TDS. The primary components of an IT declaration are as follows:
Personal Information
Employee Details: Employee's full name, PAN, and employee code (if any).
Contact Information: Address, email, and phone number for updating the employer's records.
House Rent Allowance
Rental Agreement: Rental payment details, like the landlord's name, address, and PAN. In case the annual rent paid is above a threshold, usually INR 1,00,000.
Rent Receipts: Month-to-month rent receipts for claiming the Housing Rent Allowance.
Section 80C Investments
Public Provident Fund (PPF): Contributions to PPF accounts.
Employees' Provident Fund (EPF): TDS on salary for EPF.
Life Insurance Premiums: Proof of insurance premium payment
Equity-linked Savings Scheme (ELSS): Investments in tax-saver mutual funds
Tuition Fees: Tuition fees paid for any two children
Home Loan Principal Repayment: Certificate from the lender on the principal repayment towards home loan during the year.
Section 80D: Medical Insurance Premiums
Insurance Premium Receipts: For insurance regarding health insurance paid for self, spouse, children, and dependent parents.
Preventive Health Checkup Costs: Receipts for preventive health checkups within the limit prescribed under the section.
Section 80E: Interest on Education Loan
Interest Payment Proof: Documents showing interest paid on education loans for higher education.
Section 80G: Donations
Donation Receipts: Proof of donations made to eligible charitable organizations along with the PAN of such organization.
Section 24: Interest on Home Loan
Interest Certificate: From the bank or financial institution outlining the interest component on home loan repayments.
Other Deductions
Section 80CCD(1B): Contributions to National Pension System
Section 80TTA: Interest on savings bank account
Any other deductions applicable under various sections of the Income Tax Act.
Declaration and Verification
Declaration: Statement declaring that the information provided is true and accurate.
Signature: Employee's signature verifying the declaration.
How to Prepare for Income Tax Declaration?
Efficient preparation of your ITD and its submission to your employer requires a systematic approach so that you maximize tax benefits. Here is how exactly you prepare for IT Declaration:
Understand Eligible Deductions and Exemptions:
Research the Deductions: Be aware of the various sections that provide deductions, such as Section 80C for investment, Section 80D for medical insurance, and Section 24 for interest on home loans.
Plan Your Investments in Advance: Plan your investments at the beginning of the financial year itself so that the expenditure can be spread out. As a result, under those heads given above, you would get the maximum deduction.
Gather Necessary Documents:
Sources of Investment Proofs: Receipts for ELSS, PPF, premiums of life insurance, NSC, statements of repayment to housing loan, receipts of tuition fees, and so on.
Rental Agreements and Receipts: In case of claiming HRA, ensure to have a rental agreement along with monthly rent receipts.
Receipts of premium paid for Medical Insurance: To claim deductions under Section 80D.
Calculate the Deductible Amount:
Estimate Your Deductions: Calculate the total amount from your investments and expenses that may be claimed as deductions by using some online calculators or consulting a tax advisor.
Fill Out Form 12BB:
Declare Your Investments: Form 12BB is a Declaration form that includes your tax-saving investment and expense details. Fill this correctly, as it will aid your employer in estimating your TDS.
How to File IT Declaration?
IT Declaration can be filed in the following ways:
Form 12BB Submission: Download Form 12BB from the website of the Income Tax Department or through the HR portal of your employer. Fill the same with details of deductions and attach proofs relating to the same.
Digital Submission: Most organizations nowadays allow or demand digital submission of Form 12BB. Attach the filled form along with all investment proofs digitally through the Company's Employee Portal or as instructed by HR.
Physical Submission: If your Employer wants a physical copy, then prepare a file comprising Form 12BB along with all supporting documents. Provide documents to the concerned department and take acknowledgement of the receipt.
Verification by Employer: Your employer will verify Form 12BB submitted by you along with proofs. If any discrepancies or missing proofs are found, then additional proofs may be requested.
Changes in Payroll: Based on the declarations and proofs, an adjustment of monthly TDS will be made by your employer. This is to ensure that the correct amount of tax is deducted from your projected taxable income.
Keep Records: Keep duplicate copies of everything presented or submitted by you, including forms as well as receipts, for your record. They may be required at times or later when employees verify their Form 16 or at a later date when the annual tax return is filed.
Common Mistakes to Avoid in IT Declaration
IT declarations play a major role for salaried employees since these declarations have a huge impact on the TDS which will be calculated and deducted by the employer. Needless to say, it is important to avoid common mistakes to ensure accuracy. Here's a list of common mistakes employees should avoid in their IT declaration:
Delay in Submission
Mistake: Filing the IT declaration form at the last minute.
Consequence: Insufficient time for checking and verification may lead to mistakes. Also, excess TDS may get deducted in case the form is submitted late when the tax-saving investments are not properly reflected.
Solution: Filing the IT declaration well in advance of the last date.
Incorrect or Incomplete Information
Mistake: Uploading incorrect financial information or not filling all the fields of the IT declaration form.
Consequence: Wrong TDS Calculation bridges to excess deduction or under-deduction. Both irritate creators at the actual time of filing income tax returns.
Solution: Check all entries for accuracy and completeness before submitting.
Overestimating Deductions
Mistake: Declaration of more deductions which cannot actually be invested by the end of the fiscal year.
Consequence: In case the investments declared are not made, this would result in a mismatch at the time of filing tax returns and the individual would have to pay tax and penalty.
Solution: Declare only such deductions that you are quite sure about making.
Not Providing Proof and Documents
Mistake: Not submitting or delaying in submitting the proofs for investments and deductions claimed.
Consequence: The Employer would not consider these deductions, and one would end up with more TDS deductions.
Solution: Making available all proofs and submitting along with the IT declaration is mandatory.
Not Updating Changes in Investments
Mistake: Not updating the employer about changes or additional investments made subsequent to the declaration.
Consequence: The declared and actual investments will not match and may pose problems in the final tax computation.
Solution: Intimate your employer about any change in your investment plans at the earliest.
Ignoring Eligible Deductions
Mistake: Forgetting or not knowing all eligible deductions like HRA, LTA, Section 80 deductions, and so on.
Consequences: Higher TDS due to higher taxable income.
Solution: Carefully examine all the deductions available under the Income Tax Act and make proper declarations for the same.
Mismatch with Form 26AS
Mistake: Declaration of wrong information in TDS details, which does not match Form 26AS
Consequence: Discrepancies in TDS credit as per record of the Income Tax Department, consequently resulting in demands for tax payments or refunds.
Solution: Keep checking form 26AS regularly to ensure proper recordings and correctness of deductions and credits made, their correctness vis-à-vis your declarations.
Underutilization of Section 80C
Mistake: Not utilizing the complete limit of INR 1.5 lakh available under Section 80C.
Consequence: Paying more tax than necessary.
Solution: Plan your investments in tax saving instruments to make full use of the limit available under Section 80C.
Not Consulting a Tax Expert
Mistake: Do your tax planning and declaration on your own if you are unaware of the correct methodology to adopt.
Consequence: This can result in errors in IT declaration and tax planning.
Solution: If unsure, consult with a tax expert to get clarity on your tax-saving options and declaration details.
Ignoring New Benami Transaction Laws
Mistake: Not knowing the new tax laws and changes.
Consequence: Missing out on tax savings or non-compliance.
Solution: Stay updated on the latest tax rules and their impact on your declarations.
Eligible Expenses and Investments to be Declared in IT Declaration
House Rent Allowance (HRA): Rent paid for accommodation, subject to conditions under Section 10(13A) of the Income Tax Act.
Interest Payable on Home Loan: Deduction for interest on home loan under Section 24(b) for self-occupied or let-out properties, up to the applicable limit.
Leave Travel Allowance (LTA): Claim for travel expenses incurred for domestic travel with family, applicable under Section 10(5), subject to certain conditions.
Deductions under Chapter VI-A:
Section 80C: Investments such as PPF, ELSS, NSC, Life Insurance Premium, and tuition fees.
Section 80CCC: Contributions to certain pension funds.
Section 80CCD: Contributions to the National Pension Scheme (NPS) and Atal Pension Yojana.
Section 80E: Deduction for interest on education loans.
Section 80G: Donations to certain charitable organizations.
Section 80D: Deduction for health insurance premiums and medical expenses for self and family.
Section 80TTA: Deduction on interest earned from savings accounts.
Other Incomes: Declaration of additional income sources such as rental income and interest income (from fixed deposits, bonds, and so on).
Tips for Optimizing Your IT Declaration
Optimizing the IT declaration with an employer is important to achieving maximum tax savings while remaining well within the four corners of the law. Here are a few tips that will prove useful for employees while maximizing their IT declarations:
Start Early: Start investment and deduction planning at the beginning of the financial year. This gives you sufficient time to spread out your investments and, on the same note, to not rush into any last-minute decisions that might turn out to be financially uncompromising.
Know Eligible Deductions and Exemptions: Be aware of all deductions and exemptions one is entitled to under the Income Tax Act. Some of the most common provisions include:
Section 80C: Investments such as PPF, NSC, life insurance premiums, ELSS, tuition fees, and so on, up to a maximum limit of INR 1.5 lakh.
Section 80D: Premiums paid for medical insurance to self and family.
Section 24: Interest on the home loan in case of a self-occupied property.
House Rent Allowance (HRA): Can be claimed when you are paying rent and HRA is not received by your employer.
Calculate HRA Accurately: If you get HRA and pay rent, compute the exemption amount correctly. Of the following, the least is exempt :
Actual HRA received;
40% of Salary, 50% of Salary if residing in metros;
Excess of rent paid over 10% of salary.
Proper Maintenance of Documents: Keep all receipts, bank statements, and documents relating to investments and expenses in order. All these will be required while submitting proofs to your employer and also for your record.
Avail Section 80E for Education Loan: In case one has taken an education loan, the interest that is paid for such loan is deductible under Section 80E. This deduction is available for a maximum of 8 years or until the interest is paid, whichever is earlier.
Claim Additional Deductions: Explore additional deductions, like donations under Section 80G, which can bring down taxable income provided proper receipts and documents are furnished for the same.
Enlist Professional Help If Necessary: In case tax planning and declaration is somewhat confusing to you, then consider getting professional service from a tax professional. This may be quite useful if you have numerous sources of income or other complex financial situations.
Review and Update Your Declarations: Review your declarations mid-year to ensure that your investments and deductions are on track. Update your declarations if there have been significant changes to your financial situation or if you failed to invest as planned at the beginning.
Maximize Section 80C Investments: Like every year, exhaust the INR 1.5 lakh limit under Section 80C. Depending on your risk appetite and financial goals, invest in products like ELSS, PPF, life insurance, and so on.
Claim Preventive Health Checkup Expenses: Don't forget to claim up to INR 5,000 for preventive health checkups under the overall Section 80D limit. This often overlooked deduction aids in reducing tax liability.
Legal Implications of Misreporting IT Declaration
There are a number of legal implications under the Indian Income Tax Act in case of misreporting of income or deductions in the ITD submitted by employees to their employer. The consequences are paradigmatic in nature and not only affect the immediate financial situation of the employee. Hence, it has far-reaching legal repercussions. Here's an exploration of what could happen in such cases when an employee provides incorrect information in his IT declaration:
Penalties for Under-reporting or Misreporting of Income
Under Section 270A of the Income Tax Act, a penalty may be imposed if an individual under-reports or misreports his/her income. Under-reporting would attract a penalty of 50% of the tax payable on under-reported income, and as far as misreporting is concerned, it would be as much as 200% of the tax payable on misreported income.
Misreporting includes concealment of investments, not recording the same in the books of accounts, claiming expenditure which is not substantiated by any evidence, and recording of any false entry in the record, and so on.
Payment of Tax with Additional Tax plus Interest: If misreporting results in inadequate payment of tax, the assessee will be liable to pay the deficient amount of tax. Further, interest, as per Section 234B and/or Section 234C, may also be charged on the due tax from the due date of filing until the actual date of payment.
Revised Assessment: In case of mismatches between the IT declaration and the IT Department's information on income, such as Form 26AS or the transaction reports directly sourced from banks and other financial institutions, it may require the employee to file a revised return. This revision must be done within the prescribed deadline; otherwise, penalties may apply.
Tax Audits and Scrutiny: The misreporting or discrepancies in the IT declaration will lead to scrutiny or a tax audit by the Income Tax Department. In such audits, taxpayers are asked to periodically submit more supporting documents and explanations as to why there is a mismatch or error in the originally filed returns.
Refund Related Consequences: Incorrect IT declarations can lead to delayed refunds for those employees who are due for refunds. In the worst-case scenarios, they could even lose their refunds till such time the anomalies are cleared.
Loss of Financial Credibility: Multiple errors or willful misrepresentation in IT declarations can lead to loss of financial credibility of the employee. This could have further consequences on loan sanctions, credit ratings, and professional relationships since financial integrity would be at stake.
Criminal Liabilities: In the most extreme cases where there is substantial tax evasion, there can be criminal proceedings against such an individual. The culprit may not only be fined but can even be criminally prosecuted in extreme situations.
FAQ
Q1. What is an IT declaration?
IT Declaration is a document wherein employees declare to their employers, at the beginning of the financial year, all such investments that are eligible for deduction against tax.
Q2. Why should an employee declare his investments correctly in an IT declaration?
Correct declaration will ensure correct deduction of tax from the salary of an employee and he would neither pay more nor less tax than what is due from him.
Q3. What kind of deductions can one claim for in an IT declaration?
Some common deductions include investments under Section 80C, like PPF, NSC, payment of premium of life insurance policies, and so on. Health insurance comes under Section 80D, while interest on home loans comes under Section 24.
Q4. How do IT declarations avoid errors?
Avoiding errors in declarations would need early planning of your investments, keeping the receipts in order, and periodic review or updating of investment details.
Q5. What is the deadline for submitting IT declarations?
The deadline for submitting IT declarations may vary from employer to employer but is normally fixed before the TDS computation for the financial year in early April.
Q6. Can an IT declaration be revised?
Yes, most employers allow revisions to IT declarations at the time of mid-year review to accommodate changes in investment plans.
Q7. How does an incorrect IT declaration affect tax liability?
The wrong declaration can result in either excess TDS, which means excess tax paid for which a refund will then have to be claimed, or tax due to be paid at the end of the year.
Q8. What documents are needed for IT declaration?
The documents needed for IT declaration will include: investment proofs, insurance receipts, home loan statements, and any other financial document.
Q9. What are the implications of not declaring or mis-declaring IT?
The implications of mis-declaration or non-declaration are mismatched tax records, penalty risk, and problems in tax returns.
Q10. What are the advantages to an employee for declaring IT properly?
Proper IT declaration ensures correct tax deduction, better financial planning, and saves one from the hassle of tax reconciliations at the end of the financial year.
Q11. What is the purpose of an IT declaration?
The purpose of an IT (Income Tax) declaration is to report all the planned income, tax-saving investments, and eligible expenses of an employee for the financial year. This declaration helps employers determine the employee's estimated taxable income and deduct appropriate taxes (TDS) from their salary in the payroll application.
Q12. What happens after submitting the IT declaration?
After submitting the IT declaration, employees are required to submit documentary proof of their declared investments and expenses, such as receipts, investment certificates, and loan statements. This is typically done in January or February. Additionally, employees must submit Form 12BB, which consolidates the details of tax-saving claims. This process ensures accurate tax deductions and compliance with the declared investments.
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