Tax Deductions Surge in April: Understanding the Seasonal Anomaly

Tax Deductions Hit Salaried Employees Hard in April

Many salaried employees noticed a sharp fall in their take-home salary in April despite receiving the same salary as before. The issue is particularly common among employees who switched jobs during the previous financial year and joined a new organisation towards the end of the year.

In many such cases, employees received a higher in-hand salary for a few months after joining the new company because tax deduction at source (TDS) was either lower or not fully adjusted initially. However, once the new financial year started in April, tax deductions increased significantly even though the salary remained unchanged.

Apart from job switches, a higher tax deduction in April can also happen because of non-submission of investment declarations, inclusion of bonuses in annual salary projections, or default selection of the new tax regime by employers.

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When an employee joins a company in the middle or towards the end of a financial year, the employer may calculate tax only on the salary payable for the remaining months of that year. In some cases, previous employer income may not immediately get factored into payroll calculations, especially if salary details from the earlier employer were not disclosed.

This often results in lower TDS for a few months and a higher take-home salary.

The situation changes once the new financial year begins in April. At the start of the year, employers project the employee's income for the full 12 months and calculate annual tax liability accordingly. The estimated tax is then spread evenly across the year through monthly TDS deductions.

As a result, even though the gross salary remains the same, the monthly tax deduction rises sharply, and the take-home salary falls. For example, suppose an employee joins a company in January with a salary of Rs 1.5 lakh per month. For January, February, and March, the in-hand salary may appear quite high if tax deduction is lower due to timing or payroll calculations. But when April comes, the company now assumes the employee will earn Rs 18 lakh over the full year, calculates tax on that annual income, and starts deducting TDS accordingly from the first month.

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Employees Changing Jobs Have Options

Employees changing jobs during the financial year can submit Form 12B to the new employer along with documents such as Form 16, full-and-final settlement payslips, AIS or Form 26AS. Alternatively, employees can report the previous employer's income to the new employer or report the income in the tax return and remit the tax along with interest, if applicable.

However, disclosing the previous employer's income at the tax return stage may result in additional tax outflow due to double count of tax slabs and standard deduction by both the employers.