Why You Must File Income Tax Even If Your Employer Has Been Deducting Taxes Monthly
In today's tax landscape, many employees often wonder if they still need to file an income tax return despite their employer deducting taxes from their salaries every month. The answer is yes – you typically still need to file an income tax return at the end of the year. This article will explore the reasons why, and what happens during the tax return process.Understanding TDS and Income Tax Returns
Your employer deducts income tax from your salary monthly using a system like Pay As You Earn (PAYE). This deduction, known as Tax Deduction at Source (TDS), is an estimated liability calculated based on your income. However, filing an annual income tax return is a legal requirement for several key reasons:Final Tax Liability:
Filing allows you to calculate your final tax liability for the year. This involves reconciling your total income, deductions, and credits, which may alter the amount of tax you owe or the amount you will receive as a refund.
Additional Income Sources:
Even if your employer deducts taxes from your salary, you might have additional income from other sources such as freelance work, investments, or interest from bank accounts. This income is not fully accounted for in your employer's deductions, so you need a complete tax return to ensure all sources of income are considered.
Deductions and Credits:
Filing a return enables you to claim any deductions or credits you might qualify for. These can significantly reduce your tax liability. For example, you can claim deductions for charitable donations, mortgage interest, and other eligible items.
Compliance:
Whereas your employment income is often subject to TDS, other sources of income are not. Filing your return ensures that you comply with all tax laws and regulations. Failure to do so can result in penalties, fines, or even legal consequences.
Tax Return Process and TDS
Once the financial year ends, you will receive Form 16 from your employer, which details the TDS deducted from your salary. Before July 31 of the next year, you have to file your income tax return. This process involves:Comprehensive Income Accounting:
Your return will take into account your income from all sources (e.g., salary, interest, dividends, etc.) to compute your total taxable income. TDS from your salary is only a portion of your total income.
Calculation of Tax Liability:
Based on your total income, tax deductions, and tax credits, your tax liability will be calculated. If the TDS deducted is more than your tax liability, you will receive a tax refund. Conversely, if your liability exceeds the TDS, you will need to pay the difference to the Central Board of Direct Taxes (CBDT).