Indian Tax & Payroll – All You Need to Know About Investment Proof Submission

In India, employees must submit an investment declaration before the beginning of the tax year in April. An investment declaration is a document in which employees provide their investment plans that they then will provide proofs for at year end. Taxes will be calculated and deducted from April- December.

 An investment proof submission will then be required, this is based off the investment declaration given by employees.

In January, employees are asked to produce proofs against the investment declaration given in April and consider the same when calculating their taxes. Based then on the investment proof submissions provided, taxes will be recalculated and deducted accordingly in the remaining three months of the financial year ( January- March).

Investment proof submission can be a long and manual process, often involving a lot of paperwork and last-minute checks. However, this process can be simplified by having a systematic procedure in place and preparing ahead of time.

Below are all the details that both employees and employers need to know about investment proof submission in India.

What is Investment Proof?

Investment proof is the actual proof employees must submit, where they must declare the investment in April for tax computation, as per income tax.

There are certain guidelines issued by the Department of Income Tax, India, for verification of investment proof that employers must follow.

For example, all employers are required to keep this proof for the next 6 years.

Each month, employers must deduct taxes from their employee’s salary. For employees to be exempt from these taxes, they must submit investment declarations meaning that they can then claim allowances and deductions. So, before deducting taxes, an employer estimates the taxable income of their employees based on these declarations.

For employees, this usually involves a lot of manual work – such as printing and physically submitting each form of proof.

Meanwhile for the employers, it can be a  challenge to collect and verify each of these documents.

How Does the Investment Proof Verification System Work?

The Investment Proof Verification System operates as follows:

Step 1: Every employee receives an email about the submission of their proof of investment.

Step 2: A local payroll provider can then verify uploaded proofs online and accept or reject the submissions.

Step 3: Employers can export the information in MS Excel and the payroll provider imports it into the payroll system for further calculation of salaries.

Important Tax Saving Investment/Expenditure Proofs

• Investments – Under Section 80C
  For investments such as:

– Equity Linked Savings Schemes (ELSS) of mutual funds (MFs)

– Life insurance

Submit the ELSS fund statement and premium paid receipts respectively.

• Public Provident Fund (PPF) when maintained with a bank or a post office, you must submit photocopies of the passbook showing all the transactions and the account details.
• If maintaining PPF online, you must take a printout of the e-receipt showing transactions and the account details.
• With Sukanya Samriddhi Schemes and 5-year tax saving fixed deposits, the deposit receipt or a certificate from the bank must be submitted to the employer.

• Tuition fees
  With tuition fees, you must submit photocopies of the school receipt with the schools’ seal and signature of the receiver.
• First-time home buyers
  For loans sanctioned between 01-Apr-2018 to 31-Mar-2019, Section 80EE allows tax benefits for first-time home buyers under which the benefit can be claimed on home loan interest. This deduction is over and above the Rs 2 lakh limit under Section 24 of the Income-tax Act. Hard copies of all the relevant documents must be submitted. The deduction is allowed up to Rs 50,000 per year starting from FY 2018-19 and subsequent years until the loan is repaid.
• House Rent Allowance Exemption
  For those who claim HRA relief, the Permanent Account Number (PAN) of the landlord is mandatory. This condition is not applicable for those whose rent payment is less than or equal to Rs 1 lakh per annum, i.e., INR 8,333 per month. A copy of the lease rent agreement or declaration by the landlord in a prescribed format is to be submitted. Further, ownership proof of landlord of rented premises, which can be house tax receipt or the latest electricity bill or share certificate in case of co-operative society houses have to be submitted. The original rent receipts for the period April 2018 till date must be provided.
• Housing loan repayment (principal)
  The certificate from a financial institution specifying the principal paid during April 2018 to March 2019 needs to be submitted. Ask the institution to mention the provisional amount for the last 2-3 months of the current financial year as equated monthly installments (EMIs) would still be pending.
• Loss from housing property – interest on housing loan – self occupied
  The interest certificate from the bank or financial institution, specifying the break-up of interest and the principal amount for FY 2018-19 would be required. Possession/construction completion certificate are a must for availing the relief by some employers. Further, the date the loan was  taken and the date of possession are mandatory to avail the benefit.
• Loss from housing property – interest on housing loan – let out on rent
  If the house for which loan has been availed is let out, the same should be submitted with certificate from a financial institution specifying principal and interest paid during April 2018 to March 2019 (FY 2018-19).
• New Pension Scheme (NPS)
  There is no need to submit proof of actual Investments in case the investments in NPS is through Corporate Model or Employee Model as the same are recovered and deposited by company in your PRAN (Permanent Retirement Account Number) account. However, if you have opted for investment of Rs 50,000 under NPS on your own, i.e., outside salary, then submission of copies of PRAN card, NPS Transaction Statement for Tier 1 Account is necessary.
• Mediclaim premium
  Call up the insurer and ask him to send the statement for tax purpose under Section 80D. The premium should not be paid by cash and should be paid by cheque or digital transfer from the bank account.

Common Mistakes While Submitting Investment Proof

Investment proof submissions are lengthy and specific. To prevent prolonging the process, avoid the common mistakes listed below.

1. 1. Financial Planning
      The employee declares investment at the beginning of the financial year i.e. April or May and investment proof will be submitted at the end of the financial year i.e. from December, January and February every year. Generally, the employee is not able to invest as per declaration, to save tax.  So, it is advised that financial planning be done at the beginning of the year, so that employees can manage their expense on investment declaration and actual proof. Then, there will be no mismatch declaration v/s actual at the end of year and no extra tax burden in January, February and March.

1. 1. Photocopy of investment proof
      The Employee must keep the photocopies of investment proof themselves as well as their employers and preserve these photocopies of actual proof for seven years after submission. This is because the income tax department may issue a scrutiny notice for the last seven years. If the employee has all the documents readily available, it will save time and effort trying to provide the relevant material to the income tax department.

1. 1. Reimbursement bills or invoice
      Employees must follow the company guidelines to submit reimbursement bills and be eligible for tax exemption on specific salary elements. If the employee fails to do so then the same salary component will be taxable and the company will tax it.

1. 1. Future Investment
      The last date of Income Tax Investment Proof submission with the employer is January 15^th. There is a possibility that the employee might have to make more investments at later date, i.e. February or March. In this case, the employee has to submit a future declaration with the employer on all such future investments. Based on employee declaration, the employer considers them for tax deduction purposes. Therefore, an employee should submit declaration so that they can be considered by their employer. Otherwise, they will miss the tax benefit.

1. Avoid last minute rush 
   A small mistake or error in the submission of Income Tax Investment Proof may cause major delay – Ss the employee should take this process seriously. Normally, an employer gives at least 30 days time to complete this exercise but like Income Tax Return, often up to 80% of employees submit on the last day. It’s important employees give the payroll team sufficient time to check proofs. In the case of any error or mistake, they will then have adequate time to alert the employee and rectify it.

What happens at the end of the tax year?

At the end of the tax year, employees will be issued a Form 16.

A Form 16 is similar to a P60 in the UK and  Ireland. It is given to the employee in the month of May every year after all investment activities have been completed and reported to the government.

The employee can get all the Income details they earned from their employer in last financial year along with tax deducted and credited to their account over the year.

If the employee had multiple employers in the financial year, the employee will get a separate Form 16 from each employer for the period which they worked for each employer. Form 16s are key document for employees to file their yearly Income Tax filling, which needs to be submitted before July 31^st annually.

When a Form 16 is being issued, a ‘Digital Signature Certificate’ (DSC) of authorized signatory for each Form 16 is required.  A Digital Signature Certificate is a secure digital key that is issued by the certifying authorities for the purpose of validating and certifying the identity of the person holding this certificate. Digital Signatures make use of the public key encryptions to create the signatures.

In Summary

Submitting the investment proof on time goes a long way in saving taxes and making the most of employee’s income. It is a long process that must be given significant attention.