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Form 16 - What is it and how does it work?

RBL Bank Jun 16, 2020

As tax filing season draws closer, salaried people eagerly wait for their Form 16 as it is the key to filing their income tax returns. Employees don their tax planning hats to find the best ways to save taxes.

Experts say that most of the investments in life insurance, tax-saving fixed deposits, PPF, NPS, ELSS and others occur during the end of the financial year. As a salaried employee, it’s important for you to know all about Form 16 because you will have to deal with it every year.

Are you new to the tax filing club? Do you want to know what Form 16 is, why it’s important and how it works? Read on.

What is Form 16?

Form 16 is a certificate that shows a detailed breakdown of tax deducted by the employer from the employee’s salary and submitted to the income tax authorities as tax deducted at source (TDS). This certificate is required when a salaried individual files income tax return. Using Form 16, the tax authorities calculate how much tax you have paid; whether you need to pay more; or if you are eligible for a refund. Every employer is required to issue Form 16 by June 15th of each financial year.

Additionally, the Form 16 shows any additional income reported by the taxpayer and tax deductions claimed by him to lower his tax liability. Form 16 is divided into two parts: Part A and Part B.

Part A of Form 16 includes the following:

  • Employer’s name and address
  • Employer’s PAN and TAN details
  • Employees PAN details
  • Breakdown of the TDS amount paid and credited on behalf of the employee

Part B of Form 16 includes the following:

  • Detailed breakup of salary
  • Deductions allowed under Chapter VI-A of the Income Tax Act
  • Allowance extent exempt under Section 10
  • Relief under Section 89

A Sample Form 16

A Sample Form 16 AA Sample Form 16 B

Form 16A and Form 16B

While Part A and Part B are two different sections of Form 16, there are two different types of Form 16s applicable for two different sets of taxpayers.

Form 16A

While Form 16 only mentions income from salary, Form 16A details TDS deducted against income from other sources excluding salary. Form 16A displays details of income such as interests earned on fixed deposit, rental income, insurance commission, etc.

Form 16B

Form 16B is only applicable if you have earned income in the financial year through the sale of property. When you sell a property, the buyer has to deduct 1% as TDS from the total amount and submit it to the Income Tax Department. After the TDS is submitted, he (buyer) should issue Form 16B to you showing that you have paid TDS against the sale of property.

Is Form 16 mandatory for all salaried individuals?

According to Indian law and regulations, it is mandatory for the employer to issue a Form 16 to the employee if the annual salary falls under the taxable income bracket. If your salary is below the taxable bracket, it’s not mandatory for your employer to issue Form 16 as he is not deducting TDS from your salary.

In case you are a freelancer or an independent contractor, your client or employer may deduct TDS and issue quarterly Form 16s to you even if your annual income is below the taxable threshold. In this case, the excess TDS deducted from your salary is refunded by the IT department when you file your returns.

Benefits of Form 16

Form 16 is not only mandatory by law but it has several benefits. With this form, it’s easy to file your returns as you don’t have to submit separate documents for salaried and non-salaried incomes.

With Form 16 at your disposal you also save money because you can easily file your return online without availing the professional service of a chartered accountant. Also, it is easy to verify if the TDS deducted from your income is being submitted to the government by checking the Form 26AS from the Income tax website.

Proper and timely submission of Form 16 to the Income Tax department shows that you are tax compliant and a law abiding citizen. Additionally, since banks and financial institutions consider the Form 16 as a valid income proof document, it’s easy for you to avail loans at competitive rates.

There might be some instances where you may not receive Form 16 from your employer. For instance, if your company has abruptly shut down, you may not receive Form 16 from your employer. In that case, you have to submit a long list of documents and compute your TDS, deductions, taxable income, and income from capital gains and house property separately. Without Form 16, filing tax returns can be a cumbersome and time-consuming task. Therefore, ensure that you get the Form 16 from your employer before the tax filing season begins.

Disclaimer: Articles published on the website are merely indicative and suggestive in nature and do not amount to solicitation. The contents do not guarantee the desired returns and/or results. Reader is advised to exercise discretion and consult independent advisors for achieving desired result. Visitors to this blog/ website w.r.t products & services offered by RBL Bank Limited herein, shall ensure that the comments / feedback posted shall be restricted to the contents published herein and shall not contain such language that may be un-parliamentary or against any religion, caste, section of society, political view etc. While our endeavor is to publish the comments that are submitted, however, all comments/feedback shall be subject to internal review by RBL Bank Limited. We do not guarantee that the comments that are submitted will be published.

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