Money Magazine - How does changing jobs impact your Taxes ?

Better job prospects, higher salary, attractive work environment, travel opportunities, unendurable circumstances in the present job, uncertainty or downsizing;  irrespective of the reason, you are likely to switch jobs at some point in your life.

At such times, you tend to look at issues like work environment, growth opportunities, pay and perks, distance from residence but very rarely, how this job change affects your tax scenario.

First, all compensation that you receive when you quit your current job would be taxed – this includes earned leave, if any (Upto a maximum of 3 lakhs is exempt; but check out the rules before getting a final settlement). So make sure your ex-employer pays your final compensation after deducting TDS.

EPF: Any EPF (Employee Provident Fund) withdrawals in cash, if you haven’t worked with the company for more than five years of continuous service, will be taxed. Employee and employer contributions will be taxed as ‘Salary’ and the interest on this will be taxed as ‘Income from Other Sources’. Ideally, transfer your EPF balance to the new EPF account with your new employer – this way your retirement savings will go on uninterrupted and there will not be any tax issues. The HR departments at both companies can see to this, provided you fill out the forms and remember to follow it up till it gets done!

ESOPs: If you have ESOPs with your ex-employer, check the vesting date and the tax implications of selling such stock. Rather than paying capital gains where the holding period does not qualify as long- term, it might be better to wait for a few more months and save on taxes.

Tax computation: The most important point with respect to taxes that you need to consider whilst changing jobs is the computation of your tax liability by your new employer . You could end up with either seeking tax refunds or paying heavy taxes at the time of filing returns if this is not done correctly.

What happens is that most employers tend to compute tax liability after taking into consideration the basic exemption limits and the exemptions availed under Section 80C. Since this would already have been considered by your previous employer (in the same financial year), the tax liability newly computed with double counting of exemptions and deductions will be lower than it should be.  If tax liabilities like capital gains tax have been considered by both, then this would result in more amounts being deducted under TDS. This will mean that you need to seek tax refunds and that may mean a long wait.

You can avoid this by making sure you have got the Final Form 16 from your ex-employer – he needs to provide it to you by April 30th of the year after you leave the company. More importantly, present this form to your new employer, so that he knows what are the deductions and exemptions that have already been considered.

With most companies, a new employee is required to give the particulars of income from his earlier employment by filling Form 12B. Mention all details clearly, so that you can avoid double counting and ensure all deduction and exemptions have been considered and ONLY ONCE. If Form 16 is still pending from your old employer, use the old salary slips instead.

Use this opportunity to get your TDS in order. Take time to fill out your Tax Declaration for your new employer. Consult your financial planner/tax advisor and redo your investment plan and tax plan in line with your new income.

Proper tax planning can help you save taxes, invest better and increase your wealth.