Switching Jobs? Here's How It May Complicate Your Income Tax Planning

With the job market increasingly dictated by flexibility and improved pay prospects, job hopping within a short time has become a trend—particularly among young professionals. While career benefits may be immediate, the tax complications that come with frequent changes in jobs are a surprise for many. Handling numerous Form 16s, coordinating deductions, and full disclosure become essential at the time of income tax filing.

Every job change during a financial year generates a new Form 16, the document that summarises your salary income and the tax deducted at source (TDS) by your employer. If you’ve worked with two or more employers in a year, you’ll need to combine the income from each employer while filing your income tax return (ITR). Every employer calculates the income earned under their employ alone and adjusts the TDS for it accordingly—resulting mostly in cumulative short payment of tax if your total income during the year goes into a higher tax slab.

Underreporting these incomes when they are not combined properly may cause improper filing, which would at a later time attract demands or notices from the Income Tax Department.

Risk of Underreporting

The most common mistake is not reporting income earned by a former employer—especially where employees think that TDS has already been deducted and that nothing more needs to be reported. But the Income Tax Department cross-verifies income reported by them with Form 26AS and the Annual Information Statement (AIS) and the latter captures all tax-related information associated with your PAN.

If a prior employer's income is not included on your return, even if there is no tax owing, the discrepancy can trigger red flags and result in compliance problems.

Deductions Claimed More Than Once

Another common error among job changers is accidentally claiming deductions twice. Section 80C deductions—available only in the old tax regime—like EPF, PPF, or tax-saving mutual fund contributions can be claimed during the financial year. If the employee fails to adjust and merge these properly, the last ITR might show an overstated deduction.

Similarly, the same problem can occur for House Rent Allowance (HRA), medical insurance premiums under Section 80D, or education loan deduction. Taxpayers have to calculate the eligible amount themselves and ensure that they claim it once only.

Gaps in TDS and Advance Tax

When an employee joins a new employer during the middle of the year, they tend to overlook sending Form 12B, giving information about previous employer income and TDS. Without this, the new employer might take it for granted that their salary is the sole income and calculate TDS based on that. This can lead to a deficiency in tax deducted.

If the total tax payable is more than the amount already withheld, the employee has to pay the balance tax. This can lead to a huge tax outflow at the time of filing or even incur interest if advance tax was not paid within specified timelines under Sections 234B and 234C.

Tax on Gratuity and Leave Encashment

Changes in jobs with resignation after prolonged tenures can be accompanied by gratuity payments or encashment of leave. These elements are subject to certain tax treatments. Gratuity, for instance, is exempt up to Rs 20 lakh under specified conditions, while leave encashment is exempt under restrictions. Failure to declare these correctly or misinterpreting their exemptions can lead to either over-taxation or inaccurate reporting.

Keep Records and Plan Ahead

To prevent tax mistakes, one must keep a record of all Form 16s, payslips, and evidence of deductions. Verification of the AIS on the income tax portal prior to filing will enable one to detect any discrepancy or unreported income. Payment of advance tax prior to March 31 in case of an anticipated TDS shortfall will alleviate the burden and avoid penalties.

With job switching becoming a norm, tax planning must be integrated into career planning. Staying organised and aware can help employees avoid costly mistakes and ensure a smooth tax filing experience, even if their employment journey during the year wasn’t.