Can Salaried Individuals Overpay Tax Unknowingly?

If your salary seems to disappear faster than your weekend, taxes might be the culprit. Many professionals unknowingly overpay due to a lack of awareness about tax slabs, deductions, and exemptions. While TDS deductions by employers are based on estimated income, you have the power to optimise your tax liability. Let’s break down the ways you might be overpaying and how to keep more of your money where it belongs: in your pocket! 
 
However, before that, let’s get all clear on how the taxes are charged.
 

Understanding Taxation for Salaried Individuals

The Indian taxation system follows a slab structure where individuals are taxed at different rates based on their annual income. The current tax slabs vary based on whether an individual opts for the old tax regime or the new tax regime introduced in Budget 2020.

Old Tax Regime (With Exemptions and Deductions):
 

1. Income up to ₹2,50,000 – No Tax
2. ₹2,50,001 – ₹5,00,000 – 5%
3. ₹5,00,001 – ₹10,00,000 – 20%
4. Above ₹10,00,000 – 30%
    

New Tax Regime (Lower Rates, No Exemptions):
 

1. Income up to ₹2,50,000 – No Tax
2. ₹2,50,001 – ₹5,00,000 – 5%
3. ₹5,00,001 – ₹7,50,000 – 10%
4. ₹7,50,001 – ₹10,00,000 – 15%
5. ₹10,00,001 – ₹12,50,000 – 20%
6. ₹12,50,001 – ₹15,00,000 – 25%
7. Above ₹15,00,000 – 30%

Understanding these slabs is crucial, as many individuals pay more tax than required simply because they fail to choose the right tax regime.

How Salaried Individuals Overpay Taxes?

Here are some common ways salaried individuals end up paying more tax than necessary:

1. Incorrect Salary Tax Slab Consideration: Your employer calculates TDS based on projected earnings, but if deductions and exemptions are not correctly accounted for, you may fall into a higher tax slab than necessary.
   
   
2. Failure to Declare Investments and Deductions: Many individuals forget to declare tax-saving investments under sections like 80C, 80D, and 10(14), leading to higher TDS deductions.
   
   
3. Not Claiming House Rent Allowance (HRA): If you live in rented accommodation but fail to submit rent receipts to your employer, you may miss out on significant tax savings.
   
   
4. Not Availing Section 80D Medical Insurance Deductions: Taxpayers can claim deductions for medical insurance premiums for themselves, family, and parents. Failing to claim this deduction can increase your tax burden.
   
   
5. Overlooking the New vs. Old Tax Regime: Many salaried professionals stick to the old tax regime without evaluating if the new regime (which offers lower tax rates but no deductions) might be more beneficial.
   
   
6. Delay in Filing Income Tax Returns (ITR): Not filing ITR on time can lead to penalties, missed refunds, and loss of benefits associated with carry-forward losses.
   
   
7. TDS Mismatch and Non-Verification of ITR Return Status: A mismatch between TDS deducted and Form 26AS can result in excessive tax paid. Regularly checking your ITR return status ensures accurate tax computation.

How to Avoid Overpaying Taxes?

Now let us see how you can save more money by avoiding undue taxes. 

1. Optimise Investment Declarations:

One of the biggest reasons for excess TDS deductions is failing to declare investments on time. Employers calculate TDS based on estimated income, and if you don’t provide details of your tax-saving investments early in the financial year, they may deduct more tax than necessary. To avoid this, declare your planned investments at the beginning of the year. Utilise tax-saving instruments under Section 80C, such as PPF, EPF, ELSS, NPS, and 5-year fixed deposits, to maximise deductions. Additionally, other tax-saving options like health insurance premiums (Section 80D) and home loan interest deductions (Section 24) should be considered to reduce taxable income further. 

2. Choose the Right Tax Regime:

Since the introduction of the new tax regime, taxpayers now have two options:

The old tax regime, which allows various deductions and exemptions, and the new tax regime, which has lower tax rates but eliminates most deductions. Choosing the right regime can significantly impact how much tax you pay. Before making a decision, compare your tax liability under both regimes. If you have multiple deductions, the old regime may be more beneficial. However, if you prefer a simplified tax structure with lower rates, the new regime might be the better option. A quick tax calculation at the start of the financial year can help you optimise your savings.

3. Regularly Check ITR Return Status:

Many taxpayers unknowingly leave their money with the tax department simply because they don’t check their ITR return status. After filing your income tax return, it’s essential to verify that your submission is processed correctly and that any eligible refunds are credited to your account. In some cases, technical issues or mismatches in tax filings may result in delays. By keeping an eye on your return status, you can take timely action to resolve discrepancies and ensure that any excess tax paid is refunded without unnecessary delays. Did you know? Thousands of taxpayers fail to claim refunds just because they don’t check their ITR return status regularly!

4. Verify Form 26AS and AIS:

Your Form 26AS and Annual Information Statement (AIS) are crucial for tracking taxes deducted and income earned throughout the year. Form 26AS provides a consolidated view of tax credits, including TDS deducted by your employer, banks, or other institutions. The AIS gives a detailed breakdown of your income sources, such as salary, interest, dividends, and investments.

Always cross-check these documents with your salary slips and financial records to ensure that all income sources are correctly reported. Any discrepancies should be rectified promptly to avoid incorrect tax payments or potential scrutiny from tax authorities.

5. File ITR Before the Due Date:

Filing your Income Tax Return (ITR) on time is more than just a legal obligation. It helps you avoid penalties and ensures you can claim refunds without delays. Late filings can result in fines, loss of interest on refunds, and unnecessary financial stress. Mark the due date on your calendar and gather all necessary documents well in advance to ensure a hassle-free filing process. Additionally, early filing reduces the risk of last-minute technical issues on the tax portal, helping you avoid unnecessary complications.

Final Words

With better financial planning and a clear understanding of tax slabs, deductions, and exemptions, you can take control of your tax liabilities. Don’t assume your employer’s TDS deductions are always accurate; verify them, stay updated on your ITR return status, and make informed tax-saving decisions. A proactive approach not only helps you optimise tax payments but also ensures you’re not giving away your hard-earned money unnecessarily. After all, every rupee saved is a rupee earned!