Form 16 - Learn All About including Types, Eligibility, and Importance

In India,under section 203 – Income-Tax Act 1961, an employer gives a document or a certificate to its salaried employees,containing all the details about salary an employee received by the employer/ organisation in an specific financial year and the income tax that has been deducted by the employers from the salary of the employee, this documents or certificate is known as Form 16.

Form 16 is a confirmation by an employer that TDS has been deducted and deposited with the government on behalf of the employee.

An employer in an organisation gets a monthly salary. Such a salaried individual does not pay income tax directly to the government. Instead, the employer deducts tax from the salary of the employee and deposit it to the government on behalf of the employee.

The Income Tax Act binds every employer or organisation to deduct Tax (or TDS – Tax deducted at source) while paying salaries. These taxes are subtracted from the salary of the employee as per the income tax rate prevailing in that particular financial year or the income tax rate slab under which his/her income falls in. Employers are supposed to issue this document to their employees on or before 31st May of the F.Y., immediately following the F.Y. in which the salary was paid and tax was deducted.

The TDS, so held over by the organization or employer has to deposit with the Income Tax department and Form 16 in evidence of the same. An employee can use Form 16 to source details while filling up his/her income tax return (ITR) and retain it as a backup testament for TDS.

The form has two components: Part A and Part B

Part A of Form 16 encompasses the information about tax collected at source on salary by the employer. It is generated and downloaded by the employer from the TRACES portal. Part B is an annexure to Part A of Form 16 which has to be issued by the employer. Let's have a deeper dive into them.

Form 16 Part A

Form 16 Part A is the certification of tax deducted by the organization or employer from the salary income, on the employee’s behalf and deposited in the income tax department. It is a duly verified attestation by the employer that they have held over the TDS from the employee’s salary and deposited it with the government.

It is the summary of the following information:

• Name and address of the employer
• PAN (Permanent Account Number) and TAN of employer
• PAN of the employee
• The Assessment Year (AY)
• The time period for which the individual was employed with the employer in the concerned Financial Year
• Summary of the amount paid or credited, and tax deducted at source as mentioned in respect of the employee
• Date of tax deduction from the salary
• Date of tax deposit in the government’s account
• Acknowledgement Number of the TDS Payment

A few worth noting points about Part A Form 16

• Information like the individual and employer’s name, address details, PAN details of both an employer’s TAN details bolster the IT Department to track the movement of money from the account of employee and employer.

• TAN refers to the number assigned to an account responsible for the deduction and collection of tax. Notably, an organization who does not possess the TAN is ineligible to deduct TDS.

• Assessment year is the year in which the income is getting assessed, means the year in which the taxpayer file the income tax returns of the year prior to it. For instance, for the income earned between 1 April 2016 and 31 March 2017, the Assessment Year will be 2017-18.

• Part A is generated and downloaded from the Traces portal of the Income Tax department. It also contains details such as Bank’s BSR code via which the payments are done, for future endorsement. All the pages of Part A are required to be duly attested/signed by the deductor either digitally or manually.

Form 16 Part B

Part B is a detailed statement about the computation of Income, on the basis of which tax is being calculated and deducted by your employer. It is a structured and comprehensive representation of the breakup of the salary earned by an employee along with various deductions, exemptions (if any) and the tax computation after considering all the items in accordance to the prevailing tax slab rates, in a prescribed format. Part B also contains the employee details such as name and PAN etc.

Part B of Form 16 includes the following:

• Total Salary Received: Salary structure further classified into various parts like House Rent Allowance, Leave Travel Allowance, Gratuity and Leave Encasement, etc.
• Exemptions Allowed: According to Sec (10) of Income Tax Act, 1961, allowances provided to employees for Medical, Housing rent (HRA), Conveyance, Children education and hostel expenditure etc are also required to be specified in the Form 16 part B.
• Gross Income: The sum total of the salary income received from employer and income from other sources like income earned from house/property etc shared employee with the employer during the F.Y. has to mentioned in this part of Form 16.
• Deductions From Salary:
• / 80CCC / 80CCD constitutes contributions made towards schemes like Public Provident Fund, Life Insurance policies, tax saving mutual funds, pension, Sukanya Samriddhi and so on. The maximum limit of deduction under these schemes Rs. 1,50,000.
• Deductions under other sections: Details about Deductions under other sections such as 80D (premium paid towards health insurance or Mediclaim), 80E (interest payment on education loan), 80G (donations), etc has to be submitted by the employee to the employer along with the necessary relevant documents.
• Net Taxable Salary: Tax liability is calculated on Net Taxable Salary which is obtained by subtracting the total aggregated deduction under “Chapter IV-A” from the gross income.
• Education Cess and surcharges, if any
• Rebate as per Section 87, if applicable
• Relief as per Section 89, if any
• Total tax payable on income
• Tax deducted and the balance tax outstanding or refund applicable

Types of Form 16

Form 16 particularly deals with the TDS deducted on the salary income by your employer while there are 2 other types of Form 16 that are Form 16A and Form 16B which treats the TDS on income other than salary.

Form 16A:

Form 16A is a TDS certificate applicable for TDS on income other than salaries like interest income earned from Fixed Deposits, TDS on rent receipts, TDS on insurance commission or any other income which is eligible for such deduction. Form 16A contains details of the income earned other than from salary, TDS deducted and deposited on such income. It also constitutes personal details like the name and address of deductor/deductee, PAN details, TAN details of deductor.

Form 16B:

Form 16B is a TDS certificate or document representing the TDS deducted on the sale of the property and attests that the TDS amount cut down on Property by the Buyer has been duly deposited with the Income Tax Department. The buyer needs to subtract 1% TDS on Property from the amount he has to pay to the seller for buying immovable property, followed by the submission of the TDS to the Income Tax Department and issuance of the Form 16B to the seller of the property. Form 16B is a shred of evidence that the TDS cut down on the sale of the property has been deposited to the government’s revenue.

Eligibility criteria for Form 16

As per the rules and regulations issued by the Finance Ministry of the Indian Government, every salaried individual who comes under the taxable bracket is eligible for the Form 16 which means that if your gross total income exceeds 2.5 lacs, you need to pay tax and you are eligible for the Form 16. Hence, in these cases, the company/employer is under an obligation to issue Form 16 to the employee.

Employees with an income of less than Rs. 2,50,000 for the Financial Year, are exempted from income tax. Hence, if no tax has been deducted, Form 16 will not be issued to these employees with less than basic salary.

Nowadays many organizations issue this certificate to all the employee regardless of their eligibility as it is a consolidated representation of the employee’s earnings and has other additional uses also.

A few important points about Form 16

• Only an employer can download and issue Form 16. No individual is allowed to download his / her Form 16 online via Gen TDS Software .
• An employer can download Form 16 via TRACES website provided by the Income Tax department.
• All salaried employees are eligible to get a Form 16 from their employers.
• If your employer deducts TDS from salary, it is mandatory for him to issue your Form 16 to the employee as it is a TDS certificate which certifies that the TDS is deposited to Government.
• The employer should issue Form 16 prior to the due date of May 31 of every F.Y.

Importance of Form 16 for a salaried individual:

• Proof during any income tax related scrutiny

It is an endorsement of tax deduction by the employer and can be produced to the income tax department in case of any issue in future.

• Transparency and certification

The form-16 regulates transparency and certifies that an employer has deposited tax on behalf of the employee.

• The account of employees’ income and applicable tax

Form 16 contains all the income, exemptions and deductions related information. It is an account of employees’ income and applicable tax.

• Challan details of taxes paid on behalf of employees.

The form-16 is an important document for the salaried employees to file an income tax return. In the income tax return, an employee has to fill the taxable income, deductions and taxes paid. All these pieces of information are present in Form-16.

• Loan application

It is also used as evidence of income. Banks demand Form 16 for sanctioning the home loan sanctions. For approving the loan applications, many financial institutions ask this certificate as a part of their verification process.

• Form 16 is required while processing visas.

It is an important document for acquiring the Income Tax Clearance Certificate (ITCC) via the IT Department. Many visa checklists such as the one for Schengen visa, ask for Form 16 as one of the documents to be submitted.

Effortless preparation of ITR

This certificate enables the taxpayer to easily prepare the income tax return in India, by him/herself, without the help or interference of Chartered Accountants or financial planners.