India – Payroll Year End Activities

It is vital for Employers to plan and organize all aspects of your year-end processing and obligations.

Year Start Activities

1. April is the start of the Financial Year (FY) in India.
2. The monthly tax in India is calculated and withheld on an estimated basis, based on the employee’s tax saving investment declaration which must be declared by employee either during the beginning of the FY or at the time of joining (for new joiners).
3. Once the signed investment declaration form (hard/soft copy) is received from the employee, the employer (or the payroll service provider), will estimate the taxes based on the salary and the investment declaration, and commence withholding the taxes on a monthly basis from the employees’ salary.
4. If the employee does not submit the investment declaration form no tax exemption should be given, apart from on employee’s Provident Fund (statutory as well as voluntary) contribution for which no declaration is required.

Year-End (YE) Activities

Please note that the YE in India is different from most other countries. The main activity is due before the YE, i.e. the true-up of tax from the employee during the last two months of the live payroll. As March is the end of the Financial Year (FY), to be compliant with the Income Tax (IT) rules the employer must collect the evidence of the actual investment proofs (soft/hard copy) and re-calculate the tax liability during February and March payrolls. The potential impact on the employee’s salary during these months is as follows:

1. If the proofs submitted match the investment declaration, then there will be no additional tax liability for the employee and they will get exactly the same net pay during February and March as well.
2. If the proofs submitted are higher than the investment declaration (but within the legal limits), there will be a lower tax deduction and therefor higher net pay
3. If the proofs submitted are lower than the investment declaration, there will be a higher tax deduction and therefor lower net pay
4. If no declaration was made originally the investment declaration plus evidence can be submitted and the taxes can be reduced. If this would leave the employee still in a position of tax overpayment the employee can request for the tax refund from the IT department by filing their individual income tax return.

Points to note

1. The above mentioned YE activity is complex and unique for India and not specific to any business, industry or payroll provider
2. The tax exemption should not be given to the employee in the final true up without the requisite proofs unless this is specifically authorised by the income tax department, auditor or other relevant statutory bodies.
3. Due to this specific manual YE process in India, February and March tend to be a very busy time for anyone involved as the process is also complicated and usually is accompanied by a high volume of queries
4. Response times may become little longer than usual due to the high volumes
5. The outcomes of the true up tax might have significant impact to the employees net take home, so this tends to be an emotive topic, especially as the outcome achieved by March can only be rectified by the employee in their tax return and this might take time and effort.

Deadlines for the YE activities

• File the 4th quarter return with the Income tax Department – 31st May
• Issue the Form-16 (YE forms) to the employee – 31st May
• File the individual income tax return with the Income tax Department – 31st July

Suggestion to improve the Indian YE processes going forward

1. For 2018 and onwards, activpayroll will ensure that February and March payroll deadlines are adjusted allow more time for the YE process
2. Activpayroll will communicate regarding the India YE with the clients in advance
3. If the client is new in Indian market or not fully familiar with the India YE process, a joint call can be arrange to further the clients understanding
4. The client must own the collection of the proofs and ensure that all the proofs are submitted via eFile, not email attachments