Debunking the Myths: Must You Declare Previous Employer's Income to a New Employer?

Starting a new job can be a daunting process, especially when it comes to addressing financial details from previous employment. One critical aspect is the declaration of your previous income, particularly if your previous employer did not deduct Tax Deducted at Source (TDS). Dealing with this situation correctly is crucial for maintaining tax compliance and avoiding financial penalties. Here’s a deep dive into why you should or shouldn’t declare your previous income, and the implications if you don’t.

Why Declare Your Previous Income?

Transparency: Being transparent about your income can build trust with your new employer. It ensures that your tax reporting is accurate and aligns with the expectations set by both the employer and tax authorities. Transparency is especially important in ensuring that your salary structure and tax liability are correctly calculated.

Income Declaration: Most new employers require you to submit a salary declaration form, which includes all sources of income, such as income from your previous employer. This step is necessary for calculating both your take-home pay and your potential tax liabilities. Failing to disclose this income can result in incorrect calculations and potential legal issues.

TDS Implications: If your previous employer did not deduct TDS, you might need to pay taxes on that income when you file your annual income tax return. Not declaring this income could lead to underreporting, which can trigger additional tax, interest, and penalties.

Tax Filing: Including all income sources, including those from your previous employer, on your income tax return is essential. This ensures you pay the correct amount of tax based on your total income, avoiding any discrepancies that could lead to legal issues.

Consequences of Not Declaring Your Previous Income

Failing to declare your previous employer's income can lead to several serious consequences:

Double Allowances: Both employers might claim the basic exemption limit (Rs. 2.5 Lakh) twice, which is against tax regulations. This can result in double tax deductions, leading to a mismatch in your reported income and tax liability.

Standard Deduction Claims: You might be granted a standard deduction under Section 16 ia and Chapter-VI-A Deductions from both employers, which is not allowed. This can result in short deductions and payments, leading to interest under Sections 234B and 234C of the Income Tax Act, 1961.

Interest Payments: If you don’t report income from your previous employer, you risk facing interest charges on underpaid taxes. These charges can add up significantly, making the situation financially burdensome.

Quoting Official Guidelines

The Indian Income Tax Department provides guidelines that outline the requirements for tax deduction and tax reporting. For instance, in the Para 3.30 of Circular 20/2020 dated 03.12.2020, the Circular on deduction of Tax TDS on Salaries Under Section 192 of the Income Tax Act, 1961, it states that when an individual is working under more than one employer, the tax is to be calculated on the aggregate salary. The employee is required to furnish the details of the income to the current/present employer, who will then deduct the tax at source on the total salary received.

Legal Implications: Not reporting your income can lead to legal consequences, including audits, fines, and penalties. The ultimate responsibility to report correct income lies with the individual, and any discrepancies can result in costly corrections.

Conclusion

Declaring your previous employer's income to your new employer is not just a matter of ethical compliance; it’s a legal requirement. It ensures that your tax liability is accurately calculated, and you avoid the financial and legal penalties associated with underreporting. If you are unsure about how to handle this situation, consulting a tax professional can provide personalized advice based on your specific circumstances.

By being transparent and consistent in your tax reporting, you can maintain a smooth transition to your new job and avoid any unnecessary complications with the tax authorities.