Simplifying Your Form 16 Process

By Author: Sharma
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Employee tax deduction is the responsibility of an organization. Having deducted tax, it is mandatory for the organization to issue a Form 16 at the end of the financial year to each employee. This is easier said than done and usually most companies encounter huge delays in issuing Form 16. With this document, we help simplify this process for you

Employee tax deduction is an organization’s responsibility. Having deducted tax, it is mandatory for the organization to issue a Form 16 to every employee at the end of the financial year.

Form 16 is a certificate issued by the employer stating the details of the salary earned by the employee and the tax paid to the government on his/her behalf. Using the information in Form-16, employees prepare and file their Income Tax Return.

Under the Income Tax Act, 1961, it is mandatory for organizations to issue Form 16 to every employee and it is important that this is done on time, so that the employee has enough time to file his Income Tax return before the govt. published deadlines.

Understanding the process of Form 16

A lot of organizations ...
... process Form 16 in a traditional way despite the several hassles & complexities involved. The complexity can be explained with the components involved in the processing of Form 16 which are –
Personal details of the Employee
Including Name, Permanent Account Number (PAN) etc.
Employer details
Including Name, Permanent Account Number PAN, TAN etc.
Details of Employee Salary
Including various salary components, Gross Salary, Net Salary, Perquisites
Details of available deductions
As allowable under Income Tax Act and based on documents submitted by the employee including Rent receipts, Medical reimbursements, other allowable deductions
Total Income and Total Tax deducted
Details of the Acknowledgement Number of the Income Tax Payment made by the Employer
Details of Education Cess or Surcharge etc.

There is a predefined traditional approach to process Form 16 that organizations generally follow

*Employees make investment declaration in the months of May-June so they can claim tax exemptions (Based on this declaration Apr-Dec salary is processed)

These are typically made in the form of paper documents signed by the employee. These are then uploaded by HR teams to a payroll master. Once these declarations are made, it is usually difficult to make changes
Based on these declarations, the organization processes salary and deducts tax through the months of Apr-Dec.
HR teams of organizations collect the investment proofs submitted by their employees. They need to verify the proofs submitted against the investment declaration made as also validate and check authenticity of the submitted documents as per income tax rules.

*Employees need to submit document proofs based on these declarations in the months of Jan-Feb.

*Based on the actual documents submitted, the tax liability is re-worked and the balance tax payable if any is now recovered from the employee salary payable in the months of Jan/Feb/March.

*At the end of the financial year, they need to issue an annual statement and a tax statement signed by a certified authority which is the Form 16

This reconciliation usually takes a lot of manual effort and ends up taking a lot of time. Several organizations are not able to issue Form 16 to its employees on time.

Common challenges faced while processing Form 16, the traditional way

• Documentation & Errors

– A lot of documents traverse through multiple hands before they are entered into the payroll file. This can lead to errors
– The whole system is based on manual entry by non-stakeholders and is thus prone to errors
– Versioning and integrity of files is always a challenge as multiple team members handle it all the time
– Having made entries in the payroll calculation, employee declarations do change through the year causing further problems in tax computation

• Investment proof collection and tax finalization for FY

– This is usually a manual and labor intensive process. Also this usually is a very soft issue causing a lot of concerns to employees as errors directly lead to them losing income
– Non-timely submission can lead to direct loss of income and this needs strong people management skills
– Validation of documents happens as per govt. regulations, which change from time to time. This often leads to conflicting arguments with employees and this needs to be well managed

• Tracking change in govt. policies & regulations

– Need to track change in govt. policies and corresponding change in payroll working. Usually involves software customization which are difficult to manage in-house

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