Understanding the distinction between salary returns and normal returns is crucial for taxpayers, especially in jurisdictions like Pakistan where tax laws can be complex.
In this blog article, we will explore about the definitions, filing processes, and implications of both types of returns, providing a comprehensive guide for salaried individuals and other taxpayers.
What is a Salary Return?
A salary return is a specific type of income tax return filed by individuals whose income primarily comes from salaries. This category includes employees from both the private and public sectors, as well as pensioners. The key characteristics of salary returns include:
- Simplified Format: Designed to accommodate the straightforward income structure of salaried individuals, salary returns typically have fewer fields to fill out compared to normal returns. This simplification aims to ease the filing process for those who may not have extensive knowledge of tax regulations.
- Tax Withholding: Salaried individuals usually have taxes withheld at the source by their employers. This means that a portion of their salary is deducted for tax purposes before they receive their paychecks. Consequently, when filing a salary return, these individuals often do not owe additional taxes unless they have other sources of income.
- Eligibility: In many jurisdictions, including Pakistan, individuals earning income solely from salaries or where salary constitutes more than 50% of total income are eligible to file a salary return. This is often facilitated through specific forms designated for salaried individuals.
What is a Normal Return?
A normal return, on the other hand, refers to the standard income tax return filed by individuals with diverse sources of income. This may include business profits, rental income, capital gains, and other earnings beyond salary. Key features of normal returns include:
- Comprehensive Reporting: Normal returns require detailed reporting of all income sources, which can complicate the filing process. Taxpayers must account for various heads of income defined under tax laws.
- Complexity in Filing: Unlike salary returns, normal returns may involve more intricate calculations and documentation, such as profit and loss statements for businesses or details about capital gains.
- Broader Applicability: Individuals engaged in business activities or those with multiple income streams must file normal returns to ensure compliance with tax regulations.
Key Differences Between Salary Return and Normal Return
To better understand the distinctions between salary returns and normal returns, here’s a comparative overview:
| Feature | Salary Return | Normal Return |
|---|---|---|
| Definition | Filed by individuals earning primarily from salaries | Filed by individuals with multiple income sources |
| Format | Simplified with fewer fields | Comprehensive with detailed reporting |
| Tax Withholding | Taxes withheld at source | May require additional tax payments |
| Eligibility | Salaried individuals or pensioners | Business owners or those with diverse incomes |
| Filing Complexity | Generally straightforward | More complex due to varied income sources |
Filing Processes
Filing a Salary Return
- Obtain Necessary Documents: Gather documents such as salary certificates and tax deduction certificates from your employer.
- Choose the Right Form: In Pakistan, salaried individuals typically use Declaration Form 114(I) for filing their salary returns.
- Complete the Form: Fill out the form with relevant information regarding your salary and any other applicable deductions.
- Submit the Return: File your return through the Federal Board of Revenue (FBR) online portal (IRIS) or through designated offices before the deadline.
- Keep Records: Maintain copies of your filed return and supporting documents for future reference.
Filing a Normal Return
- Collect Comprehensive Income Data: Compile all sources of income including business profits, rental income, and any capital gains.
- Select Appropriate Forms: Depending on your income sources, select the appropriate tax return forms as prescribed by the FBR.
- Detailed Reporting: Ensure all income is accurately reported along with any allowable deductions or credits.
- File Electronically or Physically: Submit your completed return through IRIS or at FBR offices before the due date.
- Document Retention: Keep thorough records of all submitted documents and calculations for potential audits.
Implications of Filing
For Salary Returns
- Tax Refunds: If excess taxes are withheld during the year, salaried individuals may be eligible for refunds upon filing their returns.
- Simplified Compliance: The streamlined process reduces the burden on taxpayers who might not be well-versed in tax laws.
For Normal Returns
- Potential Tax Liabilities: Individuals with multiple income streams may face additional tax liabilities based on their total earnings.
- Increased Scrutiny: More complex filings may attract greater scrutiny from tax authorities, leading to potential audits if discrepancies arise.
Understanding the difference between salary returns and normal returns is essential for effective tax management. While salary returns offer a simplified approach for salaried individuals, normal returns cater to those with diverse income sources requiring more detailed reporting. By recognizing these differences, taxpayers can ensure compliance with tax regulations while optimizing their financial outcomes during tax season.
What are the main challenges faced by salaried individuals when filing tax returns?
Filing tax returns can be a daunting task for salaried individuals, particularly in complex tax environments. Below we will explore about the primary challenges they face, along with potential solutions to help navigate the process more effectively.
Lack of Awareness About Deductions
One of the most significant challenges for salaried employees is the unawareness of available deductions. Many employees are not fully informed about the various tax-saving provisions beyond the commonly known Section 80C, which allows for deductions related to investments in specified financial instruments. Other deductions, such as those under Sections 80D (health insurance), 80E (interest on education loans), and 80G (donations to charitable organizations), are often overlooked.
- Solution: Employers and tax consultants should provide educational resources to employees regarding these deductions. Regular workshops or informational sessions can enhance awareness and encourage effective tax planning.
Complex Tax Filing Processes
The complexity of tax return forms is another hurdle for many salaried individuals. In countries like Pakistan, the existing income tax return forms can be overwhelming, containing numerous fields that may not be relevant for individuals whose only source of income is salary. This complexity can lead to confusion and errors during filing.
- Solution: The Federal Board of Revenue (FBR) has been urged to simplify tax return forms specifically for salaried individuals. A separate, streamlined form could significantly reduce filing difficulties and improve compliance rates among this demographic.
Issues with TDS (Tax Deducted at Source)
Salaried employees often face issues related to inaccurate TDS deductions. When individuals change jobs, their new employer might not have complete information regarding their previous earnings, leading to incorrect TDS calculations. This situation can result in under-deduction or over-deduction of taxes, complicating the filing process.
- Solution: Employees should proactively declare their previous income to their current employer at the start of their employment. This practice ensures that TDS is calculated accurately and reflects total earnings correctly over the financial year.
Missing Out on HRA Exemptions
Many salaried individuals fail to claim exemptions on House Rent Allowance (HRA) due to not submitting necessary documentation, such as rent agreements and receipts, to their employers on time. This oversight can lead to higher taxable income and increased TDS throughout the year.
- Solution: Employees should provide required documentation early in the financial year and maintain open communication with their HR departments regarding HRA claims. If HRA is not received, they may still claim deductions under Section 80GG.
Underreporting Income Due to AIS Mismatches
Salaried individuals are sometimes unaware of discrepancies between their reported income and what is reflected in the Annual Information Statement (AIS) provided by tax authorities. This mismatch can lead to underreporting of income and potential penalties during audits.
- Solution: Regularly reviewing AIS and reconciling it with Form 16 (issued by employers) can help ensure that all income is accurately reported. Employees should also provide feedback to correct any inaccuracies found in AIS.
Advance Tax Payment Confusion
There is a common misconception among salaried employees that since TDS is deducted from their salaries, they do not need to pay advance tax on other sources of income. This misunderstanding can lead to penalties under sections 234B and 234C for non-payment of advance taxes.
- Solution: Employees should declare all sources of income at the beginning of the financial year and ensure that at least 90% of their total tax liability is paid before the end of the financial year.
Increased Tax Burdens
Recent changes in tax laws have led to increased tax burdens on salaried individuals due to higher tax rates and reduced deductible allowances. These changes have made it essential for employees to stay updated on current regulations affecting their tax liabilities.
- Solution: Staying informed through reliable financial news sources or consulting with tax professionals can help salaried individuals adapt to changing tax laws effectively.
Filing tax returns poses several challenges for salaried individuals, from lack of awareness about deductions to complexities in filing processes and issues with TDS calculations. By understanding these challenges and implementing proactive strategies, employees can navigate the tax filing landscape more effectively, ensuring compliance while optimizing their tax liabilities.
What are the most common deductions that salaried employees overlook?
Salaried employees often miss out on valuable tax deductions that can significantly reduce their tax liability. Understanding these common deductions can help individuals maximize their tax savings and ensure compliance with tax regulations.
Below are some of the most frequently overlooked deductions that salaried employees should be aware of.
1. House Rent Allowance (HRA)
Many salaried individuals fail to claim the House Rent Allowance (HRA) exemption due to a lack of awareness or failure to submit the necessary documentation on time. HRA is a component of salary provided to employees living in rented accommodation, and it can be partially exempt from income tax.
- What to Do: Employees should provide a declaration of rent paid along with rent receipts and agreements at the beginning of the financial year to their employers. If HRA is not received, individuals can claim a deduction under Section 80GG, which allows up to ₹60,000 per year for rent paid.
2. Medical Insurance Premiums
Deductions under Section 80D for premiums paid on health insurance policies for oneself, spouse, children, and parents are often overlooked. This deduction can significantly reduce taxable income.
- What to Do: Keep track of all medical insurance premiums paid during the financial year and ensure they are claimed while filing tax returns. The maximum deduction available is ₹25,000 for individuals and ₹50,000 for senior citizens.
3. Contributions to Retirement Accounts
Contributions made to retirement accounts such as Employees’ Provident Fund (EPF) or National Pension Scheme (NPS) can provide substantial tax benefits under Section 80C and Section 80CCD(1B). Many salaried employees do not fully utilize these benefits.
- What to Do: Ensure that contributions towards EPF or NPS are documented and included when calculating deductions under Section 80C (up to ₹1.5 lakh) and additional contributions under Section 80CCD(1B) (up to ₹50,000).
4. Education Loan Interest
Interest paid on education loans qualifies for a deduction under Section 80E. This deduction is available for loans taken for higher education for oneself or dependents and is often overlooked by those who have recently completed their studies.
- What to Do: Keep records of interest payments made on education loans and claim the full amount as a deduction while filing taxes, as there is no upper limit on the amount that can be claimed.
5. Donations to Charitable Organizations
Many employees forget to claim deductions for donations made to registered charitable organizations under Section 80G. These donations can be eligible for either 100% or 50% deductions depending on the organization.
- What to Do: Maintain receipts of all donations made throughout the year and ensure they are reported when filing taxes. Check whether the organization is registered under Section 80G for eligibility.
6. Tax Preparation Fees
Fees paid for professional tax preparation services are also deductible. Many salaried individuals overlook this expense when filing their returns.
- What to Do: If you hire a tax consultant or use tax preparation software, keep track of these expenses as they can be claimed as deductions in subsequent years.
7. Union Dues and Professional Membership Fees
If you pay dues to a union or membership fees for professional associations related to your job, these expenses may be deductible.
- What to Do: Keep receipts of any union dues or professional membership fees paid during the year and include them in your tax filings.
8. Work-Related Expenses
Salaried employees often incur various work-related expenses that may not be reimbursed by employers, such as costs associated with using personal vehicles for work purposes or home office expenses.
- What to Do: Maintain records of these expenses, including mileage logs if using a personal vehicle for work-related tasks, and claim them appropriately based on local tax regulations.
Salaried employees frequently overlook several key deductions that could significantly reduce their taxable income. By being aware of these common deductions—such as HRA exemptions, medical insurance premiums, retirement contributions, education loan interest, charitable donations, tax preparation fees, union dues, and work-related expenses—individuals can optimize their tax returns and potentially increase their refunds.
