What is Form 16 and how to generate it
Understanding labour law provisions and the significance of various payroll forms, such as Form 16 and Form 24Q, is crucial for running a compliant and successful payroll.
As a business owner wearing multiple hats, you may not have the resources to read through whole acts and understand the applicability of each form. That's precisely why we created this comprehensive guide on Form 16—to equip you with the knowledge necessary to run a compliant business and avoid hefty fines.
Our aim with the guide is simple: to break down Form 16's essentials, including its purpose, format, and the process of generating it into easily digestible sections. Let's start with the basics.
What is Form 16?
Form 16 is a certificate issued under Section 203 of the Income Tax Act for Tax Deducted Source (TDS) from the salary.
In simple terms, it is issued by an employer to their employees as proof of the employee's earnings and the taxes deducted from their salary and paid to the government.
Why Form 16 is important
The form holds significant importance for both the employer and the employees. Here's why Form 16 is essential for both parties.
- Compliance and legal obligation: The Income Tax Act makes it mandatory for the employer to issue Form 16 to their employees. Failure to issue Form 16 or inaccuracies in the form can lead to penalties and legal consequences for the employer.
- Record keeping and audit trail: The form serves as a record for the employer's tax related transactions with the employees. It helps in simplifying tax assessments and audits done by tax authorities.
- Income tax filing: Form 16 is the most critical document required by an employee to file their income tax return as it provides a comprehensive overview of their salary and the tax deducted at source by the employer.
- Verification of tax deductions: The form allows employees to verify whether the correct amount of TDS has been deducted from their salary. If there are any discrepancies, they can take it up with the employer or file an income tax refund. Read more about what an income tax refund is and how to file for one.
Format of Form 16
Form 16 is divided into two parts: Part A and Part B.
Form 16 Part A
Part A of Form 16 contains the employer and employee's details and provides a summary of the TDS deducted by the employer and deposited with the government on behalf of the employee.
The components of Form 16 Part A are:
- Name and address of the employer.
- Permanent Account Number (PAN) of the employer and the employee.
- Tax Deduction and Collection Account Number (TAN) of the employer.
- Financial Year (FY), which is the year in which taxes are calculated and deducted from an employee's salary based on the income slab they fall under. It is a 12-month period that starts from the 1st of April of a year and ends on the 31st of March of the following year.
- Assessment Year (AY), which is the 12-month period following the FY in which the employee's income is assessed, taxes which are due are paid, and income tax returns are filed using Form 16.
Example: If an employee earns income during April 2023 to March 2024, which is FY 2023-2024, the corresponding AY will be from April 2024 to March 2025. In AY 2024-2025, the employee's income for FY 2023-2024 will be assessed, and income tax returns will be filed.
- Summary of the salary paid.
- Date of tax deducted from the salary.
- Date when the collected tax was deposited in the government account.
- Summary of tax deducted and deposited every quarter with the government.
- Acknowledgement number of TDS payments.
Note: Only Form 16 Part A certificates downloaded from the TRACES website are considered valid by the Income Tax Department.
Form 16 Part B
Form 16 Part B provides a complete picture of the salary earned by the employee, and the exemptions and deductions claimed by them during the entire fiscal year.
The components of Form 16 Part B are:
- Detailed breakup of the employee's salary which includes:
- Gross salary.
- Gratuity amount received, if any.
- Leave encashment amount received, if any.
- Pension amount.
- Standard deductions and other deductions allowed as per Section 80C of the Income Tax Act.
- Total taxable income.
- Rebate and surcharge, if applicable.
- Net tax payable by the employee.
As an employer, you are required to complete the below tasks in order to generate Form 16 without hassle.
Obtain necessary details
Maintain accurate records of your employees PAN, salary details, tax deductions, and other relevant financial information.
Calculate and deduct TDS on salary
Calculate TDS on employee salaries as per the applicable income tax slab rates they fall under and deduct the amount before processing their salaries. This tedious process can be automated with the help of payroll software, which comes prebuilt with automatic TDS calculation and deduction.
File quarterly TDS returns
Deposit the deducted TDS amount to the government within the specified due dates and file quarterly TDS returns using Form 24Q with the Income Tax Department. These returns contain details of TDS deducted from your employees' salaries during each quarter of the FY.
Learn how Zoho Payroll can help you track TDS liabilities and generate Form 24Q here.
Register on the TRACES website
TDS Reconciliation Analysis and Correction Enabling System (TRACES) is the authorized government website run by the Income Tax Department which allows employers to view their TDS payments and generate Form 16.
Register on the portal by visiting the TRACES website and provide the necessary details.
To learn more about the registration process, take a look at the e-tutorial prepared by the government.
Upon successful registration, you will receive a confirmation message in your email. You can then use your login credentials to sign in to the portal and generate Form 16.
How to generate Form 16
Generating Form 16 involves two steps: downloading Part A and Part B of Form 16 from TRACES and consolidating them to prepare Form 16. Here's how you can complete the entire process.
Download Part A and Part B of Form 16
- Go to the TRACES website and log in by entering your user ID, password, and your business's TAN number.
- From the dashboard, click the Downloads tab.
- Select the fiscal year for which you would like to download the data for Form 16.
- Enter the name, father's name, and designation of the authorized "Tax deductor" of your organization.
- In the subsequent window, verify the information you submitted previously, and follow the steps mentioned to capture the BSR code and challan details.
- Once done, you will get an authentication code, which you need to make a note of, and then click Proceed with transaction.
- You can then head over to the Downloads tab to find Part A and Part B of Form 16. It will be a text file.
For additional help, have a look at the step-by-step guide prepared by the tax authorities.
Consolidate and generate Form 16
Merge the two text files–Part A and Part B–to generate the complete Form 16.
You can use the PDF Converter Utilities developed by TRACES for this purpose. Log in to your TRACES account, go to the Downloads tab, and click on Click here to download the utility. Alternatively, you can use payroll software to generate a consolidated Form 16.
When you should distribute Form 16
Employers must issue Form 16 to their employees on or before the 15th of June of the assessment year, as mandated by the Income Tax Act.
You can distribute it through your organisation's employee self-service portal, allowing your employees to download their form and file tax returns.
The way forward
Generating Form 16 accurately and on time is of paramount importance for every employer. From calculating taxes to providing a detailed breakdown of earnings, this document plays a pivotal role in ensuring financial transparency between employers and employees.
As a business owner juggling multiple responsibilities, dedicating time to decipher intricate legalities may not be practical. That's where modern technology comes to your aid. Payroll software can be your ally, simplifying and automating the entire payroll process, including generating Form 16.
Payroll software, such as Zoho's, allows you to upload Part A of Form 16 downloaded from the TRACES website, automatically generate Part B of Form 16, and help you digitally distribute Form 16 to all your employees, keeping your business's payroll operations compliant with the laws at all times.
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