One of the most common misconceptions among salaried employees in India is the belief that once their employer has deducted tax at source and deposited it with the government, their income tax obligation for the year is fully settled. The Form 16 arrives, the tax has been paid, and the ITR is just a formality. This belief is understandable, but it is often incorrect, and the consequences of acting on it can be a tax demand notice with interest after the return is filed.
The truth is that the employer’s TDS under Section 192 is calculated only on salary income, based on the information the employee has shared with the employer, which is typically limited to declared investments, HRA details, and basic personal circumstances. The employer has no way of knowing about a savings account earning interest elsewhere, shares sold during the year, a flat rented out to a tenant, freelance work done on the side, or income of a minor child that the tax law requires to be clubbed with the parent’s income. Each of these, individually or together, can create a gap between the TDS already deducted and the actual total tax payable, resulting in additional tax liability at the time of filing.
This article covers the most common and important reasons salaried individuals end up owing additional tax despite their employer having deducted what appeared to be the full amount.
Reason 1: Change of Employer During the Year Creates a Dual Slab Benefit Problem
This is one of the most significant and most misunderstood reasons for additional tax liability among salaried professionals. When an employee changes jobs mid-year, two separate employers are involved, each deducting TDS independently on the salary paid by them, without knowing what the other has paid.
Here is why this creates a problem. Both employers independently apply the basic exemption limit and the lower tax slabs to their portion of the salary. The first employer treats the employee as if the salary from that employer alone is the entire year’s income and applies the slab rates accordingly, starting from zero. The second employer does the same thing. The result is that the basic exemption benefit and the lower 5 percent and 10 percent slab rates have effectively been used twice, once by each employer, when in reality they should have been applied only once against the combined total income for the full year.
When the return is filed and both salaries are combined, the total income is higher than what either employer individually accounted for, and the combined figure may attract a higher average tax rate than either employer computed. The difference between the tax actually due on the combined salary and the total TDS deducted by both employers is an additional tax liability that falls entirely on the employee.
The simple precaution here is for the employee joining a new employer to share the salary details and TDS certificate from the previous employer using Form 12B, so the new employer can factor in the income already earned and deduct TDS correctly for the remainder of the year. In practice, this step is often skipped, leaving the gap to be discovered and paid only at ITR filing time.
Reason 2: Interest Income on Savings Bank Account
Interest earned on savings bank accounts is taxable income. It falls under the head “Income from Other Sources,” and while a deduction of up to Rs 10,000 per year is available under Section 80TTA under the old tax regime, anything beyond that is fully taxable. Under the new tax regime, no such deduction is available at all, making the entire savings bank interest taxable.
Banks do not deduct TDS on savings bank interest unless it crosses a much higher threshold, which means this income arrives in the taxpayer’s hands without any tax being deducted on it. The employer, of course, has no information about this income and does not account for it while computing salary TDS.
Many salaried employees in Gurgaon maintain multiple savings accounts across different banks, sometimes a salary account, a joint account, and one or more other accounts opened over the years. Each account earns interest individually, and the amounts across accounts can add up meaningfully over a full year, especially when parked funds earn higher sweep rates. All of this interest must be declared in the return under “Income from Other Sources,” and the tax on it represents additional liability beyond what the employer’s TDS covered.
Reason 3: Interest Income on Fixed Deposits
Fixed deposit interest is taxable in full under the head “Income from Other Sources,” and it is taxed at the individual’s applicable slab rate, not at a special flat rate. Banks do deduct TDS on fixed deposit interest, but only at 10 percent, and only when the interest earned exceeds Rs 50,000 in a financial year across all branches of that bank (the limit is Rs 1,00,000 for senior citizens).
For a salaried employee in a higher tax bracket, say the 20 percent or 30 percent bracket, the bank’s TDS at 10 percent covers only a portion of the actual tax due on that interest. The remaining 10 or 20 percentage points of tax on that interest income is an additional liability that shows up only when the return is filed and the full income picture is assembled.
Consider a straightforward example. A salaried employee in the 30 percent bracket earns Rs 2,00,000 in fixed deposit interest during the year. The bank deducts TDS at 10 percent, which is Rs 20,000. But the actual tax due on that interest at the 30 percent slab rate plus cess is approximately Rs 62,400. The remaining Rs 42,400 is additional tax that the employee must pay at the time of filing, plus interest under Section 234B if advance tax was not paid on it during the year.
This gap widens further when an employee holds multiple fixed deposits across different banks, since the TDS threshold applies separately at each bank.
Reason 4: Capital Gains From Selling Shares or Mutual Funds
Capital gains from the sale of listed shares, equity mutual funds, debt mutual funds, or any other capital asset during the year are a completely separate head of income from salary. The employer has no knowledge of these transactions and does not factor them into TDS computation at all.
The tax treatment of capital gains depends on the nature of the asset and how long it was held. For listed equity shares and equity-oriented mutual funds, long-term capital gains (held for more than 12 months) exceeding Rs 1.25 lakh in a year are taxed at 12.5 percent without indexation. Short-term capital gains on equity, where the holding period is 12 months or less, are taxed at 20 percent. For debt mutual funds and other assets, different rates and holding period rules apply.
None of these gains are reflected in the employer’s TDS computation, and brokers or mutual fund houses do not always deduct TDS on these gains, particularly for resident individuals. The full tax on capital gains therefore becomes a fresh liability at the time of filing the ITR, sometimes running into a significant amount for employees who actively trade or have redeemed large investments during the year.
Salaried employees should download their consolidated capital gains statement from their broker and from CAMS or KFintech for mutual funds before filing, and reconcile these carefully against the pre-filled data in the ITR.
Reason 5: Freelance Income or Part-Time Professional Income
A growing number of salaried employees earn additional income outside their primary employment. This can take many forms: consulting for a startup on weekends, content writing for online platforms, tutoring, digital marketing assignments, or any other activity where skill is offered for payment outside the employer-employee relationship.
This income is classified under the head “Profits and Gains from Business or Profession” and is entirely separate from salary income. The employer does not include this in TDS calculations. The client who pays for the freelance work may deduct TDS at 10 percent under Section 194J, but as discussed in the article on freelancer taxation, this TDS at 10 percent may be significantly lower than the actual tax due if the employee is in the 20 or 30 percent bracket.
The combined effect of salary and freelance income together can push the total income into a higher bracket than either source would reach alone, and the additional tax on the incremental income, over and above what the employer’s TDS and the client’s TDS together covered, becomes payable at filing time.
Reason 6: Rental Income From Property
If a salaried employee owns a property that is rented out, the rental income is taxable under the head “Income from House Property.” The employer does not know about this income unless the employee specifically declares it, which many do not.
Net annual value of a let-out property, after deducting municipal taxes paid, is subject to a standard deduction of 30 percent under Section 24(a), and any home loan interest paid on that property can also be deducted under Section 24(b) without any ceiling (unlike a self-occupied property where the interest deduction is capped at Rs 2 lakh). The remaining rental income after these deductions is taxable at the applicable slab rate.
The employer’s TDS does not account for rental income at all. When the ITR is filed and this income is included, it increases the total taxable income and can push the employee into a higher slab, creating an additional tax liability that must be paid before or while filing the return.
Reason 7: Surcharge Becoming Applicable When Incomes Are Combined
This reason is particularly relevant to higher-income salaried employees and is one that can come as a genuine surprise. Surcharge is an additional tax levied on the income tax amount of individuals earning above certain thresholds.
Here is how this creates a problem for salaried employees. The employer computes TDS based on salary income alone, and if that salary is, say, Rs 48 lakh, no surcharge applies and none is included in the TDS. During the year, the same employee earns Rs 5 lakh from fixed deposit interest and Rs 4 lakh from capital gains. When all income is combined in the ITR, the total comes to Rs 57 lakh, which now crosses the Rs 50 lakh threshold and attracts a 10 percent surcharge on the income tax. This surcharge was not calculated by the employer at all when computing TDS, and the entire surcharge amount becomes additional tax payable at filing time.
The surcharge is calculated on the income tax amount, not on the income itself, so even a relatively modest crossing of the Rs 50 lakh threshold can add a meaningful amount to the final bill. Marginal relief is available from surcharge where income just marginally exceeds Rs 50 lakh, Rs 1 crore, Rs 2 crore, or Rs 5 crore, which prevents a situation where crossing the threshold by Rs 1 actually costs more in surcharge than the amount of income by which the threshold was crossed. But for employees whose combined income comfortably exceeds these thresholds, marginal relief does not apply and the surcharge is payable in full.
Reason 8: Clubbing of Minor Child’s Income
The Income Tax Act contains a provision under Section 64(1A) that requires certain income earned by a minor child to be clubbed with the income of the parent who earns more. This means if a salaried employee’s minor child earns income from investments, interest, dividends, or any other source (other than income arising from the child’s own manual work or skill), that income is not taxed in the child’s hands but is instead added to the parent’s income and taxed at the parent’s applicable slab rate.
A small exemption of Rs 1,500 per minor child per year is available to the parent in whose hands the clubbing applies, meaning only income above this amount is clubbed. But beyond this modest exemption, any meaningful interest, dividend, or investment income in a minor child’s name, including a fixed deposit or savings account opened in the child’s name, becomes part of the parent’s taxable income.
The employer naturally has no information about this. The TDS calculation done by the employer on salary is entirely independent of any income that must be clubbed from a minor child. When the ITR is filed and this clubbed income is added, it increases the total income and can increase the tax liability beyond what the employer’s TDS covered.
Salaried employees who have opened savings accounts, fixed deposits, or mutual funds in their minor child’s name should check whether any income from those investments during FY needs to be clubbed with their own income before filing.
Reason 9: Profits and Losses From Derivatives Trading (Futures and Options)
Income from trading in futures and options on recognised stock exchanges is treated as business income under the head “Profits and Gains from Business or Profession,” not as capital gains. This is an important and widely misunderstood distinction.
Since it is business income, it is added to the total income and taxed at slab rates, and the employee filing an ITR with F&O income will generally need to file ITR-3 rather than ITR-2, since ITR-2 does not accommodate business income. The employer, of course, has no knowledge of this trading activity.
For salaried employees who trade in derivatives, the combined income of salary plus F&O profits can push the total well above what the employer’s TDS accounted for, resulting in additional tax at filing time. Equally, if the F&O trading resulted in a net loss for the year, this loss can be set off against other business income in the same year, but to carry it forward to future years it must be reported in a return filed on or before the due date. A belated return forfeits the right to carry forward such losses, making timely filing even more important for those with derivative income or losses.
Reason 10: Interest on Income Tax Refund From a Previous Year
When the income tax department processes a return and issues a refund that was due, it also pays interest on that refund due to the delay in processing the refund. This interest is taxable income in the year in which it is received and must be declared under “Income from Other Sources” in the return for that year.
This is a source of income that most salaried employees never think about. The refund itself is not taxable, but the interest component that accompanies it is. If the department credited a refund during FY that included an interest component, that interest must be included in the ITR.
What to Do: Putting It All Together Before Filing
The common thread across all these reasons is that the employer’s TDS calculation is based on a limited and necessarily incomplete picture of the employee’s total income for the year. The ITR, by contrast, requires the complete picture: every source of income, every rupee earned, and the full tax computation that results from combining all of it.
The practical steps before filing are straightforward. Download the Annual Information Statement from the income tax portal and read it carefully, since it contains entries from banks, brokers, registrars, and other institutions covering interest, dividends, capital gains, and other receipts across the full year. Match every entry in the AIS against your own records. Calculate any additional tax due on income not covered by the employer’s TDS. Pay any self-assessment tax or advance tax shortfall through the portal using Challan 280 before filing the return, since the return should be filed only after all dues are cleared. Include interest under Section 234B and 234C where applicable if advance tax was not paid on time during the year.
The importance of this exercise cannot be overstated. A salaried employee who files an ITR declaring only salary income while leaving out capital gains, fixed deposit interest, rental income, and freelance receipts is not filing a complete return, regardless of whether the employer’s TDS covered the salary tax in full. The department’s AIS already contains most of this information, and any mismatch between what is in the AIS and what is declared in the return will be flagged automatically.
Frequently Asked Questions
1. My employer deducted full TDS on my salary. Do I still need to file an ITR? Yes. Filing an ITR is mandatory for anyone whose total income, including all sources and not just salary, exceeds the basic exemption limit, and also for several other categories of persons regardless of income. The employer’s TDS covers only salary income. All other income must be declared in the return.
2. What happens if I do not declare interest income or capital gains in my ITR? The income tax department’s Annual Information Statement already contains entries reported by your bank, broker, and mutual fund house. Any income that appears in AIS but is not declared in the return will cause a mismatch, which can lead to a notice or further inquiry. Declaring all income is both a legal obligation and a practical necessity.
3. I changed employers this year. What should I do before filing? Collect Form 16 from both employers. Combine the salary figures and the TDS figures from both Form 16s. Compute the actual tax on the combined salary and check whether the total TDS deducted by both employers together covers that tax. If there is a shortfall, pay the difference as self-assessment tax before filing.
4. Is savings bank interest really taxable? The amount seems so small. Yes. All savings bank interest is taxable under “Income from Other Sources.” Under the old tax regime, a deduction of up to Rs 10,000 per year is available under Section 80TTA, so only the amount above Rs 10,000 is effectively taxable. Under the new tax regime, there is no such deduction and the full interest is taxable at slab rates.
5. What is surcharge and when does it apply to a salaried person? Surcharge is an additional levy on income tax applicable when total income from all sources exceeds Rs 50 lakh. It is calculated as a percentage of the income tax amount, not of the income itself. A 10 percent surcharge applies between Rs 50 lakh and Rs 1 crore of total income. If a salaried employee’s salary alone does not cross Rs 50 lakh but crossing it becomes possible when other income like interest, capital gains, or rental income is added, the surcharge becomes payable on the total income tax, and this would not have been accounted for in the employer’s TDS.
6. Do I need to include my minor child’s fixed deposit interest in my own ITR? Yes. Under the Income Tax Act, income earned by a minor child from passive sources such as interest and dividends is required to be clubbed with the income of the parent who earns more. After a small exemption of Rs 1,500 per child, the remaining income is taxed in the parent’s hands at the parent’s applicable slab rate.
7. How do I pay the additional tax that is due at the time of filing? Additional tax payable after accounting for TDS already deducted is paid as self-assessment tax through the income tax e-filing portal or authorised bank branches using Challan 280. The challan should be selected for self-assessment tax and must reflect the correct assessment year. The payment details including the BSR code, challan serial number, and date of payment are entered in the ITR before submission.
8. Can I be penalised for not paying tax on income sources outside my salary? Yes. If total tax liability after all credits exceeds Rs 10,000 and advance tax was not paid during the year on income outside salary, interest under Sections 234B and 234C becomes applicable from the due dates of the advance tax instalments through to the date of actual payment. Additionally, filing a return that omits income sources visible in the AIS can invite notices and, in cases of substantial omission, scrutiny proceedings.
