While changing companies, people make this big mistake of not disclosing the salary income of previous employer to new employer, says Abhinav Gulechha.
Last week I met my good old friend Apurva. I knew he was not happy with his work profile and I was pleased to know that he got a better offer which he was contemplating to accept.
Having changed jobs earlier as well, he knew the pain and paperwork that came with it, and wanted some financial tips to ensure that the transition is smooth and a stress-free one.
Apurva is not alone. Today, a plethora of opportunities has helped people to change jobs without a second thought, while at the same time shortage of time and not giving financial planning its right priority has forced people to make costly financial mistakes.
In this article, I have tried to put across some suggestions so that you don’t make such mistakes and can make this transition smooth and stress free:
Ensure that a decent contingency fund is in place:
From the date you put in your papers, the employer will promptly freeze your salary payouts and you will get everything along with the full and final settlement.
So, if you put in your papers today, it might be a good couple of months or even more than that till you receive your next credit in bank account.
In between all this, your household expenses and Equated Monthly Installment (EMIs) will not stop.
At this stage, you need to have an adequate financial back up of atleast 3 months of fixed monthly commitments in a good fixed deposit/ liquid fund.
Cross check your monthly tax deductions with Form 26AS:
Download Form 26AS from the Income Tax Department website and compare the Tax Deducted at Source (TDS) amount as per your payslip vis a vis that shown in Form 26AS.
In case of any discrepancy, immediately bring it to the notice of the employer and request it to re-file the TDS return so that correct tax is reflected in your Form 26AS.
This will ensure that you do not face any issues at the income tax assessment stage when you file your return.
Declare the salary income from previous employer to the new employer:
While changing companies, people make this big mistake of not disclosing the salary income of previous employer to new employer.
As a result, the new employer estimates a reduced annual tax liability and accordingly deducts a lesser tax.
However, at the time of filing of the income tax return, the TDS falls woefully short of the actual tax liability for the year, which results in a hefty tax outgo as well as levy of interest.
To avoid this, make the necessary disclosures of the earlier income and also ensure that the new employer considers it in its TDS estimation.
Review your insurance covers:
People rely on the insurance cover offered by the employer which comes free of cost and don’t bother to take own insurance cover - this can prove to be dangerous, especially because when one changes jobs, there is a little gap where he/she is not covered by insurance.
Also, the new employer might not be offering group insurance cover to its employees, or offer a very low coverage which is inadequate.
So please understand - there are no free lunches, it makes sense to purchase your own insurance cover at the earliest.
Tax implications of premature withdrawal from Employee Provident fund (EPF):
At the time of leaving a job, employees make the mistake of withdrawing the EPF amount without knowing associated tax implications.
In case you have served less than 5 years of continuous service, the receipt will be taxed as per your tax slab.
So, instead of being in a hurry for withdrawing the EPF accumulation, a better option will be to transfer it in your new company.
Review your investment plan:
A job change will mostly come with a sweet pay hike. If you are not proactive with your finances, this additional income will fritter away. Instead, you can put up a plan to use this additional income in the following way:
Purchase own insurance covers if you don’t have already them in place
Beef up your contingency fund
Pre-pay high cost debt like credit card, personal loan, vehicle loan etc.
Start investing systematically for your financial goals
Conclusion:
Job change is indeed a stressful affair and at the same time an exciting one, as one awaits new responsibilities and challenges in the new role.
These financial tips can help you ensure a peace of mind and staying financially organised in this phase.
As for Apurva, now that he knows what to do, he can say good bye to his financial worries and concentrate on delivering his best in the new assignment.
The author is the founder of “Soham Financial Services” and a member of The Financial Planners’ Guild, India (FPGI).
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