The Tax Impact of a Career Break
Taking a sabbatical, unpaid maternity leave, or a career break affects more than just your monthly cash flow. It significantly alters your annual tax calculation.
Because income tax in India is calculated on your total income for the entire financial year (April to March), working for only a few months changes your tax bracket and often leads to a tax refund.
How Unpaid Leave Lowers Your Tax
At the start of the financial year, your employer estimates your annual income assuming you will work all 12 months. They calculate the total tax due and divide it by 12, deducting that amount as TDS every month.
If you go on unpaid leave in October, you only receive salary for 6 months. Your actual annual income is half of what the employer estimated. This means: 1. You might drop into a lower tax slab (e.g., from 30% to 10%). 2. You might become eligible for the Section 87A rebate (if your income drops below ₹12 lakhs in the new regime), making your tax liability zero.
Because the employer already deducted high TDS in the first 6 months, you have paid more tax than you owe.
Claiming Your Refund
To get that excess TDS back, you must file your Income Tax Return.
Your employer will issue a Form 16 showing the actual salary paid to you and the total TDS deducted. When you file your ITR, the portal will calculate your tax on the lower actual income and show the excess TDS as a Refund Due.
Do You Still Need to File?
You must file an ITR if your total gross income (salary received + FD interest + any other income) exceeds the basic exemption limit. For AY 2026-27, the basic exemption limit is ₹3,00,000 under the new tax regime.
Even if your income is below ₹3 lakhs, you should file an ITR if TDS was deducted, as this is the only way to claim a refund.
The new-regime basic exemption is Rs 3,00,000 for AY 2026-27, and filing is the only route to recover excess TDS from a part-year of work. Source: Income Tax Act; Finance Act 2024 new-regime slabs.
Don't Forget Other Income
While on sabbatical, you might not have a salary, but you might have income from: - Freelance gigs or consulting. - Interest on fixed deposits or savings accounts. - Capital gains from selling mutual funds or stocks to fund your break.
All of this must be declared in your ITR. If you have freelance income, you must use ITR-3 or ITR-4, not ITR-1.
What you should do
- Total your part-year salary plus any interest or freelance income
- File even if below the limit when TDS was deducted, so you can claim the refund
- Report FD interest, capital gains and freelance income earned during the break
- Use ITR-3 or ITR-4 if you had any freelance income, not ITR-1
Common mistake
Skipping the return because "there was no salary for half the year". Early-year TDS often exceeds your real liability, so not filing simply forfeits the refund you are owed.
If your income is purely salary and interest, upload your Form 16 to LastMinute ITR to quickly calculate your revised tax liability and claim your refund.