Any person earning Income has to pay tax. So why are we waiting for the last-minute rush, tax planning and investing to save taxes should not be left for the last minute. Better to start now, this way one can get ample time to carefully plan your tax which will enable us to achieve our target of Tax saving and also helps to accumulate wealth for our future.
There are various tax savings options available under section 80 C of the Income Tax Act, 1961. Now the next step is to figure out the option which offers the highest possible returns.
Here we are going to discuss few such investments which are good tax-saving instruments and simultaneously helps to create wealth in a long term:
- Equity Linked Saving Scheme (ELSS)
Equity is the best investment option that offers a kind of wealth creation opportunity. It holds the potential to beat inflation and generate long-term wealth. However direct investment in stocks does not offer a tax-saving advantage and it is subject to a highly volatile market that needs lots of expertise to create wealth out of it. That is where Mutual Funds come because one can leverage the power of investing in equity but leave the expertise required for equity investing to the domain experts for small fees.
Equity Linked Saving Scheme (ELSS) is one of the best options in the given scenario. ELSS funds are diversified Equity Mutual Funds. One of the important advantages is it has a mere 3 years Lock-in period which is the lowest among other tax-saving instruments at the same time it gives the highest returns.
ELSS funds primarily invest in Equities and Equity Linked Instruments, across the market in terms of sectors and market cap.
Liquidity is also one of the factors of evaluation, the 3 years lock-in with ELSS funds may be a better option for most investors because your money is far more liquid than in other investments.
Due to 3 years, lock-in period Fund Managers can generate better returns because they can take long term strategic decisions as opposed to short term moves in response to investor behaviour when the market is volatile.
SIP in ELSS:
Another good option is to invest in ELSS via SIP. Here one can invest regularly as per our financial goals and it also benefits from averaging during times of volatility.
One can also gain from the power of compounding, which is one of the next best options in building wealth creation. As per the growth option in ELSS funds you stand to benefit from the power of compounding.
E.g. If we invest Rs.5000/- per month (SIP) for 15 years in ELSS then the total investment was only Rs. 9 lakhs and the returns after 15 years would have been Rs.44.5 lakhs.
- Public Provident Fund (PPF)
When people think of building a corpus for their retirement, the first thing that comes to their mind is by contributing to the Public Provident Fund. Public Provident Fund is one of the safe options of investment as it is backed by the government. It gives a fixed rate of Interest annually (7.1% per annum – at present). However, with the current changes proposed in Union Budget 2021, the interest earned will be taxable if the annual contribution is Rs.2.5 lakhs and above.
It is available in all post offices and all public or private sector banks.
The Frequency to deposit in the PPF account is also as per the tax payer’s requirement ie. One can deposit either a lump-sum amount or in instalments during the Financial Year.
E.g. With an investment of only Rs. 5000 per month at 7.1% per annum one can receive approx. Rs. 16.7 Lakhs after 15 years.
It is suitable for investors who want to avoid risk, save for long term goals like child education, marriage, etc without worrying about any capital loss.
Must Read: Portfolio Management Services in India
- Sukanya Samriddhi Yojana
Sukanya Samriddhi Yojana (SSY) is a small deposit scheme for the girl child launched as a part of the “Beti Bachao Beti Padhao” campaign. One of the reasons why this scheme has become popular is due to its tax benefit. It is again backed by the Government so it is preferred by those taxpayers who want to save tax and get good returns without capital loss.
Though this option is available only to those who have a girl child, it is a good tax-saving instrument that fetches the highest rate of interest (7.6% per annum) and also creates corpus in the long run which enables the taxpayer to achieve their financial goals like girl child marriage or for her study purpose.
A Sukanya Samriddhi Account can be opened any time after the birth of a girl child till she turns 10, where you will have to deposit a minimum of Rs.250/- and a maximum of Rs. 1.5 lakhs can be deposited during the financial year. The account remains operational for 21 years from the time it is opened or until the girl in whose name it is opened gets married, after she turns 18 years.
It comes with exempt-exempt-exempt (EEE) status as its annual deposit qualifies for Sec 80 C benefit and maturity proceeds are also non- taxable. The Interest received is also exempt from Tax.
- National Pension Scheme
As the name suggests National Pension Scheme is dedicated solely to retirement planning. It is a pension cum investment scheme launched by the Government of India for the age from 18 to 65 years. NPS is also a good option for wealth creation as your money gets invested across asset classes like equity, Government/corporate bonds, etc.
Here one can have the choice to select our asset allocation which follows an age-based asset allocation model depending on our risk appetite.
It has the dual benefit of investing for retirement and also the best tax saving instrument as it qualifies for EEE status.
Hence the National Pension Scheme can be a good option for those who are not comfortable making investment decisions on their own then such a tailor-made solution can be the best choice and will also build a corpus for their retirement.
- Fixed Deposit Scheme
Fixed Deposits are one of the safest investment options, especially when one compares them with stocks or other market-linked instruments. As the volatility is low the corpus that one set aside in Fixed Deposits serves as a great way to ensure that your capital is safe.
For the investor who is just starting with different investment options, then investing the same amount as your capital is an easy way to arbitrage your risks and receive an assured amount at maturity.
One can also start saving at an early age and multiply wealth with the power of compounding.
- United Linked Insurance Plan
United Linked Insurance Plan is a combination of savings and protection. Along with providing Life Insurance it also helps to channelize one’s savings into various market-linked assets for meeting long term goals.
A Minimum lock-in of 5 years is long term, which ensures investors generating good market-linked returns.
It is good to stay invested in these schemes for a long-term period of say about 10 years or more. Over the long term, ULIP is expected to generate returns ranging from 10% to 12%. The returns from the best ULIP are better than other market instruments like FD’s, NSC’s, PPF, etc. Best ULIP can also beat inflation in the long term.
One can also get a brisk return by exercising the option of fund switching in ULIP’s due to long term investment.
The amount received on maturity is exempt from taxation u/s 10 D of Income Tax Act, 1961. Along with this tax relief, one can also avail of tax benefits on premiums paid up to a maximum of Rs.1.5 lakhs u/s 80 C of Income Tax Act, 1961.
Thus, the objective of wealth creation over an investment horizon of 10 years can be fulfilled by investing in the best ULIP.
It is wise to think of investing beyond the traditional ways of saving tax like, investing in Fixed income tax saving instruments like FD, PPF, or endowment life insurance plans etc. Plan for other options like ELSS, ULIP, etc based on the risk appetite and other relevant factors as discussed above of an individual.
With many options available when investing for wealth creation and saving tax at the same time can be easily achieved by making the right choice at the right time and getting started with it at the earliest.
What is tax planning?
Tax planning is the analysis of an individual’s financial situation from a tax efficiency point of view so as to plan an individual’s finances in the most optimized way. It allows an individual to make the best use of various taxes. Income tax planning involves planning under various provisions of the Indian taxation laws. In India, tax planning offers provisions such as deduction, contributions, incentives, exemptions.
Advantages of tax planning:
- To reduce tax liabilities
Individuals wish to reduce their tax burden and save money for their future. With the various benefits offered under the Income Tax Act 1961, you can reduce your payable tax by arranging your investments. The Act offers many tax planning investment schemes that can reduce your tax liability.
2. Minimise litigation
Minimising litigation saves the taxpayer from legal liability. Litigate is to resolve tax disputes with
local, federal, state or foreign tax authorities.
3. Leverage productivity
The core tax planning objective is channelizing funds from taxable sources to different income-generating plans. This ensures optimal utilization of funds for productive causes.
4. Ensure economic stability
Effective tax planning and management of income provides a healthy inflow of white money that show sound progress of the economy. This benefits both the citizens and the economy. Every taxpayer’s money is devoted to the betterment of the country.
How to save taxes?
- Section 80C
Taxpayers are provided with several options to reduce their tax liabilities. There are various sections of the Indian Income Tax law that offer tax deductions and exemptions, of which, Section 80C is the most popular tax-saving instrument. Here is a quick look at how you can save tax by using various deductions allowed under the Income-tax Act.
Section 80C It is the most commonly used section where an individual can save tax by investing or spending a maximum of Rs 1.5 lakh in a financial year in/on specified avenues. Some of the commonly used investment/expenditure avenues under Section 80C are Employees Provident Fund (EPF), Public Provident Fund (PPF), Equity-linked savings scheme (ELSS) mutual funds, National Pension System (NPS), repayment of the principal amount of home loan, children school fees etc.
- Section 80CCD (1b)
You can further save tax by investing additional Rs 50,000 in NPS. Do keep in mind that this deduction is available over and above the tax benefit available under section 80C. Thus, you can save tax by investing up to Rs 2 lakh in a financial year -Rs 1.5 lakh under section 80C and Rs 50,000 under Section 80CCD(1b).
- Section 80CCD (2)
This deduction is available on the employer’s contribution to an employee’s Tier-I NPS account. A maximum contribution of 10% of the basic salary plus dearness allowance (if applicable) is allowed under this section.
- Section 80D
Premium paid for the health insurance policy of self, spouse and dependent children can be claimed as deduction under section 80D of the Income-tax act up to Rs 25,000. In addition to that, the premium paid for the health insurance of parents can offer an additional tax break up to Rs 25,000. If your parents are senior citizens (age 60 years and above), then this tax break would go up to a maximum of Rs 50,000. Therefore, health insurance premiums paid for self (including spouse and dependent children) and senior citizen parents can help you save tax up to Rs 75,000 in a financial year. If both the taxpayer and parents are senior citizens then, the maximum deduction of Rs 1 lakh can be claimed in a financial year.
If your senior citizen parents are not covered under any health insurance policy, then the medical expenses incurred for them can be claimed as a deduction under section 80D. The maximum amount that can be claimed as a deduction under section 80D for medical bills in this manner is currently Rs 50,000.
- Section 80DD and Section 80DDB
Apart from section 80D, there are two other sections that can help you save tax in case of medical expenses incurred for disabled and/or specified persons. Section 80DD offers a tax break on the medical expenses incurred for a dependent disabled person. Dependent here includes spouse, children, parents, brothers, and sisters of the individual.
The deduction allowed depends on whether the dependent is disabled or severely disabled. If the dependent is at least 40% disabled, then the maximum deduction that can be claimed is Rs 75,000. On the other hand, if the disability is 80% or more, then it is considered a severe disability and the maximum deduction that can be claimed is Rs 1.25 lakh.
Section 80DDB offers a deduction for the medical expenses incurred for the treatment of specified illnesses such as cancers, chronic kidney diseases, etc. This deduction can be claimed for the expenses incurred on self or the dependent. For individuals below 60 years of age, whether self or dependent, the maximum deduction allowed is Rs 40,000. For senior citizens aged 60 years and above, the maximum deduction that can be claimed is Rs 1 lakh. The list of diseases for which deduction can be claimed under this section is specified in the Income-tax Act.
- Section 80U
If you are an individual with a disability of 40% and above, then you can claim a tax break under section 80U. However, deductions under sections 80U and 80DD cannot be claimed simultaneously.
Deduction under section 80U is claimed by the disabled individual whereas deduction under section 80DD is claimed by the dependent who has incurred expenses for the treatment of the disabled individual. The deduction amount under Section 80U for disability and severe disability is the same as mentioned in section Section DD
- Interest on Housing Loan
Apart from the tax benefit available on home loan principal repayment under section 80C, one can also claim tax benefit on a maximum of Rs 2 lakh on the interest paid on the loan during a financial year. If you are paying interest on a home loan for an under-construction property, this benefit will be available after the possession of the house, provided it happens within five years. The interest paid during the construction period can be accumulated and claimed in five equal installments after getting possession of the house.
- Section 80EEA
If you have taken a home loan to buy a house under the affordable housing segment during FY 2020-21, then you are eligible to claim an additional tax break on interest paid up to a maximum of Rs 1.5 lakh. This deduction is available over and above section 24 (mentioned above) where you get a tax benefit of up to Rs 2 lakh. However, there are certain conditions that you must satisfy before claiming tax benefits under Section 80EEA.
- Section 80G
Contributing to charity can also help you save tax. If you donate to specified government notified funds under section 80G you can claim up to 100% of the donation as a deduction from your gross total income thereby reducing your taxable income and consequently the tax
- Section 80TTA
Interest earned on balances in savings accounts held with banks or post offices is taxable under Income from other sources. However, interest earned from these sources up to Rs 10,000 in a financial year can be claimed as a deduction from gross total income under section 80TTA.
- Section 80TTB
Senior citizens (those aged 60 years and above) can claim a maximum deduction of Rs 50,000 from gross total income under this section. The deduction can be claimed on the interest earned from specified sources such as savings account, fixed deposits, senior citizen savings account etc.
- Section 80E
Interest paid on an education loan will also get you a tax break. Only individuals can claim this deduction. HUFs are not entitled to this deduction. There is no limit on the maximum amount that one can claim as a deduction from gross total income under this section in a financial year. However, the benefit is available for a maximum of 8 years from the start date of loan repayment.
Tax Planning is not a day’s work and has to be carried out considering the financial goals, liquidity position, and taxability on returns etc. A taxpayer can save the tax as well as build wealth alongside by doing tax planning in advance.
The most feared and most awaited event of the year; The Budget. Every person, every industry waited patiently for the announcement from our respected Finance Minister Nirmala Sitharaman.
With COVID-19 pandemic on the backdrop, India was waiting for a “get well soon”.
Let’s see what the Budget 2021 brought forward for us – Decoding Budget 2021:
1. No changes in personal income tax
Budget 2021 did not alter the personal income tax structure which meant that the common man is not burdened with tax levy this time. However, we have tried to summarise a few pointers to understand the changes
2. No ITR filing for senior citizen above the age of 75 years
Budget 2021 dictates that Senior citizens above the age of 75 years need not file Income Tax returns henceforth. However, this exemption is valid only if the senior citizen has income from pension and interest.
Only snitch here is that the bank interest should have been received from the same bank where the pension gets deposited.
3. Prefilled Income Tax Returns
Ease of filing will be achieved as a result of Prefilled Income tax returns with the details of interest, dividend, capital gains etc. This is a welcome change since time will be saved and accuracy will be achieved.
Capital gains especially for trading in shares and mutual funds is a very cumbersome task. Prefilled details of capital gain will be a relief.
4. Dividend not required to be considered for determining the advance tax
The dividend has been made taxable only on the receipt or declaration of the same from the view of Advance Tax calculation.
Earlier the taxpayers would need to pay the interest due to underestimation of dividend income while calculating the advance tax. However, with the change in Budget 2021, the taxpayer need not consider dividend in advance tax calculation unless it is declared or paid. This will reduce the interest and penalty on advance tax payments of the taxpayers.
Related article: Reviewing Your Financial Plan? Keep This Checklist Handy
5. Taxability of Interest on Employees Provident Fund (EPF) contribution
Interest on EPF contribution in excess of Rs. 2.5 lakhs, however, will be taxed only if withdrawn in such year.
This move is expected to divert the investors away from EPF, so that the investors would prefer to move in the funds to more lucrative options.
6. Double TDS rate where the taxpayer does not file Income Tax Return (ITR)
Budget 2021 has prescribed TDS at double rates where the taxpayer does not file Income Tax return.
This will encourage and push the non filers to file their ITR, which will increase the coverage of Income Tax.
7. Deduction for interest exemption of Affordable Housing remains unchanged this year too
The deduction will be allowed till the year-end i.e. March 2022, on the Affordable Housing Scheme for Rs. 1.5 lakhs.
This was a specific benefit given by Budget 2019, however, FM has reconsidered extending the same to the year 2021 is a positive sign for especially migrant workers and the lower working class.
Related article : How to select a suitable Tax regime for Yourself?
8. ULIPs brought into the tax net
Budget 2021 has brought in ULIPs under taxability net, prescribing that the capital gains on ULIPs will be taxable if the yearly premium is more than Rs. 2.5 lakhs.
ULIPs were having a specific advantage over regular ELSS (Equity Linked Saving Schemes) Funds due to no restriction on premium payments. However, with this amendment, ULIPs are pretty much at par with Mutual Funds.
9. Revision of return preponed by 3 months
Henceforth the taxpayers would be required to file the revised / belated returns by December 31st of every assessment year.
10. Rush start to Startups
Budget 2021 has boosted up the way ahead for the startups by prescribing some booster doses for revival and growth.
11. Removal of condition of waiting period for conversion of One Person Company (OPC)
Budget 2021 has removed the waiting period of 2 years for converting the OPC into a public limited company or private limited company.
12. No Cap on paid-up capital and turnover
Budget 2021 has eliminated the restrictions with respect to paid-up capital and turnover.
13. Non-Resident Indians (NRI) can incorporate OPC in India
This amendment will bring in the most required capital inflow in India especially in start ups.
14. Emphasis on healthcare
COVID-19 was an alarming state of events in the year 2020, which has reaffirmed the need to improve healthcare and sanitization activity.
15. Increased spending to 137% on Healthcare facilities.
Prime Minister Atmanirbhar Swasth Bharat Yojana will have competitive healthcare facilities with this spending.
16. COVID-19 Vaccine
FM has assured that more vaccines will be available soon and an amount of Rs. 35000 crores would be spent on vaccine efforts.
17. Privatisation, Divestment and Foreign Direct Investment (FDI)
Budget 2021 hs been truly an example of a progressive budget since it has talked in lengths and details about Divestment, privatization and foreign direct investment in government companies and public sector units
18. The monetisation of assets of PSUs
FM has announced that assets of Railways, Airports etc will be monetised through National Asset Monetisation Plan.
19. Disinvestment of PSUs (Public Sector Units)
List of PSUs will be made which are targeted for disinvestment and strategic disinvestment will be carried out to garner the funds
20. Changes in the Insurance Act to attract FDI (Foreign Direct Investment)
Budget 2021 has raised the FDI limit to 74% which was 49% earlier. This will attract more international players into the Insurance field due to allowability f foreign ownership.
21. Acche din for Government schemes
- Free Cooking gas
- Application of Minimum Wages Act to all workers inclusive etc.
Decoding Budget 2021 in all can be looked like more of an ambitious budget which has paved the way for the much sluggish economy bearing the impact of COVID19 hit. However, there is too less for the common man in terms of tax impacts and exemptions, apart from health and wellbeing concerns.
For any assistance on Financial planning and Tax planning book your appointment now – Click here
Our respected Finance Minister came up with an option of opting for an old or new tax regime whichever is beneficial to the taxpayer. Both the regimes have their own pros and cons of their own. This article will sum up the benefits as well as downsides of both the regimes which will help you in choosing a suitable regime for yourself.
Let’s see what Old Tax Regime was all about:
The old regime is the one that existed all these years which comes with allowed deductions and exemptions. Tax rates in the old scheme are divided into 3 slabs which may sound on the higher side but the impact can be reduced with the help of allowable deductions and exemptions.
Most of the deductions and exemptions were to provide relief to the salaried individuals. Some of the deductions are allowed alike to all who do not need any payment or expenditure. Some of the deductions need to have an amount spent or invested as prescribed in the Income Tax Law.
Let’s have a look at the allowable deductions and exemptions under the Old Tax Regime
- Standard Deduction
There is a standard deduction of Rs. 50,000/- which is applicable to the individual. A standard deduction can be claimed against the salary income without any conditions or restrictions.
- HRA exemption
HRA is part of any salary structure usually, which refers to House Rent Allowance. HRA can be claimed as exempt to the lower of
- Actual HRA
- 50% / 40% of Salary
- Annual rent paid less 10% of salary
Exempted HRA would be allowed as exemption against salary income only on submission of authentic rent receipts.
- Deduction under section 80C
Deduction under section 80C is restricted to Rs.150000 which is allowable as a deduction against gross total income. Deduction under section 80C can be availed if the taxpayer invests in any of the combinations of the following savings/ investment options.
- PPF (Public Provident Fund)
- NSC (National Savings Certificate)
- 5 Years Term deposit with banks
- LIC (Life Insurance Corporation) premiums
- EPF (Employees Provident Fund)
- ELSS (Equity Linked Saving Scheme)
- ULIPs (Unit Linked Insurance Premium) etc.
- Deduction under section 80D
Deduction under section 80D is allowed against investment in Medical/ Health Insurance. Payment of health insurance premium for self and family is allowable as a deduction. However, proof of investment is required to be maintained in this case also.
The tax rates under Old Regime are as below:
|0 – Rs.2,50,000/-||Nil|
|Rs.2,50,001 – Rs.5,00,000/-||5%|
|Rs.5,00,001 – Rs.10,00,000/-||20%|
Related Article: Old vs New tax regime – Check what Mr. Shah opted for?
Let’s now understand the New Tax Regime
The new scheme comes with totally different tax rate slabs without allowable deductions or exemptions. If any taxpayer is unable to make any tax-saving investments then the new tax scheme would definitely be a better choice.
Following are the tax rates under the New Regime
|0 – Rs.2,50,000/-||Nil|
|Rs.2,50,001 – Rs.5,00,000/-||5%|
|Rs.5,00,001 – Rs.7,50,000/-||10%|
|Rs.7,50,001 – Rs.10,00,000/-||15%|
|Rs.10,00,001 – Rs.12,50,000/-||20%|
|Rs.12,50,001 – Rs.15,00,000/-||25%|
If any taxpayer opts for New Tax Regime, then he would be eligible to take benefit of these tax rate slabs. However, no deductions or exemptions prevalent under the Old Tax Regime will be allowed if any person opts for a New Tax Regime.
How to choose a suitable Tax Regime?
- First, calculate tax under the Old Regime which will require you to collect all proof of investments etc. for claiming the deductions.
- Don’t forget to claim the standard exemption against the salary income if your employer has not considered it.
- Now calculate tax under the New Regime which will require you to simply calculate the tax on gross total income without considering the deductions or exemptions.
- Compare both the Tax Regimes to understand which is beneficial for you as a taxpayer.
- You are free to choose the beneficial tax regime based on tax-saving you make.
- If you have not made any investments in tax-saving instruments then it is better to calculate the tax impact under the new scheme first. Then calculate tax under the old scheme, assuming that you have made the proposed investments. Then it will be a reasonable base for decision making whether to opt for the old or new tax regime.
- Usually, New Tax Scheme is better to opt for where the taxpayer revolves around taxable income of Rs. 750,000. This is the threshold wherein the New Tax Regime may fair better than the Old regime.
- However, for the taxpayers earning above Rs.10 lakhs, the Old Tax Regime is better. This is because it allows you to reduce the tax incidence through deductions and exemptions.
Also check out: 5 Major Types of Taxes We Pay In India – MintyApp Blog
There is no fair and square rule which will prescribe or suggest the tax regime which you should opt for. However, there are some tax calculators which allow you to calculate tax under both tax regimes. This would definitely help you choose a suitable choice.
For any assistance on Tax planning and Tax planning book your appointment now – Click here
Benjamin Franklin once famously said, “In this world, nothing can be said to be certain except death and taxes”. We can’t beat death but we can definitely cope with taxes with the right advice.
Mr. Shah was seen worried for a few days. When asked, he said, “Taxes were a complicated issue even for Benjamin Franklin. Now we are having 2 versions of it. How to choose whether the old tax regime is better or the new one?”
I could not stop myself and asked if he would be willing to listen to how the better choice could be made between the Old Tax Regime or New Tax Regime. He obviously agreed and here is what we discussed. Hope it will help all.
Let’s understand what are old and new tax regimes.
Old Tax Regime refers to the existing Income Tax Structure having tax slabs as below
|0 – Rs.2,50,000/-||Nil|
|Rs.2,50,001 – Rs.5,00,000/-||5%|
|Rs.5,00,001 – Rs.10,00,000/-||20%|
This Old Tax Regime comes with deductions and exemptions like HRA exemption, deduction under chapter VI-A. This Old Tax regime helps the taxpayer to reduce the tax incidence if proper tax-saving investments are made.
New Tax Regime refers to new tax rates as given below.
|0 – Rs. 2,50,000/-||Nil|
|Rs. 2,50,001 – Rs.5,00,000/-||5%|
|Rs. 5,00,001 – Rs. 7,50,000/-||10%|
|Rs. 7,50,001 – Rs.10,00,000/-||15%|
|Rs. 10,00,001 – Rs.12,50,000/-||20%|
|Rs. 12,50,001 – Rs.15,00,000/-||25%|
New Tax Regime does not come with exemptions and deductions due to lower tax rates. This tax regime is specifically suitable for those who have lesser disposable income for making the tax-saving instruments.
Let’s take an example for the better understanding:
Let’s assume that Mr. Shah has income from a salary of Rs. 10,00,000/-. He has invested Rs.100000/- in LIC and PPF. He has some tax-saving ELSS fund units in which he had invested Rs. 50000/-. He has a let-out house on which he pays interest on a housing loan of Rs.30000/-.
Let’s see how tax calculation takes place under the Old Tax Regime and New Tax Regime
|Particulars||Old Tax Regime||New Tax Regime|
|Gross Income From salary||10,00,000||10,00,000|
|Less : Standard Deduction||(50,000)||Nil|
|Income From salary||9,50,000||10,00,000|
|Income from House Property (interest on loan depicting the negative value since it is relating to let out property)||(30,000)||(30,000)|
|Gross Total Income||9,20,000||9,70,000|
|Deduction under section 80C|
|LIC and PPF||(1,00,000)||Nil|
|Net Taxable Income||7,70,000||9,70,000|
|Income Tax thereon||66,500||70,500|
- Tax incidence as per the old tax regime is lesser as compared to the new tax regime in the case of Mr. Shah
- However, if the investments are not made accordingly then the new tax regime would result in lesser tax incidence due to lower tax rates
- If the gross income of Mr. Shah is less than Rs.10 lakhs then the result would be the opposite since the effective tax rates in the new tax regime till the threshold of Rs.7.5 lakhs are 10%
- If the deduction limit gets exhausted for higher-income slabs then the comparison should be made between the old tax regime and the new tax regime.
It is not an easy answer for the Old or New Tax regime for any taxpayer. It is better to do the calculations under both regimes to understand which one is beneficial. Ideally, the Old regime works best for higher income brackets since tax can be reduced by resorting to deductions and exemptions. On the other hand, the new tax regime is beneficial where the taxpayer does not wish to make any tax-saving investments.
Finance Minister in budget 2021 has made the maturity proceeds of the unit-linked insurance policies (Ulips) taxable. However, it will be taxable only if the annual premium is above ₹2.5 lakh. The rules will apply for Ulips issued on or after 1 February 2021. According to the Budget memorandum, “Under the existing provisions of the Income Tax Act, there is no cap on the amount of annual premium being paid by any person during the term of the policy. Instances have come to the notice where high net worth individuals are claiming exemption under this clause by investing in Ulips with a huge premium. Allowing such exemption in policy/policies with huge premium defeats the legislative intent of this clause.”
Are you wondering what will be the tax rate?
Ulips will be taxed at 10%, above an annual exemption of ₹1 lakh, at par with equity mutual funds. It is an attempt to rationalize taxation of Ulips. The non-exempt Ulips shall be provided with the same concessional capital gains tax regime as available to the mutual fund to provide parity with equity mutual funds.
Currently, the entire amount received under a life insurance policy is exempt under section 10(10D). Section 10(10D) of the Income Tax Act exempts any amount received under a life insurance policy including Ulips, if the sum assured is more than 10 times the annual premium. This exemption includes death benefits, maturity benefits and accrued bonus. It means until now, there was no upper limit applicable to the claim against a life insurance policy.
31st March marks the end of the financial year in our country when everyone is supposed to conduct their income tax efiling with the government. This applies to all kinds of establishments be it business or otherwise but functioning in accordance with the Income Tax Act (ITA) and trade and business laws of India. However, when it comes to filing, it gets tricky to choose the income tax return form amidst various options available.
Currently, there are seven valid forms to choose from as some of the previous ones have been discontinued or replaced by others. The Income Tax Return forms have to be filled with information regarding the company or individual’s income and tax, which then needs to be submitted to the Income Tax Department. In fact, if you are filing returns for yourself, there are four different kinds of forms that could be applicable to you.
Today we are going to walk you through the various ITR forms out there to help you identify which one to fill so that you can go ahead and carry out your tax return filing in a hassle-free manner.
ITR Form 1 or Sahaj
ITR form 1 is applicable to any individual, or a Hindu Undivided Family (HUF) whose annual income is below 50 lakhs INR (through pension or salary). This is also applicable for individuals receiving income from a single property or through pension/salary. You need to keep in mind that money earned through gambling of any kind or lottery cannot be accounted for through the ITR-1 form. You are not eligible to use this form if you have income arising from agriculture that amounts to more than 5,000 INR. Taxable Capital gains also cannot be filed through the ITR 1 form.
The ITR 2 form is very similar to the ITR-1 form, with just a few differences. You can’t use the ITR-2 form if your total income includes revenue from any business or vocation. On the other hand, income through lottery can be included in this, as well as that arising from more than one property. Other than that, it is similar to the ITR 1 when it comes to filing capital gains (taxable).
Any individual or HUF earning income from a business that is proprietary in nature or from more than one property is eligible to conduct their e tax filing using this form. This is also applicable to someone who is a partner in that establishment/firm. Again, like the ITR 2, income from the lottery can be filed through this.
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If your requirements are similar, you might want to have a look at the ITR 3 form. It is important to carefully analyze all the form options, before choosing the one that would be applicable to you. Anybody is eligible for this option provided you have engaged in the Income Scheme (Presumptive) of Sections 44AE, 44AD, and 44ADA of the ITA (Income Tax Act). All kinds of earnings can be filed through this (property, lottery, etc.). However, if you are eligible for Tax Audit then you will have to opt for the ITR-3 form.
The specifications of the ITR 5 stand very clear for making it applicable to LLPs, firms of every kind, Association of Persons (AOP), And Body Of Individuals (BOI). You can file every kind of tax return online through this, other than salary, which is not eligible for this particular form.
The most distinguishing factor for this form is that it is compatible only with e filing of income tax. Companies that have claimed exemption under section 11 of the ITA cannot avail of this. The ITR 6 is applicable to any establishment earning an income through the property(s) used for religious or charitable causes. Just like the ITR 5 form, the salary cannot be filed using this.
To find out if you are eligible for this, you must go through sections 139(4A), 139(4B), 139(4C), or even 139(4D). All of these refer to establishments that strictly fall under the category of a Trust. This is what separates the ITR 7 from the rest.
In a manner, similar to ITR 6, returns on property held for religious or charitable causes are eligible to use this. The article 139(4A) specifies the terms for an establishment to be included in its definition.
Section 139(4B) gives access to political parties if the amount exceeds the maximum limits, in which case it would be exempted from Income tax according to the provisional specifications in Section 139A of the ITA.
Tax return filing pertaining to specifications under sections 139(4C) gives eligibility to news agencies, research associations that are scientific in nature and institutions falling under categories mentioned in sections 10(23A) and 10(23B).
At the same time, Income Tax Return under section 139(4D), needs all institutions, colleges, and universities to use this form, apart from the ones already mentioned. Considering the fact that there are so many different kinds of forms to assist with tax return filing in India, one needs to be extremely cautious in realizing their eligibility while deciding which ITR form to fill. It is also important for you to remember that you should complete filing your returns before the 31st of December to avoid paying a penalty of 5,000 INR. With technology advancing as far as it has, several companies also offering free e tax filing services. While filing your ITR, you need to make sure that you know about all the available options for completing the same in an honest and timely manner!
Why does the Government want to take away our money? What are they using it for? Why do we have to pay tax on the all the income we earn? These are some of the most common questions, taxpayers ask. Well, India is a democratic country, so you have no choice but to pay tax. However, what you do have, is options to save the tax that you pay. The reason as to why we have to pay tax, is basically because, the government uses that same money to fund projects, that are for the betterment of the country.
Few examples would be, construction of roads, free education for under privileged children, pension to retired employees, etc. Though due to corruption, all the money paid as taxes is not being used to it’s full potential. This doesn’t mean that people should try and find out ways to hide their income, so that they can avoid paying taxes, because if you get caught, then there is a possibility, you will end up paying much more than, you initially had to pay as tax.
People mistake tax evasion for tax planning, they think that, by hiding their income, they are planning their taxes. Tax evasion is wrong, because here, taxpayers do not use the tax saving tools to avoid paying taxes, they hide their income which is illegal and this, results in black money. It is always better to be safe than sorry, so pay your taxes, if you don’t, then the penalty charges may come crashing down on you.
Another reason why you must pay taxes is because, when you go in for a home loan, one of the documented proof that is required is your current and previous years Income Tax Return Filings. Also while making your passport these document proofs are required. So if you actually go to see, there’s not only the penalty charges, that you will have to face, but also, a lot more is at stake too.
If you do not know how to file your taxes, or how to show the other income you receive, take the help of a Chartered Accountant, they are tax experts, so they will not only file your taxes the right way, but also tell you where and how you can save more of your taxes.
When do we have to pay tax
As mentioned above, tax is levied on those earning income, it could from different avenues, like house property, salary or business, capital gains, winning a lottery, etc. There is a certain limit up to which your income earned will be exempt from tax, but any income received over and above that, will be taxed.
People find it unfair, that they have to pay tax on every income that they earn. That’s why for different incomes, it is taxed differently. For higher risk investments, the tax rate is very low as compared to the less risky investments. For example, those investing in equity, after one year of holding the investment, it becomes tax free upto 1 lakh of gain, but if it is held for less than a year, then it is taxable at 15% + 4% education cess.
The fact that all incomes are taxed differently, reduces the stress of the people. For example, investors can plan their investments in such a way, that they receive the maximum amount of their income earned. Whereas salaried employees can save tax only depending on their income and they have very limited options to invest in, that will save their tax.
Let us look at the tax slab rates for individuals, falling in different categories as per old as well as new tax slab in Table 1 below:
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An education cess will also be applied at 4%, along with the above tax rates. Please note that there are some pointers to keep in mind, apart from the above table:
- Individual earning income over and above 50 lacs but below 1 crore, have to pay an additional surcharge of 10% on the tax. Surcharge further increases based on taxable income.
- Earlier dividend was tax free upto 10 lacs, but now any dividend received is a taxable income for the investor. Please keep in mind that it will be taxed as per your slab rates.
- If the total income is less than Rs.5 lakhs, the rebate shall be either 100% of the income tax or Rs. 12,500/-, whichever is less. This rebate can be availed under section 87A.
We pay so many types of taxes in India, directly or indirectly. Today we will focus on 5 major taxes an individual has to pay on the income he receives. Listed below are the incomes:
- Salary income:
Income received by an employee from an employer, for the services rendered by the employee. It could either be in the form of monetary or non – monetary benefits. Some parts of the salary are fully taxable and some are exempt up to a certain limit. Each company forms their salary structure in a different way. Observe the Table 2 below and understand the different sections of the salary.
These are the main parts, that a salary structure consists of. Once employees claim all the exemptions available, then they also can claim the deductions available to them, under different sections, for example 80C, 80D, 80G, etc. So after taking benefit of all the exemptions and deductions, the final gross salary will be considered and taxed according to the slab rates above, in Table 1.
- Income from Business / Profession:
Any profit earned or gain received from an individual’s business or profession, will be taxed under this head. Let us understand what is a business and what is a profession:
Business: Any activity related to trade, commerce and manufacturing, with the intention of earning profit is known as business.
Profession: Any person who uses their skillful knowledge, in their field of expertise, to render their services for a certain amount of fees. For example, Lawyers, Doctors, Chartered Accountants and other professionals.
How is tax implied?
Tax is charged on the profit earned by businessman or professional and not on the turnover or sales consideration. All the expenses incurred on the business or profession can be claimed against the income. Some of these expenses are, stationery, transport cost, internet charges, etc. So once all the expenses are deducted from the income, the remaining part will be the profit earned, which will be taxed.
When tax audit is applicable?
Business: If the business sale crosses over 1 crore.
Profession: If the professional income exceeds 50 lakhs.
Note: If the assessee earns income below 2 crores, and if no books of accounts are maintained, then he has an option to opt for presumptive taxation, which means, 8% of the turnover is considered as the profit earned for non-digital transactions and 6% for digital transactions , and tax is levied on that.
- Income from Capital Gain:
Any income or gain earned on an appreciated capital ( movable / immovable ) of an individual, will be taxed under this head of income, with subject to certain exemptions. The capital gain incurred can be short term capital gain or long term capital gain, it all depends on ‘for how long the asset is held’. The below table will make your concept clear.
There are certain ways to save your income tax on long term capital gains.
4. Income from House Property
If the asset is sold, before the completion of the minimum holding period, then it is considered as short term capital gain. And if it is sold, after the completion of the minimum holding period, then it will attract long term capital gains. Also note that the 4% which is added is the education cess which is charged. Tax charged on capital gain from house property, can be exempted under section 54, subject to certain conditions.
Any income from any land, building or apartment, which is owned by the assessee, but not utilized for any business or professional purposes, is taxed under this head of income. Let us look at the following points:
- If a person has multiple properties, then he / she can claim only two as self occupied and the others by default become Let out or Deemed to be let out.
- The deductions that one can claim from income from house property are municipal taxes ( which are actually paid), 30% on the annual value, which is a standard deduction.
- Interest on house loan can also be claimed, upto a limit of 2 lakhs in a financial year.
A major example of this is, an individual having 2 flats, he stays in one and gives the other on rent, so the rent, becomes the income of the individual, and after availing the above deductions, the income will be taxed according to the tax slab of an individual.
- Income from other sources:
Income which is earned from anywhere else, apart from the income received under the above heads, will be considered and taxed as income from other sources. Some examples of this income are, winnings from a lottery / betting / game show, gifts, foreign dividend, interest income on investment and securities, rental income from plant, machinery and buildings,
- Any brokerage charges paid, eg. commission.
- Depreciation can also be claimed.
- Any other expenditure incurred ( not capital expenditure ) for the purpose of generating such income.
So after, the deductions, the income will be taxed as per the slab rates of an individual.
The above are the major taxes we pay on the various incomes we earn. Now I’m sure many of you are clear on what incomes you earn and under which heads they are taxed. So pay your taxes on time, SAVE as much, of your taxes as you can, of course through the tax saving tools offered to you. When you have a choice to choose the right path, why go down the wrong?
Mr. and Mrs. Sharma, both in their early 30s, after completing 5 years of their married life decides to have a house of their own. Both husband and wife are working at good positions in corporate and are regularly paying income tax on their incomes. After sheer hard work and a lot of savings, they will finally be able to make a house of their own. Both of them are really excited to live in their own house. They have invested almost everything they had in this new house.
Mrs. Sharma has big dreams for the house. She has all the color combinations and furniture designs pre-decided. While Mr. Sharma has planned to hire the best architect for their house. But all these dreams are becoming a reality after cutting their leisure for the past 5 years. Also after saving every single penny they could in these past 5 years. Most probably this scenario will continue for a few more years as they have invested everything they had in their dream house.
Well, this case study seems to be familiar to most of the people around us. They are passionate people who work really hard to fulfill their dreams. All of us have a list of wants, actually a pretty expensive wish list to be checked in as little time as possible. But just hard work is not enough for these purchases. One needs to consider the tax-smart alternative to pay less by using tax planning.
So, before we see some ways to plan our taxes on home loan, let us first understand the concept of tax planning.
Tax planning is simply arranging your financial activities in such a way that maximum tax benefits are enjoyed. This can be done by making use of all beneficial provisions in the tax laws. It helps any person to take full advantage of all available exemptions, deductions, concessions, rebates, and reliefs within the boundaries of the law. Tax planning is important to avoid expensive tax blunders people make. It is also helpful in planning your financial transactions in a manner that you can legally reduce your taxes.
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The Income Tax Act, 1961 under various sections provides us the opportunity to plan our investment. Thus, you can claim various exemptions and deductions against the quantum of your tax liabilities. Now let us discuss a few of the most common tax planning tools with you which will assist you in optimizing your home loans.
Tax benefit on home loans
Home loans are highly advisable options for tax planning as one can claim a deduction in 3 different sections for the repayment of home loans. Thus resulting in huge tax savings. So to make it simple, let us understand this benefit by categorizing the repayment into two components. First is repayment of principal amount and second is repayment of interest on home loans.
The deduction for repayment of principal amount on home loans can be claimed under Section 80C of the Income Tax Act, 1961 up to ₹ 1,50,000. While the interest paid on home loans can be claimed under Section 24 of the Income Tax Act, 1961 up to ₹ 2,00,000. Also, an additional deduction of₹50,000 for interest on home loans can be claimed. First-time buyers can claim this additional deduction under Section 80EE of the Income Tax Act, 1961.
As Sharma’s were earning well, they could have invested their savings in some eligible funds and claim deductions thereof. Moreover, had they considered the option of a joint home loan, they both could have claimed deductions for payment of principal and interest amounts in respective sections as discussed above.
These smart choices would have given them the option to have their dream house much before, instead of making them wait for 5 years. Also, they could have even enjoyed their lives without sacrificing much in their leisure.
Tax planning is like a win-win situation for everyone. We, the taxpayers are able to plan our activities in such a manner that we attract minimum liability to tax by taking full advantage of tax laws. Our government also is at advantage as the exemptions and deductions that we get can be utilized only by making investments in various schemes initiated by the government. Finally, our nation will also prosper as the money invested by us in government schemes will help in the development of our country and those schemes will also generate employment in the nation. Thus, your simple step of tax planning is even helping our society to grow.
Tax planning is not something you do at the last moment before filing your tax return. Tax planning is much more than that last moment rush. It is a disciplined approach. One has to be smart enough from the beginning of the financial year to plan all the transactions considering the tax-smart choices so that you don’t end up paying more taxes than you have to!
As the ITR (Income Tax Return) filing date has again extended till 31st December 2020, the taxpayers are compiling their tax related documents and other relevant certificates and making their sacred rounds to the tax consultants office. But what if I tell you that you can file your own Income tax returns without making certain common repetitive mistakes. This would not only save your time in revising the return or even avoid receiving the tax notice.
Providing Basic Personal and Tax Details
Income Tax return contains the basic personal details like name, address, mobile number, date of birth, email id etc. and other important tax relevant details like PAN number, residential status, bank account details (especially account number and IFSC code- which are important since the refund gets credited to the account number mentioned by the taxpayer in the return based on IFSC code), etc.
If any taxpayer omits any of such important details or fill in wrong details, the impact of the same may vary from hurdle in communication (in case the taxpayer quotes wrong mobile number or address etc.) to severe consequences (for e.g. where the taxpayer fails to quote correct PAN).
Related Article : – Income tax return (ITR) filing deadline for 2019-20 extended
Selecting Wrong Return Forms
Depending upon the type of income earned and reported by the taxpayer, appropriate income tax return forms are to be selected for filing the income tax return. For e.g. there are different tax return forms for salary income, business income, and capital gains etc. If you earn salary income along with meager savings bank interest income, then you need to file ITR-1. However, if you earn income under the head business or profession, then you need to file ITR 3 and ITR4 as suitable.
If any taxpayer fails to select and submit the correct income tax return and appropriate return forms, then the assessing officer may even assess the return of income as invalid or void. This will convert your valid income tax return to invalid or defective return, which is almost equal to non-filing of return. Hence, to avoid such consequences, always select and fill in and submit the appropriate return forms.
Not Declaring Exempt Income
Most of the times, taxpayers fail to recognize the importance of recording or declaring the exempt income in the return of income. Exempt income is exempted from tax liability only if they are declared and reported in the return of income. For e.g. agricultural income is exempt but is used for determining the tax rate in case the income crosses prescribed threshold.
In such increased tax rate, agricultural income will still be exempt but other income will be taxed at such higher tax rate. Also for dividends on equity shares, it is exempt, however, reporting and declaring a dividend on the share is still mandatory since the threshold for taxability of dividends.
If any taxpayer fails to disclose or report the exempt or non-taxable income in the return of income, then it may be termed as concealment of income and accordingly action will be taken by issuing tax notice.
Related Article: – Know All About Deduction Under Section 80C
Not Submitting Proofs for Deductions and Exemptions
If the taxpayer omits or fails to submit evidence of amount invested in tax-saving instruments, then the deduction for such investment may or may not be allowed. For e.g. if the taxpayer fails to submit interest certificate for interest paid on housing loan, then he can claim the same later under section 80C at the time of online IT return submission.
Always ensure that you have submitted evidence of tax saving instruments like interest certificate, PPF investment, LIC premium receipts etc. to the employer before the prescribed cut-off date. This will help you avoid the last-minute rush and will also help ensure that you will claim each and every tax deduction. Thus, it is crucial to submit proofs for deductions and exemptions.
Tax Credit and Tax Payments
Most of the times, the taxpayers will receive the TDS certificates for each income earned (salary, interest etc.). However, there are cases, where you won’t receive the TDS certificate or receive it quite later after filing of income tax return. Sometimes mentioning incorrect details like incorrect TAN or incorrect assessment year etc. will also make you ineligible for claiming the tax credit.
Same thing is applicable in case of self-assessment tax and advance tax. If the taxpayer fails to fill in the details of tax challans through which such tax is paid or fills in incorrect challan details, then he may end up in not receiving the credit for the tax paid by him.
To avoid such scenario, one must always compare the form 26AS with the TDS certificates and tax challans. This will help you assess if any TDS or tax payment is not reflected on your PAN and you may ask for TDS return revision or enquire your bank for the same in case of tax payment challans.
Verification of Return
Even if underrated, this thing is most important to help you avoid the tax notice for non-filing or non- submission of tax return. It is mandatory to verify the tax return by sending the printed and signed copy of ITR-V to CPC or you also have an option for e-verification. E-verification is very simple and convenient as it can be done online without any need to send any hard copy of ITR-V. To avoid receiving notice of non-filing or non-submission of return of income, the return of income needs to be verified (by sending ITR-V by post to CPC, Bangalore) or e-verified online.