Income tax is paid by every individual who earns above INR 2.5 Lakhs per annum. Post the limit of INR 2.5 Lakhs, each and every individual is liable to pay taxes. It’s also everyone’s duty to file Income Tax returns, even if the tax liability is nil. The last date for filing of Income Tax Return for FY 2019-20 is 31st December 2020. Many people think that if they have paid their taxes, but not filed their return on time, it’s absolutely fine, however, this is incorrect. Although you might have paid your taxes well on time, still individuals can lose getting benefits if they don’t file their ITR within the due date.
What Is ITR – Income Tax Return?
ITR or Income Tax Return as prescribed by the government of India has to be filed every year by an individual or a business who is receiving income in any form i.e. Salary, wages, investment returns, capital gains, or interest.
There is a specific date by which the income tax return must be filed by each and every person. Through the ITR, the Income Tax department comes to know if a person has paid excess tax, then he or she is eligible for a refund by the government, according to the department’s calculations, and even the source of Income, etc.
What Happens If You Forget To File Your Income Tax Return?
- Interest loss in case of refunds: – If you are claiming a refund on your TDS deduction, you can lose interest in it, which is around 6% pa. For returns that are filed after the due date, the interest is calculated from the date when the return is filed till the time when the refund is granted to the individual. Talking about the usual procedure of interest calculation, it is done from the 1st of April of the following year.
- Interest liability on the individual:- For people who already have some form of tax liability, the late filing of the return would levy interest of 1% (from due date – date of filing return).
- Penalty for non-taxpayers: – In case you do not have to pay any taxes to the government for your income, but by 31st March, you fail to file the tax return, can attract a penalty of INR 5000 if the proper reasoning is not provided for return file delay.
Non Tax Payers – How Are They Affected For Not Filing The Return?
People who are not liable to pay any tax to the government would be required to prepare a computation and submit that no amount of tax was payable and everything was deducted at source. Also, this is helpful, when the timeline for tax file return is over.
What Are The Penalties Of Late Filing Of Income Tax?
If the income tax is filed after the due date by an individual, then there are certain penalties levied on the individual. Under section 271F, a penalty of INR 5000 is levied on a person if the income tax is filed late.
This penalty is mostly paid in cases where an individual receives a letter from the Income Tax department of the government of India.
The rare cases of penalties levied by the Income-tax department are imprisonment of 3 Months – 2 years (for tax liabilities less than INR 25 lakh) and up to 7 years (for tax liabilities exceeding INR 25 lakhs). Moreover, the times when you have not paid full or partial tax in the current or subsequent financial year, then you need to pay a penalty of INR 5000 along with 1% interest each month.
Important Dates For Income Tax Returns
Here are the lists of important details for every individual to keep a track off:
- Every year, the return should be filed by 31st July.
- In case this date is missed by the taxpayer, you can file the income tax return by 31st March of next coming year.
- If in case this deadline is also missed, the taxpayer has time till 31st March of next year to submit the IT return.
The time line for accepting returns is till two years from the date you paid the taxes, post which there is a lot of adverse consequences.
However what if you miss the date and do not file the tax on time, ever wondered how it would affect you?
According to section 234 in the directory of the Income-tax Act, there are various penalties and allegations for the delay in filing or non-filing of the returns. Usually, you need to pay interest of 1% for every month due to tax due to filing returns.
You can either hire a CA (Chartered Accountant) for filing your tax return or you can even do it yourself through the online facility provided by the Income Tax department of the government of India.
With the usual misconception of failing to pay taxes can attract penalties, people don’t understand that failing to file the return on time (for tax and non-taxpayers) can also attract a penalty.
How To File The Income Tax Return?
The income tax return can be filed through the online portal or a CA can also file the return for any individual or a business at a nominal charge.
Who Should E-File Income Tax Returns?
The online form is quite easy to be filled and anyone can file income tax returns
So, file your Income Tax well before due date and have a peace of mind!
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.
Form 26AS is a consolidated annual statement which has tax credit related information. This statement contains detailed information on tax deducted from the income received by the taxpayer as well as tax paid (challans) in the nature of advance or self-assessment tax. This statement will also contain refund details if any pertaining to the PAN of the taxpayer. This is a very important supporting document which needs to be verified before Income Tax Return Filing. This article will explain the importance and will also explain how to interpret the 26AS statement.
Why the need for Form 26AS?
- It is better known as Tax Credit Statement which sums up every tax credit in the form of TDS and TCS.
- It also displays taxes paid by the taxpayer as “Self- Assessment Tax” and “Advance Tax”
- 26 AS also contains the refund paid out by the Income tax department and hence allows for verification of refunds.
- As this statement combines every tax credit and tax paid as well as refunds paid out to the taxpayer Hence, it facilitates compact supporting document for return filing.
- It also allows convenient and easier return processing.
Every taxpayer considers the TDS certificates as full and final proof for TDS deduction and would continue to file the return of income on the basis of such certificates. However, Form 26AS is conclusive proof of TDS, TCS, and taxes paid. If any TDS certificate is issued manually and such TDS is not shown in Form 26AS then it would mean that the tax deductor has either not paid the TDS to government treasury or has defaulted or wrong filed TDS Return. This would help taxpayers as the Income Tax Department will correlate the data from TDS Returns for Refund processing and if Form 26AS is not considered, it would unnecessarily delay the refunds.
Sometimes the taxpayer may even miss out the incomes (like interest on FD since it accumulates till maturity). In such cases, the Form 26AS will display the TDS deducted by the banks or financial institutions, which needs to be reported in return of income
Understanding Form 26 AS
Form 26AS is divided into 9 sections which are explained as below
- Part A :- Part A of Form 26AS contains TDS details with respect to tax deducted from the income earned or received by the taxpayer. This part will segregate the TDS based on the type of income (head of income) and nature in which it is earned. These subsections are based on sections under which TDS has been booked and deducted and paid to the Treasury of government. So if a taxpayer earns interest income and salary income, then Part A of Form 26AS will be segregated into section 192B (for TDS on salary) and section 194A (for TDS on interest)
- Part A1 :- This part contains the details of the income on which TDS is not deducted as a result of the submission of Form 15G or 15H. When any taxpayer submits Form 15G or 15H, it is considered as evidence which will lead to no TDS on income received by the taxpayer. For e.g. if any taxpayer submits Form 15G or 15H to the bank, then the bank shall not deduct tax under section 194A on interest income received and earned by the taxpayer. Entries appearing herein are the result of TDS return filed by the Tax Deductor. Hence, if there is TDS mismatch (between TDS certificate and Form 26AS) or no TDS (due to non-filing or wrong filing of TDS returns), then the Tax Deductor will have to revise and rectify the TDS return to render appropriate tax credit.
- Part A2 :- This part is specifically dedicated to TDS on sale of immovable property under section 194-IA. This section under Form 26AS requires the buyer to deduct and pay the TDS under section 194-IA on the consideration received on sale of immovable property.
- Part B :-This part holds the details of TCS (Tax Collected at Source) based on PAN of the taxpayer. TCS is applicable on certain goods like Scrap, Alcoholic Liquor etc. In such cases, TCS is collected and paid to the government treasury by the seller (one who receives money) rather than buyer (as in case of TDS). If you sell these goods and are required to collect TCS then this section will have entries for transactions for which you have collected TCs and filed TCS return.
- Part C :- This part will hold the details of taxes paid by the taxpayer in the nature of Self-Assessment Tax and Advance Tax. This section will show the challan details through which the tax was paid by the taxpayer. Challan details will have break up of tax paid (into tax, cess etc.), BSR code, date of deposit, Challan Serial Number etc. which should be filled in the Return of Income as present in Form 26AS.
- Part D : – This part will contain the details of the refund paid to the taxpayer in relation to return of income filed. Refund details will have Assessment year, Mode of Payment, Refund amount, Interest on the refund, date of payment etc. This will help you verify whether you have actually received the refund and if not you can sort it out with the assessing officer.
- Part E: – This part is concerned with AIR (Annual Information Return) transactions based on the PAN of the taxpayer. There are various high-value transactions which are required to be reported in the AIR return by Mutual Fund Companies, banks etc. Such transactions will be traced from AIR returns filed by these Mutual Fund companies etc. based on PAN and will be displayed in Form 26AS.
- Part F : – This part is concerned with TDS on immovable property under section 194-IA but for a buyer of the property. This would mean that entries will appear here only if there has been the sale of immovable property and where the TDS has been deducted and paid to the government treasury by the taxpayer.
- Part G: – This part deals with TDS defaults in the nature of
- Wrong deduction
- Short deduction
- Delayed deposit of TDS
- No deposit of TDS etc.
This part will have details of TDS short payment, interest leviable thereof (due to delay), late filing fees etc. This will not include demands raised by the assessing officer.
We hope that now you must have understood all the components of form 26AS. You may download your form 26AS from the income tax website and file your returns accordingly. Alternatively, if you feel it a little complicated you may get in touch with our Tax experts at Minty who will guide you and make this process easier for you.
The wealth earned by us is indeed determined by the quality of our health. The increasing medical costs makes it extremely difficult to sustain the corpus acquired by us throughout our life if we do not make adequate planning for health insurance. This is why financial planners focus on the importance of health insurance in retaining the viability of your long run financial goal. For benefitting out of the same, you will have to select the right health insurance plan which can last throughout your retirement life and hike up the value of your financial plan.
Importance Of Having Medical Insurance In Place
All of us yearn for a secure future both in terms of financial and health-related matters. A medical expense might seem manageable in your 30s with a regular income source for adding to your corpus. But the entire story changes once you enter the golden age of your life. With limited or even nil income sources, you need to bank on your earlier saved corpus to mitigate the rising medical costs. This is why it always pays to have health insurance in the first place.
Medical emergencies do not come with a prior warning. It also has a tendency of increasing with every passing day. Keeping such things in mind, it pays to have a health insurance policy in place. You can ensure the same by ear marking a certain portion of your savings to pay the premium starting today itself. A sound health insurance policy can assist you in handling all unannounced health expenses in a smooth fashion without causing a dent in your regular finances.
Purchasing a health insurance plan and aligning the same with your financial goals can be of great assistance in shielding you from unannounced medical expenses that can arise during your golden years. With a limited income source, it becomes extremely difficult to cater to the same. This is where a health insurance policy comes in as a complete blessing by providing for treatment expenses and hospitalization charges. Some of the policies also offer comprehensive plans to cater to a more versatile set of requirements.
Let’s see health insurance benefits in detail:-
Health insurance plans also serve as an important tax saving tool. An assessee can claim deduction under section 80D on the premium paid by him for securing the health of his family and parents. This deduction can be claimed as follows:
- For Self & Family – Maximum deduction of 25000 INR per annum on health insurance for self and family. Maximum deduction of 50,000 INR per annum if you are a senior citizen.
- For Parents -Maximum deduction of 25,000 INR per annum on health insurance premium paid on behalf of parents. Maximum deduction of 50,000 INR per annum on premium payments incurred for senior citizen parents.
- A deduction of 5000 INR can be claimed per annum on health check-up related expenses. This is applicable to all the family members of the taxpayer including his/her spouse, children and parents. This deduction is part of 25000/50000 as the case may be.
It takes years of hard work to gather adequate corpus which can bring you in line with your ultimate retirement goal. However, a sudden medical emergency can squeeze out all your hard-earned funds at one go. Nothing matches up to the importance of human life and that is why we try our level best to provide ourselves and our loved ones with the best of medical treatment.
Having a medical insurance policy can guard your back in such a case by preparing you to face all sorts of emergencies without worrying about the financial setback caused by the same. However, this is possible only when you opt for a health insurance policy which has adequate cover size and tenure to render protection against all sorts of illnesses.
Real Life Examples
Let us take the example of a middle-aged man in his 30s who falls ill and has to spend 10 lakh INR on treating his illness. He does not hold a health insurance plan and finances his expenses partly from his savings and partly by taking a loan. Once he recovers from the illness, he needs to start paying back his bank debt. This will be followed by saving money to primarily meet the earlier gap in savings for fulfillment of his ultimate financial goals.
Had he taken a health insurance policy which could cover his entire medical costs, then he wouldn’t have had to face such a scenario in the first place. The premium for gaining coverage worth 10 lakh INR would have varied somewhere between 10000-15000 INR per annum approximately. He could have even got a family floater policy covering two adults and two children by shelling out a little more yearly. Spending this nominal amount could have buffered him in times of medical emergency without derailing him from his ultimate financial objective.
Read More :- 6 Retirement Planning Mistakes To Avoid
Health insurance comprises the lion’s share of retirement planning and it is time individual investors understand the same. Increasing medical expenses and future uncertainty is making it mandatory to have a medical insurance plan in place for buffering you from further troubles.
It is also necessary to maintain good physical and mental health in order to attain your ultimate financial goals. This is why financial advisors advocate these medical insurance plans to individual investors from a very early age so that they can gain more coverage by shelling out a relatively smaller premium.
HUF or Hindu Undivided Family is a unique taxable entity which is existing only in India. This entity is taxed independently from its members. This entity can be created by Hindus as well as by Sikhs, Jains and Buddhists also. Let’s see how it can be advantageous from a taxation perspective.
How to create HUF
- The moment you are married, HUF is automatically created, however, it should consist of at least one male.
- It includes wives and unmarried as well as married daughters.
- It has assets which are either acquired as a gift or through WILL or as an ancestral property or property contributed to the common pool by members of HUF.
- HUF should be registered in its name and should have a legal deed. It is better if the HUF has its PAN number as well as a bank account.
Section 80 deduction
Salaried people are always fascinated about this section because it is where they can save tax. You may be surprised to hear that HUF can as well claim this deduction. However, it is better to invest in Life Insurance policies (on HUF member’s life) or bank fixed deposits. This leads to additional deduction of Rs.1,50,000. This is particularly beneficial for those individuals who have already exhausted their section 80C deduction.
Similar treatment for other deductions under section 80 like section 80D (mediclaim), 80G (donations to charity institutions etc.) and even section 80DDB (for deduction for payment for medical treatment of specific diseases or ailments etc.)
Section 24 benefit
Planning to buy a second home? Why not take it on the name of your HUF? There are two benefits for that – one is that you can make your HUF liable for the rental income taxability and another that the HUF can as well claim section 24 deduction for interest on housing loan for Rs.2,00,000 (Self Occupied Property) and for any amount (for let out or deemed let out property). And, HUF will also be able to claim standard deduction on the rental income received.
And, of course this interest deduction for housing loan is in addition to the interest on housing loan claimed by the family member or Karta.
Where the HUF owns the house and you and your family reside in that house, then you can also avail of the HRA exemption by taking rent receipts. This would result in two-way benefits as below.
- First, it will exempt your HRA to the extent as prescribed under the Act
- As the house is in the name of the HUF, it can claim deduction under section 24 for interest on housing loan as well as standard deduction also, since it is receiving rental income from you.
Low Tax Incidence Incomes
Incomes such as short term capital gains are taxed at a lower tax rate of 15%, which means that if the HUF earns taxable gains below the threshold, then only marginal income will be taxed at this rate. Also, it would be better to trade in the name of HUF, especially if you have large trading volume, since there would be tax on dividends if it crosses Rs.10 lakhs.
Gifts can be obtained by the HUF, where the tax liability arises when such gifts exceed Rs.50,000, unless such gift is received from the relatives. By this way, any karta or coparceners can manage their tax liability with respect to gifts by routing these gifts in the name of HUF.
Note: Karta is a person who is the head of a HUF. He is the one who is the senior-most male member of the family. Co-parceners on the other hand are the other members.
Points To Be Remembered
- HUF will need to file a return of income every year, considering every income which is received on its name. However, there is a clubbing provision that would hold the Karta liable for all the income which is diverted to HUF with an intention to evade tax.
- Any asset which is contributed to the HUF will be treated as a common asset and the asset owner must renounce the ownership in the name of HUF. Hence, if the previous owner wishes to sell such an asset, then it cannot be done so without the consensus of all HUF members.
- Any addition to the family by birth or marriage will add a member to HUF. Hence, it may be very difficult to manage such a large HUF, while keeping appropriate records of assets and funds contributed to HUF and by HUF.
- Shutting down the HUF is a difficult process and hence it is impossible to proceed with unless all the HUF coparceners agree to the partition.
- Where there is no male member, female member can become karta, but its tax aspects are still in debate.
- If any member of Karta transfers any property to HUF without any sufficient consideration, then it will be clubbed in the hands of such transferor.
- Where any woman has any wealth which she brought in from her maiden home, the income from the same would not be taxable as income of HUF, rather in hands of such wealth owners.
Health problems coupled with their associated treatment expenses have been undergoing a rise in recent years especially due to poor lifestyle choices and changing food habits. We have seen that Indians self-finance 78% of their medical expenses out of which 72% comprise expenses related to purchasing medicines both before and after the procedures. This was the main reason behind the introduction of several provisions in Income Tax Act 1961 for providing requisite relief to the society.
Today we are going to take a detailed look at the tax benefits which can be claimed by an individual out of his medical expenses in AY 2020-21.
Section 80D Tax Deduction
First and the most common section is 80D. If you have taken a health insurance policy for yourself or your family or both then you can claim deduction of the premium paid under this section.
You can claim this deduction for medical insurance for yourself, your spouse, dependent children and parents. This benefit is not available for brothers, sisters or grandparents.
Amount allowed for deduction for self, spouse and dependent children is maximum Rs.25000. Another 25000 is allowed for medical premium paid for parents. This is provided you are paying a yearly premium regularly without fail. If the assessee or the parents falls under the senior citizen age category i.e above 60 years of age, then his exemption amount increases to Rs.50000. Thus, we can see that a person can avail a tax benefit in the range of Rs.25000 to Rs.100000 from this section.
It is important to know that expenditure on preventive health check-up can also be claimed in this section. The maximum deduction that can be claimed is Rs 5,000 irrespective of the person’s age. Remember, this is not over and above the individual limits as explained above.
There is good news for senior citizens above the age of 60 years. If they are not eligible to take health insurance, still deduction is allowed for Rs 50,000 towards medical expenditure.
Section 80DD Tax deduction
A HUF or resident individual can claim deduction on the medical treatment and rehabilitation expenses incurred on a handicapped dependent relative u/s 80DD of Income Tax Act 1961. The law defines a dependent person as a spouse, children, parents, brothers and the sisters of the individual.
A fixed deduction of Rs.75000 can be claimed when disability ranges between 40-80% whereas Rs.125000 can be claimed if the quantum of disability exceeds 80%. The amount of deduction is fixed here irrespective of the amount you actually spend. So even if you are spending 35000, you will still get a deduction of 75000 or 125000 as per the case.
Now you might have a question about who will define the percentage of disability in an individual.
Well, a certificate of disability from a prescribed medical authority is required for claiming deduction under this section.
Section 80U Tax Deduction
This section is similar to above i.e. 80DD. The only difference is that a taxpayer will get the benefit of this deduction if he himself is handicapped. For both sections, the amount that can be claimed as deduction does not depend on the age of the person. It depends on the percentage of disability of the person.
So the same 75000 or 125000 can be claimed as fixed deduction depending upon the extent of disability.
Section 80DDB Tax Deduction
Minor medical treatments, small surgeries and even medical consultations hold the ability of burning a deep hole in your wallet. In such a scenario, you can bring down your tax burden by availing the available deductions up to the maximum ceiling. A member of HUF or resident individual can claim deduction u/s 80DDB on medical expenses incurred on self, children, spouse, parents and dependent siblings.
However, this benefit can only be enjoyed by an assessee for the following specified ailments and diseases which are mentioned in Income tax Act:
- Malignant Cancer.
- Neurological diseases identified by a specialist with a disability level certified to be at least 40% or above such as Dystonia MusculorumDeformans, Dementia, Motor Neuron Disease, Hemiballismus,Chorea, Parkinson’s Disease, Aphasia and Ataxia.
- Chronic Renal failure.
- AIDS- Acquired Immuno-Deficiency Syndrome.
- Hematological disorders like Thalassaemia or Hemophilia.
It is imperative to note here that this section does not cover common medical expenses such as C-section or cataract. The age of the person on whom all medical treatment expenses has been incurred is considered before claiming the deduction u/s 80DDB.
The upper cap of deduction allowed in the provisions of Income Tax Act 1961 has been kept at 40,000 INR or the actual amount paid, whichever is less. It is for expenses incurred on self, dependent or a member of HUF. However, the exemption amount increases to 1,00,000 INR or actual expenses incurred, whichever is less if the medical expense is incurred on a senior citizen.
It is essential to understand that the amount of deduction claimed u/s 80DDB is exclusive of any other deduction which has been covered by other sections under Chapter VI-A. Any amount which has been reimbursed by the employer or received from the insurer on account of health insurance policy needs to be adjusted with the amount of deduction which can be claimed u/s 80DDB.
Read More :- Save Tax Without Investing More! How?
These provisions in unison can be of great assistance in decreasing the tax burden while ushering in various exemptions and deductions related to payment of insurance premiums and other medical expenses. So make use of these expenses to lower your tax liability. For further personalised assistance, you can get in touch with our tax experts at Minty.
Tax saving without investing? Seems like a dream, isn’t it? But yes, it’s true! There are certain exemptions and certain deductions which you can claim and gain the tax savings without investing a penny. Generally, these will come in the form of a loss from a certain head of income or certain expenses. So why wait? Let’s see what all is there in store for you.
Housing loan benefit
Those of you who have purchased the house by obtaining the housing loan will get benefit from such loan from your taxable income. Want to know how? The principal repaid during a financial year in the form of EMIs will form part of section 80C deduction income tax act (up to Rs.150000). On the other hand, you will also be eligible to claim loss under the head “Income from house property” with respect to interest paid each year.
Where self-owned house properties are eligible for interest deduction up to Rs.200000, rental properties have the privilege to avail unlimited interest claim. However, the overall loss one can claim under the head of House Property is restricted to Rs 2 lakh only in a financial year. The unclaimed amount can be carried forward to the next year. Carry forward is allowed upto 8 years. So practically whatever you are spending on loan repayment i.e. interest and principal both, will earn you a manageable tax deduction.
Additionally, second homes are eligible for standard deduction @30% also from the annual value (for deemed let out homes) or rent received (for let out properties). This results in just 70% of rent or annual value taxed and then setting it off with interest claim.
Deduction under section 80E is available to those taxpayers who have taken the education loan for higher studies for himself, spouse and children. However, this deduction is limited to the extent of interest paid on such education loans. There is no upper limit of interest to claim under this section. So whatever is your interest cost, you can claim fully. This deduction is restricted to the period of 8 years or term period of loan repayment whichever is earlier.
Tax saving with respect to section 80E will be hence, available without investing in any of the tax saving instruments. Rather, this is the benefit available to those paying interest on education loan, even if it is for higher education courses abroad.
This is one more expense which forms part of Section 80C deduction. Such deduction can be claimed for the maximum of two children. But, you can claim tuition fees paid for both the children for any academic year. This deduction cannot be claimed for any donation or coaching class fees etc.
Employees EPF contribution
Every salaried employee is likely to get his salary mandatory deducted for EPF (Employees Provident Fund) which forms part of retirement benefit. Apart from its post-retirement benefits, you can claim deduction under section 80C with respect to such contribution to EPF. Since, higher the salary, higher will be the EPF contribution, if you are already in higher tax brackets, it will be evident that your section 80C deduction threshold will be fully exhausted with this just one deduction. This will leave no room or requirement for further tax saving investments unless you are investing to save rather than just save taxes.
LTA (Leave Travel Allowance)
The Income Tax department has already taken note that people spend on travel and has enlisted LTA as one of the valid vacation based deductions. LTA is available to most of the employees as a part of their CTC. However, this portion of your salary structure can only be exempted subject to certain restrictions.
- LTA exemption can be availed only for travel expenses i.e. to and fro expenses with respect to a travel destination. This means that no exemption for hotel expenses, local conveyance or sightseeing etc.
- It can be availed only up to certain limits as specified in the rules. For e.g. if you are traveling by air, then LTA can be exempted only up to fare equal to the economy fare of the airline.
- This exemption is not available for overseas travel, hence if you are having combined plans of domestic and foreign travel, you better take separate tickets for domestic and foreign travel, since you can claim domestic travel expenses only.
If you are staying in a rented apartment, then a sizable amount of your income is spent on paying rent. You can use this expense to lower your tax liability. If you are salaried, then you must be receiving House rent allowance as part of your CTC. You will be eligible to claim HRA exemption as prescribed in Income tax act.
If you are not salaried or your employer doesn’t provide you with HRA as part of your CTC, then what to do? You can still claim the benefit of your rent paid under section 80GG upto 5000 per month.
So these were some of the exemptions or deductions that you can avail without making any investments. This will help you to reduce tax liability by making use of the expenses you already make. Apart from the above, you are also eligible to get a standard deduction of 50,000 if you’re salaried. If you have any further queries and to plan your taxes, you can get in touch with one of our Tax experts who can guide you to lower your tax outgo.
With the tax return filing season around the corner, many of you must be planning your taxes or reviewing your tax status. After putting so much effort in earning money, who likes paying taxes on their incomes?
No one does, right?. But, like it or not, as per the current tax regulations, if your income is anywhere above Rs. 5 lakhs in a financial year, you would have to pay taxes. However, income tax regulations are not so bad after all. They allow you to lower your tax liability by various options. It is because of these options that everyone plans their taxes to make most of it. Everyone wants to avail the maximum reduction in their tax liability. Tax exemptions and Tax deductions are two such options which allow lowering of your tax liability.
Tax Exemptions and Tax Deductions
To most of the people, these two terms sound similar. But they are not. Meaning and usage are completely different.
Most of us substitute tax exemption for a tax deduction and vice-versa due to lack of technical knowledge. They are, after all, getting a reduced tax liability. So, why bother with the details?
Let us now understand that Tax Exemption and Tax Deduction are two separate terms with separate tax treatments. Thus, knowing their difference is necessary.
Before moving on to the differences, it is important to understand the various heads of income as per income tax act. There are 5 sources of income namely:
- Income from Salary
- Income from House Property
- Profits/ Gains from business or profession
- Capital Gains
- Income from Other sources
An individual can earn income from either one or two or all the above heads of income. So in order to ascertain the total income an individual earns, we need to total the income from all the sources whichever is applicable. This total is called Gross total income.
Now that you have understood the concept of Gross total income, we will move on to see the meaning of Tax Exemption and Tax Deduction.
Tax exemption can be an income or an investment which is not taxable. These incomes or investments pertain to a specific head of income and can be claimed from those heads only. After deducting allowed exemptions from the specific income head, the different heads of income are totalled to arrive at the gross income.
For instance, under the ‘Income from salary’ head, you can claim an exemption for House Rent Allowance (HRA), Leave Travel Allowance (LTA) and Leave Encashment. After these exemptions are availed, the taxable portion of ‘Income from Salary’ would be obtained.
Tax exemptions can also be termed as tax free incomes. For eg, interest income of PPF, Maturity/Death benefit from life insurance policies. In short, incomes which are not taxable in the first place.
Read More :- Tax planning and its benefits
Now let us see what are Tax deductions. It also lets you lower your tax liability. Once you compute your gross total income, the Income Tax Act allows you to deduct some amount from your income. So that your income reduces and thereby reduces your tax liability.
This amount is based on certain investments or expenses you make in a financial year as per Income Tax Act called Deductions. Allowed deductions can be found in Chapter VIA of the Income Tax Act. This chapter contains sections 80C to 80U.
Common examples include life insurance premiums, health insurance premiums, ELSS investments, PPF investment, Repayment of principal component of home loan etc.
Moreover, there are certain other deductions available from a particular head, like standard deduction from salary income, Interest paid on home loan from “Income from house property” which help in lowering tax outgo.
Tax deductions are deducted from the gross total income or individual head to help save taxes.
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Now let us compare the two –
Exemption Vs Deduction
Tax exemption – The allowed exemptions are not included in your taxable income. They are deducted first to arrive at your gross total income.
Tax deduction – Deductions remain clubbed with your income. Once the gross total income is calculated, the deductions are deducted to arrive at Net taxable income. On this income, tax slabs are applied to calculate the tax amount.
Tax exemption – Exemptions are applied at each head of income to get the taxable amount of that particular head.
Tax deduction – Deductions are applied to your gross total income.
Tax exemption – It consists of those items which are not taxable.
Tax deduction – Deductions are those items which are taxable but because of the provisions of the act, their taxability has been reduced.
So, though exemptions and deductions have the same goal – reduction of your tax outgo, they are different. You should know the difference to file your taxes properly. Mistakes in tax filing can lead to penalties and unnecessary hassles. Though they sound technical the concept of exemptions and deductions is not complicated. Just a little understanding is all you need. So, the next time you file your taxes, know which items are exemptions, which are deductions and how they differ.
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In the Union Fiscal Budget 2020 unveiled by the FM, Nirmala Sitharaman announced a new and simplified income tax regime with revised income tax slabs and tax rates. This new tax system is optional to the taxpayers and it is not mandatory to opt for a new tax regime. To put it simply, the assessee can either choose the New Tax Regime or continue to follow the Old Tax Regime depending on what is best suitable from a tax planning point of view. As we have entered into the new Financial year 2020-21, it is important that we start planning for our taxes now. But this year, the first step in your tax planning would be to decide whether to go with the old tax regime or new one.
It is not very straightforward to decide and there are many things which you need to consider while making this decision. So let us start by understanding the change in slab rates in the following table:-
As you can see in the above table, the New Tax Regime has proposed lower income-tax rates, for income slabs up to Rs 15 lakh but the catch here is that the option for such a concessional tax regime requires the taxpayer to forego around 70 specified exemptions and deductions. Some of the major ones which are availed by most taxpayers include: –
- Standard deduction of Rs 50,000
- House Rent Allowance
- Leave Travel Allowance
- Deduction under section 80C of Rs 1.5 lakh which includes ELSS, PPF, life insurance premium, repayment of principal of housing loan etc..
- Interest paid on self-occupied property of Rs 2 lakh
- Health Insurance premium
- Interest paid on Education loan
So now the question arises, how does one actually choose which regime is better? To understand the implications of opting for either of the options, let us now look at the pros and cons of both tax regimes.
Pros of the new tax regime:
- Enhanced Liquidity: With more disposable income in the hands of the taxpayer due to lower income tax rates, assessees who could not invest in specified instruments due to certain financial or other personal reasons can now do so.
- Reduced documentation: As most of the exemptions and deductions are not available, the documentation required is lesser and the tax filing is easier.
- Flexibility in investments: The new regime provides taxpayers with a flexibility of customising their investment choices as per their wish. As earlier one was required to invest in certain prescribed investments only, to avail tax benefits.
- Some Exemptions are still allowed: There are few exemptions that are available in the new tax regime. Income from life insurance policies, retirement benefits, employer contribution to NPS under 80CCD(2) and Section 80JJAA [i.e. for new employment] are some which can be claimed.
Cons of the new tax regime:
Forgoing the Deductions: There is one but it is the biggest disadvantage to let go of almost all the exemptions such as Leave Travel Allowance (LTA), House Rent Allowance (HRA) etc and deductions available under chapter VI A of the Act that grant deductions under Section 80 such as 80C, 80CCC, 80CCD, 80D, 80DD, 80E, 80EE, 80G, 80GG, 80GGA, 80GGC, etc.
Pros of the Old System:
The old system inculcates a good saving system by enforcing investments in certain tax-saving investments. If individuals are left on their own to invest, they are most likely to not to do it. So the old tax regime provides a disciplined approach in investing by providing tax benefits on some investments. These investments provide for long term goals of an individual like retirement, children marriage and higher education.
Cons of the old system:
- Less Liquidity: In order to reduce tax outflow, taxpayers invest in certain investments to avail the maximum deduction which in certain cases leaves them with less liquidity which discourages.
- More Documentation: With the need to submit investment proofs to claim deductions, a taxpayer has to file a lot of documents which takes away some of your time.
- No Flexibility in investments: Even if the investor wants to invest in funds which are performing better, the investor can not, and has to invest in funds which are mostly risk-averse in nature and may not provide significant returns over the period of investments
Now that we have seen advantages and disadvantages of each option, let’s take a step ahead to see some calculations. Below table shows the minimum deduction amount to claim in old tax regime to make it a better option than new tax regime.
Let me explain one of the examples from the table. If a person earns 10 lacs of income and if he manages to claim a deduction of Rs.1.87 lakhs or more, then the old tax regime will be beneficial for him. But if he can claim a deduction of an amount less than 1.87 lakhs then the new tax regime will be beneficial. By looking at these figures, in most of the cases, old tax regime will be beneficial as people are able to claim this level of deductions
To conclude, I would like to say that in order to decide which option is better for you, calculate your tax outflow according to both the options and go for the one which has the least amount of tax. Also, keep in mind the pros and cons that we have discussed to make an informed decision.