Coming close to the end of the Financial year all of you might be thinking about How to save our Income Tax?
Deductions allowed under the income tax act help you reduce your taxable income. You can avail these deductions only if you have made tax-saving investments or incurred eligible expenses.
Equity Linked Savings Scheme
ELSS is also known as Equity Linked Saving Scheme. ELSS is a mutual fund invested in equity. It can be claimed as deductions under section 80C. However, there is a 3 year lock-in period. If the fund is held for 3 years without withdrawals, then it becomes applicable for a deduction. The interest income received on ELSS is tax-free.
Let us take an example, Mr. Manish has started investing in an ELSS fund, to avail of the tax benefit under section 80C. But in the 2nd year of investing in this fund, he withdrew the whole amount due to an emergency that occurred. Due to this withdrawal made by him, the fund will now be taxable and the benefit that he took under section 80C is now taxable too.
If he had to keep the fund for 3 years without any withdrawal made, then the income received after 3 years would be exempt from tax and he could also avail the benefit under section 80C.
House Rent Allowance
House Rent Allowance is otherwise known as HRA. It is an allowance given by the employer, to those employees who stay on rent. It forms a part of the salary break up. It has a three-step calculation, which we will see later. Many people still do not know how to claim HRA. You can also claim HRA by paying rent to your parents if you are staying with them.
Let us take an example:
Mr. Vishal is staying on rent and paying ₹15000 per month. His employer gives him an HRA of ₹14000 per month. His basic salary is ₹30000 per month. Find out how much HRA, he can claim.
He can claim the minimum of the 3 steps given below:
- HRA = (₹14000*12) = ₹1,68,000
- Actual rent paid – 10% of basic = (₹180000 – ₹36000) = ₹1,44,000
- 50% of Basic = ₹180,000
Therefore the amount that he can claim as exemption is ₹144000.
Tuition Fees or Child’s education fees
A person’s child’s school fees also qualify as a deduction under section 80C. To claim this deduction, the receipts of the school fees are required. You can claim this amount only for your child. Many people do not know about this tax-saving tool and that it comes under section 80C. The maximum limit under this section is ₹150000. So you can claim upto that amount under this section.
Let us take an example:
Ms. Shama, has 2 children, Aryan and Zoya. They are twins aged 12 years old. They go to one of the most expensive schools in their area. The school fees itself come upto ₹180000 annually. Ms Shama claims this amount under section 80C but only upto the maximum limit of ₹150000.
This deduction is allowed under section 80E. When you take an educational loan, the interest that you pay on this loan qualifies for deduction under this section. This is applicable only on education loans, taken for higher studies, this means that any course done after your Senior Secondary Examination or it’s equivalent, will only be considered. Vocational courses are also considered. Only an individual taxpayer can claim this amount, a HUF or any other taxpayer cannot claim the same. The loan can be taken in your spouse, child’s or any student that you are a legal guardian for.
Let us take an example: Mr. Anil, who has completed his graduation, wants to pursue his further education in the finance industry abroad which is ₹30 lakhs for 2 years, so he takes an education loan for the same. The interest rate for such loan is 9.5%. So the whole interest amount that he has to pay towards the loan is completely exempt from tax.
Principal Amount on Housing Loan
The repayment of the housing loan taken by an individual or a HUF can be claimed under section 80C. The maximum limit is ₹150000. This limit is the total of all the tax-saving tools that are available under section 80C (i.e. ULIP, NSC, 5-year Fixed Deposit, PPF, etc). The tax benefit of the home loan can be availed only once the construction of the house is complete. The registration and stamp duty fees can also be claimed under section 80C, even if a person has not taken a loan. If the assess transfers the house property, which he has claimed the tax deduction on, before the completion of 5 years from the end of the financial year in which he has obtained possession, then such deduction will not be allowed. All the deductions claimed earlier will now be taxable as income.
For example: If Mr. Akil has taken a home loan of ₹60,00,000 and is paying an annual EMI of ₹5,00,000. Out of this EMI, ₹200,000 comprises the principal amount and ₹300,000 is the interest amount. So Akil will get only ₹150000 as a deduction under section 80C since that’s the maximum limit.
Interest Income on Loan
The tax deduction on interest income on housing loan, is allowed under section 24. As per this section, the income from house property received will be deducted from the interest amount paid on the loan, if the loan was taken for the purpose of purchase, construction, repair, renewal, reconstruction of a residential house property.
If it is a self-occupied property, then the maximum deduction available is ₹2 lakhs. Whereas in the case of a let-out property, there is no maximum limit. The whole interest amount can be claimed as a deduction.
Let’s take the above example only: For example, Mr. Akil lives in a house on which he has taken a home loan of ₹6000000/-, and is paying an annual EMI of ₹500000/-. Out of this EMI, Rs. 200000/- comprises the principal amount and Rs. 300000/- is the interest amount. Then from that ₹300000/- of interest, he will get a maximum deduction of only ₹200000/-, since it’s self-occupied. If it had to be let out, then he would have got the whole of ₹300000/- as a deduction.
Interest Income on savings bank account
The interest that is received from the savings bank account qualifies for deduction under section 80TTA. This deduction has a maximum limit of ₹10000/- on the interest amount. If the interest amount is over and above ₹10000/-, then it will be taxable. This deduction is applicable to savings accounts in banks, cooperative banks and post offices. It is applicable to individual taxpayers and HUF only.
For example, Mr. Sunny opened a savings bank account with ₹100000/-, a few years ago and didn’t touch the money in this account. The balance as of today is ₹115000/-. So under section 80TTA, Sunny can claim ₹10000/- as a deduction, but ₹5000/- will be taxable.
Profit from selling shares
If an investor buys shares and holds them for more than a year and then sells it at a profit, it will be considered as a long-term capital gain. This capital gain is exempt from tax. There is no tax applicable in the case of long-term capital gains of shares, in India. However, tax is applicable in the case of short-term capital gains in shares. If the shares are sold at a profit, before the completion of 1 year, it will be considered as short-term capital gain and a flat rate of 15% will be charged as tax.
For example, Mr. Shivam bought 200 shares for ₹250 each and after the completion of one year, he sold it at ₹300. So the profit made is ₹10000/-. The whole amount of ₹10000 will be exempt. If he had to sell the shares before the completion of 1 year, he would have to pay a tax of ₹1500/-.
Leave Travel Allowance (LTA)
LTA can be claimed under section 10(5). This amount is tax-free, subject to certain conditions. It is compensation given by the employer to remunerate the employee due to the tax benefit attached to it. The exemption is applicable to leave taken anywhere in India and is limited to only the travel costs that actually occurred and not the whole cost of the trip. The family includes spouse and children (not more than 2), in the case of parents, brothers and sisters, they should be wholly or mainly dependent on the employee.
For example, if the employer provides ₹20000 as LTA, but the employee’s actual travel expenses come up to only ₹15000, then he can claim only ₹15000 as an exemption.
The deduction that is allowed for mediclaim comes under section 80D. The premium paid towards a mediclaim policy can be claimed as a deduction under this section. A person can take mediclaim policies in the spouse, children and dependent parent’s names and also claim a deduction. The maximum amount one can claim is ₹55000/-. A person can claim ₹25000/- maximum for self, and ₹25000/- for their parents and ₹30000/- in case their parents are senior citizens.
For example: If a person is paying a premium of ₹20000/- towards his mediclaim policy and ₹30000/- for his parents, who are not senior citizens, then the total amount that he can claim will be ₹45000/-, since his parents are not senior citizens, they are allowed only ₹25000/-. If they had to be senior citizens, then the whole of ₹50000/- could be claimed.
5 years Fixed Deposit with banks and post office
If a person has taken a fixed deposit for a term of years or more, then they qualify to claim deduction under section 80C. However, if the fixed deposit is taken for a term, less than 5 years, then they cannot avail the benefit under this section. The maximum amount available for deduction is Rs. 150000/-
Example: Ms. Khushboo, has taken a fixed deposit of ₹500000/- for a term of 10 years. So she is eligible to claim a deduction, under section 80C to the maximum of ₹150000/- only. If she had to take a 2-year deposit, then she wouldn’t be able to take the benefit under section 80C.
Public Provident Fund
Public Provident Fund also known as PPF. This is one more tax-saving tool that qualifies as a deduction under section 80C. This is one of the best tax-saving tools since the income earned is fully exempt from tax. The amount invested can be claimed as a deduction under section 80C. The maximum deduction that can be claimed under section 80C is ₹150000/- and an additional ₹50000/- under NSC.
Let’s take a situation: Mr. Wayne opens a PPF account on 1st April 2014, he contributes the maximum amount allowed in the PPF account which is ₹150000/-. So he can claim this whole amount under section 80C.
Hindu Undivided Family
HUF is one of the biggest tax-saving tools. Apart from salary income, any other income can be transferred to the HUF account, to avail of the tax benefits under section 80C. The tax slabs are the same for a HUF as that of an individual. It is very useful for married couples as well.
Let’s take an example in the case of a husband and wife: If either the husband or wife happens to be holding an ancestral property that accrues rental income, they can transfer this income to the HUF account and it will be taxed as the income of HUF. For example, a person earning a salary of ₹700,000/- p.a. and receiving ₹600,000/- p.a. as rental income from their ancestral house, and if he transfers the rental income amount to the HUF account, instead of adding it to his income, he will have to pay only ₹115,000 as tax. But if he clubs the rental income to his salary, he would have to pay ₹215,000/-.
Dividends on mutual funds
Any dividend received from any mutual fund is tax-free in the hands of the investor. However, the Dividend Distribution Tax is levied by the Indian Government on various companies on the dividend paid by them.
For example, Mr. Yogesh has invested ₹400000/- in an equity mutual fund and is receiving a dividend of ₹40000/-, then the whole amount of ₹40000/- will be exempted from tax in the hands of Yogesh.
Gifts received from blood relations are exempt from tax. However, if you receive gifts at the time of marriage from ANYONE, then too, it is fully exempt. Gifts received from anyone other than blood relations will be exempt up to ₹50000 but if the amount received, is over and above ₹50000 then the whole amount will be taxable.
Let’s take an example: If Mr. Sagar receives a gift of, ₹30000 from friend A and ₹20000 from friend B, then the whole amount of ₹50000 will be exempt from tax. Now suppose Mr. A gave ₹40000/-, then the whole of ₹60000 will be taxable in the hands of Sagar.
Life Insurance Premium
Any life insurance policy that you take and the premium that you pay for it will qualify as a deduction under section 80C. The maximum premium amount that a person can claim as deduction under section 80C is ₹150000/-. Life insurance includes all policies like ULIPs, term insurance, endowment policies, child plans, etc.
For example, Mr. Sanjay has taken a life insurance policy and is paying a premium of ₹100000/-, then he can claim the full amount as deduction under section 80C, But only up to ₹100000 and not more than that.
Donations made can be claimed as a deduction under section 80G. Here we have 2 types of donations. There are certain government trusts like Prime Minister Relief Fund, National Sports Fund, National Cultural Fund, Andhra Pradesh Chief Minister’s Cyclone Relief Fund, and few others, which provide 100% tax benefits if donated to these Trusts. Whereas other governments and private trusts provide only 50% tax benefits if donated to them.
For example: If Mr. A donated ₹200000 towards the Prime Minister Relief Fund, then the whole amount can be claimed as a deduction under section 80G. If he donated the same amount to the Jawaharlal Nehru Memorial Fund (doesn’t qualify under the 100% deduction Trusts), then he would be allowed only ₹100000/- as deduction, under this section.
National Saving Certificate
The amount invested in the NSC can be claimed as a deduction under section 80C. There is a lock-in for 5 years, which means that the person cannot withdraw the money for 5 years. There is no maximum limit that you can invest in this fund. However, the interest is taxable. A person can only claim ₹150000/- as the maximum deduction under section 80C.
Example: If Ms. Chitra invests ₹200000 p.a. in NSC, then she is eligible to the maximum benefit of only ₹150000. It doesn’t matter how much you invest, the maximum amount that anyone can claim under section 80C, combining all the avenues available under this section, should be ₹150000.
Deductions under section 80U for the handicapped
If a person is handicapped partially or fully, they can claim deductions under section 80U. If a person has a dependent, then he can claim the amount under section 80DD. If a person is suffering from any disability not less than 40%, he/she can claim an amount of ₹50,000 and if the person is suffering from permanent disability, then he/she can claim ₹1,00,000. Only a certificate of being handicapped, from a government hospital, is required as proof.
Example: Mr. Vishal is permanently handicapped and his bills come up to ₹150000, then he can claim only an amount of ₹1,00,000 as deduction under section 80G.
Interest Income on a NRI’s account.
An NRI has the option to open either of the 2 accounts, i.e. NRE (Non – Resident Rupee) and NRO (Non-Resident Ordinary Rupee). The income earned on or transferred to the NRE account is tax-free as this income is earned abroad. On the other hand, the NRO account is opened, if the NRI is earning any income in India, he can deposit it in the NRO account only and not in the NRE account.
Example: Ms. Melanie, is an NRI, she has an NRE as well as an NRO account. She has a flat in Mumbai and is receiving rent of ₹20,000 every month and is depositing it in the NRO account. This rent will be taxable in her hands. But the income she earns abroad is transferred to the NRE account, will be tax-free, as the income is not earned in India.
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The Income Tax Department launched its new e-filing portal www.incometax.gov.in
New e-filing Portal Features And Benefits are covered in our video.
b) Easy to use
c) Multiple login Options
d) Single Dashboard
2. Income tax payment on same portal
a) Multiple Payment Options
b) No challan needed
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3. Easy to fill details
a) Interactive Q&A format
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Date of filing ITR – Extended from 31st July to 30th Sep
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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:
Related Article : New Tax Regime Vs Old Tax Regime -Which one should you opt for?
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?
Income Tax Returns (ITR) for individual taxpayers have to be filed by 31st Dec 2020. This means that it’s time to evaluate your finances and declare all sources of income, so your taxes can be filed correctly. While the process of filing your ITR has been one which has traditionally been riddled with complicated forms and procedures, the government has taken active measures in order to make this a more streamlined activity. The Union Budget has been introducing some radical changes which have come into effect in the last few years. While these changes may at first glance look very long drawn and complicated, they have in fact reduced the pressure for the taxpayer.
If You have not filed your Income Tax Return – File Now!
One such change introduced in the last few years is a relaxation of the rules of long-term capital gains (LTCG) disclosures. Earlier, when filing your ITR, you had to declare LTCG on each equity investment individually. However, since 2019, the Central Board of Direct Taxes (CBDT) brought into effect the rule that only the net consolidated amount generated through LTCG from equity-related investments need to be declared. For those taxpayers who earn over Rs.1lakh from equity investments during the financial year, this decision brings a great sense of relief. The paperwork associated with filing LTCG on equity investments of large amounts has been reduced significantly, thus simplifying the tax filing process.
Related Article: Know the Tax Treatment for Mutual Funds
What is the LTCG on Equity?
As per the Finance Bill 2018, LTCG from listed shares or mutual funds which are equity-oriented were liable to be taxed. On April 1, 2018, it was also announced that LTCG incurred through the sale of any instrument which has been held for more than 12 months will be taxed at 10% – with the exclusion of cess and surcharge – if the LTCG amount exceeds Rs.1lakh.
It is important to note here that LTCG up to Rs.1lakh is exempted from being a taxable amount. There is also something known as the grandfathering process, according to which if you have bought equity shares or mutual funds before 31st of January, 2018, the gain which has been calculated up to that date will not be taxed. Short-term capital gains (STCG), however, will still fall under the radar of taxes at 15%, with the exclusion of cess and surcharge.
Where do I disclose LTCG?
Apart from LTCG, another important thing that needs to be reported is LTCL or a long-term capital loss. This is important because after calculation, if LTCL is seen to exceed LTCG, not only will the tax on LTCG be nullified, the remainder of the loss incurred can be used in the subsequent 8 financial years to nullify against the capital gains earned.
LTCG and LTCL both have provisions to be disclosed in ITR-2 and ITR-3 forms, as per the CBDT’s mandate. There are specific columns where the taxpayer has to mention the net amount generated. For instance, if you are filing an ITR-2 form – for those HUFs (Hindu Undivided Families) or individuals who do not earn income from profits through profession or a business – LTCG must be disclosed in Section B4. Likewise, if you are an individual or HUF who earns income from profits via a profession or business, you need to file ITR-3, where Section B5 will allow you to disclose the details of LTCG.
All in all, we can say that the new reforms introduced by the government from time to time have been made keeping the ordinary taxpayer in mind. As the new rules are implemented stringently, it’s important to keep a track of all the changes which have been introduced so you don’t end up filing the incorrect taxes!
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.
Oh. So is it possible to do so? But why?
Your salary is made of many components like basic salary, allowances (taxable and exempt), perquisites etc. While calculating taxable salary, some of these components are taxed as per Income Tax Act, whereas some stand exempt under the law or partial for some of the cases, subject to conditions. We will give you some of those items or parts of the salary structure, which would help you take more salary to your home.
HRA (House Rent Allowance)
You may be happier to go for flat provided by your employer (if you are that lucky!), rather than stay in rented house and pay the rent. However, Income Tax Act has different treatments for the housing alternatives, in case you don’t own your house or you are staying in any other town (where you don’t own your house).
However, there are few points to be noted:
- If you stay in your own house, it is better to have lower HRA in your basic salary structure if it is possible.
- If the house is owned by your parents, grandparents etc., you can still pay them rent, and claim the HRA exemption.
- If it is possible to negotiate, then keep the HRA around at the similar level of rent paid, which will exempt the allowance fully.
Related Article :- Why Tax Planning Is So Important That It Can’t Be Missed
Car purchase or perk
You may be thinking of owning of car and if yes, this pointer is for you. There could be more than one scenarios.
- If your employer lends you loan for car purchase, it can be easily accepted as the EMIs are deducted from the taxable salary and such portion of salary is tax free. However, only hindrance could be that you don’t own the car till all the EMIs are paid off as in the case of external car purchase.
- If you are amongst those very few people, to whom the employer offers car as a perquisite, then you are the luckiest of luckiest. This is because, in such a case, perquisite in the nature of car, is taxed only for Rs.1800- Rs.2400 per month if you are using it for personal purposes as well. Only drawback here could be, that you don’t own the car, but on quitting the job, you can surely buy it at approval of company.
- There could be one more situation where the you own the motor car and expenses will be reimbursed, then also Rs.1800-Rs.2400 per month is taxable as perquisite, if you use it for both professional and personal purpose.
As a salaried individual of a private sector company, you could only rely on EPF as your retirement corpus. However, if you have education loan which has interest rate @ 11-13% then, you may rethink on that loan repayment.
EPF pays interest for almost around 8.5%, so it would be better to pay off the education loan rather than investing in EPF. This will result in 2 benefits.
- Tax benefit under section 80E for repayment of interest on education loan.
Law does not put upper threshold for interest repayment in an year. So, we can draw an inference that if we repay the whole loan in a year, we are able to claim total interest that we paid in the same year under section 80E.
- Prepayment of the education loan by routing EPF investment amount to the same, will result in elimination of almost 2-4% interest payable. Best even because, EMIs are post tax commitments. This makes prepayment of education loan land a double bonanza.
There are many other allowances and perquisites which are worth mentioning here.
- Education or Training
If the employer reimburses the course expenses or training expenses or if he himself provides such course or training, then in such a case, it is exempt perquisite. So, if you want to earn and learn, your employer can sponsor you and that too without any tax consequence.
- Sodexho or Other Meal Coupons
These are part of your salary but are given out before the month starts and you can spend them wherever they are accepted. You are not required to submit proof of spending them over, so rest assured you enjoy them without worrying about tax effect.
Not an allowance, but gratuity is a long term benefit and is payable only if you complete service of 5 years in the same company. Hence, it is better to get rid of this component and adjust it under some other head, if you don’t plan to stick around much in one company for long.
This is for vacation expenditure for 2 journeys in a block of 4 years. Make sure that your salary structure has this component and be sure that you maintain appropriate evidence for claiming the exemption of the same.
While we are striving hard to make money, income tax takes part of it, (for high tax brackets, at almost 30% of the salary). So, if allowed, it is wiser to structure the salary or apply your existing structure in such a way that it will result in minimum tax effect.
Income Tax Filing/Planning Seems Confusing? Minty Ko Puchha kya?
Tax Awareness’ is keeping yourself up to date with current tax rules made. Tax is vast and it is very difficult too, to keep up with the changes in these rules every year. And it is because of this lack of awareness, people just pay the tax that gets deducted from their salary. They feel that tax is so complicated, that is better to just pay it off. Some people have had bad investment experiences, so they do not want to take the risk of investing again. All these problems are caused due to unawareness of the deductions available.
If asked, what is basic tax deduction that everyone knows about, all will say section 80C, but people are still unaware of the investment tools available under it. Many people completely exhaust their deductions under this section, by investing in popular investments like PPF, life insurance, principal amount of the housing loan, fixed deposits, etc. They invest the maximum amount which is Rs. 1.5 lakhs p.a.
A person’s 3 to 4 months salary gets deducted in a year, towards paying taxes. Can’t believe it? well it’s true. I’m sure those of you who are paying taxes without trying to save them, are now thinking twice. You should, you will be shocked to see the difference of how much you can save, and how much you were actually paying. A normal salaried man will be clueless as to what are the changes in the tax rules, so he/she should seek a consultant’s help. There’s one more added benefit to savings your taxes, you are also creating wealth for your future use. For example, if you invest in an ELSS fund, you are claiming your tax deduction under section 80C, as well as building up a corpus for the future.
This table will show you the comparison of the tax treatment, of some of the popular investments under section 80C:
|Tax savings tools||Lock in duration||Pre – tax rates||Post tax amount|
|Equity Linked Savings Scheme (ELSS)||3 years||12% – 14%||After the lock in period, gain more than 1 lac is taxable at 10%.|
|Life Insurance||5 years minimum||4 – 6%||The claim is tax free|
|National Saving Certificate||5 years||6.8%||Interest is taxable|
|Public Provident Fund||15 years||7.10%||Tax free|
|5 year Fixed Deposit||5 years||5.5-6.7%||Interest is taxable|
Now look at the investment avenues, under section 80C, and see where you can save more :
1. Registration charges and stamp duty for a house:
The registration fees you pay for registering your documents of the house and the stamp duty that you pay, these amounts can be claimed as deductions under section 80C. Many people don’t even know that such a deduction exists. Well now you know.
2. Sukanya Samriddhi Account:
In this scheme, you can open an account on behalf of your minor daughter till the age of 10. Any amount deposited in this account would be eligible for deduction under Section 80C. Further, this account can be opened for a maximum of two girls and in case of twins this facility will be extended to the third child as well.
3. Children’s education fees:
Your child’s education fees can also be claimed under this section. Many people are not aware of this deduction as well. Of course, you have to show the receipts of the school fees to claim as deduction. Those people without children, cannot make such claims.
4. Public Provident Fund:
also known as PPF. It is one of the best assured investments. It is completely tax free. The current rate of interest is 8.7% it’s for a term of 15 years, with minimum amount Rs. 500 and maximum amount Rs. 150000/-. The only problem is that the interest rate is not fixed.
5. Provident Fund (PF) and Voluntary Provident Fund (VPF):
In your PF, both you and the employer contributes, while the employer’s contribution is exempt, your contribution is available for deduction under section 80C. VPF is the extra contribution that you make apart from your contribution with your employer.
6. Life insurance premiums and ULIPS:
Life insurance premiums take for self, spouse or children only, can be claimed as deduction, under this section. If you are paying more than one premium, it can be included in this deduction. The same goes for ULIP.
7. Equity Linked Saving Schemes (ELSS):
If anyone invests in this fund, there is a lock in period for 3 years. This means that you cannot withdraw the money for 3 years. So if this fund is kept for 3 years, then you are eligible for deduction under this section.
The EMI consists of 2 amounts, Interest and principal amount, so in this case, only the principle amount is up for deduction here. Interest amount can be claimed as deduction under section 24 as a loss from house property.
9. POTD – Post Office Time Deposit:
They are similar to fixed deposits. The interest earned is taxable but can be claimed under this section. The rate of interest is compounded quarterly but paid annually. Time deposit of tenure 5 years is eligible for deduction under 80C.
10. Fixed Deposits (FDs):
If fixed deposit, is kept in the bank for 5 years, then it is eligible for deduction. Please note that this FD needs to be “Tax Saving FD”. Therefore, one needs to mention in the bank that they want to invest in tax saving FD and not just a regular 5 years FD. However, the interest income will be taxable.
This is a 5 year small saving scheme, available for deduction. The interest is fully taxable but as it is reinvested, the interest is also eligible for 80C deduction.
The interest income is chargeable to tax but amount invested can be claimed as deduction under this section.
Everyone wants to save tax, but awareness is the barrier. These tax saving tools can help you get yourself started. As mentioned earlier, that tax is vast and only with an expert’s help, you can make use of all the tax deductions properly. So it’s better to take the help of an expert, so you can save more of your in hand salary. If you can save it, why pay it!
‘Tax’ a most feared word. No one likes to pay tax, since it’s a compulsory contribution. People think that paying tax is a waste of their hard earned money, because money is going out in form of tax but the money is not reaching the right hands. The more you earn the higher tax bracket you fall into. But having said that, there are plenty of tax saving tools out there. Of course it’s not possible for a layman to know all the tax rules, but if the tax cut is a huge amount then tax planning is required.
What is tax planning?
Well, let’s just say, if you do tax planning, then you can take more of your hard earned money home. Tax planning is making maximum use of the tax saving tools, to take more of your earnings home. Of course everyone’s earnings, situation, assets, etc are different, so different tax rules apply to different people. People think it’s normal that their tax gets cut, because they earn that much, but what they don’t realize is that, if they put in a little efforts, they can save part or the whole tax that gets cut. If they are not sure of how to save the tax, then take help of a consultant. Here also people make a fuss that fees are expensive. What is not considered is that, the tax that is getting cut is much more than the fees of the consultant.
Now a days, people are realizing the importance of tax planning. They are actually taking it seriously and showing in interest saving their taxes. But still in our many years of experience, there are some that do not know the basic deductions. There are some who have exhausted the basic deductions and still a huge chunk is getting cut. This is because they do not know about the other tax saving tools. One of the main reasons as to why people do not know the tax rules or tools, is because some rules change every year and it is difficult to keep up for a normal person. Tax is complicated, there’s only so much one can learn about the deductions, it is not possible to learn everything. Even chartered accounts and other tax experts reach where they are after years of experience and training.
Here are some pointers to keep in mind, before you think ‘It’s okay if my tax is getting cut’:
Why Pay, When You Can Save
Even though the Govt. has made tax a compulsory contribution, tools to save the same contribution is also given. If you don’t know about the tax saving tools or you’ve not updated yourself on it or not aware of the changes in the tax rules. then take help of a consultant. So when you can save and take the award of your hard work home, why let it go.
Must read: Tax Planning demystified
Hard Earned Money
Nobody works for free, unless you are doing charity work. People work so hard and put in all their efforts just so that, their family can live a better life. But it’s such a disappointment when they realize, that their 2 to 3 months salary goes in paying annual tax. When you’ve worked so hard for it, your are completely entitled to it. So tax planning is very necessary to take more of your salary home.
Invest The Surplus
Is your salary going in paying tax and the rest to meet your monthly expenses that very little is left to invest? This is where tax planning can help. After your tax planning is done, you’ll be surprised to see how much you can save. That money saved can be invested in tax free investments. This way you can earn out of the tax saved.
Some people don’t realize that they can bring their tax down to nil if they use the tax saving tools to the maximum. Tax planning is very necessary, as the tax saved can be invested in tax free instruments and the amount gained can be used to fund a certain goal. So put some thought into saving your taxes, don’t let it just get cut.
So as you can see, that all these pointers are for your benefit only. Once you do your tax planning, you’ll be surprised at how much your gonna save. Tax planning is very important and it’s good to see that people are making efforts to save their tax. At the same time, it’s also sad to see that some people are not doing anything to save their taxes, either because they do not know the basic tax saving tools or don’t want to seek a consultant’s advice because of the high fees. Having said that, there are many ways in which people can be helped. Tax planning seminars, tax planning workshops, there are companies which provide such services. One can even update themselves on the new tax rules. So save as much as you can, after all it is your hard earned money.
For many people, tax planning is all about how to save taxes. However, there are various sections under Income Tax Act of India in which you can claim specific expenses as deductions. To reduce taxes it is not only important to invest but it is important to properly arrange financial affairs as well. To reduce the tax burden for its citizens, Indian Government each year through the budgetary proposal introduces legitimate ways to save on tax.
It is important for every taxpayer to know which all expenses are allowed as a deduction for tax planning purpose. Let us discuss few of the common expenses that can be claimed as deductions under various sections of Income Tax Act in India.
- Children Tuition Fees :- Taxpayers are allowed to claim tuition fees paid on two children’s education in a Financial Year. Under section 80C of Income Tax Act India, you can claim up to Rs.1.5 lacs as a deduction towards actual tuition fee paid for dependent children. You can claim tuition fees paid for two dependent children. However, both husband and wife have a separate limit. Therefore, if both are working, each parent can claim benefit up to two children.
- Stamp duty and registration charges paid on the purchase of a new house :- Stamp Duty and Registration Charges are major cost component of new house purchase. It’s around 8% to 10% of your new house cost. To incentivize taxpayer, Government has included stamp duty and registration charges as an eligible deduction from the total income under the section 80C of income tax act.
- Expenses incurred on specified diseases like AIDS, Cancer or other neurological diseases :- Under section 80DDB a taxpayer can claim amount spend on medical treatment of self or dependent on specified diseases like AIDS, Cancer or other neurological diseases. Point to remember here is the condition to receive such tax benefit is that there is no medical reimbursement by any insurance company or employer for this amount. The maximum limit on tax benefit is as follows.
|The maximum limit on tax benefit||A.Y. 2019-20 onwards till date|
|Individual below < 60 Age||40000|
|Individual above > 60 Age but below < 80 Age||100000|
|Individual above > 80 Age||100000|
Amount allowed as deduction is the least of above specified amount or actual amount spent.
- Medical Expenses incurred on expenses on disable dependent :- To provide relief to a taxpayer who has disabled dependent or dependent with a severe disability can seek a tax deduction for expenses on medical treatment or amount deposited under a prescribed scheme for the maintenance of the dependent. Under section 80 DD for F.Y. 2020-21, if the disabled dependent is suffering from 40% or more disability, a maximum limit on amount can be claimed as a deduction is Rs. 75,000/- and the same for a disabled dependent who is suffering from severe disability i.e. 80% or more disability, a maximum limit on amount can be claimed as the deduction is Rs. 125,000/-.
- Deduction for rent paid by an individual :- Section 80GG can be claimed as a deduction for rent paid subject to some condition. You get the lowest of the following values as tax-free deduction
- Rs.5000 per month
- 25% of total income (total income is calculated excluding capital gains and other deductions)
- Actual rent exceeding 10% of income (income would be calculated excluding capital gains and other deductions)
Even if you are self-employed professional, businessman or salaried individual you can claim 80GG benefit. The most important condition to claim benefit under this section is you should not have received HRA benefit during the years and you must pay rent for the house you reside in. There are few more important conditions to be fulfilled to get the benefit under section 80GG. The amount is rather small but a rupee saved is rupee earned.
These were some of the important expenses which can help you save taxes.
Income tax is always a complicated subject. It’s difficult to understand for a layman. For a salaried person understanding complicated and confusing tax terminology is a nightmare. Through this article we will make your life simple and make you understand tax jargon in an easier manner. In today’s article we will discuss about the basic difference between Exemption, Deduction and Rebate.
Is an amount which is part of your total income but it’s exempt from tax. It means while calculating taxable income some sources of earning is exempt. For example u/s. 10(10D) maturity proceeds of Life Insurance policy is exempt from taxes. In this case while calculating taxable income we will not include life insurance maturity proceeds. In simple term, Tax exemption means tax free sources of earning. It’s advisable to include more and more of exempt sources of earning which will help us to reduce taxable income and in turn tax liability.
Few of the popular example to understand Exemption are
- From salary income based on specific calculation House Rent allowance (HRA) is exempt
- Gratuity received on retirement from employer is also exempt upto a specific amount
- Maturity proceed from PPF account is exempt
It is an amount invested or expenditure allowed under specific section to be reduced from total taxable income. For example, if we invest in 5 year tax saving Bank FD, the investment amount is allowed to be deducted from total taxable income. Amount paid towards mediclaim policies for self and dependents is allowed to be deducted from total income.
Few of the popular example to understand deduction are
- U/s. 80C – Investment or expenditure upto 1.5 lacs p.a. is allowed as deduction from total income. For e.g. Investment in ELSS Scheme of Mutual funds or expenditure towards school tuition fees for two kids are eligible expenses for 80C.
- U/s. 80D – Payments for medical insurance premium for self & dependent and for dependent parents is allowed as deduction from total income.
- U/s. 80DD – Expenditure towards medical treatment of disabled dependent is allowed as deduction from total income upto a specific amount.
It is a different concept all together. Tax Rebate is an amount which is deducted from total tax payable.Unlike deductions which are reduced from total income, Tax rebate is an amount which is deducted directly from your taxes.
An individual can claim rebate of Rs 12500 if he has taxable income less than Rs 5 Lacs. In this case Rs.12500 is reduced from total tax payable before education cess.
To conclude, All three are an important tools for tax planning. Understanding of these three tax terminology will help us to increase tax free income and know tax deductible investment / expenditure. Exemption and Deduction will reduce taxes indirectly. While tax rebate will help us to reduce tax liability directly.