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What is Tax Planning ?

Tax planning is an essential part of your financial planning. Efficient tax planning enables you to
reduce your tax liability to the minimum. This is done by legitimately taking advantage of all tax
exemptions, deductions rebates and allowances while ensuring that your investments are in line
with your long term goals.

What tax planning is not...

• Tax Planning is NOT tax evasion. It involves sensible planning of your income
sources and investments. It is not tax evasion which is illegal under Indian
laws.
• Tax Planning is NOT just putting your money blindly into any 80C
investments.
• Tax Planning is NOT difficult. Tax Planning is easy. It can be practiced by
everyone and with a very little time commitment as long as one is organized
with their finances.

Planning taxes this year

a. You will have certain needs and goals to meet. Understand what those are and then figure out
how to maximize tax efficiency in your effort to meet them. Tax planning should be a part of the
overall financial planning that you must do.

For instance, you might be getting married and need to buy a house. In this situation you need to
get insurance to protect you spouse if they are financially dependant upon you, as well as you
need to get a home loan. What should you prioritize and what do you have the capacity to afford?
If you blindly put money into an insurance policy, it might not even be sufficient to give you
adequate insurance cover. However, if you choose to pay off the principal on your home loan,
that could be a better option in this situation.

b. Do not blindly invest money with the the first agent that you might come across. You might
end up making mistakes. A lot of people end up buying insurance policies with minimal
insurance coverage or putting money in instruments where they cannot access the money when
they need it.

c. Do not make last minute decisions just because your payroll department has reminded you that
the internal deadline for submitting proofs is approaching. Tax planning involves planning in
advance to avoid the last minute scramble.
Selecting tax saving investments

You should think about the following criteria, before selecting your tax saving investments for
the year:

• Liquidity: How quickly will you need the money? Will you need to access the
money within the next year or two years or over what duration ?
None of the above instruments let you withdraw your money quickly, in fact
there is a minimum three year lock in for all tax saving investments.
• Risk and Return: How much risk do you want to take. There is a trade off
between the two, some instruments are very low risk, but as a result they
give low returns which are capped.
• Inflation protection: The instruments that give you a low return typically
are the worst type of investments regarding inflation. This is important
because many of the instruments give you a fixed rate of interest, and lock in
your money for a long period. This is not a good protection against inflation.
• Tax Exemption: All tax saving investments under Section 80C are alike in
one respect that they are tax exempt when they are invested. But they differ
with respect to the tax on the income you earn from such an investment as
well as the tax on the maturity of the investment

What are the most commonly available deductions?

There are 4 most commonly used deductions that most people can avail of. These are popularly
known by the section of the Income Tax Act under which they appear. Click on each of them to
get more details.

80C deduction: Up to Rs.1 lakh, and used towards certain investments, payment of insurance
premium, repayment of home loan principal amount, provident fund etc.

80D deduction: Up to Rs.15,000, and used towards annual medical expenses

80E deduction: Deduction of entire amount of interest paid on higher education loan for any
family member

80G deduction: Deduction for contribution to charitable organization

In addition to these, there are numerous other deductions that are less common or that might not
usually apply to you. Please check with your tax advisor if you might be eligible for any other
deductions. Click here to read more about them.

Less Commonly Used Tax Deductions


Under section 80 of the Income Tax Act, there are other less commonly used deductions. Please
check with your tax advisor on how to use them, if you are eligible for these.

Section Quick Description of Deduction Limit

Maximum upto Rs.1 lakh, if used with


Deduction in respect of
80CCC 80C and 80CCD, in aggregate the limit
contribution to pension fund.
is Rs.1 lakh.

Deduction in respect of Maximum upto Rs.1 lakh, if used with


80CCD contribution to pension scheme 80C and 80CCD, in aggregate the limit
notified by Central Government. is Rs.1 lakh.

Deduction in respect of Rs.50,000, irrespective of the amount


maintenance including medical incurred or deposited. However in case
80DD treatment of a handicapped of disability of more than 80% a higher
dependent who is a person with deduction of Rs.75,000 shall be
disability. allowed.

Deduction in respect of medical Actual incurred, with a ceiling of up to


80DDB
treatment Rs.40,000.

Deduction in respect of rent paid


by self-employed or those not
80GG Maximum of Rs.2,000 per month
receiving HRA in their
employment.

Donation for contribution given


Amount donated to political party is
80GGC by any person to any political
fully exempt
party.

80U Deduction in case of a person Rs.50,000, irrespective of the amount


with disability incurred or deposited. However in case
of disability of more than 80% a higher
deduction of Rs.75,000 is allowed.

80C Deduction:Check out the eligible instruments

This allows a deduction for specific investment, contribution, deposits or payments made by the
taxpayer during the tax year.

Who is it available to?

All individuals and HUF (Hindu Undivided Family).

What is the amount of the deduction?

A total of Rs.1 lakh in aggregate across all eligible 80C instruments.

What are the eligible instruments?

The most commonly used eligible instruments towards the 80C deductions are:

• Life insurance premium, including premium for a unit-linked insurance plan (ULIP)
• Contribution to Public Provident Fund or Provident Fund
• Investment in pension plans
• Investment in Equity Linked Savings Schemes (ELSS) of mutual funds
• Home loan principal repayment
• Investment in Infrastructure Bonds, National Savings Certificates
• Payment of tuition fees to for full-time education of any 2 children of an individual
• Fixed deposit with any scheduled bank or post office for 5 years
• Senior citizens savings scheme

Please check with your tax advisor in case from time to time there are other instruments that
become eligible under 80C.

80D Deduction:Check out the eligible instruments

This allows a deduction for the payment of your medical insurance premium.

Who is it available to?

All individuals and HUF (Hindu Undivided Family). The amount must have been paid using the
taxpayer’s income chargeable to tax.

In case an individual is taking the deduction, the medical insurance policy can be take in the
name of any of the following: the taxpayer or the spouse, parents or dependent children of the
taxpayer.

In case a HUF is taking the deduction, the medical insurance policy can be taken in the name of
any member of the family.

What is the amount of the deduction?

The general deduction available to each taxpayer is Rs.15,000, for self, spouse and children. An
additional deduction for parents is Rs. 15,000. If the amount paid is for a senior citizen, then one
can claim an additional exemption of Rs.5,000.

What are the eligible instruments?

All medical insurance policies are eligible for the 80D deduction up to the specified amount.
Please remember that the premium towards the policy cannot have been paid in cash.

Please check with your tax advisor in case from time to time there are some changes to the
amount or type of deduction available under 80D.

80E Deduction:Check out the eligible instruments

This allows a deduction for payment of interest of loan taken towards higher education.

Who is it available to?

The deduction can be taken by the taxpayer for his/her higher education loan or for any member
of the taxpayer’s family. The amount must have been paid using the taxpayer’s income
chargeable to tax.

What is the amount of the deduction?

The entire payment of interest is deductible. The deduction is available for a maximum period of
8 years or till the principal and interest amount have been repaid, whichever comes earlier.

What are the eligible instruments?

The 80E deduction is usable only in the case of loan taken for higher education from a financial
institution or recognized charitable institution. In this context, higher education means full-time
studies for any graduate or post-graduate course specifically in engineering, medicine,
management, applied sciences, mathematics or statistics. Please make yourself familiar with
whether your course and subject of study are eligible for this deduction.

Please check with your tax advisor in case from time to time there are changes to the amount of
deduction under 80E and the types of education loans permitted.

80G Deduction:Check out the eligible instruments


This allows a deduction for donations made to recognized charities and charitable institutions.

Who is it available to?

The deduction can be taken by any individual, HUF (Hindu Undivided Family), firm or
company. Please note that donations made in kind are ineligible for the deduction.

What is the amount of the deduction?

The deduction available is 100% of the amount contributed to the charity, or in some cases 50%
of the amount, which may further be with or without restriction. This calculation can get a little
complicated, so its best if you ask your tax advisor on the total amount that you will be eligible
for. Also, different charities get treated differently, so best to seek professional advice on this
matter depending upon the charity of your choice.

What are the eligible charities and charitable institutions where my donations are eligible
for the deduction?

Common charities that are eligible for this deduction are the Prime Minister’s National Relief
Fund, Prime Minister’s Drought Relief Fund. Before making a donation, please check with the
charity if it is recognized and has been registered with the appropriate authorities.

If you make a donation to a notified temple, mosque, gurudwara or church, it might also be
eligible but please confirm that this place of worship has been registered with the authorities. As
mentioned above, donations made in kind are ineligible for the deduction, so make sure that you
pay by cheque or bank draft and keep record of the transaction.

Please check with your tax advisor in case from time to time there are newer charitable
institutions that become available or there are changes to the amount of deduction under 80G.

Tax Treatment of Income from Salary

If you earn it, they will tax it! So, lets go through what are the different items that are taxable.

Any income arising out of an employee – employer relationship is taxed under the head Salary.
Your Salary is taxed either on receipt or on due basis, whichever comes earlier.

What are the different incomes taxed under the head "Salaries"?

There are three different incomes taxable under the head Salaries:

1. Salary Due: Any income due from an employer to an employee, whether paid or not.
This is also true if the income is due from a former employer.
2. Advance Salary: Any salary paid by an employer to an employee even though it was not
due or was paid before the due date. This is also true if the advance salary had been paid
by a former employer.
3. Arrears of Salary: Any arrears of salary paid to an employee by an employer, for which
income tax had not been previously deducted. This is also true in case the arrears are paid
by a former employee.
4. How can I calculate my Salary Income?
5. These calculations are best left to your internal human resource or accounts department.
Nevertheless, here is a quick table that can guide you to getting an understanding of how
to calculate your salary income. But some of you might find the terms and words used a
little technical, so don’t say we didn’t warn you….for simplification purposes, we have
used round numbers for the table.

Example
Item
Amount (in Rs.)

Basic Salary, Pension, Annuity, Bonus, Dearness


Allowance, Commission, Advance Salary, Arrears of 100,000
Salary

Add Gratuity Leave Encashment, Commuted Pension, 10,000

Add Perquisites and Profits in addition to or in lieu of Salary 5,000

Employer’s contribution to recognized Provident Fund in


Add 300
excess of 12% of salary

Gross Salary 115,800

Less Deduction for Entertainment Allowance -5,000

Less Deduction for Employment Tax -1,000

Salary Income 109,800


6. Please recognize that not all these line items might be applicable to you, the above is just
an illustrative example to demonstrate how one can calculate one’s Salary Income.

Tax Treatment of Provident Fund

Provident Fund Scheme is a welfare scheme where both the employee and employer make a
monthly contribution. The interest earned on these regular contributions is also credited to the
fund. The balance keeps on accumulating year after year and on retirement or resignation the
accumulated balance is given to the employee.

What are the different kinds of Provident Funds?

At present there are 4 types of provident funds:

1. Recognized Provident Fund (RPF): This scheme is applicable to an organization which


employs 20 or more employees. An organization can also voluntarily opt for this scheme.
All RPF schemes must be approved by The Commissioner of Income Tax. Here the
company can either opt for government approved scheme or the employer and employees
can together start a PF scheme by forming a Trust. The Trust so created shall invest funds
in specified manner. The income of the trust shall also be exempt from income taxes.
2. Unrecognized Provident Fund (URPF): Such schemes are those that are started by
employer and employees in an establishment, but are not approved by The Commissioner
of Income Tax. Since they are not recognized, URPF schemes have a different tax
treatment as compared to RPFs.
3. Statutory Provident Fund (SPF): This Fund is mainly meant for
Government/University/Educational Institutes (affiliated to university) employees.
4. Public Provident Fund (PPF): This is a scheme under Public Provident Fund Act 1968.
In this scheme even self-employed persons can make a contribution. The minimum
contribution is Rs.500 per annum and the maximum contribution is Rs.70,000 per annum.
The contribution made along with interest earned is repayable after 15 years, unless
extended. The rate of interest is statutorily set at 8% per annum.

What is the Tax treatment of Provident Fund?

As mentioned above, both the employer and employee contribute towards Provident Fund. The
contribution made by employees is out of their own income and therefore no question of taxation
arises as the entire amount has already been taxed. The contribution by the employer is over and
above salary of employee and therefore is seen as income of employee and taxed. The interest
earned on the Provident Fund balance is on both employer as well as employee contributions,
and this interest is also an income of employee and therefore taxed.

The detailed tax treatment of different kinds of provident funds is little technical. There are rules
that govern whether a certain fund will be taxable or not, the technical details of which are
shown here.

Tax treatment of Provident Fund can be discussed under two scenarios:

• One during continuity of job, and


• Upon receipt of accumulated balance of provident fund at the time of retirement or
resignation

The table below shows the tax treatment of different kinds of provident funds:
Fund During Continuity of Job Upon Retiremen

Interest on Repayment of sum on


Employee's Employer's
Provident retirement, resignation
Contribution Contribution
Fund or termination

RPF Deduction Exempt upto Exempt upto Nothing is taxable subject


under Section 12% of Salary. 9.5%. to following conditions:
80C is Thus Interest
1. Employee left the
available. Contribution exceeding
job after five years
made by 9.5% shall be
of service OR
employer added to
2. Where Period of
exceeding 12% employee's
service less than 5
shall be added to Salary
years, the
employee's salary Income.
termination is due
Income.
to ill health,
discontinuance of
business of
employer. OR
3. here on re-
employment, the
balance in R.P.F is
transferred to R.P.F
with new employer.
[For the purpose of
computing 5 years
period, Period of
services rendered
with previous
employer shall also
be included.]

If none of the above


conditions are satisfied
then:

1. The amount not


taxed earlier shall
be taxed in the
same manner as
URPF, given
below.

2. Any tax concession


(e.g. 80C) availed
by assesses for
contribution to RPF
shall now be
withdrawn.

URPF No deduction Any amount of Not taxable Sum received on


under section contribution is retirement/ termination
80C available not taxable comprise of following:

Employer's Contribution
and interest there on:
Taxable as Salary Income.
Employee's own
Contribution : It is not
taxable.
Interest on employee's
contribution: Taxable as
income from other
sources.

SPF Deduction Fully Exempt Fully Exempt


under Section
Fully Exempt
80C is
available.

Assessee / Employee can make contribution to


Amount received
PPF, No concept of Employer’s Contribution.
PPF (including interest) is
Deduction under section 80C available on
Fully Exempt.
contribution made.

I have changed my job. Can I transfer my Provident Fund deducted by the


previous employer to my Provident Fund account with the new employer?

Yes, you can transfer your old Provident Fund account to your new employer. The process to do
this is very simple. Upon your change in employment, file a Form 13 with the new employer.
Thereafter, the labour consultant or human resources department of your new employer shall
follow up on the transfer process with the Provident Fund authorities. (Download Form 13 here)

Can I take an withdrawal/advance from the balance accumulated in my


Provident Fund account?

Yes, you can take a withdrawal/advance from your Provident Fund account. Here is the process:

• Upon resignation or retirement from an establishment you can apply for PF withdrawal
using Form 19. Withdrawal is allowed under two options: (Download form 19)
1. If the member has attained 55 years of age; or
2. ii. The member should not work in any covered establishment for a period of 2
months from the exit date.

Additionally, you also have an option to withdraw funds from your Employee Pension
Scheme. If you choose to do so, you will need to file an application using Form 10C.
(10C)

• You can also take an advances from your Provident Fund account, but only for certain
specified purposes. The application for an advance is made using Form 31.

Advance may be availed for the following purposes:

o Marriage expenses for self, son, daughter and brother / sister


o Education for self, son, daughter
o Medical treatment
o Purchase or construction of dwelling house.
o Repayment of housing loan
o Purchase of plot
o Addition or alteration of house
o Repair of house
o Lockout or closure of establishment by employer
o Withdrawal prior to retirement
Please note that the amount of advance or withdrawal is not required to be
refunded back into the account under normal circumstances. However, if the
amount is not utilized for the specified purpose, then the same will need to be
refunded with penal interest.
A fixed minimum balance in the account has to be maintained before arriving at
the amount of advance that can be taken from the account.

Tax Filing

Filing your tax returns is an annual activity that most of us have to take care of so that we operate
within the law.

Do I need to file a tax return?

You will need to file an annual tax return if you fall into one of the following categories:

1. 1. If you are an individual whose annual income, before tax deductions, is above any of
the following cases
o Rs.150,000 for all resident Indians, other than the two cases mentioned below
o Rs.180,000 for resident women
o Rs.225,000 for resident senior citizens
2. If you need to file for a tax refund for tax deducted at source
3. If you get a notice from the Income Tax Department for return of income
4. If you want to claim carry forward losses from the current year in future years

If you liked this article, you might also want to read:

I need to file a tax return, how can I do that?

As an individual taxpayer, you can file your tax return in two ways:

1. You can fill out the tax form and deposit the hard copy to the local income tax department
office
2. Or, you can chose to file electronically on the internet on the Income Tax Department’s
website. You will need a digital signature to be able to file electronically. If you do not
have a digital signature, you will need to file a hard copy of your online
acknowledgement manually with the Tax Department

The above procedure is true for HUFs (Hindu Undivided Family) as well.

Are there deadlines for filing tax returns?

Yes! And if you do not meet these deadlines you might have to pay interest or penalties or even
face a tax inquiry.

The due date for filing your tax return is:

• July 31 for individuals whose accounts do not require a tax audit


• September 30 for persons and companies who need to be audited

What does a "tax audit" mean?

Tax audit results in an audit of accounts if the turnover of a business exceeds Rs. 40 lakhs or in
case of specified professionals the professional receipts exceeds Rs. 10 lakhs. Salaried
employees do not need to worry about tax audits.

The tax audit is done by Chartered Accountants.

I have heard about some people paying Advance Tax - what is this?

Advance Tax is paying some part of your annual taxes in advance of the annual deadline.

If you are a salaried employee, you do not need to pay Advance Tax. However, if you are a self-
employed professional or a businessperson, you will have to pay Advance Tax.

Advance Tax is paid using Tax Payment Challan and can be deposited at banks empanelled with
the income tax department, for example at designated branches of ICICI, HDFC, SBI etc. Please
note that not all branches will accept the Challan, so please make yourself aware of which of
your local branches will accept it.

Due date for Payment of For Individuals / For Corporate


Advance Tax Firms Assessees

1st Payment of up to
15 June Not applicable
25%

1st Payment of up to 2nd Payment of up to


15 September
30% 50%

2nd Payment of up to 3rd Payment of up to


15 December
60% 75%

15 March 3rd Payment of 100% 4th Payment of 100%

How can I calculate my taxes? What are the income tax slabs?

Calculating your income taxes is very easy. All you need to know is which tax slab will be
applicable to you. But, before we get to tax slabs, lets understand in 3 quick steps how to
calculate taxes.

Step 1: Identify and tabulate all sources of income – salary, business income, interest, rental,
capital gains
Step 2: Identify which deductions and tax savings are applicable to you – 80C deductions,
interest repayment
Step 3: Apply the relevant tax slab depending upon your sex and age, after taking the deductions
and savings

In addition to the tax payable on income, you will also have to pay a Surcharge (if your income
exceeds Rs.10 lakhs in case of individuals) and an Education Cess levied by the Government on
all tax payers. If you are a salaried employee, chances are that your employer has already
deducted these in your monthly pay.

The tax slab will help you identify how much of your income will be available to you tax free
and thereafter what tax rate will be charged to the remaining income.

If you are a woman or a senior citizen, you will be entitled to a larger tax-free amount. The
following tables will help you identify which tax slabs are relevant for you:
• Resident Individual below 65 years of age or HUF (tax free income up to the first Rs.1.50
lakhs)
• Resident Woman below 65 years of age (tax free income up to the first Rs.1.80 lakhs)
• Resident Senior Citizens – 65 years of age or above (tax free income up to the first
Rs.2.25 lakhs)

As shown below, after the initial tax-free amount, different slabs of your income will be charged
at different rates.

For Resident Individual below 65 years of age or HUF

Net Income Plus Plus Education


Income Tax
Range Surcharge Cess

Up to Rs.1,50,000 Nil Nil Nil

Rs.1,50,001 to 10% of income above


Nil 3% of income tax
Rs.3,00,000 Rs.1,50,000

Rs.3,00,001 to Rs.15,000 + 20% of


Nil 3% of income tax
Rs.5,00,000 income above Rs.3,00,000

Rs.5,00,001 to Rs.55,000 + 30% of


Nil 3% of income tax
Rs.10,00,000 income above Rs.5,00,000

Rs.2,05,000 + 30% of
Above Rs. 10% of 3% of income tax
income above
10,00,000 income tax and surcharge
Rs.10,00,000

For Resident Women below 65 years of age

Net Income Plus Plus Education


Income Tax
Range Surcharge Cess

Up to Rs.1,80,000 Nil Nil Nil

Rs.1,80,001 to 10% of the income above Nil 3% of income tax


Rs.3,00,000 Rs.1,80,000

Rs.3,00,001 to Rs.12,000 + 20% of the


Nil 3% of income tax
Rs.5,00,000 income above Rs.3,00,000

Rs.5,00,001 to Rs.52,000 + 30% of the


Nil 3% of income tax
Rs.10,00,000 income above Rs.5,00,000

Above Rs.2,02,000 + 30% of the 10% of 3% of income tax


Rs.10,00,000 income above Rs.10,00,000 income tax and surchargee

For Resident Senior Citizens ( 65 years of age and above, including those who
turn 65 at any time during the Financial Year 2008-09)

Net Income Plus Plus Education


Income Tax
Range Surcharge Cess

Up to Rs.2,25,000 Nil Nil Nil

Rs.2,25,001 to 10% of the income above


Nil 3% of income tax
Rs.3,00,000 Rs.2,25,000

Rs.3,00,001 to Rs.7,500 + 20% of the


Nil 3% of income tax
Rs.5,00,000 income above Rs.3,00,000

Rs.5,00,001 to Rs.47,500 + 30% of the


Nil 3% of income tax
Rs.10,00,000 income above Rs.5,00,000

Above Rs.2,05,000 + 30% of the 10% of 3% of income tax


Rs.10,00,000 income above Rs.10,00,000 income tax and surchargee

I am not sure about which form I should use to file my tax return.

Its simple. The form you need to fill out depends upon the nature of your income. Please note
that you only need to fill out just one form.
If you are a salaried employee with no additional sources of income apart from your salary, you
will need the simple ITR1 form. However, if you have any additional sources of income such as
interest income, rental income, or capital gains from sale of assets, then you will need to use ITR
2 form.

The details of the most commonly used forms for individuals are shown below.

Form
Applicability
No.

If you are an Individual and only have income from salary, pension, family
pension or interest.
ITR 1
For example: Amit earns salary income from his job at Infosys, but has no
other sources of income. He must file his tax return using ITR1 form.

If you are an Individual or a HUF and have other sources of income such
as rental income, capital gains from sale of assets, dividend income.

ITR 2
For example: Aruna earns salary income from her job at Infosys, but also
has interest income from her savings account and FDs, and earns rental
income from her apartment. She must file her return using ITR2 form.

If you are an Individual or a HUF and are a partner in a partnership firm.

ITR 3 For example: Raj is a partner at a firm of Chartered Accountants. Neha is a


partner at a Law firm. Both Raj and Neha must file their respective returns
using ITR3 form.

ITR 4 If you are an Individual or a HUF and have income from a proprietary
business or profession.
For example: Devika is a doctor and only works at her clinic at home. She
must file her return using ITR4 form.

The above forms are the most commonly used forms for individual taxpayers. However, if you
are a company and need to file returns, you can find more details for other forms here.

Form
Applicability
No.

ITR 5 For Firms, AOPs and BOIs

For Companies other than companies claiming exemption under section

ITR 6 11

For persons including companies required to furnish return under section


ITR 7
139(4A) or section 139(4B) or section 139(4C) or section 139(4D)

ITR 8 Return for Fringe Benefits

Calculating Your Income Tax Liability 2008-09

The income tax which is charged to you is based on the tax slabs declared by the Government in
its annual budget every year. The following table encapsulates the tax slabs applicable this year.
(Financial Year 2008-2009 )

Taxable Income Slab Tax Slab


Upto Rs. 1,50,000
Up to Rs. 1,80,000 (for women)
Nil
Up to Rs. 2,25,000 (for residents,
65 years or above)
Rs. 1,50,000 – Rs. 3,00,000 10%
Rs. 3,00,001 – Rs. 5,00,000 20%
Rs. 5,00,001 – Rs. 10,00,000 30%
30% + 10%
Above Rs. 10,00,001
surcharge on tax
Note: In addition, an education cess of 3% is charged
on the entire tax amount including surcharge

Please note that the taxable income is arrived at after adding all your different sources of income
and subtracting the deductions that you have taken advantage of under Section 80.

Lets take a few examples to illustrate how you can calculate taxes based on these slabs.

Example 1:
Sarla is a salaried employee, her annual income is Rs. 2,40,000. She has made no tax savings
investments during the year.
Let us calculate her income tax liability.

Heads Amounts
Gross Total Income Rs. 240,000
Deductions Nil
Taxable Income Rs. 240,000
Income Tax Calculations Tax
Tax on Income upto Rs 180,000 0% Zero
Tax on the remaining Rs 60,000 10% Rs.6,000
Total Income Tax Due Rs. 6,000
Educational Cess @ 3% Rs. 180
Total Tax Payable Rs. 6,180

Example 2:
Vinod is a salaried employee. His annual income is Rs. 3,25,000.His home loan interest payment
is Rs 1,20,000 and his home loan principal repayment is Rs. 80,000.He has made an investment
of Rs. 50,000 in NSC.
Let us calculate Vinod's interest liability.

Heads Amounts
Income from Salary Rs. 325,000
Income from House Property
(Section 24 Deduction for Home loan Rs.120,000
interest repayment)
Gross Total Income Rs. 205,000
Section 80 C Deductions Rs.100,000
NSC Investment Rs. 50,000
Home Loan Principal
Rs.80,000
Repayment
Total Rs. 130,000
Taxable Income 105,000
Total Tax Due Rs. 0
Example 3:
Ram is a salaried employee who earned Rs.12,00,000. He has bought a health insurance policy
for himself worth Rs 10,000. Ram has also bought ELSS funds for Rs. 80,000 and has also paid a
LIC premium of Rs. 20,000.He has also donated Rs. 20,000 to the Prime Minister's Relief Fund.
Let us calculate Ram's tax liability.

Heads Amounts
Rs.
Gross Total Income
1,200,000
Section 80 C Deductions Rs.100,000
Rs.
LIC Premium
20,000
Home Loan Principal Rs.
Repayment 80,000
Rs.
Total
100,000
Other Donations Rs. 30,000
Section 80D Health Insuance Rs.
Premium 10,000
Section 80G Donation To A Rs.
Charity 20,000
Total Taxable Income 1,070,000
Income Tax Calculations Tax
Tax on Income upto Rs 0% Zero
150,000
Tax on the next Rs 1,50,000
10% Rs.15,000
(Slab 150,001 to 3,00,000)
Tax on the next Rs 2,00,000
(Slab Rs. 3,00,001 to Rs. 20% Rs.40,000
500,000)
Tax on the Tax on next Rs.
570,000 30% Rs. 1,71,000
(above 500,001)
Income Tax Due Rs. 2,26,000
Surcharge on total tax
(Surcharge is applicable if the
10% Rs. 22,600
taxable income
is above Rs.1,000,000)
Income Tax Due Rs. 2,48,600
Educational Cess @ 3% Rs.7,458
Total Tax Payable Rs.2,56,058

Top Misconceptions about Taxes

Do I need to file my tax returns? How do I file them?

Misconception 1:

• My employer has deducted tax at source from my paycheck and thus


I don't have to worry about filing tax returns. Just because taxes have
been paid on your behalf does not mean that filing a tax return is not
required. If your combined annual income from all sources is above the
amount that is exempt from income tax you are required to file your returns.
Your employer gives to you a statement called Form 16 at the end of the
financial year that shows the amount of tax that has been deducted at
source. You will need to put the tax deduction amount shown on the Form 16
on your tax return form. Therefore, it is important to ensure that you obtain
this statement from your employer on time.

Misconception 2:
• Filing tax returns is a complex and cumbersome process. I need a
Chartered Accountant to help me file my tax returns. Contrary to
popular belief preparing and filing a tax return is actually quite simple. In fact
if you have a digital signature you can accomplish the entire process sitting
at home on your computer thanks to the e-filing facility available on the tax
department website (www.incometaxindiaefiling.gov.in). Alternatively, you
can submit the returns online, print a one-page receipt, sign it and drop it off
at the income tax office within fifteen days of submitting the returns. No
documents are required to be submitted with the receipt. If you so desire, you
can fill out the forms on your own. However, if you want professional help
there are many third party service providers who offer tax preparation and
filing services for as low as Rs.200.

Housing and tax

Misconception 3:

• he interest I pay on a home loan is deductible from my income from


house property up to a maximum of Rs. 1,50,000 per year. This is true
if you have taken a home loan for a single house and it is self-occupied.
However, if you take a home loan on a second house, the entire interest paid
on the loan can be claimed as a deduction from your income on house
property. If you are planning to invest in real estate with the expectation that
the property would appreciate in value over time, you could take advantage
of the above rule. Thus a smart investment strategy would be to take a home
loan on a second house, rent out the house and claim interest paid on the
loan as a deduction from the rental income, thereby reducing your borrowing
costs significantly.

Misconception 4:

• I receive tax exemption on the actual rent I pay for my rented home.
his is not entirely accurate. Section 13 A of the Income Tax Act states that the
maximum amount that is exempt from tax is the lower of the following
amounts: (i) the House Rent Allowance given by the employer, (ii) 50% of
your basic salary if you live in a metro, (iii) or, actual rent paid minus 10% of
your basic salary. Thus if actual rent paid is lower than 10% of your basic
salary you receive no exemption. The other key point is that you cannot claim
any exemption under this section if you live in your own home or if you are
not paying rent to anyone.

The magical 80’s

Misconception 5:
• Section 80C benefits are available only on making an investment or
saving or paying a premium on insurance. You can claim a deduction for
the school or university tuition fees you pay for your children (maximum of
two) as long as they are enrolled in a full time program at any institute in
India. In addition you can claim a deduction for the repayment of principal on
any home loan that you may have taken. Both these deductions have to of
course be within the overall annual Section 80C cap of Rs.1lakh.

Misconception 6:

• If I avail of tax free medical reimbursement from my employer up to


Rs.15,000, I cannot claim deduction on health insurance premium
paid. Tax free medical reimbursement by your employer up to an amount of
Rs.15,000 per year for your family’s medical expenditure is separate from the
Rs.15,000 deduction available under Section 80D for the premium you pay on
buying health insurance. Both these exemptions are covered under different
sections of the Income Tax Act and you can enjoy benefits from both. The
former covers costs for your daily medical needs and outpatient treatment
(OPD), while the latter protects you from expenditure for hospitalization.

Misconception 7:

• My friends tell me that the only interest payment I can claim an


exemption for is the interest paid on home loans. There is a section of
the Income Tax Act called 80E that permits deduction on interest paid on
loans taken for higher education for self, spouse and children. There is no
limit on the amount of deduction you can claim. The only thing to keep in
mind is that the program for which the loan is taken should be a graduate or
post-graduate program in engineering, medicine or management or a post-
graduate course in the pure or applied sciences.

Interest income and others

Misconception 8:

• Interest I earn on my savings account balance is exempt from


income tax.After the removal of Section 80L of the Income Tax Act, interest
income from any source including savings account balance, is subject to
income tax. What you may be referring to is the rule around tax deducted at
source for the interest payments you receive on your savings account. As per
existing rules, as long as the combined interest income that you earn, on any
savings accounts or fixed deposits, at a single bank branch, is less than
Rs.10,000 there will be no tax deducted at source. If you want to better
manage your cash flow and do not want tax to be deducted at source you
could consider spreading your deposits across multiple bank branches, even
if they are of the same banking company.
Misconception 9:

• I have to pay taxes on interest received from my fixed deposits only


on maturity. Your tax liability on interest income from your fixed deposit is
calculated on an accrual basis. Let’s say that you have made a fixed deposit
for three years and have elected not to receive any regular interest payouts
and instead have decided to receive a lump sum payout on maturity after
three years. That does not mean that you are not liable to pay income tax
annually on the interest that is credited to your fixed deposit account every
year, even though you do not have access to that interest income.

Misconception 10:

• I received cash as a gift from a close friend. I do not have to pay any
tax. You are right as long as the amount was less than Rs.50,000 during the
financial year. The applicable rules for gift tax state that any cash gifts,
without any upper limit, received from specified relatives are exempt from
income tax. However, if you receive a cash gift from a friend, which exceeds
Rs.50,000 in one financial year, you are liable to pay income tax on the
entire amount. However, the good news is that cash gifts received during
your marriage, of any amount, and from anyone are totally free from income
tax.