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Best Wishes!!

Anand

Monday, April 12, 2010

Income Tax in India

Every individual who earns an income in India is supposed to pay Tax on the Income earned by him during that financial year to the government of India. Calculation of the Income Tax to be paid by an individual is a cumbersome process. The government of India provides certain benefits to its citizens who earn an income in the country by means of deductions, exemptions etc. Before going into the details below are the items that would be covered in this article.


1. Heads of Income
a. What exactly qualifies to be an income, for which you need to pay Tax.
b. Salary Perquisites that are taxable
2. Deductions
a. House Rent Allowance – HRA
b. Leave Travel Allowance – LTA
c. Medical Allowance
d. Transportation Allowance
e. Interest paid on Housing Loan
3. Exemptions
a. Under Section 80C
b. Under Section 80D
c. Under Section 80DD
d. Under Section 80DDB
e. Under Section 80E
f. Under Section 80U

4. Clubbing of Minor Income

Heads of Income:
The Heads of Income includes the types of income earned by an individual that would qualify as Income for which he/she needs to pay tax. These include the components that would be earned by an individual through employment with an organization/company. They are:
1. Salaries & Wages
2. Bonus & Commissions
3. Other Perquisite benefits

According to the IT laws Perquisites include the following:
a. Rent free accommodation or concessional rate accommodation received from the employer
b. Any other benefit given by the employer either in cash or material (Apart from monthly Salary)
c. Any Fringe benefits provided by the employer (This would include Mobile bill reimbursement, Petrol expenses etc)

Deductions on Income:

As per the IT regulations, there are certain deductions that are allowed on the income earned by an individual. These amounts can be subtracted while arriving upon the net taxable salary of an individual.

They include:
1. Housing Rent Allowance (HRA)
The HRA is usually a part of the salary/wages paid out to an employee by the employer. The deduction on HRA is eligible to any individual who is residing in a rented house and is paying rent to the house owner. There are some rules that govern the limit till which HRA can be deducted from your taxable income. Out of the below mentioned 3 items whichever is LEAST will be considered for the purpose of deduction under the HRA component.
a. Actual amount of the HRA paid by the employer (As part of Salary) Or
b. 50% of Basic salary in case of Metros (Delhi, Bombay, Calcutta & Chennai) or 40% of Basic salary in case of non Metros. Or
c. Actual rent paid by the individual – 10% of Basic salary
For e.g., your monthly Basic salary is Rs. 12,000/- and the HRA component as per your salary is Rs. 6000/- and the actual rent you are paying is Rs. 6000/- in Chennai then the amount you would be eligible for HRA exemption is Rs. 4800/- (Actual rent – 10% of Basic salary) per month.

2. Leave Travel Allowance (LTA)
LTA also is usually a part of the salary paid out to an employee as part of his employment. As per the Indian tax laws you are eligible to claim an amount that less than or equal to the total LTA paid out to him by his employer. This would cover the expenses incurred in travel of self with/without dependents. (Dependents would include spouse, children and dependent parents) There are some conditions which need to be satisfied for an individual to claim exemption under LTA. They are:
a. LTA can be claimed only twice in a block of 4 financial years. You cannot claim LTA every year.
b. Only Transportation expenses would be considered for LTA. Accommodation & food expenses are not considered.
c. For an employee to be eligible for claiming LTA, he/she should have taken at least 3 days of earned leave from the employer

3. Medical Allowance
Medical allowance is also a part of the salary paid out to an employee. The maximum amount eligible for this component is either Rs. 15,000/- or the actual amount paid out to you as part of Salary. To claim exemption under this you need to provide medical bills to substantiate your claim of having incurred medical expenditure. The medical bills can be in the name of the individual or his spouse or children or dependent parents.

4. Transportation Allowance
The IT laws permit a deduction of Rs. 9,800/- as a standard transportation allowance to all resident individuals who pay income Tax. This amount is standard irrespective of the job/industry the individual is employed. Also this amount does not change irrespective of the means of transport you use to commute to your office.

5. Interest Paid on housing loan
The IT laws permit an individual who has taken a home loan from a recognized bank for the purpose of construction or purchase of a residential property to claim exemption on tax on the interest part of the loan taken by the individual. There is a limit to this exemption which is as follows.
a. If the property is occupied by the individual then the maximum eligible amount under this is Rs. 1,00,000/-
b. If the property is rented out and the rental income is included in the total income earned by the individual then there is no maximum amount. The actual interest paid on the home loan can be used for deduction from total salary considered for the purpose of income tax.
Note: Exemption is available on home loans taken to purchase residential property only. Home loans taken to purchase land do not qualify for income tax exemption.


Income Tax Exemption:

The Income Tax laws allow all individuals who are assessed for income tax to claim exemption from income tax under the following heads.
1. Section 80C

The section 80C of the IT laws provide exemption from income tax on amounts that are invested by the individual. This usually includes the amount the individual invests in certified instruments that are exempt from tax. They are:
a. PF – Provident Fund (A portion of your salary is deducted by your employer as PF and would be remitted to the PF house that is maintained by the government of India. A maximum of 12% of your basic Salary is eligible for exemption from income tax)
b. PPF – Public Provident Fund – A maximum of Rs. 70,000/- per financial year.
c. ELSS – Equity Linked Savings Scheme (Mutual funds)
d. NSC – National Savings Certificate
e. KVP – Kisan Vikas Patra
f. Life Insurance (Insurance provided by LIC & Other registered Insurance companies)
g. Tax Saving ULIP’s – Unit Linked Insurance Plans
h. Principal amount repaid as part of the Home loan
i. 5 year bank fixed deposits
A point to be noted here is that the sum total of all these components can be a maximum of Rs. 1,00,000/- per financial year.

2. Section 80D

This section of the IT laws provide exemption on the premium paid towards Medical insurance of the individual, spouse & children and also dependent parents. The maximum eligible amount under this section is Rs. 15,000/- per financial year.

3. Section 80DD

Exemption under sec 80DD is available to any individual who:
a. Incurs any expenditure for the medical treatment, training and rehabilitation of a disabled dependent Or
b. Deposits any amount in schemes of the LIC of India for the maintenance of the disabled dependent.
A deduction of Rs. 50,000/- is available to all individuals who incur any of the above two said expenditures. Where the dependent has a Severe disability a deduction of Rs. 1,00,000/- is allowed. An individual should furnish a copy of the issued certificate by the medical board constituted either by the Central government or a state government in the prescribed form, along with the return of income of the year for which the deduction is claimed.

4. Section 80DDB
An individual, resident in India spending any amount for the medical treatment of specified diseases affecting him or his spouse, children, parents, brothers and sisters and who are dependent on him, will be eligible for a deduction of the amount actually spent or Rs 40,000, whichever is less.

For any amount spent on the treatment of a dependent senior citizen an individual is eligible for a deduction of the amount spent or Rs 60,000, whichever is less is available. The individual should furnish a certificate in Form 10-I with the return of income issued by a specialist working in a government hospital.


5. Section 80E
Under this section, deduction is available for payment of interest on a loan taken for higher education from any financial institution or an approved charitable institution. The loan should be taken for either pursuing a full-time graduate or post-graduate course in engineering, medicine or management, or a post-graduate course in applied science or pure science. There is no upper limit and the entire interest amount repaid each year to the bank for a period of 8 years is exempt from income tax

6. Section 80U - It is deduction in the case of a person with a disability. An individual who is suffering from a permanent disability or mental retardation as specified in the persons with disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995 or the National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999, shall be allowed a deduction of Rs 50,000. In case of severe disability it is Rs. 75,000.

The Income tax assessee should furnish a certificate from a medical board constituted by either the Central or the State Government, along with the return of income for the year for which the deduction is claimed.
Note: Section 80U is available only for individuals who are disabled but still earn an income that qualifies for income tax.


Clubbing of Minor Income:
There might be cases where the minor child in the family earns an income that could be through interest earned on deposits in the name of the minor or through dividends on shares held in the name of the minor etc. Under such a situation,
• The minor's income is clubbed with that of the parent with the higher income.
• Only income earned till the year the minor attains age 18 is clubbed.
In excess of Rs. 1,500 earned by a minor, the income is added to the parent with higher income, irrespective of the residential status of either the child or the parent. The clubbing provision is applicable even if the parents are NRI and the minor stays in India or vice-versa.

To know about the Tax Slabs for the financial year 2010 - 2011 Click Here

34 comments:

  1. "entitled to pay tax"

    Pardon this grammatical flame, but its "required to pay tax" or something similar. "Entitled" is a word used to indicate that its some form of honor or concession or benefit. A tax is NOT a honor, concession, benefit etc.

    ReplyDelete
  2. @Prana

    Point Noted & changed. thanks for pointing out.

    ReplyDelete
  3. we are not receiving HRA from the employer. But we are paying house rent. whether we can avail tax benefit.please clarrify

    ReplyDelete
  4. @ Neha - HRA is just a component in your salary. Whether your employer includes it in the CTC or not, you can claim tax rebates if you are paying a house rent. If you contact an auditor who specializes in filing tax returns, they will usually have a template for house rent and you can fill it to avail the house rent allowance part of the exemption.

    Hope that clarifies.

    ReplyDelete
  5. 1. CAN I CLAIM AS DEDUCTION U/S 80C this year return 12-13, NSC VIII issue which I did not gave in the 11-12 return,

    ReplyDelete
  6. @ Venumadhav

    No. You can claim on NSC instruments purchased between 1st april 2011 up until 31st march 2012 or the financial year 2011-2012.

    Whether you submitted it for tax benefits last year or not, you cannot use it because, the purchase date is in the previous financial year

    ReplyDelete
  7. Can i show my Post paid personal mobile bills as tax exemptions?

    ReplyDelete
  8. Is the monthy annuity payment received from LIC considered as Salary Income. If yes, the income tax form ITR2 expects you to fill the name of the Employer. Obviously LIC is not your employer in this case ! So ,what is the remedy or do I treat the annuity income from LIC as "other income" ? Form 26AS shows that the TDS deducted is under section 192 !!

    ReplyDelete
    Replies
    1. It will be treated as Other income. Any income that is earned outside of a regular employment will be considered Other Income only

      Anand

      Delete
  9. what is the definition of dependent parents ? do they have to be earning income or not ? and if you show that you are paying rent to your parents, can you claim mediclaim premium paid for them under sec. 80 d for exemption ? thanks.

    ReplyDelete
    Replies
    1. Both parents must be retired and should not be earning an income. Even if one of them is earning an income then they are not considered dependent.

      the rent you pay to your parents is an income for them, so you cannot. You cant have it both ways man. Actually speaking this rent being paid to parents thing in itself is incorrect because staying in the house is your legal right and you need not pay any rent for it (logically speaking). Nonetheless, if you show that, that becomes an income for your parents, so they are no longer dependents.

      Hope this helps.
      Anand

      Delete
  10. Is income from the savings bank account and Fixed deposit taxable ?

    regards Arindam

    ReplyDelete
  11. I have not claimed any LTA through my employer in the current 4 year period ,so can i directly mention it while filling income tax return to get income tax exemption on the travel amount

    ReplyDelete
    Replies
    1. Yes, as long as LTA was part of your salary component every month that you receive from your employer.

      Anand

      Delete
    2. See the article on LTA to learn more - http://anandvijayakumar.blogspot.sg/2013/02/everything-you-need-to-know-about-leave.html

      Click here to read it.

      Anand

      Delete
  12. Hi Anand,
    I wanted to know about the details to be filled in ITR-2 for the short term capital gain or loss from selling shares within a year.
    What exactly will be the cost of acquisition, transfer, improvement and full value of consideration?

    Does brokerage, STT etc can also be included in calculating gain or loss?
    Does every company shares bought and sold need to be shown or only the net gain or loss needs to be filled?

    ReplyDelete
    Replies
    1. Hi Anonymous,
      No brokerage or STT cannot be included while calculating gain or loss. Yes, every company share that was bought or sold has to be considered and the net gain or loss will determine your eventual tax amount.

      Let us say you bought shares of company ABC for Rs. 1000 and sell it for Rs. 1100 below is how your capital gains tax will be computed.

      Long term: Assuming you sold stock ABC through a registered stock exchange, e.g., the Bombay Stock Exchange or the National Stock Exchange of India, and you paid the Securities Transaction Tax (STT), you don't owe any other taxes on the long term capital gain of INR 100.

      Short term: If you sell the ABC stock within one year of its purchase, you're required to pay short term capital gains on the net profit, in which case you pay the STT and the exchange fees and an additional flat rate of 15% on the profit Rs. 100/-

      In case there are multiple transactions of buy & sell in the same financial year (all within the short term category) you can offset the profits and loss and will end up paying the 15% tax on the eventual profit you made if any. Lets say you made a profit if Rs. 100 on ABC and incurred a loss of Rs. 200 on stock XYZ then you wont be paying any capital gains tax on your share transactions this year because you did not make an overall profit. Understand?

      The cost of acquisition, transfer, improvement etc dont apply to shares. They will apply to capital gains for a house.

      Anand

      Delete
  13. Thanks Anand for the prompt and the quick reply.

    I have done transactions in a company ABC for intra-day as well as positional trade, and have also sold them within a year i.e. short term category. Now, for intra-day transactions, no STT is paid, while for positional trade, STT is paid. I get the profit-loss statement from the DP, which clubs all the investments in the company ABC. So can I feed in the data for net profit/loss as received from the statement from DP. Can i confirm that no details of all company transactions to be shown in ITR-2 , only the net profit/loss right?

    ReplyDelete
    Replies
    1. Hi Anonymous,
      As long as all transactions & their profit/loss is considered it should be ok but still I would suggest you consult with a tax consultant or an auditor to get these things clarified. Mistakes in tax forms are considered serious and can result in penalties & delays. So, to avoid the same I suggest you consult a qualified authority.

      Thanks
      Anand

      Delete
  14. Hi Anand
    I am a network engineer and my salary is increased to Rs 30000 this month can you tell me how much tax will be deducted.I work for a MNC in Hyderabad.Thank you
    Regards
    Sai

    ReplyDelete
    Replies
    1. Sai,
      Just monthly salary alone cant help me calculate how much tax will be deducted from your salary. This article explains so many details which is required to calculate Tax liability.

      Anyways - Standard deduction is 2 lacs for individuals. So, Based on the current tax slabs, if I take your total salary per year (3.6 lacs) and reduce the standard deduction you will be left with 1.6 lacs. This remaining 1.6 lacs will be taxed at 10% which means if you have absolutely no tax savings whatsoever, you will pay Rs. 16,000/- tax this year.

      If you utilize Section 80C and other tax saving options, your tax liability will come down even more.

      Anand

      Delete
  15. can I c/f Ltcl on Shares?

    ReplyDelete
    Replies
    1. Hi Anonymous - Sorry your question isnt very clear. Can you elaborate?

      Delete
  16. can i carried forward Long term capital loss on listed shares?

    ReplyDelete
    Replies
    1. No, only short term losses can be carried forward.

      Delete
  17. But No where is written that neither in Income tax act nor in any other act?

    ReplyDelete
  18. Hey Anand, what is income tax filing and income tax return filing ? I work in a firm and income tax is being deducted from my salary. I have not availed any tax saving options and I'm not interested with it also. Is it necessary to file income tax at the end of financial year eventhough tax is being deducted from my salary?

    ReplyDelete
    Replies
    1. Anonymous - Yes, as long as you are earning an income in India, filing tax returns is mandatory and you have no choice but to learn about taxes and file your tax returns.

      I recently published a book where I have explained about the taxation process, how to save your tax etc. You can refer to it for more details

      Website to buy my book: https://www.distribly.com/product/1688?aid=15702

      Anand

      Delete
  19. Hi Anand,

    Have there is any option to get rebate for dependent parents? Note - not dissabled. If yes in which section?

    ReplyDelete
    Replies
    1. Yes, even if they are not disabled, you can avail tax benefits for dependent parents. Check out my new book on Indian income tax - all the tax saving sections and how you can qualify for those tax benefits is clearly explained there. The book is priced at US$ 4 (Offer for a short time) which you can pay via credit card and download the pdf book right away from this link: https://www.distribly.com/product/1688?aid=15702

      Best of luck
      Anand

      Delete

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