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Incom Tax

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Calculate your tax, in 5 minutes flat!

Sunil Dhawan and Swami Saran Sharma, Outlook Money

“When there is an income tax, the just man will pay more and the unjust less on the same amount of income.”

Greek philosopher Plato left this world about 350 years before Christ, but in this quote, he said something that would apply at all times, in all lands. When you add the incomes under all the five heads and account for the deductions to get your total taxable income, the amount on which you have to pay tax, Plato’s quote might find an echo in your mind too.

There’s some relief for those with an annual income of Rs 100,000 or less — they don’t have to pay tax. The limit is Rs 135,000 and Rs 185,000 for women and those above 65 years of age, respectively. The tax payable at different income levels is shown in the table.

10 How much to pay as tax

Tax rates for all except senior citizens and women

Taxable income (Rs)
Tax rates
Education cess

Upto 1 lakh

1 lakh to 1.5 lakh
10% of Rs 50,000
2% of tax

1.5 lakh to 2.5 lakh
Rs 5,000 + 20% of Rs 1 lakh
2% of tax

2.5 lakh to 10 lakh
Rs 25,000 + 30% of (Taxable income minus Rs 2.5 lakh)
2% of tax

10 lakh and above
Rs 2.50 lakh + 30% of (taxable income minus Rs 10 lakh)
10% of tax
2% of tax

Remember, filing of return is compulsory if your taxable income exceeds the basic limit indicated above, even if the tax payable is nil. You need to file returns even if you have incurred losses as a businessman or professional.

A surcharge and an education cess is levied on the amount of tax payable. The surcharge is 10 per cent of the tax amount and has to be paid if your annual income exceeds Rs 10 lakh (Rs 1 million).

The education cess of 2 per cent has to be paid if your annual income is above Rs 100,000. These charges push the tax rate of 10 per cent to 10.2 per cent, 20 per cent to 20.4 per cent and the highest tax slab to 30.6. For those with income exceeding Rs 10 lakh, the rate becomes 33.6 per cent, including surcharge and education cess.

If the tax already deducted by your employer is more than the tax payable, you are eligible to get a refund of the excess amount. Mention the details of your bank account in the tax form so that the refund gets credited to it.

11 Tax payable

Your numbers (Rs)

Total tax payable (inc surcharge + Cess)

Rs 3,01,479

Rs 2,93,148 Less
Deducted at source

Final tax payable / refundable

Rs 8,331

The calculations are indicative and do not exhaust all possibilities

The fundamental rule of income tax is that tax becomes due as soon as income is earned. In the case of salaried employees, tax is deducted every month after estimating the total income for the year and accounting for deductions.

As far as business income is concerned, it is difficult to estimate income from day-to-day transactions. Therefore, tax is charged on estimation of income basis. As a thumb rule, if your income from a business or profession comes to Rs 100 at the end of a financial year, the income tax department assumes that Rs 30 (30 per cent) of it accrued up to September, Rs 60 (60 per cent) accrued up to December and the total income, that is, Rs 100, accrued till March.

You are supposed to match this income pattern while depositing self-assessment tax. You will have to pay a penalty in the form of interest on the due amount if you don’t pay, pay less, or defer paying the advance tax.

Don’t worry if you have paid all the taxes, but not filed your return by the due date, as the IT Act permits you to file the return till the end of assessment year. However, if you don’t meet this deadline too, you are liable to pay a penalty of Rs 5,000.

American Novelist Herman Wouk said, “The only imaginative fiction being written today is income tax returns.” Our advice: do your bit as a responsible citizen of the country, pay taxes on time, stay away from fiction, and relax.
11 = Tax Payable

Calculate your income in 10 minutes!

Sunil Dhawan and Swami Saran Sharma, Outlook Money

‘I’m spending a year dead for tax reasons.’

This is what the tax noose made English writer Douglas Adams say. Many, like Adams, would do anything to escape the pain of taxes. While knowing the tax process does not take the pain away, it does give a better grip on the tax cuts that we get.

For incomes to be taxed, they first need to be classified under various categories to allow us to count them better. Incomes like those from agricultural activity and dividends (from mutual funds and stocks) are not part of income that is counted for taxation. Incomes are classified under five heads in India.

Here’s a quick guide to doing what you believed was too tough for you. This is not an exhaustive list of what you can include under each head, but you would be 90 per cent there. For the rest, call the friendly neighbourhood CA.

1. Salary income

First, you have to find out the “income chargeable under the head salaries.” For this, you need to know your gross salary, which normally includes basic salary, commissions earned, taxable allowances, taxable perquisites and retirement benefits.

Subtract certain deductions like conveyance allowance (up to Rs 800 per month) from this. The balance is charged under the head salary income.

Total taxable income: Your ‘basic salary’ is fully taxable. Further, any amount of dearness allowance, commissions and bonuses, city compensatory allowances, overtime allowance and even lunch allowance that you get is fully taxable.
House rent allowance: HRA is exempted up to a certain limit provided you are actually paying house rent. The lowest of three amounts, actual HRA received or rent paid in excess of 10 per cent of basic salary or 50 per cent of your basic salary (40 per cent of your basic salary if you reside in a city other than Mumbai, Kolkata, Delhi and Chennai), would determine how much is to be exempted. The balance is taxable.

Conveyance allowance: Up to Rs 800 per month is exempt from tax.

Leave travel allowance: This is a reimbursement for travel expenses that you and your family members incur within India while you are on leave. While LTA can be paid to you every year, it is treated as tax-free only for two journeys in a block of four years. Both these journeys can be made in any one of the four years or spread out over the four years.
Medical allowance: Reimbursement of medical expenditure incurred by you and your family is tax-free to the extent of Rs 15,000 per annum. Remember, all reimbursements need to be supported by bills or other documents.

Perquisites. Perquisites are benefits that your employer gives you in addition to your regular salary. These are usually in the form of accommodation or car or concessional loans. The total of all perquisite values is added to the salary and tax is calculated on the usual slabs.

Premium paid by your employer under group insurance or medical insurance premium paid by your employer escapes the tax net. However, you need not worry about calculating all this. Your employer will give you Form 12 BB, which will show you the value of perk as part of your salary.

You will also get Form 16, which shows the ‘income chargeable under the head salaries’ and TDS, taking into account all the allowances and deductions. If there is no deduction of tax at source for you, your employer will give you a certificate of salary earned during the financial year instead of Form 16
American journalist Bill Vaughan had remarked, “The tax collector must love poor people, he’s creating so many of them.” You might want to agree after seeing what taxes have done to your income.

2. Income from house property

Rental income from a residential or commercial property that you own is liable to be taxed.

Even if the property is not rented out, it will be treated as rented out and the rental income will be liable to be taxed. What is taxed under this head is not the actual rent but the inherent capacity of the property to earn income. This is known as the property’s “annual value”.

The gross annual value is the highest of these: the municipal value, the actual rent, or the fair rental value.

To calculate your gains, see the worksheet. Preferential treatment is given to one self-occupied house which has not been let out at any time. In this case, the annual value is taken as ‘nil.’ The interest payable on home loans taken on or after 1 April 1999 is tax-deductible up to Rs 150,000 a year.

3. Capital gains

If you hold a house, commercial property, gold or silver for more than 36 months, they are termed as long-term assets. If you hold them for 36 months or less, they are short-term assets.

However, shares and units of equity mutual funds are short-term assets if you hold them for a year or less and long-term assets if you hold them for more than a year.

To calculate your gains, see the worksheet. Short-term capital gains are included in your gross total income and, after deductions, are taxed as per your tax slab.

Other than for listed securities, long-term gains are taxed at 20 per cent with indexation. Gains from equity shares or units of equity mutual funds are tax-free in the long term and taxed at 10 per cent in the short term.

4. Gains from business and profession

Income earned from your profession, or through business, is taxed under the head ‘profits and gains from business and profession’. The income chargeable to tax is the difference between gross receipts and the expenses incurred to earn that income.

A person carrying a profession of law, medicine, engineering, architecture or technical consultancy, whose total gross receipts from that profession exceed Rs 150,000 per annum, is required to maintain books of accounts.

5. Other incomes

Any income that does not fall under the four heads of income mentioned above is taxed under the head ‘Income from other sources’.

An example of such income is interest from bank deposits or national savings certificates.

6. Computation of Gross total income.

1 + 2 + 3 + 4+ 5 = 6 = Gross Total Income

How to pay LESS tax on your income!

“If you beat us in a game of cricket, we will forgive your tax for three years. If you lose, you’ll have to pay triple the taxes.”

This was the condition the British administrator put before Bhuvan (Aamir Khan) in the film Lagaan. The Lagaan episode holds true even for you! Some of your tax is waived if you invest in specified areas.

This is the crux of allowing deductions from your gross total income. The smaller the income on which tax is levied, the lesser is the tax. Under Section 80C of the Income Tax Act, you can reduce your total income by up to Rs 100,000 by making specified investments. There are other sections of the Act as well wherein you can reduce your total income. These investments are mentioned below.

1. Section 80C products

Bank deposits: Term deposits in a scheduled bank with a minimum period of five years notified under the Bank Term Deposit Scheme, 2006, not only give you a fixed and assured return (around 8 per cent), but also a tax advantage.

Term deposits are a one-time investment and there is no commitment to pay in the future. But remember that the entire interest income from such deposits is taxable. State Bank of India and HDFC currently offer 8 and 7.75 per cent interest, respectively, over five years, while ICICI Bank offers 8.25 per cent.

Employee Provident Fund: This is a forced saving for employees and helps them save for retirement. Every month, 12 per cent of your basic salary is deducted and put into a kitty maintained either by the government or your company’s trust.

7 Deductions Deductions available
Amount Your numbers
(in Rs) Sections When, where and how much of deductions
Rs 20,000 — Insurance premiums

Rs 1 lakh in specified instruments like life insurance and ELSS

Rs 70,000 — Public provident fund

Pension plans of life insurance companies; 80C limit stands reduced by 80CCC investment

Rs 10,000 — Invetsment in ELSS

Rs 10,000 deduction on mediclaim, Rs 15,000 for senior citizens

Rs 10,000 — Medical Insurance Premiums

Rs 50,000 reduced from total income of a person with a handicapped dependent

Rs 5,000 — Donations

Rs 40,000 and Rs 60,000 (sr citizen) deduction for expenditure on treatments of special diseases

Rs 0 — Other deductions

Interest on education loan – entire amount tax deductible

Donations (all donations don’t qualify for 100% deduction)

Deduction according to formula for rent paid for housing

Rs 1,15,000 — Total Deductions

Rs 50,000 deduction from total income for handicapped persons

The contribution currently earns a tax-free return of 8.5 per cent. The rate of return is fixed by the government every year in March-April. Your employer also pitches in with 12 per cent of your salary every month. Of this, 8.33 per cent is diverted to your pension fund, the remaining amount is put in the provident fund.

Public Provident Fund: This is a self-directed investment option. It is essentially a 15-year investment that gives a tax-free return of eight per cent as of now. The rate is subject to change. Investments of Rs 500-70,000 qualify for a tax deduction under Section 80C.

Home loans: The total amount eligible for deduction is up to Rs 100,000 a year for the principal amount

Children’s fees: Parents can claim a deduction for tuition fees for a maximum of two children within the overall limit of Rs 100,000. However, payment towards development fees or donations to the institution are excluded.

National Savings Certificates: These are for those who are less averse to risk. This government-backed security is available at post offices and gives an interest rate of eight per cent, compounded half-yearly as of now. The interest is entirely taxable. NSCs are good for those in lower tax slabs with an investment horizon of six years.

Equity-linked savings schemes: These are mutual fund products and carry market risk. Like all tax saving options, these plans have a lock-in period of three years. Therefore, it makes sense to go in for funds with good track records rather than the new fund offers, especially in this category. Choose the ‘growth’ option for an optimal investment.

Life insurance: Your life cover premium is eligible for a tax deduction up to Rs 1 lakh under Section 80C. If the premium paid in any of the years is more than 20 per cent of the sum assured, then deduction will be allowed only up to 20 per cent of the sum assured. This applies to all term, endowment and unit-linked plans.

Pension plans: If any investment is made under this section, then the qualifying amount under Section 80C stands reduced to that extent. Investment in insurance and mutual fund pension plans also comes under this section with an overall limit of Rs 1 lakh.

8 Section 80C investments
Wealth creation through tax planning

Plans available
Interest (%/yr)
Tenure (yrs)
Tax status of returns

Bank fixed deposit 8
Entirely taxable
Deposits up to Rs 1 lakh per bank per branch insured

Employee Provident Fund 8.5**
Till superannation
Tax free
Interest is normally announced every April
National Savings Certificate 8
Entirely taxable
Highest safety
Public Provident Fund 8**
Tax free
Withdrawals, loans available
Equity-linked savings schemes Market linked
3 minimum
Dividend and capital gains are tax-free
Life insurance – endowment IRR of 4-7
Life insurance cover
Life insurance – unit linked Market linked
Life insurance cover
Pension plan (insurance) Market linked
Till age 45
Pension taxable
Benefit u/s 80CCC within overall limit of 80C
UTI – Retirement Benefit Pension Fund Balanced Fund
Till age 58
Capital gains tax
Returns (%) over 3/5 years^15.0/17.0
Templeton India Pension Plan Balanced fund
Till age 58
Capital gains tax
Returns (%) over 3/5 years^16.1/20.1
*May vary for each company **Current rate of interest *** Subject to attaining a minimum investment of Rs 10,000/- by the age52 years ^As on 16 jan 2007

2. Other deductions

Health insurance: Under Section 80D, medical cover premium is tax-deductible up to Rs 10,000, with an additional deduction of up to Rs 5,000 if the policy is in the name of a senior citizen (65 years or older) and the premium is paid by him. If someone below 65 buys a plan for his dependents, he can avail benefit upto Rs 15,000.

Educational loan: The interest on loans taken for higher education are also eligible for deduction from your total income under Section 80E. There is no monetary ceiling on the interest you can claim as a deduction. The loan must have been taken from a financial institution or an approved educational institution. Remember, repayment of loan or interest on loans taken by parents for higher education of their child is not eligible for deductions.

9 Taxable income

Your numbers (Rs)

Gross total income

Rs 11,83,999

Rs 1,15,000 Less

Rs 10,68,999 Taxable income

The calculations are indicative and do not exhaust all possibilities

Charity: To avail tax benefits under Section 80G, donations must be made only to specified trusts. The tax breaks vary according to the trust to which you have donated.

Medical treatment: Any expenditure for the medical treatment (including nursing) of a handicapped person, training and rehabilitation of a person suffering from a permanent physical disability (including blindness) or from mental retardation, qualifies for a deduction under Section 80DD upto Rs 50,000. A life insurance policy bought for the benefit of such a handicapped person is also eligible for this benefit up to Rs 50,000. In case the disability is severe, the claim can go up to Rs 75,000.

What to do: US radio comedian Fred A. Allen once said, “An income tax form is like a laundry list – either way you lose your shirt.” The law, indeed, takes its own course, and cares little whether you are left with your shirt on or not. But the law just became better this year, by removing caps on investments in the avenues mentioned above, except for PPF, where deductions are available only up to Rs 70,000. Thus, investors can invest in line with their risk appetites and needs.

Investments in tax instruments should never be done merely to save taxes. The value derived through liquidity, returns and security over the next few years should guide your investment decision.

The Income Tax Act does not treat all kinds of savings uniformly – the taxability of contributions, accumulations and withdrawals differs from one instrument to another. In a PPF scheme, for instance, you can avail deductions, and the interest and the money you get on maturity is not taxed. This is the ‘exempt-exempt-exempt’ method of taxation, since all three stages – contribution, accumulation and withdrawal – are exempt from tax.

On the other hand, while contributions to, and accumulations in pension plans are not taxable, lump sums withdrawn or periodical pension are taxed in the year of receipt. This is the ‘exempt-exempt-tax’ method of taxation.

Don’t forget to keep the records of your investments and tax deduction certificates, since you will have to attach them with your returns.

If you think the tax rates are skewed, American explorer Jeff Rich will give you company. He said: “We are all are equal, but some pay higher tax rates than others.” And you thought tax was invented to make life fair for everybody.

6 – 7 = 9 = Taxable Income

Written by Bhushan Kulkarni

February 9, 2007 at 9:30 am

Posted in Uncategorized

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