Tax Advice

How to Save Income Tax? Tax Saving Guide.

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 2^nd 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:

1. HRA = (₹14000*12) = ₹1,68,000
2. Actual rent paid – 10% of basic = (₹180000 – ₹36000) = ₹1,44,000
3. 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. 

Educational Loan

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.

Also read: Best Tax Saving Instruments to Maximise Your Corpus – Fintoo Blog

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.

 Mediclaim

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 1^st 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

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

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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Best Tax Saving Instruments to Maximise Your Corpus

Any person earning Income has to pay tax. So why are we waiting for the last-minute rush, tax planning and investing to save taxes should not be left for the last minute. Better to start now, this way one can get ample time to carefully plan your tax which will enable us to achieve our target of Tax saving and also helps to accumulate wealth for our future.

There are various tax savings options available under section 80 C of the Income Tax Act, 1961. Now the next step is to figure out the option which offers the highest possible returns.

Here we are going to discuss few such investments which are good tax-saving instruments and simultaneously helps to create wealth in a long term:

• Equity Linked Saving Scheme (ELSS)

Equity is the best investment option that offers a kind of wealth creation opportunity. It holds the potential to beat inflation and generate long-term wealth. However direct investment in stocks does not offer a tax-saving advantage and it is subject to a highly volatile market that needs lots of expertise to create wealth out of it. That is where Mutual Funds come because one can leverage the power of investing in equity but leave the expertise required for equity investing to the domain experts for small fees.

Equity Linked Saving Scheme (ELSS) is one of the best options in the given scenario. ELSS funds are diversified Equity Mutual Funds. One of the important advantages is it has a mere 3 years Lock-in period which is the lowest among other tax-saving instruments at the same time it gives the highest returns.

ELSS funds primarily invest in Equities and Equity Linked Instruments, across the market in terms of sectors and market cap.

Liquidity is also one of the factors of evaluation, the 3 years lock-in with ELSS funds may be a better option for most investors because your money is far more liquid than in other investments.

 Due to 3 years, lock-in period Fund Managers can generate better returns because they can take long term strategic decisions as opposed to short term moves in response to investor behaviour when the market is volatile.

SIP in ELSS:

Another good option is to invest in ELSS via SIP. Here one can invest regularly as per our financial goals and it also benefits from averaging during times of volatility.

One can also gain from the power of compounding, which is one of the next best options in building wealth creation. As per the growth option in ELSS funds you stand to benefit from the power of compounding.

E.g. If we invest Rs.5000/- per month (SIP) for 15 years in ELSS then the total investment was only Rs. 9 lakhs and the returns after 15 years would have been Rs.44.5 lakhs.

• Public Provident Fund (PPF)

When people think of building a corpus for their retirement, the first thing that comes to their mind is by contributing to the Public Provident Fund. Public Provident Fund is one of the safe options of investment as it is backed by the government. It gives a fixed rate of Interest annually (7.1% per annum – at present). However, with the current changes proposed in Union Budget 2021, the interest earned will be taxable if the annual contribution is Rs.2.5 lakhs and above. 

It is available in all post offices and all public or private sector banks. 

The Frequency to deposit in the PPF account is also as per the tax payer’s requirement ie. One can deposit either a lump-sum amount or in instalments during the Financial Year.

E.g. With an investment of only Rs. 5000 per month at 7.1% per annum one can receive approx. Rs. 16.7 Lakhs after 15 years. 

It is suitable for investors who want to avoid risk, save for long term goals like child education, marriage, etc without worrying about any capital loss.

Must Read: Portfolio Management Services in India

• Sukanya Samriddhi Yojana

Sukanya Samriddhi Yojana (SSY) is a small deposit scheme for the girl child launched as a part of the “Beti Bachao Beti Padhao” campaign. One of the reasons why this scheme has become popular is due to its tax benefit. It is again backed by the Government so it is preferred by those taxpayers who want to save tax and get good returns without capital loss.

Though this option is available only to those who have a girl child, it is a good tax-saving instrument that fetches the highest rate of interest (7.6% per annum) and also creates corpus in the long run which enables the taxpayer to achieve their financial goals like girl child marriage or for her study purpose.

A Sukanya Samriddhi Account can be opened any time after the birth of a girl child till she turns 10, where you will have to deposit a minimum of Rs.250/- and a maximum of Rs. 1.5 lakhs can be deposited during the financial year. The account remains operational for 21 years from the time it is opened or until the girl in whose name it is opened gets married, after she turns 18 years.

It comes with exempt-exempt-exempt (EEE) status as its annual deposit qualifies for Sec 80 C benefit and maturity proceeds are also non- taxable. The Interest received is also exempt from Tax.

• National Pension Scheme

As the name suggests National Pension Scheme is dedicated solely to retirement planning. It is a pension cum investment scheme launched by the Government of India for the age from 18 to 65 years. NPS is also a good option for wealth creation as your money gets invested across asset classes like equity, Government/corporate bonds, etc.  

Here one can have the choice to select our asset allocation which follows an age-based asset allocation model depending on our risk appetite. 

It has the dual benefit of investing for retirement and also the best tax saving instrument as it qualifies for EEE status.

Hence the National Pension Scheme can be a good option for those who are not comfortable making investment decisions on their own then such a tailor-made solution can be the best choice and will also build a corpus for their retirement.   

• Fixed Deposit Scheme

Fixed Deposits are one of the safest investment options, especially when one compares them with stocks or other market-linked instruments. As the volatility is low the corpus that one set aside in Fixed Deposits serves as a great way to ensure that your capital is safe.

For the investor who is just starting with different investment options, then investing the same amount as your capital is an easy way to arbitrage your risks and receive an assured amount at maturity.

One can also start saving at an early age and multiply wealth with the power of compounding. 

• United Linked Insurance Plan

United Linked Insurance Plan is a combination of savings and protection. Along with providing Life Insurance it also helps to channelize one’s savings into various market-linked assets for meeting long term goals.

A Minimum lock-in of 5 years is long term, which ensures investors generating good market-linked returns. 

It is good to stay invested in these schemes for a long-term period of say about 10 years or more. Over the long term, ULIP is expected to generate returns ranging from 10% to 12%. The returns from the best ULIP are better than other market instruments like FD’s, NSC’s, PPF, etc. Best ULIP can also beat inflation in the long term. 

One can also get a brisk return by exercising the option of fund switching in ULIP’s due to long term investment.  

The amount received on maturity is exempt from taxation u/s 10 D of Income Tax Act, 1961. Along with this tax relief, one can also avail of tax benefits on premiums paid up to a maximum of Rs.1.5 lakhs u/s 80 C of Income Tax Act, 1961.

Thus, the objective of wealth creation over an investment horizon of 10 years can be fulfilled by investing in the best ULIP.

Conclusion 

It is wise to think of investing beyond the traditional ways of saving tax like, investing in Fixed income tax saving instruments like FD, PPF, or endowment life insurance plans etc. Plan for other options like ELSS, ULIP, etc based on the risk appetite and other relevant factors as discussed above of an individual. 

With many options available when investing for wealth creation and saving tax at the same time can be easily achieved by making the right choice at the right time and getting started with it at the earliest.

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ULIPs with an annual premium above ₹2.5 lakh to be taxed

Finance Minister in budget 2021 has made the maturity proceeds of the unit-linked insurance policies (Ulips) taxable. However, it will be taxable only if the annual premium is above ₹2.5 lakh. The rules will apply for Ulips issued on or after 1 February 2021. According to the Budget memorandum, “Under the existing provisions of the Income Tax Act, there is no cap on the amount of annual premium being paid by any person during the term of the policy. Instances have come to the notice where high net worth individuals are claiming exemption under this clause by investing in Ulips with a huge premium. Allowing such exemption in policy/policies with huge premium defeats the legislative intent of this clause.”

Are you wondering what will be the tax rate?

Ulips will be taxed at 10%, above an annual exemption of ₹1 lakh, at par with equity mutual funds. It is an attempt to rationalize taxation of Ulips. The non-exempt Ulips shall be provided with the same concessional capital gains tax regime as available to the mutual fund to provide parity with equity mutual funds.

Currently, the entire amount received under a life insurance policy is exempt under section 10(10D). Section 10(10D) of the Income Tax Act exempts any amount received under a life insurance policy including Ulips, if the sum assured is more than 10 times the annual premium. This exemption includes death benefits, maturity benefits and accrued bonus. It means until now, there was no upper limit applicable to the claim against a life insurance policy.

How To Find Out Which ITR Form To Fill?

31st March marks the end of the financial year in our country when everyone is supposed to conduct their income tax efiling with the government. This applies to all kinds of establishments be it business or otherwise but functioning in accordance with the Income Tax Act (ITA) and trade and business laws of India. However, when it comes to filing, it gets tricky to choose the income tax return form amidst various options available.

Currently, there are seven valid forms to choose from as some of the previous ones have been discontinued or replaced by others. The Income Tax Return forms have to be filled with information regarding the company or individual’s income and tax, which then needs to be submitted to the Income Tax Department. In fact, if you are filing returns for yourself, there are four different kinds of forms that could be applicable to you.

Today we are going to walk you through the various ITR forms out there to help you identify which one to fill so that you can go ahead and carry out your tax return filing in a hassle-free manner.

ITR Form 1 or Sahaj

ITR form 1 is applicable to any individual, or a Hindu Undivided Family (HUF) whose annual income is below 50 lakhs INR (through pension or salary). This is also applicable for individuals receiving income from a single property or through pension/salary. You need to keep in mind that money earned through gambling of any kind or lottery cannot be accounted for through the ITR-1 form. You are not eligible to use this form if you have income arising from agriculture that amounts to more than 5,000 INR. Taxable Capital gains also cannot be filed through the ITR 1 form.

ITR-2

The ITR 2 form is very similar to the ITR-1 form, with just a few differences. You can’t use the ITR-2 form if your total income includes revenue from any business or vocation. On the other hand, income through lottery can be included in this, as well as that arising from more than one property. Other than that, it is similar to the ITR 1 when it comes to filing capital gains (taxable).

ITR- 3

Any individual or HUF earning income from a business that is proprietary in nature or from more than one property is eligible to conduct their e tax filing using this form. This is also applicable to someone who is a partner in that establishment/firm. Again, like the ITR 2, income from the lottery can be filed through this.

Related Article : What Is Form 16? Upload Form 16 And File Income Tax Return – Fintoo Blog

ITR-4

If your requirements are similar, you might want to have a look at the ITR 3 form. It is important to carefully analyze all the form options, before choosing the one that would be applicable to you. Anybody is eligible for this option provided you have engaged in the Income Scheme (Presumptive) of Sections 44AE, 44AD, and 44ADA of the ITA (Income Tax Act). All kinds of earnings can be filed through this (property, lottery, etc.). However, if you are eligible for Tax Audit then you will have to opt for the ITR-3 form.

ITR- 5

The specifications of the ITR 5 stand very clear for making it applicable to LLPs, firms of every kind, Association of Persons (AOP), And Body Of Individuals (BOI). You can file every kind of tax return online through this, other than salary, which is not eligible for this particular form.

ITR-6

The most distinguishing factor for this form is that it is compatible only with e filing of income tax. Companies that have claimed exemption under section 11 of the ITA cannot avail of this. The ITR 6 is applicable to any establishment earning an income through the property(s) used for religious or charitable causes. Just like the ITR 5 form, the salary cannot be filed using this.

ITR-7

To find out if you are eligible for this, you must go through sections 139(4A), 139(4B), 139(4C), or even 139(4D). All of these refer to establishments that strictly fall under the category of a Trust. This is what separates the ITR 7 from the rest.

In a manner, similar to ITR 6, returns on property held for religious or charitable causes are eligible to use this. The article 139(4A) specifies the terms for an establishment to be included in its definition.

Section 139(4B) gives access to political parties if the amount exceeds the maximum limits, in which case it would be exempted from Income tax according to the provisional specifications in Section 139A of the ITA.

Tax return filing pertaining to specifications under sections 139(4C) gives eligibility to news agencies, research associations that are scientific in nature and institutions falling under categories mentioned in sections 10(23A) and 10(23B).

At the same time, Income Tax Return under section 139(4D), needs all institutions, colleges, and universities to use this form, apart from the ones already mentioned. Considering the fact that there are so many different kinds of forms to assist with tax return filing in India, one needs to be extremely cautious in realizing their eligibility while deciding which ITR form to fill. It is also important for you to remember that you should complete filing your returns before the 31st of December to avoid paying a penalty of 5,000 INR. With technology advancing as far as it has, several companies also offering free e tax filing services. While filing your ITR, you need to make sure that you know about all the available options for completing the same in an honest and timely manner!

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5 Major Types of Taxes We Pay In India

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:

1. 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.
2. 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.
3. 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:

1. 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. 

2. 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.

3. 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.

5. 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,

Deductions:

• 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?

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How Mr. Sharma’s home loan helped him Save Tax?

Mr. and Mrs. Sharma, both in their early 30s, after completing 5 years of their married life decides to have a house of their own. Both husband and wife are working at good positions in corporate and are regularly paying income tax on their incomes. After sheer hard work and a lot of savings, they will finally be able to make a house of their own. Both of them are really excited to live in their own house. They have invested almost everything they had in this new house.

Mrs. Sharma has big dreams for the house. She has all the color combinations and furniture designs pre-decided. While Mr. Sharma has planned to hire the best architect for their house. But all these dreams are becoming a reality after cutting their leisure for the past 5 years. Also after saving every single penny they could in these past 5 years. Most probably this scenario will continue for a few more years as they have invested everything they had in their dream house.

Well, this case study seems to be familiar to most of the people around us. They are passionate people who work really hard to fulfill their dreams. All of us have a list of wants, actually a pretty expensive wish list to be checked in as little time as possible. But just hard work is not enough for these purchases. One needs to consider the tax-smart alternative to pay less by using tax planning.

So, before we see some ways to plan our taxes on home loan, let us first understand the concept of tax planning.

Tax Planning

Tax planning is simply arranging your financial activities in such a way that maximum tax benefits are enjoyed. This can be done by making use of all beneficial provisions in the tax laws. It helps any person to take full advantage of all available exemptions, deductions, concessions, rebates, and reliefs within the boundaries of the law. Tax planning is important to avoid expensive tax blunders people make. It is also helpful in planning your financial transactions in a manner that you can legally reduce your taxes.

Related Article : Tax Planning For Beginners: 3 Key Principles Explained

The Income Tax Act, 1961 under various sections provides us the opportunity to plan our investment. Thus, you can claim various exemptions and deductions against the quantum of your tax liabilities. Now let us discuss a few of the most common tax planning tools with you which will assist you in optimizing your home loans.

Tax benefit on home loans

Home loans are highly advisable options for tax planning as one can claim a deduction in 3 different sections for the repayment of home loans. Thus resulting in huge tax savings. So to make it simple, let us understand this benefit by categorizing the repayment into two components. First is repayment of principal amount and second is repayment of interest on home loans.

The deduction for repayment of principal amount on home loans can be claimed under Section 80C of the Income Tax Act, 1961 up to ₹ 1,50,000. While the interest paid on home loans can be claimed under Section 24 of the Income Tax Act, 1961 up to ₹ 2,00,000. Also, an additional deduction of₹50,000 for interest on home loans can be claimed. First-time buyers can claim this additional deduction under Section 80EE of the Income Tax Act, 1961.

Recommendation

As Sharma’s were earning well, they could have invested their savings in some eligible funds and claim deductions thereof. Moreover, had they considered the option of a joint home loan, they both could have claimed deductions for payment of principal and interest amounts in respective sections as discussed above.

These smart choices would have given them the option to have their dream house much before, instead of making them wait for 5 years. Also, they could have even enjoyed their lives without sacrificing much in their leisure.

Conclusion

Tax planning is like a win-win situation for everyone. We, the taxpayers are able to plan our activities in such a manner that we attract minimum liability to tax by taking full advantage of tax laws. Our government also is at advantage as the exemptions and deductions that we get can be utilized only by making investments in various schemes initiated by the government. Finally, our nation will also prosper as the money invested by us in government schemes will help in the development of our country and those schemes will also generate employment in the nation. Thus, your simple step of tax planning is even helping our society to grow.

Tax planning is not something you do at the last moment before filing your tax return. Tax planning is much more than that last moment rush. It is a disciplined approach. One has to be smart enough from the beginning of the financial year to plan all the transactions considering the tax-smart choices so that you don’t end up paying more taxes than you have to!

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