What is tax planning?
Tax planning is the analysis of an individual’s financial situation from a tax efficiency point of view so as to plan an individual’s finances in the most optimized way. It allows an individual to make the best use of various taxes. Income tax planning involves planning under various provisions of the Indian taxation laws. In India, tax planning offers provisions such as deduction, contributions, incentives, exemptions.
Advantages of tax planning:
- To reduce tax liabilities
Individuals wish to reduce their tax burden and save money for their future. With the various benefits offered under the Income Tax Act 1961, you can reduce your payable tax by arranging your investments. The Act offers many tax planning investment schemes that can reduce your tax liability.
2. Minimise litigation
Minimising litigation saves the taxpayer from legal liability. Litigate is to resolve tax disputes with
local, federal, state or foreign tax authorities.
3. Leverage productivity
The core tax planning objective is channelizing funds from taxable sources to different income-generating plans. This ensures optimal utilization of funds for productive causes.
4. Ensure economic stability
Effective tax planning and management of income provides a healthy inflow of white money that show sound progress of the economy. This benefits both the citizens and the economy. Every taxpayer’s money is devoted to the betterment of the country.
How to save taxes?
- Section 80C
Taxpayers are provided with several options to reduce their tax liabilities. There are various sections of the Indian Income Tax law that offer tax deductions and exemptions, of which, Section 80C is the most popular tax-saving instrument. Here is a quick look at how you can save tax by using various deductions allowed under the Income-tax Act.
Section 80C It is the most commonly used section where an individual can save tax by investing or spending a maximum of Rs 1.5 lakh in a financial year in/on specified avenues. Some of the commonly used investment/expenditure avenues under Section 80C are Employees Provident Fund (EPF), Public Provident Fund (PPF), Equity-linked savings scheme (ELSS) mutual funds, National Pension System (NPS), repayment of the principal amount of home loan, children school fees etc.
- Section 80CCD (1b)
You can further save tax by investing additional Rs 50,000 in NPS. Do keep in mind that this deduction is available over and above the tax benefit available under section 80C. Thus, you can save tax by investing up to Rs 2 lakh in a financial year -Rs 1.5 lakh under section 80C and Rs 50,000 under Section 80CCD(1b).
- Section 80CCD (2)
This deduction is available on the employer’s contribution to an employee’s Tier-I NPS account. A maximum contribution of 10% of the basic salary plus dearness allowance (if applicable) is allowed under this section.
- Section 80D
Premium paid for the health insurance policy of self, spouse and dependent children can be claimed as deduction under section 80D of the Income-tax act up to Rs 25,000. In addition to that, the premium paid for the health insurance of parents can offer an additional tax break up to Rs 25,000. If your parents are senior citizens (age 60 years and above), then this tax break would go up to a maximum of Rs 50,000. Therefore, health insurance premiums paid for self (including spouse and dependent children) and senior citizen parents can help you save tax up to Rs 75,000 in a financial year. If both the taxpayer and parents are senior citizens then, the maximum deduction of Rs 1 lakh can be claimed in a financial year.
If your senior citizen parents are not covered under any health insurance policy, then the medical expenses incurred for them can be claimed as a deduction under section 80D. The maximum amount that can be claimed as a deduction under section 80D for medical bills in this manner is currently Rs 50,000.
- Section 80DD and Section 80DDB
Apart from section 80D, there are two other sections that can help you save tax in case of medical expenses incurred for disabled and/or specified persons. Section 80DD offers a tax break on the medical expenses incurred for a dependent disabled person. Dependent here includes spouse, children, parents, brothers, and sisters of the individual.
The deduction allowed depends on whether the dependent is disabled or severely disabled. If the dependent is at least 40% disabled, then the maximum deduction that can be claimed is Rs 75,000. On the other hand, if the disability is 80% or more, then it is considered a severe disability and the maximum deduction that can be claimed is Rs 1.25 lakh.
Section 80DDB offers a deduction for the medical expenses incurred for the treatment of specified illnesses such as cancers, chronic kidney diseases, etc. This deduction can be claimed for the expenses incurred on self or the dependent. For individuals below 60 years of age, whether self or dependent, the maximum deduction allowed is Rs 40,000. For senior citizens aged 60 years and above, the maximum deduction that can be claimed is Rs 1 lakh. The list of diseases for which deduction can be claimed under this section is specified in the Income-tax Act.
- Section 80U
If you are an individual with a disability of 40% and above, then you can claim a tax break under section 80U. However, deductions under sections 80U and 80DD cannot be claimed simultaneously.
Deduction under section 80U is claimed by the disabled individual whereas deduction under section 80DD is claimed by the dependent who has incurred expenses for the treatment of the disabled individual. The deduction amount under Section 80U for disability and severe disability is the same as mentioned in section Section DD
- Interest on Housing Loan
Apart from the tax benefit available on home loan principal repayment under section 80C, one can also claim tax benefit on a maximum of Rs 2 lakh on the interest paid on the loan during a financial year. If you are paying interest on a home loan for an under-construction property, this benefit will be available after the possession of the house, provided it happens within five years. The interest paid during the construction period can be accumulated and claimed in five equal installments after getting possession of the house.
- Section 80EEA
If you have taken a home loan to buy a house under the affordable housing segment during FY 2020-21, then you are eligible to claim an additional tax break on interest paid up to a maximum of Rs 1.5 lakh. This deduction is available over and above section 24 (mentioned above) where you get a tax benefit of up to Rs 2 lakh. However, there are certain conditions that you must satisfy before claiming tax benefits under Section 80EEA.
- Section 80G
Contributing to charity can also help you save tax. If you donate to specified government notified funds under section 80G you can claim up to 100% of the donation as a deduction from your gross total income thereby reducing your taxable income and consequently the tax
- Section 80TTA
Interest earned on balances in savings accounts held with banks or post offices is taxable under Income from other sources. However, interest earned from these sources up to Rs 10,000 in a financial year can be claimed as a deduction from gross total income under section 80TTA.
- Section 80TTB
Senior citizens (those aged 60 years and above) can claim a maximum deduction of Rs 50,000 from gross total income under this section. The deduction can be claimed on the interest earned from specified sources such as savings account, fixed deposits, senior citizen savings account etc.
- Section 80E
Interest paid on an education loan will also get you a tax break. Only individuals can claim this deduction. HUFs are not entitled to this deduction. There is no limit on the maximum amount that one can claim as a deduction from gross total income under this section in a financial year. However, the benefit is available for a maximum of 8 years from the start date of loan repayment.
Tax Planning is not a day’s work and has to be carried out considering the financial goals, liquidity position, and taxability on returns etc. A taxpayer can save the tax as well as build wealth alongside by doing tax planning in advance.
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.
Income tax is paid by every individual who earns above INR 2.5 Lakhs per annum. Post the limit of INR 2.5 Lakhs, each and every individual is liable to pay taxes. It’s also everyone’s duty to file Income Tax returns, even if the tax liability is nil. The last date for filing of Income Tax Return for FY 2019-20 is 31st December 2020. Many people think that if they have paid their taxes, but not filed their return on time, it’s absolutely fine, however, this is incorrect. Although you might have paid your taxes well on time, still individuals can lose getting benefits if they don’t file their ITR within the due date.
What Is ITR – Income Tax Return?
ITR or Income Tax Return as prescribed by the government of India has to be filed every year by an individual or a business who is receiving income in any form i.e. Salary, wages, investment returns, capital gains, or interest.
There is a specific date by which the income tax return must be filed by each and every person. Through the ITR, the Income Tax department comes to know if a person has paid excess tax, then he or she is eligible for a refund by the government, according to the department’s calculations, and even the source of Income, etc.
What Happens If You Forget To File Your Income Tax Return?
- Interest loss in case of refunds: – If you are claiming a refund on your TDS deduction, you can lose interest in it, which is around 6% pa. For returns that are filed after the due date, the interest is calculated from the date when the return is filed till the time when the refund is granted to the individual. Talking about the usual procedure of interest calculation, it is done from the 1st of April of the following year.
- Interest liability on the individual:- For people who already have some form of tax liability, the late filing of the return would levy interest of 1% (from due date – date of filing return).
- Penalty for non-taxpayers: – In case you do not have to pay any taxes to the government for your income, but by 31st March, you fail to file the tax return, can attract a penalty of INR 5000 if the proper reasoning is not provided for return file delay.
Non Tax Payers – How Are They Affected For Not Filing The Return?
People who are not liable to pay any tax to the government would be required to prepare a computation and submit that no amount of tax was payable and everything was deducted at source. Also, this is helpful, when the timeline for tax file return is over.
What Are The Penalties Of Late Filing Of Income Tax?
If the income tax is filed after the due date by an individual, then there are certain penalties levied on the individual. Under section 271F, a penalty of INR 5000 is levied on a person if the income tax is filed late.
This penalty is mostly paid in cases where an individual receives a letter from the Income Tax department of the government of India.
The rare cases of penalties levied by the Income-tax department are imprisonment of 3 Months – 2 years (for tax liabilities less than INR 25 lakh) and up to 7 years (for tax liabilities exceeding INR 25 lakhs). Moreover, the times when you have not paid full or partial tax in the current or subsequent financial year, then you need to pay a penalty of INR 5000 along with 1% interest each month.
Important Dates For Income Tax Returns
Here are the lists of important details for every individual to keep a track off:
- Every year, the return should be filed by 31st July.
- In case this date is missed by the taxpayer, you can file the income tax return by 31st March of next coming year.
- If in case this deadline is also missed, the taxpayer has time till 31st March of next year to submit the IT return.
The time line for accepting returns is till two years from the date you paid the taxes, post which there is a lot of adverse consequences.
However what if you miss the date and do not file the tax on time, ever wondered how it would affect you?
According to section 234 in the directory of the Income-tax Act, there are various penalties and allegations for the delay in filing or non-filing of the returns. Usually, you need to pay interest of 1% for every month due to tax due to filing returns.
You can either hire a CA (Chartered Accountant) for filing your tax return or you can even do it yourself through the online facility provided by the Income Tax department of the government of India.
With the usual misconception of failing to pay taxes can attract penalties, people don’t understand that failing to file the return on time (for tax and non-taxpayers) can also attract a penalty.
How To File The Income Tax Return?
The income tax return can be filed through the online portal or a CA can also file the return for any individual or a business at a nominal charge.
Who Should E-File Income Tax Returns?
The online form is quite easy to be filled and anyone can file income tax returns
So, file your Income Tax well before due date and have a peace of mind!
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.
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).
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.
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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.
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.
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.
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!
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:
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An education cess will also be applied at 4%, along with the above tax rates. Please note that there are some pointers to keep in mind, apart from the above table:
- Individual earning income over and above 50 lacs but below 1 crore, have to pay an additional surcharge of 10% on the tax. Surcharge further increases based on taxable income.
- Earlier dividend was tax free upto 10 lacs, but now any dividend received is a taxable income for the investor. Please keep in mind that it will be taxed as per your slab rates.
- If the total income is less than Rs.5 lakhs, the rebate shall be either 100% of the income tax or Rs. 12,500/-, whichever is less. This rebate can be availed under section 87A.
We pay so many types of taxes in India, directly or indirectly. Today we will focus on 5 major taxes an individual has to pay on the income he receives. Listed below are the incomes:
- Salary income:
Income received by an employee from an employer, for the services rendered by the employee. It could either be in the form of monetary or non – monetary benefits. Some parts of the salary are fully taxable and some are exempt up to a certain limit. Each company forms their salary structure in a different way. Observe the Table 2 below and understand the different sections of the salary.
These are the main parts, that a salary structure consists of. Once employees claim all the exemptions available, then they also can claim the deductions available to them, under different sections, for example 80C, 80D, 80G, etc. So after taking benefit of all the exemptions and deductions, the final gross salary will be considered and taxed according to the slab rates above, in Table 1.
- Income from Business / Profession:
Any profit earned or gain received from an individual’s business or profession, will be taxed under this head. Let us understand what is a business and what is a profession:
Business: Any activity related to trade, commerce and manufacturing, with the intention of earning profit is known as business.
Profession: Any person who uses their skillful knowledge, in their field of expertise, to render their services for a certain amount of fees. For example, Lawyers, Doctors, Chartered Accountants and other professionals.
How is tax implied?
Tax is charged on the profit earned by businessman or professional and not on the turnover or sales consideration. All the expenses incurred on the business or profession can be claimed against the income. Some of these expenses are, stationery, transport cost, internet charges, etc. So once all the expenses are deducted from the income, the remaining part will be the profit earned, which will be taxed.
When tax audit is applicable?
Business: If the business sale crosses over 1 crore.
Profession: If the professional income exceeds 50 lakhs.
Note: If the assessee earns income below 2 crores, and if no books of accounts are maintained, then he has an option to opt for presumptive taxation, which means, 8% of the turnover is considered as the profit earned for non-digital transactions and 6% for digital transactions , and tax is levied on that.
- Income from Capital Gain:
Any income or gain earned on an appreciated capital ( movable / immovable ) of an individual, will be taxed under this head of income, with subject to certain exemptions. The capital gain incurred can be short term capital gain or long term capital gain, it all depends on ‘for how long the asset is held’. The below table will make your concept clear.
There are certain ways to save your income tax on long term capital gains.
4. Income from House Property
If the asset is sold, before the completion of the minimum holding period, then it is considered as short term capital gain. And if it is sold, after the completion of the minimum holding period, then it will attract long term capital gains. Also note that the 4% which is added is the education cess which is charged. Tax charged on capital gain from house property, can be exempted under section 54, subject to certain conditions.
Any income from any land, building or apartment, which is owned by the assessee, but not utilized for any business or professional purposes, is taxed under this head of income. Let us look at the following points:
- If a person has multiple properties, then he / she can claim only two as self occupied and the others by default become Let out or Deemed to be let out.
- The deductions that one can claim from income from house property are municipal taxes ( which are actually paid), 30% on the annual value, which is a standard deduction.
- Interest on house loan can also be claimed, upto a limit of 2 lakhs in a financial year.
A major example of this is, an individual having 2 flats, he stays in one and gives the other on rent, so the rent, becomes the income of the individual, and after availing the above deductions, the income will be taxed according to the tax slab of an individual.
- Income from other sources:
Income which is earned from anywhere else, apart from the income received under the above heads, will be considered and taxed as income from other sources. Some examples of this income are, winnings from a lottery / betting / game show, gifts, foreign dividend, interest income on investment and securities, rental income from plant, machinery and buildings,
- Any brokerage charges paid, eg. commission.
- Depreciation can also be claimed.
- Any other expenditure incurred ( not capital expenditure ) for the purpose of generating such income.
So after, the deductions, the income will be taxed as per the slab rates of an individual.
The above are the major taxes we pay on the various incomes we earn. Now I’m sure many of you are clear on what incomes you earn and under which heads they are taxed. So pay your taxes on time, SAVE as much, of your taxes as you can, of course through the tax saving tools offered to you. When you have a choice to choose the right path, why go down the wrong?
We all want to make that extra money on the side, and if you really put your mind to it, you can make your ends meet. Do you think, the beggars on the road have no choice to make a living for themselves? They do have a choice. We gave them money, when they come to beg, is only encouraging them more, to continue begging. Even the roadside vendors, may not have their shops registered or may not even pay income tax. Two main reasons could be literacy and corruption. Literacy because, they wouldn’t know the importance of declaring their income and getting themselves registered and corruption because, if they get caught, they pay bribes to be let off the hooks. One way you can’t really blame them, because that is their only source of income and that is how they make their ends meet, they don’t have much of a choice. So basically everyone has needs, but what we are willing to do, to fulfill those needs, is what separates us from the beggars. Salary is not enough to make ends meet, as our demands keep on increasing. So what other choices do they have?
Well, there are many more ways to earn that extra income, it can be done through investments. You invest a certain sum of money in any investment instrument and give it time to grow through the interest earned, in other words, your invested capital is being appreciated, this capital appreciation is also known as capital gains. We all know, where there is income, there is tax, some investments have more advantages over the other investments. Also, the duration is one more important factor that decides,’ how much tax you pay’ and also if you have incurred a long term or short term capital gain. The longer the investment kept, the better it is for you, since you save more tax. Let us now look at how a short and long term investment is categorized:
- Short term investment in case of Equity, debt, and real estate: For equity, if the investment asset is held for less than 12 months and attracts gain, then it is considered as short term capital gain and will be taxed at a flat rate of 15% + educational cess at 4%. For debt, real estate, and physical gold, gold ETF, the short-term capital gain will arise, only if the asset is held for less than 36 months and will be taxed according to their slab rates + educational cess at 4%.
- Long term capital gain in case of Equity, debt, and real estate: For equity, if the investment is held for more than 12 months, the amount withdrawn will be tax-free in the hands of the investor up to a realized gain of 1lac and 10% tax will be levied on any gains above this threshold of 1 lac. For debt, real estate, and gold, the long term capital gain will arise, only if the asset is held for more than 36 months and will be taxed at 20% with indexation benefit + educational cess at 4%.
One more term that we need to understand before we move ahead is ‘Indexation Benefit’. What is the indexation benefit? Say Mr. Paul bought a house 5 years back for Rs. 60 lakhs, he wants to sell his house now for Rs. 1 Crore, what will be the capital gain he earns? Now, I’m sure many of you will say Rs. 40 lakhs. But that’s wrong because, in those 5 years, the value of the house has also appreciated saying Rs. 80 lakhs, so Mr. Paul has made a capital gain of only Rs. 20 Lakhs. So indexation is a technique to adjust the income payments, through a price index and the benefit is given, just to maintain the purchasing power of the people, after taking inflation into consideration.
As you can see for yourself, investing for a longer term is better than investing for a shorter term. Now let us look at the 5 categories, where you can incur long term capital gain and as we have already seen you can save maximum tax when your capital assets are long term in nature:
This is a very risky type of investment, as it has direct exposure in the market. Under equity, there are again numerous instruments in which you can invest, namely shares, mutual funds, etc. Since the risk is very high, the tax implication on equity investments is also very lenient. In fact, a person can save more tax, if they invest in equity and it could be tax-free if these investments are held for more than 12 months and the gain amount is less than 1 lac. However, there is only one equity mutual fund, which is known as Equity Linked Saving Scheme, which is available for deduction under section 80C. This fund’s lock-in period is for 3 years, as it is the only fund available for deduction.
For example, If a person has invested in 100 shares for Rs. 50000/-, he now wants to sell off those shares for Rs. 80000/-, within 6 months from the date of purchase, he has attracted short term capital gain, so now he has to pay 15% + 4% on that profit of Rs. 30000/-. Let us say he has kept it for 12 months and wants to sell it now at Rs. 100000/-, the whole amount of Rs. 50000/- will be tax-free in the investor’s hands.
This is a safer option as compared to equity funds in terms of risk, so the tax levied on debt instruments is also more as compared to equity investments. But the same logic of the holding period of the investments is applied here as well, the longer the investment held, more of your tax gets saved. Unlike equity investments, after 36 months of holding the investment, the amount withdrawn will not be tax-free, but the person will get the indexation benefit. So once the indexation benefit is deducted from the sale consideration, 20% + 4% will be levied on the remaining amount.
This is another asset, held by an individual, which can attract capital gains. If a person sells his house, the profit that he makes on the sale of his property will be taxed on, for how long he has held that property. Again if it is a short-term capital gain, it will be taxed as per the individual’s slab rate. On the other hand, if it is a long term capital gain, then tax will be charged at 20% with indexation benefit + 4% educational cess. Now, an exemption on the long term capital gains is available under section 54. But to claim this deduction, the following has to be fulfilled:
- To claim this exemption, a residential property must be bought, it could be either old or new or to be constructed.
- To claim this deduction, only two house property can be bought and it should be in the name of the seller too.
- This property has to be situated in India, this deduction available cannot be claimed for properties bought or constructed out of India.
- The seller should purchase a residential house either 1 year before the date of sale or 2 years after the date of sale. In case the seller is planning to construct a house, he will have to construct the residential house within 3 years from the date of sale.
Please keep in mind that, in the long term capital gains are not invested in a new house property, before the date of tax filing or 1 year from the date of sale, then the same amount can be deposited in a Capital Gains Account, as per the Capital Gains Account Scheme, 1988. Also note that, if the property bought is sold before the completion of 3 years, then the exemption will be reversed and now the gains acquired from the sale will be taxed as short-term capital gains. So like equity, in real estate also, there is a chance for your long-term capital gains to be tax-exempt.
This is a completely different category and the long-term gains taxed, is also different from the rest. So if these bonds or debentures are sold before the completion of 12 months, then it falls under short term capital gains and will be charged as per the individual’s slab rate. However, if it’s sold after the completion of 12 months, then it is taxed at a flat rate of 10%. So again here, you have long term gains having the upper hand.
There are different ways in which people can invest through gold. Buying gold is a common way of investing in it. It is, however, more of an asset than an investment. For gold, only after the completion of 36 months, will it be considered long term and will be taxed at 20% + 4% with indexation benefit. If it doesn’t complete 36 months, then it will be charged according to the individual’s slab rate. It is better not to hold gold physically, it is a safer option to buy paper gold. The Government has proposed that Sovereign Gold Bonds, issued by the Reserve Bank of India, will be exempt from capital gains tax which makes it one of the best ways to invest in Gold. Another exemption that has already come into force, since April 2016 is, under Gold Monetisation Scheme, the deposit certificates issued, will also be exempt from capital gains tax.
Related Article : Sovereign Gold Bonds – Should you invest?
Note: In the case of SIPs, in mutual funds, each of your SIP has to complete, the relevant months to fall into the long term capital gain category. For example, SIPs in equity mutual funds, have to complete 12 months individually to be tax-free. So if I invest Rs. 1000/- every month, starting from January 2020, then the SIP of January 2020 ONLY will complete 12 months in Jan 2021 and that amount plus the interest earned on it will be tax-free (i.e. Rs. 1000 + interest amount ). So February’s 2020 SIP will be tax-free only in February 2021 and so on. In the case of the Equity Linked Savings Scheme, each SIP will have to complete 3 years.
So it’s very clear now, that the longer you stay invested, the better it is for you. It is very easy to dream, but the hard part is putting that dream into action, you have the above options to guide you also, what are you waiting for? We all crib about how we have to pay tax for all the incomes we earn; well now we have a choice to reduce that tax payment.
As the ITR (Income Tax Return) filing date has again extended till 31st December 2020, the taxpayers are compiling their tax related documents and other relevant certificates and making their sacred rounds to the tax consultants office. But what if I tell you that you can file your own Income tax returns without making certain common repetitive mistakes. This would not only save your time in revising the return or even avoid receiving the tax notice.
Providing Basic Personal and Tax Details
Income Tax return contains the basic personal details like name, address, mobile number, date of birth, email id etc. and other important tax relevant details like PAN number, residential status, bank account details (especially account number and IFSC code- which are important since the refund gets credited to the account number mentioned by the taxpayer in the return based on IFSC code), etc.
If any taxpayer omits any of such important details or fill in wrong details, the impact of the same may vary from hurdle in communication (in case the taxpayer quotes wrong mobile number or address etc.) to severe consequences (for e.g. where the taxpayer fails to quote correct PAN).
Related Article : – Income tax return (ITR) filing deadline for 2019-20 extended
Selecting Wrong Return Forms
Depending upon the type of income earned and reported by the taxpayer, appropriate income tax return forms are to be selected for filing the income tax return. For e.g. there are different tax return forms for salary income, business income, and capital gains etc. If you earn salary income along with meager savings bank interest income, then you need to file ITR-1. However, if you earn income under the head business or profession, then you need to file ITR 3 and ITR4 as suitable.
If any taxpayer fails to select and submit the correct income tax return and appropriate return forms, then the assessing officer may even assess the return of income as invalid or void. This will convert your valid income tax return to invalid or defective return, which is almost equal to non-filing of return. Hence, to avoid such consequences, always select and fill in and submit the appropriate return forms.
Not Declaring Exempt Income
Most of the times, taxpayers fail to recognize the importance of recording or declaring the exempt income in the return of income. Exempt income is exempted from tax liability only if they are declared and reported in the return of income. For e.g. agricultural income is exempt but is used for determining the tax rate in case the income crosses prescribed threshold.
In such increased tax rate, agricultural income will still be exempt but other income will be taxed at such higher tax rate. Also for dividends on equity shares, it is exempt, however, reporting and declaring a dividend on the share is still mandatory since the threshold for taxability of dividends.
If any taxpayer fails to disclose or report the exempt or non-taxable income in the return of income, then it may be termed as concealment of income and accordingly action will be taken by issuing tax notice.
Related Article: – Know All About Deduction Under Section 80C
Not Submitting Proofs for Deductions and Exemptions
If the taxpayer omits or fails to submit evidence of amount invested in tax-saving instruments, then the deduction for such investment may or may not be allowed. For e.g. if the taxpayer fails to submit interest certificate for interest paid on housing loan, then he can claim the same later under section 80C at the time of online IT return submission.
Always ensure that you have submitted evidence of tax saving instruments like interest certificate, PPF investment, LIC premium receipts etc. to the employer before the prescribed cut-off date. This will help you avoid the last-minute rush and will also help ensure that you will claim each and every tax deduction. Thus, it is crucial to submit proofs for deductions and exemptions.
Tax Credit and Tax Payments
Most of the times, the taxpayers will receive the TDS certificates for each income earned (salary, interest etc.). However, there are cases, where you won’t receive the TDS certificate or receive it quite later after filing of income tax return. Sometimes mentioning incorrect details like incorrect TAN or incorrect assessment year etc. will also make you ineligible for claiming the tax credit.
Same thing is applicable in case of self-assessment tax and advance tax. If the taxpayer fails to fill in the details of tax challans through which such tax is paid or fills in incorrect challan details, then he may end up in not receiving the credit for the tax paid by him.
To avoid such scenario, one must always compare the form 26AS with the TDS certificates and tax challans. This will help you assess if any TDS or tax payment is not reflected on your PAN and you may ask for TDS return revision or enquire your bank for the same in case of tax payment challans.
Verification of Return
Even if underrated, this thing is most important to help you avoid the tax notice for non-filing or non- submission of tax return. It is mandatory to verify the tax return by sending the printed and signed copy of ITR-V to CPC or you also have an option for e-verification. E-verification is very simple and convenient as it can be done online without any need to send any hard copy of ITR-V. To avoid receiving notice of non-filing or non-submission of return of income, the return of income needs to be verified (by sending ITR-V by post to CPC, Bangalore) or e-verified online.
On Saturday, CBDT (Central Board of Direct Taxes) extended the deadline for filing income-tax returns (ITR) for FY 2019-20 (AY 2020-21) from 30th November 2020 to 31st December, 2020. This is the second time that the due date has been extended this year. Usually, the due date is 31st July which now has been extended till 31st Dec for current assessment year.
This announcement has provided a major relief to the tax payers who were facing the challenge of meeting the statutory and regulatory compliances owing to COVID-19 Pandemic. This will give more time to taxpayers to furnish their income tax returns.
The government mentioned that it had received a large number of pleas for the extension in view of outbreak of COVID-19 pandemic and lockdown. The GST Council had also recommended that taxpayers should be granted more time to comply.
Not only this, but several chartered accountant bodies had also been urging the government to extend the return filing deadlines this year looking at the disruptions caused by the Coronavirus pandemic which further led to a national lockdown.
It was further announced that taxpayers whose accounts needs to be audited will have to file their returns latest by 31st January 2021. This means such tax payers got additional two months to file income tax returns. Earlier, the date was extended from 31st October to 30th November and now it got further extended till 31st December 2020.
CBDT statement further added that the due date for payment of self-assessment tax for taxpayers whose self-assessment tax liability is up to ₹1 lakh has also been extended to provide relief to small and middle class taxpayers. The new due dates to pay self-assessment tax is 31 January, 2021 for tax payers whose account needs to be audited and for the rest the due date is 31st Dec 2020.
It is crucial to understand that though the due date for filing of income-tax return for the Assessment Year 2020-21 has been extended, however no relief shall be provided from the interest chargeable under section 234A if the tax liability exceeds ₹1 lakh. Thus, if self-assessment tax liability of a taxpayer exceeds ₹1 lakh, he would be liable to pay interest under section 234A from the expiry of original due dates.
The due date for furnishing of ITRs for the taxpayers who are required to furnish report in respect of international/specified domestic transactions has also been extended to 31st January, 2021.
|Particulars||Original Due date||First Extension||Second Extension|
|ITR for FY 19-20 (AY 20-21)||31st July 2020||30th Nov 2020||31st Dec 2020|
|Payment of Self-assessment Tax (if upto 1 lac)||31st july 2020||30th Nov 2020||31st Dec 2020|
|ITR for FY 19-20 (AY 20-21) for taxpayers whose account needs to be audited||31st Oct 2020||30th Nov 2020||31st Jan 2021|
|Payment of Self-assessment Tax (if upto 1 lac) for taxpayers whose account needs to be audited||31st Oct 2020||30th Nov 2020||31st Jan 2021|
|Due date for furnishing of various audit reports including tax audit report and reports on specific domestic or international transactions||30th sep 2020||31st Oct 2020||31st Dec 2020|
|ITR for taxpayers who need to furnish reports on specific domestic or international transactions||30th Nov 2020||NA||31st Jan 2021|
The above table summarizes the extended deadlines for simple understanding.
Related Article : Know These Changes In ITR Forms Before Filing!
Not only this, the government on Saturday has also extended the due date for GST annual returns for FY 2018-19 by two months to December 31, 2020. Owing to lockdown, normal operation of businesses have still not been possible in several parts of the country and thus it has been requested from the government that the due dates for the same should be extended.
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Income Tax Return (ITR) forms are used by every taxpayer to provide details regarding the revenue earned, sources of income and the amount of tax payable. There are seven kinds of forms issued by the Income Tax Department which you can choose from. The Central Board of Direct Taxes (CBDT) issues new ITR forms every year. The ITR forms for AY 2020-21 (FY 2019-20) have introduced new additional columns & schedules. These changes have been introduced to capture new, yet essential information. The last date for ITR filings for all the assessees has been extended to 30th Nov 2020.
CBDT has already issued notifications regarding the new ITR forms for AY 2020-21. All companies and individuals are required to carry out their tax return filing through these forms – based on the slab they fall under along with information about revenue earned between 1st April, 2019 and 31st March, 2020. 31st March marks the end of the financial year in our country and it is crucial to understand ITR changes, so that you are able to fill in the correct form.
Tax consultants can advise you regarding the new columns and tables which have been added to the new ITR forms along with a few of the older schedules which have been converted and refitted. These clearly focus more on the taxpayer’s claim for expenses, exemptions or deductions. Taxpayers who have chosen a presumptive taxation scheme have to provide more information about their revenue and the same goes for trusts.
Related Article : 10 Income Tax Return Filing Tips To Remember
Now, let’s talk about a few of the specific changes in ITR forms which an individual taxpayer must be aware of before income tax efiling:
- New ‘Schedule DI’ has been added to furnish details of investments during the extended period. The time limit has been extended for making investments, deposits, payments, etc. for FY 2019-20 till July 31, 2020 in order to claim deduction under Chapter VI-A, section 10AA and sections 54 to 54GB.
It must be noted that though the time limit for making tax-saving investments has been extended by four months, there is no increase in the threshold limit available under respective sections.
- A taxpayer who co-owns a house property is allowed to file ITR-1 and ITR-4 to report the income from the house property in the AY 2020-21, if he/she meets the other conditions.
- In order to ensure that individuals, entering into certain high-value transactions, furnish the ITR, the seventh proviso to section 139 was inserted by the Finance (No. 2) Act, 2019. According to this provision, every person, who is otherwise not required to file ITR due to the reason that his income does not exceed the basic exemption limit, is required to file tax return if during FY 2019-20 he/she has:
Related Article : Tax Planning For Salaried Youngsters
a) Deposited more than Rs 1 crore in one or more current accounts maintained with a bank or a co-operative bank;
b) Incurred more than Rs 2 lakh for himself or any other person for travel to a foreign country; or
c) Incurred more than Rs 1 lakh towards payment of electricity bill.
If an assessee is required to file the return of income in any of the circumstances covered under the seventh proviso to Section 139(1), he/she is required to furnish the relevant details in ITR-1 and ITR-2 forms, i.e. amount deposited in the current account, the amount incurred on the foreign travel or amount paid toward electricity bill.
- The Finance (No. 2) Act, 2019 inserted sub-section (5E) to Section 139A to allow the interchangeability of Aadhaar with PAN. Thus, where a person has not been allotted PAN, but he possesses Aadhaar, he may furnish his Aadhaar number in lieu of PAN. To allow quoting of Aadhaar in place of PAN, these schedules now substitute the term ‘PAN’ with ‘PAN/Aadhaar’.
Accordingly, the assessee can furnish Aadhaar or PAN in respect to the following person:
- A person filing the Income-tax return as a representative assessee;
- Co-owner of the house property;
- Tenant(s) of the house property;
- Buyer of the immovable property transferred during the year;
- A person whose tax credit is being claimed by the assessee;
- Tenants/buyer who has deducted tax at source;
- Person holding 10% or more of the voting power in case of unlisted company;
- Shareholders of unlisted companies including start-ups;
- Person whose income is clubbed with the income of assessee; and
- Spouse governed by Portuguese Civil Code.
- In the new ITR-1 and ITR-2 forms, the assessee has been given an option to choose multiple bank accounts for the payment of refund. Earlier, the assessee were allowed to choose one bank account. However, the refund will be credited to one of the accounts decided by CPC after processing of ITR is completed.
- The ITR forms require the individual assessee to furnish the nature of employment. The new ITR-1 form expands the category of employers. Now, in the new ITR forms, following six categories are available for selection in the nature of employment:
- Central Government.
- State Government.
- Public sector undertaking.
- Not Applicable.
These are the changes in ITR forms you must know before filing for AY 2020-21. Filing your ITR can be a very complicated process. It is crucial to be patient and choose the correct ITR form applicable to you. Please note the changes before choosing the form to avoid errors.
Tax Awareness’ is keeping yourself up to date with current tax rules made. Tax is vast and it is very difficult too, to keep up with the changes in these rules every year. And it is because of this lack of awareness, people just pay the tax that gets deducted from their salary. They feel that tax is so complicated, that is better to just pay it off. Some people have had bad investment experiences, so they do not want to take the risk of investing again. All these problems are caused due to unawareness of the deductions available.
If asked, what is basic tax deduction that everyone knows about, all will say section 80C, but people are still unaware of the investment tools available under it. Many people completely exhaust their deductions under this section, by investing in popular investments like PPF, life insurance, principal amount of the housing loan, fixed deposits, etc. They invest the maximum amount which is Rs. 1.5 lakhs p.a.
A person’s 3 to 4 months salary gets deducted in a year, towards paying taxes. Can’t believe it? well it’s true. I’m sure those of you who are paying taxes without trying to save them, are now thinking twice. You should, you will be shocked to see the difference of how much you can save, and how much you were actually paying. A normal salaried man will be clueless as to what are the changes in the tax rules, so he/she should seek a consultant’s help. There’s one more added benefit to savings your taxes, you are also creating wealth for your future use. For example, if you invest in an ELSS fund, you are claiming your tax deduction under section 80C, as well as building up a corpus for the future.
This table will show you the comparison of the tax treatment, of some of the popular investments under section 80C:
|Tax savings tools||Lock in duration||Pre – tax rates||Post tax amount|
|Equity Linked Savings Scheme (ELSS)||3 years||12% – 14%||After the lock in period, gain more than 1 lac is taxable at 10%.|
|Life Insurance||5 years minimum||4 – 6%||The claim is tax free|
|National Saving Certificate||5 years||6.8%||Interest is taxable|
|Public Provident Fund||15 years||7.10%||Tax free|
|5 year Fixed Deposit||5 years||5.5-6.7%||Interest is taxable|
Now look at the investment avenues, under section 80C, and see where you can save more :
1. Registration charges and stamp duty for a house:
The registration fees you pay for registering your documents of the house and the stamp duty that you pay, these amounts can be claimed as deductions under section 80C. Many people don’t even know that such a deduction exists. Well now you know.
2. Sukanya Samriddhi Account:
In this scheme, you can open an account on behalf of your minor daughter till the age of 10. Any amount deposited in this account would be eligible for deduction under Section 80C. Further, this account can be opened for a maximum of two girls and in case of twins this facility will be extended to the third child as well.
3. Children’s education fees:
Your child’s education fees can also be claimed under this section. Many people are not aware of this deduction as well. Of course, you have to show the receipts of the school fees to claim as deduction. Those people without children, cannot make such claims.
4. Public Provident Fund:
also known as PPF. It is one of the best assured investments. It is completely tax free. The current rate of interest is 8.7% it’s for a term of 15 years, with minimum amount Rs. 500 and maximum amount Rs. 150000/-. The only problem is that the interest rate is not fixed.
5. Provident Fund (PF) and Voluntary Provident Fund (VPF):
In your PF, both you and the employer contributes, while the employer’s contribution is exempt, your contribution is available for deduction under section 80C. VPF is the extra contribution that you make apart from your contribution with your employer.
6. Life insurance premiums and ULIPS:
Life insurance premiums take for self, spouse or children only, can be claimed as deduction, under this section. If you are paying more than one premium, it can be included in this deduction. The same goes for ULIP.
7. Equity Linked Saving Schemes (ELSS):
If anyone invests in this fund, there is a lock in period for 3 years. This means that you cannot withdraw the money for 3 years. So if this fund is kept for 3 years, then you are eligible for deduction under this section.
The EMI consists of 2 amounts, Interest and principal amount, so in this case, only the principle amount is up for deduction here. Interest amount can be claimed as deduction under section 24 as a loss from house property.
9. POTD – Post Office Time Deposit:
They are similar to fixed deposits. The interest earned is taxable but can be claimed under this section. The rate of interest is compounded quarterly but paid annually. Time deposit of tenure 5 years is eligible for deduction under 80C.
10. Fixed Deposits (FDs):
If fixed deposit, is kept in the bank for 5 years, then it is eligible for deduction. Please note that this FD needs to be “Tax Saving FD”. Therefore, one needs to mention in the bank that they want to invest in tax saving FD and not just a regular 5 years FD. However, the interest income will be taxable.
This is a 5 year small saving scheme, available for deduction. The interest is fully taxable but as it is reinvested, the interest is also eligible for 80C deduction.
The interest income is chargeable to tax but amount invested can be claimed as deduction under this section.
Everyone wants to save tax, but awareness is the barrier. These tax saving tools can help you get yourself started. As mentioned earlier, that tax is vast and only with an expert’s help, you can make use of all the tax deductions properly. So it’s better to take the help of an expert, so you can save more of your in hand salary. If you can save it, why pay it!