All you need to know about TAX before it’s too late
Before diving into taxes, ensure you have a calm mind to understand the terminologies. This may seem overwhelming at first but once you put your mind into it, everything would make sense. I tried my best to make it as simple as possible.
First things first, what is Tax? It is a compulsory or mandatory financial charge imposed on a taxpayer (i.e. an individual or legal entity) by a governmental organisation. Now you understand what tax is, it is a charge, now let’s understand why an individual ends up paying it.
The taxes individuals pay finance the government’s spending and various public expenditures. Taxes are the only thing that allows the government to run the country and conduct civil operations, without them it would be impossible. Think how difficult it would be to manage everything if you stopped receiving income from your regular source of income.
Now that you have got a fair idea what tax is, why one should pay and its importance. Let’s dig into how to compute tax.
The simple formula to find your taxable income:
Taxable income = Total Income — Tax Deductions — Total Exemptions — Total Rebate*
Now lets breakdown the tax computing process into series of steps:
Step 1 is to calculate your annual gross income. Now don’t get nervous if you are not aware what is your annual gross income. It is the amount of money you make in a financial year. Now this amount can be from your employment, freelancing, etc. It is the money without any deductions. The gross income from your employment constitutes of various components such as Basic, LTA, special allowance, medical allowance, PF. I will write a separate blog on each of these components in my next blog.
Annual Gross Income = Basic + HRA + LTA + Special allowance + PF + …
Step 2 is to compute HRA.
Important points to note about House Rent Allowance:
Tax exemptions under HRA is lowest of the following:
a. Actual HRA received in salary
b. 50% of basic + DA (metro city) or 40% of basic + DA (Non-metro city)
c. Actual rent paid — 10% of basic + DA
Step 3 is to calculate your net salary by neglecting all the deductions of HRA, LTA (House Rent Allowance and Leave Travel Allowance) and standard deduction from the annual gross salary. According to Section 16i a, there is a standard deduction of 50,000 INR.
Net salary = Annual Gross salary — HRA — LTA — Std. deduction (INR 50,000/-)
Step 4 is to add all sources of income you get with the net salary calculated in step 3. Now this other sources of income can be from
- Rental income
- Capital gains from your investments
- Interest gained from holding Fixed Deposits
- Freelancing
Gross Taxable income = Net salary + Income from other sources
If you have reached this far, give yourself a pat. All things explained from now on makes you a financially aware person.
The interesting irony here is government imposes tax and pushes an individual to save or invest money for their future. A bit confused? Read further to find out how…
There is a long list of sections like 80C, 80D, 80E and so on. Each section has a limit associated to it and various options to claim tax deductions.
- 80C [Claim limit is up to INR 1.5L]
a. PPF — Public Provident Fund (Lock-in period: 15 years)
b. ELSS — Equity Linked Saving Scheme (Lock-in period: 3 years)
c. EPF — Employee Provident Fund (Deducted from your salary)
d. VPF — Voluntary Provident Fund (Can be deducted from your salary if you ask your HR to deduct it on a monthly basis)
e. SSY — Sukanya Samriddhi Yojana (For those who have a daughter less than 10 years old can enrol for SSY. You will invest for 15 years and the amount gets matured when your daughter 21years old)
f. LIC — Premium paid for term insurance
g. Tax saving FDR — Fixed Deposit Receipt (Lock-in period: 5years)
h. NSC — National saving certificate (Lock-in period: 5 years, fixed interest rate)
i. SCSS — Senior citizen savings scheme (This is for >60 years old, you get interest on quarterly basis. Lock-in period: 5years, you have the flexibility to extend for another 3 years)
j. ULIP — Unit Linked Insurance Plan (Mix of investment — shares and bonds + insurance) (5 years)
k. Infrastructure bonds
l. Repayment towards principal of home loan
m. Stamp duty & registration charges for purchase of property
n. School fees of your kids
2. 80CCC Deduction for life insurance annuity plan.
a. Deduction for payment towards annuity pension plans. Pension received from the annuity or amount received upon surrender of the annuity, including interest or bonus accrued on the annuity, is taxable in the year of receipt.
3. 80CCD(1B) [additional tax upto 50,000 INR]
a. NPS (National Pension System)
b. Atal Pension Yojana
4. 80D [Limit depends on age of self and family members up to INR 25,000]
a. Premium paid for medical insurance
b. Senior citizen parents’ medical/medicine expenses — upto INR 50,000 (only if no insurance)
c. Individuals can claim a maximum deduction of Rs 25000 for insurance premium for self, spouse and dependent children.
d. Individuals can claim a maximum deduction up to Rs 50,000 including premium for self, spouse, dependent children and dependent parents below 60 years of age.
e. Whereas, Individuals can claim a maximum deduction of up to Rs 75,000 including premium for self, spouse, dependent children and dependent parents above 60 years of age.
f. Further Rs 1,00,000 can be claimed as a maximum deduction if an individual is above 60 years of age and makes the payment for premium for self, spouse, dependent children and dependent parents who are also above 60 years of age.
g. Health checkup — Rs. 5,000/-
5. 80TTA
a. Interests earned from savings account
- Less than 60 years up to INR 10,000
- Senior citizen — INR 50,000
6. 80E Education loan
a. On interest paid
7. 80G [10% of gross income]
a. Donations
8. Section 24
a. Home loan [Claim limit up to INR 2L] on interest paid
9. 80 EE
a. First time home buyers upto INR 50,000
10. 80EEA
a. Extra interest payment up to INR 1.5L for first time home buyers
11. 80RRB
a. Income earned by royalties and patents
12. 80EEB
a. Interest deduction for vehicle loan for purchase of electric vehicle
13. 80GG
a. If your income does not include HRA component, you can claim rent deduction under 80GG
Step 5 is to calculate the net taxable income:
Net taxable income = Gross taxable income — eligible deductions
Step 6 is to find out in which slab your net taxable income falls. The slab is mentioned as follows:
Step 7 is to add additional 4% Cess to the tax rate computed in step 6.
Additional surcharge has to be paid for people who earn more than 50 Lakhs in a financial year.
Aaah… At last, we have reached the conclusion of this article. What is interesting is that there are so many options available to save on taxes and plan your investment. Take your financial situation into consideration and invest wisely. With a clear understanding of the deductions, you can save for yourself, care for your family and leave something behind for future generations without losing money in taxes.
Happy investing!
