This is a guest post by one of our readers and our financial planning client Mr. Rahul Udare from Mumbai.
He is CA by profession, and he has created a 45 min excellent video for beginners on the topic of Income Tax. This video below will help anyone understand various things related to income tax and returns and how everything works.
In a recent notification, income tax department has come up with a new form 12BB, which from now onwards has to be submitted if you want to claim your LTA, HRA and Interest on Home loan interest.
It’s a single form, which you need to fill and attach all proofs and furnish all information related to these exemptions. This form will be applicable from June 1, 2016.
What all information is asked in Form 12BB?
Following is the list of various things you need to arrange before you fill up this form 12BB form
LTA (Leave Travel Allowance) – One has to provide all the proofs of travel like tickets, invoices, boarding pass (in case of flight). More info here
HRA (House Rent Allowance) – For claiming HRA, If the rent paid is above Rs 1 lacs a year, one has to provide Name, Address and PAN of the landlord and Rent receipts.
Interest on Home Loan – To claim this, one has to furnish the name, address and the PAN of the lender organization
Deductions under 80C & Others – You will also have to furnish the details and proofs of the actual investments done under Sec 80C and others
You can download form 12BB here, It’s a PDF version (We don’t have excel format). Below I have provided a snapshot of the form 12BB format, so that you can have a look at it and see what all fields you have to fill up.
Main reason to introduce this form 12BB?
The primary reason why this new form is being introduced is that till now there was no standard process to collect all the proofs and information regarding the various deductions.
IT department thinks that with this new change, fraud will go down. Here is what Financial Express says on this point
You may no longer be able to provide fake bills to claim income tax deductions for leave travel allowance (LTA) and house rent allowance (HRA).
Changes announced on Tuesday in reporting format for individuals claiming tax deduction on leave travel allowance (LTA), leave travel concessions (LTC), house rent allowance and interest paid on home loans is aimed at plugging leakages on account of fake bills, experts say.
So with this form, all the information will be captured in one place and even the employers will be made accountable for checking all documents and if the proofs are genuine or not.
Please share what do you think about this new form? Do you think that this will add more work and headaches for salaried employees?
There are many different kinds of tax paid by us in India; however, we don’t have a lot of clarity on each kind of tax and what it means. Hence I thought I will give a brief overview of the overall India taxation system. So in this post I will explain various kind of taxes one by one and their categories.
Direct Tax vs. Indirect Tax
Before explaining each kind of taxes, first understand that there are two categories of taxes, which are called direct tax and indirect tax.
Direct Tax – As the name suggests, Direct taxes are those taxes that are directly paid by the person/entity to the government. The best example for this is – Income Tax, where we have to pay the income tax on our earned income to the govt directly at the end of the financial year.
The direct taxes are the one that pinches the investor’s maximum because they clearly see it going out of their pocket.
Indirect Tax – Indirect taxes are those kinds of taxes, which are collected by govt from the intermediary or manufacturer, but eventually which is passed to the users only. So we pay these taxes also from our pocket, however, it’s taken from us in a very indirect way by including it in the price of the product itself. So we always hear the final price (price + tax) and it does not pinch us a lot because most of the time we don’t even realize that we are paying that tax.
A good example of this is “Service tax”. So when you go to a restaurant, you can see that the service tax is added to the bill and you make the payment for it. The hotel then pays this service tax to the govt only.
Jurisdiction of Taxes – Central, State and Local
You already know that India has federal structure and there are governments at center and different states and they have to arrange for their own income from various sources. So taxes fall under 3 jurisdictions, which is
Central Govt
State Govt
Local Govt
So some taxes go to the central govt and some go to state govt and few goes to the local city municipality. The below chart gives you a crisp idea about it.
10 types of Taxes we pay in India
We will now see various kinds of taxes we pay in India. I will explain each of them. We will first see the major taxes which impact us in a big way and which are the major taxes from which govt gets the revenue, then we will see the other taxes in brief
1. Income Tax
The tax which everybody is aware of is Income tax. This is levied on the income earned in a year by an individual or a business body. The 12 month period considered for the taxation is from Apr 1st to Mar 31. The incomes is categorized under 5 heads namely
Salaries
House property
Business Income
Capital Gains
Others
A person has to hence, find out all their income and see which heads they are falling into. For most of the people who are salaried class, it’s only one head “Salary” and a bit on the “Others” section like interest income from FD, saving bank account or dividend incomes.
The income tax for Individuals is calculated based on the different slabs, which are as follows
So if a person salary is 8 lacs per year, there will be no tax on the first 2.5 lacs, Then 10% tax will be applicable on the income from 2.5 lacs to 5 lacs, which will be 25,000 and 20% on the income from 5 lacs to 8 lacs, which is Rs 60,000, totaling his income tax to Rs 85,000 for the year.
Below is a snapshot of income categories and number of people who fall under them along with the % share of their income tax as of 2012
Income tax is something that almost everyone is aware of because one has to deal with it directly.
2. VAT (Value Added Tax)
The VAT is an indirect tax levied by a state when some good is sold within the state. So if some goods are sold within Karnataka (Bangalore -> Mysore), the Karnataka Govt will levy VAT on the goods sold.
The VAT is a tax that is not very visible to a common man in their day to day life, but it’s presence in almost every sector and goods. Each small thing which we consume today has gone through multiple stages of production and VAT is paid at each stage by the manufacturer and eventually, the final consumer pays for it (Bundled within MRP)
For example, when you buy a mobile phone, you also pay the VAT, which goes to the govt but paid by the seller. The seller actually gets a lesser amount. For example in the below example, you can see the invoice of an Asus Zenfone mobile bought online by my wife. You can see that out of Rs 10790 which was paid, Rs 1325 (14%) was the VAT which went to the govt.
Note that VAT rates are subject to states, hence the rates change from one state to another. This is the reason why some goods are cheaper in one state and expensive in another.
CST (Central Sales Tax)
Note that VAT is a state-level tax, however when a good is sold from one state to another, then the tax is called CST or Central Sales Tax which goes to the central govt.
So when a seller in Maharashtra sells some goods to a consumer in any other state (like Tamil Nadu), then it’s not the VAT, but CST which applies and it goes to the central govt wallet 🙂
3. Service Tax
Service tax is another very important tax which was introduced in the year 1994. It’s a tax charge for providing services. Like in the case of restaurants, when they serve us for food, they are providing us a service, hence we are charged service tax on a certain portion of bill amount.
In the same way, when you hire the services of a consultant, they will charge you a service tax and pay it to govt. It depends if they have charged you the service tax on top of the fees or they have included the service tax in the price itself and tell you the final amount. In any case, the service tax is to be paid to govt if the revenue of the service provider is more than 10 lacs in a financial year.
Increase in service tax revenue in India
Over the last decade, service tax has become of the major tax collected by govt and it has been increasing year on year. It’s mainly because the number of services on which service tax is applicable has been increasing year on year in the last decade and even the rate has increased. At this point in time, the service tax applicable is 15% (including the Swachh Bharat cess of 0.5% and Krishi Kalyan cess of 0.5%).
Below you can see how the service tax revenue has increased in the last 20 yrs.
Negative List concept in Service tax
A few years back, there was a list of services that were issued by govt, on which service tax was applicable, and if a service is not on that list, it was not applicable. However a few years back, it’s changed and now a “negative list” concept in introduced, which means that service tax is now applicable to every service which exists.
Only on a few services which are part of the negative list will be exempted from service tax.
Service tax is now part of our day to day life. We eat in restaurants, stay in hotels, and take various kinds of services every month/year and if you calculate the total amount of service tax you pay, you will be amazed to see the number.
4. Excise Duty
A few years back, when I used to see the budget speech, I eagerly waited for the income tax-related announcements and wanted to know is 80C limits have been raised or if tax limits are changed. I happily ignored “excise duty” related announcements because frankly speaking, it made no sense to me.
How does it matter if to me if the excise duty on mobile handsets was increased? I never understood what all that means. However now I know how important excise duty is for the govt and what is it related to common man.
Excise duty (also called CENVAT) is the tax which is levied by govt at the time of manufacturing of the goods. It’s as simple as that. It does not matter if you hire someone to manufacture the goods or you do it yourself, but if you manufacture some goods, you will have to pay the excise duty if your turnover exceeds Rs 1.5 crore.
Now obviously, the excise duty is a cost for the manufacturer and it’s eventually passed on to the consumer. If excise duty didn’t exist, the prices of the goods would come down by that much margin.
So assume you start manufacturing some goods at mass scale, and if it’s in the list of the “excisable goods”, which means goods on which excise duty applies, one has to pay the excise duty to the govt. So if we take an example of cars, as it’s a big-ticket item, even a slight change in excise duty means the prices go up by a big amount.
See the example below
Excise Duty on Petrol & diesel
Let’s understand this better with petrol & diesel prices. The raw petroleum which is bought by the oil companies is the base price. After that when they refine it and convert it to the usable petrol and diesel, VAT and Excise duty is applied which increase the final price of the petrol, add to that the dealer commissions and we get the final price which we pay.
The chart below shows the breakup of petrol prices (for the year 2014).
Excise duty is one of the biggest revenue generators for the govt because the amount of manufacturing which takes place all over the country is huge.
5. Customs Duty
Customs duty is the tax levied on the items imported from other countries to India or exported out of India. So when you buy something from Amazon US and want it to be shipped to India, you are actually importing it, and hence a custom duty will be charged separately.
Below is a duty rate for various products categories which is taken from this website
Category / Product to Import
Total Duty Rate
Laptops, Notebooks, Computers
14.712%
Tablets, iPad
28.852%
Laptop Battery
23.852%
iPod, Music Players
28.852%
Software CDs and DVDs
10.300%
Computer Printers
14.712%
Electronics
28.852%
Hard Disk (internal)
6.300%
Hard Disk (external)
14.712%
Web Cameras
28.852%
Computer Processor
6.300%
Internet Modem
14.712%
Other Computer Peripherals
14.712%
Cables and Wires
23.852%
Television Sets (TV)
28.852%
Movie CDs, DVDs, and Blue Ray
28.852%
Video Games and Game Consoles
28.852%
Mobile Phones
~18%
Phone Accessories
28.852%
Digital Cameras and Video Camcorder
28.852%
Camera Lens (Photography)
28.852%
Sports Equipment
14.712%
Books (Educational)
Free (No duty)
Car Parts
28.852%
Toys and Games
28.852%
Stationery Items
28.852%
Cosmetic Goods
28.852%
Hand Watches (Wrist Watches)
28.852%
Sun Glasses
28.852%
Apparel (Clothes)
28.852%
Fashion Accessories
28.852%
Artificial Jewellery
28.852%
Shoes (Retail Price < 1k INR)
21.782%
Shoes (Retail Price > 1k INR)
28.852%
Kitchen and Dining
28.852%
Food Supplements, Body Building
28.852%
Medicine
28.852%
No Custom duty up to Rs 25,000 while travelling back to India
Note that if you are coming back to India, then up to Rs 25,000 worth of goods can be brought back without any customs duty, but beyond that, you will have to pay the duty. This is applicable to most of the items. You can read more about this below in an answer given by Jai Veer on Quora
We have now covered major 5 taxes which needed more detailing and explanation, now we are going to see other taxes, but we will now see them in a crisp manner and not go too much into detail
6. Professional Tax
Professional tax is levied by the state govt for all the salaried employees and some professionals like CA, Lawyers, etc. If you see your salary slip, you can see the amount of professional tax deducted. Note that the tax slab depends on the state in which you are working and the amount of salary you have per month.
Every state has different slab rates. Below is an example of a few states.
Many states do not have professional tax, for example – Punjab, Uttar Pradesh, Rajasthan, Haryana and many more.
7. Capital Gains tax
Capital gains tax is the tax which is levied on the gains which are raised by the sale of a capital asset like property, vehicle, jewellery, bonds, land or machinery.
This tax is not applicable each year, but only in the year when the capital asset is sold or transferred to some other party. The gains are categorized as either short term capital gains or long term capital gains depending on the duration you hold the property.
Here is a very good video on this topic which explains capital gains.
The calculation for this tax is not very straightforward and involves a bit of work, hence we are not covering it here. As of now, just understand that if you purchase a property at cost C , and sell if after some years at sale price S. Then your capital gains will be calculated and you will have to pay tax on that.
Entertainment tax is the state-level tax levied on the tickets for the cinema and other entertainment shows. It’s also levied on the stage shows, amusement parks, and many sports activities. Most of us can relate the entertainment tax with the movie tickets. If you see your movie ticket closely, you will see that a good chunk of the cost goes into the entertainment tax.
Maharashtra charges one of the highest entertainment tax at 45% and I am not very happy with that because I am a movie buff. However, some relief for me, because I see a lot of Marathi movies too (which are exceptionally well most of the time) and which does have entertainment tax (regional movies generally don’t have entertainment tax in the home state).
Below you can see the slab rates for all the states in India for entertainment tax.
9. Stamp Duty
Stamp duty is a kind of tax which is levied when a legal document is executed. Most of us can understand it in real estate terms. So when we buy a property and we execute the agreement to sale, the stamp duty is charged as a percentage of the property value which is mentioned in the agreement or the govt ready reckoner rates whichever is higher.
Most of the time this stamp duty is in range of 4-6% depending on the state. This stamp duty is paid every time a sale is made in property, which means if the same property exchanges hand 5 times in 10 yrs period, the govt will get the stamp duty 5 times. Below is the slab rate for stamp duty in various Indian states.
Note that this data is a bit old and there might be slight changes at present, so please consider the chart below only as a reference point.
Hence, this way stamp duty becomes a revenue source for the state government.
10. Property Tax
Property tax is the tax paid by property owner every year. This tax is a local municipal level tax and the rate is decided by the local municipality. The amount of tax depends on various factors like the size of the property, kind of property (residential or commercial), age of the property and many more.
Just for reference, in a city like Pune, I know that the property tax for a 2 BHK flat comes around Rs 8,000 to Rs 15,000 approx.
Conclusion
Apart from the taxes above, there are various other small taxes that are paid from time to time like toll tax, dividend distribution tax, securities transaction tax, luxury tax, and Octroi. We have not covered them in this article, but you can read about them separately
Let us know what do you think about the tax system in India and if you feel you are over burdened with taxes?
Before I even start this article, please watch the first 5-6 min of the following video which comes from Ravish Kumar of NDTV and you will get the hottest points of discussion in this budget, which is taxation on EPF withdrawal.
The video below discusses various viewpoints from govt representatives, economists and some other people on why this is a foolish decision from govt and at the same time, why it makes sense to tax the EPF withdrawal. You will listen to the full video if possible for you, or else at least listen to the first half.
So, I was watching Budget 2016 yesterday and desperately waiting for the personal taxation announcement because that’s the main thing I understand :). By the end of the budget speech, it became clear that there were no changes in income tax slabs nor 80C limits and all hell broke loose on the news that the EPF withdrawal will be taxed on the 60% corpus.
The whole twitter and facebook was full of angry people showing their disappointment on the budget and how it has betrayed the salaried class. The issue went really out of hand and a twitter trend #RollBackEPF started trending and every person from across the country wanted it to be taken back. It was really a crazy day. And today govt has clarified that the tax is only applicable on the interest component only (more on that later in the article)
This budget’s major focus was on the rural economy and farmers which are neglected for decades anyways. Only time will tell if the efforts were taken in this budget work or not and if things improve and get better for farmers and rural economy. Let’s wait for that.
While there were many things in this budget, on the taxation front and other announcements, nothing major was there in this budget for a common man on taxation front and that made the salaried class very very disappointed.
Let’s look at the budget highlights one by one. My focus is to share all the major points which concern or are related to a common man.
1. No Changes in Tax Slab rates or 80C
Let me again share it. There was no change in the income tax slabs or the 80C limit. Everything remains the same on this front. Everyone was expecting that the slab will be raised or 80C limits will be increased, but that didn’t happen. There were conversations like the basic exemption limits should be raised to at least Rs 5 lacs from the current 2.5 lacs, and this was, in fact, Arun Jaitley’s demand in 2014 that the limits should be raised. Not sure what’s coming in his way now when he himself is the decision-maker.
2. Up to 40%, NPS withdrawal maturity becomes tax-free
Now 40% of the NPS corpus will be tax-free at the time of maturity, rest 60% corpus will be taxed if you withdraw it fully. However, if you buy an annuity (pension) from the remaining 60% corpus you won’t have to pay the tax. However, note that the pension amount which you will get will be normally taxes as the income in your hands.
This means that if you have Rs 1 crore in NPS at the time of maturity, if you withdraw the full amount, then 40 lacs will be tax-free, but the rest 60 lacs will be taxed. Now if the applicable tax at that time is 20% (just an example), then 12 lacs will go in tax and you will get the remaining 48 lacs in our hand. So a total of 88 lacs you will get out of 1 crore. However, you can choose to just take 40 lacs in hand and leave the 60 lacs in a pension product to generate the monthly income (which I think many will choose anyways).
One good point is that if the NPS holder dies, then the full death claim will be tax-free in the hand of the receiver.
3. EPF Interest becomes taxable for 60% corpus
As I said earlier, the EPF was the center point of discussion after the budget speech and govt has clarified that only the interest component will be taxed at the time of withdrawal and that too only on the 60% corpus. The 40% part will be tax-free fully. Note that this is applicable only on the interest earned after 1st Apr, 2016. The interest earned before this date will be tax-free.
Also, an important point here is that there is a lot of debate and confusion around this point as of now. We should wait for more clarification on this from govt in the coming days.
4. PPF remains tax-free (its still EEE)
PPF is untouched and still remains full tax-free as of now. Yesterday there was this confusion, that NPS, EPF and PPF, all of them are brought at the same level and many worried people whose PPF was going to mature in the coming months/years panicked and started asking if their PPF corpus will also get taxed.
So at this point of time, PPF remains the only investment product which comes under EEE (Exempt, Exempt, Exempt)
5. Employer contribution in EPF restricted to 1.5 Lacs per year
Now an employer contribution is EPF is restricted to Rs 1.5 lacs per year or 12% of the basic salary whichever is lower. Till now there was no limit like that, but with this budget that is changed. Incase employer does contribute more than 1.5 lacs per year, then it will taxable in employees hand.
Also, note that the govt will now contribute the 8.33% EPS part for the employees from its own pocket for the first 3 yrs for the new EPFO members.
6. Health Insurance of Rs 1 lacs for Senior Citizens
There will be a health insurance scheme launched soon which will provide Rs 1 lac of health cover to poor families. Also, the senior citizens who belong to these families will also get an additional Rs 30,000 top-up cover on top of Rs 1 lac. The govt budget documents give the reasoning for this scheme.
Catastrophic health events are the single most important cause of unforeseen out-of-pocket expenditure which pushes lakhs of households below the poverty line every year. Serious illness of family members cause severe stress on the financial circumstances of poor and economically weak families, shaking the foundation of their economic security
7. HRA exemption under Sec 80GG raised from 24k to 60k per year
As per sec 80GG, those who do not get HRA in their CTC from their employer can now claim up to Rs 60,000 per year as a deduction under rent paid. Earlier this was only Rs 2,000 per month. This will help a lot to those people whose employers are not giving them HRA Component. Rs 5,000 though is a less amount, but still a respectable deduction at least.
In other word eligibility will be least amount of the following :-
1) Rent paid minus 10 percent the adjusted total income.
2) Rs 5,000 per month. (this was Rs 2,000 earlier)
3) 25 percent of the total income.
8. First time home buyers to get extra Rs 50k deduction in Interest
The first time home buyers will get an additional Rs 50,000 tax exemption in interest part apart from the current exemption, provided following points are true
The loan amount should not be more than 35 lacs, and the value of the house should not be more than 50 lacs
The loan should be sanctioned between 1st April 2016 – 31st Mar 2017
The home buyer should not have any other residential house on his name
9. Dividends above Rs 10 lakh to attract an additional 10% tax
Now if a person is earning more than Rs 10 lacs of dividend from stocks will have to pay the tax of 10% on it. Right now companies anyways pay DDT (Dividend distribution tax) on the dividends declared. I think this is anyways going to impact only those who have very high investments in stocks and they earn big dividends. A normal investor will mostly be out of this.
10. Service tax increased from 14.5% to 15% due to Krishi Kalyan cess
A new cess called Krishi Kalyan cess of 0.5% is added to service tax, which is applicable to all taxable services, which simply means that the service tax has now gone up from 14.5% to 15%. While this 0.5% does not look much, its actually going to be a decent amount for a common man in addition to what we pay.
That means an extra Rs 2 in the bill if you have food worth Rs 1,000 in a restaurant.
That means an extra Rs 5 in your phone bill of Rs 1,000
I think it will add a few hundred extras in your expenses if you count entire years of expenses. This will be applicable from 1st June, 2016 so you still have some time 🙂
11. TDS of 1% on buying cars above Rs 10 lacs
1% TDS is proposed on the purchase of luxury segment cars costing Rs 10 lacs or more. The same TDS is also there if one buys any goods or services exceeding Rs 2 lakh. On top of this, an infrastructure cess of 1% is on small petrol cars, CNG cars and 2.5% cess on diesel cars are there, which means that cars, in general, become a bit expensive.
Even the branded clothes and tobacco items will become costlier due to the excise duty increase
12. Possession period for property raised to 5 years for claiming tax benefit
Earlier, if one used to buy/construct a property, one had to get the possession in 3 yrs itself to claim the tax benefits on the interest paid under sec 24. Now it has been raised to 5 yrs. This will help those real estate investors who have not got the possession due to delays from builders.
13. Tax Rebate of Rs 5,000 for those with income less than 5 lacs
For small tax payers with an income of fewer than 5 lacs, the tax rebate is increased from Rs 2,000 to Rs 5,000. This means that if the income tax payable is upto Rs 5,000 for small tax payers, they don’t have to pay it. Rs 5,000 will get deducted from the tax payable. So if a person is earning Rs 4 lacs (taxable income), then as per slab his income tax is Rs 15,000 (10% of the income above 2.5 lacs), out of this Rs 15,000 tax payable, he will get the rebate of Rs 5,000 and he will pay only Rs 10,000. This was earlier set at Rs 2,000 only, but now changed to Rs 5,000
14. ATM’s in Post offices
Over the next 3 yrs, govt plans to roll out the ATM’s in post offices so that more people in rural areas can access the banking services. The department of Posts plans to bring around 25,000 post offices under this in the next few years.
There are many more things in the budget, but I am not going into each of those. The points above are the main highlights which I am discussing here. You can read all the points of budget in this PDF file
Please share how do you rate this budget and what do you think about the move on the EPF taxation?
Do you know everything regarding investment proofs which you provide to your employer at the time of tax-saving season? If your answer is NO, then this article will help you understand a lot of things which you don’t know or partially know about.
So, I will talk about some of the common things you should take care while giving your investment proofs to your employer for tax saving purpose.
1. Investment declaration helps employer to deduct appropriate tax
The first and most basic thing, that you as an employee should know is that your employer is supposed to deduct your income tax on monthly basis and deposit it with govt on 7th of the following month.
For this, the employer should calculate your taxable salary and it can only happen if you before hand give him an idea about how you are planning to save tax, and apart from that how much of HRA, LTA, Medical reimbursements you are entitled for.
For this purpose, your employer asks you to declare your various investments in the start of the year itself, so that they can compute your net taxable salary and then pay your salaries accordingly, after deducting TDS from your salaries.
And then, finally around Dec/Jan, they start asking you to provide them the actual proofs of your investments and receipts so that they can match things with their initial calculations and if there are any difference they have 2-3 months in hand to handle the discrepancies. Below is a small example of it
What If you failed to submit investment proofs?
If you failed to submit your investments proofs (you declared them, but didn’t invest in reality), in that case you are liable to pay higher income tax, but employer has not deducted it and hence they get a 2-3 months of extra time to adjust it from your salary.
Following things are required by employer as investment proofs.
To claim LTA, you need to provide Travel receipts (flight boarding pass, train tickets)
ELSS investments proofs or any other 80C investments
Life insurance and health insurance premium receipts
Various donations receipts
Rent receipts to claim HRA
2. You can also share your saving bank interest, FD interest with employer
A lot of people do not know this, but you can share your saving bank interest, FD/RD interest earned during year, any capital gains from shares or mutual fund, rental income and other kind of incomes with your employer, so that they get a complete picture of your taxable salary and deduct your income tax which will be more accurate.
If you do not disclose these additional incomes to your employer, in that case – you will have to separately pay additional income tax yourself and then take these things into account while filing your income tax returns.
Note that another advantage of declaring these additional income with employer is that you will not have to pay any penalty which might arise due to not paying advance tax on time.
Also, you won’t have to take the burden of paying the additional tax at the end of the year, the tax will get distributed almost equally throughout the year.
3. Didn’t submit income tax proofs to employer? You can claim things later
A lot of investors have this myth, that if they didn’t do their investment proof submission to employer, they will never be able to claim the deductions and will have to pay higher income tax. This is not true.
Yes, it’s a good practice to give the investments proof to your employer on time, and that will save you a lot of headache later while filing the returns.
But for some reason, if you fail to provide the investment proofs (example, like you don’t have money in the month of Jan and you decided to buy a life insurance policy only in Mar), in that case – your employer will deduct the income tax, but then at the time of filing your tax returns you can claim the tax refund, if you finally managed to invest in tax saving products later.
Here is a chart which will give you a better idea
Here is another detailed example of how it happens
Ajay has the salary of 12 lacs a year, and he declares to his employer that he will invest Rs 1.5 lacs in 80C products
Employer based on Ajay declaration will calculate that Ajay taxable salary is 10.5 lacs and will be based on that suppose the total income tax for the year is 60k (just for example) . So Ajay final salary will be 10.5 lacs – 60k = 9.9 lacs. This 9.9 lacs divided by 12 will be 82500 which he will get on monthly basis and the employer will deposit Rs 5,000 as his tax to govt on monthly basis
Now in Jan, when the employer asks Ajay to give them the investment proof, suppose Ajay realizes that he forgot to make the investments and does not have money to invest 1.5 lacs in 80C products. But he will do it in Mar himself. And he fails to provide the income tax proofs to his employer.
Now his employer will come to know that Ajay real taxable salary is 12 lacs and not 10.5 lacs as declared by him and lets say on this his income tax is 1 lac, so additional 40k is to be recovered from Ajay, which will be adjusted from Ajay’s salary in Feb/Mar
Ajay then invests 1.5 lacs in Mar and finally his taxable income should be just 60k , as per the planning (because his taxable income is 10.5 lacs as declared in the start). However his employer has deducted 1 lac in total from his salary and paid to govt.
Now Ajay can declare in his tax returns that he has invested in 80C products and he is liable to get refund of Rs 40,000 which he will get in next few months.
In the example above, you can see that not giving investment proofs on time has resulted in some inconvenience for Ajay, but that does not mean that he will lose out on his tax benefits. One can always invest around the end of the year and then claim back the tax refund later.
However, there is one exemption here
Few exemptions are made only at employer level, like LTA and medical reimbursements. So if you fail to provide LTA and Medical reimbursements proof to your employer on time, then you lose the benefit. You can’t claim it back at the time of filing returns.
4. You DONT need to submit any proofs while filing your tax returns
Another important point you should remember is that while filing income tax returns, you just have to furnish the information about your investments, and not attach any investment proof.
Please do not attach xerox copies at all. It’s not required.
Its required by the employer because they are deducting the TDS and as a third party they need the documents for verification purpose.
But if you are claiming at all the benefits yourself at the end of the year, you just need to declare things. However note that you should keep the receipts and all the required documents with you for some years, because if their is any scrutiny later, you need to be prepared to answer income tax authorities along with documentary evidence.
Which means that you should never lie about your investments which you have not done in reality. Always provide true information.
5. You need to give “proposed investment” proofs for the month of Feb and March
A lot of people are confused on how will they provide the investment proofs for the month of Feb and Mar in Jan itself, when the employer asks for investment proofs. It might happen that your life insurance premium is due in Mar or if you are doing SIP in ELSS funds, you still don’t have the statements showing the investments.
In those cases, you have to provide a declaration that you are going to make the investments for Feb/Mar and based on that declaration, your employer will process the TDS.
All the employers provide you with the declaration form. You just need to write there that you promise to do the investments for tax saving in next 2 months and your exemptions should be given to you based on your declaration.
Let me know if you have any questions or if you want to share some important information on this topic
Paying Income tax is one thing, which most of the people do not like. Everyone tries to minimize their income tax by some or the other means. So today, I will be sharing with you the list of some income’s which are 100% tax-free in India.
Yes, you heard it right. If you earn these income’s, then you do not pay any income tax on them at all. This article is mainly for information purpose because I have seen many investors who are yet not clear on the taxation rules of a few incomes. Here we go:
1. Interest on saving bank interest – up to Rs 10,000 a year
From 2013 onwards, a new section 80 TTA is introduced under which, the interest on your saving bank account up to Rs 10,000 is not taxable. So if your saving bank interest for a year is Rs 20,000, then out of that Rs 10,000 is exempted and only the rest Rs 10,000 will be added to your taxable income.
This is a great relief for tax-payers because it was really a big headache to find out the saving bank interest from all the accounts and add them up and pay income tax because, for most of the people, it would be few hundreds or thousands of interest income. Now that is gone!
2. Interest earned in NRE account
Any interest you earn on your NRE (Non-Resident Exempt) account is 100% Tax-free in India. Here we are talking about both, the Fixed Deposit and normal saving bank interest. Both of them are tax-free for NRI. NRE deposits are a great way to earn a decent interest on the savings done by NRI.
Some of our clients even go an extent of taking a loan from the country they are working in like UAE/Singapore because they get it at 2-3% and then reinvest the same in NRE deposits here in India where they earn around 8-9%. Also because there is no tax, hence TDS is also not applicable to the NRE account deposits.
And the best part is that the money in NRE accounts is repatriable which means if you are in the US and you invest some money in India in your NRE account, the principle and interest money can be taken back to the US.
3. The share of Profits paid to partners in the firm
If a partnership firm earns some profit and instead of retaining it within the partnership firm, it has paid to the partners as a share of profits, then it is tax-free in the hands of the partner, because the tax is already paid by the firm on it.
Example – If A and B are partners in a firm. They get 5 lacs each in a year as a share in the profits earned by the firm, then it will be tax-free in their hands. But if they are receiving any salary from the firm, then its taxed in their hands.
I would like to request that as this is related to corporate tax, please consult a qualified CA on this issue.
4. Maturity or Claim amount received by Life Insurance Company
The money you get from life insurance companies on maturity, claim or surrender is 100% tax-free provided, If the premium paid does not exceed 20% of the sum assured. I am quoting new amendments which have come in recent years.
As per amendments introduced in the Finance Act, 2003, (i.e., with effect from April 1, 2003), any proceeds received on account of maturity/surrender of an insurance policy were exempt from tax only if the premium paid did not exceed 20% of the sum assured.
As an example, if the annual premium is Rs 10,000, to qualify for exemption, the minimum sum assured under the policy was required to be Rs 50,000.
If the sum assured was less than the said value, the entire maturity proceeds would be taxable. Such limit of 20% was later reduced to 10% by the Finance Act, 2012, (i.e., with effect from April 1, 2012) to increase the insurance coverage amount, i.e., the sum assured threshold was increased from a minimum of five times of annual premium to 10 times.
For policies taken on the life of a disabled person or person suffering from certain ailments, the limit was relaxed to 15% of the sum assured with effect from April 1, 2013.
5. LTA money received from Employer
Most of the companies pay LTA (Leave Travel Allowance) each year to their employees, which can be utilized for traveling purpose. This LTA is not taxable in hands of the investor provided they provide the proof of travel. So if your company is not paying you any LTA, ask them to restructure your salary and label some part as LTA, because almost everyone spends a minimum amount traveling in a year.
For example, if you are getting a salary of Rs 5 lacs and their is no LTA in your salary component, you can ask your employer to label 20k as LTA and rest 4.8 lacs as other components, this way you will be able to save tax on that 20k part at least.
6. Money got under VRS scheme up to Rs 5 Lacs
If a person takes VRS (Voluntary retirement scheme) then any amount received up to Rs 5 lacs is income tax-free. However, not everyone is eligible for it. Only employees of Public sector companies or an authority established under a Central or State govt is eligible for this.
7. Money received from your EPF account after 5 yrs
The money one gets from their EPF account is also tax-free, provided the money is taken out after 5 yrs of service. A lot of times investors change their jobs in 3-4 yrs and withdraw their EPF money only to realize that they could have timed their withdraw in a better manner and save 30% of their EPF money which went into income tax (assuming they are in 30% tax bracket).
8. Profits from shares or equity mutual funds after a year
When you earn any profits from your shares or equity mutual funds after holding it for minimum 1 yrs, it is called Long-term Capital gains, and it is 100% tax exempted as per current tax rules.
For example, if you invest Rs 1 lac in shares and after 2 yrs its worth is now Rs 2 Lacs. In this case, when you sell your shares, you will not be paying any income tax on this Rs 1 lac profit because of long-term capital gains rules.
However, it’s important to know that exemption is allowed only when Security Transaction Tax (STT) has been paid (which is paid by you when you buy on a recognized stock exchange such as BSE or NSE). But if you do an out of exchange sales, then STT might not get paid and hence in future when you sell shares, you will have to pay tax on profits.
Update : Now after budget 2018, the profits from shares or equity will be taxed at a flat rate of 10% above the threshhold limit of Rs 1,00,000 in a financial year. Before budget 2018, the profits from equity after an year was 100% tax free.
9. Dividends received from your shares or equity mutual funds
You receive dividends from your stocks or equity mutual funds (dividend option). This dividend money you get is also tax-free in your hand. However, the bad side of the story is that company anyways pays the dividend distribution tax to govt before giving the dividends to its shareholders. Hence, anyways we are getting slightly less share of profits in our hand anyway.
Update : Now after budget 2018, the dividends from equity shares or mutual funds will be taxed at a flat rate of 10% above the threshhold limit of Rs 1,00,000 in a financial year. Before budget 2018, the profits from equity after an year was 100% tax free.
10. Any amount received through WILL or Inheritance
There is no inheritance tax in India now. So anything you get in inheritance through WILL is not taxable in your hands. It becomes your property and now when you invest that money, only the interest part earned on that property will be taxed.
11. Agricultural Income –
Agricultural Income is exempted from tax. However, the income from agriculture (if earned more than Rs 5000 a year) has to be taken into consideration for calculating the tax payable.
12. Gifts received in cash or kind –
If you get anything in cash or in kind for your marriage, that kind of gifts are 100% tax exempt. But if cash received from a relative or a friend exceeds Rs 50000 a year will be taxable. It should not happen that you get some gift after 2 yrs of marriage and you try to justify that it was a gift for your
Example #1 – If one of your friend gifts you Rs 40000 and another one gift you 10000 then there is no need to pay tax because the amount is not exceeding Rs 50,000. Let’s take another example.
Example #2 – If one of your friend gifts you Rs 40,000 and another one gift you 20,000 then the whole 60,000 shall be taxable and the recipient has to pay tax as per his slab rate
13. Scholarships and Cash Awards –
Cash Awards received from central and state government is fully exempted from tax. Any kind of scholarship granted to any deserving student to meet the cost of education is exempted from tax under Section 10(16) of the Income Tax Act of 1961. There is no cap on the maximum limit and the entire sum of money received as a scholarship gets the tax exemption treatment.
Conclusion –
Paying income tax is a moral and legal obligation of every proud citizen of the country. The Indian taxation system is designed in such a way that no unnecessary taxes become a financial burden on the taxpayer. I hope you all are clear about tax-free incomes in India.
Do let us know if we have missed any other important point in this article in the comments section.
There is a good news to taxpayers. CBDT recently announced that taxpayers who filed their income tax returns online will no longer have to send the ITR-V paper acknowledgement by post to CPC Bangalore, if they have aadhar card which can be used for verification purpose.
Instead of manual verification, a new Electronic Verification Code has been introduced to verify the e-returns. For that one will have to mention their aadhar card number in ITR form, and tax-payer will get an OTP number on their mobile for verification, which needs to be completed on the website of tax filing.
Below is a snapshot of the new ITR form where aadhar card number is asked in case you have it.
Issues with the old system
Earlier the process was like this. Once you e-filed your tax returns, you then had to send the acknowledgement copy within 120 days to CPC Bangalore. Only those who had signatures could do verification online, but it was very rare, hence millions of tax-payers had to take the pain of manually sending the form.
However, the old system was not robust and a big number of people used to get messages that their acknowledgement has not reached tax department and other manual errors used to happen.
With the introduction of this new system, things will be simplified and even faster. Now the process will be as simple as filing the tax returns online and they will get a one time password for verification purpose on the registered mobile number, which has to be used for verification on the website of tax department. That would complete the process of verification.
But I don’t have Aadhaar Card ?
Don’t worry. You can always send the physical documents ITV-V to CPC, Bangalore like you did earlier. You can do that even if you have aadhar card. This new system of verification is just an alternative way for those who have aadhar card.
What do you think about this new system?
Write us your opinion on this in our comment section.
Today I will show you, how you can pay your income tax online using challan number 280 on the income tax website. Most of the people rely on their CA and other service providers to paying income tax. Salaried class mostly don’t need to pay additional income tax most of the times at the end of the year because anyway their employers pay it on their behalf.
However, one might come across a situation where they have to pay their income tax themselves in following situations like.
If TDS deducted is less than the actual tax liability?
If you have got a notice for balance tax to be paid
If one has any other income apart from salary
What is Challan 280?
Challan 280 is the form which is required to be filled when you want to pay your income taxes. This can be done offline at the bank, or you can also pay it online. We will see both of them
How to pay income tax offline at the bank?
One can physically go to the bank and submit the filled challan 280 form along with the money. You can download the challan 280 from Income Tax website.
How to pay income tax online?
Another way to pay the taxes is by filling up challan 280 online and making the payment through your net banking facility. I have included the steps one needs to take below. Also, you can see the video below to learn the steps.
Step 1#: Choose the option “Challan 280” from income tax website
The first step is to visit this link and click on the option “Challan 280”.
Step 2#: Fill details on the Challan 280 form
Once you click on the challan 280 link, you will be directed to the page which will ask you various details.
Choose (0021)INCOME-TAX (OTHER THAN COMPANIES), which is to be chosen by individuals
Choose an assessment year, which is next year for which you are paying income tax. So if you are paying income tax for the year 2013-2014, the assessment year will be 2014-2015
Enter your PAN Number, address, Email, Phone etc
For Type of Payment, you can choose “(300) SELF ASSESSMENT TAX” if you are paying the final income tax for the year, or “(100)ADVANCE TAX” if you are paying the advance tax.
Choose the bank name from where you are going to make the payment and finally click on the “Proceed” button which will take you to the next page for confirmation of all the details entered by you
Step 3#: Verify Details and proceed for payment
On the next page, you will be asked to verify all the details you had filled. It’s important to check that the name mentioned on this page is for the same person for whom the income tax is to be paid. It should match with the PAN card holder name, also match the assessment year, email and phone number and other details.
Step 4#: Enter your login details for the bank
On the next page, you need to enter your bank username and password, so that you can make the payment finally.
Step 5#: Fill the Income-tax payable and make payment
The next step is to enter the income tax amount and other details as applicable and then finally hit the payment button.
Step 6#: Download the PDF receipt and also get it in your email
Once you make the payment, it will give you an option to download the challan receipt in PDF format. You can save it on your computer. Also, you will get the email containing the challan copy anyways.
I hope you got a good idea of how to pay income tax online. In case you have any questions, please ask in the comments section below.
When budget speech was over, the first thing I did, was that I created a poll asking people, if you are happy or disappointed with the overall budget. I was sure that most of the people will vote for “Disappointed” and that’s exactly what happened. Around 192 people voted for it and around 65% people said they were disappointed.
While, I agree that the budget didn’t offer too many benefits to common man, as they had expected, but the budget 2015 has a lot of things to offer and it’s worthwhile to look at things a little deeper. So what I am going to do is list down all the major changes for you below and explain them
1. No changes in Tax Exemption Limit or 80C limit
One of the big blow for most of the people in India was that there were no changes in the income tax exemption limits and 80C limit. At the moment, there is no income tax to be paid if taxable income is upto Rs 2.5 lacs in a year. Most of the salaried class people were expecting some relief in this area and were expecting that the limit should be changed.
However, they were disappointed heavily, when there was no change. Mr. Arun Jaitley himself had demanded raising the limits from 2 lacs to 5 lacs sometime in 2014 when BJP was not in power, but now when he is finance minister himself, he didn’t do what he “expected” from others.
2. Health Insurance limit increased from Rs 15,000 to Rs 25,000 per year
A big change in this budget was increase in health insurance exemption limit from Rs 15,000 per year to Rs 25,000 per year. In the same manner, for senior citizens – its raised from Rs 20,000 to Rs 30,000. This is really a good move because health insurance premiums can go up to Rs 25,000 per year in case one is paying the premium for self, spouse and children. This will encourage more and more people to buy health insurance.
So if you are paying yours and senior citizen parents health insurance premium, you can avail a maximum of Rs 55,000 under sec 80D. It’s a good time to head over to this website and leave your details if you are interesting in buying health insurance.
One more announcement was made that those senior citizens who are above 80 years in age, and are not covered by any health insurance, they can avail a deduction of Rs 30,000 towards expenditure on medical treatment.
3. No tax on Interest under Sukanya samriddhi account
When few months back Sukanya Samriddhi account was launched, that time the interest was taxable and investors complained how PPF is better than this scheme, but Arun Jaitley clarified that there won’t be any income tax on the interest part also, which makes this scheme better compared to its earliar version. However its still debatable if its good or bad compared to other alternatives like PPF or mutual funds in a long run.
4. Transport Allowance Limit increased from Rs 800 to Rs. 1600 per month
Another good thing about budget was that the transport allowance was raised from Rs 800 to Rs 1,600 per month. Transport allowance is not taxable at all.means now out of your overall income, total Rs 19,200 will be deducted
That means whatever income you earn, Rs 19,200 will be deducted on the name of transport allowance (Rs 1600 X 12) and you need to pay tax only on the balance amount, subject to other exemptions and benefits. While it’s doubled from Rs 800 to Rs 1,600, still Its not very high amount, especially for big cities where the transportation expenses are very high.
5. TDS introduced for Recurring Deposits Interest
You might not have heard this in the budget speech, but now the TDS will be cut even for the recurring deposits. Till now for so many years, TDS was deducted only in case of fixed deposit, and not in case of recurring deposits. But now this has changed. While it’s not a big issue, but anyways you need to pay the tax on recurring deposit interest earned, even if TDS is not deducted. An amendment will happen in the definition of “Term/Time Deposit” under sec 194A and recurring deposits will come under TDS.
6. Service Tax Rate Increased from 12.36% to 14%
This was a big blow for common man. The service tax rate was increased to 14% from earliar rate of 12.36%. That means whichever services you avail, you will be paying the additional 1.64% in service tax. In case of restaurants, you will be paying 0.656% more every time (restaurants are required to charge service tax only on 40% part of the bill) . So if your restaurant bill was Rs 1,000, you earlier paid Rs 49.4 as service tax, but now you will pay Rs 56 , which is Rs 6.6 more.
7. Wealth Tax act abolished and replaced with 2% surcharge for super rich
Wealth tax is now abolished. Wealth tax is the tax one used to pay for certain kind of assets worth Rs 30 lacs. The wealth tax didn’t bring a lot of wealth for govt and hence they have simplified the whole thing by removing it. Instead of it, they have introduced a 2% surcharge on the those who earn more than Rs 1 crore a year. This new move will bring in around Rs 9,000 crore in govt kitty!
What I loved about whole removal of wealth tax is that CA students were very happy about this as their syllabus is now simplified :), here is one tweet which confirms that!
8. Tax-free infrastructure bonds worth Rs 20,000 crore to be introduced
Tax-Free Infrastructure bonds are back. Keeping the focus on the infrastructure development, especially for railways and roads, the finance minister announced that the bonds worth Rs 20,000 crores will be introduced. The interest on these bonds will tax-free and the maturity will be after the long term tenure of 10-15 yrs.
9. PAN Mandatory for all Transactions above Rs. 1 Lakh
Now, if there is a transaction of more than Rs 1 lac, it would be mandatory to quote the PAN Card. For example, if you are paying Rs 4 lacs for buying a car, you will have to quote your PAN number for sure. This requirement of furnishing PAN is for both purchase and sale transactions. Finance minister also mentioned that tax authorities are also making provisions to check “splitting of reportable transactions” , which means that if someone tries to split the transactions only for the sole reason of avoidance of mentioning PAN, then it would be detected.
Suppose you want to make a transaction of Rs 4 lacs into gold through your debit card, but if you make 5 payments of Rs 80,000 to avoid mentioning PAN, then there will be some mechanism to detect this and you will have to explain it to tax authorities if there is any enquiry.
The Finance Bill also includes a proposal to amend the Income-tax Act to prohibit acceptance or payment of an advance of `Rs 20,000 or more in cash for purchase of immovable property’.
10. FM to Reduce Corporate tax rate from 30 to 25% over next 4 years.
This is not directly related to common man, but its important to mention it here. Just like salaried people pay tax, even corporates (companies and firms) also pay tax and the rate was 30% till now. That will be reduced to 25% over the next 4 yrs. This is really big thing, because a lot of tax is earned by govt from big and small companies and it was a bold move to reduce the taxation rates for corporates.
11. Choice between EPF and NPS
Now employees will get an option between EPF and NPS, but this option will be available to only those employees whose monthly income is upto a limit, which is not yet shared. However the good part is that employer will still have to contribute their share into EPF, only the employee share will either be invested in NPS or EPF.
Both EPS and NPS are retirement tools by govt and I personally think that over the years, govt should keep only NPS and abolish EPF, so that the whole system is more simplified.
12. Upto 10 Year imprisonment for concealment of Income or Assets abroad
Do you have any property or income abroad ? If Yes – please understand that you need to mention and declare it in your income tax return in India. Otherwise it amounts of black money and as per this budget you can be jailed for upto 10 yrs if found guilty. So if some Indian who has or does not have income of India or not, is getting any income outside India and has any assets outside, they have to file the tax returns for it without fail. If govt finds out that you didnt follow this rule, even your assets in India might be siezed in India.
Not just that, even you will have to pay a penalty of upto 300% . Read this article which explains things in a bit more detail.
13. NPS limit raised from 1 lac to 1.5 lacs
The limit of NPS has been increased from 1 lac per year to 1.5 lacs. NPS is a retirement benefit investment product by govt were you can invest and create your retirement corpus.
14. Pay Rs 12 a year and get 2 lacs accidental insurance
Focusing on poors who do not have any access to insurance products, it was announced that a special scheme with name “Pradhan Mantri Suraksha Bima Yojana” will be launched soon and will be connected to Pradhan Mantri Jan Dhan Yojana . By paying Rs 12/year , one would be eligible for getting accidental cover of Rs 2 lacs.
The exact details on this are yet to come and it would be interesting to read the finer points on this scheme and how it works. Because this scheme will provide 1 lac of insurance for Rs 6 , however in market when you buy any standard accidental insurance, the premium per lac can range from Rs 100 to Rs 500. Lets see more on this when the scheme details come in future.
15. Pay Rs 330/year and get 2 lacs life insurance
Under ‘Pradhan Mantri Jeevan Jyoti Bima Yojana’ one would be entitled to a life insurance of Rs 2 lacs sum assured for a premium of Rs 330/year . This would cover natural and accidental death both and any person under age range of 18-50 will be eligible to buy this policy.
The good part of this scheme is that one would be able to buy a lower sum assured of Rs 2 lacs because for people in lower income range, even a sum of Rs 2 lacs ifs good enough and it would really help them in life, but the premium of Rs 330 is not very cheap, because that turns out of be Rs 165 per 1 lac of life insurance. However in market when you shop for any pure term plan , the premiums are very much in same range. For example when a 30 yr old person buys a 1 crore term plan, he/she pays around Rs 8,000 a year, thats Rs 80 for every 1 lac of sum assured.
Anyways, its a good scheme which can benefit poors. The details are yet to come and we are not sure of the fine prints as of now.
16. Gold Bonds to be launched other measures
A special kind of gold bonds will be launched very soon, which will be alternative of buying the physical gold in market. So if you want to invest in physical gold “only” for the prices appreciation, then you can instead buy these bonds whose prices will move as per market price only. This is really good because there were almost no option to invest in pure gold other than physical gold. And the good part is that this will be from govt :).
Another good thing announced was that there would be Gold Scheme’s where one can deposit their physical gold which are in forms of bricks and coins (anything other than jewelry) and earn interest on it. While this is not very much beneficial for a common man, as they mostly have their gold in jewelry format only. So big institutions, temples, and other charitable trusts would benefit from this scheme.
Apart from this, new gold coins will be minted which will be having India ashoka chakra on it, so it will be “Indian gold coins” which didn’t exist till now and one had to buy foreign gold coins.
So overall – How was the Budget ?
The only question, a common man is asking is “How was the budget ?” . I personally think it was a balanced budget overall. For a salaried person, they might not find too many things in this budget and budget surely disappointed them and then there are some things which are good also. Lets not get into debate of “good” or “bad” because one person opinion might be wrong for someone else. Its a personal judgement overall
So you tell me, how was the budget for “you” and how do you feel about it ? What are good and bad things you find in this budget ?
Most of the people in India try to save income tax by investing the money in their spouse, children and parents name. We are going to explore this topic more deeper and help you understand the exact rules applicable and how you can save more tax legally, by gifting money to your family members.
Majority of people, just transfer the money to their family member account and invest that money, thinking that they will not be paying tax on that amount and it’s a smart way of gifting the money and avoid paying the tax. But that’s not correct. I have already written in detail about what is gift tax and certain exemptions when one don’t have to pay any tax on gifts received.
What most of the people do in real life is that, they just transfer the money to their family member bank account and invest that money in their name, assuming that by default it will help them in saving tax, because they have gifted away that money and because their family member has income below exemption limit, they also don’t have to pay any tax. However, it’s not that simple.
Now, let’s understand the tax implications of various people involved when a gift is given and what is the right way to save tax by gifting money.
Let’s take an example– where husband earns Rs 10 lacs per annum, gifts Rs. 1 lakh out of that to his wife, who is a homemaker. Wife, then invests this Rs 1 lac in a Bank FD at the rate of say 10% interest per annum and earns Rs 10,000 as income.
This transaction has three parts and the tax implications as follows
Tax Implication on GIVER (husband) for the amount gifted
Tax Implication on receiver (Wife) for the amount received
Tax Implication on the income earned, when the gifted money is invested.
Tax Implication on GIVER (husband) for the amount gifted
Let’s first talk about the tax implication for the person giving the gift.
The person, who gives the gift can never claim any income tax deduction or exemption from his/her income. Most of the people confuse the entire gifting implication and assume that the money which they have gifted to somebody will be reduced from their total taxable income and they have to pay tax only on the balance income. But that is not correct.
In the above example, the husband earns Rs 10 lacs per annum and should ideally pay tax on that full amount after deducting any income tax exemption they get from various sections like 80C and others.
How most of the people think?
Now husband can argue that the Rs. 1 lac which was gifted to his wife should be reduced from his total taxable income and he should be paying taxes only on Rs. 9 lacs. But this is simply not allowed!
Because – if this is allowed, then everyone will gift all their salary or business income to wife or parents and no one will pay tax at all, because they don’t have any income now as the entire income is gifted. That does not make any logical sense.
So in the above example, husband has to pay tax on his income of Rs 10 lacs subject to all the benefits as available to him under various sections of the IT act and let’s say that his total tax after all tax deductions (80C) comes to Rs. 75000/- and his post-tax income is Rs. 9.25 lacs. He can gift whatever he wants out of this post-tax income.
Tax Implication on Reciever (Wife) for the amount received
Now let’s take the tax implication for wife, who got the money in our example. Will she pay income tax on this gift received or not?
The answer is NO
Because this is a gift from her husband, who comes under the specified list of relatives who are exempt under the income tax act from gift tax liability. If she had got this 1 lacs from her friend or some random person, who is unrelated to her. In that case, this 1 lac would be considered her income for the year and taxed in her hands, but here she will not pay any tax on this 1 lac.
Below is the list of relations from whom if one gets any gift, they don’t need to pay any tax.
Your spouse
Your brother or sister
Brother or sister of your spouse
Brother or sister of either of your parents
Any of your lineal ascendants or descendants
Any lineal ascendant or descendant of your spouse
Spouse of the persons referred in above points
So the point is that, if one gets a gift from close family members, like spouse, parents, siblings etc, the receiver does not pay any income tax on the money received.
Tax Implication on the income earned, when the gifted money is invested
Now the tricky part comes in.
What happens when the gifted money is invested in products like FD’s or shares? Let’s say that the wife invests this Rs. 1 lacs in a bank FD and earns an interest @10% annually, ie Rs 10,000.
Now who will pay the tax on this interest of Rs 10,000?
Husband or Wife?
I know most of the people will think that its wife, because once she gets the gift, now its her money and she is 100% owner of that money and any income generated from that should also be her own income and she should pay the income tax on that amount. So here in this case, if wife does not have any other income apart from this Rs 10,000 , then her total income for the year will be Rs 10,000 only and as its lower than the exemption limit, so she will not be paying any tax and won’t be required to file any income tax returns.
However in real life, this is not how it works.
In this case, IT department clearly knows that people will gift the money to their spouse who does not have any income, so that the whole income generated become’s tax-free. To combat this, there is something called as Income Clubbing provisions, which adds the income of one person in other income in certain cases, and that will apply in this case.
So in the above example, this interest income of Rs. 10,000 would not go tax-free and will be clubbed with husband’s income and he has to pay tax based as per the applicable tax slab.
So if, husband earned Rs 10 lacs a year, now this Rs 10,000 will be his additional income making his total yearly income as Rs 10.1 lacs.
But Income earned from the income earned is not clubbed
One interesting point to note is that any further income generated from the income is not clubbed further and that will be 100% income of the person who got the gift.
So in above example, when wife gets Rs 1 lacs as gift, and earns Rs 10,000 as the income, that Rs 10,000 will be clubbed with income of husband, but when this Rs 10,000 is further invested into FD again and earns Rs 1,000 income, this time – it will be wife’s income and not husband.
So now, how you can apply this rule in real life? Here is a tip !
Let’s say you have Rs 10 lacs with you. If you invest this money in your name, you will earn Rs 1 lac as income from it and pay tax on it, but next time again when you invest this 1 lac, you will earn Rs 10,000 and then again have to pay tax on it because it will be your own income.
What is the alternative way ?
What you can do here is that, you can invest Rs. 10 Lakhs in your wife’s name and earn an interest of Rs. 1 lac. This Rs. 1,00,000 will be clubbed in your income for the computation of income tax; which was going to happen anyways. however, when your wife further invests this 1
However, when your wife further invests this 1 lac in another FD and earns Rs. 10,000 (assuming 10% interest) as interest on it, this time it will be considered as her income and will not be clubbed with your income. Assuming husband in 30% tax bracket, it’s a saving of Rs 3,000. Might look small, but its one of the ways to save the tax by Rs 3,000 in a legal way.
The image below shows you the rules and how the tax implication will apply in various cases explained above
3 tricks to save more tax legally by investing in family members name?
Now you are clear about the tax implication on person giving the gift, on person who is taking the gift and on the income generated from the investment done by the gifted money.
Now let’s see some things, which an investor can do to legally save tax in a more smart manner by involving their family members and that too in a 100% legal manner.
Trick #1 – Invest the gifting money into tax-exempt or low-tax instruments
Clubbing provisions will not apply when the gifted money is invested in any investment option which are tax exempt by default. Or one can invest in lower tax options.
For example – rather than a normal FD, if the money is invested in shares of a listed company and sold after 1 yr or an ELSS mutual fund, and sold after 3 yrs lock in period, then in that case the profits which attract on 10% tax as equity taxation after recent budget is only 10% without indexation, that too above Rs 1 lac limit
Trick #2 – Invest money in your parents name
You can save taxes by gifting money or by giving loans to your parents or in-laws because clubbing provisions does not apply in these cases. This is because any income generated on the gifted or loaned money to parents is purely parents income and will be taxed in their hands only.
Let’s see an example.
Assume that you have Rs 40 lacs in your hand which you want to invest and your father and mother are both senior citizen and have no income from any source. Now what you can do is, gift Rs 20 lacs to each parent and let it get invested in a bank FD at an interest rate of 10% (just an assumption)
Now both of them will get 2 lacs as the interest income individually and this is their only income in a year and will be below the exemption limit (Rs 3 lacs for senior citizens) . So there won’t be any income tax to be paid by them.
This way you have invested Rs 40 lacs in family name itself with ZERO income tax.
On the other hand if this 40 lacs was invested in FD on a main bread-winner name who is into 30% bracket, he would have paid 30% income tax on 4 lacs of interest, which is Rs 1.2 lacs. This whole 1.2 lacs is saved.
Even if parents are having additional source of income, it’s still beneficial to gift the money to them as it would lower the income tax outgo, because of the lower slab rates and applicable exemption limit.
You can apply the same logic and invest in property in parents name and let the income come to them and enjoy the tax-free income subject to exemption limits.
Trick #3 – Invest money on Major Children Name
In the same way, even the money gifted to major children (above 18 yrs) will not be clubbed in your hand. So in case you have children who are 18 years or older who are either studying or earning at a lower tax slab than you, then gifting your surplus money and investing in their name will neither attract gift tax nor clubbing of income will apply.
Income earned out of investments made by your major Children out of the gifts given by you will be taxed in their hands only.
This is really a great thing because if you are going to pay for some upcoming children education goal or marriage goal, then instead of investing the money in your name and funding the goal later, why not just gift the money to the child and invest it in their name itself. When the goal arrives, the money can then be used, but for years there will be no tax liability (or lower tax) and you will save a good amount of income tax.
You may even consider giving interest-free loans to your children as it is lawful and can help you save you more taxes. However when the children are minor then clubbing provision will attract except in cases where the income is earned by the child due to his or her skill or talent.
Plan your Income Tax with help of a CA
There are lots of ways one can save income tax by restructuring their investments in family members name. Generally people do not have much time to plan all this and for years they pay higher income tax and never optimize it. If you really want to work on this. I suggest hire a good CA for his consultancy services. This can be your family CA or some friend if you want or some external person whom you can trust.
Let me know what new ideas are coming to your mind right now after reading this article? What are your views on this? Please share it on comments section.
This article is guest post by Rishabh Parakh, a Chartered Accountant by Profession & Founder Director of Money Plant Consulting, which provides services related to income tax filing, scrutiny cases and various other CA related services with operations in Pune, Mumbai and expanding to other regions.
