Are you paying your income tax only at the end of the financial year ? If your answer is YES, then understand that you are doing it in wrong manner. Today we will learn about Advance Tax which is not widely understood and its quite important thing to know. I know that majority of the people don’t follow this process and pay the income tax at the end of the year only (infact on the last minute many times), But today you should understand if advance tax is applicable in case your case or not.
You can either view the youtube video below to learn about it, or skip it and read the article below.
What is Advance Tax ?
As the name suggests, Advance Tax is part payment of your income tax liability in advance. So instead of paying everything at the end of the year, you pay it 3 times in a year in parts. The concept of Advance tax exists because govt wants you to pay income tax as you earn month after month and not at the end of the year. Advance tax is to be paid when your annual tax liability exceeds Rs 10,000 overall .
However important point is that Advance tax is applicable on your Income from sources other than your Salary like
Interest on FDs or Savings bank deposits exceeding Rs. 10,000/-
Rental income on House Property/properties
Capital Gains on sale of Mutual Funds or Shares
Income from any other sources not mentioned as above.
Which means that if you are a salaried employee who does not have any other income source and if your employer deducts TDS regularly, then Advance Tax is not applicable in your case. You dont need to worry about it.
On which date you have to pay Advance Tax ?
You have to pay advance tax 3 times in a year, which is 15th Sept , 15th Dec and 15th Mar and you should be paying not less than 30% , 60% and 100% of your income tax liability before these dates. Below picture makes it clear for you.
Which means that if your income tax liability for a year is Rs 1,00,000 , then you should pay advance tax of Rs 30,000 by 15th Sept, another Rs 30,000 by 15th Dec and rest Rs 40,000 by the end of 15th Mar
What if I don’t pay Advance Tax on time ?
If Advance Tax is applicable in your case, then you should be paying it on time, but if you don’t pay it on time, then you can pay it on the next due date along with the interest. So those who have not paid the first installment (i.e. September 15) of Advance Tax (if applicable to you), then you can pay it together with second installment (on of before 15th Dec), but with interest on the first instalment for deferment of the same by three month and if you are not paying it even on Dec 15th , then you can pay it by the end of the year along with the interest.
You will be charged with penalty under Sec 234B and 234C incase you ddon’tpay your advance tax on time. Let me quickly share what is sec 234C and sec 234B
Understanding Penalty under Section 234C
Lets first understand sec 234C. Under this section, if you don’t pay your installments of advance tax on time, then you are charged 1% of simple interest for next 3 months on the amount of shortfall. So this is the penalty to be paid because of DELAY!
Understanding Penalty under Section 234B
If your total advance tax paid by last due date (15th Mar) is less than 90% of your advance tax liability, then you will have to pay 1% interest on the balance amount each month until you complete the payment. which means that suppose your income tax liability is Rs 1,00,000 in total and if you have not paid anything upto 15th Mar, then you will be charged 1% on the outstanding balance (Rs 1 lac in this case) each month, unless you pay it, so if you pay in June , then you will be charged for 3 months penalty and it would be Rs 3,000 in total other than penalty under sec 234C.
Lets understand sec 234B and 234C with help of case studies. Lets assume that your total Income Tax payment for the year would be Rs 50,000, then as per rules of Advance tax, you should be paying
Rs 15,000 by 15th Sept
Another Rs 15,000 by 15th Dec
And Rest 20,000 by 15th Mar
Now imagine you don’t pay any advance tax , then how much penalty you will pay under sec 234B and 234C under various situations ? Below I have explained 4 situations where you pay your full income tax on different dates. Check out how much penalty you will have to pay under these situations !
How to pay Advance Tax ?
Now comes the final question, that how can you pay your advance tax ? Most of the people are worried on this, as they feel that paying advance tax would be very tough or involves lots of hassles, but thats not correct. You can make payment of your advance tax in less than 5 min.
There are mainly two ways of payment advance tax.
1. Offline option
Almost all the banks have tie up with govt for accepting the advance tax from the taxpayers, you can go to the banks which have the tie up and fill up the challan number 280 and pay your advance tax to them.
1. Online Payment of Advance Tax
The other faster way to make payment online. Here is how it works
Assessment year (to know more about this, click here)
Once you choose these details, you can then click on “proceed” and it will connect you to the Bank which you had selected, It will show you your NAME on the next page, so that you can confirm there was no mistake from you end, then you can make the payment online, and you will be able to print the receipt online (you will also get it on email)
Are you paying your Advance Tax
I guess, you are now clear about the advance tax and how its calculated . Its a good practice to pay your advance tax on time and do not delay it because it can mean a penalty of few thousand rupees in most of the cases. I know its tempting to delay the headache and complete the payment once in a year, a lot of people might be ok with paying some penalty, but then you also invite related problems with it. Pick your choice.
If you are a taxpayer then you must have heard the recent news about Income tax department’s drive by keeping a close eye on all your transactions. Even the salaried employees are on the radar.
Department has already identified 12 lakh taxpayers who have not filed their returns, more than 20 Crores high value transactions are being scrutinized and Notices/letters to more than 1.5 lakh people have already been issued.
8 reasons why you can expect income tax scrutiny notice?
Let’s take the first parameter today and see how & under what circumstances a notice can be issued to you as follows:-
Reason #1 – You have not filed your return
Every individual earning more than Basic Exemption Limit i.e. Rs. 2,50,000/- p.a. (Basic Exemption Limit has been enhanced from Rs. 2 lakhs to 2.5 lakhs in the last union budget for current financial year) needs to file tax returns compulsorily, even if the tax is already deducted (TDS) and paid .
So if you have not filed your returns for past few years, then you can expect a notice from IT department very soon. You might have not filed it due to your laziness or simply because you didn’t get the time, but understand that this mistake can cost you a lot especially when you have some any kind of tax evasion !
Reason #2 – Interest from FDs or Savings A/C
This is one big reason which can apply in most of the investors case . Generally banks deduct 10% TDS on the deposits interest by default, but you are suppose to pay any additional tax if applicable depending on your income tax bracket. There is a big myth that one does not need to pay any tax if TDS is cut by the bank.
For example – If you are 30% tax bracket and you have Rs 5 lacs FD in bank and imagine 8% is the interest rate, which means you get a Rs 40,000 interest from the FD , now the bank will deduct the 10% TDS (which is Rs 4,000) and pay to the govt , and give Rs 36,000 directly to you .
Now actually tax you had to pay was 30% to govt, which means that at the end of the year you need to pay additional Rs 8,000 in tax. If you have not done this , then you might be inviting trouble for future.
Reason #3 -Sudden drop in Income
Do you know that if there is a significant reduction in your income from last year, then it may cause suspicion and you might invite a IT scrutiny. This is more applicable in case of businesses and traders, because their income is highly volatile .
However in case of salaried people, this is not a big issue because in general there is no huge drop from the last year income. Let me give you an example – Imagine Ajay, who runs a business and earned Rs 15 lacs in a year and paid his taxes properly in year 2014 .
Now in 2015, he files his income tax returns with Rs 12 lacs income or Rs 17-18 lacs income, this looks natural overall , but imagine he files his return declaring his income to be Rs 3.5 lacs, then suddenly it raises some eyebrows and the IT department might want to talk to you . It might happen that you are not doing any tax-Chori, but IT department might want to enquire .
Reason #4 – Claiming Higher refund amount
If you have filed your returns claiming a high refund in a particular year, there are chances that you might get a scrutiny .
This is because firstly, its a higher amount to be refunded back to you , so naturally tax department might want to have a look at data and might question things (otherwise everyone will start asking for refunds without solid reasons) , and secondly – the refunds are generally a lower amounts because of the mismatch in your planning or some calculation and any big tickets will attract eye balls .
So if you have paid Rs 2 lacs tax, and you are asking for Rs 15,000 Refund or Rs 35,000 refund . It looks fine .. but if you ask back 90,000 refund, that might attract scrutiny.
Reason #5 – Mismatch in TDS credit
You need to check & reconcile your form 26AS with all the taxes as paid on your account . It should ideally not happen that the TDS amount you are claiming in your income tax return and the TDS actually updated in your form 26AS are different .
That’s why before filing your returns, its an important thing to check your 26AS , make sure its updated properly (check with your employer who has paid TDS, check with banks who paid TDS on your interests) . Only once everything looks fine, then claim the TDS amount . Don’t assume things like (my employer must have paid TDS and updated it properly) .
Reason #6 – Non Declaration of Exempted Income
There are various income’s on which you don’t have to pay income tax , but they must be still mentioned in the income tax return . Things like your long term capital gains tax from equity/dividends received on equity shares of Indian companies/Saving bank account interest up to Rs. 10000/PPF interest , or lets say gifts you receive from your parents/relatives ..
These are some of the things which are exempted from tax, but that does not mean you don’t have to tell the income tax department about it and you should anyways not hide it because there is no reason for it. I know a lot of people might be feeling – “Since it is already exempt, then what is the need of declaring it, I have never done it for last so many years!” .
So now as you know make sure you take your income tax filing very seriously, because till the time you don’t get IT scrutiny its not an issue , but the day you will get it, you will know it’s a pain
Reason #7 – Taking double benefits due to change in Job
Many times salaried employee who changed job during previous year gets multiple form 16 & fails to declare income from all the employers & calculate and pay the due taxes, if any. It may arise on account of certain deductions & benefits given twice .
Many times, it has been observed that when people changes their job during a year they forgot to inform about their previous income to their new employer or if at all they have declared it, they forget to make sure that it has been duly incorporated while calculating their tax liability and arriving at a TDS figure and because of this failure, new employer will deduct taxes on the income which will go from their side by giving and allowing all the deductions like 80C/section 10 etc.
All over again (as the previous employer had already factored the same while paying TDS) and also basic exemption limit and initial tax slabs benefits are also given again resulting in lower deduction of taxes.
But due to lack of this technical knowledge along with a pressure and joy of a new job this goes unnoticed and there is a shortfall in taxes which was supposed to be deducted and paid to the government; so beware when you change your job and inform previous employer income duly to your new employer to avoid getting an IT notice.
Reason #8 – High Value Transactions
If you have executed high value transactions either for investments or spending then chances of you getting the notice from IT Department are very high.
For example – Your credit card usage of more than Rs. 2 lakhs p.a./ investing in FDs for more than Rs. 5 lakhs/ depositing more than Rs. 10 lakhs in your bank account/ investing more than Rs. 2 lakh in MFs or Rs. 1 lakh in Shares or buying or selling property over Rs. 30 lakhs.
All these transactions are reported to the IT department under Annual information Returns filed by respective companies and may attract an enquiry ranging from simple to exhaustive by IT department.
How to Avoid getting Notice from IT department
With the IT department becoming net savvy and going online, it has become very easy for them to identify discrepancies in your papers and to keep a close eye on almost every financial transaction you do.
Even the honest taxpayers have received notices and have come under the scrutiny causing them running around to prove their honesty. Hence it becomes very critical for everyone to maintain their papers & documentary evidences properly to safeguard their own interest.
Here is sample of how a tax notice looks like in reality. I have scanned and uploaded a real life tax notice for you to look at below
You need to take the following actions to minimize your chances of receiving a notice –
Always file your returns on time and correctly – This is the basic precaution you need to take to ensure 100% compliance with the law. Make sure you are filing the return correctly and all the details given by you while filling Returns matches with the details available with department.
Submit ITR V to Centralized Processing Centre (CPC) Bangalore: Your filing of taxes would get complete only when your ITR V reaches CPC. Just uploading returns online is not enough; make sure you get confirmation of its receipt from CPC. Please follow the Dos & Don’ts of sending ITR-V to CPC.
Check your form 26AS (Tax Credit Statement): “26AS” gives the details of the “TDS” deposited on your behalf. You should check all the TDS payments duly credited to you or get it rectified otherwise. It can be viewed though NSDL or IT department’s site and even through Bank’s online portal.
Mismatch in Income & Expenses/investments: If your income was Rs. 10 lakhs and you invested Rs. 25 lakhs, you need to justify the source of used funds and the same applies to expenses also.
Gifts/Money credited to your account: If you have funds credited to your account out of Gifts or loan from relatives/ friends, you need to keep the documentary evidence for the same. You may also need to report these transactions in few instances.
Declaring “Exempt” Income: Even though few Incomes are exempt from the tax, you still need to declare this while filing your return.
Updating PAN details: Keep updating any changes in your pan data like address/surname change post marriage etc.
Pay Advanced Tax: if you are liable to pay advance tax, then you have to pay it as per its schedule & deadline.
Form 15H or 15G: Use 15H/15G instead of claiming refund, submit this at all the financial institutions like banks to prevent them from deducting TDS on your investments with them; in case your Income is below the taxable limit.
Avoid High Value transactions: Department gets information for all your high value transactions from the concerned institution and chances of you coming under scrutiny increases. Avoid these transactions wherever possible & plan it carefully and legally.
How to deal with Income Tax Notice if you are already in receipt of one?
Any communication from IT department & especially receiving a Notice can send shivers down your spine, even though it might be a routine enquiry or a simple clarification sought. Notice can be issued for varied reasons and there is no standard single solution to deal with different notices in the same way, but you can surely follow these 6 steps steps as mentioned below in response to any kind of notice you may receive:-
Step 1
Neither Panic nor Ignore – Your first reaction could be to press the panic button or ignoring it completely due to ignorance, both ways are wrong and key is to handle this carefully and sincerely else you may end up paying hefty penalty along with tax payment.
Step 2
Check if its issued in your PAN – Department issue notices based on your PAN and not by name, so make sure notice is issued in your PAN and do not pertains to someone else who shares similar names or DOB as yours!
Step 3
Identify the reason behind issuing a notice – Reasons could be a simple mismatch in TDS or inconsistency in your returns or some serious concerns like income concealment or survey or scrutiny of accounts.
Step 4
Check Validity and Issuer Details – Check the validity of a notice & timely issuance and under which IT section it has been issued and also look at the mention of officer in-charge, his or her designation, signature, address with details of ward & circle no. etc. Verify these details in view to avoid being cheated.
Step 5
Check DIN – If the notice is delivered online then check document identification number.
Step 6
Preparation two sets of documents and covering letter – Start collecting documents which you are asked to furnish before the assessing officer or based on the gravity of the notice. and make sure you prepare a covering letter along with the set of documents.Prepare two set of all the documents required to be submitted to the department along with a covering letter, get a stamp on your copy for your record purpose and as a proof of submission of documents and complying with the notice. You can also consult a CA for his help in drafting the proper income tax notice reply letter
3 Important Points you should always remember
Reply in time – Always reply in time even if you are not able to collect the required documents. You can even ask for some time to prepare the same. It would establish that you are honest and cooperating with the laws.
Preserve the Envelope: If you receive the notice in an envelope please keep the same safely as it contains Speed Post number which work as an evidence of its delivery to you.
Professional Help: If the gravity of notice is high then it would be prudent to have a CA represent you (you can hire us for your issues or any other income tax related problem). Otherwise you can follow the above steps and represent yourself in most of the cases.
One of the major steps that you need to take even otherwise is to keep track & records of all your Tax papers & financial transactions for the last 6 years as it will help you substantiate your claims in case of any scrutiny.
I hope this guide has given you enough knowledge about the income tax notice and why scrutiny cases happen . If you just take care of few things, you can surely lower the chances of getting income tax notices. Let us know what all did you like and if you have any questions in the area of income tax ?
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.
Let me start by sharing with you what was the situation of millions of tax payers in India till now.
If they wanted to do e-filing and went to income tax website and tried to login to their account, they failed at it, because they did not have the password, because it was created by their CA’s or someone else who assisted them once in filing their tax.
And the person could not even use the “forget password” option, because it asked for some information like Phone/Email to send the OTP pin or authentication link and obviously their phone and email was not used while creating the account.
And this meant depending on the CA for this. However recently Income Tax Department has taken strict action on this. Income Tax department has sent an email to all the income tax payers to update their emails and phone numbers if they want to do that.
Now as per new rule, A person can use his phone/email on maximum 10 accounts (now CA’s wont be able to update their personal phone/emails on all their clients, which is also a bit big issue for most of the CA’s , because a lot of their clients are not net savvy and its very convenient for CA’s to manage their accounts)
Anyways, Here is a an email snapshot of the email which was sent by income tax department.
How to update your Phone Number and Email on income tax website
If you are a new user, then its very simple and you can just go to their website and create a fresh login/password. Now its mandatory to give phone and email id. There will be one time password (OTP) sent and authenticated.
Now if you are a registered user (your PAN is your User id) and if you want to make sure that the full control of your login is with you, then make sure you update your email and phone on the website.
Here is what you need to do to update your phone and email on their website
1. Go to https://incometaxindiaefiling.gov.in/ and try to login
2. Click on “Forgot Password” link and put your User id (your PAN) and move ahead
3. One the next pages you will get an option to update your email and phone.
4. Choose that and follow the steps.
Below is an image snapshot of how it looks like
Note that there is also an issue with this new move, because now any person who has information about your details can create a new email and phone and can use that to claim an account (assuming he also has information about the bank details which was used by the person) .
A lot of CA’s are also not liking this change by the income tax department, because now their clients will go away as they are not under control of their CA’s .
Would like to know what you do you think about this move by IT department.
Budget 2014 was a big event this year as the expectations from BJP govt was very high. Here are some of the income tax rules which were changed int his budget and impact a common man directly.
1. Income Tax Exemption Increased from 2 lacs to 2.5 lacs
The basic exemption limit was raised by Rs 50,000 in this budget and now the new limit is Rs 2.5 lacs . So there is no tax to be paid upto income of Rs 2.5 lacs. For senior citizens, the new limit will be Rs 3 lacs. So the new tax slabs looks something like this
3% education cess is extra on income tax
2. 80C limit raised from 1 lacs to 1.5 lacs
This was a big relief for most of the people, as the old limit of Rs 1 lac in 80C was not enough for most of the people. There are too many things like EPF, PPF, Home Loan Principle amount, tuition fees, Life Insurance Premium, Tax Saving Mutual Funds and Tax saving FD and many more things, which gets 80C exemption.
Now with this exemption increase to 1.5 lacs, more motivation will be there for people to utilize this 80C limit. So if a person earns Rs 4 lacs, he/she can invest upto Rs 1.5 lacs in 80C, which lowers the taxable income to 2.5 lacs , which does not attract any income tax. So in best case, a person do not have to pay income tax upto Rs 4 lacs income with help of 80C investments done.
3. PPF limit raised from 1 lacs to 1.5 lacs
The limit for PPF investments was increase from 1 lacs to 1.5 lacs. This is going to be a great news for PPF fans and especially those who are investing in PPF in their children names, as the overall limit would increase for their family.
4. Home Loan Interest exemption raised from 1.5 lacs to 2 lacs
This was again a big relief for salaried class, as a lot of people who have taken home loan pay much more than 1.5 lacs of interest per year. With the increase of limit from 1.5 lacs to 2 lacs, the extra saving is of tax on Rs 50,000 , which turns out to be around Rs 15,000 for those who are in 30% tax slab. Note that this is only applicable for self occupied house taken on home loan.
5. Capital Gains Tax on Debt funds raised from 10% to 20%
The capital gains tax on debt funds has been raised from 10% to 20% and the minimum holding period to get benefit has been raised from 12 months to 36 months. So what happened was that earlier, people in 20%-30% tax slab rate used to invest in debt fund for 12 months and got it taxed at 10%, which was a great alternative to fixed deposits (where you pay 30% tax , if you are in higher tax slab) . But now this cant be done . Those who are interest to understand this part, please read this analysis on Deepak Shenoy Blog.
Then vs Now – An example calculation of a person earning Rs 10 lacs
Below I have given an example of a person who earns Rs 10 lacs, and takes full benefit under 80C , Home loan Interest and other basic exemptions like HRA, Medical Bills, Medical Insurance premium etc and compared his situation from past year rules vs the new rules which came in new budget. It has been seen that he can save approximmately Rs 30,000 additional tax. Have a look below
Download the Income Tax Calculator
I have created an excel calculator which you can use for calculating your new income tax and also compare with past year and see how much saving you will make with new rules.
There is a proposal for introducing a single demat account for all the financial products
The EPFO will launch a unified EPF account, which will be a single account and there wont be headache to transfer or merge them every-time you change the job.
There will be uniform KYC across all financial institutions so that you don’t have to update your KYC at all the places
Please share how do you see this budget and the benefits ? Do you think its really going to help bring the “acche din” or not ? Please share your thoughts in comments section below.
You can now save tax on an additional Rs 10,000 that you earn from savings bank interest. In the financial bill 2012, A new section called 80TTA was added to the Income Tax Act – 1961. This section allows an income tax deduction of up to Rs 10,000 to an individual or a HUF for interest earned on the savings bank account held with a Bank, Post Office or a Society.
Note that it’s not applicable on Fixed Deposits or Recurring Deposits. It’s only applicable to a normal savings bank account. The section is applicable with effect from April 01, 2013 and will apply from AY 2013-14 onwards.
Few Clarifications on 80TTA (Amendments)
If the interest earned out of saving bank account is more than Rs 10,000 . You will have to pay tax on the remaining amount over and above Rs 10,000
This tax deduction is over and above Rs 1 lac deduction under Sec 80C.
Rs 10,000 is the total deduction allowed by combining all the saving bank accounts interest. If you earn Rs 6,000 from each of 3 different accounts (Total Rs 18,000) , you will get deduction of Rs 10,000 and pay tax on remaining Rs 8,000.
The filing of income tax return would not be mandatory if your Gross Total Income is below the applicable basic exemption limit even though interest on saving accounts exceeds Rs. 10,000/ . (For example , if your saving bank interest is Rs 40,000 , but overall income is still Rs 1,60,000/year, you dont have to file income tax return)
Relief from tracking Small interest amount
The best thing I love about this tax deduction is that for tax purposes, investors will no longer have to worry about considering small amounts of interest that they earned on their savings bank account. It was a common occurrence to get a few hundred rupees as interest multiple times a year and it was a real pain to include them while computing taxable income. Almost all investors avoided including them, and thus were officially coming under the scanner as tax avoiders. With this tax deduction, they can now breathe a big sigh of relief.
Will fixed deposits give better returns ?
The answer is YES, in almost all cases, Fixed Deposits (despite being taxable) will give better returns than a normal savings bank account. However, there is a special case where Fixed Deposits are going to only marginally beat a normal savings bank account. It’s for those who come under the 30% tax slab and those whose saving bank interest rate is close to 6% (like Kotak or YES Bank).
I know this is a small percentage of investors, but if they invest some money in Fixed Deposits, the net returns are going to be very close to those of a normal savings bank account. Assuming they want to invest Rs 1 lakh or 1.5 lakhs for a year, returns on a 1 year Fixed Deposit after tax will be very close to interest earned on a savings bank account, because the latter will not be taxable. The table below explains this in more detail
Huge Balance in Saving bank Account ?
If you are earning 6% from your savings bank account, it takes Rs 1.66 lakhs to get Rs 10,000 interest in a year and if you are earning 4% interest, it will take 2.5 lakhs balance through the year to get the full exemption. However in our experience, we have seen a lot of our clients, as well as other investors, who keep a huge savings bank account balance – as high as 20-30 lakhs in some cases. In that case you will be earning a huge amount of interest on your savings bank account and it will all be taxable. So it is always a good practice to create a Fixed Deposit for the excess amount and only keep about 1-2 lakhs in your savings bank account.
Is your saving bank account interest more than Rs 10,000 in a year ?
Do you know that Income Tax Department offers your tax filing services at your door step with help of a trained and certified professional who can help you with tax filing and in many cases totally FREE of cost or at a small fees ? Let me introduce to the concept of TRPS (Tax Return Preparer Scheme) . Just like you have CA , you have something called as TRP or “Tax Return Preparer” trained by Income Tax Department for helping a tax payer in preparing and filing his income tax returns.
What does a Tax Return Preparer (TRP) do ?
Mainly a TRP (Tax Return Preparer) helps a person to file his income tax returns. But lets see it in detail. Mainly a TRP shall
Prepare the return with due diligence;
Affix his signature on the return prepared by him;
Furnish the return with the Assessing Officer having the jurisdiction over the concerned assessee or to any other officer or agenc as may be directed by the Resource Centre with the approval of the Board;
Hand over a copy of the return to the person whose return is prepared and furnished by him;
Retain a copy of the acknowledgment of having furnished the return;
In respect of returns prepared and furnished by him during a month, maintain record of the following, namely
the name of assessees whose returns of income have been prepared and furnished by him during that month;
the permanent account number of such assessees;
assessment year;
date of furnishing the return;
acknowledgment number;
jurisdiction of the Assessing Officer;
amount of income declared in the return;
amount of tax payable;
amount of tax paid;
The fee charged and received by him
How to Find a TRP for yourself ?
Note that you can find a TRP in your home town or near you and he will visit your home/office and do all the work for you. You can visit this webpage and find out a TRP in your city. Or you can fix an appointment by filling up this form and a TRP will call you back to confirm your appointment. Even if you are doing everything on your own and want some help on filing your ITR (download this ITR FAQ guidebook), you can tax online help by asking question here and you will get back a call for help.
You can also call the helpline at 1800-10-23738 or mail to [email protected]
How much does a TRP charge as Fees ?
Now this is a little interesting and you should know this. Income Tax Department knows that most of the individuals do not file their ITR, because they have no idea how to do it and hence they either dont pay tax or just keep delaying it. So if someone knows that he will get help in filing the Income Tax Return (ITR) at his door step, the chances are many people will give it a try and hence the tax revenues will go up for Govt.
So Income Tax Department pays incentives to TRP for every returns filed by them. The amount of incentive depends on how many tax returns you have filed till now . If you are filing it for the first time, then the incentive is 3% of the tax paid . If a person is filing his returns for 2nd time in life, then its 2% incentive and for 3rd time its 1% . The higher incentive is given when someone files his return for the first time, because its his entry into tax filing world and generally people shy away from that first time only. A TRP will not get any incentive from govt if a person has already filed his returns more than 3 times. So in a nutshell, TRP’s incentive is directly linked to how many more tax payers they can add to the pool of tax payers.
Upto Rs 250 as charges
However TRP’s are also allowed to charge upto Rs 250 from the income tax payer if he wants to . So some TRP’s charge the fees and some dont if they know that their incentive will cover their charges.
To explain to you with an example. Lets say if a person has paid Rs 20,000 as income tax. Then as an incentive , a TRP will be 3% of 20,000 – which is Rs 600 . Now a TRP might not charge you directly because he anyways is going to get it from govt, or if he feels – He can still ask your for some money as fees (subject to maximum Rs 250) .
However lets say your income tax payable is just Rs 2,000 , in which case 3% of 2,000 is just Rs 60 and surely the TRP will ask you for his fees . However its always a good idea for you to know how he is being paid so that you can tell him and get it negotiated. But I think if they do a good job, there is nothing wrong in paying their small fees , at the end they give you door step service.
Note that these TRP’s are actually trained by Income Tax Department with help of third party companies like NIIT. This step was taken by Income tax department to raise awareness level of tax filing among tax payers, to give them door step services and at the end help in generating self employed through this scheme. There are various TRP’s who have filed tax returns for thousands of individuals and now serve a big client base.
Every year, when the new financial year starts, employers ask their employees to declare their investments and give an idea about where will they invest to save the tax. There is a page on the companies’ websites, where each employee has to declare their investments. Come of the examples of the target options are life insurance premiums, ELSS investments, Rent, Ulips and home loan-related numbers.
Why do employers ask for this investment declaration?
The employer asks for this information because they want to approximate how much will be your final taxable income (after deducting the tax saved through 80C investments, HRA, Home loan and medical bills. So that they can cut a constant amount of TDS each month.
A lot of employees get a bit tensed thinking, what exactly they should mention while declaring the investments. They feel that at the end of the year, they will have to invest exactly in the same order in which they declared. However, this is not correct. All you need to do is invest the same amount declared at the start of the year into any tax-saving investments option.
For example – If you had declared that you will invest Rs 50,000 in LIC policy and Rs 30,000 in Tax saving mutual funds (ELSS). The total is Rs 80,000. Now your employer will deduct Rs 80,000 from your projected income for the year and arrive at net taxable income and find out how much is the tax you need to pay at the end of the year (projected). Now he will just divide it by 12, and find out the monthly number and start cutting that much tax each month from your salary.
Now when the month of Dec/Jan arrives, your employer asks you for investments proof. Now when you actually give it to them, they recalculate things and see if things are matching with what you declared at the start of the year or not.
There can be 3 scenarios here.
Case 1 – Amount Actually Invested Less than Amount declared in the start
In-case you were not able to invest up to the amount you declared, or you were not able to submit the documents to your employer on time, it means your employer will assume that you will not be able to do so, and that means that they have over estimated your tax saving and the tax paid by employer is lesser (because you owe more tax, due to less tax-saving investments) . In which case, the employer will recalculate your tax liability and now will adjust it with the next 1-2 month salary (Feb/Mar). Which means you get less salary in the last 1-2 months.
But, If you are able to finally invest for tax saving, then at the time of tax filing you need to declare it and ask for a tax refund from the IT department. It’s always a good idea if you can avoid this situation because then it takes a lot of time to get back your refund.
If for some reason, your employer does not cut the tax from your last month’s salary, then you directly owe the tax to govt. This can also happen if you have any other income source, which is not accounted for by the employer, in that case, you need to pay the tax to govt directly. You can do it online using Challan 280 on the IT department website. Then at the end of the year, you can file the returns.
Case 2 – Amount Actually Invested = Amount declared in the start
If you invest the same amount as declared at the start of the financial year, it means that your taxable income would be almost same as computed by your employer and the amount of tax you paid was equal to what you owe to the income tax department. In this case, there is nothing much you need to do. just file the ITR at the end of the year and everything should be pretty smooth unless you have income from other sources.
Case 3 – Amount Actually Invested More than Amount declared
It might happen that you declared only Rs 50,000 investments, but finally invested Rs 1,00,000 into tax-saving instruments, which means you saved more tax. However, your employer has been deducting the tax assuming your declaration for Rs 50,000 only, which means the employer was paying more tax to govt on your behalf. Now, this means you are entitled to get a tax refund and you can ask for it when you file the returns. Generally, it’s a good idea to declare the maximum possible investments in the start, let your employer assume you will do maximum tax saving (so that less tax is paid), and then make sure you actually invest the promised amount. In the worst case, if you fail to do so, better pay the tax at the end of the year or get less salary (be prepared for it)
This article from Bemoneyaware talks about this topic in much detail. Did you get clarity about investment proofs for your employer? Do you have any questions?
Do you have some doubt on Income Tax Return Filing Process or some question whose answer you are not getting anywhere? This post might be the end of your struggle.
Few weeks back, we ran a survey and asked investors to send us their queries and doubts on Income Tax Return Filing, whatever it may be. We then picked up some of the most asked and common doubts which investors face and thought of creating this comprehensive guide which will act like the bible to your ITR related queries.
Nobody in this world likes the annual exercise of filing Income Tax Return. Yet due to legal responsibility, everybody has to file his Income Tax Return. Now before understanding the Income Tax Return filing, let’s understand few common things first, which will help you to resolve your queries on ITR.
1. Permanent Account Number (PAN)
Permanent Account Number (PAN) is a ten-digit alphanumeric number, issued in the form of a laminated card, by the Income Tax Department, to any “person” who applies for it or to whom the department allots the number without an application. PAN enables the department to link all transactions of the “person” with the department.
These transactions include tax payments, TDS/TCS credits, returns of Income/wealth/gift/FBT, specified transactions, correspondence, and so on. PAN, thus, acts as an identifier for the “person” with the tax department.
A typical PAN is AFZPK7190K
First three characters i.e. “AFZ” in the above PAN are alphabetic series running from AAA to ZZZ
Fourth character of PAN i.e. “P” in the above PAN represents the status of the PAN holder.
“P” stands for Individual,
“F” stands for Firm,
“C” stands for Company,
“H” stands for HUF,
“A” stands for AOP, “T” stands for TRUST etc.
Fifth character i.e. “K” in the above PAN represents first character of the PAN holder’s last name/surname.
Next four characters i.e. “7190” in the above PAN are sequential number running from 0001 to 9999.
Last character i.e. “K” in the above PAN is an alphabetic check digit. (More Details on PAN)
2. Tax Deduction Account Number (TAN)
TAN or Tax Deduction and Collection Account Number is a 10 digit alpha numeric number required to be obtained by all persons who are responsible for deducting or collecting tax. It is compulsory to quote TAN in TDS/TCS return (including any e-TDS/TCS return), any TDS/TCS payment challan and TDS/TCS certificates. (More Details on TAN)
3. Financial Year
In India, the Financial Year is defined as a period starting from 1st April of a Calendar Year & ending on 31st March of the next immediate Calendar year. All the income earned by a tax assessee has to be accounted for segregation on the basis of dates in different Financial Years.
4. Assessment Year
The applicable Assessment Year for a given Financial Year is the next +1 year. For example, if a FY is 2012-2013, the relevant AY ‘ll be 2013-2014. All the income earned by you in a FY and taxes paid by you in that FY ‘ll be assessed only in the relevant AY.
5. Form-16
It’s the statement of your yearly income provided by your employer to you after the end of FY. This includes your gross income, deductions claimed by you, net income, tax liability there on, Tax deducted by your employer, any tax liability or refund.
The most important thing to be remember in form 16 is the TAN of your employer should be written clearly & so do your own PAN.
6. Form-16A
Form 16 is issued by the Tax deducting authority where the TDS is applied on your investments (say FD in banks) or non salary cases. Say TDS applied by tenant against rent paid to landlord. Here again TAN & PAN quotation is must.
7. Types of Income
As per Income Tax Act 1961, the income can be classified only under the following heads.
1. Income From Salary or Pension
2. Income from House Property – Rental Income
3. Income from Business or Profession – Say Income to a Doctor or an Agent or Advocate or a Shopkeeper
4. Income from Capital Gains – Income arising out of sell of capital assets like Property, Gold, Art, Coins, Mutual Fund Units, Equity, Precious stones
5. Income from other sources – Any income which can not be classified in the previous 4 categories, comes under this head. Interest income, winning amount in Lottery or Quiz show (example KBC), Horse racing winning, Amount received as Gift from non relatives are some examples.
Now from the above list you can identify that you are having at least 2-3 income sources. Income Tax Deptt. has created different types of Income Tax Return Forms for the combination of different income sources.
Before Discussing Income Tax Return Forms, let’s discuss Income Tax Return itself.
8. What is the importance of Income Tax Return
If your income exceeds the zero tax limits, it’s mandatory for you to file an Income Tax return. During your income earning in the whole FY, there may be a situation that the tax deducted from you is more than the actual liability or there are some losses or deductions which you could not claim during the income earning phase or you paid less tax than the actual liability.
In all such case, you can only save yourself by filing an Income Tax Return. Actually your Income Tax Return form is the account statement of your income, tax liability there on & the tax paid by you. If there is excess tax payment, you ‘ll get refund. If the paid tax is less than your tax liability you w’d have to pay the difference amount.
Below is the official version for Income Tax Return filing essentially.
“The filing of income tax/wealth-tax return is a legal obligation of every person whose total income and wealth tax during the previous year exceeds the maximum amount which is not chargeable to income tax or wealth tax under the provisions of I.T.
Act, 1961 or Wealth Tax Act 1957, as the case may be. The return should be furnished in the prescribed form on or before the due date(s). Penalty of Rs. 5000 is imposable for non-filing of return within the assessment year.
Interest is also chargeable for non-filing or late filing.”
Watch this video to know why you should file income tax return:
9. Types of Income Tax Assessees
As there are multiple source & types of Income, so are types of Income Tax Assessees. Here are few examples –
Individual
Hindu Undivided Family
Firm
Limited Liability Partnership
Association of Persons
Company
Trust
Body of Individuals
Artificial Judicial Person
Local Authority
10. Types of Income Tax Return Forms
On the basis of the income combinations as well as Assessee types as discussed above, the Income Tax Deptt. has issued multiple Income Tax Return forms. these are numbered as ITR-1, ITR-2 ……. ITR-7.
Here is a table to understand the combinations of types Incomes for Individual Assesses & the applicable ITR form. Please do note, ITR-5, ITR-6 & ITR-7 are used by assesses other than Individuals & HUFs, hence not discussed here to keep this matter relevant for general public & common Individual assessee.
Majority of common individual tax payers fall in ITR-1 & ITR-2 category.
11. Online & Offline filing of Income Tax Return
The Income Tax Department is slowly transforming itself. Earlier all the returns were only offline mode. First non Individual & non HUF ITRs were made online filing compulsory. After that for Individuals & HUFs having income more than 10L Rs. were made online filing compulsory.
Now From AY 2013-2014, the income limit has been reduced to 5L Rs. for online filing. So we can safely assume that from next AY i.e. 2014-2015, the online return filing ‘ll be compulsory for each & every tax payer.
12. How to file online ITR
It’s quite easy. Now a days, a person can e-file either self by logging into the official site of e-filing. Apart from this, there are many other private online portals who are helping you to e-file your ITR. (Taxsmile, Taxspanner, Taxyogi, Cleartax are few examples)
Frequency asked doubts on Income Tax Return Filing
We hope that you are very clear about the basic information which every tax payer should be aware about. Now lets see some of the most commonly asked questions on Tax Filing. We collected these questions from one of our surveys and just categorized them into 13 questions. Here are they –
1. I forget (or could not produce in time) to claim HRA/Savings/Home Loan/LTC/Medical Bills etc from my employer. What to do?
Please relax. For all such cases, where either you could not claim on time or forget all together, your return filing is the time to tell the Income Tax department about the same & now you can claim the refund for the excess tax deducted from you. Note that the declaration given to employer is just to make sure that your TDS cut by employer is inline with your plans in a financial year. Incase something does not match, It can be finally done at the time of tax returns filing.
2. Where should I produce Bills/papers/receipts of the things related to Q. 1 above
Please do note that current ITR forms are ‘annexure less’ forms. Which means, that you need not produce any support documents to the Income Tax Department at the time of filing. Just keep the documents safely with you, so that you can produce the same if Income Tax people demand it from you in future. Documentation should be surely done by you, because incase there is a scrutiny case in future, you should have to documentary evidence.
3. I could not file my previous years income tax return on time or forget it .
It happens ! . There are penalty provisions if you do not file your due Income Tax Return on time. To correct the mistake, please file a delayed return now if you have not filed the previous years return. For ITRs related to previous years, please take help of a Tax professional to do the same. Filing late is better than not filing at all. Just contact a CA or tax filing portals, and they will be able to help you. Read this article on Late Tax Filing for clarity
4. I did not get the refund order/cheque . What to do ?
First check your refund status here. In case your refund status is available as cheque issued & the same is not received by you. Please contact at the E-mail or Phone nos. in the shared link. Also you read this article on how to Check your Income tax refund status online & Learn how to use RTI
5. I received the Refund cheque but I misplaced it/delivered at wrong address/wrong bank account number.
A lot of these issues happens because the address you provided at the time of filing returns years back is not the same where you are residing now, and the cheque goes back. For all such cases, you should contact your Jurisdictional Assessing Officer for offline filed ITR or CPC Bangalore for online filed ITRs. For online filed ITR, there is a link within your login window for Refund Reissue Request, use this for refund reissue.
6. How can I calculate my tax liability arising out of capital gains
Relax. You just need to punch in the required data in the excel sheet for ITR e-filing available at the e-filing portal. The sheet ‘ll calculate your tax liability on it’s own. Or you can refer to this article which will guide you on how to calculate capital gains.
7. How can I pay my due taxes as per calculation done by me or ITR excel sheet
Paying your due taxes is very easy. There are 2 ways to it. a) Use your net-banking account . b) Use the Official Portal . Please do note for self payment of Income tax, the applicable challan number is 280.
8. I fall in 20-30% tax slab. Bank deducted TDS @ 10%. Should I pay more Tax
The answer is yes. Bank has merely done it’s legal responsibility. Your Tax liability is more than the work done by bank. So please calculate your actual tax liability by adding the interest income into your gross income & pay your due taxes. Here is a full article on TDS related issues.
9. I forget to put in some data or wrong data was put in during my original return filing. How to rectify it ?
No problem, you can file a revised return to rectify these mistakes. The revised return can be filed before the assessment year is over for your original filed return. Here one important point is that the original return must be filed within due date. Just note this point, that if you have filed your returns and if there are any issues or errors, you can always file a revised return later.
10. I own a house in the same city & reside in a rented accommodation. Can I claim HRA & Home loan benefit simultaneously ?
The answer is YES. If you are actually residing on rent due to your Job or any other issues & the home loan house is also in the same city, you can claim both HRA as well as Home Loan benefits. Read this article for more on this
11. I was earning salary earlier. But now there is no income due to break or because I have become NRI with no Indian Income. Should I still file my ITR for zero income ?
The answer is no. if you do not have income or income is within the zero tax slab, you need not file your ITR. Yes in case, some TDS was there, you w’d have to file your ITR to claim the refund of this TDS amount..
12. My wife is a home maker & investing small money into direct Equity & earning some income. Which ITR should she use ?
First of all make sure her income is under zero tax slab or more than it. In case she is earning more than zero tax slab, she should file her ITR. Now the quantity of trades done by her to earn that income ‘ll decide the applicability of ITR. In normal situations, such earning ‘ll be Capital gains (Here it’s assume that gains are short term in nature due to holding less than 1Y) & she should use ITR-2.
For a very high quantity of trading activities, the applicable form ‘ll be ITR-3.
13. I worked with 2 employers in a FY. How to handle & file my ITR ?
First of all please collect form 16 from both of your employers. Now consolidate the income from both employers & check for an pending tax to be paid. Pay it now. Once all this is over, please file your ITR.
We hope all your queries about income tax return filing is solved in this article. If not, please post your doubts over comment section.
This article is contributed by Ashal Jauhari . A key member of Jagoinvestor community and a Tax expert . He writes on his blog here
A lot of investors still do not understand what is the meaning of TDS (Tax Deducted at source) is and how it’s related to their taxation.
While the concept is very easy overall, I have seen that tons of investors still get confused when TDS is cut on their Fixed Deposits at maturity and they feel that they don’t need to pay any tax now, or feel that they don’t have to pay any tax on their Fixed Deposit interest just because it was below 10,000 and TDS was not cut.
So in this article, let me make sure that you are 100% clear about Tax Deduction at Source and what it means.
What is Tax Deducted at Source?
TDS or Tax Deducted at Source is a tax collection mechanism by Government of India, where at the time of transaction itself, the tax is deducted by the paying party and directly deposited to the income tax department.
It’s assumed that the receiving party (one who gets the money) will have some tax liability. Now at the end of the year when you find out your tax liability, the TDS amount is the tax you have already paid and now you need only pay the balance amount.
So in a way, Tax Deduction at Source is a good thing for 2 reasons. You automatically pay a part of your tax liability and income tax department receives their tax collection. So TDS is always a mechanism, to reduce tax theft. Let me give you some very simple examples of TDS collections
Example 1 – Tax Deduction Source cut by Employer
When a company pays salary to employees, you must have seen that they pay the salaries after cutting the tax amount.
So at the start of the year itself, after the employee declares his 80C investments, HRA, LTA and other tax deductions which he will avail, the employer ‘estimates’ what will be the tax outgo of the employee and then each month they cut a certain amount as tax and pay directly to the income tax department.
And then at the end, the employee calculates his actual income tax liability to be paid. If the Tax Liability is more than TDS cut, he pays rest of the tax money and files the returns. If the Tax to be paid is less than the TDS amount, in that case he can claim for a refund in the tax returns.
Example 2 – TDS cut by Banks on Fixed Deposits
When you open a Fixed Deposit, you earn some interest in a year. Now the rule is that if the interest amount each year exceeds Rs 10,000 on your fixed deposits (across the different branches of the same bank also), the TDS has to be deducted by the bank.
Now a lot of people confuse this by paying the tax. The rule is that any amount you earn as interest is taxable. Even if the interest is Rs 100 or Rs 1000, you still need to pay the tax on that amount. Just that if the interest exceeds Rs 10,000, the bank will cut the tax directly and pay the tax to govt.
That will make sure that you pay your tax in advance itself (you know how difficult it is to pay tax when you have finished that money at the end). Note that TDS is also applicable in case of Sweep in Accounts and MODs (Multi option Deposit Scheme by SBI)
What about NRI Fixed Deposits?
In case of NRIs, the sad part for them is that there Tax Deducted at Source is cut @30% on any interest income earned on NRO fixed deposits (no limit of Rs 10,000 interest.)
Even if they earn Rs 1,000 as interest, they still pay TDS @30%. Note that the Fixed Deposits in NRE and FCNR accounts are totally tax-free in India, hence no Tax or TDS. A lot of NRIs send money back to India and invest in Fixed Deposits in their NRO account.
If they have to pay tax at the end, well and good, else they need to file the tax returns and claim it back. NRI’s should read this article on TDS applicability in economic times and also read this article to understand how NRI’s can claim exemption on TDS is applicable for you.
If you want to know more about the tax applicable on NRE, NRO and FCNR account then watch this video:
Make sure you quote your PAN
A lot of times, PAN card number is asked by banks or at other places before the payment is made to you. Do you know that there is a reason for it? If there are any TDS to be cut, they first check if PAN number of the receiving party is available or not.
If PAN number was given by the party, then the TDS is cut at a lower rate, but if PAN number is not quoted, then TDS cut is high.
For example, in the same Fixed Deposit amount, do you know that the TDS is cut @10% if PAN number is given, but if PAN is missing, then its 20% Tax Deducted at Source? These are the numbers of individuals (not companies, LLPs or corporate bodies.)
You should also know that in this budget Tax Deducted at Source @1% is to be cut for any real estate transaction above 50 lacs!
I want to invest where TDS is not applicable
A lot of investors try to invest in bonds, securities or at those places where TDS will not be cut. They do not understand that TDS is nothing but paying tax in a different way. I assume that they thought that if TDS is not cut, they don’t have to pay any tax, which is totally wrong.
All they are doing is taking the onus on themselves to pay the tax at the end. Or many might be finding ways to save the tax by various means suggested by their CAs.
A lot of investors also try to open a lot of small FDs and break it in the same bank but in different branches or in different banks too, but they do not know, that in this era of core banking, banks and tax officials can just punch your PAN numbers (yes, my CA told me this) and get all your tax-kundali and how much fixed deposits you have and how much interest you earned out of your investments.
So you need to pay your tax on those amounts anyway, whether TDS was cut or not. If TDS was cut, in a way it’s better because you pay the tax in advance itself and don’t have to arrange for tax amount at the end of the year. It really pinches at the year-end to arrange money and see it go into tax!
Make sure you ask for TDS certificates
Whoever cuts the TDS and pays it to income tax department has to issue you TDS certificates as the proof that you have paid the TDS. The document they give you is called the ‘TDS certificate.’ You would need this document if you want to show that the TDS amount is being adjusted in your tax payment.
Generally, as a rule, all the parties send the TDS certificates to you, but make sure you are proactive in asking’ it from them.
Myth: I don’t have to pay any tax if TDS is deducted
At a lot of times, it so happens that you don’t have to pay any tax at the end of the year and you already know it, but just because your deposits are earning more than Rs 10,000 of interest income, the bank cuts the TDS amount and then you have to claim it back by filing a return.
Case 1 – If Tax payable (TP) is more than TDS
In this case, if yearly TP is more than the TDS then the investor will have to pay the remaining amount left after deduction i.e TP – TDS = Remaining Tax Payable.
Case 2 – If Tax Payable (TP) is less than TDS
In this case, If yearly TP is less than the TDS then the investor will have to file for tax return because the tax which he was supposed to pay was less than the deducted tax.
Case 3 – If Tax Payable (TP) = TDS
In this case, if TP is equal to TDS then the investor will not have to pay any extra tax because the tax is already paid. However the investor will have to file for ITR toi show that he has paid the interest and is not liable to pay anymore tax.
All those people can simply submit Form 15G/15H to bank (each year) and then the bank will not cut the TDS (my father in law told me how Bank of Maharashtra guys in some particular branch still cut the TDS even if you deposit the Form 15G/H and how they are such a pain).
TDS tip – for salaried investors
Let me share with you a little tip which a lot of you might know already, but it will surely help new people. If you are a salaried employee, your employer must be deducting the tax each month already and you know that you don’t have to pay any tax at the end.
But now if suppose you already have made some fixed deposits or some investments, where the Tax was deducted, then you have already paid some part of tax liability.
Your employer is not aware that you have already paid some tax through TDS route. So in the Jan-Feb season when they finally ask for your investment proofs, you need to also give them form 192 and deposit the TDS certificates to your employer so that he can adjust the Tax paid and pay you back the extra amount. (March month salary is generally higher due to this money coming back and also because of HRA/LTA reimbursements).
Most of the people who join their first job, get benefits like RSU, ESOP and ESPP as part of their CTC package (infact this is how employers show a high CTC while recruiting).However most of the employees do not understand these things in the beginning. Over the next few months, they start getting some knowledge about these benefits as employee.
A lot of people confuse these 3 things with each other and often do not have a full understanding of what they mean and how they work and what are the tax implications when they exercise their benefits.We will now take each one of these and understand them.
In this articles lets understand all these 3 things – RSU , ESOP and ESPP in detail.
1. RSU (Restricted Stock Units)ESOP
RSU or Restricted Stocks units are very simple to understand. The Company gives company Stock to an employee without any conditions, however there is a vesting period involved. Vesting Period is the tenure for which you will have to wait, before you can claim those shares. So if a company gives you 100 RSU vesting in 2 yrs. That simply means that after 2 yrs, you will get 100 stocks of the company. It will be all yours and you are free to keep them or sell them after that. RSU’s are also a great way to reward the employees, like in 2012 WIPRO awarded 4.5 million RSU’s to its 1200 employees (mostly top management).
RSU’s are a great way to make sure that the employee stays with the employer for long term. Imagine a company, who gives 1000 RSU’s vesting in 4 yrs. An employee will thinking many times before changing his job, because if he leaves the job and moves to another company, then he will loose those RSU’s, which might be worth a lot of money depending on the stock price. I had myself got RSUs from Yahoo, when I joined them, but due to their declining stock price over so many years, RSUs were not a great motivator for me. It was just a bonus amount for myself.
RSU can also be given in phased manner sometimes, like 25% RSU each year. So if company is giving 100 RSU’s with condition of 25% RSU vesting each year, then 25 shares will vest in first year, then another 25% in 2nd year and like this, only after 4th year, an employee will be able to get all 100 stocks.
Its worth noting that if you leave a job, a lot of companies require you to sell your RSU’s in next few months. for example next 3 months.
2. ESOP (Employee Stock Options)
Employee Stock Options or ESOP are generally given by most of the big companies in India, especially IT companies which are listed outside India. ESOPs are nothing but “OPTIONS”, which are also in stock market in India (remember Future & Options?)
Let me tell you what Stock Options are in general. If a person has a Stock Option, he actually has a right to BUY a stock in future at a pre-decided price agreed at the time of giving those stock options. So in future whatever is the market price does not matter, you always have an option to buy it at the price which was agreed upon. In this case if market price of the stock is above the pre-decided price, then you can just exercise your options of buying the stock and instantly you will be in profit. If however, the current market price is less than the pre-decided price, then you choose not to exercise the stock option at all and nothing happens.
Let me give you an example. Let’s say that an employee joins a company on 1st Jan 2013. His company gives him 500 ESOPs with vesting period of 3 yrs and at the vesting price of Rs 200. What this means is that his vesting date is 1st Jan 2016 (after 3 yrs) , On that date, he has a OPTION to buy 500 stocks of the company at Rs 200 if he wishes. Now lets say on 1st Jan 2016 …
Case 1 – The stock price is Rs 800
In this case, the employee can exercise his option and he can get 500 stocks at only Rs 200 . At this moment, the employee will make a clean profit of Rs 600 each shares and a cool Rs 3,00,000 . Note that he does not have to pay anything here, when he exercises his option, he will automatically get his profit without putting anything from his pocket. It makes sense to exercise his option in this case, because vesting price is less than market price.
Case 2 – The stock price is Rs 130
In this case, it does not make any sense to exercise, because you will be in loss, because the price you have to pay is less than market price, so you let this option go.
Note : In case of stock options, you can never make any loss, it will always be some profit only.
3. ESPP (Employee Share Purchase Plan)
ESPP or Employee Share Purchase Plan is a benefit given by employer to its employees to purchase the stock of the company at a discounted price. In an ESPP plan, an employee has to contribute a part of this salary in ESPP plan each month. An employee can choose how much of his salary he wants to contribute by himself. It can range from 1% to 15% of his salary. All the money which he contributes gets accumulated for few months and then in one go, stocks are purchased for him at some discounted price. On what price the discount will be given depends on your company EPSS plan. However in general its the minimum of the prices in the start of the EPSS plan and at the end of the ESPP plan. Let me give you an example.
Suppose your company offers a ESPP plan twice a year which you can opt for, one window opens is Jan-June (where you can join in Jan only) and other is July to Dec (You can join in July only). So you will have to tell the company how much you want to contribute each month before hand. If you choose it to be 10% , then 10% of your salary will be cut for ESPP plan and you will get the rest in your hand.
Now suppose a person chooses Jan-June window and he is contributing 10,000 a month for this, then in next 6 months, he will accumulate Rs 60,000 for ESPP, and now at the end of the Plan he will be able to get the shares.
What will be the share price considered for him ?
Let’s say that the stock price in the start of the plan (Jan month) was Rs 100 and the stock price at the end of the plan (June) was Rs 120. Then the stock price considered for him will be minimum of 100 and 120 , which is Rs 100 and on this he will get 15% additional discount and his final price would be Rs 85 only.
Note that this example is assuming that minimum of two is taken , your company EPSS might just consider the “starting price” or “ending price” .. So please look at your company EPSS plan in detail.
When to choose ESPP plan ?
ESPP is a great way to get the stock price at discount, but one should anyways take care of few things. If company’s future prospects look great in future, then one should buy the stocks anyway, so ESPP becomes a great deal where you sure shot get 15% discount. However if company’s prospects look bad in future, then you have to figure out if it’d make any sense to go for ESPP plan or make a better use of your money elsewhere.
Below is a video from Salesforce which explains their ESPP plan, watch it to get a feel of how EPSS works ?
Taxation on RSU, ESOPs and ESPP
The taxation for RSU, ESOP’s and ESPP is governed by same rules, as all of them have to deal with stocks which a employee acquires and the taxation is pretty simple to understand. There are just two rules.
Tax to be paid in India
When you sell the your RSU/ESOP/ESPP (after vesting period is over) and get back the money, its your responsibility to pay the tax on the amount in India. How much tax is to be paid by you, depends on the nature of the gains. If you sell the shares before 1 year of acquiring the shares, then the gains are called Short Term Capital Gains (STCG) and if you sell the shares after 1 year, then the gains will logically be Long Term Capital Gains.
If stocks are listed in indian stock exchanges, then you have just have to pay 15% tax on Short Term Capital Gains and no tax on long term capital gains. However if stocks are not listed on indian stock exchanges, but some foreign country, then you will have to add the short term capital gains tax in your income and pay tax as per your slab rate, and 20% with indexation on the long term capital gains, which is the case when STT is not paid when the transaction is done.
Below is the simple table which will explain things to you
[table]
Listed/Gain-Type
Short Term Capital Gain (Less than 1 yr)
Long Term Capital Gain (More than 1 yr)
Stocks Listed on Indian Stock Exchange
15% Tax on Profits
No Tax
Stocks NOT Listed on Indian Stock Exchange
Profits will be treated as your Income and taxed as per your Slab
20% with Indexation
[/table]
Incase Stocks are listed on Foreign Stock Exchange
In these cases, it might happen that when you sell your RSU, ESOP’s or ESPP, the tax is directly cut by the trading portal like etrade (in US) and you only get reduced number of units (after tax). After that when you take the money back in India, you might have to pay the tax on the income again if the double tax treaty is not available with that country.
I hope, you got a lot of clarity about RSU (Restricted Stock Units), ESOPs (Employee Stock Options) , ESPP (Employee Share Purchase Plan). These are some of the benefits employees get and understanding them is very critical for them. Please share if you have any of these benefits and if you had any confusion around them?
