Apart from death, the only thing that is certain is that we will be taxed! That is at least true in most countries of the world, including in India. We shall look at what are the few ways in which salaried individuals can save on paying taxes, but we first need to know the provisions of the Act (Income Tax Act) broadly as they apply to us.
How much tax are you liable to pay? To estimate this, you have to list all your income for the Financial Year (April 1 to March 31) first. Under the Act, your income would fall under the following categories:
Income from Salaries: Salary, Pension, and any payment arising from an employer-employee relationship
Income from Business and Profession: We shall not be covering this. For the purpose of this article, we shall assume that our primary source of income is from salary, and apart from rental income or bank interest and dividends, there are no other major sources of income.
Income from House Property: Rental income
Capital Gains: The profit or loss arising out of selling an asset – the sale price less the original cost (“indexed original cost” in some cases) is the Capital Gain on sale of a particular asset. Asset includes house, land, shares, jewelry even if it is part of one’s personal effects, securities, units of Mutual Fund, and all other kinds of assets which are not “personal effects”.
Income from Other Sources: Any income that does not fall under any of the four heads above, will figure here. Includes income from interest on bank deposits, accrued interest on NSC’s and FD’s, income from lotteries, anonymous donation and any money that falls from heaven.
Agricultural income is exempt from tax. Dividends from Equity Shares and Mutual Funds are exempt from tax – they have already incurred dividend distribution tax at the point of distribution.
Worldwide income is taxable – if you have any income from sources outside the country, that has to be included. In case you happen to be working or settled abroad, different provisions may apply, but we shall not be covering those in this article.
The way it works is that all that you earn is liable to tax unless it is specifically exempt. So if you are in doubt, you can assume it is taxable! There are specific exemptions available under the relevant heads of income which we shall look at. All provisions related here refer to the Financial Year 2010-2011 (relating to your current income for which you shall be filing returns in the next financial year, by July 31, 2011), and this article merely touches upon some of the more relevant provisions for a salaried individual resident in India – it is by no means complete – we recommend you contact your tax advisor when it comes to your specific issues and queries!
Your annual income will be taxed in the following slabs:
Up to the first Rs.160,000: Nil – In case of women (who are not senior citizens) this amount is Rs.1,90,000. In case of senior citizens above 65 years of age this amount is Rs.2,40,000.
160,000 (or 1.9 lakhs or 2.4 lakhs) to 500,000: 10%
500,000 to 10,00,000: 20%
Above 10,00,000: 30%
There is an educational cess of 3% that is added to the tax amount. Thus the highest marginal tax rate for an individual is 30.9%.
Income from Salaries
Let us have a detailed look now at “Income from Salaries”. All amounts that are received from the employer or a former employer are taxable including salary and allowances in all its forms, bonus, gratuity, pension, etc. There are a few specific provisions for exemptions on items that generally form part of your pay package that we can now look at.
House Rent Allowance (HRA): The least of the following is exempt:
- Actual rent paid less 10% of Basic Salary
- 50% of Basic Salary (in case of Mumbai, Delhi, Chennai, Calcutta) – 40% of Basic Salary in all other cases
- Amount received as “House Rent Allowance” which forms part of salary
In effect what it means is that you get exemption for any rent that you pay in excess of 10% of your Basic Salary. If the rent paid is claimed by your spouse in his / her salary or if you don’t live in a rented accommodation, then the entire HRA amount is taxable in your hands.
Provident Fund: You pay 12% of your basic salary as contribution towards your PF which is deductible under Section 80C (more on 80C later). The employer contributes an equivalent amount – this amount contributed by the employer is tax-free - it is directly deposited into your PF account and you cannot withdraw it except under certain conditions. This money earns interest at the rate declared by the Government every year – currently, it is 8.5% tax-free. You get to withdraw the accumulated sum on retirement fully tax-free. There are certain conditions under which you can avail of loans against your PF balance, but it would be in your interest to let the corpus grow and not touch it till you retire. Which other investment gives you an exemption in tax at the time of investment, an exemption on Interest earned, and a full exemption on withdrawal? By the way, what we just described is called the E-E-E model.
Superannuation Fund contribution (SAF): The employer can contribute up to another 15% (over and above the 12% to PF) to the Employee’s Superannuation Fund. This amount does not require a matching contribution from your side. It is tax free up to Rs.100,000; the balance amount is taxable. Obviously, since it enjoys an exemption, there are certain conditions attached. The corpus is invested by the trust either by itself or through LIC through a fund set up for this purpose. The returns that the fund gets every year are added back to the corpus of the holders, and these yearly accretions to your account are tax-free. At the time of retirement or superannuation, you can commute one-third of the amount, i.e., get one-third of your accumulated corpus in cash tax-free. The balance two-thirds has to be invested in buying an annuity that will start giving you pension after you turn 60. The pension, by the way, when you start getting it, is fully taxable as your income. So the SAF can be said to be following the E-E-T model.
Staff Transportation provided to-and-fro between office and home, is fully exempt though it is a perk that the company provides to you. In case the company does not have this facility and gives you a transport allowance instead, such allowance is exempt up to an amount of Rs.800 per month.
Meal Coupons (Sodexho or Ticket Restaurant) that the employer provides to you, and/or meals provided at company expense at office, are tax-free since there is a provision in the Act which exempts such payments up to the limit of Rs.50 per meal.
The premium on Medical Insurance and Life Insurance which the Company pays is exempt from tax.
Employee Rewards / Awards are taxable if the amount exceeds Rs.5000 per annum.
Some companies have Medical Allowance and Leave Travel Allowance on which tax exemptions can be claimed. Against your medical allowance you can claim up to Rs.15,000 per annum tax-free on production of medical bills for treatment of self and family. Against your Leave Travel Allowance, you can produce tickets and proofs to claim travel expenses tax-free twice in a block of four years, for going on vacation with family. The amount eligible is economy class air fare. However, these two provisions are highly prone to misuse where people produce false claims, and there is a heavy onus placed on the company to ensure sufficient safeguards. Several large companies do not have these two allowances as part of their pay – they prefer to gross up the tax and include the amount in the pay, rather than take a risk with false claims.
We shall discuss more on Tax in the next issue. Bye till then.