Valuation of Perquisites
In case the company provides you a car for official as well as personal use, where expenses on maintenance or running are met or reimbursed by the employer, a perquisite value is added. For cars at or below 1600cc capacity, Rs.1,800 per month is added to the salary as perk, and for cars above that capacity, Rs.2,400 per month is added. In case a chauffeur is provided another Rs.900 per month is added. Remember that these are not the "tax" amounts - when this is added to your income you will pay tax on this at a maximum rate of 30% depending on your total income.
For loans provided by the Company, either at nil rate or concessional rates of interest, the “normal” rate of interest (as charged by SBI for that kind of loan) less what you pay as interest, is added as a perk value. Loans for medical treatment for certain diseases and loans below Rs.20,000 are exempt from this.
Valuation of rent-free unfurnished accommodation depends on the city or town where it is provided. For cities with a population exceeding 25 lakh people, the amount of lease rent paid (if leased by the employer) or 15 percent of salary (defined to include most components – almost works out to ctc), whichever is lower, is added as a perk. If furniture is provided, actual hire charges or 10% of the original cost of furniture (if owned by the employer), whichever is applicable, is added as a perk.
Gratuity up to Rs.10,00,000 is exempt. However, this is subject to the fact that you have received gratuity after five years of continuous service. This amount of Rs.10 lakhs is for a lifetime. So you need to keep track of it! This amount used to be Rs.3.5 lakhs – it has been revised to Rs.10 lakhs in May of this year.
Tax deducted at source (TDS)
When your employer deducts TDS from your salary and pays it to the Government, the employer is just acting as your agent and depositing “advance tax” on your behalf with the government. For arriving at the rate of deduction, the employer just computes income tax as would normally be paid by you based on your salary income. Certain declarations like your projected 80C investments are considered in the calculation.
In case you have given your house on rent to a corporate and the rent exceeds Rs.1,80,000 per annum, TDS at the prescribed rate is deducted. For bank deposits, in case your interest income exceeds Rs.10,000 for the financial year, TDS at the rate of 10% is deducted by the bank and deposited with the government on your behalf.
In case you win a lottery or a prize in any show, TDS at the rate of 30% is deductible.
In all these cases, the company, or agency deducting TDS on your behalf, deposits the TDS deducted with the government and provides the details to you in the form of a TDS certificate which is called Form 16 in case of Salary income, and Form 16A in all other cases.
The incomes in all the above cases, have to be included as part of your total income and the resultant tax computed. Once you have arrived at your total tax liability, you can then set off all the TDS paid on your behalf based on the TDS certificates received by you.
Special Tax Rates
Dividends earned by you from Equities, or from Equity or Debt Mutual Funds, are tax free. However, the company and/or the mutual fund has to pay a dividend distribution tax at prescribed rates. In the case of a company this tax comes out of post-tax profits, and in case of mutual funds, it comes out of your corpus.
Winnings from lotteries are taxed at 30% irrespective of your total income. If you look at the TDS rates given earlier, you can see that this entire tax due is anyway deducted as TDS!
There are special rates for Capital Gains as well which we shall see in the next section.
Gain or loss on sale of asset is treated as Capital Gain and taxed at special rates. The general principle is that long term capital gains are taxed at lower rates; rates for short term capital gains are higher. Long term is defined as sale after holding an asset for more than three years, except in case of listed equity or mutual funds, where the period is one year.
In case of Equity and Equity oriented Mutual Funds, long-term (sale after holding for more than a year) is taxed at “nil” rate and short-term (sale after holding for a year or less) is taxed at 15%.
In case of Debt oriented Mutual Funds, for long term gains (sale after holding for more than a year), you can choose between paying 10% of the gain (non-indexed) or 20% of the gain after indexing the purchase price. Short term gains are just added to your income and taxed at the normal rates.
In case of all other assets, long term gains (sale after holding for more than three years) are taxed at 20% post-indexation. Short term gains (held for three years or less) are just added to the income for the year and taxed at the normal rates.
Indexation is nothing but “adjusting” the purchase price upwards for inflation. The purchase price is adjusted upwards to reflect the rise in prices due to inflation, before being deducted from the sale price for computing the capital gains. This results in reducing the capital gains – the idea being to tax you for capital gains in excess of normal inflation. The Index Number is published every year.
Capital gains can be set-off against capital losses incurred. Capital losses cannot be set-off against your other Heads of Income, like salary. However, these losses can be carried forward for eight years and set-off as per certain rules in later years – we shall not get into those rules since they are quite complex – you need to talk to your CA!
In all the above cases, we have mentioned the base rate (10/15/20 percent). The actual tax will be 3% higher due to education cess (3% of the tax amount).
In case you own only one house in which you are staying you are eligible for deducting interest paid on housing loan (taken from approved institutions) up to Rs.1,50,000. In case the property is jointly owned, each owner is eligible for this deduction up to Rs.1,50,000 each. You will notice that the year-end statement that you receive from your Housing Finance Company (HFC) will show the interest portion and the principal portion of your EMI separately. The principal portion is eligible for deduction under section 80C. More about 80C later.
Pre-construction/pre-occupation interest needs to be accumulated till you take possession of the house – it can then be apportioned equally over five years and added to the interest for the respective year, which will be subject to the ceiling of Rs.1.5 lakhs mentioned above.
In case you own more than one property you need to show the rental incomes against your other properties and add it for tax. Even in case these other properties are not rented a “fair” rental based on rules needs to be shown as income – this is subject to some specific exemptions which again we shall not get into. That’s the bad news – the good news is that for such properties you can deduct 30% of rental income as a standard deduction, deduct municipal taxes paid, and deduct interest without any limit to arrive at the income from those properties. Even if you arrive at a “negative” number, you can set it off against other heads of income like salaries, if in the same year. If carried forward, it is subject to some set-off rules later.
Whatever we have discussed above only covers the general cases – there are several specific possibilities that are not covered. In an article of this nature, it is only possible to aim for a general understanding – you must contact your CA for assistance at all times.
In the next issue, we shall look at ways in which we can save tax, including the famous Section 80C. Bye till then!