Income Tax & Saving schemes in India:
What is Tax?
→ A compulsory contribution to state revenue, levied by the government on workers' income and business profits, or added to the cost of some goods, services, and transactions.
What is Income Tax?
→ Tax levied directly on personal income
How to calculate HRA?
→ HRA or the House Rent Allowance is an amount paid by employers to employees as a part of their salaries. It provides employees with tax benefits for what they pay towards accommodations every year
Salary Structure
→ A pay scale (also known as a salary structure) is a system that determines how much an employee is to be paid as a wage or salary, based on one or more factors such as the employee's level, rank or status within the employer's organization, the length of time that the employee has been employed, and the difficulty of the specific work performed.
How to reduce Income Tax using Conveyance Allowance?
→ It's paid by the company towards cost of travel from home to work and back and is exempt from Income tax. Tax Implications: Rs 1600 per month or the conveyance allowance component in your salary slip, whichever is lower, is exempted from tax.
How to reduce Income Tax using HRA?
→ HRA or the House Rent Allowance is an amount paid by employers to employees as a part of their salaries. It provides employees with tax benefits for what they pay towards accommodations every year. The decision of how much HRA needs to be paid to the employee is made by the employer based on certain criteria like the salary and the city of residence. The house rent allowance is regulated by the provisions of Section 10(13A) of the IT Act.
How to reduce Income Tax using Medical Allowance?
→ Medical allowance can also be said as Medical reimbursement.
Any perquisite such as medical allowance is taxable, while reimbursement by an employer of medical expenses incurred by an employee is generally tax-free.
Comparison of Saving Schemes:
Employees' Provident Fund:
→ retirement benefit scheme
→ available to all salaried employees
→ fund is maintained and overseen by the Employees Provident Fund Organisation of India (EPFO)
→ company with over 20 employees is required by law to register with the EPFO
→ employer both contribute 12% of your basic salary (plus dearness allowances, if any) into your EPF account
→ While your contributions are made monthly, the interest is calculated yearly
→ At the start of every year, you have an opening balance (which is the amount accumulated till that point). Your opening balance for the next year would be: opening balance + total monthly contributions + interest on the (old opening balance + contribution)
Public Provident Fund:
→ interest rate of 7.8% that is fully exempted from Income Tax under section 80 C
→ Good long term investments of 15 years
→ minimum deposit amount Rs 500 and max amount Rs 1,50,000 in a financial year
→ deposits can be done in each month
→ loans can be availed between 3rd to 6th financial year
→ Partial withdrawal facility can be availed from 7th financial year onwards
Life Insurance Premium:
→ Benefit is available to Individual assessee and Hindu Undivided Family assessee
→ In case of individual assessee - Himself/herself, spouse, children of such individual
→ If the amount of premium paid in a financial year for a policy is in excess of 20% of the actual capital sum assured, then deduction will be allowed only for premiums upto 20% of the sum assured.
→ Maximum amount of deduction that an assessee can claim under Sections 80C, 80CCC will be limited to Rs. 150,000.
Children Tuition Fee
→ Deduction is available only to an Individual.
→ Deduction is available to a maximum of 2 children for each individual. Therefore, a maximum of 4 children deduction can be claimed, i.e. 2 by each parent.
→ Deduction is available maximum up to Rs.1.50 Lakh for each financial year for each parent respectively.
→ Deduction can be availed for any class but the institution should be located in India
→ Allowed only for full time course
→ Adopted child school fees is also eligible
Equity Linked Saving Schemes
→ Tax-saving mutual funds can be used to reduce taxable income by upto 1.5 lakh Rupees
→ Falls under Section 80C
→ Investment can be lump sum or SIP
→ 3 years lock-in period
→ Minimum Rs 500 for investment
→ High risk
→ Individuals and HUFs can invest
How to save Tax using Fixed Deposit?
→ Guaranteed returns
→ 5 years lock-in period
→ Risk free
→ Minimum investment Rs 500
→ No premature withdrawals, loans or overdraft
→ Indian citizens, senior citizens, HUFs and NRIs can invest
How to save Tax using Sukanya Saving Scheme?
→ Falls under Section 80C
→ Very useful for girl child education and marriage
→ Interest compounded and credited to the account annually
→ Accumulated interest is exempt from taxes
→ Amount can be drawn only after maturity period
National Pension Scheme
→ Save tax up to Rs 1.5 lakh under Section 80C
→ Additional tax benefits under Section 80CCD
→ Investments in equity as well as fixed income
→ Long-term investment to help plan for retirement
→ 8% to 10% (expected)
→ Market related risks
How to save Tax using Medical Insurance Premium?
Max deduction for a taxpayer is up to Rs. 25,000/- of self, spouse and dependent children. If individual or spouse is more than 60 years old the max deduction is Rs 30,000.
How to save Tax using Education Loan?
→ Only Individuals can avail this benefit
→ Parents can also avail for children higher education loan
→ Loan should be taken from bank or financial institutions
→ Loan is taken for higher studies in India or outside India
→ Loan should be taken for higher studies
→ Amount that can be claimed is total interest part of the EMI paid during the financial year
→ Deduction for the interest on loan starts from the year in which you start repaying the loan
→ No Tax benefit is allowed for the principal repayment
First time Home buyers
→ Applicable only of Individuals
→ Deduction is over and above the Rs 2 lakhs limit under section 24 of the income tax act.
→ Loan must have been taken from a financial institution for purchasing your first residential house property.
→ This is the 1st house you have purchased
→ Value of this house is Rs 50 lakhs or less
→ Loan taken for this house is Rs 35 lakhs or less
How to save Tax for Savings Account Interest?
→ Section 80TTA provides a deduction of Rs 10,000 on interest income
→ From a savings account with a bank
→ Interest from fixed deposits
→ Interest from recurring deposits
→ Any other time deposits
→ The maximum deduction is limited to Rs 10,000. If your interest income is less than Rs 10,000, the entire interest income will be your deduction.
