How to Calculate Income Tax

December 16, 2010   ·   3 Comments

Saving Income Tax without Doing a Single Rs. Saving:

1) A person(Male) is Exempted from till 1.6 Lacs.

2) Conveyance Allowance can be Max Taken as 800 Rs/Month i.e. 9600 Rs/Year

What’s Important: If an Employer sets CA(Conveyance Allowance) less than 800 Rs/Month, then only that much Amount can be taken as CA for Exemption.

3) House Rent Allowance will depend on various Factors:

1)      If a Person Lives in Metro, then he/she is Exempted 50% of Basic, Otherwise 40% of Basic

2)      House Rent Allowance given by Employer

3)      Rent Paid by the Person – 10 % OF Basic Salary

The Least Amount out of this Will be considered as House Rent Allowance.

e.g. Let a Person living in a Metro pays a House Rent of 6000 Rs/Month & His Employer has set an amount of 4000 Rs/Month in his Pay Slip & His Basic Salary is say 10,000/Month Then HRA will be calculated as:

1) Exemption Allowed due to Salary: 50 % of Basic = 5000 Rs.

2) House Rent Allowance given by Employer = 4000 Rs.

3) Rent Paid by Person = 6000 Rs – 10 of Basic = 6000 – 1000 Rs.= 5000 Rs.

Now Least Amount Here comes out to be 4000 Rs./Month = 48,000 Rs.

This will be considered as your HRA.

What’s Important: As you go upper in Hierarchy, Some Employer gives an option to Employees to set your Pay Slip According to your Wish. You can make sure that you set HRA as Third Option here i.e. Rent Paid – 10 % of Basic. This way you will be able to save Income Tax by making Sure that HRA set by Employer is not the least.

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4)      Meal Allowance: Employer gives an option To Employee to opt for Meal Allowance. If the Employee Opts for Meal Allowance then that Amount will be deductible in his Take Home Salary. One can avail Coupon as Sudexo or Axis Bank, HDFC Bank Meal Card of that Amount which he has opted for Meal Allowance. Max .

There are 2 slabs for Meal Allowance:

a)      13,200 Rs. Per Year=1,100 Rs. Per Month

b)      26,400 Rs. Per Year=2,200 Rs. Per Month

Meal Allowance/Month allowed by Indian Government is 26,400 Rs/Year or 2200 Rs/Month. Again it is up to your Employer that How Much Maximum Meal Allowance You can get for Exemption. If an Employer sets Meal Allowance as Forst Slab of 13,200 Rs/Month, then only that much Amount can be taken as Meal Allowance for Exemption. Most of the Employer, Though, Provide the option to the Employee to chosse their Own Meal Allowance.

5) Leave Travel Allowance: One can opt for Max. 25,000 Rs. LTA in an year. If the Employee Opts for LTA Allowance then that Amount will be deductible in his Take Home Salary. At the end of the year, one has to submit the Bills of Travelling to get this Rebate. Now, Let us say if a person Produces 15,000 Rs. Bill, then the remaining 10,000 Rs will be taxable. Tax will be deducted accordingly & then Rest of the Amount will be paid to the Employee.

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Till Now, What we have learnt is How Much one can save Income Tax without Actually Saving:

Income Tax Saving Techniques:

 

1) Section 80D: Medical Insurance Premiums

Health insurance, popularly known as Mediclaim Policies, provides a deduction of upto Rs. 35,000.00 (Rs. 15,000.00 for premium payments towards policies on self, spouse and children and (read as in addition to) Rs. 15,000.00 for premium payment towards non-senior citizen dependent parents or Rs. 20,000.00 for premium payment towards senior citizen dependent). This deduction is in addition to Rs. 1,00,000 savings under IT deductions clause 80C. For consideration under a senior citizen category, the incumbent’s age should be 65 years during any part of the current fiscal, eg. for the fiscal year 2010-11, the incumbent should already be 65 as on March 31,2011), This deduction is also applicable to the cheques paid by proprietor firms.

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2) Exemption for Home Loan

For self occupied properties, interest paid on a housing loan up to Rs 1,50,000 per year is exempt from tax.(Excluding Rs.1,00,000/p.a. u/s 80c Saving) However, this is only applicable for a residence constructed within three financial years after the loan is taken and also the loan if taken after April 1, 1999. If the house is not occupied due to employment, the house will be considered self occupied.

What’s Important: One Can Increase the Exemption Limit of 1.5 Lacs. Here is How:

For let out properties, the entire interest paid is deductible under section 24 of the Income Tax act. However, the rent is to be shown as income from such properties. 30% of rent received and municipal taxes paid are available for deduction of tax.

The losses from all properties shall be allowed to be adjusted against salary income at the source itself. Therefore, refund claims of T.D.S. deducted in excess, on this count, will no more be necessary

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3) Exemption for Education Loan (80 E):

Deduction amount: – The amount of interest paid is eligible for deduction and moreover there is no cap on the amount to be deducted. You can deduct the entire interest amount from your taxable income. However there is no benefit available on the repayment of principal amount of the loan. i.e. Only Interest paid to the Bank will come under Exemption.e.g. If the Loan Amount is 1 Lac Rs. & Interest paid is 20,000 Rs. then the Amount for which Exemption can be Taken will be 20,000 Rs. Only.

Loan should be in the name of Individual: - Deductions on education loan can only be claimed if the loan has been taken in your own name. If your parents, spouse or sibling has taken the loan for your studies, then you are not entitled to get tax benefit.

Deduction period: - Deduction shall be allowed in computing the total income in respect of the initial assessment year* and seven assessment years immediately succeeding the initial assessment year or until the interest is paid by the assessee in full, whichever is earlier. i.e. Max. of 8 Years in Total is allowed.

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4)      Exemption for Physically Handicapped (80 U) or Dependents Physically Handicapped(80 DD):

Total Limit for Dependents Physically Handicapped(80 DD) is 75,000 Rs.

a) A deduction of Rs. 15,000 u/s 80DD was allowed to an individual or HUF in respect of expenditure incurred on medical treatment of a handicapped dependent. Similarly, u/s 80DDA a separate deduction to a parent or guardian in respect of deposits upto Rs.20,000 made in specified schemes of Life Insurance Corporation & Unit Trust of India was available to provide for the future needs of the said dependent Making the sum to 35,000 Rs.

b) The old sections 80DD and 80DDA have been merged into a new see. 80DD. Now, w.e.f. 1-4-2000 i.e. for A.Y. 2000-01 and subsequent years, a total deduction of Rs.40,000 will be available to the parent or guardian in respect of either medical expenditure incurred on medical treatment of or for the future needs of the disabled or handicapped dependent.

Exemptions for persons with disability and families:

There are special tax concessions in the Income Tax Act for disabled persons. Section 80 U allows an exception of Rupees 40,000 from the income of the assessee with disability. (Apart from 80DD benifits to parents)

In Case of Physically Handicapped Persons
A person who is suffering from permanent physical disability or mental retardation is entitled to deduction upto Rs. 40,000.
Handicapped must be certified by a physician, surgeon or a psychiatrist who is working in a government hospital.
Under section 80DD and 80U of Income Tax Act, physical disability must be one of the following:
Permanent or more than 50% disability in limb
Permanent or more than 60% disability in 2 or more limb
Permanent loss of voice
Permanent blindness
Mental Retardation in which mental intelligence is less than 50% of normal required intelligence

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5)  Investment Under 80 C & Infrastructure Bonds 80 CCF:

This is going to be our Business Area.

Popular Investment Options

  • PPF (with post offices/banks), statutory Provident fund (deducted and paid by the employees).
  • Life insurance premium (with the LIC or other private insurers).
  • Unit-linked insurance (UTI & ULIPS)
  • Equity-linked saving schemes(ELSS Mutual Funds)
  • National Saving Certificates.
  • Infrastructure bonds (Investment Under 80CCF)
  • Monthly Income Scheme(MIS)
  • Kisan Vikas Patra

I Have given a snap shot what comes under Investment under 80 C. Details on how to Pick Life Insurance, mutual Funds & others will follow soon in another Post:

Public Provident Fund

* PPF (with post offices/banks), statutory provident fund (deducted and paid by the employees).
* Minimum Limit – Rs. 500
* Maximum Limit – Rs. 1,00,000
* Tenure – Minimum 15 years
* Investment has to be made every year

It can be opened at any branch of the SBI or its subsidiaries, at any post office or at the branches of specially nominated nationalised banks. The withdrawals are restricted to 50 per cent of the balance standing at the end of the 4th year.

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Life Insurance

* Maximum Limit – Rs. 1 lakh.
* Premium paid in any year should not exceed 20% of the sum incurred (issued after 1 April 2003).
* The sum paid in excess of 20% will not be allowed for any deductions.
* The tax-free status is limited to direct taxes and not to the service tax payable on insurance maturity.

ULIP

* It is the combination of investment fund and insurance policy.
* Minimum Limit – Rs. 15,000 with annual contribution of Rs. 1,000.
* Maximum Limit – Rs. 2 lakh with annual contribution of Rs. 20,000.
* Age of the investor – 12 – 55 years 6 months.
* It is also exempt from wealth tax.
* Service tax may be charged since insurance cover is taken.

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ELSS (Equity Linked Savings Scheme)

* Maximum Limit – Rs. 1 lakh.
* It offers investors a window to benefit from the ‘power’ of equities, with tax benefits as a sweetener.
* Lock-in period – 3 years.
* Liquidity option is curtailed.
* It has risk but the return is maximum, even up to 47%.

National Saving Certificates (NSC)

* Offers flexibility like PPF.
* Available at any post office in a denomination as low as Rs. 100.

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Infrastructure Bonds (80CCF)

* Investments are in the form of shares/ debentures/ bonds issues by public Non-Banking financial institutions like LIC,IDFC,LNT
* These are useful for investment made for long run. The Maximun Investment under 80CCF is 20,000 Rs. . The Interest Paid is Non-Taxable.
* Money is returned in a relatively longer period like 5 years or 10 years. After 5 Years, A person get the option to sell the Bonds whereas in 10 Years, No Such Option is gven to the Holdee.
* The interest rate is the prevailing interest rate. For 5 Years, Interest Rate is 7.5 % & for 10 Years, Interest Rate is 8 %

Monthly Income Scheme (MIS)

* 8% of interest.
* Bonus of 5% on maturity.
* Minimum Limit – Rs. 1,000
* Maximum Limit – Rs. 3 lakh (Rs. 6 lakh for joint account).
* Maturity Period – 6 years
* Lock-in Period – 3 years
* Withdrawal before 3 years there is a deduction of 3.5%
* Withdrawal after 3 years but before 6 years, bonus will not be paid

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Kisan Vikas Patra

* Money doubles in 8 years and seven months.
* Available at any post office in denominations of Rs. 100, Rs. 500, Rs. 1,000, Rs. 5,000 and Rs. 50,000.
* Interest is paid only after maturity.

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 How to Calculate Income Tax

Rajesh Singla

Rajesh is the founder & CEO of Stockssavvy, Stocks analyst,financial advisor by choice,software engineer by fate,biker,gamer,cricket lover n enthusiastic person. He believes in doing things not just to get by but to get Ahead...

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  • Sudip D

    Hi Rajesh.. I have read couple of your articles & found them very detailed & informative. Thanks for addressing the need of the readers perfectly.

    I have a query that I want to ask you.

    My company had deducted income tax from my salary but they didn’t pay it to the Govt. Now they will refund the amount which they had deducted as income tax. So I want to pay the tax myself. So in this regard I want to know I can go about it? I mean how can I pay the tax myself; what’s the procedure, etc.?

    Thanks in advance for your reply.

  • Anonymous

    @Sudip,

    If company is not paying income tax on your behalf, this will be reflected in your form 16 given by the employer. After the financial year is over by March,2011 , you need to calculate the total income tax which you need to pay. This amount you can pay directly to income tax department while filing your return. Some banks and Websites which help people fill their income tax on net also give the option of paying the calculated income tax through them, in that case, they provide you a IT receipt which you need to mention while filing income tax in your IT form.

    Regards,
    Rajesh Singla

  • vimalarani85

    I am Vimalarani, My monthly earnig is arround 2 Lks i want to know How to calculate income tax? and How to reduce it… Pls give some valuable suggestion

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