Category: Tax

This is another post from the Suggest a Topic page, and we’re going to look at Wealth Tax as proposed in the Direct Tax Code today.

The source of this information is primarily Part E, Chapter X, Wealth Tax from the Direct Tax Code, and the Revised Discussion Paper on the Direct Tax Code, so if you know of a later document on DTC, then please let me know and I’ll revise the post according to information in that document.

Under DTC, Wealth Tax will be charged on individuals, HUFs and private discretionary trusts. Non profits will be exempt from this tax.

Currently, Wealth Tax is charged only on “unproductive assets” but with the Direct Tax Code – Wealth Tax will be charged on all assets with just a few exceptions.

The DTC document describes these applicable assets in detail; for instance a watch valued at more than Rs. 50,000 will be included in your wealth, and cash exceeding Rs. 2 lakhs will also be included in your wealth.

However, there are some exceptions in what will be included as part of your assets. So, if you were a king before independence then your house or your jewelery will not be taxed at all. Or, if you weren’t a king but still had a house or plot which didn’t exceed 500 square metres – that will be excluded from Wealth Tax calculations.

Or, if you had a house that you let out for more than 300 days in a year, then that house will not be included as part of your Wealth.

This is a fairly involved and long list, and if you had to pay Wealth Tax then you definitely need professional advice to figure out what to include, and at what value.

The good news however is that as it stands right now, the threshold for attracting Wealth Tax is pretty high at Rs. 50 crores. Based on that, only a few people will be liable to pay this tax. The rate is set at 0.25% of your net wealth.

Net Wealth is arrived at by subtracting wealth related loans from your assets.

As you know, there is a lot in the DTC that is still to be finalized, and the discussion paper does touch upon the fact that the current limit is too high, and also that productive assets should be exempt from taxes (like they were earlier), so it’s fair to assume that they will bring down the limit of Rs. 50 crores, and they will let shares remain outside the purview of this tax.

I think shares will be kept out of the purview of Wealth Tax because most promoter families have shares worth thousands of crores in their companies, and in some cases they may even have to sell some stock to pay this tax. Some of you might draw parallels with proposed  ESOPs (Employee Stock Options) taxation from about a decade ago.

We will have to wait and watch to see how Wealth Tax is finalized in the Direct Tax Code, but given the high threshold limit, most of us probably don’t have much to get worried about.

This is another post from the Suggest a Topic page, and in this post we’re going to take a look at some of the main aspects of income tax that affect most salaried people.

The suggestion was to write a post for someone who has just started earning, so I’m going to write this post with what I think are the main aspects that someone who is starting out should be familiar with.

What are deductions?

If you understand deductions in the beginning itself that will make it easier to understand how taxes are calculated later on. Deductions are items that are allowed to be reduced from your taxable income.

For example – current income tax rules allow you to invest up to Rs. 1.2 lacs in certain specified assets, and when you do so, the equivalent amount is reduced from your taxable salary.

So, you could have a salary of Rs. 5 lacs and if you invested Rs. 1 lac in a deductible asset – your taxable salary will only be Rs. 4 lacs, and you won’t have to pay tax on the whole 5 lacs.

It is important to remember that deductions reduce your taxable salary and thereby reduce your taxes. They are not to be directly reduced from your tax liability.

Main Salary Heads

When you look at your salary – you will notice that it’s divided into certain categories, and that’s because current income tax rules allow certain deductions based on different categories.

Usually, you will find the following categories:

1. Basic Pay: Your employer has to contribute a certain percentage of your basic pay to your provident fund which is why this is usually a small part of your total remuneration.

2. Leave Travel Allowance (LTA): LTA is taxed differently from your other salary and there are rules specific to it. That’s why you will find a separate head for that as well. You can read my post about LTA here.

3. House Rent Allowance (HRA): Like LTA, there are special provisions for HRA as well, so it forms a different head of the salary. You can read my post on HRA here.

Income Tax Slabs

India has a progressive tax structure which means that the tax rate increases as your income rises, and you have to pay taxes at a higher rate when your income rises.

For the current financial year following is the tax slab.

Upto 180,000: 0%

180,000 – 500,000: 10%

500,000 – 800,000: 20%

800,000 & above: 30%

This slab is different for women and senior citizens, and you can find all the tax slabs here.

This is fairly straight-forward and the only thing I’d like to mention here is that if you make 9 lacs then not all the 9 lacs is taxed at 30%. Only the sum above 8 lacs (i.e. 1 lac in this case) is taxed at 30%. The rest of the amount is taxed at the rate of the respective slab.

Deductions under Section 80C

If you are just starting to earn (and not a commerce student) then you probably haven’t heard of Section 80C. It’s a section within the Income Tax Act that specifies what instruments you can invest under that allow you a reduction in your taxable income.

This is important because it allows you to save tax and invest your money at the same time. The catch here is that everything under this section comes with a lock in period, so you can’t access your money for some time. That said, try and plan for this section well in advance and take as much advantage of it as possible.

You may find my article on Section 80C Tax Saving instruments useful for this purpose. The maximum tax advantage you can get is Rs. 1 lacs, and your provident fund also forms part this limit so you may not even need to invest the whole amount here.

Deductions under Section 80CCF

80CCF is much like 80C, but adds to the limit available in 80C. Using this section you can reduce an additional Rs. 20,000 from your taxable income over and above the 80C deductions.

You can read my detailed article on 80CCF here.

Capital Gains on Shares and Mutual Funds

Apart from your regular income you may invest in shares and mutual funds as well, and any gains from these sources are called Capital Gains and treated differently from your regular income.

You can take a look at my post on capital gains on shares and mutual funds to get a quick view on how dividends and capital gains are taxed on these instruments.

Tax on Debt Instruments

I had written a post earlier on tax specifically related to debt instruments and this might come in handy if you want answers on what instrument attracts TDS, on which ones you need to pay tax even though there is no TDS etc.

Conclusion

In my opinion, knowing these things about tax will be a good start for someone who is starting to earn. This is basic information that most people should have, and at the same time it’s not likely that it overwhelms you either.

Do let me know if you have any other questions, or if you think I missed something.

The DTC (Direct Tax Code) will change the way capital gains are taxed on shares, and although still not finalized, here is my understanding on how capital gains will be imposed under the new DTC regime.

Short term or long term under DTC

The revised DTC discussion paper says that assets will no longer be treated as short term investment or long term investment based on how long you hold them, but the calculation will be done from the end of the financial year in which you own the asset.

Right now, if I buy a share on April 1 2011, and sell it on April 2nd 2012 – it will be treated as a long term capital asset, and the gains will be tax free.

With the introduction of DTC – the holding period will be calculated from the end of the financial year in which it was acquired, so in my example – the holding period will be calculated from March 31st 2012 and I will have to pay short term capital gains on it.

This will probably have the most impact on FMPs that are issued in March of this year to be redeemed in April of the next year to get benefit of double indexation.

Under the new regime this won’t be possible.

(Source: Revised Discussion Paper: Chapter V Section 3.2)

Tax Rate on Capital Gains on Shares under DTC

Currently, long term capital gains on shares are tax free, while short term capital gains are charged at 15%. In the new DTC regime – capital gains will be added to the income of the individual and will be taxed at the rate applicable to the taxpayer.

Short term capital gains on shares under DTC

Short term capital gains will be taxed on the tax slab of the investor. Your profit will be added to your income, and then you will be taxed based on whatever slab you fall under.

Long term capital gains on shares under DTC

This is where it becomes slightly complex. Currently you don’t have to pay any capital gains on long term capital gains but in the future you will have to pay tax on the capital gains – but not the whole amount.

The government will allow you to deduct a certain percentage from your capital gain based on some parameter which I think will be how long you held the share for.

So, say you make Rs. 1,000 in gains for shares you held for a year, and the government says that for one year you’re allowed to deduct 50% from your capital gains for the purpose of tax -  then instead of adding Rs. 1,000 to your taxable income, you will only have to add Rs. 500 to your taxable income.

This will then be taxed at your tax slab.

As far as I know the method of computing the deduction has not been out yet, and the discussion paper only gives examples.

Final Words

I have been holding off on writing about this because there is still some way to go and not everything has been finalized but there’s a lot of interest in the subject and I think it’s better to at least get started on this topic here.

The source of my article has been this revised discussion paper here, but if you know of a revision after that version, then do let me know and I’ll update my post.

This is another post from the Suggest a Topic page, and this time we’re going to take a look at how capital gains – short term and long term as well as dividend distribution taxes are charged on shares, equity mutual funds, debt mutual funds, and Gold ETFs.

The way I have gone about creating this list is to look at the tax section of various mutual funds, and then refer back to the relevant act.

In a few cases I’ve been unable to make heads or tails of the act so I have not linked back to the act in those cases.

The most helpful page to get started was the UTI Tax page which has laid out the mutual fund taxation in very good detail. You can find similar pages on all mutual fund websites, but I’m linking to them because I found them quite useful.

Before you go on to read the table I should remind you that I’m not a tax expert and while this table can serve as a good starting point you shouldn’t file taxes just based on this!

Asset Class	Classification as Short term or Long term	Long Term Capital Gains	Short Term Capital Gains	Dividend Distribution Tax
Shares	Less than a year is short term and more than a year is long term	Exempt under section 10 (38)	15% under section 111A	15% Under Section 115 – O
Equity Mutual Fund	Less than a year is short term and more than a year is long term	Exempt under section 10 (38)	15% under section 111A	Exempt under section 115 R
Debt Mutual Fund	Less than a year is short term and more than a year is long term	10% without indexation or 20% with indexation whichever is lower plus surcharge and cess	Gains taxed on investor’s slab.	12.5% under section 115 R
Money Market Funds & Liquid Funds	Less than a year is short term and more than a year is long term	10% without indexation or 20% with indexation whichever is lower plus surcharge and cess	Gains taxed on investor’s slab.	25% under section 115 R
Gold ETFs	They are treated exactly like Debt Mutual funds.

 

You don’t pay the dividend distribution tax – the company or the mutual fund pays that, but it still reduces the amount of income you will get so I have included it here. Dividends are not taxable in your hand since such tax has already been paid by either the company or the mutual fund.

The original question also touched upon how someone with multiple transactions could keep track of the taxes, and calculation, but I’m afraid I don’t have any input on that.

Please do let me know if you see any errors or have any other comments!

Got the following question in an email which Gurpreet responded to.

 

I have changed job and new employer has opened new PF account. I have a choice of withdrawing old PF amt or transferring to new.

If I withdraw PF, will it be treated as taxable income? If yes, can I save tax by investing partially in any government schemes / bonds?

Here is the response.

PF withdrawal is taxable if a person has worked in the company for less than 5 years. Tax cannot be saved even by investing in any govt schemes / bonds. It just gets added to income from salaries, and then the taxability will depend upon the Gross Income of the assessee.

 

Head	Statutory PF	Recognized PF	UnRecognised PF
Employers contribution to PF	Exempt from tax	Exempt up to 12% of salary (Basic +DA)	Exempt from tax
Deduction under sec 80C	Available	Available	Not available
Interest credited on PF account	Exempt from tax	Exempt up to 9.5%	Exempt from tax
Lump sum payment received at the time of retirement or termination of service	Exempt from tax	Exempt from tax:	Only employees share of contribution is exempt
		a. If the employee has worked for at least 5 years with the employer
		b. If the service is terminated on account of ill-health or by contraction or discontinuance of the employer’s business or any other reason beyond control of employee
		c. If the employee transfers the balance in his PF to his new PF a/c maintained by his new employer

Any thoughts on this – has anyone done this?

Reader D.D. Kandpal sent me this incredible LTA tip, which I hadn’t heard or read anywhere, and I thought I’d share it on a post of it’s own.

Please note that these provisions are for those who join Government service only.

Rule 8 Type of LTC

“ Fresh recruits to Central Government may be are allowed to travel to their home town along with their families on three occasions in a block of four years and to any place in India on the fourth occasion. This facility shall be available to the Government officers only for the first two blocks of four years applicable after joining the Government for the first time. The blocks of 4 years shall apply with reference to the initial date of joining the Government even though the employee changes the job within Government subsequently. The existing blocks will remain the same but the entitlements of the new recruit will be different in the first eight years of service.”

Ref  O.M.  NO. F.No. 31011/4/2008-Estt. (A)  dated 23rd September, 2008 issued by Government of India, Ministry of Personnel, Public Grievances & Pension, Department of Personnel & Training .

Thank you to Mr. Kandpal for sending this along, and my apologies for publishing this so late.

Click here to read the original post – Can a holiday package be claimed for LTA exemption?

Another post from the Suggest a Topic page, and this one is actually written by my CA friend Gurpreet Singh. We’re trying to collaborate and see if he can answer some of the taxation related questions here on OneMint, and write some articles on tax as well.

Details of Section 80D

Any amount paid by an Individual or HUF to an Insurance company as Medical Insurance Premium i.e. premium paid in respect of Mediclaim Policy can be claimed as deduction under section 80D.

Note: Life Insurance Premium is NOT covered under this category.

Important points:

1. Premium paid should be in respect of Mediclaim Insurance policy.
2. The deduction is also available when the Taxpayer makes any contribution towards Central Government Health Scheme.
3. Deduction is available only to Individuals and HUFs (Hindu Undivided Family). Corporates or Partnership firms cannot claim this deduction.
4. Deduction is not allowed when the premium is paid by cash. In other words, the deduction will be allowed when the premium is paid by modes other than cash i.e. cheque or DD.
5. Deduction is allowed in respect of following persons:

Taxpayer	Insured Person
Individual	On the health of taxpayer himself/herself, spouse, parents, dependent children of taxpayer
Hindu Undivided Family (HUF)	On the health of any of the member of the family

Amount exempted under Section 80D

Least of the following is allowed to be deducted from Gross Total Income of the Taxpayer for 80D:

a. Actual Mediclaim Insurance Premium paid

b. Rs. 15,000

In case the Mediclaim Insurance Premium paid is for a Senior Citizen (person above 65 years), least of the following is allowed as deduction :

a. Actual Mediclaim Insurance Premium paid

b. Rs. 20,000

Details on Section 80DD

This is a deduction in respect of maintenance including medical treatment of handicapped dependent that is a person with a disability.

It is available to individuals and HUFs (Hindu Undivided Families).

In the case of an individual the deduction is available to spouse, children, parents brothers or sisters of the individual.

In the case of HUF the deduction is available to any member of the HUF.

The second condition is that the disabled person should be wholly or mainly dependent on the person seeking the deduction for their support and maintenance.

The dependent should have a disability of at least 40%, and for claiming the deduction the assessee has to furnish a copy of certificate issued by the medical authority

There are two ways in which the expenses could have been incurred:

Option 1	Option 2
The taxpayer has incurred an expenditure for the medical treatment, training, nursing and rehabilitation of the dependent	The taxpayer has paid/deposited under any scheme framed in this behalf by the LIC or any other insurer or the administrator or specified company and approved by the Board in this behalf, for the support/maintenance of the dependent

Amount of deduction eligible under Section 80DD:

1. Fixed deduction of Rs 50,000/- is allowed irrespective of amounts incurred in Option 1/2

2. Deduction of Rs. 1,00,000/- is allowed in case where the dependent has the disability of more than 80%

If the dependent predeceases the Individual/HUF, an amount equal to the amount paid shall be deemed to be the income of the individual/HUF and will be chargeable to tax

Details on Section 80DDB

This deduction is in respect of medical treatment of a specified disease or ailment as prescribed by the Board.

80DDB deductions are also available to individuals or HUFs and are available for expenditure incurred in respect of assessee himself or his dependent spouse, children, parents, brothers/sisters.

In order to get 80DDB deduction the assessee has to submit a certificate in the prescribed form from a neurologist, oncologist, urologist, haemotologist, immunologist or such other specialist as prescribed working in a government hospital.

Amount of Deduction under 80DDB:

Actual amount paid or Rs 40,000/-, whichever is lower

In case the amount incurred is in respect of a person who is a Senior citizen then:

Actual amount paid or Rs 60,000/-, whichever is lower

These  were some details on Section 80D, 80DD and 80DDB, and feel free to ask any questions and I’ll try to answer them here.

I got this question in a comment the other day, and I phoned up my CA friend to ask about this.

He told me that a holiday package can be claimed for LTA exemption, but the only thing to keep in mind is that LTA exemption is for spouse, dependent children, dependent brothers or sisters only, so if you have taken a holiday with your extended family or children who are no longer dependent on you, then you can’t claim LTA exemption on that part of the expense.

Another thing is that since LTA exemption can be claimed only for travel – if your holiday package included hotel and sightseeing (which it normally does) – you won’t be able to take an exemption for that.

I thought this is a good opportunity to update my old post on LTA tax, so here is that post updated with new information.

The following points need to be kept in mind while taking the LTA or producing bills for it to get  LTA Exemption:

Can We Claim LTA Every Year?

One of the most common questions about LTA is whether it can be claimed every year or not? The answer is Yes – you can claim LTA every year, but you will not be able to claim LTA exemption ever year.

Other Points About Tax On LTA

1. If you do not wish to claim LTA in one particular year you can have your employer carry forward your LTA for the next year.
2. A supreme court judgment said that it’s no longer mandatory for employers to collect travel bills.
3. You can get your LTA exempt twice in a block of four years. Right now the block that is relevant is 2010 – 13. This block is decided by the Government so does not have a bearing on when you start your job and also these blocks are calendar years and not financial years.
4. The bills can be air, rail or even a private rental company however the exemption is only for domestic travel so an international ticket won’t do.
5. The bills have to be for a journey that has been undertaken when you are on leave and should be for you and your family that is spouse, children and dependant parents, brothers and sisters. Your family can’t claim the exemption if you have not accompanied them.
6. If you and your wife both get LTA – both of you can’t claim exemption for the same travel but you can avail exemption independently for different travels. So effectively between the two of you, you can claim exemptions four times in four years.
7. If for some reason you fail to claim LTA exemption in the bucket of four years – you still have the option to claim exemption in the first year of the next block.
8. Only travel bills can be used for LTA exemption, so a hotel bill can’t be produced for claiming LTA exemption even though you might have stayed in the hotel during your leave.
9. LTA can only be claimed for the shortest distance between two places. So if you are planning to travel from Goa to Mumbai then you will be allowed exemption on tickets from Goa to Mumbai and back. You will not be allowed to produce tickets that are via some other place like Mumbai to Hyderabad and then from Hyderabad to Goa and so forth.
10. LTA can only be claimed on tickets or rented private vehicles, you cannot show petrol or diesel vehicles for your own vehicles and then claim exemption on it.

The above are just some of the points that need to be kept in mind while discussing LTA exemptions.

I never liked tax, and have never been good with it, so there are many chances of a mistake, so please correct me if you see anything wrong.

Let me give you an example of why I don’t like tax. Here is this thing from the Income Tax Act that tells you how many children you can claim exemption for:

HAS ANY CHANGE BEEN MADE IN RULES FOR EXEMPTION OF L.T.C. TO DENY THIS BENEFIT TO LARGE FAMILIES?

Yes. Exemption of L.T.C. shall not be available to more than two surviving children of an individual after 1 st October 1998. However, this shall not apply in respect of children born before 1.10.98 and also in case of multiple births after one child. If an employee has before 1.10.98 even five children or more, exemption would still be available to all children. However, if an employee begets a third child after 1.10.1998, the L.T.C. for the third child will not be exempt.

You can thank them for not suggesting adoption!

With the tax season fast approaching, I thought I’d do a post with the tax rates for the current year, and the investing options that can avail you tax deductions. These don’t include things like loss from house property, or disability deductions, but are deductions that can be claimed under Section 80C or 80CCF when you invest a certain amount in some tax saving instruments.

First, let’s take a look at the tax slab for the current year:

Income Tax Slab:

Income	Tax Rate
Up to 1,60,000 Up to 1,90,000 (for women) Up to 2,40,000 (senior citizens older than 65)	0%
1,60,000 – 5,00,000	10%
5,00,000 – 8,00,000	20%
More than 8,00,000	30%

Education Cess: 3% of income tax & surcharge if the taxable income is more than 160,000.

The cess is levied on the tax itself, so whatever is your final tax liability – take 3% of that and add to your tax to arrive at the tax due.

Tax Saving Schemes

The table that follows lists out tax saving schemes that entitle you to a reduction on your taxable income.

What this means is that if you have a taxable salary of Rs. 9,00,000 and invest Rs. 1,00,000 in any of these tax saving schemes then your taxable salary gets reduced by 1,00,000, and you pay tax as if you only earned Rs. 8,00,000 in the year.

The maximum investment column in this table indicates that the tax benefit ceases to exist for an amount in excess of what’s indicated there. So, if you invest more than 70,000 in PPF – you will still be entitled to tax benefit on only Rs. 70,000.

Also, note that the combination of these options will give you a maximum tax benefit of Rs. 1,00,000, so if you have already bought insurance worth Rs. 1,00,000 investing another Rs. 1,00,000 for ELSS will not get you additional tax saving.

The only exception to this is the 80CCF Infrastructure Bonds, which reduce your taxable income by Rs. 20,000 over and above the Rs. 1,00,000 saved by the other options.

Regular readers know it all too well, but it’s my duty to remind you that I’m not a tax expert, and in fact hire someone else for my own taxes, so you need to keep that in mind while looking at this list, and consider it nothing more than a starting point.

S.No.	Name	Maximum Investment	Notes
1	Life Insurance Premium Paid	1,00,000	Policy should either be in your name, spouse’s name or children’s name
2	Contribution to Public Provident Fund	70,000	You can’t add the employer’s contribution to PF under this head.
3	Investment in NSC (National Savings Certificate)	1,00,000	Post office scheme with guaranteed returns.
4	Contribution to ULIPs	1,00,000	Do your due diligence before getting into these.
5	Contribution to ELSS Mutual Funds	1,00,000	Link to a post on ELSS here.
6	Contribution made to notified pension funds	1,00,000	UTI Pension fund is one example of this
7	Amount spent on children’s education	1,00,000	For tuition fee only, and  a maximum of 2 children
8	Annual Repayment of Housing Loan	1,00,000	There are a lot of conditions in this that I’m not fully familiar with, so you need to consult an expert before banking on this.
9	Tax Saving Fixed Deposits	1,00,000	Term of 5 years (Full post here)
10	Premium Paid Towards Jeevan Suraksha	1,00,000	Pension plan with annuity for life.
11	Section 80CCF Infrastructure Bonds	20,000	This is over and above the 1,00,000 mentioned above. (Full post here)

 

After writing this post I also created a detailed graphic that makes these tax saving schemes easy to understand, and also includes the details on home loan and education repayment which are not present here. You can view the 80C tax saving infographic here.

Update: Premium Paid towards Jeevan Suraksha does not come under Section 80C benefits as listed in this post, but is covered under Section 80CCC.

Thanks to R P Sarathy, and Nilesh Gupta for pointing out the error, and my sincere apologies for my mistake.