Income Tax - How to calculate Income Tax

How to calculate tax:

Example 1: Let us take a case where the assessee’s income is Rs. 3,10,000
According to the Income Tax Slab, the first 1,50,000 is not taxable
The next Rs. 1,50,000 is taxable @ 10%
10% of Rs. 1,50,000 is Rs. 15,000
The remainings Rs. 10,000 is taxable @20%
20% of Rs. 10,000 is Rs. 2,000

Therefore, the net Income Tax Payable is Rs. 15,000 + Rs. 2,000 = Rs.17,000

Section 88 of the Income Tax Act, 1961, is one of the most popular sections. The reason: Investments covered under it offer a rebate. A rebate is when the government gives you a concession on your income. The actual amount of the rebate varies:

If your gross total income does not exceed Rs 150,000, you will get a 20% rebate.
If your gross total income exceeds Rs 150,000, you will get a 15% rebate.
If your gross total income exceeds Rs 500,000, Section 88 will not be applicable.

Say you have to pay Rs 18,000 as tax, and you are entitled to a rebate of 20%.

You invest Rs 50,000 in the instruments eligible for a rebate. That means you save Rs 10,000 of your tax (20% of Rs 50,000). So instead of paying tax of Rs 18,000, you pay a tax of Rs 8,000.

The maximum amount that can be invested under Section 88 is Rs 1,00,000. In other words, the maximum tax that can be saved is upto Rs 20,000.

Also, the limit of Rs 100,000 has several sub-caps (mentioned below) for different investment products. The investments that fall under this section qualify for a maximum investment of Rs 70,000. Infrastructure bonds claim the balance 30% (Rs 30,000).

Or you could invest the entire Rs 100,000 in infrastructure bonds.

Housing Loan:

Deduction on interest
Under Section 24, any interest paid on the money borrowed to purchase, construct, repair, renovate or reconstruct the property is allowed as a deduction. The entire amount of interest paid is allowed as deduction if the loan is taken to purchase, construct, repair, renovate or reconstruct a property that is let out.

A maximum deduction of Rs 30,000 is allowed to the tax payer in respect of interest paid if a self-occupied property is acquired, constructed, repaired, renovated or reconstructed with borrowed money.

If the loan is taken after 1 April 1999, to purchase or construct a self-occupied house, an enhanced deduction of Rs 1.5 lakh (Rs 150,000) is allowed, only if the purchase or construction is completed within a period of three years from the end of the year in which the loan is taken

Mutual Funds -- ELSS
Equity-linked saving schemes are basically equity funds (funds that invest a major portion of their assets in the stock market) with a tax benefit. They have the potential to give a high return but are also risky.
Maximum investment: Rs 10,000.

Lock-in period: Three years.
Return: Not fixed. Dividends and appreciation in NAV. Both are tax free.

Mutual Funds -- TIPP
The Templeton India Pension Plan is a balanced fund. This means up to 40% of the money is invested in equity and the rest in debt (fixed income instruments). Maximum investment: No cap but the tax benefit will only avail upto an investment of Rs 70,000.
Lock-in period: Three years.
Return: Not fixed. Dividends and appreciation in the net asset value (NAV). This is the cost of a unit of a fund. Both are tax free.

Small saving schemes -- PPF
The Public Provident Fund stands next to none in terms of safety and tax benefits. Maximum investment: Rs 70,000 per annum.
Lock-in period: 15 years from the date of inception. Partial withdrawals are permitted after the seventh year.
Return: 8% per annum tax free.

Small saving schemes -- NSC
The National Savings Certificate has a fairly large fan following. While the interest is taxable, a deduction can be claimed under Section 80L. Under this Section, interest in certain investments can be exempt from tax upto Rs 15,000. Maximum investment: No cap but the benefit will only avail upto Rs 70,000. Lock-in period: Six years.
Return: 8% taxable.

Infrastructure Bonds -- IDBI/ ICICI Bank
Financial institutions like IDBI and ICICI Bank come out with bonds that also have a tax benefit under Section 88. IDBI currently has an issue open and ICICI Bank will be coming out with one by the end of this month.
Though the interest is taxable, you can claim exemption from tax to the tune of Rs 15,000 under Section 80L. It is advisable to opt for the interest on a yearly basis (to be within the Rs 15,000 limit).
If you decide to go for the cumulative option, where you get it all at one go (a lumpsum at maturity), your interest earnings that year may exceed the limit. Maximum investment: Rs 100,000 lakh to avail of the tax benefit.
Lock-in period: Three years.
Return: 5% to 6%. When the tax break is taken into account, it works out to 8.7% to 11.71%. Interest is taxable.

Life insurance schemes
Calamities like the Gujarat earthquake and the more recent tsunami tragedy have forced people to re-look at insurance. When buying insurance, keep one thing in mind: Look to maximise your cover, not returns.
Maximum investment: It all depends on the terms of the policy. The total premium paid has to be within the Rs 70,000 limit of rebate under Section 88.
Lock-in period: Depends on the scheme opted for.
Return: Depends on the policy being purchased and the tenure you opt for. To help you make your choice, we suggest LIC's Jeevan Rekha
This policy is a unique whole-life-cum-money-back policy. In this policy: You get a guaranteed return (10% of sum assured) every five years. This return is tax free.
On death, the entire amount is given to the beneficiary (tax free).
You get a guaranteed risk cover for life.
If you enter young, you get it really cheap.
In short, a winner all the way!
But remember that this is a general analysis. And the final choice should be made only after taking professional help.

Medical Insurance Schemes (Section 80 D)
Even if you are happy that your employer covers your medical expenses, please revisit this aspect.
It is possible that you may change jobs and may be between jobs for some time, keeping your medical position open.
This definitely requires you to avail of medical insurance from third party insurance companies to cover this risk even if you do have coverage from your employer.
Medical premium payment is covered as deduction from your gross total income, hence knocking of that much income from being taxed. What this means is that the premium paid for towards the mediclaim policy is deducted from the income directly. So first your gross total income is calculated. Then this amount is deducted, to finally arrive at the next taxable income.
The maximum amount of premium paid to be considered for deduction is Rs 10,000. And in the case of a senior citizen (above 65 years of age) in the family, the maximum amount eligible is Rs 15,000.
Maximum investment: Depends on the cover you want and need.
Lock-in period: Premium paid on yearly basis. Policy would be live till premium is paid.
Return: Coverage of the entire medical expense risk.

Pension Plans (Section 80 CCC)
This is a must in every portfolio -- it enforces disciplined investing for a prolonged period of time thereby allowing the power of compounding to work its magic. Also it is one of the few tax saving avenues available for people in the high networth bracket.
But remember that the tax saving in a pension plan is mere deferment of taxes -- when you receive the pension later, the same would be taxable.
There are several plans available today, especially the unit-linked ones offered by the private operators. These plans offer a lot of flexibility and can be tailored to suit your risk-return appetite.
Just as you pay medical premiums, the same working principle applies: the investment you make in a pension plan makes you eligible for deduction from your gross total income.
Maximum investment: There is no specific cap, but tax deduction is available for maximum investment of Rs 10,000.
Lock-in period: Funds cannot be withdrawn till one attains the age of 50.
Return: Performance not guaranteed. Pension received is fully taxable.

TAX ON 6th CPC ARREARS

TAX ON ARREARS - GOVT.REQUIRES TO CLARIFY SERVICE

Thanks to 6CPC report implementation all Central Government employees expect to receive the arrears of salary (the increased wages) shortly. A part of this increase would be paid in the current financial year and the balance will be paid in the next financial year. An issue arises as to the taxability of the income likely to be received by the employees.

The income chargeable to tax under the head ‘salaries’ includes:Salary due from an employer in the financial year, whether paid or not; salary paid or allowed to an employee in a financial year, even though not due; any arrears of salary paid or allowed to an employee in a financial year.

Therefore, an issue arises whether only the partial income that is received in the current financial year would be liable to tax or whether the entire income which the employee is likely to receive in the current financial year and the next financial year would be liable to tax now.In this context, it is important to note the provisions of Section 192 of the Income-tax Act, 1961 (the ‘Act’), which specify the deduction of tax on salary by the employer.

As per these provisions, an employer responsible for paying salary shall at the time of payment deduct income tax on the amount payable to the employee. It is pertinent to note that employer is required to deduct tax only at the time of payment of salary.

Therefore, if no payment is made, no tax is required to be deducted by the employer.By implication, if only partial payment is made in current financial year then the government is required to withhold tax only in respect of part amount paid in the current financial year.

However, an issue still remains that even if the balance portion which is not paid by the government and on which no tax is deducted, whether the said amount would still be liable to tax in the hands of the employees in the current financial year. This issue requires deliberations as to whether the phrase ‘allowed to’ would cover the payment which is yet to be made to the employees and hence this requires further clarifications from the government.

It is also important to note that government employees are also entitled to relief u/s 89 in respect of salaries received in arrears in any one financial year which relates to earlier financial years. Briefly, relief is calculated by spreading the arrears over the past years to which they pertain i.e., the tax payer can get the benefit of relief at the time of the deduction of tax at source by requesting his employer concerned.