Most of us pay more tax by neglecting to know about House Rent Allowance(HRA) component in our payslip.
What is HRA?
HRA is house rent allowance offered by employers to all its employees. HRA is exempted from taxable income and hence reduces the tax paid by an employee.
How HRA is calculated?
The HRA calculated by the employer is the minimum of the following three amount.
1. Actual HRA given by the employer as mentioned in the payslip.
2. Acutal rent paid by employee minus(-) 10% of his/her basic salary
3. 50% of basic salary in metro cities(delhi,mumbai,chennai,calcutta) or 40% of basic salary in other cities.
Lets take an example.
Ram lives in a house in bangalore and pays a rent of 7,000. The HRA offered by his employee is 6000/month and his basic salary is 20,000/month. Let us calculate the three amount stated above
1. HRA offered = 6,000
2. Rent - 10% of basic = 7,000 - 10% of 20,000 = 5,000
3. 40% of basic salary = 40% of 20,000 = 8,000
Hence minimum of the three , 5,000 is taken as HRA and 12*5,000 = 60,000 is exempted from tax for the current financial year.
Note : You have to pay monthly rent receipts to your employer and you can not have short routes in stating wrong rents paid by you.
Showing posts with label Tax. Show all posts
Showing posts with label Tax. Show all posts
What is Capital Gain tax?
Tax is one area where most of us have always loads n loads of questions. One major tax that is associated with any individual who owns an asset is Capital gains tax.
What is Capital Gains?
When a person sells an asset and makes profit out of it, the profit is called Capital Gains. The tax paid on profit of these asset sale is Capital Gains Tax. The asset may include mutual funds, stocks, house, land,gold and few other. When a person makes a loss out of his asset sale, it is called Capital Loss.
What are 2 types of Capital Gains?
Depending on how long you hold on to your asset before selling, there are two types of capital gains.
Short Term Capital Gains
If a person sells an asset before 3 years from its purchase and if he makes a profit , it is called short term capital gains tax. For mutual funds and equities, it is 1 year.
Long Term Capital Gains
If a person sells an asset after 3 years from its purchase and makes a profit, it is called as a long term capital gains tax. For mutual funds and shares, it is 1 year.
Short Term Capital Gains Tax:
The short term capital gains is added to your taxable income for the financial year and taxed at your income tax slab rate.
Long Term Capital Gains Tax:
There are two ways for taxing long term gains.
1. 10% of your gains without indexation.
2. 20% of your gains with indexation.
Lets take an example for case 2 (with indexation)
What is Capital Gains?
When a person sells an asset and makes profit out of it, the profit is called Capital Gains. The tax paid on profit of these asset sale is Capital Gains Tax. The asset may include mutual funds, stocks, house, land,gold and few other. When a person makes a loss out of his asset sale, it is called Capital Loss.
What are 2 types of Capital Gains?
Depending on how long you hold on to your asset before selling, there are two types of capital gains.
Short Term Capital Gains
If a person sells an asset before 3 years from its purchase and if he makes a profit , it is called short term capital gains tax. For mutual funds and equities, it is 1 year.
Long Term Capital Gains
If a person sells an asset after 3 years from its purchase and makes a profit, it is called as a long term capital gains tax. For mutual funds and shares, it is 1 year.
Short Term Capital Gains Tax:
The short term capital gains is added to your taxable income for the financial year and taxed at your income tax slab rate.
Long Term Capital Gains Tax:
There are two ways for taxing long term gains.
1. 10% of your gains without indexation.
2. 20% of your gains with indexation.
Lets take an example for case 2 (with indexation)
Let's say Mr Ram purchased a house of Rs 2,50,000 (Rs 250,000) on June 20, 1996. He sells it on January 20, 2005, for Rs 4,50,000 (Rs 450,000). Since the house was sold over 36 months after being bought, the capital gain will be long term.
First, you calculate the Cost Inflation Index. These indices are fixed and declared by the Central Government every year (see table below). This is called indexation.
Cost inflation index:
Index of the year it was sold / index of the year it was bought
2004-05 index / 1996-97 index
480/305 = 1.57377
Indexed cost of acquisition
= Buying cost x CII
= 250000 x 1.57377
= 3,93,443
Long term capital gain
= Selling price – Indexed cost
= 4,50,000 – 3,93,443
= Rs 56,547
Tax payable will be 20% of Rs 56,547 ie Rs 11,310. (Plus surcharge of 10% if applicable)
How double indexation increases return in FMP?
Finance minister Mr P.Chidambaram in one of the award function asked the recipient of the award "What is your wish list in this year's budget" and the recipient "he din want to pay more taxes" and the recipient is none other than India richest person Mr Mukesh Ambani. In return FM commented that "India is a country where a normal person as well as the richest person does not want to pay taxes".
If Mukesh Ambani himself is more conscious about paying taxes, aam aadmi like you and me should be trying to save taxes in a judicious manner. So lets see how we can reduce taxes on Fixed Maturity Plan by double indexation.
How is the profit taxed from debt mutual funds?
Debt mutual funds have a long term capital gain tax which is taxing the interest if the investment is held for more than a year. There are two methods of taxation.
1. 10% on the interest gained without indexation.
Taxable amount = Amount Returned - Amount Invested
2. 20% on the interest gained without indexation.
In the second gain, the taxable amount is calculated by
Taxable amount = Amount Returned – (Amount Invested * Inflation Index for Redemption financial Year/ Inflation Index for Investment financial Year)
Inflation index for every year is released by the govt.
Lets understand this concept with an example.
Assuming an FMP of 15 months returning 11% and Rs 10,000 is invested. Inflation index for 2006-2007 100 and inflation index for 2007-2008 is 105 and for 2008-2009 is 111. s Tax is calculated using indexation at the rate of 20%.
Scenario 1:
Amount invested in sep 2007.
Amount redeemed in Dec 2008 = Rs 11,000
Taxable Amount = 11000 - (10000 * (inflation index for 2008-2009 / inflation index for 2007-2008))
= 11000 - (10000 * 111/105)
= 11000 - 10571 = 430
Tax @ 20% = 20% of 430 = 86
Amount redeemed = 10914.
Scenario 2:
Amount invested in Mar 2007.
Amount redeemed in Dec 2008 = Rs 11,000
Taxable Amount = 11000 - (10000 * (inflation index for 2008-2009 / inflation index for 2006-2007))
= 11000 - (10000 * 111/100)
= 11000 - 11100 = -100
Net Loss = 100 and hence no tax.
Amount redeemed = 11000
So in this case we have totally avoided tax.
Hence while planning an FMP investment, we should plan it in such a way that it spans two financial years to get the advantage of double indexation.
If Mukesh Ambani himself is more conscious about paying taxes, aam aadmi like you and me should be trying to save taxes in a judicious manner. So lets see how we can reduce taxes on Fixed Maturity Plan by double indexation.
How is the profit taxed from debt mutual funds?
Debt mutual funds have a long term capital gain tax which is taxing the interest if the investment is held for more than a year. There are two methods of taxation.
1. 10% on the interest gained without indexation.
Taxable amount = Amount Returned - Amount Invested
2. 20% on the interest gained without indexation.
In the second gain, the taxable amount is calculated by
Taxable amount = Amount Returned – (Amount Invested * Inflation Index for Redemption financial Year/ Inflation Index for Investment financial Year)
Inflation index for every year is released by the govt.
Lets understand this concept with an example.
Assuming an FMP of 15 months returning 11% and Rs 10,000 is invested. Inflation index for 2006-2007 100 and inflation index for 2007-2008 is 105 and for 2008-2009 is 111. s Tax is calculated using indexation at the rate of 20%.
Scenario 1:
Amount invested in sep 2007.
Amount redeemed in Dec 2008 = Rs 11,000
Taxable Amount = 11000 - (10000 * (inflation index for 2008-2009 / inflation index for 2007-2008))
= 11000 - (10000 * 111/105)
= 11000 - 10571 = 430
Tax @ 20% = 20% of 430 = 86
Amount redeemed = 10914.
Scenario 2:
Amount invested in Mar 2007.
Amount redeemed in Dec 2008 = Rs 11,000
Taxable Amount = 11000 - (10000 * (inflation index for 2008-2009 / inflation index for 2006-2007))
= 11000 - (10000 * 111/100)
= 11000 - 11100 = -100
Net Loss = 100 and hence no tax.
Amount redeemed = 11000
So in this case we have totally avoided tax.
Hence while planning an FMP investment, we should plan it in such a way that it spans two financial years to get the advantage of double indexation.
What is ELSS?
Most of us during the month of march rush up to our auditors or financial planners for tax planning to invest upto 1 lac which qualifies for tax exemption under section 80 (c) . Most of us end up in paying LIC premium,PPF,NSC,5 year bank FDs and other traditional tax savings instrument. Let us go through one another option available to us - ELSS
ELSS - Equity Linked Savings Scheme is a type of mutual fund which is qualified for tax exemption under section 80 c. Lets dig into more information on this scheme.
Features
1. It is a mutual fund with a lock in period of 3 years. The lock in period of 3 years is much lesser than lock in period of 15 years in PPF and 6 years in NSC or 5 years in bank FD.
2. It is a equity diversified fund and hence the returns over a longer period of time is higher than the fixed income instruments like PPF,NSC.
3. With high returns, comes high risk associated with the investment.Hence if you are an investor who does not want to take any risk with your investment, you can avoid ELSS.
4. You can invest upto 1,00,000 in ELSS for getting tax exemption.
5. You can invest periodically via SIP option and that brings in discipline and cost averaging in your investment.
6. You can opt for dividend option and get some money out of the scheme even during the lock in period. This is not possible in PPF or NSC in a duration of 3 years from investment.
So start exploring the various ELSS schemes in the market and choose a one with good track record and a good rating. You can refer http://valueresearchonline.com/ for fund ratings
ELSS - Equity Linked Savings Scheme is a type of mutual fund which is qualified for tax exemption under section 80 c. Lets dig into more information on this scheme.
Features
1. It is a mutual fund with a lock in period of 3 years. The lock in period of 3 years is much lesser than lock in period of 15 years in PPF and 6 years in NSC or 5 years in bank FD.
2. It is a equity diversified fund and hence the returns over a longer period of time is higher than the fixed income instruments like PPF,NSC.
3. With high returns, comes high risk associated with the investment.Hence if you are an investor who does not want to take any risk with your investment, you can avoid ELSS.
4. You can invest upto 1,00,000 in ELSS for getting tax exemption.
5. You can invest periodically via SIP option and that brings in discipline and cost averaging in your investment.
6. You can opt for dividend option and get some money out of the scheme even during the lock in period. This is not possible in PPF or NSC in a duration of 3 years from investment.
So start exploring the various ELSS schemes in the market and choose a one with good track record and a good rating. You can refer http://valueresearchonline.com/ for fund ratings
How to plan tax early?
Most of the tax payers prepare tax planning only at the eleventh hour when the taxman blows his whistle,but it can be easily avoided by starting your tax planning early.The following steps are involved for planning your tax early
1. Estimate your tax after deducting all tax exemptions from your gross salary.
2. Declare your 80(c) and 80(d) tax exemptions details with your employer during the start of the financial year.
3. Collect all bills for medical bill reimbursement upto 15000 and get it remibursed as n when you get bills.
4. Pay yours n your dependent's medical insurance premium and get exempted upto 20,000 under section 80(d).
5. Get all the bills/receipts for investments under 80(c).
6. Get your rental agreement and rent receipts ready.
7.If you had opted for ELSS, go for SIP and have your SIP statements ready.
8. For home loan borrowers, get the interest and principal breakdown of your EMI payment from your bank.
9. Figure your if there are any capital losses for the financial year and it can be deducted from tax.
10. Include all interest gained from bank fixed deposits in the taxable income.
11. In May, when you get form 16, file the tax by e-filing or with your auditor.
1. Estimate your tax after deducting all tax exemptions from your gross salary.
2. Declare your 80(c) and 80(d) tax exemptions details with your employer during the start of the financial year.
3. Collect all bills for medical bill reimbursement upto 15000 and get it remibursed as n when you get bills.
4. Pay yours n your dependent's medical insurance premium and get exempted upto 20,000 under section 80(d).
5. Get all the bills/receipts for investments under 80(c).
6. Get your rental agreement and rent receipts ready.
7.If you had opted for ELSS, go for SIP and have your SIP statements ready.
8. For home loan borrowers, get the interest and principal breakdown of your EMI payment from your bank.
9. Figure your if there are any capital losses for the financial year and it can be deducted from tax.
10. Include all interest gained from bank fixed deposits in the taxable income.
11. In May, when you get form 16, file the tax by e-filing or with your auditor.
How to save tax?
The various options for saving tax are
1. Five-Year Bank Deposits
Lock-in period: Minimum 5 years
Safety: High
Instrument: Fixed return
Annual return: Depends on market interest rates
Limit: None
2. Public Provident Fund
Lock-in period: 15 years
Safety: Highest
Instrument: Fixed return
Annual return: 8%
Limit: Rs 500 (min) to Rs 70,000 (max) per FY
3. National Savings Certificate
Lock-in period: 6 years
Safety: Highest
Instrument: Fixed return
Annual return: 8%
Limit: Rs 100 onwards. No upper limit
4. LIC premium payment
Non ULIP Policies
Lock-in period: Period of policy
Safety: High
Instrument: Almost Fixed return in terms of annual bonus paid by LIC
Annual return: 6%-10%
Limit: None
ULIP Policy
Lock-in period: 3 years minimum
Safety: Market Dependent
Instrument: Market oriented instrument
Annual return: Inline with market benchmark indices of the policy
Limit: monthly 1000
5. Pension Plans
Mutual Fund Pension Plans
Lock-in period: 3 years minimum
Safety: Market Dependent. It is a balanced fund.
Instrument: Market oriented instrument.
Annual return: Moderate return dependent on market performance.
Limit: monthly 500
Insurance Pension ULIP Plans
Lock-in period: 3 years minimum
Safety: Market Dependent. It is a balanced fund.
Instrument: Market oriented instrument.
Annual return: Moderate return dependent on market performance.
Limit: monthly 1000
6. Mediclaim premium paid upto Rs 20,000 is tax exempted.
7. Conveyance Allowance - Rs 9,600
8. HRA
9. Housing Loan
Principal - Upto 1,00,000
Interest - Upto 1,50,000
Interest on 2nd house loan - Entire Interest paid is tax exempt.
So utilize all the available options and save tax and earn more!
1. Five-Year Bank Deposits
Lock-in period: Minimum 5 years
Safety: High
Instrument: Fixed return
Annual return: Depends on market interest rates
Limit: None
2. Public Provident Fund
Lock-in period: 15 years
Safety: Highest
Instrument: Fixed return
Annual return: 8%
Limit: Rs 500 (min) to Rs 70,000 (max) per FY
3. National Savings Certificate
Lock-in period: 6 years
Safety: Highest
Instrument: Fixed return
Annual return: 8%
Limit: Rs 100 onwards. No upper limit
4. LIC premium payment
Non ULIP Policies
Lock-in period: Period of policy
Safety: High
Instrument: Almost Fixed return in terms of annual bonus paid by LIC
Annual return: 6%-10%
Limit: None
ULIP Policy
Lock-in period: 3 years minimum
Safety: Market Dependent
Instrument: Market oriented instrument
Annual return: Inline with market benchmark indices of the policy
Limit: monthly 1000
5. Pension Plans
Mutual Fund Pension Plans
Lock-in period: 3 years minimum
Safety: Market Dependent. It is a balanced fund.
Instrument: Market oriented instrument.
Annual return: Moderate return dependent on market performance.
Limit: monthly 500
Insurance Pension ULIP Plans
Lock-in period: 3 years minimum
Safety: Market Dependent. It is a balanced fund.
Instrument: Market oriented instrument.
Annual return: Moderate return dependent on market performance.
Limit: monthly 1000
6. Mediclaim premium paid upto Rs 20,000 is tax exempted.
7. Conveyance Allowance - Rs 9,600
8. HRA
9. Housing Loan
Principal - Upto 1,00,000
Interest - Upto 1,50,000
Interest on 2nd house loan - Entire Interest paid is tax exempt.
So utilize all the available options and save tax and earn more!
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