Income Tax India: Expert advice, 2016-17
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6 ways to pay less tax, legally
Sources:
1. The Times of India, Mar 01 2016 2. The Times of India, Mar 01 2016
Why your taxable income is not the same as your income
Under income-tax law, your total income earned during a financial year is categorised under five heads. Four of these heads, listed below, are relevant to a salaried person:
A typical salaried employee is unlikely to earn any income which would fall under the fifth head: `Profits & gains from business or profession'.
While your employer knows of your salary income and deducts tax (TDS) against that, it is easier to disclose details of all your other taxable income (such as bank interest) at the beginning of the financial year so that this can be factored in while calculating TDS. It will save you the trouble of having to pay advance tax.
However, even if the entire tax payable by you has been deducted at source, you still need to file your own Incometax return.
The tax law details how to determine the taxable amount under each head of income. You could get tax benefits under some heads, either by way of an exemption (eg: HRA) or a deduction (eg: interest on savings bank accounts up to Rs 10,000 in aggregate per year). As a salaried employee, the only possibility of your incurring a loss is when you sell your investments or properties or pay interest on your house mortgage. The law also provides for intra-head andor inter-head set-off of such losses.
The income from all the various heads adjusted for loss set-off is your `gross total income'. From your gross total income, you get a deduction for various eligible investments or payments made (All this and more is dealt with in sections of our article dealing with salary and savings). The resultant figure is your net taxable income on which you pay tax at the applicable tax rates.
The tax provisions announced in Budget 2016 apply to income earned from April 1, 2016 to March 31, 2017 (Financial Year 2016-17).
Irrespective of whether it is your first job or whether you have conquered the corner office, income-tax duly deducted from your monthly salary pinches.
Further, tax is levied not just on your basic pay and cash allowances that figure prominently on your salary slip, even taxable perquisites (such as car, or housing provided by your employer) are subject to tax. The sum total of your salary, allowances and benefits is referred to as Cost to Company (CTC) the cost which your employer incurs to have you on the payroll.
The key CTC components which could help reduce your tax liability and boost your take home pay are outlined below. These apply to all non-government employees.
Use these benefits t0 boost your take-home salary
Your CTC components and various tax breaks
HOUSING To rent or live in an employer provided flat?
It may be easier to live in a flat provided by your employer (if you are lucky to be given this option) rather than go house-hunting.
But do bear in mind that rental payment to your landlord could help you reap tax benefits against the House Rent Allowance (HRA) which typically is a standard part of CTC. On the other hand, the employer-provided flat would leave you with a taxable perquisite.
First an insight into both:
House rent allowance (HRA):
HRA is the most common CTC component. Those staying in rented accommodation can avail of an exemption against the HRA received and only the balance would be taxable. The exemption is limited to (a) rent paid less 10% of basic salary or (b) 50% of basic salary where the house is situated in any of the four cities of Delhi, Mumbai, Kolkata or Chennai, and 40% of basic salary in other cities or (c) actual HRA received, whichever is the lowest. If your CTC doesn't contain an HRA component, deduction for rent paid is available from gross taxable income, subject to various limits (maximum deduction Rs 5,000 per month or Rs 60,000 per annum).
CAUTION POINT:
For claiming HRA exemption, if your annual rent exceeds Rs 1 lakh, you should obtain not just the rental receipts but a copy of your landlord's PAN card for submission to your accounts department.
Flat provided by employer:
The perquisite value varies depending on whether the flat is owned by the employer, taken on rent for you or hotel accommodation has been made available for you.
The value will not exceed 24% of your salary when such accommodation is provided in a hotel and 15% of salary in other cases. This will be reduced by the amount recovered from you, if any. Where the employer provides furnished accommodation to you, another 10% of the cost of furnishing (if owned by employer) or actual hire charges payable (if leased by employer) is added to the perk value each year.HOT TIP: Hotel accommodation provided by your employer for the first 15 days when you move to a new town is not a taxable perquisite. Do your own maths! The illustration below guides you on how to do the maths. In Scenario A, it is more beneficial to claim house rent allowance, but in the other scenario, the opposite holds true.
Leave travel concession (LTC):
Your annual holiday within India can get you a tax break. The tax exemption on any reimbursement of your travel expense while on leave is limited to the economy class air fare for the shortest route available to your vacation destination. No exemption is available for expenses such as hotel, local conveyance, etc. Keep the travel bill handy to submit to your accounts department to claim the exemption.
HOT TIP:
LTC is allowed to you as a salaried employee in respect of two journeys performed in a block of four calendar years. The current block of four years commenced on January 1, 2014. So if you haven't taken that much-needed break last year, do so now. Keep proper tabs, retain relevant travel bills and claim your LTC.
CAUTION POINT:
Your travel expenses for a holiday abroad are not eligible for a tax break. If you are planning a long vacation covering destinations in India as well as a foreign country with one air-ticket, the tax man may not allow a tax break even for your cost of journey within India.
Leave encashment:
In case you haven't availed of your entitled leave, you may have an option to get it encashed. With an increasing realisation that employees who avail of annual leave are more productive, most employers permit such encashment only on retirement or resignation.
While there are detailed rules to e t calculate tax exemption on such en cashment, the maximum exemption r available is Rs 3 lakh.
CAUTION POINT:
Any leave o encashed while on employment is taxable. Only the leave encashed on resignation or retirement is tax free. Further, the Rs 3 lakh limit is a lifetime exemption limit, if you have job hopped and availed of exemption, it will be reduced by the exemption claimed by you earlier under any previous employment.
Other allowances and tax benefits
Car perquisites : The tax treatment of an employer-provided flat has been illustrated earlier. There can be other perquisites also that are available to you. For instance, the perquisite value of a car provided to you depends on the cubic capacity of the car engine whether you or the employer pays for its maintenance, running cost (including fuel), provision of a driver and whether use is official or personal Refer table below.
Transport allowance:
Any such allowance paid by your employer to meet your daily conveyance needs is tax exempt up to Rs 1,600 per month.
HOT TIP:
For claiming the exemption, you don't need to submit any expense proof. However, if you are incurring expenses on official travel, your employer can reimburse on the basis of the claim submitted by you (backed by bills) and such reimbursement is not taxable.
Children's education allowance: This component gets you a limited tax break of Rs 100 per month per child and Rs 300 per month per child for hostel ex penses (both restricted to two children) (Also refer to tuition fee payments ex plained in the section on savings).
Home advantage: buying, letting out & selling explained
It's always exciting to buy your own home. And why stop at one if you can afford two -as an investment or a weekend getaway . What's more, a home loan gets you a tax break.
Buying a new house:
If you have several years of employment ahead of you, home loan is an ideal option. In fact, it works better than dipping into your savings, as the tax law provides for benefits both for the payment of interest and repayment of the principal amount.Typically , the longer the loan tenure, the lower is the monthly EMI but higher is the interest outgo. For instance, one bank charges an EMI of Rs 42,889 for a loan amount of Rs 20 lakh for a duration of 5 years. For a loan tenure of 10 years, the EMI charged is Rs 26,875. But shop around for a home loan since banks offer different rates and terms.
Interest payable on home loans and the tax benefit:
Irrespective of whether you are paying interest to a bank or to your employer or friend, interest payable on home loans for `selfoccupied' property is subject to a maximum deduction of Rs 2 lakh under the head `Income from house property'.
For first-time home buyers, with effect from April 1, 2016, an additional deduction of Rs 50,000 per annum on account of interest paid on housing loan is available under Section 80EE. The deduction would be available if loan is sanctioned by a bank during April 1, 2016-31 March, 2017, the value of loan sanctioned is up to Rs 35 lakh and the value of this house does not exceed Rs 50 lakh.
It may be cheaper to book an apartment under construction. In this case, you can claim the total interest paid during the pre-delivery period as a deduction in five equal instalments starting from the financial year in which the construction was completed or you acquired your apartment (generally this denotes the date of possession). Of course, the maximum you can claim as deduction per year continues to be Rs 2 lakh if the loan is taken before April 1, 2016 or Rs 2.5 lakh if the loan is taken on or after April 1, 2016 by a first-time home buyer.
What is `self-occupied' property:
It's best to be clear on what consti tutes `self-occupied' property . Here is some guidance: If you are suddenly transferred to another city (where you live in a rented apartment), your own property will be considered as `self occupied'. Also, if you have opted to purchase a new apartment in a tier 2 town where property is cheaper, and continue to stay in a rented premise, this new apartment will be regarded as `self-occupied' entitling you to deduc tion of housing loan interest.
CAUTION POINT:
A certificate from the lender is required to claim deduction for interest even if the lender is an employer or a friend. To claim deduction, it is essential that the acquisition or construction is completed within 5 years from the end of the financial year in which the loan was taken; else the deduction allowed will be limited to Rs 30,000.
Set-off your interest payment:
As income from a `self-occupied property' is nil, deduction of interest, in technical parlance, will mean a loss under the head `Income from house property'.This “loss“ can be set off, in the same year, against your income under other heads (including salary income). Such set-off will reduce your total tax liability. Any loss not set-off within the same year can be carried forward and setoff in the next 8 years. However, in the subsequent years, such set-off is possible only against `Income from House Property'. So even if you let out your property next year, this carry forward of loss can bring a marginal dip to your tax liability.
HOT TIP:
If you have purchased a new apartment jointly say, with your spouse and are also paying the home loan jointly, then each of you is entitled to deduction up to Rs 2 lakh-2.5 lakh. In case you have a working sondaughter and the bank is willing to split the loan three ways, all three can avail deduction, subject to given conditions.
Repayment of housing loan:
The principal repayment of the housing loan is allowed as a deduction from your gross total income, subject to an overall cap with other eligible investments of Rs 1.5 lakh.
CAUTION POINT:
Unlike deduction of interest, deduction of principal repayment will be allowed only if the loan is taken from specified institutions like banks or LIC.
Your TDS obligations:
If the value of your proposed flat is more than Rs 50 lakh, you are required to deduct withholding tax at the rate of 1% from the payment made. In case you are paying the builder in instalments, as the property is still under construction, but the total value of the property exceeds Rs 50 lakh, the same rules for withholding tax apply . Tax has to be deducted against each instalment paid by you. Tax withheld has to be deposited by the 7th of each subsequent month (except March where due date is April 30).
In addition, you will be required to furnish information about the tax deducted and deposited online on the Tax Information Network (TIN) website in Form 26QB (URL is https:onlineservices.tin.e gov-nsdl.cometaxnew tdsnontds.jsp). Further, you will also have to download Form 16B, which is the TDS certificate from the website (URL is https:http:www.tdscpc.gov.in applogin.xhtml) and issue it to the seller. In case of failure to comply, you will have to pay interest and penalties.
Best to let out your 2nd house:
Make sure not to keep your second house (which is not a self-occupied property) unoccupied. Your second house if locked and empty will still attract tax on its `deemed rental value'. In other words, tax is calculated at expected market rent.
Interestingly, if you let out the second house, you can deduct the entire interest you are paying on it from the rent received. If there is a loss, you can deduct the loss from your taxable income.
For example: If your interest outgo is Rs 15 lakh and the rent is Rs 10 lakh, you can get a tax benefit on Rs 8 lakh (Rent Rs 10 lakh less: (a) Standard deduction of 30% of rent which is Rs 3 lakh and (b) Interest Rs 15 lakh). This is applicable for any number of houses and there is no cap on the amount of deduction you can claim.
Selling your apartment:
If you sell your house, whether it is self-occupied or your second apartment, you will incur capital gains (given that there has been appreciation in property prices, it is unlikely that you will be making a loss). Capital gains is the difference between the sale proceeds and the cost of acquisition of the apartment you are selling. If the house is held for not more than 36 months, you will incur a short-term capital gain, which is subject to tax based on your ap plicable slab rate.If you fall in the lower tax bracket with a tax rate of 10.3%, short-term capital gains will not pinch you. Else you could end up with a tax rate of nearly 35%.
If the property is held for more than 36 months, LTCG arise. The cost of acquisition used for computing LTCG is the indexed cost of acquisition (in other words, an adjustment is made for inflation). Tax is levied on LTCGs at 20% (plus surcharge and cess as applicable).Save on LTCGs: Reinvestment of capital gains could get you tax breaks.
Reinvesting in residential property or securities:
To be able to save tax on capital gains, you must invest the entire LTCG from the sale of residential property in another (i.e. only one) residential property in India (one year before or two years after the date of sale). You could also construct another residential house property in India within three years of sale. Also, you may put the amount of capital gains in capital gains account scheme with a bank where investment in new property is not made before filing of tax return. If the entire amount is not reinvested or not deposited in capital gains account scheme, the remaining portion of the gain will be taxable.
CAUTION POINT:
Exemption from LTCG will not be available in case the reinvestment is made in more than one flat (even if the same are adjoining flats) or in commercial property .Nor can you reinvest in overseas property .
HOT TIP:
Exemption is also available for investments made in certain bonds or notified fund by central government within 6 months of sale of a capital asset. There is a cap of Rs 50 lakh on such investment.
Medical: Cashless cover plus cash in your pocket
Increasing costs of hospitalisation make it imperative for you to have a medical insurance policy that would cover you and your family needs. More so, in case your employer doesn't provide a group medical insurance cover
Group medical insurance provided by your employer:
It may be likely that your employer has covered you under a group medical insurance policy . At the time of joining employment, you do need to check which members of your family can be covered and nominate them accordingly . In subsequent years, updates of nominee details are called for.
Typically, companies provide a medical insurance cover for the employee, spouse and dependent children. Some extend it to employee's parents and in-laws. It is also worth checking which ailments are not covered (say dental related) or which have a cap beyond which expenses will not be reimbursed. Many group insurance policies have a cap on various common ailments, such as for cataract surgery -hospital expenses beyond this cap are not reimbursed and have to be borne by you.
Both the premium paid by your employer for you and your family members is tax free in your hands.If during a year, under this policy cover, you make a claim, the money received from the insurance company is also tax free.
Buying a medical insurance policy:
In case you aren't covered under a group medical insurance policy or wish to have added coverage, you can buy a medical policy and reap certain tax benefits. Searching for the most suitable medical policy may be a good idea for instance, a particular insurance company may cover ambulance or post-hospitalization expenses to the full extent, another could cap it or not cover it at all. As in the case of a group insurance policy, any claim amount that you receive from the insurance company, whether it is for your own illness or that of other family members covered by you is tax exempt in your hands.Premium paid is available as Premium paid is available as a tax deduction from your gross total income, gross total inco subject to certain limits (Refer to the table on tax deduction for medical insurance premium paid).
In case you are unable to get your parents, who are very senior citizens (above 80 years) insured, or they are no longer covered by an insurance policy, fret not.A deduction of up to Rs 30,000 is available on expenditure towards their medical expenses.
Other medical-related tax benefits:
Over and above the Rs 15,000 of medical expenditure which you can avail of as a tax-free reimbursement in a year, certain other medical related expenses also entitle you to a tax deduction from your gross total income. These range from expenditure incurred for preventive health check-ups to those for specific dis eases such as malignant cancers. Tax deduction for medical expenses if you or your loved one is differently abled is also available (Refer to table below for more details).
Market investments: cut the pain from the gain
Tax free dividend:
As an investor you enjoy tax free dividend, be it from shares or units of mutual funds, if it is less than Rs 10 lakh a year.Tax free long-term capital gains: Long-term capital gains on sale of listed shares and equity-oriented mutual funds are also exempt. To qualify for long-term capital gains exemption, these securities need to be held for a period of at least 12 months by the investor.
Only a minimal securities transaction tax (from 0.001% to 0.1% of sale price) is payable by the seller (this tax cost is payable both by buyer and seller in case of a share deal on a stock exchange).In some cases, you even get a tax benefit at the time of making the investment.
CAUTION POINT:
Debt-oriented mutual funds need to be held for at least 36 months to qualify as a long term capital asset (as opposed to listed shares and equity-oriented mutual funds which require a holding period of just 12 months). However, even on sale after this period, the long term capital gains that arises is subject to a tax of 20% (surcharge and cess as applicable) with indexation (Refer to table showing tax impact on your `listed' investments).
Tax free bonds:
Among the various market related investments detailed in the table `Tax Impact on Your Listed Investments' Tax Free Bonds, which made a re-appearance after Budget 2015, are the flavour of the season. Investment in such bonds provides you with an opportunity to obtain higher interest rates. Tax Free Bonds are similar to other coupon bearing bonds which provide a fixed income but unlike other bonds, the interest income from tax free bonds is exempt. However, the redemption of bonds will attract tax.
Set off provisions for capital losses
The set off provisions for capital losses are rather restrictive.Loss from transfer of a short-term capital asset (Eg. listed shares or equity-units held for less than 12 months) can be set off against gain from transfer of any other capital asset in the same year. Loss from transfer of a long-term capital asset can be set off against gain from transfer of any other long-term capital asset in the same year. But, long-term capital loss cannot be set off against short-term capital gains. Any unutilised capital loss after absorption in the same year can be further carried forward to next eight years and be utilised under the same conditions as above.
CAUTION POINT:
You should file your I-T return before July 31 to carry forward any losses.
See also
Direct taxes: India / Income Tax India: Expert advice / Income Tax India: Expert advice, 2016-17 / Income Tax India: Expert advice, 2017-18 / Income Tax India: Expert advice, 2018-19 / Income Tax India: Laws / Income Tax India: NRIs / Wealth tax: India
