Income tax, India: legal methods to reduce the burden
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2015: opportunities available
The Times of India Mar 01 2015
A salaried person can't escape the monthly deduction of tax at source, but buried in the statutes are several provisions to minimize the burden and boost your take-home. Did you know that renting an apartment can be cheaper than moving into a fully furnished flat provided by the employer? Or that contributing to the Ganga clean-up initiative can not only ease your conscience but give you a tax breather?
Salary benefits can boost your take home pay
You may have often wondered why the fancy sum shown in your employment contract is not what you actually get to take home. Well, `salary' is not just limited to the basic pay and allowances that figure in your monthly salary slip.
It includes taxable perquisites (benefits in kind such as housing provided by your employer). This kitty of all allowances, perquisites and benefits is referred to as `cost to company' (CTC) the cost which your employer incurs for having you on the rolls and which you will find indicated in your employment contract.
If you take a second look at your salary slip, you will also see deductions for income tax, professional tax (which is state-specific and runs into a few hundred rupees; for example, the maximum is Rs 200 in Maharashtra) and your contribution towards Provident Fund. No wonder you walk home with a lighter wallet.
But there is some hope. Your employer in all likelihood asks you to fill out a detailed schedule at the start of the financial year and furnish proof of various expenses (such as rent paid over the year) and investments made much before March (the last month of a financial year).The reason is simple some of the CTC components are eligible for a tax break and could entail a lower tax deduction at source.
The key CTC components which could help reduce your tax liability and boost your takehome pay are outlined below. These apply to all non-government employees.
Your CTC components and various tax breaks
House Rent Allowance (HRA)
HRA is the most common CTC component for those not staying in an accommodation provided by the employer.
HRA exemption is limited to the lower of: (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.
If your employer does not give you HRA, deduction for rent paid by you is available from gross taxable income, subject to various limits (maximum deduction of Rs 2,000 per month).
CAUTION POINT: For claiming HRA exemption, if your annual rent exceeds Rs 1 lakh, you should obtain not just the rent receipts but a copy of your landlord's PAN card for submission to your accounts department.
Transport Allowance
Any such allowance paid by your employer to meet your conveyance needs for commuting to office is taxexempt up to Rs 1,600 per month.
Children's Education Allowance
This component in your CTC gets you a limited tax break of Rs 100 per month per child and Rs 300 per month per child for hostel expenses. Both allowances are restricted to two children. (Also refer to tuition fee payments in section on savings).
Reimbursements
Certain reimbursements are exempt, such as medical expenses of up to Rs 15,000 per year or reimbursement of your entire telephone expenses (even as the employer may impose an internal cap). In addition, if you get meal vouchers, the same are exempt from tax to the extent of Rs 50 per meal.
Tax break
Leave Travel Concession (LTC): Your annual holi day within India can get you a tax break. The tax exemption on any reimbursement of your travel expense while on leave is limited to economy-class airfare for the shortest route available to your vacation destination. The point to note is that no exemption is available for expenses such as hotel, local conveyance etc. Keep the travel bill handy to submit to your accounts department.
HOT TIP: As a salaried employee, you are entitled to LTC on two journeys in a block of four calendar years. The current block of four years commenced from 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.
Leave Encashment
In case you haven't availed of your entitled leave, you may have an option to get it encashed. With an increasing realization that employees who avail of annual leave are more productive, most employers permit such en cashment only on retirement or resignation.
While there are detailed rules to calculate tax exemption on such encashment, the maximum exemption available is Rs 3 lakh.CAUTION POINT: Any leave 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 hopped jobs and availed of exemption, it will be reduced by the amount claimed by you earlier under any previous employment.
Plumping your pre requisites
Perquisites such as a flat or a car provided by your employer make life that much easier but they do add to your taxable income. The silver lining: some tax concessions are available, so make the most of them.
Flat Provided By Employer
An employer-provided accommodation takes away the hassle of find ing a place, especially in a new town, but it does add to your taxable perks. Its perquisite value varies depending on whether the flat is owned by the employer, has been taken on rent for you or hotel accommodation has been made available. It will not exceed 24% of your salary when such accommodation is provided in a hotel and in other cases, 15% of salary or rent paid by employer, whichever is less.This will be reduced by the amount recovered from you, if any. Where the employer provides furnished accommodation, another 10% of the cost of furnishing (if owned by employer) or actual hire charges (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.
CAUTION POINT: If you are one of the lucky few to get the option of obtaining a flat from your employer, it may be a good idea to see whether you are better off living in an employer-provided flat or renting a flat and claiming HRA.The table above guides you on how to do the math. In this particular case it was more tax-efficient to opt for HRA as it meant a lower taxable income.
Car Provided By Employer
The perquisite value of a car provided to you depends on the cubic capacity of the engine and whether you or the employer pays maintenance and running cost (includ ing fuel), assuming you are using it for both personal and official uses. Here, the maximum perquisite value that can be added to your salary income is Rs 2,400 per month. If your employer has also provided a driver, another Rs 900 per month will be added.
Reaping retirement benefits
Employees' Provident Fund: Employer's share of PF contribution is not taxable. Employee's share of PF contribution is eligible for deduction from gross total income un der the overall cap of Rs. 1.5 lakh (refer to sec tion on savings). PF balance can be withdrawn by the employee in specific circumstances like retirement, building a house, daughter's mar riage etc. Such withdrawal is not taxable if the employee has rendered continuous service for a period of 5 years or more. If an employee has not rendered 5 years of service, he may transfer the balance under the new employer's account; such transfer of balance is not taxable and is treated as continuity of service.Gratuity: If you change your job after a continuous tenure of 5 years or retire after a continuous service of 5 years, you are entitled to a gratuity payment. While there are detailed rules to calculate tax exemption, the maximum amount of gratuity that is tax exempt is Rs 10 lakh.
CAUTION POINT: This Rs 10-lakh ceiling is a lifetime exemption limit, any tax-free exemption claimed by you from any previous employment will be deducted from this.
Total taxable income
Under Income Tax (I-T) law, your total income during a financial year is categorized under five heads. Four of these heads 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'. You need to be careful when computing your income for advance tax or at the time of filing your return for instance, a dormant savings account which you have forgotten about could be earning interest and needs to be considered.
The I-T 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 ac counts up to Rs 10,000 in aggregate).
As a salaried employee, the only possibility of you incurring a loss is when you sell your investments or properties or pay interest on your home loan. The I-T law provides for intrahead andor inter-head set-off of such losses.
The income from the various heads adjusted for loss set-off is your gross total income. From this you get deductions on various investments or payments. The resultant figure is your net taxable income on which you pay tax at the applicable rate. The tax provisions announced in Budget 2015-16 apply to income earned from April 1, 2015 to March 31, 2016 (FY 2015-16).
Save for tomorrow
Saving for a rainy day can also help you cut taxes. However, beware of the overall cap of Rs 1.5 lakh for investments under the well-known Section 80C. In addition to invest ments, certain payments like repayment of housing loan also fall within this overall cap of Rs. 1.5 lakh available for deduction from income tax.
Key investmentopportunities
New Pension Scheme (NPS): NPS is a flexible retirement savings scheme which offers both a lump-sum amount and monthly pension ie a fixed income to an employee after retirement.
Further, the employee has various options available, such as the percentage he wishes to invest in equity or debt. On resigning, the employee can carry this account with him over to the next employment.
Employees' contribution to NPS will be deductible up to 10% of salary subject to overall cap of Rs 1.5 lakh (which includes investments under Section 80C). An additional deduction of Rs 50,000 is also available for any contribution made by employees to NPS. Employer's contribution will also be available for deduction up to 10% of salary (with out any cap). Accruals from your NPS account are taxable only when you opt outwithdraw from the scheme or on maturity (at the age of 60).
CAUTION POINT: This additional deduction of Rs 50,000 for employee's contribution to NPS is over and above the overall cap of Rs 1.5 lakh under section 80 CCE.
Investments covered under Section 80C Public Provident Fund (PPF)
In addition to the contributions to Employees' Provident Fund (EPF) deducted from your monthly pay slip, contribution to PPF is another popular option offering a tax-free interest rate of 8.7%. You can invest Rs 500 to Rs 1.5 lakh every year in a PPF account with a post office or any authorized bank and claim deduction for the amount claim deduction for the amount invested. Such PPF accounts can be in the name of self, spouse or child. And yes, the maturi ty proceeds are fully exempt from tax.
HOT TIP:
Withdrawal from your PPF account is not permissible until 5 years, but a loan on the accumulated balance may be obtained (after the expiry of one year from the end of the financial year in which the initial deposit was made) for certain purposes such as buying a prop erty or marriage, subject to various limits.
National Savings Certificates (NSC)
The amount invested in NSC schemes (managed through post offices in India) is eligible for deduction. The interest accrued annually on NSC is taxable as other income, although the reinvested interest each year also qualifies for deduction.
Life Insurance: You can claim deduction for premium paid towards life insurance policy for self, spouse and children. Any proceeds from the policy will be tax-free subject to certain conditions.
Small Savings: A 5-year term deposit with a bank under a notified scheme or a post office qualifies for deduction. However, the interest that accrues on it is entirely taxable.
Sukanya Samriddhi Scheme: Under the PM's `Beti Bachao Beti Padhao' campaign, opening a Sukanya Samriddhi Account -a deposit scheme framed for encouraging education of your daughter -gets you a tax break.
You can open a deposit account in the name of your daughter either with a post office or an authorized bank, anytime up to her attaining the age of 10. An initial deposit of Rs 1,000 is required and the maximum deposit in a given financial year is Rs 1.5 lakh. After opening this account, additional deposits can be made for the next 14 years. The deposits currently yield an annual interest of 9.1% which is tax free.
The account matures on completion of 21 years from the date it was opened or the date of the girl's marriage, whichever is earlier.However, the scheme also allows withdrawal (of up to 50% of the balance) before maturity for the purpose of higher education or pre-marriage expenses. Withdrawal from the scheme is also exempt from tax.
CAUTION POINT:
The amount invested under this scheme is covered in the overall cap of Rs 1.5 lakh. Further, you can open such an account for up to two daughters only an exception being in the case of birth of twins or triplets.
Other payments that get you a deduction
Deductions within the overall cap of Section 80C are also available for various other payments such as when you repay your housing loan. Deduction is also available for any stamp duty and transfer charges paid. Tuition fees paid for full-time education of your children (any two) in a university, college, school or educational institution in India is subject to a deduction. Please note that development fees or donations cannot be claimed as a deduction.
More tax savers
Apart from investments or payments eligible for deduction under Section 80C, there are a few other instances where you can avail of a tax benefit. The entire interest paid by you in a year on educational loan for higher education of self, spouse, children qualifies for a deduction from your gross total income. Such deduction on interest payment is available for eight years starting from the financial year in which you first paid the interest.
Interest earned on savings bank account (not your fixed deposits) with a bank or post office of up to Rs 10,000 can be claimed as a deduction from your gross total income.
House property
Do the daily advertisements of fancy residential projects tempt you to buy a house of your own? Home loans are available with suitable EMIs from various banks but do your research and opt for a loan package that suits you best.
TAKING A HOUSING LOAN
Typically, the longer the loan tenure, the lower is the monthly EMI but higher is the interest outgo. The Reserve Bank of India (RBI) has prohibited banks from levying any foreclosure charges if you pay off the loan prior to its tenure. Once you have the loan in hand, you will be paying a periodical interest and also repaying the principal in tranches. The I-T law provides for benefits in both instances.
Tax benefits on interest paid
Interest payable on `self-occupied' property is subject to a maximum deduction of Rs 2 lakh under the head `Income from house property'. Even a loan taken from an employer, friend or private lender is eligible for such a deduction. Booking an apartment which is under construction is sometimes cheaper. The I-T law permits you to 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.
CAUTION POINT:
A certificate from the lender is required to claim deduction on interest even if the lender is an employer or a friend. To claim deduction of Rs 2 lakh, it is essential that the acquisition or construction is completed within 3 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 against other income, which includes salary income, in the same year. This reduces your total tax liability . Any loss not set off within the same year can be carried forward and set off 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 relaxation in your tax liability.
Definition of `Self-occupied' property
Here is some guidance on what exactly constitutes `self-occupied' property . 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 house, this new apartment would be regarded as `self-occupied' entitling you to deduction of housing loan interest
HOT TIP: If you have bought the new apartment jointly say with your spouse then each of you is entitled to a deduction of Rs 2 lakh, as explained above. In case you have a working son or daughter and the bank is willing to split the loan three ways, all three can avail deduction up to Rs 2 lakh each.
Repayment of your housing loan
The principal repayment of the housing loan made by you is allowed as a deduction from your gross total income (subject to an overall cap with other eligible investments of Rs 1.5 lakh). Please refer to the section on savings.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.
Buying an apartment and your TDS bbligations
As per the I-T law, the buyer of an immovable property worth Rs 50 lakh or more is required to deduct (and deposit) withholding tax at the rate of 1% from the consideration payable to the seller. In case of failure to comply with the provisions, interest and penalty are imposed on the buyer.
Thus, if the purchase price of your flat is Rs 50 lakh or more, then you have to comply with the tax deduction at source (TDS) obligations. 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.egov-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.inapplogin.xhtml) and issue it to the seller.
CAUTION POINT If you have booked a flat and are paying the builder in instalments, but the value of the flat as per the sale agreement is more than Rs 50 lakh, then tax has to be deducted against each instalment payment.You also need to comply with the timelines for deduction and deposit of TDS and filing of the information online and submission of the TDS certificate to the builder.
Out Your Second House
Investing in real estate has become attractive, but make sure not to keep your second house (which is not a self-occupied property as explained above) unoccupied: it makes better sense from the I-T law perspective to rent it out. Your second house, if locked and empty (with no income accruing from it in the form of rent), will still attract tax on its `deemed value'. In other words, tax is calculated at expected market rent.
Interestingly, if you let out the second house, you can deduct the entire amount of interest you are paying on it without any cap from the rent received. If there is a loss, you can deduct it from your taxable income.For example, if your interest outgo is Rs 10 lakh and the rent is Rs 6 lakh, you can get a tax benefit on Rs 5.8 lakh (Rent Rs 6 lakh less: (a) Standard deduction of 30% of rent which is Rs 1.8 lakh and (b) Interest Rs 10 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 tax (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. Further, capital gains can be either short-term or longterm depending on the tenure for which the house was held. A short term capital gains will have a different tax impact than a long-term capital gains (LTCG).
If the house is held for not more than 36 months, on sale, you will incur a short-term capital gain, which is subject to income tax based on your applicable 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 33.99% tax rate.
If the property is held for a longer period, LTCG arise. The cost of ac quisition 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).
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 (only one) residential property in India. Such investment can either be within one year before or two years after the date of sale. You could also construct another residential property in India within three years of the date of sale.
Also, you may deposit the amount of capital gains under capital gains account scheme with a bank in case investment in new property is not made before filing of I-T return (not later than the due date for filing your I-T 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 a commercial property . Further, while the RBI permits you to invest in property overseas (a remittance of $250,000 or Rs 1.5 crore approx per year is permitted which can even be used for property acquisition), if LTCGs are reinvested in property overseas you will not get the tax exemption.
Exemption is also available on investments made in certain bonds within six months of sale. They include Rural Electrification Corporation and NHAI. The maximum amount that can be so invested is Rs 50 lakh.HOT TIP: Such exemption is also available on sale of any other longterm capital asset.
