Your Complete Guide to Indian Income Tax and Retiring as a Crorepati - 2nd Edition Preview

Your Complete Guide to Indian

Income Tax and Retiring as a

Crorepati

Retiring as a Crorepati was Never So Easy

© 2015 – Anand’s Blog

Author: Anand Vijayakumar

Your Complete Guide to Indian Income Tax and Retiring as a

Crorepati

© 2015 Anand’s Blog. All Rights Reserved. Page 2

Copyright © 2015 Anand’s Blog. All Rights Reserved. No part of this publication may be reproduced,

stored in a retrieval system, or transmitted, in any form or in any means – by electronic, mechanical,

photocopying, recording or otherwise – without the explicit prior written permission of the Author.

LEGAL DISCLAIMER: The Author is an Independent Blogger and Financial Advisor. Use of the information contained in

this book is at one’s own risk. This is not an offer to sell or solicitation to buy any investment products. All stock market

investments carry an inherent risk of loss and the author will not be liable for any losses incurred out of the investment(s)

made by the reader. Information contained herein does not constitute a personal recommendation or take into account the

particular investment objectives, financial situation or needs of individual investors. All content and information provided in

this book is on an “As Is” basis by the Author. Information in this book is believed to be reliable but the Author does not

warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or

implied. The author may hold investments in any of the products discussed here however the author has NO Vested Interest

in recommending any of the products outlined in this book. The Performance of the products quoted in this book may or may

not be sustained in future. All rate of returns used in calculation’s are for indicative purposes only and do not guarantee

future results. The actual returns your portfolio will gain will be based on multiple factors like your investment choice, market

performance etc.


Crorepati


Contents of this Book

What’s New in this Year’s Edition? .............................................................................................................. 6

Introduction .................................................................................................................................................. 7

Why This Book? ..................................................................................................................................... 7

Basics of Indian Income Tax .......................................................................................................................... 8

The Financial Year Cycle ........................................................................................................................ 8

Tax Deducted at Source – TDS .............................................................................................................. 9

The Form 16 .......................................................................................................................................... 9

Tax Filing and Refunds ........................................................................................................................ 10

Rectifications to Your Tax Returns ...................................................................................................... 11

What to do if I missed my Tax Filing Deadline? .................................................................................. 11

The Current Tax Slabs in our Country ......................................................................................................... 13

What is Taxable Income? ............................................................................................................................ 15

Heads of Income ................................................................................................................................. 15

Deductions on Income: ............................................................................................................................... 16

House Rent Allowance or HRA ............................................................................................................ 16

Leave Travel Allowance or LTA ........................................................................................................... 17

Medical Allowance .............................................................................................................................. 17

Transportation Allowance ................................................................................................................... 18

Interest Paid on housing loan ............................................................................................................. 18

Tax Exemptions ........................................................................................................................................... 20

Section 80C – Exemptions for Qualified Investments ......................................................................... 20

Section 80D – Exemptions for Medical Insurance .............................................................................. 21

Section 80DD - Medical Treatment of a Physically Disabled Dependent ........................................... 21

Section 80DDB - Medical Treatment of Self/Dependents for Major Diseases: .................................. 22

Section 80E – Exemption for Education Loan Repayment .................................................................. 23

Section 80U - Exemption for Disabled Tax Payers: ............................................................................. 23

Section 80G – Exemptions for Charitable Donations .......................................................................... 24

Section 80CCG – Exemption for Investing in Rajiv Gandhi Equity Savings Scheme – RGESS: ............. 26


Crorepati


Section 80TTA – Exemption for Interest Income Earned from Savings Accounts .............................. 27

Section 80GG – Exemption for Individuals Living in Rented Houses .................................................. 27

Section 80GGC - Donations Made to Political Parties: ....................................................................... 28

Section 80CCD - Contribution to NPS Scheme: ................................................................................... 28

Clubbing of Minor Income: ......................................................................................................................... 30

A Comparison of the Various Instruments Available to Invest Under Section 80C .................................... 31

Life Stage based Tax Saving Portfolio that can make you a “CROREPATI” ................................................. 33

The Investment Strategy ......................................................................................................................... 34

Your Life Stage Based Tax Saving Portfolio ............................................................................................. 35

What to do with Maturity Amounts ................................................................................................... 37

The Yearly Portfolio Performance Review .......................................................................................... 40

Some Common Tax Filing Mistakes ............................................................................................................ 42

Not declaring Interest Earned from Bank Accounts, Fixed Deposits etc. ............................................... 42

Double Declaration of Deductions and Exemptions ............................................................................... 43

Not Declaring other sources of Income like Gifts ................................................................................... 43

What are the Chances that My Mistakes are found out? ....................................................................... 43

The Best Investment Options – As of Today ............................................................................................... 45

Best Fixed Deposits to Invest in Now ...................................................................................................... 45

Best Mutual Funds – For Investment ...................................................................................................... 48

Some Last Words ........................................................................................................................................ 52

Your Portfolio’s Growth – Over Time ..................................................................................................... 52

Appendix A – House Rent and You ............................................................................................................. 54

For People Living in Rented Houses: ....................................................................................................... 54

For People Owning a House that Rented Out: ........................................................................................ 54

For People Owning a House that is not Rented Out: .............................................................................. 54

Appendix B – LTA and You .......................................................................................................................... 55

Conditions that need to be met to Claim LTA ......................................................................................... 55

Some Additional Points Reg. Claiming LTA: ............................................................................................ 55

Appendix C – Education Loan and You ....................................................................................................... 56

Appendix D – Rajiv Gandhi Equity Savings Scheme and You ...................................................................... 57

Appendix E – Wealth Tax and You .............................................................................................................. 58


Crorepati


Appendix F – Capital Gains Tax and You ..................................................................................................... 59

Capital Gains on Sale of Investments ...................................................................................................... 59

Short Term Capital Gains Tax .............................................................................................................. 59

Long Term Capital Gains Tax ............................................................................................................... 59

Capital Gains on Sale of Property ........................................................................................................... 60

Short Term Capital Gains Tax .............................................................................................................. 60

Long Term Capital Gains Tax ............................................................................................................... 60

Appendix G – Sukanya Samriddhi Scheme and You ................................................................................... 62

Who can open this Sukanya Samriddhi Account? .................................................................................. 62

Where can we open this Sukanya Samriddhi Account? ......................................................................... 62

Minimum and Maximum Allowed Contributions ................................................................................... 63

Account Maturity. Withdrawal and Loan Options .................................................................................. 63

Interest Rate Offered .............................................................................................................................. 63

My Take on Sukanya Samriddhi Scheme ................................................................................................ 63

Appendix H – A Sample Income Tax Calculation ........................................................................................ 64

A Little Bit More About Hari: .............................................................................................................. 64

Hari’s Total Income: ............................................................................................................................ 65

Deductions on Hari’s Income – For Tax Calculation Purposes: .......................................................... 66

Exemptions that Hari can Avail – For Tax Calculation Purposes: ........................................................ 67

Hari’s Taxable Income: ........................................................................................................................... 68

Hari’s Tax Exemptions: Rs. 1,67,500/- ............................................................................................... 68

Hari’s Deductions: Rs. 2,48,300/- ...................................................................................................... 68

Hari’s Tax Liability ................................................................................................................................... 68


Crorepati


What’s New in this Year’s Edition?

The year 2014 was monumental for many reasons. Firstly, the new BJP Government led by Mr. Narendra

Modi took charge under immense expectations from the billion plus population of our country.

Secondly, this book, my first ever adventure in writing was successful and as a book on India Income Tax,

this book needs to be updated every year, as the tax laws in the country change.

This year, on February 28th

2015, our Finance Minister presented the Indian Union Budget. Expectations,

as always were sky high and there are quite a few updates on Individual/Personal Taxation laws. In this

edition, you will be able to review all the modifications to personal tax laws.

Apart from the modifications in personal tax laws, you will also be able to learn about the new Sukanya

Samriddhi Savings Scheme that can help you invest for your daughters future. You will also be able to

find out the best fixed deposit interest rates (both regular and tax saving) plus the latest list of

recommended mutual funds that you can invest now.

Hope you find this edition useful.

Best Wishes


Crorepati


Introduction

Do you remember what happened when you got your first salary? The day my first month salary got

credited I heard and learnt about two words that I haven’t been able to forget till date…

Every country needs money to run the government, pay its staff and plan for development projects

across the country. The Government gets this money through taxes. There are numerous types of taxes

like – Income Tax, Wealth Tax, Sales Tax, Service Tax etc…

Tax Income is the single largest contributor to the Governments Exchequer. The projected Income Tax

receipts for our government at the end of the financial year 2013-2014 is expected to be around Rs. 11

lakh crores.

Why This Book?

Even though everyone who earns an income in India has to pay taxes, the government offers certain

benefits to its citizens by means of deductions and exemptions. Not everything you earn is taxed and

not everyone is taxed at the same level. People who earn more are taxed more in comparison to people

who earn less. The idea behind this book is multifold, they are:

• To help you understand the complex tax regulations in our country

• To help you understand the benefits that you can avail through the various applicable tax

laws

• To help you utilize all the deductions and exemptions and save Income Tax in a legal way

• To identify the best possible investment instruments that are available in the market as of

today

• To utilize the Tax Benefits offered by Section 80C of our Tax Laws and build a “Crorepati

Retirement Portfolio”

If you are an NRI and do not pay taxes in India, there is nothing wrong in learning about Indian Income

Tax because when you come back home permanently you will still need it. Plus, you can still follow the

life stage based portfolio and replace the ELSS Mutual Fund component with an Equity Diversified

Mutual Fund and build up a retirement corpus.


Crorepati


Let’s get started, shall we?

Basics of Indian Income Tax

Every Individual who earns an income in India has to pay a % of his earnings as Income Tax at the end of

each financial year to the Government of India. Calculation of the Income Tax to be paid by an individual

is a cumbersome process and could be extremely confusing especially if you have just taken up a job and

started earning. In fact, even individuals who have been working for many years do not fully understand

the Tax Policies.

This section covers the basics of the Indian Income Tax and how things work. If you have been employed

for at least one year or more, you probably know many of these things but, for the benefit of the

beginners we are covering the basics here. Plus, when I name the book as “Your Complete Guide” I

shouldn’t be missing anything isn’t it?

The Financial Year Cycle

India is one of those countries that follow a separate Financial Year cycle for Tax Computation purposes.

The financial year starts on 1st

of April and ends on the 31st

of March next year. The current financial

year started on 1st

April 2013 and will end on 31st

March 2014. All the money an individual earns during

this 1 year period is considered income for Tax Calculation.


Crorepati


Tax Deducted at Source – TDS

Anyone who is salaried would probably know this but again for the sake of completeness – Tax

Deducted at Source or TDS refers to the amount of money your employer deducts from your Salary

every month and sends it to the Income Tax Department automatically. Every company asks for their

staff to update their tax deductions, tax savings etc. (which we will be covering in the subsequent

sections) so that they can calculate the employees Tax Liability accurately. Company’s usually have full-

fledged tax computational software into which they key-in the income details of their employees as well

as their investment/deduction/exemption details. Using this info, the software accurately calculates the

“Tax Liability” of the employees.

This calculated Tax Liability of the employee is divided by the number of months remaining in the

financial year and deducted from the employee’s monthly salary. This way, the company tries to deduct

at least as much money as the employee owes the government as Tax Dues. In almost all cases where

the employee has no other source of income, the TDS is usually higher than the individuals’ tax liability

and he/she gets the refund after filing the tax returns.

The Form 16

After the end of each financial year, if you are a salaried employee, your employer will give you a

document called the “Form 16”. The form 16 outlines all the money you earned as part of the

employment including the amount of money that was deducted as TDS by your employer. The form 16

will clearly specify the amount of money that you need to pay the tax department or the amount the tax

department owes you. The form 16 will be signed and certified by the authorized signatory from your

company who will certify that:

� All the information in the form 16 is accurate

� All the TDS that was deducted from your salary was remitted to the Tax Department

� All the Investment Proof, Deductions etc. have been submitted to the Tax Department

on your behalf already

If you have received your “Form 16” it means that, your company has done almost everything on your

behalf and all you need to do now is - file your tax returns using this document.


Crorepati


Tax Filing and Refunds

As mentioned in the previous section, after you receive the Form 16, you need to file your tax returns.

Even though your employer deducted TDS and submitted all of your investment/deduction related

proof, you will need to formally file your tax returns to close-out the Process.

The government opens up a time window that starts around July and ends around August/September

each year during which you are expected to file your returns. Any additional income that you might have

earned or any extra deductions that were missed in the form 16 have to be included when you file your

tax returns. This year, to help tax payers finish their filing; the IT Department had extended the deadline

up until 31st

October 2013.

If the amount deducted as TDS is lower than your final tax liability, you need to pay the remaining

money along with the tax returns. In case your TDS was higher than your final tax liability, you can

expect a refund from the government. The money will be electronically credited into your bank account

after a few months. Don’t worry; the government will pay you an interest at 8% for as many months

they keep your refund money.

Once you file your returns, you will get something called an “ITR-V” form which stands for Income Tax

Returns – Verification form. It is an acknowledgement which is generated automatically after filing a

return online. It contains the basic details of income mentioned in the ITR Form while filing the return

along with the date of filing the return, acknowledgement no and the details from where the return was

filed. If the return is filed online with Digital Signature then it is not required to be sent to CPC Bangalore

for processing. In case the return is filed without Digital Signature, you have to duly sign the ITR-V and

send it to CPC Bangalore (address along with instructions mentioned in the ITR-V) within 120 days of

filing the return. After the ITR-V is received by the department, an ITR-V receipt is emailed to the email

id mentioned in the return form. If there is any mismatch in the signature then the ITR-V is rejected and

you are required to send it again.

The status of the return can be checked online at the Income Tax Department website

i.e. www.incometaxindiaefiling.gov.in


Crorepati


Rectifications to Your Tax Returns

There may be situations where you did some clerical or numerical error while filing your Tax Returns. In

such a situation, you can make amendments to your tax returns and rectify the mistakes. You need to

make an application to the Income Tax Commissioner of the Tax Office where you filed your returns to

submit the amendments to your Tax Returns. Alternately, if the Tax Authorities identify any mistakes in

your tax returns, they too will contact you reg. the same. You will receive a notice with details of the

mistake or discrepancy found out by the Authorities and you will be asked to clarify and provide more

details. In either case the process of making the amendments to your tax returns, remains almost the

same.

In cases where you identified the mistake, you need to request the amendment before the end of the

next financial year. For ex: If you want to make amendments to the returns you field this year, you have

time until March 2014 to submit the request for amendments.

As a general point of advice, making amendments to tax returns and following up with the authorities is

even more complicated than the normal tax filing process. So, I would strongly suggest that you enlist

the help of a Chartered Accountant or any specialist who can help you with the same.

What to do if I missed my Tax Filing Deadline?

If you are someone who had to travel out of country or for some other reason, could not file your tax

returns within the deadline set by our IT Department, you will be in a little bit of trouble. However, the

government realizes that people might be in circumstances that could force them to delay their tax

return filings and hence provides options for such individuals who missed the tax filing deadline.

Things to know about Late Filing of Tax Returns

� If you are filing your returns within 1 financial year, there will be no fine or penalty. i.e.,

If you file your tax returns for the financial year 2012-2013 by 31st

March 2014 – there is

no penalty

� If you are filing your returns after the 1 year grace period, the penalty is Rs. 5,000/- for

late filing. i.e., If you file your tax returns for the financial year 2012-2013 on or after 1st

April 2014, you need to pay this Rs. 5,000/- penalty

� Penalty Interest of 1% per month (Simple Interest) would be applicable on tax dues for

every month of delay starting from April

� You will not receive interest on the Tax Refunds for the period that you delayed.

� You will not be able to make any amendments to your tax returns after you submit. For

normal tax filings, you have time until the end of the next financial year wherein you can


Crorepati


make amendments to your tax returns whereas for late filing this privilege is not

available.

� Capital Losses cannot be carried forward unless they are specified by the 31st

of July and

filed in the Income Tax Return. Exemption to this rule is that, you can still carry forward

loss on sale of residential property

Usually late filing of tax returns is slightly more complicated than the regular process. So, I would

suggest you take professional help from a competent tax advisor or a chartered accountant to ensure

that you do not miss anything.


Crorepati


The Current Tax Slabs in our Country

As I said before, the amount of tax you pay depends on which Tax Slab you fall into. Below is the current

Tax Slabs:


Crorepati


Points to Note:

1. If your Taxable income is above 1 crore you need to pay an additional 12% surcharge on your

Tax Amount. For ex: If your tax liability is 30 lakhs on a taxable income of 1 crore, after including

the Surcharge, your tax liability will be 33.60 lakhs (Last year this surcharge was 10%)

2. An Educational cess of 2% and a Higher Educational cess of 1% will be payable on your total tax

liability including the surcharge. For ex: If your Tax liability is Rs. 25,000/- after including the

Educational cess and Higher Educational cess, the final tax to be paid will be Rs. 25,750/-

3. The tax slabs above reflect the changes that were introduced as part of the new Budget that was

presented in the Parliament in July 2014. The Tax Slabs were not changed in this year’s budget.


Crorepati


What is Taxable Income?

Not all your income is taxable. As I highlighted in the introductory section, the government allows some

deductions and exemptions which you can use to reduce your tax liability. The term “Taxable Income”

refers to the amount of money for which you are supposed to pay Income Tax. You can calculate your

Taxable Income as follows:

As you read on, you will first find out what qualifies as income and then we will take a look at the

various deductions and exemptions using which you can reduce your Taxable Income.

Heads of Income

Heads of Income is the technical term used in almost all tax related documentation in our country which

I am just using here so that you wouldn’t be surprised if you read any article related to income tax.

Actually it is just a fancy term which refers to the types of income earned by an individual that would

qualify as Income for which he/she needs to pay tax. They include:

1. Salary/Wages

2. Bonus

3. Commissions

4. Income from Other Sources – Ex: House Rent, Interest from Fixed Deposits etc.

5. Other Perquisite Benefits

The first 4 items are pretty straight forward and so, I am not going to explain them. According to the

Indian Tax laws Perquisites include the following:

a) Rent free accommodation or concessional rate accommodation received from the employer

b) Any other benefit given by the employer either in cash or material (Apart from monthly Salary)

c) Any Fringe benefits provided by the employer (This would include Mobile bill reimbursement,

Petrol expenses and any other reimbursements you may receive from your employer)

Documents

Your Complete Guide to Indian Income Tax and Retiring as a Crorepati - 2nd Edition Preview