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'I'm spending a year
dead for tax reasons.'
Calculate your income in 10 minutes!
T
his
is what the tax noose made English writer Douglas Adams say. Many, like
Adams, would do anything to escape the pain of taxes. While knowing the
tax process does not take the pain away, it does give a better grip on
the tax cuts that we get.
For incomes to be taxed, they first
need to be classified under various categories to allow us to count them
better. Incomes like those from agricultural activity and dividends (from
mutual funds and stocks) are not part of income that is counted for taxation.
Incomes are classified under five heads in India.
Here's a quick guide to doing what
you believed was too tough for you. This is not an exhaustive list of what
you can include under each head, but you would be 90 per cent there. For
the rest, call the friendly neighbourhood CA.
1.
Salary income
First, you have to find out the
"income chargeable under the head salaries." For this, you need
to know your gross salary, which normally includes basic salary, commissions
earned, taxable allowances, taxable perquisites and retirement benefits.
Subtract certain deductions like
conveyance allowance (up to Rs 800 per month) from this. The balance is
charged under the head salary income.
-
Total taxable income:
Your
'basic salary' is fully taxable. Further, any amount of dearness allowance,
commissions and bonuses, city compensatory allowances, overtime allowance
and even lunch allowance that you get is fully taxable.
-
House rent allowance:
HRA
is exempted up to a certain limit provided you are actually paying house
rent. The lowest of three amounts, actual HRA received or rent paid in
excess of 10 per cent of basic salary or 50 per cent of your basic salary
(40 per cent of your basic salary if you reside in a city other than Mumbai,
Kolkata, Delhi and Chennai), would determine how much is to be exempted.
The balance is taxable.
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Conveyance allowance:
Up
to Rs 800 per month is exempt from tax.
-
Leave travel allowance:
This is a reimbursement for travel expenses that you and your family members
incur within India while you are on leave. While LTA can be paid to you
every year, it is treated as tax-free only for two journeys in a block
of four years. Both these journeys can be made in any one of the four years
or spread out over the four years.
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Medical allowance:
Reimbursement
of medical expenditure incurred by you and your family is tax-free to the
extent of Rs 15,000 per annum. Remember, all reimbursements need to be
supported by bills or other documents.
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Perquisites
. Perquisites
are benefits that your employer gives you in addition to your regular salary.
These are usually in the form of accommodation or car or concessional loans.
The total of all perquisite values is added to the salary and tax is calculated
on the usual slabs.
-
Premium
paid by your employer under group insurance or medical insurance premium
paid by your employer escapes the tax net. However, you need not worry
about calculating all this. Your employer will give you Form 12 BB, which
will show you the value of perk as part of your salary.
-
You will also get Form 16, which
shows the 'income chargeable under the head salaries' and TDS, taking into
account all the allowances and deductions. If there is no deduction of
tax at source for you, your employer will give you a certificate of salary
earned during the financial year instead of Form 16
American
journalist Bill Vaughan had remarked, "The tax collector must love
poor people, he's creating so many of them." You might want to agree
after seeing what taxes have done to your income.
2.
Income from house property
Rental
income from a residential or commercial property that you own is liable
to be taxed.
Even if the property is not rented
out, it will be treated as rented out and the rental income will be liable
to be taxed. What is taxed under this head is not the actual rent but the
inherent capacity of the property to earn income. This is known as the
property's "annual value".
The gross annual value is the highest
of these: the municipal value, the actual rent, or the fair rental value.
To calculate your gains, see the
worksheet. Preferential treatment is given to one self-occupied house which
has not been let out at any time. In this case, the annual value is taken
as 'nil.' The interest payable on home loans taken on or after 1 April
1999 is tax-deductible up to Rs 150,000 a year.
3
.
Capital gains
If
you hold a house, commercial property, gold or silver for more than 36
months, they are termed as long-term assets. If you hold them for 36 months
or less, they are short-term assets.
However, shares and units of equity
mutual funds are short-term assets if you hold them for a year or less
and long-term assets if you hold them for more than a year.
To calculate your gains, see the
worksheet. Short-term capital gains are included in your gross total income
and, after deductions, are taxed as per your tax slab.
Other than for listed securities,
long-term gains are taxed at 20 per cent with indexation. Gains from equity
shares or units of equity mutual funds are tax-free in the long term and
taxed at 10 per cent in the short term.
4
.
Gains from business and profession
Income earned from your profession,
or through business, is taxed under the head 'profits and gains from business
and profession'. The income chargeable to tax is the difference between
gross receipts and the expenses incurred to earn that income.
A person carrying a profession of
law, medicine, engineering, architecture or technical consultancy, whose
total gross receipts from that profession exceed Rs 150,000 per annum,
is required to maintain books of accounts.
5
.
Other incomes
Any income that does not fall under the four heads of income mentioned
above is taxed under the head 'Income from other sources'.
An example of such income is interest
from bank deposits or national savings certificates.
6.
Computation of Gross total income.
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Gross Total Income
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