Now that you have your papers in order, how do you calculate your tax liability and figure out whether you need to pay more tax or get a refund? How do you know if you have done it right? To do that, you will have to add up your total earnings from various income sources. This will give you the gross total income. To get your total taxable income, you will have to subtract the standard tax deductions (section 80) from the gross income. Here’s a look at the five income heads and what they include.
Income from salary
Gross salary includes basic salary, commissions, allowances and perquisites. Subtract certain deductions from this. The balance is charged under the head “salary income”. Your basic pay, allowances, commissions and bonuses are fully taxable.
House rent allowance (HRA): This is exempt up to a certain limit if you are actually paying house rent. The lowest of three amounts—the actual HRA received, rent paid in excess of 10% of basic salary, and 40% of your basic salary (50% for Mumbai, Kolkata, Delhi and Chennai)—would be exempt. Conveyance allowance up to Rs800 a month is exempt from tax.
Leave travel allowance (LTA): It 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 that time.
Also See How To Compute Your Taxable Income (Graphics)
Medical allowance: Reimbursement of medical expenditure incurred by you and your family is tax-free up to Rs15,000 a year. All reimbursements need to be supported by bills.
Perquisites: These are benefits that you get in addition to your regular salary. They are usually in the form of accommodation, car and concessional loans. The total of all perquisite values is added to the salary and tax is calculated on the usual slabs. Premium for group medical and term insurance paid by your employer escapes the tax net. However, you need not worry about calculating all this. Your employer will give you form 12BA, which will show the value of your perks as part of your salary.
Income from house property
Rental income from a residential or commercial property that you own is taxable. If you have more than one property and one is self-occupied, then even if the other properties are not rented out, they will be treated so and the implied rent, based on the annual value of the property, will be taxed. The gross annual value is the highest of the municipal value, the actual rent, or the fair rental value. Preferential treatment is given to one self-occupied house, whose annual value is taken as nil. The interest payable on home loans is tax-deductible up to Rs1.5 lakh a year.
Income from capital gains
Let’s assume you made certain capital gains last year. If you held real estate, gold or silver for at least 36 months, they will be termed long-term assets. Otherwise, they are short-term assets. However, shares and equity mutual funds (MFs) are short-term assets if you hold them for a year or less, and long-term assets otherwise. Short-term capital gains are included in your gross total income and taxed according to the slab in which your income falls. Except listed securities, long-term gains made from all other asset categories are taxed at 20% with indexation. Gains from shares or equity MFs are tax-free in the long term. These gains are taxed at 15% in the short term, provided, of course, that the securities transaction tax has been paid.
Income from business/profession
In case you have income from a business or are in a profession, the excess of gross receipts over expenses incurred for running the business will be taxed under this head. A person earning his living in a profession such as law, medicine, engineering, architecture or technical consultancy, whose total gross receipts from that profession exceed Rs1.5 lakh a year, is required to maintain books of accounts.
Income from other sources
Usually, any income that does not fall under the four heads of income mentioned above is taxed under this head. Examples of such income are the interest earned on bank fixed deposits, savings accounts and national savings certificates.
Now that you have the numbers right, you can proceed to the final act of filing your taxes.
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Get this right
The amount of tax a business entity or professional needs to pay depends on the gross receipts minus the expenses incurred for running the business. Expenses that satisfy two conditions qualify for deduction from income. They should either be directly related to the business or profession, and should have been incurred during the financial year. Documentary evidence in the form of bills and receipts needs to be furnished for such expenses. If a car was used for your business, you can claim deductions, among other things, for petrol bills, insurance premium and maintenance charges. If you have employed people, their salaries are eligible for deductions.
Awareness is bliss
When markets are on an upward trajectory, experts classify stocks with high valuations as growth stocks. In bull markets, most new offers carry this tag. Always keep an eye on the stock price and see if the company can match its earnings with its valuations. Generally, companies in the infrastructure sector, a growth sector, have high levels of debt due to the capital-intensive nature of the business. During a sudden downturn, companies with high levels of debt may find it difficult to service them. During the current downturn, a couple of real estate companies had to sell assets to service their debts.
Cancelling your insurance policy?
You can cancel your insurance policy in the free-look period, the 15-day period beginning from the day you receive the policy, in case you disagree with or are not comfortable with its terms and conditions. If you have decided to cancel the policy, keep in mind that the insurance company refunds the premium paid after the following deductions.
• Cost pertaining to medical tests, if any
• Stamp duty
• The risk of premium in case the customer is provided cover in the free-look period
In unit-linked insurance plans (Ulips), any increase or decrease in the net asset value of the plan during the free-look period is passed on to the consumer. This is achieved through additions to or deductions from the premium.
Disclose MF commission, Sebi tells agents
Just as talk of variable entry load was gaining ground, the Securities and Exchange Board of India (Sebi) abolished entry loads in MF schemes. The commission amount will now be decided by the agent and the investor. Sebi now also mandates that agents will have to disclose the commission they earn to the investor. At present, equity funds charge 2.25% entry load upfront, that eventually gets passed on to your agent.
In other words, for every Rs100 you invest, only Rs97.75 gets invested in the market and the rest goes into your agent’s pocket. But now, the entire amount will be invested in the market.
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