Taxation and Government Benefits

Introduction

Ganesh is working at the bank. He is enjoying the work profile there. He has made many friends. As January approaches, he hears some of his friends, especially the more senior ones, talking about filing their income tax returns. They talk about their tax planning exercises. Some are complaining about how much tax they have already paid. Others are happy to file their returns as they are expecting tax refunds.

Ganesh, who has never worked before or paid tax before, is curious. He wonders: Do I also have to pay tax? If so, how much? And more importantly, how?

Ravi, from the Human Resources (HR) department of the bank is his friend. Ganesh knows that the HR department’s main role is to solve employee problems and advise them on any work related issues. So, that afternoon, as he does not have much office work to do, he goes to meet Ravi.

Ravi assures him that he has nothing to worry about. “I can certainly try to answer your questions. But I will take you to someone who can explain it still better.” Ravi introduces Ganesh to the bank’s legal and tax expert – Mr. Chhabria.

Taxation

Mr. Chhabria begins by explaining that the Government needs to collect tax so that it can spend on various items which benefit the country as a whole. For instance, if the government did not pay the salaries of Army men, who would? And if the Government did not build roads and put street lights in the cities, who would? There are many other expenses that the Government undertakes to ensure that the really poor people of the country are taken care of... And when we pay taxes, we help the Government to do all these things.

The Government collects various types of tax. It taxes companies on the profits they make. It also taxes us indirectly on a large number of products that we consume. For instance, there is a tax on items that are manufactured in the country, from everyday items like soaps and shampoos to bikes and cars. This is called Excise duty. The Government also puts a tax on items that are purchased from countries outside India to be sold in India. This is called Customs duty. The Government charges a Service tax on various services such as restaurants, beauty parlours, etc. We also have to pay tax on a number of other items that we consume, right from sugar, ghee and textiles to plastics, fertilizers, kerosene stoves and lanterns. This is called Value Added Tax or VAT.

The Government taxes individuals directly too. There are a few sources from which income earned is not taxed. Agricultural income and income earned in the form of dividends received by holding stocks and stock-based mutual funds are two such sources which do not attract any tax.

We have to pay income tax on the income that we earn between April of one year and the following March. This is called the financial year. Although the financial year ends in March every year, the Government gives us until the end of July to file our returns (i.e. fill in a form telling the Government how much we have earned from various sources) and pay our taxes.

Over centuries, Governments have tried different forms of taxing people. Today, the most popular way of taxing people by Governments across the world is progressive taxation. This means that rich people are taxed more than poor people. For instance, our government does not expect those whose salary is less than Rs.2,00,000 per year to pay tax. This minimum exempted amount is higher for women and aged people.

Then, on money earned over and above the exempted amount, the Government charges three different rates – 10%, 20% and 30%.

“I don’t understand, sir,” interrupted Ganesh, who was listening carefully to everything Mr. Chhabria said so far.

“Let me explain. If a man’s income is below Rs.2,50,000 per annum, he does not have to pay tax. If his income is between Rs.2,50,000 and Rs.5 lakh, he has to pay a 10% tax on any income that he earns above Rs.2,50,000. So, if his income is Rs.3,00,000, how much tax should he pay?”

“I’m sorry, sir. I really don’t follow...” said Ganesh honestly.

“Oh it seems complicated. But once I explain to you with examples, it will be as clear as water!” said Mr. Chhabria supportively.

Calculating tax

Mr. Chhabria got up from his chair and walked over to a whiteboard at the back of his cabin. It was full of notes and calculations. He wiped it clean and began writing down the tax slabs very clearly.

Income tax slabs 2014-2015 for Tax payers

Government benefits

Mr. Chhabria explained, the Government has made some concessions for tax payers. Under section 80C of the Income Tax Act, if you invest in certain savings products, purchase insurance or spend on buying a home, amongst others (total list below) you can reduce all these amounts from your taxable income. However, the maximum amount that you can reduce you taxable income by is Rs. 1 lakh. Any investments and expenses that you make in 80C instruments above Rs. 1 lakh may benefit you in other ways but will not be counted for tax reduction purposes.

List of qualifying investments under Section 80C Tax Savings*

(*Source: http://www.finance-trading-times.com/2011/06/2249-section-80c-tax-savings-complete.html)

Employee Provident Fund (EPF) & Voluntary Provident Fund (VPF)

Now-a-days, almost all companies are legally required to deduct Provident Fund from an employee’s salary. This itself forms a major constituent of the investments under section 80C, for all the salary class employees. Apart from the normal EPF, any investments you make on your own in the Voluntary Provident Fund (VPF) also qualifies for tax saving under section 80C.

Public Provident Fund (PPF)

On the lines of PF and VPF, the 15-year long PPF contributions also qualify for tax savings under section 80C.

Life Insurance Premiums

Any premium you pay towards life insurance policies for you own self, your spouse or your children, qualifies for tax savings. However, please note that you can NOT claim tax deduction for life insurance premiums paid for your parents, in laws, siblings, etc.
If you have multiple policies, you can add all of their premiums together and claim for the collective sum. And most important point - many people think that only LIC policies premiums are eligible for tax deductions, it’s not so - any life insurance policy premium paid to private insurance firms also qualifies for tax benefit under section 80C.

Equity Linked Savings Scheme (ELSS)

For the high risk takers, the ELSS scheme which has a minimum lock-in period of 3 years and invests your money in equity mutual funds also qualifies for tax savings.

Home Loan Principal Repayment

If you have taken a home loan, there are two components you need to repay back to the bank - first is the interest component on the loan amount and second is the loan amount itself, i.e. the principal amount. Under section 80C, you get a tax relief on the repayment of principal amount.

National Savings Certificate (NSC)

If you have bought the 6-year long tax saving NSC, then that amount can be claimed for tax deduction under section 80C.

Infrastructure Bonds

Recently, the government came out with a new section especially for tax deductions to be offered for investments in Tax Free Infrastrucutre Bonds. Here, you get a Rs. 20,000 deduction over and above the Rs. 1 lakh limit if you invest in these bonds.

Pension Funds – Section under 80CCC

This is a special sub-section called 80CCC, which is a part of section 80C, exclusively for investments in pension funds. So if you are investing in any qualifying pension funds either from government or private financial companies, then you can claim tax benefit on that investment.

Tax Saving Bank Fixed Deposits (5-Yr FDs)

Special Fixed Deposits issued by bank in the name of minimum 5 year long Tax savings fixed deposits give you another option for tax savings.

Senior Citizen Savings Scheme 2004 (SCSS)

This is a recently introduced scheme under which ONLY senior citizens can invest and get returns of around 9% per annum. Any investments made in this SCSS scheme is eligible for tax deductions.
5-Yr post office time deposit (POTD) scheme

There are multiple post office savings scheme available for investments for various tenure. However, only one of them, that of 5 years and currently offering 7.5% interest rate is eligible for tax benefit. No other post office saving scheme qualifies for tax deductions.

NABARD rural bonds

NABARD i.e. National Bank for Agriculture and Rural Development has issued special bonds called the NABARD Rural Bonds. Investments in these bonds is tax free under section 80C.

Unit linked Insurance Plan ULIP Investments

Any ULIP investment, basically a mix of investment and insurance gives you tax deduction under section 80C. However, one must be aware about the long lock in periods and heavy policy charges which vary from one ULIP scheme to the other.

All the above mentioned schemes qualify for the tax benefit under section 80C (except Infrastructure Bonds). However, they are all investment schemes where you need to put in money for a certain period of time (lock-in period) to claim tax benefit.

Apart from the above mentioned savings and investments, there are certain expenses which can also give you tax relief under section 80C.

Children’s Education Expense

If you are paying for the education for your own children, then you can claim tax benefit on tuition fee paid to the school or education institute. You need to maintain the receipts for claiming the tax benefit under section 80C.

Stamp Duty and Registration Charges for a home

If you have bought a home (on your own or home loan), then you can claim tax benefit under section 80C for the registration charges and Stamp Duty charges paid towards purchase of your home.

Source: Portal Content Team