Income Tax Deduction in India

Every individual who earns an income in India is supposed to pay Tax on the Income earned by him during that financial year to the government of India. Calculation of the Income Tax to be paid by an individual is a cumbersome process. The government of India provides certain benefits to its citizens who earn an income in the country by means of deductions, exemptions etc. Before going into the details below are the items that would be covered in this article. 


1. Heads of Income 
a. What exactly qualifies to be an income, for which you need to pay Tax. 
b. Salary Perquisites that are taxable
2. Deductions
a. House Rent Allowance – HRA
b. Leave Travel Allowance – LTA
c. Medical Allowance
d. Transportation Allowance
e. Interest paid on Housing Loan
3. Exemptions
a.Under Section 80C 
b. Under Section 80D 
c. Under Section 80DD
d.Under Section 80DDB
e.Under Section 80E
f.Under Section 80U

4.Clubbing of Minor Income

Heads of Income: 
The Heads of Income includes the types of income earned by an individual that would qualify as Income for which he/she needs to pay tax. These include the components that would be earned by an individual through employment with an organization/company. They are: 
1. Salaries & Wages 
2. Bonus & Commissions 
3. Other Perquisite benefits 

According to the IT 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 etc) 

Deductions on Income: 

As per the IT regulations, there are certain deductions that are allowed on the income earned by an individual. These amounts can be subtracted while arriving upon the net taxable salary of an individual. 

They include: 
1. Housing Rent Allowance (HRA) 
The HRA is usually a part of the salary/wages paid out to an employee by the employer. The deduction on HRA is eligible to any individual who is residing in a rented house and is paying rent to the house owner. There are some rules that govern the limit till which HRA can be deducted from your taxable income. Out of the below mentioned 3 items whichever is LEAST will be considered for the purpose of deduction under the HRA component. 
a. Actual amount of the HRA paid by the employer (As part of Salary) Or
b. 50% of Basic salary in case of Metros (Delhi, Bombay, Calcutta & Chennai) or 40% of Basic salary in case of non Metros. Or
c. Actual rent paid by the individual – 10% of Basic salary 
For e.g., your monthly Basic salary is Rs. 12,000/- and the HRA component as per your salary is Rs. 6000/- and the actual rent you are paying is Rs. 6000/- in Chennai then the amount you would be eligible for HRA exemption is Rs. 4800/- (Actual rent – 10% of Basic salary) per month. 

2. Leave Travel Allowance (LTA) 
LTA also is usually a part of the salary paid out to an employee as part of his employment. As per the Indian tax laws you are eligible to claim an amount that less than or equal to the total LTA paid out to him by his employer. This would cover the expenses incurred in travel of self with/without dependents. (Dependents would include spouse, children and dependent parents) There are some conditions which need to be satisfied for an individual to claimexemption under LTA. They are: 
a. LTA can be claimed only twice in a block of 4 financial years. You cannot claim LTA every year. 
b. Only Transportation expenses would be considered for LTA. Accommodation & food expenses are not considered. 
c. For an employee to be eligible for claiming LTA, he/she should have taken at least 3 days of earned leave from the employer 

3. Medical Allowance 
Medical allowance is also a part of the salary paid out to an employee. The maximum amount eligible for this component is either Rs. 15,000/- or the actual amount paid out to you as part of Salary. To claim exemption under this you need to provide medical bills to substantiate your claim of having incurred medical expenditure. The medical bills can be in the name of the individual or his spouse or children or dependent parents. 

4. Transportation Allowance 
The IT laws permit a deduction of Rs. 9,800/- as a standard transportation allowance to all resident individuals who pay income Tax. This amount is standard irrespective of the job/industry the individual is employed. Also this amount does not change irrespective of the means of transport you use to commute to your office. 

5. Interest Paid on housing loan 
The IT laws permit an individual who has taken a home loan from a recognized bank for the purpose of construction or purchase of a residential property to claim exemption on tax on the interest part of the loan taken by the individual. There is a limit to this exemption which is as follows. 
a. If the property is occupied by the individual then the maximum eligible amount under this is Rs. 1,00,000/- 
b. If the property is rented out and the rental income is included in the total income earned by the individual then there is no maximum amount. The actual interest paid on the home loan can be used for deduction from total salary considered for the purpose of income tax. 
Note: Exemption is available on home loans taken to purchase residential property only. Home loans taken to purchase land do not qualify for income tax exemption. 


Income Tax Exemption: 

The Income Tax laws allow all individuals who are assessed for income tax to claim exemption from income tax under the following heads. 
1. Section 80C 

The section 80C of the IT laws provide exemption from income tax on amounts that are invested by the individual. This usually includes the amount theindividual invests in certified instruments that are exempt from tax. They are: 
a. PF – Provident Fund (A portion of your salary is deducted by your employer as PF and would be remitted to the PF house that is maintained by thegovernment of India. A maximum of 12% of your basic Salary is eligible for exemption from income tax) 
b. PPF – Public Provident Fund – A maximum of Rs. 70,000/- per financial year. 
c. ELSS – Equity Linked Savings Scheme (Mutual funds) 
d. NSC – National Savings Certificate
e. KVP – KisanVikasPatra
f. Life Insurance (Insurance provided by LIC & Other registered Insurance companies) 
g. Tax Saving ULIP’s – Unit Linked Insurance Plans
h. Principal amount repaid as part of the Home loan
i. 5 year bank fixed deposits
A point to be noted here is that the sum total of all these components can be a maximum of Rs. 1,00,000/- per financial year. 

2. Section 80D 

This section of the IT laws provide exemption on the premium paid towards Medical insurance of the individual, spouse & children and also dependent parents. The maximum eligible amount under this section is Rs. 15,000/- per financial year. 

3. Section 80DD 

Exemption under sec 80DD is available to any individual who: 
a. Incurs any expenditure for the medical treatment, training and rehabilitation of a disabled dependent Or 
b. Deposits any amount in schemes of the LIC of India for the maintenance of the disabled dependent. 
A deduction of Rs. 50,000/- is available to all individuals who incur any of the above two said expenditures. Where the dependent has a Severe disability a deduction of Rs. 1,00,000/- is allowed. An individual should furnish a copy of the issued certificate by the medical board constituted either by the Centralgovernment or a state government in the prescribed form, along with the return of income of the year for which the deduction is claimed.

4. Section 80DDB 
An individual, resident in India spending any amount for the medical treatment of specified diseases affecting him or his spouse, children, parents, brothers and sisters and who are dependent on him, will be eligible for a deduction of the amount actually spent or Rs 40,000, whichever is less. 

For any amount spent on the treatment of a dependent senior citizen an individual is eligible for a deduction of the amount spent or Rs 60,000, whichever is less is available. The individual should furnish a certificate in Form 10-I with the return of income issued by a specialist working in a government hospital. 


5. Section 80E 
Under this section, deduction is available for payment of interest on a loan taken for higher education from any financial institution or an approved charitable institution. The loan should be taken for either pursuing a full-time graduate or post-graduate course in engineering, medicine or management, or a post-graduate course in applied science or pure science. There is no upper limit and the entire interest amount repaid each year to the bank for a period of 8 years is exempt from income tax

6. Section 80U - It is deduction in the case of a person with a disability. An individual who is suffering from a permanent disability or mental retardation as specified in the persons with disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995 or the National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999, shall be allowed a deduction of Rs 50,000. In case of severe disability it is Rs. 75,000. 

The Income tax assessee should furnish a certificate from a medical board constituted by either the Central or the State Government, along with the return of income for the year for which the deduction is claimed. 
Note: Section 80U is available only for individuals who are disabled but still earn an income that qualifies for income tax. 

For more information and free consultation on taxes and auditing and assurance service please visit http://www.neerajbhagat.com

Tax audit in India

Modi's government plans cashless coup with tax incentives on electronic payments

India has unveiled plans to cut transaction costs for electronic payments, to spur retailers and consumers to use less cash, as part of Prime Minister NarendraModi's drive to pull more people into the formal economy and boost public revenue.

India is among the most cash-intensive economies in the world, with a cash-to-GDP ratio of 12 per cent, almost four times that of markets such as Brazil, Mexico and South Africa, global payments company MasterCard estimates.

Many small Indian businesses and consumers now prefer cash, to avoid high transaction costs of up to 3 percent on electronic payments, as well as to escape sales tax.

In a draft proposal posted on the finance ministry website late on Monday, the government recommended tax concessions to reduce the cost of credit, debit and online payments. The proposals will be implemented gradually after June 29.

If successful in increasing card payments, the new measures will be a boost for global and debit card companies MasterCard , Visa and American Express, as well as domestic rival RuPay and mobile payment banks.

"It is a big economic reform of the Modi government that will ease conducting business by consumers and merchants," said A.P. Hota, chief executive of RuPay's parent, the National Payment Corp of India (NPCIL).

NPCIL, with 165 million cards, expects a jump in business once transaction costs are lowered, including those on state-run Indian Railways and retail petrol pumps, he said.

Modi is also rolling out banking services for all households and shifting the payment of state subsidies into people's bank accounts, moves intended to deepen the financial system and deter fraud.

Finance Ministry officials said the central bank and telecom operators had already been consulted on the new plan.

"The scheme aims to make the life of consumers easier," said finance ministry spokesman D.S. Malik.

One proposal is to offer sales tax rebates of 1 to 2 percentage points to merchants who report at least half of their transactions through online payments.

Consumers could get an income tax rebate for electronic payment of a proportion of their expenses, the draft said

Account outsourcing companies in India - Six things to know about the new income tax return forms

Having dropped the controversial provision for mandatory disclosure of foreign trips and dormant bank accounts, the Finance Ministry has finally come out with new and simplified income tax return (ITR) forms. The simplified ITR forms have been brought after the earlier version was opposed by the industry, MPs and assessees for its cumbersome disclosure norms.

The ITR forms,available in all "Indirect  taxation firms in India" which were notified last month by the CBDT for the current assessment year, had specific columns for banks accounts, IFSC Code, names of joint account holders and foreign visits, including the ones paid by companies.

The good news now is that apart from doing away with some controversial provisions, the new forms -- ITR 2 and ITR 2A -- will have only three pages and other details will have to be filled in schedules, according to a Finance Ministry statement issued recent .. 

However, "as the software for these forms is under preparation, the new forms are likely to be available for e-filing only by the third week of June. Accordingly, the time limit for filing these returns is also proposed to be extended up to August 31, 2015, for which a separate notification will be issued," says Rama Karmakar, senior tax professional at EY India.

Here are the 6 things you need to know about the new ITR forms:

1) Providing a big relief to assessees, the new ITR forms have been reduced to three. The number of pages for the new ITR forms has been reduced from 14 pages to 3, making it easier for income tax assesses. The new forms, known as ITR 2 and ITR 2A, will therefore consist of only 3 pages. Any other details that must be filled will have to be included in schedules," informs Adhil Shetty, founder & CEO of BankBazaar.com.

2) Currently individuals/HUFs with income from more than one house property and capital gains are required to file Form ITR-2. "A new ITR 2A form is proposed which can be filed by an individual/HUF that has income from more than one house property, but does not have any income from capital gains, income from business/profession, foreign assets/foreign income," says Karmakar.

3) An individual/Hindu Undivided Family (HUF), who has exempt income without ceiling limit (other than agricultural income exceeding Rs 5,000), can now file Form ITR 1 (Sahaj). Earlier, an individual with exempt income (e.g. dividend income) of more than Rs 5,000 was required to file ITR-2.

4) With regard to foreign travel details, it is now proposed that only the passport number, if available, will be required to be furnished in ITR-2 and ITR-2A.

5) The Finance Ministry has done away with the disclosure of details of dormant accounts which are not operational during the last three years. "As regards bank account details in all these forms, only the IFS code, account number of all the current/savings account which are held at any time during the previous year will be required to be filled-up. The balance in accounts will not be required to be furnished," says the Finance Ministry statement.

6) An individual, who is not an Indian citizen and is in India for business, employment or on student visa, will not mandatorily be required to report the foreign assets acquired by him during the prior years in which he was non-resident, if no income is derived from such assets during the relevant financial year.

According to tax experts, the above changes proposed in the ITR forms will provide respite to the taxpayers, including all expatriate employees working in India.