FINANCIAL UPDATES - 2ND APRIL 2016
LUGI CHENNAITEAM
11 tax-free income in India – every investor should know
Paying Income tax is one thing, which most of the people do not like. Everyone tries to minimize their income tax y some or the other means. So today, I will be sharing with you list of some income’s which are 100% tax-free in your hand.
Yes – you heard it right. if you earn these income’s, then you do not pay any income tax on them at all. This article is mainly for information purpose, because I have seen many investors who are yet not clear on the taxation rules of few income’s. Here we go
1. Interst on saving bank interest – upto Rs 10,000 a year
From 2013 onwards, a new section 80TTA is introduced under which, the interest on your saving bank account upto Rs 10,000 is not taxable. So if your saving bank interest for a year is Rs 20,000 . Then out of that Rs 10,000 is exempted and only the rest Rs 10,000 will be added to your taxable income.
This is a great relief for tax payers, because it was really a big headache to find out the saving bank interest from all the accounts and add them up and pay income tax, because for most of the people, it would be few hundreds or thousands of interest income. Now that is gone !
2. Interest earned in NRE account
Any interest you earn on your NRE account is 100% Tax-free in India. Here we are talking about both, the Fixed Deposit and normal saving bank interst. Both of them are tax free for NRI. NRE deposists are a great way to earn a decent interest on the savings done by NRI. Some of our clients even go an extent of taking loan from the country they are working in like UAE/Singapore because they get it at 2-3% and then reinvest the same in NRE deposits here in India where they earn around 8-9%. Also because there is no tax, hence TDS is also not applicable to the NRE account deposits.
And the best part is that the money in NRE accounts is repatriable, means if you are in US and you invest some money in India in your NRE account, the principle and interest money can be taken back to US 
.
3. Share of Profits paid to partners in firm
If a partnership firm earns some profit and instead of retaining it within the partnership firm, its paid to the partners as a share of profits, then its tax free in the hands of the partner, because the tax is already paid by the firm on it.
So is A and B are partners in a firm, and they get 5 lacs each in a year as the share in the profits earned by the firm, then it will be tax-free in their hands. Note that if they are receiving any salary from the firm, then its taxed in their hands only.
I would like to request that as this is related to corporate tax, please consult a qualified CA on this issue.
4. Maturity or Claim amount received by Life Insurance Company
The money you get from life insurance companies on maturity, claim or surrender is 100% tax-free provided,the premium paid did not exceed 20% of the sum assured. I am quoting new amendments which have come in recent years
As per amendments introduced in the Finance Act, 2003, (i.e., with effect from April 1, 2003), any proceeds received on account of maturity/surrender of an insurance policy were exempt from tax only if the premium paid did not exceed 20% of the sum assured. As an example, if the annual premium is R10,000, to qualify for exemption, the minimum sum assured under the policy was required to be R50,000.
If the sum assured was less than the said value, the entire maturity proceeds would be taxable. Such limit of 20% was later reduced to 10% by the Finance Act, 2012, (i.e., with effect from April 1, 2012) to increase the insurance coverage amount, i.e., the sum assured threshold was increased from a minimum of five times of annual premium to 10 times. For policies taken on the life of a disabled person or person suffering from certain ailments, the limit was relaxed to 15% of the sum assured with effect from April 1, 2013.
5. LTA money received from Employer
Most of the companies pay LTA each year to their employees, which can be utilized for traveling purpose. This LTA is not taxable in hands of the investor provided they provide the proof of travel. So if your company is not paying you any LTA, ask them to restructure your salary and label some part as LTA, because almost everyone spends a minimum amount traveling in a year.
For example, if you are getting a salary of Rs 5 lacs and their is no LTA in your salary component, you can ask your employer to label 20k as LTA and rest 4.8 lacs as other components, this way you will be able to save tax on that 20k part at least.
6. Money got under VRS scheme upto Rs 5 lacs
If a person takes VRS (Voluntary retirement scheme) than any amount received up to Rs 5 lacs is income tax-free. However, not everyone is eligible for it. Only employees of Public sector companies or an authority established under a Central or State govt is eligible for this.
7. Money received from your EPF account after 5 yrs
The money one gets from their EPF account is also tax-free, provided the money is taken out after 5 yrs of service. A lot of times investors change their jobs in 3-4 yrs and withdraw their EPF money only to realise that they could have timed their withdraw in better manner and save 30% of their EPF money which went into income tax (assuming they are in 30% tax bracket).
8. Profits from shares or equity mutual funds after a year
When you earn any profits from your shares or equity mutual funds after holding it for minimum 1 yrs, its called Long term Capital gains, and its 100% tax exempt as per current tax rules.
For example, if you invest Rs 1 lac in shares and after 2 yrs its worth is now Rs 2 lacs. In this case when you sell your shares, you will not be paying any income tax on this Rs 1 lac profit because of long term capital gains rules.
However, it’s important to know that exemption is allowed only when Security Transaction Tax (STT) has been paid (which is paid by you when you buy on recognised stock exchange such as BSE or NSE). But if you do a out of exchange sales, then STT might not get paid and hence in future when you sell shares, you will have to pay tax on profits.
9. Dividends received from your shares or equity mutual funds
You receive dividends from your stocks or equity mutual funds (dividend option). That dividend money you get is also tax-free in your hand. However, the bad side of the story is that company anyways pays the dividend distribution tax to govt before giving the dividends to its shareholders. Hence, anyways we are getting slightly less share of profits in our hand anyways.
10. Amount received by way of gift on marriage
Any amount you get as gift on your marriage is tax free. So your friends, relatives or any random person can gift you any amount or something valuable as a gift on your marriage, and it will be non-taxable for you. Just make sure that the timing is matched with your marriage and the gift date. It should not happen that you get some gift after 2 yrs of marriage and you try to justify that it was a gift for your marriage.
Its like this, If you are getting a gift of Rs 10 lacs from a friend (which is nearly impossible), ask them to hold on for a while and gift it to you after few months or a year when your wedding is in place and you will save a lot of taxation issues
11. Any amount received through WILL or Inheritance
There is no inheritance tax in India now. So any-thing you get in inheritance through WILL is not taxable in your hands. It becomes your property and now when you invest that money, only the interest part earned on that property will be taxed.
And Many more
Note that, it’s not possible to list down each and every income which is tax-free. Here I have listed 10 income’s which I think most of the investors should be aware about this. There are many other things which are not taxable, but it applies to certain section of investors.
Are you aware about some income which is tax-free and not mentioned here?
5 things to know before you Submit Investment proofs for tax saving
Do you know everything regarding investment proofs which you provide to your employer at the time of tax-saving season? If your answer is NO, then this article will help you understand a lot of things which you don’t know or partially know about. So, I will talk about some of the common things you should take care while giving your investment proofs to your employer for tax saving purpose.
1. Investment declaration helps employer to deduct appropriate tax
The first and most basic thing you as employee should know that your employer is supposed to deduct your income tax on monthly basis and deposit it with govt on 7th of the following month. For this, the employer should calculate your taxable salary and it can only happen if you before hand give him an idea about how you are planning to save tax, and apart from that how much of HRA, LTA, Medical reimbursements you are entitled for.
For this purpose, your employer asks you to declare your various investments in the start of the year itself, so that they can compute your net taxable salary and then pay your salaries accordingly, after deducting TDS from your salaries.
And then, finally around Dec/Jan, they start asking you to provide them the actual proofs of your investments and receipts so that they can match things with their initial calculations and if there are any difference they have 2-3 months in hand to handle the discrepancies. Below is a small example of it
What If you failed to submit investment proofs
If you failed to submit your investments proofs (you declared them, but didn’t invest in reality), in that case you are liable to pay higher income tax, but employer has not deducted it and hence they get a 2-3 months of extra time to adjust it from your salary. Following things are required by employer as investment proofs.
- To claim LTA, you need to provide Travel receipts (flight boarding pass, train tickets)
- Home loan certificates if you want to claim deductions under principal and interest repayment
- ELSS investments proofs or any other 80C investments
- Life insurance and health insurance premium receipts
- Various donations receipts
- Rent receipts to claim HRA
The first and most basic thing you as employee should know that your employer is supposed to deduct your income tax on monthly basis and deposit it with govt on 7th of the following month. For this, the employer should calculate your taxable salary and it can only happen if you before hand give him an idea about how you are planning to save tax, and apart from that how much of HRA, LTA, Medical reimbursements you are entitled for.
For this purpose, your employer asks you to declare your various investments in the start of the year itself, so that they can compute your net taxable salary and then pay your salaries accordingly, after deducting TDS from your salaries.
And then, finally around Dec/Jan, they start asking you to provide them the actual proofs of your investments and receipts so that they can match things with their initial calculations and if there are any difference they have 2-3 months in hand to handle the discrepancies. Below is a small example of it
What If you failed to submit investment proofs
If you failed to submit your investments proofs (you declared them, but didn’t invest in reality), in that case you are liable to pay higher income tax, but employer has not deducted it and hence they get a 2-3 months of extra time to adjust it from your salary. Following things are required by employer as investment proofs.
- To claim LTA, you need to provide Travel receipts (flight boarding pass, train tickets)
- Home loan certificates if you want to claim deductions under principal and interest repayment
- ELSS investments proofs or any other 80C investments
- Life insurance and health insurance premium receipts
- Various donations receipts
- Rent receipts to claim HRA
2. You can also share your saving bank interest, FD interest with employer
A lot of people do not know this, but you can share your saving bank interest, FD/RD interest earned during year, any capital gains from shares or mutual fund, rental income and other kind of incomes with your employer, so that they get a complete picture of your taxable salary and deduct your income tax which will be more accurate.
If you do not disclose these additional incomes to your employer, in that case – you will have to separately pay additional income tax yourself and then take these things into account while filing your income tax returns.
Note that another advantage of declaring these additional income with employer is that you will not have to pay any penalty which might arise due to not paying advance tax on time.
Also, you won’t have to take the burden of paying the additional tax at the end of the year, the tax will get distributed almost equally throughout the year.
A lot of people do not know this, but you can share your saving bank interest, FD/RD interest earned during year, any capital gains from shares or mutual fund, rental income and other kind of incomes with your employer, so that they get a complete picture of your taxable salary and deduct your income tax which will be more accurate.
If you do not disclose these additional incomes to your employer, in that case – you will have to separately pay additional income tax yourself and then take these things into account while filing your income tax returns.
Note that another advantage of declaring these additional income with employer is that you will not have to pay any penalty which might arise due to not paying advance tax on time.
Also, you won’t have to take the burden of paying the additional tax at the end of the year, the tax will get distributed almost equally throughout the year.
3. Didn’t submit income tax proofs to employer? You can claim things later
A lot of investors have this myth, that if they didn’t do their investment proof submission to employer, they will never be able to claim the deductions and will have to pay higher income tax. This is not true.
Yes, it’s a good practice to give the investments proof to your employer on time, and that will save you a lot of headache later while filing the returns. But for some reason, if you fail to provide the investment proofs (example, like you don’t have money in the month of Jan and you decided to buy a life insurance policy only in Mar), in that case – your employer will deduct the income tax, but then at the time of filing your tax returns you can claim the tax refund, if you finally managed to invest in tax saving products later.
Here is a chart which will give you a better idea
Here is another detailed example of how it happens
- Ajay has the salary of 12 lacs a year, and he declares to his employer that he will invest Rs 1.5 lacs in 80C products
- Employer based on Ajay declaration will calculate that Ajay taxable salary is 10.5 lacs and will be based on that suppose the total income tax for the year is 60k (just for example) . So Ajay final salary will be 10.5 lacs – 60k = 9.9 lacs. This 9.9 lacs divided by 12 will be 82500 which he will get on monthly basis and the employer will deposit Rs 5,000 as his tax to govt on monthly basis
- Now in Jan, when the employer asks Ajay to give them the investment proof, suppose Ajay realizes that he forgot to make the investments and does not have money to invest 1.5 lacs in 80C products. But he will do it in Mar himself. And he fails to provide the income tax proofs to his employer.
- Now his employer will come to know that Ajay real taxable salary is 12 lacs and not 10.5 lacs as declared by him and lets say on this his income tax is 1 lac, so additional 40k is to be recovered from Ajay, which will be adjusted from Ajay’s salary in Feb/Mar
- Ajay then invests 1.5 lacs in Mar and finally his taxable income should be just 60k , as per the planning (because his taxable income is 10.5 lacs as declared in the start). However his employer has deducted 1 lac in total from his salary and paid to govt.
- Now Ajay can declare in his tax returns that he has invested in 80C products and he is liable to get refund of Rs 40,000 which he will get in next few months.
In the example above, you can see that not giving investment proofs on time has resulted in some inconvenience for Ajay, but that does not mean that he will lose out on his tax benefits. One can always invest around the end of the year and then claim back the tax refund later.
However, there is one exemption here
Few exemptions are made only at employer level, like LTA and medical reimbursements. So if you fail to provide LTA and Medical reimbursements proof to your employer on time, then you lose the benefit. You can’t claim it back at the time of filing returns.
A lot of investors have this myth, that if they didn’t do their investment proof submission to employer, they will never be able to claim the deductions and will have to pay higher income tax. This is not true.
Yes, it’s a good practice to give the investments proof to your employer on time, and that will save you a lot of headache later while filing the returns. But for some reason, if you fail to provide the investment proofs (example, like you don’t have money in the month of Jan and you decided to buy a life insurance policy only in Mar), in that case – your employer will deduct the income tax, but then at the time of filing your tax returns you can claim the tax refund, if you finally managed to invest in tax saving products later.
Here is a chart which will give you a better idea
Here is another detailed example of how it happens
- Ajay has the salary of 12 lacs a year, and he declares to his employer that he will invest Rs 1.5 lacs in 80C products
- Employer based on Ajay declaration will calculate that Ajay taxable salary is 10.5 lacs and will be based on that suppose the total income tax for the year is 60k (just for example) . So Ajay final salary will be 10.5 lacs – 60k = 9.9 lacs. This 9.9 lacs divided by 12 will be 82500 which he will get on monthly basis and the employer will deposit Rs 5,000 as his tax to govt on monthly basis
- Now in Jan, when the employer asks Ajay to give them the investment proof, suppose Ajay realizes that he forgot to make the investments and does not have money to invest 1.5 lacs in 80C products. But he will do it in Mar himself. And he fails to provide the income tax proofs to his employer.
- Now his employer will come to know that Ajay real taxable salary is 12 lacs and not 10.5 lacs as declared by him and lets say on this his income tax is 1 lac, so additional 40k is to be recovered from Ajay, which will be adjusted from Ajay’s salary in Feb/Mar
- Ajay then invests 1.5 lacs in Mar and finally his taxable income should be just 60k , as per the planning (because his taxable income is 10.5 lacs as declared in the start). However his employer has deducted 1 lac in total from his salary and paid to govt.
- Now Ajay can declare in his tax returns that he has invested in 80C products and he is liable to get refund of Rs 40,000 which he will get in next few months.
In the example above, you can see that not giving investment proofs on time has resulted in some inconvenience for Ajay, but that does not mean that he will lose out on his tax benefits. One can always invest around the end of the year and then claim back the tax refund later.
However, there is one exemption here
Few exemptions are made only at employer level, like LTA and medical reimbursements. So if you fail to provide LTA and Medical reimbursements proof to your employer on time, then you lose the benefit. You can’t claim it back at the time of filing returns.
4. You DONT need to submit any proofs while filing your tax returns
Another important point you should remember is that while filing income tax returns, you just have to furnish the information about your investments, and not attach any investment proof.
Please do not attach xerox copies at all. It’s not required.
Its required by the employer because they are deducting the TDS and as a third party they need the documents for verification purpose.
But if you are claiming at all the benefits yourself at the end of the year, you just need to declare things. However note that you should keep the receipts and all the required documents with you for some years, because if their is any scrutiny later, you need to be prepared to answer income tax authorities along with documentary evidence.
Which means that you should never lie about your investments which you have not done in reality. Always provide true information.
Another important point you should remember is that while filing income tax returns, you just have to furnish the information about your investments, and not attach any investment proof.
Please do not attach xerox copies at all. It’s not required.
Its required by the employer because they are deducting the TDS and as a third party they need the documents for verification purpose.
But if you are claiming at all the benefits yourself at the end of the year, you just need to declare things. However note that you should keep the receipts and all the required documents with you for some years, because if their is any scrutiny later, you need to be prepared to answer income tax authorities along with documentary evidence.
Which means that you should never lie about your investments which you have not done in reality. Always provide true information.
5. You need to give “proposed investment” proofs for the month of Feb and March
A lot of people are confused on how will they provide the investment proofs for the month of Feb and Mar in Jan itself, when the employer asks for investment proofs. It might happen that your life insurance premium is due in Mar or if you are doing SIP in ELSS funds, you still don’t have the statements showing the investments.
In those cases, you have to provide a declaration that you are going to make the investments for Feb/Mar and based on that declaration, your employer will process the TDS. All the employers provide you with the declaration form. You just need to write there that you promise to do the investments for tax saving in next 2 months and your exemptions should be given to you based on your declaration.
Let me know if you have any questions or if you want to share some important information on this topic
A lot of people are confused on how will they provide the investment proofs for the month of Feb and Mar in Jan itself, when the employer asks for investment proofs. It might happen that your life insurance premium is due in Mar or if you are doing SIP in ELSS funds, you still don’t have the statements showing the investments.
In those cases, you have to provide a declaration that you are going to make the investments for Feb/Mar and based on that declaration, your employer will process the TDS. All the employers provide you with the declaration form. You just need to write there that you promise to do the investments for tax saving in next 2 months and your exemptions should be given to you based on your declaration.
Let me know if you have any questions or if you want to share some important information on this topic
9 ultimate checklist to know if your financial life is on track or not?
Let’s quickly see today what I call as a good checklist to find out if your financial life is on track? Are you doing well? When can you say that your financial life is an ideal financial life?
What are those parameters?
- Is high income good?
- Is having low expenses great?
- Is having 50 lacs in saving’s great?
A lot of investors do not even know if they are doing good, bad or just average.
I know its very subjective to say if someone is doing well or not and no one other than you should make the final judgement, but still lets look at some high level points which will should be present in a good financial life. Atleast you can get a sense of how you are doing on few parameters.
Lets see how many of these are true for you.
1. You have positive surplus each month
The first indicator I think is very simple and very important – “Are you left with a positive surplus by the end of the month or not?”. Its as simple as that. Unless you are left with some surplus (income – expenses), it makes no sense just to brag about your salary itself. What will matter is if you are having a good positive surplus each month or not.
And I am talking about a decent surplus, like 20-30% at least. So if you are earning Rs 80,000 a month, but you are left with just 2-3k by the end of the month, please don’t say you are left with surplus. It should be at least 15-20k, because this is what will help you in building your wealth. If can surely say that you earn a lot and spend like a king and enjoy life like anything. Well thats great and its surely a great thing. But not having a surplus is surely a big negative point.
Did you pass this check or not?
2. Your networth is going up on yearly basis
Is your networth increasing on yearly basis? Are you getting wealthier in totality over years or not?
- Are you wealthier compared to 5 yrs back?
- Are you wealthier compared to 3 yrs back?
- Are you wealthier compared to 1 yr back?
I am not saying that be highly rigid about 1 yr. It’s totally fine if your graph is a bit down for few months or last 1 yr, but as a general rule, it should be moving up over the years (especially if you are young and moving towards your retirement)
If the answer is YES, then fine – you are doing great, else there is something you need to fix. Your networth would keep going up and up in two cases. First is when your investments are doing well and the interests and returns you earn on it add up, this happens mostly in later part of your life, when money already have reached to a level and now the compounding helps it growth further without your suppose.
The other case is when you keep investing out of your surplus each month and its very important in initial years of your life, because only when your net worth reaches a respectable level, you will be able to feel the power of compounding and its effect on your net worth ?
Did you pass this check ?
3. You are not heavily dependent on loans to pay your bills?
If I take away your credit cards with the condition that it will be returned to you only after 3 montsh, will you panic?
I am sure many investors will panic and start wondering how they will manage now. Note that said “heavily dependent” and not “heavily using”. Personally I use credit card a lot and frequently, but you can take away my credit card and never return to me and I will not even care for a minute (after I block it).
However, some people are so dependent on credit card, like its oxygen for them. Apart from credit card, a lot of people get into this cycle of
- Need money for some purpose
- Take personal loan
- Keep paying the EMI to clear off the loan
- Need money for some purpose
- REPEAT !
This is a very unhealthy sign in your financial life and you should just not be doing this because its messing up your credit report and it will cause you insane amount of trouble getting future loans
Did you pass this check?
4. Are you protected by external risks which will destroy your wealth
In technical language, I mean to ask if you have taken life insurance, health insurance, added life insurance if you have home loan or not.
Imagine, that you are saving money for your downpayment of your dream house, but you dont have a health insurance (here is a checklist on how to buy health insurance) and suddenly some accident occures which required hospitalization, what is going to happen?
All your down payment money which you accumulated will just disappear and you will be back to square one, wondering how will you achieve your house goal now?
If you didn’t take sufficient life insurance and you have a home loan EMI, and you are gone!, then your family will either have to pay the money from somewhere or vacate the house.
As per a rough calculation, if a male aged 30-35 yrs earning 10 lacs a year, wants to take sufficient life and health insurance, he can get a 1 crore worth of term plan and a 5 lac health insurance for around Rs 20,000 a year easily. Thats just 2% of his yearly salary. I think you should do the math, and judge if its worth covering these risks or not. By the way taking your life and health insurance is a one time task. We suggest you head over to Coverfox and leave your details there if you are interested in purchasing health insurance.
Do you pass this check or not?
5. You will be able to handle sudden surprise expenses without external help
Do you have enough resources to handle surprise expenses or any unplanned expenses? Imagine following scenario’s
- Your father needs 75,000 by tomorrow
- You spouse needs Rs 1 lac which will come back after a 1 month.
Are you in a situation to arrange this money instantly (atleast 2 months of salary) or not?
By instantly, I don’t mean that it should be lying in your saving bank account, but can you atleast arrange for this amount yourself without any external support or not is the main question.
Many people I know will have NO as the answer, because they either have locked the money in financial products because of tax saving or they just don’t have it. So this point actually tests how you have managed liquidity in your financial life.
Are you able to pass this check or not?
6. You are investing a minimum of 10% of your income consistently
This is related to the first point. But still lets give a better framework to it. Are you investing atleast 10% of your income consistently or not? Ideally it should be maximum you can afford to invest, but lets give a number which looks possible for everyone.
So if you earn Rs 50,000 per month, you should atleast be saving Rs 5,000 a month, that too consistenly.
Please dont say you started a recurring deposit of Rs 5,000 few months back, BUT later stopped it because your kids school fees had to be arranged. That does not qualify!
I think any investor has to first get learn and experience what it feels to regularly invest and next comes the conversation of mutual funds, generating high returns and all that.
Thats why, I think once you start your career, you should atleast open a recurring deposit and let it run for a year. First see how the wealth accumulation looks like, and how does it feel your wealth growing.
This will give a good base to start your wealth creation journey.
Anyways, Did you pass this check or not ?
7. You are not over-leveraged beyond the danger levels
What percentage of your income goes into paying EMI’s?
The higher it is, higher is the leverage. And beyond a level, its highly dangerous. Imagine a family whose total income is Rs 1 lac a month, but they are paying an EMI of Rs 72,000 and managing everything else in the rest amount.
Imagine what all can go wrong with this situation?
A lot of people commit themselves to too much debt which looks managable in that moment, but in long term they are a big pain.
Double Income, No kids families with too much debt
The best example I can give are double income couples, who take the loan considering that both husband and wife will keep earning and the incomes will keep rising.
However few years down the line, if wife stops working due to the new born kid (most of the cases), it becomes very tough for them to manage the EMI, and other expenses.
What is the problem here?
They planned for the “best case” and not the “worst care”. So when you plan your loans, the future looks rosy, everything looks perfect – but life is not like that. You have to consider all angles possible and in advance think about all things which can happen in general and then position yourself towards it.
As a thumb rule (which obviously does not make sense in every situation) is that one should not be paying more than 40% of their income in EMI. Keep a lot of breathing space in between. This is not applicable to you, if you are highly adventurous.
Did you pass this check or not?
8. You are earning real return in positive number
Are you earning positive real return on your investments? Which means that your post tax returns are beating inflation.
It makes no sense to earn 8% in a fixed deposit, out of which 30% will be deducted as tax (if you are in 30% tax bracket), and left with 5.5-6% return at the end of the day, whereas prices of all things are going up by 9% inflation.
So when you tell yourself – “I have invested in FD”, in reality you have only earned a positive absolute return, but a negative real return.
Its exactly like, you can buy apples for Rs 150/KG near your home, but you went to that favorite shop 5 km away here you get it cheaper at Rs 135, only to realise later, that you spend Rs 40 in petrol.
So as a good practice, keep limited amount in saving bank, fixed deposits (especially if you are in higher tax bracket) and more and more in asset classes which will give you higher return (with high volatility, not risk) like Equity mutual funds, stocks or real estate.
Did you pass this check or not?
9. You are on a high level clear what you want from your financial life
This is one parameter which I like and its not related to numbers.
So here is my question to you – “Do you have clarity on where you are headed in your financial life?”
You have been working from last many years, and you are saving money properly and everything is in place, but what is your game? Where are you headed towards?
Let me explain you with an example
When I called one of our clients from Bangalore, just few days back – he told me he is headed towardscreating his ONE crore networth in next 4-5 yrs and he is already 40% done.
I loved this, because what he has done for himself is that he is kept all the clutter out and he is highly focused on what is wants out of his money. He knows his game !
- So are you headed towards becoming “Debt free” and working towards it?
- Are you headed towards buying a house in next 5 yr?
- Are you headed towards building a regular income of Rs 40,000 per month in next few years?
- Are you headed towards spending 50% of your income each month and enjoy your life to fullest without worrying for future?
- Are you headed towards setting up a business along with your job?
So whatever it is, it has to be very clear. Dont go in silence when I ask you where are you headed? A lot of investors face this problem of not knowing what are they doing, why are they doing it, what they want to achieve ultimately, everything is vague and very unclear. Dont be like that.
Are you able to pass this check?
How much did you score?
Out of these 9 points, I would like to know how much did you score and if you are happy with it? Where can you improve and whats your plan towards it? Do you think this is a good checklist which you should look each year once and ask yourself about it.
10 types of Taxes we pay in India
We will now see various kinds of taxes we pay in India. I will explain each of them. We will first see the major taxes which impact us in a big way and which are the major taxes from which govt gets the revenue, then we will see the other taxes in brief
1. Income Tax
The tax which everybody is aware is Income tax. This is levied on the income earned in a year by an individual or a business body. The 12 month period considered for the taxation is from Apr 1st to Mar 31. The incomes is categorized under 5 heads namely
- Salaries
- House property
- Business Income
- Capital Gains
- Others
A person has to hence, find out all their income and see which heads they are falling into. For most of the people who are salaried class, it’s only one head “Salary” and a bit on the “Others” section like interest income from FD, saving bank account or dividend incomes.
The income tax for Individuals is calculated based on the different slabs, which are as follows
So if a person salary is 8 lacs per year, there will be no tax on the first 2.5 lacs, Then 10% tax will be applicable on the income from 2.5 lacs to 5 lacs, which will be 25,000 and 20% on the income from 5 lacs to 8 lacs, which is Rs 60,000 , totaling his income tax to Rs 85,000 for the year.
Below is a snapshot of income categories and number of people who fall under them along with the % share of their income tax as of 2012
Income tax is something which almost everyone is aware about because one has to deal with it directly.
2. VAT (Value Added Tax)
VAT is an indirect tax levied by a state when some good is sold within the state. So if some goods is sold within Karnataka (Bangalore -> Mysore), the Karnataka Govt will levy VAT on the goods sold.
VAT is a tax which is not very visible to a common man in their day to day life, but its present in almost every sector and goods. Each small thing which we consume today has gone through multiple stages of production and VAT is paid at each stage by the manufacturer and eventually the final consumer pays for it (Bundled within MRP)
For example, when you buy a mobile phone, you also pay the VAT, which goes to the govt, but paid by seller. The seller actually gets a lesser amount. For example in the below example, you can see the invoice of an Asus Zenfone mobile bought online by my wife. You can see that out of Rs 10790 which was paid, Rs 1325 (14%) was the VAT which went to the govt.
Note that VAT rates are subject to states, hence the rates change from one state to another. This is the reason why some goods are cheaper in one state and expensive in another.
CST (Central Sales Tax)
Note that VAT is a state level tax, however when a good is sold from one state to another, then the tax is called CST or Central Sales Tax which goes to the central govt.
So when a seller in Maharashtra sells some goods to a consumer in any other state (like Tamil Nadu), then it’s not the VAT, but CST which applies and it goes to the central govt wallet
3. Service Tax
Service tax is another very important tax which was introduced in year 1994. It’s a tax charges for providing services. Like in case of restaurants, when they serve us for food, they are providing us a service, hence we are charged service tax on a certain portion of bill amount.
In the same way, when you hire services of a consultant, they will charge you a service tax and pay it to govt. It depends if they have charged you the service tax on top of the fees or they have included the service tax in the price itself and tell you the final amount. In any case, service tax is to be paid to govt if the revenue of the service provider is more than 10 lacs in a financial year.
Increase in service tax revenue in India
Over the last decade service tax has become of the major tax collected by govt and it has been increasing year on year. It’s mainly because the number of services on which service tax is applicable has been increasing year on year in last decade and even the rate has increased. At this point of time the service tax applicable is 15% (including the swachh bharat cess of 0.5% and Krishi Kalyan cess of 0.5%). Below you can see how the service tax revenue has increased in last 20 yrs.
Negative List concept in Service tax
Few years back, there was a list of services which was issued by govt, on which service tax was applicable, and if a service is not on that list, it was not applicable. However few years back, it’s changed and now a “negative list” concept in introduced, which means that service tax is now applicable on every service which exists. Only on few services which are part of the negative list will be exempted from service tax.
Some of the services on which service tax is not applicable are
- Services by Govt
- Admission to entertainment events
- Metered cabs, radio taxis or auto rickshaws
Service tax is now part of our day to day life. We eat in restaurants, stay in hotels, and take various kinds of services every month/year and if you calculate the total amount of service tax you pay, you will be amazed to see the number.
4. Excise Duty
Few years back, when I used to see the budget speech, I eagerly waited for the income tax related announcements and wanted to know is 80C limits have been raised or if tax limits are changed. I happily ignored “excise duty” related announcements because frankly speaking, it made no sense to me.
How does it matter if to me if the excise duty on mobile handsets was increased? I never understood what all that means. However now I know how important excise duty is for the govt and what is it related to common man.
Excise duty (also called CENVAT) is the tax which is levied by govt at the time of manufacturing of the goods. It’s as simple as that. It does not matter if you hire someone to manufacture the goods or you do it yourself, but if you manufacture some goods, you will have to pay the excise duty if your turnover exceeds Rs 1.5 crore.
Now obviously, the excise duty is a cost for the manufacturer and it’s eventually passed on to the consumer. If excise duty didn’t exist, the prices of the goods would come down by that much margin. So assume you start manufacturing some goods at mass scale, and if it’s in the list of the “excisable goods”, which means goods on which excise duty applies, one has to pay the excise duty to the govt. So if we take example of cars, as it’s a big ticket items, even a slight change in excise duty means the prices go up by a big amount. See the example below
Excise Duty on Petrol & diesel
Lets understand this better with petrol & diesel prices. The raw petroleum which is bought by the oil companies is the base price. After that when they refine it and convert it to the usable petrol and diesel, VAT and Excise duty is applied which increase the final price of the petrol, add to that the dealer commissions and we get the final price which we pay. The chart below shows the breakup of the petrol prices (for the year 2014).
Source : Livemint
Excise duty is one of the biggest revenue generators for the govt, because the amount of manufacturing which takes place all over the country is huge.
5. Customs Duty
Custom duty is the tax levied on the items imported from other countries to India or exported out of India. So when you buy something from Amazon US and want it to be shipped to India, you are actually importing it, and hence a custom duty will be charged separately.
Below is an duty rate for various products categories which is taken from this website
| CATEGORY / PRODUCT TO IMPORT | TOTAL DUTY RATE |
|---|---|
| Laptops, Notebooks, Computers | 14.712% |
| Tablets, iPad | 28.852% |
| Laptop Battery | 23.852% |
| iPod, Music Players | 28.852% |
| Software CDs and DVDs | 10.300% |
| Computer Printers | 14.712% |
| Electronics | 28.852% |
| Hard Disk (internal) | 6.300% |
| Hard Disk (external) | 14.712% |
| Web Cameras | 28.852% |
| Computer Processor | 6.300% |
| Internet Modem | 14.712% |
| Other Computer Peripherals | 14.712% |
| Cables and Wires | 23.852% |
| Television Sets (TV) | 28.852% |
| Movie CDs, DVDs and Blue Ray | 28.852% |
| Video Games and Game Consoles | 28.852% |
| Mobile Phones | ~18% |
| Phone Accessories | 28.852% |
| Digital Cameras and Video Camcorder | 28.852% |
| Camera Lens (Photography) | 28.852% |
| Sports Equipment | 14.712% |
| Books (Educational) | Free (No duty) |
| Car Parts | 28.852% |
| Toys and Games | 28.852% |
| Stationery Items | 28.852% |
| Cosmetic Goods | 28.852% |
| Hand Watches (Wrist Watches) | 28.852% |
| Sun Glasses | 28.852% |
| Apparel (Clothes) | 28.852% |
| Fashion Accessories | 28.852% |
| Artificial Jewellery | 28.852% |
| Shoes (Retail Price < 1k INR) | 21.782% |
| Shoes (Retail Price > 1k INR) | 28.852% |
| Kitchen and Dining | 28.852% |
| Food Supplements, Body Building | 28.852% |
| Medicine | 28.852% |
No Custom duty upto Rs 25,000 while travelling back to India
Note that if you are coming back to India, then upto Rs 25,000 worth of goods can be brought back without any custom duty, but beyond that you will have to pay the duty. This is applicable on most of the items. You can read more about this below in an answer given by Jai Veer on Quora
We have now covered major 5 taxes which needed more detailing and explanation, now we are going to see other taxes, but we will now see them in a crisp manner and not go too much into detail
6. Professional Tax
Professional tax is levied by the state govt for all the salaried employees and some professionals like CA, Lawyers etc. If you see your salary slip, you can see the amount of professional tax deducted. Note that the tax slab depends on the state in which you are working and the amount of salary you have per month. Every state has different slab rates. Below is an example of few states.
Many states do not have professional tax, for example – Punjab, Uttar Pradesh, Rajasthan, Haryana and many more ..
7. Capital Gains tax
Capital gains tax is the tax which is levied on the gains which are arised by the sale of a capital asset like property, vehicle, jewelery, bonds, land or machinery.
This tax is not applicable each year, but only in the year when the capital asset is sold or transferred to some other party. The gains are categorized as either short term capital gains or long term capital gains depending on the duration you hold the property. Here is a very good video on this topic which explains capital gains.
The calculation for this tax is not very straightforward and involves a bit of working, hence we are not covering it here. As of now, just understand that if you purchase a property at cost C , and sell if after some years at sale price S. Then your capital gains will be calculated and you will have to pay tax on that. Cleartax has a very good tutorial on capital gain, which is worth reading if you want to learn in detail.
8. Entertainment Tax
Entertainment tax is the state level tax levied on the tickets for the cinema and other entertainment shows. It’s also levied on the stage shows, amusement parks and many sports activities. Most of us can relate the entertainment tax with the movie tickets. If you see your movie ticket closely, you will see that a good chunk of the cost goes into the entertainment tax.
Maharashtra charges one of the highest entertainment tax at 45% and I am not very happy with that because I am a movie buff . However some relief for me, because I see a lot of Marathi movies too (which are exceptionally good most of the times) and which does have entertainment tax (regional movies generally don’t have entertainment tax in the home state). Below you can see the slab rates for all the states in India for entertainment tax.
9. Stamp Duty
Stamp duty is a kind of tax which is levied when a legal document is executed. Most of us can understand it in real estate terms. So when we buy a property and we execute the agreement to sale, the stamp duty is charged as a percentage of the property value which is mentioned in the agreement or the govt ready reckoner rates whichever is higher.
Most of the times this stamp duty is in range of 4-6% depending on the state. This stamp duty is paid every time a sale is made in property, which means if the same property exchanges hands 5 times in 10 yrs period, the govt will get the stamp duty 5 times. Below is the slab rate for stamp duty in various Indian states. Note that this data is a bit old and there might be slight changes at present, so please consider the chart below only as a reference point.
Hence, this way stamp duty becomes a revenue source for the state government.
10. Property Tax
Property tax is the tax paid by property owner every year. This tax is a local municipal level tax and the rate is decided by the local municipality. The amount of tax depends on various factors like the size of property, kind of property (residential or commercial), age of the property and many more. Just for reference, in a city like Pune, I know that the property tax for a 2 BHK flat comes around Rs 8,000 to Rs 15,000 approx.
Conclusion
Apart from the taxes above, there are various other small taxes which are paid from time to time like toll tax, dividend distribution tax, securities transaction tax, luxury tax and Octrai. We have not covered them in this article, but you can read about them separately
Let us know what do you think about the tax system in India and if you feel you are over burdened with taxes?