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Income from Salary

The first step in understanding taxes should start with knowing what goes into your payslip. Your monthly payslip will show you what’s been paid to you and what deductions have been made.

1. Basic Salary

This is a fixed component in your paycheck and forms the basis of other portions of your salary, hence the name. It is usually a large portion of your total salary. HRA is also defined as a percentage of this basic salary. Your PF is deducted at 12% of your basic salary.

2. House Rent Allowance

Salaried individuals who live in a rented house/apartment can claim house rent allowance or HRA to lower tax outgo. This can be partially or completely exempt from taxes. The allowance is for expenses related to rented accommodation.If you receive HRA and don’t live on rent your HRA shall be fully taxable.

3. Medical Reimbursement

If your company provides you with medical reimbursement of Rs 15,000 towards medical expenses, you must submit bills to your employer to claim this. These expenses could be incurred towards consultation with a doctor, medicines, medical tests, etc. Deductions can also be claimed against medical expenses of your dependents. Please check about this with your company. Make sure to keep all the bills safely and submit them to your employer for reimbursement on time. The Rs 15,000 you can claim is for each tax year, starting on April 1st and ending on March 31 next year.

My company provides me with ‘medical reimbursement’ of Rs 15,000 as part of my salary. I have only claimed medical expenses worth Rs 6,000 during the year. How much tax will be deducted if I don’t submit medical proofs for the remainder of the Rs.15,000?

The IT Department allows medical reimbursement of up to Rs 15,000. You must, however, furnish the necessary bills to your employer to claim this. The remaining unclaimed amount of the Rs 15,000 is added to your taxable salary. Your taxable salary is taxed at the slab rate you belong to. The bills must be between April last year to March this year.

4. Conveyance Allowance

Conveyance allowance is given to the employees to meet travel expenses from residence to work. The conveyance allowance for up to Rs 9,600 per annum is exempt from tax. Starting FY 2015-16, this limit has been increased to Rs 19,200 per annum.

5. Leave Travel Allowance (LTA)

Salaried employees can avail exemption for a trip within India under LTA. The exemption is only for the shortest distance on a trip. This allowance can only be claimed for a trip taken with your spouse, children, and parents, but not with other relatives. This particular exemption is up to the actual expenses, therefore unless you actually take the trip and incur these expenses, you cannot claim it. Submit the bills to your employer to claim this exemption.

6. Special Allowance

Any number in your salary by the name of ‘special allowance’ is fully taxable. This is usually the leftover component of your salary, after allocating to basic, HRA, LTA, and transport allowance.

7. Bonus

Bonus the bonus usually paid once or twice a year. Bonus, performance incentive, whatever may be its name is 100% taxable. Performance bonus is usually linked to your appraisal ratings or your performance during a period and is based on the company policy.

8. Employee Contribution to PF

Both employer and employee contribute a 12% equivalent of the employee’s basic salary every month toward employee’s pension and provident fund. An interest of about 8.5% gets accrued on it. This is a retirement benefit that companies with over 20 employees must provide.

9. Professional Tax

Professional tax or tax on employment is a tax levied by a state, just like income tax which is levied by the central government. The maximum amount of professional tax that can be levied by a state is Rs 2,500. It is usually deducted by the employer and deposited with the state government. In your income tax return, professional tax is allowed as a deduction from your salary income.

How is Take Home Different from CTC?

Your job may entitle you to some benefits in the form of food coupons or a cab service apart from your salary. The total cost to the company is the sum of all the benefits offered plus your salary.

Income from house property

If you want to learn how to save tax on home loan interest, this guide is for you. It also talks about how to report home ownership in your income tax return. The guide has examples that explain all about income taxes on house property.

Major Change in-house Property Applicable for FY 2017-18 as per Budget 2017

Reduction in Tax Benefit on Rented House Property

Till FY 2016-17, loss under the head house property could be set off against other heads of income without any limit. However, form FY 2017-18, such set off of losses has been restricted to Rs 2 lakhs. This amendment would not really affect taxpayers having a self-occupied house property. This move will have an impact on taxpayers who have let-out/ rented their properties. Though there is no bar on the amount of home loan interest that can be claimed as a deduction under Section 24 for a rented house property, the losses which could arise on account of such interest repayment can be set off only to the extent of Rs 2 lakhs.

Income from Capital gains

What is a Capital Gain?

Any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. This gain or profit is charged to tax in the year in which the transfer of the capital asset takes place. Capital gains are not applicable when an asset is inherited because there is no sale, only a transfer. However, if this asset is sold by the person who inherits it, capital gains tax will be applicable. The Income Tax Act has specifically exempted assets received as gifts by way of an inheritance or will.

What is a Capital Asset?

Here are some examples of capital assets: land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery. This includes having rights in or in relation to an Indian company. It also includes rights of management or control or any other legal right.

Income from Other sources

Heads of income

The Income Tax Department breaks down income into five heads of income for the purpose of income tax reporting:

  • Income from Salary.
  • Income from House Property.
  • Income from Capital Gains/Loss.
  • Income from Business and Profession.
  • Income from Other Sources.

Income from Other Sources covers income that’s not covered in any of the heads of income.

Interest income – be it from a savings bank account or a fixed deposit or from a post office savings account – are all shown under this head. Interest from both fixed deposit and recurring deposits is taxable while interest from savings bank account and post office deposits are tax-deductible to a certain extent. But they are shown under income from other sources.

Exempt income, those that are exempt from tax, is also included under this head.

Income from business / professions

Should you incorporate a company?

One of the first questions you encounter when you begin your business is whether you should form a company. As such there is no legal rule that a ‘company’ must be formed to start a business. Incorporating a company has its own pros and cons. But so long as you are solo and your work is well managed, i.e. you act as a sole proprietor to your business, there is no mandate to form a company. By forming a company, your compliance work will increase. If your business is growing large and unmanageable, it helps to separate it into a separate legal entity which will have its own PAN and will file a separate tax return.

In case you choose to continue business as a freelancer, this does not require any formalities. You can continue to receive money to your existing savings bank account. And your income tax return will include income from your business or profession and you won’t need to file a separate income tax return.

Domestic clients

Clients based in India are bound by local laws to deduct TDS from the payments they make to you. You can take credit of this TDS against your total tax liability. If excess TDS has been deducted you can claim a tax refund or pay if there are any additional dues. TDS deductions are linked to your PAN. Remember to provide PAN to all your clients. This is important since the tax department allows TDS credit which appears in your Form 26AS. Usually TDS for freelancers is deducted @10%. The deductor also provides you a Form 16A, which is basically a proof that TDS has been deducted from your income and deposited by him to the government.

Foreign clients

If you work for clients out of India, payments may be received by you via paypal or as a direct credit to your bank account. Usually these payments are without TDS. In some countries, TDS may be deducted as per local laws. Don’t worry, you can still take credit of this paymentwith the help of the DTAAs (Double Tax Avoidance Agreements) which India has entered into with several countries With the DTAAs, your income is not doubly taxed. If no TDS has been deducted, there is nothing to worry. You need to include these receipts in your total income while making income calculations and pay applicable tax on them since you will be a tax resident of India. To meet advance tax requirements you may have to estimate your annual income from all sources.

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