Solving the tax muddle

Totalling up income

Your total income is the sum of all money inflows in your name. The income tax rules classify individual income under five heads:

1. Income from salary. The income you get each month for working as an employee. This includes any annuity or pension, fees, perks or profits in lieu of salary.

2.Income from house property. The rental income you get from ownership of a property is to be included in your total income.

3.Income from business or profession. Income or profits arising out of a business or income you earn as a professional, like a doctor, a lawyer or an architect.

4.Income from capital gain. Income or loss from the difference between the purchase price and the sale price of a capital asset like property or shares which will be included in your income.

5.Income from other sources. Like from a windfall such as a lottery.

Reduce exempt income

There are some incomes that are exempt from tax, like agriculture income, capital receipts, that is, one time payments like life insurance or gratuity up to a certain limit, interest on provident fund and public provident fund, interest on tax free GoI Savings bonds now discontinued, dividend on equity mutual funds and commuted pension. There are others that need to be deducted from each of the five categories above. Under each of the above heads there are income streams that are exempt from tax or will get included in taxable income in a reduced way.

1.Salary income. Some exemptions are:

Standard deduction. For income less than Rs 5 lakh, Rs 30,000 is knocked out of total income. For incomes over Rs 5 lakh, Rs 20,000 is reduced.

House rent allowance. According to a formula the minimum of the following: actual allowance, 50 per cent of salary or the rent paid that exceeds 10 per cent of salary you can knock a part of your house rent allowance from your total income.

2.Income from house property. Some exemptions are:

Standard Deduction. 30 per cent of the net annual value of the house property annual rent 8211; municipal taxes paid in the previous year.

Interest on borrowed capital. Up to Rs 1.5 lakh interest on money borrowed to buy a house is allowed as a deduction if you live in the house you buy. If let out, then the entire interest is allowed as a deduction.

3.Income from business or profession. Some exemptions are:

Business-related expenses. Like rent, travel, repairs and so on.

Depreciation. Rules for what can be included at what rate run into pages.

4.Income from capital gain.

Long-term capital gain from house property is exempt from capital gains tax, if invested into another property within a year.

Long-term capital gain from house property is exempt from capital gains tax if invested in special bonds floated for this purpose these have a lock in period.

Long-term capital gain from listed securities where securities transaction tax has been paid are exempt from tax.

5.Income from other sources. Each head under this income source has its own list of exemptions, for example, dividend income is exempt to the extent of collection charges and interest on loan taken for purchasing the shares.

Post exemptions, the residue left is called gross income. We now take out the deductions from gross income to reach taxable income, or the income on which tax will be levied.

Deductions allowed from gross income

A deduction is a reduction from gross income or assessable income. Before computing the tax, you are allowed to reduce the amount of assessable income under certain conditions listed under Section 80 of the Income Tax Act. Some of these totalling 36, with sub categories and sub-parts are:

1.Under Section 80 L. A maximum deduction of Rs 15,000 on interest income. Of this, Rs 12,000 income from post office deposits, the National Saving Certificates, bonds of financial institutions and bank deposits. Another Rs 3,000 interest on Central or State Government securities can be deducted.

2. Under Section 80 CCC 1. A maximum premium of Rs 10,000 a year can be deducted from assessable income if the policy is a notified pension product. These include Jeevan Suraksha from the Life Insurance Corporation, Forever Life of ICICI Prudential Life and HDFC8217;s Personal Pension Plan amongst others.

3.Under Section 80 D. Deduction of Rs 10,000 Rs 15,000 for senior citizens can be deducted if paid as premium in a medical or health insurance policy.

4.Medical reimbursements up to Rs 15,000 per year can also be claimed back from the employer and are not part of the taxable income.

5.Conveyance allowance of Rs 800 per month if given by the employer can be deducted.

Rebates on tax liability

The income left after these deductions is the taxable income on which tax will be levied according to the formula that is operative for each financial year. Once the tax liability is worked out, another concession allowed is called a rebate. A rebate, then, is a reduction from the tax liability. On investing a maximum of Rs 1 lakh, an individual can get a part of his tax liability reduced. Those earning up to Rs 1.5 lakh get a rebate of 20 per cent, those with incomes between Rs 1.5 lakh and 5 lakh get a 15 per cent rebate and for those earning above Rs 5 lakh per annum income there is no rebate.

You can choose from amongst the following options to get the rebates under Section 88. All those using insurance as a vehicle to cut taxes can see other instruments that work just as well:

Life insurance premium

Deposits in the NSC

Contributions made to PPF, GPF, EPF

Investments in special vehicles called the Equity-Linked Savings Schemes ELSS. You can get a tax rebate as well as market-linked returns from investing in this. Most mutual fund houses offer this kind of a scheme

From last year, children8217;s fees have come under Section 88 as well

In addition to Rs 70,000 in the above instruments, you can put Rs 30,00 in infrastructure bonds, like those offered by the Rural Electrification Corporation and ICICI Bank.

If all this has left you confused, remember that this is maybe 1 per cent of all the exemptions, deductions and rebates allowed in the Indian tax laws. The maze of taxes and then ways to reduce and escape them profits only the finance professional who decode the fat law books. So if, in this Budget, the government takes a bold step to sweep away this chaos of exemptions, rebates and deductions, take it as a step forward. It will just make life easier to have ONE tax rate according to the income slab we belong to that has to be paid see chart. And the annual tax panic will be history.