3.2. Taxation and Government Benefits

Transcription

1 Personal Finance and Money Management (Basics of Savings, Loans, Insurance and Investments) Module 3 Topic Taxation and Government Benefits MODULE 3 - Employment, NISM 1

2 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. MODULE 3 - Employment, NISM 2

3 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.2,00,000 per annum, he does not have to pay tax. If his income is between Rs.2,00,000 and Rs.5 lakh, he has to pay a 10% tax on any income that he earns above Rs.2,00,000. 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 for General tax payers Income tax slab (in Rs.) Tax 0 to 2,00,000 No tax 2,00,001 to 5,00,000 10% 5,00,001 to 10,00,000 20% Above 10,00,000 30% MODULE 3 - Employment, NISM 3

4 Now what this means, he said is that if our friend Ravi here earns Rs.3,00,000 per year, Rs. 2,00,000 will immediately be tax free. How much remains? Rs. 1 lakh, replied Ganesh promptly. Ok. Since Ravi s income is between Rs 2,00,000 and Rs. 5 lakh, he will have to pay a tax of 10% on whatever is taxable. So, he will have to pay 10% per one 1 lakh as tax! calculated Ganesh. That s right. He has to pay Rs. 10,000as tax in the year Now, just to make things a little more complicated: Suppose we consider a man with a higher income say Mr. Shinde. Let us assume that his income is Rs. 12 lakh. Can you tell me how he will calculate how much income tax he has to pay? I ll try, replied Ganesh nervously, approaching the whiteboard. First let me break his salary up as per the slabs. Then he took the marker from Mr. Chhabria and began to draw a neat table on the whiteboard, titled Mr. Shinde s income Mr Shinde s income Rate of tax Tax he has to pay 2,00,000 No tax Rs. 0 3,00,000 (i.e. the amount between 2,00,001 to 5,00,000) 10% Rs. 30,000 5,00,000 (i.e. the amount between 5,00,001 to 10,00,000) 20% Rs. 1,00,000 2,00,000 ( i.e. the amount above 10,00,001) 30% Rs. 60,000 TOTAL Rs. 1,90,000 Sir, he will have to pay Rs. 1,90,000 in tax. Right? That s correct. You have a very organised mind, my boy. I like the way you drew the table to make your calculations clear! Ganesh was smiling and so was Ravi. Now Ganesh, coming back to the whole reason you came to meet me...did you want to know how much tax you had to pay? Yes, sir. That is why I came to you. But I already have my answer. I do not have to pay any tax this year. But I hope sometime in the future, I will have to. It will make me feel proud to contribute to all the good things that our Government is doing. MODULE 3 - Employment, NISM 4

5 That s a very good wish, my boy, said Mr. Chhabria. Do you like the idea of paying taxes too, Ravi? Not really, sir said Ravi, a little embarrassed. I do pay my taxes if I have to. But if I can legally reduce my taxable income, I would be happy to. Of course. I will tell you about all the main concessions that the Government has made 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. The exemption (reduction from taxable income) is available to individuals from all tax slabs. So, let s suppose you earn Rs. 5 lakh per annum. You will have to pay tax on Rs. 5 lakh less Rs. 2,00,000 i.e. Rs. 3,00,000. As you fall in the 10% tax slab, you will have to pay tax of Rs. 30,000. Now, suppose you make investments of Rs. 1 lakh in 80C instruments. Your taxable income will be Rs. 5 lakh less Rs. 2,00,000 (if you are a man) less Rs. 1,00,000. This amounts to Rs. 2,00,000. As per your income tax slab, you will be required to pay tax at the rate of 10%... so your tax amount comes to Rs. 20,000. By investing in 80C or tax saving instruments, you paid Rs. 10,000 less in tax. List of qualifying investments under Section 80C Tax Savings* (*Source: 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. MODULE 3 - Employment, NISM 5

6 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. MODULE 3 - Employment, NISM 6

7 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 Summary The government collects tax from individuals and companies to carry out its duties. If we have an income that exceeds a certain amount (called the minimum exempt amount), we are required to pay tax on the amount above the minimum exempted amount. The tax that we are required to pay is progressive. This means that as our income increases, the rate of tax that we have to pay keeps increasing too. The government has listed out a number of investment products and some expenses which, if we invest in/spend on, we will be required to pay less taxes. However, at present the total benefit that we get is an exemption of Rs.1 lakh for investing /spending in these listed avenues. MODULE 3 - Employment, NISM 7