Personal Income Tax:
Personal income tax regulations in India may seem like a maze to many taxpayers thanks to various common misconceptions and popular myths surrounding it. However, as a taxpayer, you should ensure that you have a clear picture about all pertinent aspects of personal income tax such as deductions available under various sections, exemptions and common mistakes to avoid while filing returns.
Income Tax: is levied by the government on your earnings. It, therefore, follows that higher earnings will result in higher taxes.When computing your income, you should include your income under several categories. As per current tax regulations in the country, your income should be categorised under the following heads:
- Property/House (rental income from any immovable property)
- Capital Gains (investment in gold, shares)
- Other Sources (e.g, gifts from non-relatives, dividends, lotteries)
Your income tax is calculated based on the tax slabs announced in the annual budget by the finance minister every year. You should, therefore, be aware of taxation slabs in order to categorise your income for filing your tax returns. If your income can be put under more than one category mentioned above, you should calculate applicable tax under each slab according to the prevailing tax rate of a financial year for computing the total income tax.
Myths about Income Tax:
There are several myths surrounding personal income tax, some of which are listed below:
- Deductions under section 80C
- Deductions under section 80GG
- Deductions under 80G
- Deduction related to interest on housing loan
- Different tax slabs for NRIs
- Tax on interest income
- Deductions under section 80C
Section 80C is commonly associated with exemptions (up to Rs.1.5 lakh) on contributions to many popular investments as listed below:
- Public Provident Fund (PPF)
- Employee Provident Fund (EPF)
- Life insurance policies
- Unit linked insurance plans (Ulips)
- Fixed deposits (5-year)
- Equity-linked savings schemes (ELSS)
- National Savings Certificate (NSC)
However, you can avail of several exemptions under Section 80C in addition to the aforementioned investments - and not necessarily on any specific investments or savings. For instance, you can avail of deduction on the principal repayment of your home loan, tuition fees (full-time student at any Indian university) of your children, stamp duty and even registration fees at the time of purchase of a house.
- Deductions under section 80GG:
Not many are aware of the fact that you can claim deductions on your house rent even if you don’t receive your House Rent Allowance (HRA) under Section 80GG. You can claim deduction under the following conditions:
- The declaration is filed in form no. 10BA
- Your employer has not provided you with House Rent Allowance (HRA) for which you may claim exemption as per section 10(13A)
- You are not the owner of any residential accommodation where you are a member of HUF or Hindu Undivided Family, perform office duties or business activities
- You should not own any residential accommodation, the value of which, has to be ascertained as per Section 23(4)(a) or Section 23(2)(a)
You can, therefore, claim deduction on the house rent minus 10% adjusted income, 25% of total (adjusted) income and Rs.2,000 per month, whichever is less.
- Deductions under 80G:
There is a misconception that all kinds of donations are exempt from tax, which is not true. You cannot claim deductions for donations to foreign trusts and political parties. You can, therefore, claim deduction on donations to specific funds and registered charitable institutions only. It is important to note that the deduction rate (50 to 100%) may vary depending on the type of trust you donate to.
- Deductions - Housing Loan Repayment:
You can claim deduction for repayment of your principal amount up to Rs.1.5 lakh under Section 80C. In case of any property which is self-occupied, the interest on your housing loan is also eligible for deduction up to Rs.2 lakh. If your property is on lease, the interest on your housing loan can be claimed as deduction.
- Deductions - Gifts:
While it is widely known that any gifts that you receive from your relatives and during your wedding is exempt from tax, gifts received from any educational and charitable organisation, local authority or anything in terms of an inheritance are also tax-free. However, cash gifts received from non-relatives above Rs.50,000 are taxable (excess amount). Gifts include immovable property (land, building), jewellery, shares, securities, archeological artefacts and sculptures among others.
- Different Tax Slabs for NRIs:
There is misconception surrounding tax slabs for NRIs in that many believe the latter have different slabs based on gender and age, which is not true. Only resident Indians have different slabs for gender or age while NRIs have only one tax slab applicable to them.
- Tax on Interest Income:
One of the common myths surrounding personal income tax is that interest income from post office savings account, savings bank account, recurring deposits and fixed deposits is not taxable. It is important to note that all interest income should be reported (income tax returns). The interest income should be categorised under ‘Income from Other Sources’.
Many believe that e-filing is not mandatory in India. However, all taxpayers earning above Rs.5 lakh have to mandatorily file returns. Also, the process of e-filing will not be deemed completed unless a copy of ITR-V acknowledgement is sent - within 120 days of filing tax returns - to CPC in Bangalore. If you wish to e-verify income tax returns, you will need your Aadhar card.