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How you can calculate your tax, plan investments

Last updated on: January 5, 2011 08:23 IST

How you can calculate your tax, plan investments

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Sunil Dhawan

Here's a ready reckoner on how to calculate your tax dues so that you can plan your investments accordingly.

Cracking the code

A: The first step would be to get a fix on all sources of your income amounting to gross total income (GTI). Your GTI could come under any one or more of the five heads -- salary income, business income, capital gains, house property or other sources.

B: Certain expenses and payments reduce your GTI and thereby, reduce tax liability. These are not necessarily investments as such, but fall under non-80C commitments, such as medical insurance premium under Section 80D, or interest paid on a home loan.

C: Get a fix on your existing commitments towards the Section 80C instruments. The upper limit for deductions is Rs 1 lakh (Rs 100,000).

D: Figure out how much more you need to invest to reduce your taxable liability (Rs 1 lakh minus C). Link new investments to your long-term goals as most tax-savers have long tenures.

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How you can calculate your tax, plan investments

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A . Gross Total Income

Salary income: Salary includes basic pay, HRA, annuity, pension, bonus or commission, and so on, received from the employer during the year.

Tip: Restructure salary components to ensure that reimbursements are not received as allowances.

House property: Tax is on the annual value of the house property after allowing certain deductions. Deduction of interest up to Rs 1.5 lakh (Rs 150,000) allowed on home loan for self-occupied property. On second property, if it is rented out, entire interest paid on loan is deductible from income.

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How you can calculate your tax, plan investments

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Capital gains: Profits from sale of any capital asset generate short-term or long-term capital gains, depending on duration of holding.

Tip: Sell short-term loss-making holdings to set off against short-term capital gains made.

Business income: The profits and gains of any business or profession, such as that of doctor or chartered accountant, which was earned during the year.

Tip: Claim all expenses relating to business or profession.

Other sources: Any income that is outside the other four heads, such as interest from taxable investments like NSC or bank fixed deposits, comes in here.

Tip: Include income from all such sources in your I-T return.

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How you can calculate your tax, plan investments

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B. Calculate Non Sec. 80 C Deductions

Medical insurance (Sec 80D): Premiums paid for self, spouse, kids and parents qualify for deduction up to Rs 40,000.

Tip: Consider a family floater plan.

Interest on home loan (Sec 24): Maximum deduction of Rs 1.5 lakh (Rs 150,000) as interest payment on home loan for self-occupied property, unlimited for let-out property.

Tip: Rent out second property, even if not for full year.

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How you can calculate your tax, plan investments

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Interest on educational loan (Sec 80E): Entire interest paid on education loan for full-time studies for any graduate or PG course. No benefit on principal repayments. Deduction available in the year when repayment starts and only for eight succeeding assessment years.

Tip: You may take loan even for spouse.

Donations (Sec 80G): For donations to funds and charities, 50 or 100 per cent of the donated amount, depending on the charity, is deductible from income. But this shouldn't exceed 10 per cent of the gross total income.

Tip: Collect all receipts and certificates for donations and the donee.

Other non-80C 80DD: Expenses on the medical treatment of a dependent with a disability. Certification by a medical authority is a must. Up to Rs 50,000, or up to Rs 75,000 if the dependant is a person with severe disability.

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How you can calculate your tax, plan investments

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C. Existing Sec. 80C commitments

Renewal premiums: Renewal premiums towards life insurance policies -- be it term insurance plans, endowments, Ulip plans -- also qualify for tax benefit.

Home loan principal: Principal portion of the home loan EMI qualifies for deduction under Section 80C.

Tip: Keep repaying principal in your loan on a regular basis without increasing the EMI. It reduces interest burden and tenure.

Employees' Provident Fund: 12 per cent of your salary is deducted every month and an equal amount is contributed by your employer and put into a fund maintained by the government or your company's trust. The contribution currently earns a tax-free return of 8.5 per cent. Only your contribution towards the fund is eligible for deduction from taxable income of the basic salary towards EPF.

Tip: You may increase contribution up to 100 per cent.

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Tuition fees: Parents can also claim a deduction for tuition fees for a maximum of two children. The maximum limit allowed for exemption is Rs 1 lakh under Section 80C. However, any payment towards any development fees or donation to institutions is excluded.

Public Provident Fund: Anyone can open an PPF account in a bank or post office. Fifteen-year investment with a tax-free interest rate that is currently 8 per cent per annum. Can be extended in blocks of  five years. Rate of interest subject to change every April. Need to pay any amount between Rs 500 and Rs 70,000 to keep account active.

Tip: Better to invest Rs 70,000 each year even if tax break is not available on full amount.

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D. Available Window For Sec. 80C

Existing or new? The maximum deduction you can claim under Sec 80C is Rs 1 lakh. You can either increase your existing 80C commitments (C) or choose any or a combination of tax-savers listed in (D), along with new insurance plans.

Senior Citizens Savings Scheme: Notified term deposits in scheduled banks with a minimum period of five years under the Bank Term Deposit Scheme, 2006, in addition to giving a fixed and assured return (around 8 per cent) come with a tax advantage.

Post Office Time deposits: Current interest of 7.5 per cent p.a. on 5-year post office time deposit is fully taxable. Investment is deductible from income.

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National Savings Certificate: Six-year government-backed security available at post offices. Interest rate currently 8 per cent compounded half-yearly; fully taxable. Amount  invested is tax deductible.

Bank fixed deposits: Notified term deposits in a scheduled bank with a minimum period of five years under the Bank Term Deposit Scheme, 2006, in addition to giving a fixed and assured return (around 8 per cent), come with a tax advantage.  However, the interest income is fully taxable.

Equity-Linked Savings Scheme (ELSS): An equity-linked savings scheme is a type of mutual fund, which, like any diversified equity mutual fund, routes investments into the equity market. It stands apart from other mutual funds as it carries a tax benefit and has a three-year lock-in period.

Tip: Choose among Outlook Money 50 schemes, but don't go for more than 2-4 plans. Run longer if going is good.


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