As per income tax laws, there are certain types of income, on which you do not have to pay taxes. This is called exempt income. But, must you report this income? It’s always a good idea to declare all your income, irrespective of whether its tax exempt or not. Why take chances?
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As per income tax laws, some income is exempt from income tax. This income is called exempt income. The interest income earned from NRE deposits are not taxed. This is tax exempt income. You earn income in a particular Financial Year. You can avail tax deductions under various Income Tax Sections like Chapter V1A, and so on.
You can save on taxes, if you invest in certain tax saving instruments like PPF, ELSS, SCSS, NSC and so on and enjoy Section 80C deductions, up to Rs 1.5 Lakhs a year. You can avail home loans and avail tax deductions under Section 80C on Home Loan Principal EMIs up to Rs 1.5 Lakhs a year and Home Loan Interest EMIs up to Rs 2 Lakhs a year under Section 24.
Find this difficult to understand? Let’s say you invest Rs 1.5 Lakhs in PPF. You are allowed to deduct this amount (Rs 1.5 Lakhs), for the Financial Year, before your taxable income is calculated. This helps lower the taxes you pay.
Let’s say you invest in equity mutual funds or shares. You stay invested in these equity mutual funds or shares for a year or more and then sell. The profits you get are called capital gains and as you have stayed invested for a year or more, gains are called long term capital gains (LTCG). These are tax exempt up to a Lakh a year.
Let’s say you buy a luxury car with the profits. The income tax department will want to know where the money has come from. This is why you will need to declare tax exempt income.
See Also: How LTCG Is Calculated On Equities?
Dividends received from a Company are not taxed in the hands of the shareholder. They are exempt from taxes. But, if you earn dividends in excess of Rs 10 Lakhs a year, then that amount which exceeds Rs 10 Lakhs is taxed. The dividend amounts less that Rs 10 Lakhs a year are tax exempt.
PPF enjoys the EEE benefit. The amount you withdraw after the lock-in of 15 years is tax-exempt. (The amount withdrawn at maturity is tax exempt). The amount withdrawn from EPF is tax-exempt, if you have completed 5 years of continuous service with your employer.
You earn interest on SB Accounts and this interest income is tax exempt under Section 80 TTA, up to Rs 10,000 a year. This deduction is available to individuals/HUF.
The interest income you (NRI) earn on the NRE Account, is tax free in India. Reporting this income is a good idea as it helps build your financial record, vis-à-vis the Income Tax Department. This comes in handy when the IT Department is tracking high value transactions.
The gifts you receive on the occasion of marriage and inheritance are tax free.
Certain income doesn’t attract taxes and are called tax exempt income. You are not bound to declare exempt income when filing ITR. But, not doing so can bring you under the scrutiny of the Income Tax Department. The onus is on you to explain sources of income and if you are found to be in the wrong, you can be penalized.
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