Income Tax Calculations - A General Understanding

IndianMoney.com Research Team | Posted On Tuesday, April 16,2013, 05:01 PM

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We all know that without taxation a nation cannot survive. Taxes are the price we pay for a civilized society. In India just like in any other nation the main priority of most of its citizens is to save on Taxes. You must have heard the saying 'For Every Benefit You Receive Tax Is Levied'. Hardly I receive anything and the taxman is waiting at my doorstep. In order to learn more on Taxation please look up the website IndianMoney.com.

Most of us must be feeling very hot this season but not because of the heat alone. Now is that time in which the salaried employees must submit their tax related proofs in order to avail income tax deductions. But what are these tax deductions and how do they work ? Why are they so important to us? How can we use these Tax benefits in our day to day life? All these questions must be running through our minds. I would like to remind all of you that the team of Financial Planners at IndianMoney.com are always there for you to plan your Income Tax needs in a most efficient manner and are always willing to lend you a helping hand. You can explore this unique Free Advisory Service just by giving a missed call on 02261816111.

In order to understand Income tax deductions let us consider the following cases. Mr Suresh is 35 years old and works as an Operations manager in an IT Firm. His salary is INR 11 Lakhs per annum. Mr Suresh did not care to study about income tax deductions as he believed this was not his" cup of tea".

To calculate tax use our income tax calculator tool

Income Tax slab rates for Individuals Less Than 60 Years: FY-2012-2013

Annual Income	Tax Rate
Up To INR 2 Lakhs	NIL
INR 2 Lakhs-INR 5 Lakhs	10%
INR 5 Lakhs - INR 10 Lakhs	20%
INR 10 Lakhs and above	30%

Here Mr Suresh was paying his Income taxes as per the slabs shown below : Table - 1

Heads	% of Income Tax	Income Tax
Up To INR 2 Lakhs	NIL	NIL
INR 2 Lakhs -INR 5 Lakhs	10%	INR 30000
INR 5 Lakhs - INR 10 Lakhs	20%	INR 100000
INR 10 Lakhs and above	30%	INR 30000
Total		INR 160000
Educational Cess	3% of total tax	INR 4800
Net Tax Payable		INR 164800

Now let us consider what Mr Suresh should have done in order to save taxes as per the Income Tax Deductions available to him. Mr Suresh could have invested a sum of INR 1 Lakh in Public Provident fund and claimed income tax benefits under section 80C.

Invest in Public Provident Fund

This is popularly called PPF and is the most attractive tax saving fixed income option giving a tax free return of approximately 8.7% compounded annually.
The maximum amount one can invest in PPF is 1 Lakh per financial year
A PPF Account can be opened at post offices, Branches of SBI and its associate banks, and certain Private Sector Banks.
PPF carries a term of 15 years and it can be extended in blocks of 5 years each for any number of blocks.
A Loan facility up to 25% can be availed from 3rd financial year till the 5th financial year while a withdrawal of up to 50% is allowed from 6th financial year onwards.

Medical claim Benefits

Here Mr Suresh Father is 67 years old and mother is 65 years old. He has a Spouse and a child .Here he can avail a medical benefit for his parents ,spouse and his child as per the Section 80D.

Tax Deductions Under Section 80D

Here the maximum amounts available for self, spouse and dependents for mediclaim policies is INR 15000.In case of a senior citizen it is INR 20000.In case the parents of the taxpayer are senior citizens the deductions towards their medical policies is INR 20000.Mr Suresh happened to be in a charitable mood and donated INR 50000 towards Prime Ministers National Relief Fund .This is tax deductible as per Section 80G.

Table - 2

Heads	Amounts
Gross Taxable Income	INR 11,00,000
Less PPF Under 80C	INR 1,00,000
Less Tax Deductions under Section 80G	INR 50,000
Less Tax Deductions Under Section 80D	INR 35,000
Total Taxable Income	INR 9,15,000

Table - 3

Heads	% of Income Tax	Income Tax
Up To INR 2 Lakhs	NIL	NIL
INR 2 Lakhs- INR 5 Lakhs	10%	INR 30000
INR 5 Lakhs - INR 9,15,000	20%	INR 83000
Total Tax		INR 113000
Education Cess	3% on Total Tax	INR 3390
Net Tax Payable		INR 116390

Here we have Net Tax Payable INR 164800 (TABLE -1) where Mr Suresh has not done any tax deductions as per the various sections available to him.
Here we have Net Tax Payable INR 116390 (TABLE - 3) where we calculate the amount Mr Suresh could have saved had he made use of the tax saving instruments available to him
Here the difference between TABLE 3 and TABLE 1 is the yearly amount Mr Suresh could have saved on tax .This translates to a sum of INR 48,410.

I would like to end this article hoping that it has proved to be very informative showing the Income Tax Calculations. On a Lighter Note "When There Is A Single Thief Its Robbery. When There Are Thousand Thief’s Its Taxation".

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Income Tax Calculations - A General Understanding

IndianMoney.com Research Team | Posted On Tuesday, April 16,2013, 05:01 PM