A government levy or tax imposed on individual or an entity depending on their respective income or profit is known as an income tax. In India, income tax is calculated on income from salary, business & profession, house property, capital gains and other sources.As per latest TAX Slabs:
- Income level : 0 to 250,000 No TAX
- Income level : 250,000 to 500,000 10% TAX
- Income level : 500,000 to 1000,000 20% TAX
- Income level : Above 1000,000 – 30% TAX
A taxpayer can bring down their tax liability to a certain limit by taking full advantage of deduction and exemptions available under the
1961 income tax act. These include:
- House rent allowance: As per the section 10 (13A), the least of House rent allowance received, 50% or 40% of the salary and rend paid in excess of 10% of salary is exempted. Salary, here, implies the basic salary of the taxpayer plus the Dearness allowance and commission.
- Transport allowance of INR 800 per month to maximum INR 9,600 per annum is exempted.Though the Leave Travel concession is fully taxable, but the year in which it is being availed by the employee, it can be exempted for travel in any part of the country for fair of the shortest route only.
- Under section 80C, 80CCC and 80 CCD, individuals and HUF can be exempted tax on up to INR 1,50,000 for investment claims, such as Fixed deposit with nationalized bank for a term of 5 years, PPF, PF, ULIP, LIC and tuition fee of up to two children.
- Medical reimbursement of up to INR 15,000 is exempted unless the employee is availing medical allowance from the employer.
- Mediclaim of up to INR 15,00 for self, spouse and children and up to INR 15,000 for parents (INR 20,000 in case parents are senior citizens) can be availed.
- Another deduction that can be made is of education loan for higher education under section 80E. However, it can be made on interest payment alone. It can be claimed by the parent or guardian of the child also.
Next, let us understand what Provident Fund is. It is basically a fund that has been constitutes of the contributions made an employee throughout the time he or she was working along with an equal contribution made by the employer. Only employees with a basic salary of up to INR 6,500 have to make the contribution while the employers with basic salary above this amount are presented with the option of becoming the member of PF.
The PF is calculated at 12% of the basic salary of the employee. Though the employer with make this steady contribution, the employee has the option to make a bigger contribution. The 12% contribution by the employer is deposited in the PF account directly. But from the 12% contribution of the employee, 3.67% is deposited in PF account and the remaining 8.33% is deposited in the Pension plan. There are certain advantages of having PF which includes tax benefit u/s 80c, retirement benefit and withdrawal benefit.
If you withdraw your PF before the term of 5 years, the benefits the employee has gained u/s 80C against his PF account will then be reversed and will be added, fully taxable, to the income in which the withdrawal has been made. Also, the benefits provided under PF are only available after a continuous service of ten years (the company may not be the same, but the account should be the same) and once the employee has reached the age of 58 years.
Now, let us understand what Gratuity is. It is basically a part of the employee’s salary that is received by them from their employer in gratitude for the services they have been offering to the company. According to the Income Tax Act’s Section 10 (10), an employee becomes eligible for gratuity when he or she has completed a full time service term of 5 years or more with the employer working for a minimum of 240 days every year.
The Gratuity received by an employee is non taxable upto the limit of 10lakhs . The gratuity of government employees is fully exempted. For the non-government employees covered under the 1972 Payment of Gratuity Act, the maximum exemption they can avail from tax is either the actual gratuity/ INR 10, 00,000 / salary of 15 days for each completed year of service.