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What is TDS? Why is TDS Deducted and How to Claim a Refund?

We all have heard about TDS and might have also seen it get deducted from our salary, but do you understand what it is and why is it deducted? Is it only deducted from our salary or do we pay TDS on something else too?

In this article, we shall help you to understand this concept in a better way.

 

What is TDS? 

TDS stands for tax deducted at source, it was introduced by the Income Tax Department to collect tax from the very source of income instead of depending on the person earning to pay taxes.

TDS is generally lower than the actual income tax rate one pays. And it forces the recipient (of income) to declare their income as the government already has the information. Also, in case the TDS collected is more than what you owe the government, you can always claim a TDS refund.

 

Rates prescribed for different types of payments

There are over 20-25 sections that prescribe different types of payments on which tax is deductible at the source. You can learn more about it here.

 

How to claim your TDS Refund?

Where you have earned 50,000 INR in a year and only 45,000 INR is paid to you and 5000 INR is paid to GOI as TDS, then if you are eligible, you can claim a refund of the TDS amount. 

File your Income Tax Return within the due date i.e. 31 July of the next financial year. 
Where the tax liability for the entire year is less than the TDS deducted for you, you will get a refund. Where it is more than that - you pay the balance as taxes. To compute this, it is very important you check your income, understand in which heads of income you fall under, understand your taxes and consult a chartered accountant who would help you with it. 

 

What are the TDS rules?

There are certain rules set out by the tax authorities regarding TDS, that if followed properly will not end up paying penalties, interest, and fees.

  1. Tax deduction rules: Tax is required to be deducted at the time of payment getting due or actual payment whichever is earlier. A delay in deduction of tax will attract interest @ 1% per month until the tax is deducted.
  2. TDS payment rules: Every person is required to pay the tax deducted to the credit of the government by the 7th day of the following month. Non-payment or late payment of TDS will attract interest @ 1.5% per month until the tax has not been deposited.
  3. TDS return filing rules: TDS returns are required to be filed timely on the 31st day of July, October, January, and May during a financial year. Non-filing or filing of return after the due date will attract fees under section 234E @ Rs 200/- per day until the return is filed. However, this amount shall not exceed the amount of tax.
    Once you pay your TDS, you receive a TDS certificate - Form 16/16A. Read here to know more about it. This TDS certificate will help you to file your ITR and claim a refund/ know your tax liability at the end of the financial year.

 

Understand better about TDS with this youtube video

 

Wealth Cafe Advice:

If your TDS is getting deducted, make sure you know the source of your income and why the TDS has been deducted. Once you figure these things out, it is important to understand whether you are eligible for the refund and if yes, file your return by 31 July to claim that refund. If there is a payable situation, then you must file the return, pay the taxes and be free from any surprise penalties. 

Ways to reduce your capital gains while selling a house

Buying and owning real estate is an investment strategy that can be both satisfying and lucrative. It is said that one has to strip naked financially to invest in a house - and if you are going through the same - you can join us on 28th May 2022 where we shall help you in your dream of buying a house.

However, if you already own a house and wish to sell it - no matter what your reason is - tax is levied on the same depending on the asset type and the duration you hold it for. 

Firstly, let us understand which portion of the income is taxable on sale of real estate. Tax is payable on the profits you earn from selling the real estate - i.e. cost of acquisition - sales proceeds.

Nature of TaxShort-term capital gains TaxLong-term capital gains tax
Period of Holding held for less than 24 months held for  24 months or more
Tax applicable as per the Income Tax Slab Rates  20%

Now before we jump directly on how you can save your taxes - let us first understand the various types of real estate that you can own:

  1. Residential Property: This is one of the most popular ones-such properties fill one of the basic human needs as well as reflect your dearest aspirations. Both reconstruction and resale homes are included in residential property. 
  2. Commercial Property:  Commercial property includes vacant land for commercial use or existing business buildings. Office spaces, showrooms, retail outlets and warehouses are just a few examples of such properties
  3. Agricultural/Open Land: Agricultural land is typically land devoted to agriculture - you cannot use this land to build residences unless the government grants you permission to do that. Under the provisions of the law in India, fertile agricultural land could only be used for agricultural purposes and nothing else.

Now that you understand the various type of property - let’s check some of the ways in which you can save your taxes from the sale of your property:

1. Under Section 54:

Section 54 of the Income Tax Act allows the lower of the two as exemption amount:

  • Amount of capital gains on transfer of residential property, or
  • The investment made for constructing or purchasing new residential property

You can avail this exemption by selling a residential property, which is a long term capital asset and buying another residential house property only. You cannot benefit from this in the case of the sale of commercial property or agricultural land. Only the balance amount from the capital gains (if any) will be taxable at 20%. However, you can save tax on that as well by reinvesting the remaining amount under section 54EC within six months of transfer subject to other conditions to save tax (discussed below).

Also, you should have necessarily purchased a residential house either two years after the date of transfer/sale or one year before the date of transfer/sale and in case the house is under construction – the time limit is 3 years from the date of sale. You cannot purchase any residential house out of India to claim an exemption under this section.

You can club capital gain from multiple properties to buy one property but you cannot invest capital gain from a single property to buy multiple properties. However, as an exception to this rule, the purchase or construction of two residential houses is allowed only if the gain is less than INR 2 crore. But, you can exercise this option only once in a lifetime.  For all other years, investment should be made in the construction/ purchase of 1 residential house only.

2. Under Section 54EC

Section 54EC states that if the profit made on the sale of Land or Building (whether Residential or Non-Residential) – is invested by you in ‘long-term specified assets within 6 months of the sale, then the capital gains are exempt from taxation. 

The ‘long-term specified assets’ referred to above are Capital Gain Bonds issued by the government organisations like the National Highway Authority of India and Rural Electrification Corporation. These bonds are AAA-rated with an interest rate of approx 5.25% p.a. The Principal invested becomes tax-free after the lock-in period but the interest continues to remain taxable.

The maximum that you can invest in these bonds is Rs. 50 lakhs and the investment comes with a lock-in period of five years.

You may want to buy capital gain bonds only if the amount you have made as capital gains is low. If the amount is large enough to buy or build a house, the residential property would be a better investment because of greater capital appreciation.

3. Under Section 54B 

No Capital Gains will arise on the sale of Agricultural Land situated in a Rural Area as it is specifically excluded from the definition of Capital Asset. However, Capital Gains will arise on the sale of Agricultural Land situated in a Non-Rural Area. Nevertheless, the exemption can be claimed from such Capital Gains under Section 54B. Under this section, capital gains, both short-term and long-term, that arise from the transfer of agricultural land into another agricultural land are exempt from Income Tax.

This benefit is available only to an individual or a HUF. Also, to benefit from this exemption the land should be used for the agricultural purpose at least for two years. If the cost of new Agricultural Land is equal to or greater than capital gains, then entire capital gains are exempt. Moreover, if the cost of new Agricultural Land is less than capital gains, capital gains to the extent of the cost of new agricultural land are exempt.

Can a capital gain tax exemption get reversed?

You can avoid paying the capital gains tax on the property if you reinvest the amount in a new property. But, the exemption will sustain if you hold the new property for at least two years. If you sell the property before 24 months, the exclusion will be reversed, and you would be liable to pay the capital gains tax that was exempted earlier.

Wealth  Cafe Advice:

If you are unable to reinvest the gains in another house or bonds before filing your tax return for the year in which the sale took place, deposit the balance in the Capital Gains Account Scheme so that you are eligible for the deduction. Capital Gains Account Scheme (CGAS) allows you to safeguard your long-term capital gains until you are unable to invest them in a house before the due date for filing an income tax. 

Blog Article 2022

All about Advance Taxation

Advance Tax Payment is a set up to pay a share of your taxes in installments on due dates decided by the income tax department. It is also known as the ‘Pay as you earn scheme’.

What is Advance Tax Payment?

Advance tax means income tax that should be paid in advance instead of lump sum payment at year-end. It helps the Govt. to receive a constant flow of tax receipts throughout the year so that the Govt can incur its expenses timely rather than receiving all tax payments at the end of the year. This keeps the government rolling

Who is liable to pay Advance Tax?

The eligibility criteria you will have to fulfill in order to pay advance tax are:

  • Your tax liability should be INR 10,000 and above.
  • You should be a salaried or a self-employed individual.
  • Income received via capital gains on shares.
  • Interest earned on fixed deposits.
  • Winnings earned from a lottery.
  • Rent or income earned from house property.

Exemption in Advance Tax Payments

  • Senior citizens aged 60 years and above are exempted from paying the advance tax.
  • Salaried individuals falling under the TDS net are exempted from paying the advance tax.
  • However, any earnings from sources such as interest, capital gains, rent, and other non-salary income will attract advance tax.
  • If TDS deducted is more than the tax payable for the year, then one does not have to pay the advance tax.

Payment of Advance Tax:

You can choose to pay advance tax by any of the following modes:

  • Offline Mode: You can pay advance tax using Challan 280 just like any other regular tax payment at bank branches authorized by the Income Tax Department.
  • Online Mode: You can also pay it online through the official website of the Income Tax department.

Due date and Penalty on late payment

Computing the exact advance tax liability sometimes gets very difficult and therefore the Income Tax Dept has released an Income Tax Calculator which is free to use by everyone. If your tax liability is more than INR 10,000- you should pay your taxes on or before the dates mentioned below. Also, you will need to pay a penalty in case you miss paying it.

Screenshot 2022-03-09 220142

Interest on late payment of Advance Tax is applicable as follows

  1. Interest under section 234C – Interest @ 1% per month is payable if the tax is not paid as per the above schedule i.e. for Deferment in Instalments of Advance Tax
  2. Interest under section 234B – Interest @ 1% is payable if 90% of the tax is not paid before the end of the financial year i.e. for Default in Payment of Advance Tax
  3. For computing Interest u/s 234A/B/C and any other Interest, Income Tax shall be rounded off to nearest hundred and fraction of hundred shall be ignored

Refund in Advance Tax Payment

At the end of the year, if the Income Tax Department finds out that you have paid more tax than you should have paid, then it will refund the excess amount. Taxpayers can claim a refund by filling out and submitting Form 30. They have to make the claim within a period of one year from the last year of the assessment year

Wealth Cafe Advise

Where you are earning any income on which taxes could be more than INR 10,000 and the same is not deducted as TDS, then you must compute the same and pay it as advance taxes. It is best to consult a chartered accountant before 31 March so in case there are any advance taxes to be paid, you can do so without levying any penalty.

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    Blog Article 2022 (3)

    What is Tax-loss Harvesting and how you can use it to your advantage?

    Tax-loss Harvesting is the selling of securities at a loss to offset capital gains earned to reduce your overall tax liability. This allows you to offset the capital gains you made on some equity holdings against a capital loss on other equity holdings resulting in a lower tax bill in your hands in a financial year.

    Some of the ways in which this can help you reduce your tax bill are:

    1. Capital Gains in a year

    If you have Capital gains in a year and you are holding securities with marked to market losses, you can offset them. For example, You have sold some Equity Mutual Funds resulting in Long Term Capital Gains to the extent of INR 1,50,000. This will attract a tax of INR 15,000 at 10%. If at the same time you are holding Equity shares worth INR 350,000 which you had bought for INR 500,000, you can sell these shares and book a Long Term Capital Loss of INR 150,000. As a result of this transaction, your Capital Gains of INR 150,000 are set off against your Capital loss of INR 150,000 resulting in a Zero Tax bill for you. After you book the losses if you plan to maintain your positions in the loss-making shares you can buy and take your long positions on the stocks.

    2. Carry Forwards losses:

    Capital Losses can be carried forward for a maximum period of 8 years. If you have carried forward Capital losses that are set to expire, you can book capital gains to utilize them. For Ex: If you have carried forward losses of INR 200,000 from the sale of Equity Shares in the past and you are holding Equity Mutual Funds/shares whose value is worth INR 650,000 which was purchased for INR 450,000, you can sell them and book a capital gain of INR 200,000 in the current year. This will be set off against the carry forward losses resulting in Nil Capital Gains Tax.

    3. Long Term Capital Gains exemption:

    Long Term Capital Gains on the sale of Equities come with an exemption of INR 100,000 per year. The way you can take advantage of this and save on taxes of INR 10,000 per annum is by selling equities (Stocks/Mutual Funds) that you own and booking gains to the extent of INR 100,000 each year. To maintain your overall position in the equities sold, you can buy them back the next day.

    4. Transaction costs:

    While the above options do result in saving you taxes, you must be aware of the transaction costs associated with the entire process. If you buy and sell equities shares on which you incur a brokerage cost of 0.20%, once you add up the exchange transaction costs, stamp duty, and STT involved, your total transaction cost can go up to 0.40% of the turnover for each leg of the transaction. In Example (1) above you save taxes to the tune of INR 15,000 but will incur a cost of 0.80% of INR 350,000 or INR  2,800 resulting in reducing your total savings to that extent.

    Every year, the month of March is a good time to take stock of your capital gains positions and do the necessary transactions to reduce your overall tax bill. Be sure to take the advice of your Chartered Accountant so that you are clear about what can be setoff (Ex: Long Term Capital Gains can be setoff against Long Term Capital Losses only) and what can be carried forward (Ex: Speculative losses from equity transactions are treated differently from capital gains).

    How taxes work when buying US stocks from India

    Many investors want to explore the potential investment opportunity of the US Market. The New York Stock Exchange is the largest in the world, and its Market Capitalization is more than 27.7 Trillion Dollars as of Dec 2021, compared to this, the GDP of India in 2020-21 was 2.65 Trillion Dollars. So you can imagine the size of the US Equity Markets.

    As an investor from India, if you are planning to invest in the US Stock Market, you should be aware of the US Stocks tax implications. The money that you’re going to earn will not be tax-free as you need to pay tax when you earn something. We don’t pay taxes on losses. So before understanding the tax implications, it is imperative to understand the type of gains from the investment in stock. 

    There are two types of gains from a stock:

    • Dividends
    • Capital Gains on sale

    Let’s discuss the tax liability on each of them separately.

    Dividends

    Companies generally roll out dividends on the stock in order to distribute profits. Therefore, if the stock invested in, pays a dividend, it is income in the hand of the investor. This income needs to be taxed, and hence it is taxed at a flat rate of 25%. Hence, if the company declares a dividend of $100, then you will receive $75. This is lower than the standard tax rate for foreign investors in the US due to the tax treaty between India and the USA.

    Further, the dividend received as cash or reinvested is also taxed in India at the income tax slabs applicable by adding it to your current income. However, India and the USA have a double taxation avoidance agreement (DTAA) that allows you to use the tax withheld in the US to offset the tax liability in India.

    Basically, if you are paying 25$ as taxes in the USA i.e. approximately INR 25*75 = INR 1875. In India, on the same dividend income, you have to pay taxes on the same dividend at 10% i.e. INR 750 (75*100*10%). You need not pay any taxes in India but you would get credit for the taxes you have paid in the USA. To claim this credit, you will have to submit certain documents such as TRC and file your ITR on time. It's best to consult a tax advisor or a CA when/if you earn this income.

    Capital Gains

    Capital gains tax is another type of tax on stock trading in the US (basically you have to pay tax on any income you earn similar to capital gains tax in India). When you earn capital gains, there is no tax applicable in the US. Hence, if you buy shares worth say $500 and sell them for say $800, then there will be no tax liability in the US on the capital gain of $300. However, you will be liable to pay taxes on this gain in India on the said 300$. 

    As we know, in India, capital gains are taxed under two categories:

    LTCG (Long Term Capital Gains)

    When the stock is held for more than 24 months then the gains on the sale of the stock are long-term capital gains and will be taxed at 20% + applicable surcharge and fees. The exemption of Rs 1 lakh per year, which is available on long-term capital gains on the sale of shares and equity-oriented mutual funds in India, is not available on foreign stocks.

    STCG (Short Term Capital Gains)

    When the stocks are held for a period of less than 24 months then the gains on the sale of the stock are short-term capital gains that will be a part of the current income and will be taxed as per slab rates applicable to the investor. Gains made on employee stock options (ESOPs) and restricted stock units (RSUs) in foreign companies are also taxed in the same manner.

    For Example, 

    You buy shares worth $500 and sell them for $800 after 30 months. Hence, you earn long-term capital gains of $300. The tax liability will be $60 plus cess and surcharge (20% tax rate).

    You buy shares worth $500 and sell them for $800 after 20 months. Hence, you earn short-term capital gains of $300. This will be added to your current income and taxed based on the income-tax slab.

    Disclosing foreign assets in tax return

    The most important thing to note is that if you are a tax resident of India, you are required to disclose all foreign assets and foreign income in your income tax return. Even if there is no income, the assets must be declared in the return. This reporting is required for assets held at any time during the year. Even if you have sold the asset and don’t own it as of 31 March of the financial year, you still have to declare the information about the asset (and any income earned from it) in your tax return.

    Foreign assets you need to declare in the ITR

    • Equity and debt instruments
    • Depository accounts
    • Custodian accounts
    • Cash value insurance contract or annuity contract
    • Financial interest in any entity
    • Immovable property held
    • Trusts where the taxpayer is a trustee, a beneficiary, or a settler

    Also, note that filing of income tax return is mandatory for those who own foreign assets even if their total income from all sources is below the minimum exemption limit of Rs 2.5 lakh. These include assets that may have been held by you as a beneficial owner. Taxpayers who have foreign assets cannot file their returns using ITR-1. The details can only be reported in ITR-2 or ITR-3, as applicable.

    TCS is payable when you transfer funds

    Under the Liberalized Remittance Scheme, a resident Indian can transfer up to $2.5 lakh (approximately Rs 1.84 crore) abroad in a financial year. But there is a tax collected at source (TCS) if the amount exceeds Rs 7 lakh in a year. The TCS is 5% of the amount exceeding Rs 7 lakh and can be claimed as a refund when the taxpayer files his income tax return.

    Wealthcafe Advice:

    Understanding the US Stocks tax effect in detail will help you to make a wise decision whether to invest domestically or in the US Markets. It will give you realistic expectations from the investment. You may tend to stay away from international stocks since you are not aware and probably worried about the taxes and charges eating through your returns. However, we hope this article helped you understand the tax implications of investing in US stocks in a simpler way.

    How to fill Form 12 BB?

    All the salaried taxpayers need to fill out Form 12BB. It is supposed to be submitted at the beginning of every financial year by the employee to his/ her employer for the correct deduction of TDS. It discloses all their tax-saving investments of that particular financial year.

    Steps to Fill Form 12BB

     

    1. Download Sample Form 12BB
      You can download the sample Form 12BB from the Income Tax Department website.
    2. Add Personal Details
      This is the first section of Form 12BB, you need to mention your personal Details i.e, Add your Name, Address, and PAN details. Also, mention the current financial year i.e 2020-2021.
    3. Add house rent allowance Details
      If you are incurring any rental expenses for your work then that can be deducted under HRA. 
    4. Add LTA Details
      Add details of LTA if any.
    5. Enter Details regarding Interest on Loan for Borrowings
      If you are paying any Interest on EMI of home loans in this particular Financial year it can avail you benefit up to 2,00,000 for self-occupied property and no limit on rented property.
    6. Add Chapter VI-A Deductions
      Add details of tax deductible investments and deductions under 80C, 80CCD (1B), 80D, 80DD, 80E, 80G etc.

    It is important to do tax planning to save money on tax. Make sure you completed the below 3 steps to claim tax benefits

    1. Invest in section 80C investments, declare home loan principal repayment and collect Rent receipts.
    2. Declare the investment and submit documentary proof to the employer.
    3. Submit Form 12BB to the employer.

    Step 3 is the most crucial step in claiming the tax benefits. Make sure you do not miss this step. Submit form 12BB to your employer and save on tax. Happy investing.

    FAQs

    When is Form 12BB submitted?

    Usually, Form 12BB is submitted at the start of the financial year to estimate the TDS calculations accurately and adequately.

    Do I need to submit my Form 12BB to the Income Tax Department?

    No, your employer will submit the form on your behalf after computing the TDS.

    Can my actual tax-saving investment be different from the declared?

    As an investor, understandably so, your investment decisions can vary. Similarly, the actual tax investments can be different from your proposed plans. However, you should collect and have the actual evidence when applying for tax benefits.

    Is it essential to keep documentary evidence for claiming tax benefits?

    As stated in the above question, yes, you should have actual evidence to attach while applying for tax benefits and TDS to the employer, or your application wouldn’t be accepted.

    Which regime should I select? Difference between the old and new regimes of taxation?

    It is that time of the year when employees of most companies start getting requests for declaring their tax-saving investments to their employers. But before doing so, you first need to choose whether you want to opt for the new tax regime or the old tax regime.

    If you are confused about which tax regime to go for, here are two things that can help you make that decision.

    1. Consider The Slab Rates

    The major difference between the old and the new tax regimes is the different slab rates.

    Tax Slab(₹)Old Tax RatesNew Tax Rates
    0 – 2,50,0000%0%
    2,50,000 – 5,00,0005%5%
    5,00,000 – 7,50,00020%10%
    7,50,000 – 10,00,00020%15%
    10,00,000 – 12,50,00030%20%
    12,50,000 – 15,00,00030%25%
    15,00,000 & above30%30%

    As you can see in the above table, there is no difference between the tax rates for individuals earning up to Rs 5 lakh per annum. The difference in the rates starts showing thereafter. The basic tax rate under both regimes again becomes the same for those earning above Rs 15 lakh per annum. Therefore, as compared to the old tax regime, the new tax regime for high-income earners is likely to make taxpayers pay a higher amount in the long run.

    1. Weigh The Benefits of Tax Deductions And Exemptions

    While figuring out whether to choose the old or the new tax regime might look complicated, if you approach it in a systematic way, it is not that difficult to figure out. 

    Here is what you need to do –

    1. Calculate all the exemptions that you are availing of: If you are living on rent, you would be claiming HRA which is the biggest salary exemption one enjoys. Apart from that, other tax-free components include LTA, Food Bill, Phone Bills, etc. All these will become taxable if you choose to shift to the new tax regime.
    2. Look at the deductions that you claim: As a salaried employee, two deductions that you automatically get are a standard deduction of Rs 50,000 and your contribution towards your Employee Provident Fund (EPF). In the new regime, you won’t be able to claim these deductions even though you will continue to contribute to EPF. Over and above, you cannot claim deductions against your home loan (if you have one) or insurance policies, which till now has helped to reduce your taxable income.

    Now, combine these exemptions and deductions and minus them from your salary to see what is your taxable income and what it would be if you let go of these deductions. This should be the deciding factor for which regime you should go for.

    Which one is better? 

    Both systems have their own sets of pros and cons. The old system has many exemptions and deductions under numerous sections – availing a few of these required people to invest in tax-saving investment options, which helped inculcate a good habit of investing. On the other hand, the new system gives people more flexibility and tries to simplify the process. If you are someone who was claiming a lot of deductions under the old regime, you can probably save better sticking with the same system, as per the calculations. If you weren’t making any tax-saving investments or claiming any deductions earlier too, then maybe the new system may prove beneficial. It also varies based on which slab you are in as well. However, since the system is new, it makes sense to consult a competent tax expert who can suggest the optimal tax saving route for you.

    Wealth Cafe Advice:

    It is just not about taxes. A lot of time, as we have seen above, to save taxes one needs to make investments and those investments can dampen your cash flows. It could be possible that everyone is not able to save and invest their money because of financial responsibilities and other needs and hence, could select to opt for New Regime as that would make more sense from an overall financial situation for you.

    All about Gratuity

    Do you read your offer letter and see you have the benefit of gratuity but however when you see your salary slip, nothing is mentioned in it? In this article, we will understand all the aspects related to gratuity.

    What is gratuity? 

    After having served your employer for five years or more you become entitled to a payment called “gratuity". This is a lump-sum tax-free benefit that you are entitled to when you leave for another job or retire. The gratuity amount is totally paid by the employer without any contributions from the employee.

     

    What are the eligibility criteria to receive gratuity?

    Here is the list to check if an employee is eligible to receive the gratuity amount from the employer or not:

    • You should be eligible for superannuation
    • You should resign after working for five years with a single employer
    • You should retire from work
    • In case of any disability or pass away due to accident or illness

     

    The formula for calculating gratuity

    1. Income tax department website- You can go to www.incometaxindia.gov.in website. Look for the 'Tax Tools' option. Now, search Gratuity from the available options. The given calculator will compute the amount of gratuity paid with respect to the input values such as assessment year, type of employer, gratuity received exempted gratuity and taxable gratuity.
    2. Check with your employer- Your employer or the HR of the organization keeps the complete information of all the employees. One can approach his or her HR regarding the gratuity balance or amount.    
    3. Formula to calculate gratuity yourself- The formula is 15 X (last drawn salary) X (tenure of working)/26. For instance, employee X's last drawn salary is 50,000 per month and has worked with ABC ltd company for about 30 years. So, his gratuity will be calculated as: (15 X 50,000 X 30)/26= Rs 9,37,500. In this formula, the time period of more than six months is considered as one year.

    However, an employer can choose to pay more gratuity to an employee. Also, for the number of months in the last year of employment, anything above 6 months is rounded off to the next number while anything below 6 months in the last year of employment is rounded off to the previous lower number.

    Income tax on gratuity

    The taxation rules around gratuity amount primarily depend on whether an employee is employed with a government or a private entity.

    • For (central/ state/ local) government employees, the entire gratuity amount is exempted from income tax.
    • For private employees, the least of the following three amounts is exempted from income tax:
    1. a) The eligible gratuity
    2. b) The actual amount of gratuity received
    3. c) Rs. 20 lakh

    FAQs on Gratuity

    1. If I resign from a company after 4.5 years of service, am I eligible for gratuity?

    No, you have to serve at least 5 years in a company to get gratuity payment. It is best to check with the HR of your company about this. However, if someone dies while in service, the gratuity amount will be paid to their legal heir even if they have not completed 5 years of service. In addition, the amount received by a nominee/heir will not be taxed.

    2. I am a contract employee in a company. Will I get gratuity if I resign or retire after 5 years?
    If you are on the company rolls and are considered an employee of the company, then you will receive gratuity. However, if you are under a contract that is separate from the company then the gratuity should come from the contractor and not the company.

    3. Can I see gratuity in my salary slip? Is it included in my monthly salary?

    Gratuity is a monetary benefit given by the employer, but not paid as part of the regular monthly salary nor is it included in your salary slip.

    4. What kind of employees does the Gratuity Act, 1972 cover?
    Payment of Gratuity Act, 1972, applies to employees of factories, mines, oilfields, plantations, ports, railway companies, shops, or other establishments related to them. All kinds of government jobs have also been included under the purview of this act. It is applicable in all states of India except Jammu and Kashmir.

    5. Is there any difference in the calculation of gratuity for employees who are not covered under the Gratuity Act?
    Even if you are not covered by the Gratuity Act, your employer may pay you gratuity. The calculation for this is: Gratuity = Average salary (basic + DA) * ½ * Number of service years. In this case, the service years are not rounded off to the next number. So if you have a service of 12 years and 10 months, you get gratuity for 12 years and not 13 years.

    6. Is there a cap to the amount I can receive as gratuity?
    Yes. A company cannot pay you more than Rs.10 lakh as gratuity, irrespective of the number of years you have completed. This limit is also applicable to gratuity you can receive from different employers during your lifetime. If your company wishes to pay you more money, they can title it under ex-gratia or bonus.

    7. How do I nominate someone to receive my gratuity in case of my death?
    To nominate one or more heirs for your gratuity amount, you need to fill in Form F when joining a company.

    8. How many days will it take for the employer to remit the gratuity amount?
    Usually, gratuity is released along with or just before/after your full and final settlement is done. The government mandates employers to pay the amount within 30 days. If there is any delay in payment, the employer has to pay simple interest on the amount from the due date until the date when payment is made.

    9. How much time does an employer take to release the gratuity amount? As per government norms, an employer has to pay the gratuity amount within 30 days from the full and final settlement of the employee. If the deadline is missed, the employer will have to pay the gratuity amount plus interest incurred on it from the due date to the actual payment date.

    How do tax deductions help you save taxes? - An example - Part 2

    In the last article, we saw how Rocket Singh claimed tax deductions under various components of his salary structure. If you have not checked that article yet, please read it before proceeding further - Click here.

     

    Income tax deductions help individuals lower their taxable income and ultimately reduce their tax liability in a given financial year. Put simply, income tax deductions are investments made during a financial year that is offset against the gross annual income when filing income tax returns

    Now that Rocket Singh has claimed all the deductions available for him under various allowances he is now eager to reduce it further:

    Income Tax Calculation
    Tax Deduction (INR)Explanation/reasoning
    a) Annual Income12,00,000
    b) Tax deduction from salary slip-3,76,000Refer to part 1 
    f) Standard Deduction-50,000It is usually deducted from the gross salary and is claimed as an exemption without having to show any proof of expenses. Hence, this flat amount of INR 50,000 is deducted from the gross salary
    g) Section 80C (EPF +ELSS Mutual fund)-1,50,000It allows taxpayers to make certain investments and claim tax deductions of up to Rs 1.5 lakh in a financial year. Read here - to know more.
    h) Section 80D (Health Insurance)-50,000It provides income tax deductions related to the medical insurance premium paid for yourself, your spouse, your parents, and your dependent children.
    e) Section 80CCD (NPS)-50,000It relates to the deductions available against contributions made to the National Pension Scheme (NPS) or the Atal Pension Yojana (APY).
    f) Total (Deduction & Exemption)7,26,000
    Net Taxable Income (a-f)₹ 5,24,000

    As his taxable income is now INR 5,24,000, he falls under the slab of 5 lakhs - 7.5 lakhs of income tax. Thus he now has to pay a tax of INR 1500 only each month whereas he had to pay INR 15,000 in the beginning as his taxable income as per CTC was INR 12,00,000.

    Knowing all this will help you understand what exactly is a taxable income, how your income is taxed, and with careful planning, how you can save on your taxable income.

    However, it is essential to declare all the investments at the beginning of the assessment year so that the tax to be paid can be calculated properly.

     

    Further to know more about rocket singh’s journey and how he reduced his tax liability - check our course- Understanding CTC and Salary Structure.

    What is the tax liability after considering tax deductions from salary slips? - An example - Part 1

    One of the biggest reasons why many salaried individuals struggle with income tax calculation is their inability to understand salary components and structure properly. The net CTC offered to you by your employer has several tax-saving components, and to take maximum advantage of these components, you must have a proper understanding of your salary structure.

    But before knowing how to calculate the income from salary, you should first check your CTC to understand the taxability of various components. All the components would be classified into 3 categories - Taxable, Potentially taxable and Fully Exempt from tax. -.

    For instance, let us take the example of Rocket Singh who earns INR 12 lakh annually. 

    In this case:

    • Fully taxable allowance includes: Basic salary & special allowance
    • Potentially taxable allowance includes: House Rent Allowance (HRA) & Leave Travel Allowance (LTA)
    • Fully Exempt allowance includes: Food Allowance & Telephone Allowance

    (If you want to know more about allowance in detail: read here)

     

    Now that we know the taxability of the components of his salary structure, let's understand how he can reduce his tax liability by claiming maximum benefits from his CTC

     

    Income Tax Calculation (Old vs. New Tax Regime)
    Deduction & Exemption (INR)Explanation
    a) Annual Income12,00,000
    b) HRA       -3,00,000Actual HRA is INR 3,00,000 annually 

    50% of Basic in INR 3,00,000 annually

    Actual Rent Paid - 10% of Basic is INR 4,14,000 annually (INR 4,20,000 - INR 6,000) 

    Therefore, INR 3,00,000 is the lowest and hence it is used for tax exemption 

    To read more about HRA - click here

    c) Leave Travel Allowance         -28,000Mr. Rocket Singh had travelled  to Jammu along with his family this year. The total cost of the flight that he incurred was INR 28,000.  Therefore he can claim an exemption for the same as it was the shortest distance to the destination.  

    To read more about LTA - click here

    d) Food Allowance             -24,000Meal Coupons like Sodexo or Ticket are tax-free subject to Rs 50 per meal and 2 meals per day. On a calculation of 20 working days, a month, and 2 meals per day, a sum of Rs 24,000 can be availed as a deduction by Rocket Singh annually.
    e) Telephone Reimbursement            - 24,000As a thumb rule, official expenses on telephones, including mobile phones paid by the employer on behalf of the employee, are not taxable.
    f) Total  3,76,000
    Net Taxable Income (a-f) 8,24,000

     

    The Taxable income is now reduced from INR 12,00,000 to INR 8,24,000 but this is not the end. You can further reduce the taxable income by deducting the standard deduction and by claiming other tax deductions available to you under chapter VI. You can read more about these deductions here.

     

    Further to know more about rocket singh’s journey and how he reduced his tax liability - check our course- Understanding CTC and Salary Structure.

    We have also discussed in brief part 2 of this article where we discuss more about tax deductions - you can check it here



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