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Income-tax Rates FY 2019-20 (AY 2020-21)

Before knowing the tax rates, it is very important to understand the terms Financial year (FY) and Assessment Year (AY).

The below-mentioned tax rates/ slab is on the income earned for the period 1 April 2019 to 31 March 2020. FY stands for the ‘financial year’ which is from 1 April 2019 to 31 March 2020. AY stands for Assessment year which 2020-21.

For individuals, the due date to file the income tax return for the income earned from 1 April 2019 to 31 March 2020 is 31 July 2020. However, this year due to COVID 19 economic relaxations, the due date is pushed to 30 November 2020

Income tax Rates 

Tax Rates for Individuals (below 60)

Income Tax Slab

(in Rupees)

Tax Rate for Individual Below the Age Of 60 Years
0 to 2,50,000*Nil
2,50,001 to 5,00,0005% of total income exceeding 2,50,000
5,00,001 to 10,00,000Tax Amount of 12,500 for the income up to 5,00,000

+ 20% of total income exceeding 5,00,000

Above 10,00,000Tax Amount of 1,12,500 for the income up to 10,00,000

+ 30% of total income exceeding 10,00,000

Tax Rates for Senior Tax Payers between the age of 60 years to 80 years old

Income Tax SlabSenior Citizens (between 60 years – 80 years)
Up to 3,00,000Nil
 3,00,001 to 5,00,0005% of income exceeding 3,00,000
 5,00,001 to 10,00,000Tax Amount of 10,000 for the income up to 5,00,000

+ 20% of total income exceeding 5,00,000

Above 10,00,000Tax Amount of 1,10,000for the income up to 10,00,000

+ 30% of total income exceeding 10,00,000

Tax Rates for Super Senior Taxpayers above the age of 80 years

Income Tax SlabVery Senior Citizens of and above 80 years of age
Up to 5,00,000Nil
 5,00,001 to 10,00,00020% of income exceeding 5,00,000
Above 10,00,00030% of income exceeding 10,00,000

Important Notes:

  • The income tax rates are applied to the annual income calculated. Thereafter Surcharge and Cess are added to the tax payable.
    • A surcharge is also applicable slab wise. The surcharge is calculated on the Tax amount. If the income is:
  1. Above Rs.50,00,000 and up to Rs.1 crore – then 10% surcharge is applicable
  2. Above Rs.1 crore and up to Rs.2 crore – then 15% surcharge is applicable.

In the Union Budget 2019-20, a new surcharge on income tax for super-rich individuals has been levied. So, individuals earning:

  1. Between Rs.2 crore and up to Rs.5 crore –then 25% surcharge is applicable;
  2. For Above Rs.5 crore – then a 37% surcharge is applicable.
  • An additional Cess of 4% for Health & Education is applicable to the income tax plus surcharge.
  • Section 87A allows tax rebates to Individuals whose total annual income falls below Rs.5,00,000. The rebate is limited to Rs.12,500 or the actual tax amount whichever is lower.

Income Tax Slabs for HUF

The Income Tax Slab for Hindu Undivided Family (HUF) is the same as the Tax slabs for Individuals under the age of 60 years in the year 2019 – 2020.

Income Tax Slabs for Partnership Firms

There is a flat tax rate for Partnership Firms and LLPs (Limited Liability Partnerships) and they are to pay Income Tax at the rate of 30%.

Added to the tax amount is:

  1. Surcharge on tax: 12% in cases where the annual income is more than Rs.1 Crore
  2. Cess for Health & Education: is at the rate of 4% – calculated on tax amount plus surcharge

Income Tax Slabs for Local Authorities

Local Authorities to are to be taxed at a flat tax rate of 30%.

Added to the tax amount is:

  1. Surcharge on tax: 12% in cases where the annual income is more than Rs.1 Crore
  2. Cess for Health & Education: is at the rate of 4% – calculated on tax amount plus a surcharge.

Income Tax Slabs for Domestic Companies

Domestic Companies have received a boost. With the turnover raised from 250 crores to 400 crores for a tax rate of 25%. The turnover slab wise tax calculation is:

Turnover ParticularsTax Rates
Gross turnover up to 400 Cr. in the previous year25% (subject to conditions as set out in the Taxation Laws Amendment Ordinance, 2019)
Gross turnover exceeding 400 Cr. in the previous year30% (subject to conditions as set out in the Taxation Laws Amendment Ordinance, 2019)

Added to the tax amount is:

Surcharge on tax:

  1. 7% in cases where the annual income is between Rs.1 Crore to Rs.10 Crore
  2.  12% in cases where the annual income is more than Rs.10 Crore

Cess for Health & Education: is at the rate of 4% – calculated on tax amount plus surcharge

Income Tax Slabs for Foreign Companies

Foreign Companies are taxed at a rate of 40%.

Added to the tax amount is:

  1. Surcharge on tax: 2% in cases where the annual income is between Rs.1 Crore to Rs.10 Crore
  2. 5% in cases where the annual income is more than Rs.10 Crore
  3. Cess for Health & Education: is at the rate of 4% – calculated on tax amount plus surcharge

Income Tax Slabs for Co-operative Societies

Income Tax SlabIncome Tax Slab Rate
Up to Rs.10,00010% of Income
Rs.10,000 to Rs.20,00020% of Income exceeding Rs.10,000
Over Rs.20,00030% of Income exceeding Rs.20,000

Added to the tax amount is:

  1. Surcharge on tax: 12% in cases where the annual income is more than Rs.1 Crore
  2. Cess for Health & Education: is at the rate of 4% – calculated on tax amount plus surcharge
  3. So, to calculate your tax liability for the year, you should keep a track of your annual income to know what Income slab you will be falling under for the year 2019 – 2020.

Income tax rates for a non-resident – Individuals

Income SlabsIncome-tax rates
Up to 2,50,000Nil
From 2,50,000 to 5,00,0005%
From 5,00,000 to 10,00,00020%
Above 10,00,00030%
Ø  Surcharge: 10% of tax where total income increases Rs. 50 lakhs

15% of tax where total income increases Rs. 1 crore

Ø  Health & Education cess: 3% of tax plus surcharge

Capital Gains Taxation on Mutual Funds/Direct Equity

For Equity Oriented Schemes/Direct Equity

  • Long Term Capital Gains (units held for more than 12 months)
  • Short Term Capital Gains (units held for 12 months or less)

For non-equity oriented schemes

  • Long Term Capital Gains (units held for more than 36 months)
  • Short Term Capital Gains (units held for 36 months or less)
 Individual/ HUFDomestic CompanyNRI

Equity Oriented Schemes/Direct Equity

Long term capital gains10%*10%*10%*
Short term capital gains15%15%15%

Other Than Equity Oriented Schemes

Long term capital gains20% (after indexation)20% (after indexation)Listed – 20% (after indexation)

Unlisted – 10% (without indexation)

Short term capital gains30%^30%^^/25%^^^30%^

 

 

 

Tax Deducted at Source (Applicable to NRI Investors)

 
 Short term capital gains$Long term capital gains$
Equity oriented schemes15%10%*
Other than equity-oriented schemes30%10% (for unlisted without indexation) and 20% (for listed)

* Income-tax at the rate of 10% (without indexation benefit) on long-term capital gains exceeding Rs. 1 lakh provided the transfer of such units is subject to STT.

$ Finance (No.2) Act, 2019 provides for a surcharge at:

  • 37% on base tax where income exceeds Rs. 5 crore;
  • 25% where income exceeds Rs. 2 crore but does not exceed Rs. 5 crore;
  • 15% where income exceeds Rs. 1 crore but does not exceed Rs. 2 crore;
  • 10% where income exceeds Rs. 50 lakhs but does not exceed Rs. 1 crore.

Further, “Health and Education Cess” to be levied at the rate of 4% on the aggregate of base tax and surcharge.

@ Surcharge at 7% on base tax is applicable where the income of domestic corporate unit holders exceeds Rs 1 crore but does not exceed 10 crores and at 12% where income exceeds 10 crores. Further, “Health and Education Cess” to be levied at the rate of 4% on the aggregate of base tax and surcharge.

# Short term/ long term capital gain tax (along with applicable Surcharge and “Health and Education Cess”) will be deducted at the time of redemption of units in case of NRI investors.

^ Assuming the investor falls into the highest tax bracket.

^^ This rate applies to companies other than companies engaged in manufacturing business who are taxed at a lower rate subject to fulfillment of certain conditions.

^^^ If total turnover or gross receipts during the financial year 2017-18 does not exceed Rs. 400 crores.

Further, the domestic companies are subject to minimum alternate tax not specified in the above tax rates. Transfer of units upon consolidation of mutual fund schemes of two or more schemes of equity oriented fund or two or more schemes of a fund other than equity oriented fund in accordance with SEBI (Mutual Funds) Regulations, 1996 is exempt from capital gains.

Income-tax implications on dividend received by Mutual Fund unitholders

 Individual/ HUF Domestic CompanyNRI

Dividend

Equity oriented schemesNilNilNil
Debt oriented schemesNilNilNil

Rate of tax on distributed income (payable by the MF scheme)**

Equity oriented schemes*10% + 12% Surcharge + 4% Cess10% + 12% Surcharge + 4% Cess10% + 12% Surcharge + 4% Cess
= 11.648%= 11.648%= 11.648%
Money market or Liquid schemes /debt schemes (other than infrastructure debt fund)25% + 12% Surcharge + 4% Cess30% + 12% Surcharge + 4% Cess25% + 12% Surcharge + 4% Cess
= 29.12%= 34.944%= 29.12%
Infrastructure Debt Fund25% + 12% Surcharge + 4% Cess30% + 12% Surcharge + 4% Cess5% + 12% Surcharge + 4% Cess
= 29.12%= 34. 944%= 5.824%

* Securities transaction tax (STT) shall be payable on equity-oriented mutual funds schemes at the time of redemption/switch to the other schemes/sale of units.

** For the purpose of determining the tax payable by the scheme, the amount of distributed income has to be increased to such amount as would, after reduction of tax on such increased amount, be equal to the income distributed by the Mutual Fund. In other words, the amount payable to unitholders is to be grossed up for determining the tax payable, and accordingly, the effective tax rate would be higher. The above-mentioned rate is without considering the grossing up.

Surcharge mentioned in the above table is payable on base tax. Further, “Health and Education Cess” is to be levied at 4% on the aggregate of base tax and surcharge.

Disclaimer – The tax rates mentioned here are from the Finance Act 2019 and can be subject to changes. It is advisable to consult your tax consultant or financial advisor before finalizing your tax returns.

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EPF Withdrawal – Taxable or Exempt?

A contribution towards an EPF account provides a benefit to individuals by way of a deduction under Section 80 C (see here). It would also be good to know what would be the income tax implications of EPF withdrawal. Interestingly, EPF withdrawal is taxable under certain circumstances and exempt under the certain circumstances.

The following table will help you easily understand the taxability on withdrawal of EPF:

Sl NoScenarioTaxability
1Amount withdrawn is < Rs 50,000 before completion of 5 continuous years of serviceNo TDS. However, If the individual falls under the taxable bracket, he has to offer such EPF withdrawal in his return of income
2Amount withdrawn is > Rs 50,000 before completion of 5 years of continuous serviceTDS @ 10% if PAN is furnished; No TDS in case Form 15G/15H is furnished
3Withdrawal of EPF after 5 years of continuous serviceNo TDS. Further, the individual need not offer the same in the return of income as such withdrawal is exempt from tax
4Transfer of PF from one account to another upon a change of jobNo TDS. Further, the individual need not offer the same in return of income as it is not taxable.
5Before completion of 5 continuous years of service\ if employment is terminated

due to the employee’s ill health. The business of the employer is discontinued or the reasons for withdrawal are beyond the employee’s control

No TDS. Further, the individual need not offer the same in the return of income as such withdrawal is exempt from tax
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How to save tax

Mid-January is a stressful time for most salaried individuals. Most of them are calling their CAs, talking to their friends or opening fixed deposits to make investments to avoid/reduce their taxes. It is the time when most offices require the employees to submit their investment proofs for availing the tax benefit.

Most of us know about the deduction of INR. 150,000 available to individuals. This deduction means that an amount of INR 150,000 is reduced from your total taxable income and then, the balance is taxable under the Act. Generally, people know that this INR 150,000 deduction is available when you invest in the Provident Fund (PF), an insurance policy or a new fixed deposit (FD) of 5 years every year.

These are not the only options available for tax savings. In our Article, taxation of salary, we discussed ways and reasons to make the most of your salary. Here, we are going to discuss, means made available to you under the Income-tax Act, 1961 to reduce your tax payable. To make use of any of these options, you will have to actually spend the money, invest it i.e. there will be an outflow of funds. You also need to have a backup and the relevant documents to claim the tax deductions.

The deductions for the following expenses/investments are allowed.

  • Popular INR 150,000 deduction: Claiming a deduction of INR 150,000 under section 80C of the Act can reduce your tax outgo by around Rs. 45,000 (for someone in a 30% tax bracket, calculation without considering cess). Also, the government has included many options under this to inculcate and increase the practice of investing and saving.
ProductTax Benefit
1. Insurance PolicyPayments made towards the premium of self, spouse, and children. The debt should be made from the individuals’ bank account who is claiming the tax deduction.
2. Provident Fund (PF)Payment made towards provident fund or superannuation fund
3. Tuition FeesTuition fees paid to educate 2 children
4. Construction or purchase of residential houseThe principal amount of the loan towards purchasing or constructing a new house.
5. Fixed DepositInvesting in an FD for a period of 5 years or more and stay invested for 5 years.
6. Mutual FundsInvesting in a specific tax-saving MF categorized as ELSS for a lock-in period of 3 years
7. OthersNational Savings Scheme, sukanya Samriddhi Scheme, Employee Provident Fund, Voluntary Provident Fund, Senior Citizens saving scheme, Unit-linked insurance plan, Infrastructure Bonds, NABARD Rural Bonds
  • Invest for retirement and taxes – Under section 80CCD (1B), an additional deduction of up to INR 50,000 for the amount deposited by a taxpayer to the National Pension Scheme (NPS) notified by the central government can be claimed. This is subject to the contribution being less than 10% of the basic salary of the employee. Contributions to Atal Pension Yojana are also eligible.
  • Employer’s contribution to NPS – Section 80CCD (2), an additional deduction is allowed for the employer’s contribution to an employee’s pension account of up to 10% of the salary of the employee. There is no monetary ceiling on this deduction.
  • Interest earned on the savings bank account:   A deduction of maximum INR 10,000 can be claimed against interest income from a savings bank account as per section 80 TTA of the Act. Interest from a savings bank account should be first included in other income and deduction can be claimed of the total interest earned or INR 10,000, whichever is less.
  • Health Insurance and preventive health check-up: A deduction of the amount paid towards health insurance premium of your family (including your spouse and children) and parents, which are different from the benefits, based on the costs related to health check-ups. The deduction limits are as follows:
Persons coveredExemption LimitHealth check-up exemptionTotal
Self and familyINR 25,000INR 5,000INR 25,000
self and family + parents(INR 25,000 + INR 25,000) = INR 50,000INR 5,000INR 55,000
self and family + senior citizen parents(INR 25,000 + INR 30,000) = INR 55,000INR 5,000INR 60,000
self (senior citizen) and family + senior citizen parents(INR 30,000 + INR 30,000) = INR 60,000INR 5,000INR 65,000
  • Save tax on loan taken for higher education- A deduction under section 80 EE is allowed to an individual for interest on a loan is taken for pursuing higher education. This loan may have been taken for the taxpayer, spouse or children or for a student for whom the taxpayer is a legal guardian. The deduction is available for a maximum of 8 years (beginning the year in which the interest starts getting repaid) or till the entire interest is repaid, whichever is earlier. There is no restriction on the amount that can be claimed.
  • Save while you pay for a disabled dependent: Under section 80 DD medical treatment for handicapped dependent or payment to specified scheme for maintenance of handicapped dependent ‘

Disability is 40% or more but less than 80% – Rs.75,000

Disability is 80% or more – Rs. 125,000

  • Medical expenses of a disabled Individual – Self-suffering from disability:
    An individual suffering from a physical disability (including blindness) or mental retardation. – Rs. 75,000

An individual suffering from severe disability – Rs. 125,000

  • Save tax while you donate: The various donations specified under section 80G are eligible for deduction up to either 100% or 50% with or without restriction as provided in section 80G. From FY 2017-18 any donations made in cash exceeding Rs 2,000 will not be allowed as deduction. The donations above Rs 2000 should be made in any mode other than cash to qualify as deduction u/s 80G.
  • Contributions given by any person to Political Parties: Deduction under this section is allowed to a taxpayer except for a company, local authority and an artificial juridical person wholly or partly funded by the government, for any amount contributed to any political party or an electoral trust. The deduction is allowed for contribution done by any way other than cash.

These deductions are the best ways to reduce your taxes and also save and invest your money. We have included all the sections for deductions above. However, if you have any query, please leave it in the comments below and we shall revert to you at the earliest.

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Is the income up to Rs. 5,00,000 exempt as per the interim budget 2019?

The income tax rebate has been revised by Budget 2019 and there is no tax on income up to Rs. 5,00,000.  However, this benefit is available to only those whose income is equal to or less than Rs. 5,00,000.

This benefit is provided through the rebate available under section 87  A and not by amending the tax slab rates. It means if your total tax payable is lower than Rs.12,500, the amount will eligible for a rebate under Sec.87A.

Refer our Article Income-tax slab rates for Individuals for FY 2019-20 (AY 2020-21)

A summary of the Revised Income tax slab rates for FY 2019-20 (AY 2020-21)

Income slabsIndividual aged (Aged below 60 years)Senior citizens (Aged 60 years and above but below 80 years) Super senior citizens (Aged 80 years and above)
Up to 2,50,000NilNilNil
From 2,50,000 to 3,00,0005%NilNil
From 3,00,000 to 5,00,0005%5%Nil
From 5,00,000 to 10,00,00020%20%20%
Above 10,00,00030%30%30%

Please note that there is no change in the income-tax slab rates, if your income is higher than 5,00,000, then tax will be levied on income from between Rs. 2,50,000 to Rs. 5,00,000.However, if your income is Rs. 5,00,000 and less, only then your tax liability is zero.

Let’s explain you with an example

Tax Rates and SlabsIncome of 5,00,000Income of 7,00,000
Up to Rs. 2,50,000NilNil
2,50,000 to 5,00,000 (5%)12,50012,500
Above, 5,00,000(20%)Nil40,000
Rebate u/s 87A(12,500)Nil
Total Tax PayableNil52,500

You may notice that up to Rs.5,00,000, even though there is tax liability, due to revised limits of Sec.87A, your tax liability becomes zero.

However, if your total income is more than Rs.5,00,000 then you are not eligible to claim the deduction under Sec.87A. Hence, there will not be any benefit for those who are under higher tax bracket.

Points to note

  • Individuals with income up to Rs. 5,00,000 will have no taxable income, however, tds will be deducted and you will have to claim a refund.
  • To claim a refund and use the benefit it is compulsory to file the income-tax return.
  • Do remember that the rebate should be applied to the total tax before adding the education cess (4%).

For other Budget Updates, read our Article Budget 2019 Highlights – 6 things you must know.

 

How-to-calculate-Pension-under-EPS

How to calculate Pension under EPS

We have discussed everything about EPS in our series of Articles on EPS.

You can read them

http://www.wealthcafe.in/basics-of-employee-pension-scheme-eps/

http://www.wealthcafe.in/forms-of-eps/

http://www.wealthcafe.in/is-the-monthly-pension-paid-under-eps-just/

Monthly pension calculation (Employed after 16/11/1995)

The pension amount for those employed after 16th November 1995 is calculated as follows:

Pension amount = (Pensionable salary * Service period)/70

In order to calculate the monthly pension, in this case, the following points need to be kept in mind:

  • Pensionable salary is the average income of the preceding 60 months. Most employers have a restriction on pension contribution to either Rs.1,250 or 8.33%, whichever is minimum. In these scenarios, the maximum pensionable salary would be Rs.15,000.
  • Only the basic pay and dearness allowance are considered a salary.
  • If an employee has completed over 20 years of service, then two years should be added as a bonus in the equation. According to the rules, the bonus can be also applied for the service before 16/11/1995.
  • The new rules make it mandatory for the pension to be more than Rs.1,000 per month.
  • An employee is eligible for a pension after completion of 10 years of service.

2.      Monthly Pension Calculation for a member who joined EPF before 15.11.1995 have 3 components in the Pension calculation

a) Procedure for calculating the Past Service Pension

  • The pension is calculated twice based on the period of employment.
  • Once before 16/11/1995 and once after 16/11/1995.
  • For calculation of pension before 16/11/1995, the following table can be used. In this table, the pension is fixed based on the pay and period of service.
Years of past serviceUp to Rs.2,500 (Salary)Above Rs.2,500 (Salary)
Below 11 years8085
Between 11 to 15 years95105
Between 15 to 20 years120135
More than 20 years150170
  • Find out the period that had elapsed between 16.11.1995 and the date of exit and based on this period locates the corresponding Table ‘B’ Factor. Date of Exit is Date of attaining 58 years for superannuation/early pension, Date of Death for widow pension and Date of Disablement for Disablement Pension.
  • Multiply the Past Service Benefit and the Table B factor, which gives the Past.

b) Procedure for calculation of Pensionable Service Pension

  • Find out the Category of the member as to whether he belongs to X, Y or Z Category.
  • X – Date of commencement of pension is between 16.11.1995 and 15.11.2000 Y – Date of commencement of pension is between 16.11.2000 and 15.11.2005 Z – Date of commencement of pension on or after 16.11.2005.
  • Find out the Pensionable Service and Pensionable Salary of the member and substitute the same in the formula given as below.

(Average Salary X Service)/70

  • If the formula pension calculated is less than 335/438/635 respectively, for X, Y, Z categories, then only that minimum pension is to be given.

c) Procedure for the calculation of Total Pension-Add the Past Service Pension and the Formula Pension.

  • Add the Past Service Pension and the Formula Pension.
  • If the total pension is less than 500/600/800 respectively, for X, Y, Z categories, then that minimum pension shall be the total pension.
  • But this total pension is for an eligible service of 24 years or more, and if the eligible service is less than 24 years, then this total pension has to be proportionately reduced subject to a minimum of 265/325/450 depending on X, Y, Z categories (only when the minimum pension is given).
  • If the total pension itself is more than the minimum, then the proportionate reduction need not be made even if the eligible service is less than 24 years.

Wealth Cafe Tip – We tend to accept EPF the way it is displayed in our passbooks. There is always a scope of error and one should verify every return and investment they are making.

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Reduce taxes without investing any money

‘People in my office were suggesting me as to how I should make a fixed deposit from now itself to save my taxes at the end of the financial year.’ ‘Do I have an LIC policy? Do you think that would be enough to avoid taxes on my payslip?’ ‘I do not have money at the end of the year to invest to reduce taxes.’ I am sure most of us have either said such statements or heard people  make them. Irrespective of the above, most of us do wonder why our salary is being taxed and we want to know how to avoid paying taxes or pay the least possible taxes ever. I have mentioned ways to reduce your taxes without making any investments i.e. just by understanding your salary structure and its components. It is very important to know that the entire CTC amount of an individual is not taxed at the same rate but various components in the salary structure affect your taxability differently. This is the main reason why we are not paid an X amount as salary but the same is divided into the components. We have discussed the compensation structure in our Article – Understand your salary structure As discussed earlier, salary can be divided into 4 basic components and we shall discuss the taxability with respect to each component now
                                             Running away from your tax queries is not the solution to reduce your taxes.
Reimbursements and allowance: You can reduce your taxes on the reimbursements and allowances by submitting proper bills and other required documents/forms withing the due dates provided by your employer.
  • Leave Travel Allowance (LTA) – Did you know that the annual leaves and holiday that you were taking would actually help you to reduce your taxes? LTA lets you do just that. LTA remunerates employees for their travel within the country. The amount of LTA would be mentioned in your salary structure. Where you submit appropriate and eligible bills of your travel to your employer, the amount shall be paid to you and will be considered tax-free. There are a few conditions/rules which are to be followed while claiming for your tax-free. We have mentioned the same in our article How to save taxes through LTA.
  • House Rent Allowance (HRA) – Your Company pays for your rent and when you submit appropriate rent receipts, no taxes are charged on the same. This benefit is available only to those employees who are staying on rent. Given that in metro cities, many of us are living on rent, it is a great benefit to save taxes. As always, there are certain rules based on which this becomes tax-free, we have mentioned the rules in our Article How to save taxes through HRA.
  • Standard deduction towards medical and conveyance: From April 2018, a standard deduction of INR 40,000 is available towards medical and conveyance expenses of the employees. You are not required to submit any bills to claim this benefit. INR 40,000 would be directly deducted from your gross salary to compute the taxable salary numbers. Ensure that the same is deducted when you receive your Form 16.
  • Food, telephone, internet and other reimbursements – Some employees have other reimbursement items such as food, telephone, internet, uniform, newspaper etc. which are reimbursable and no taxes will be deducted on these if you submit bills as required by your employer.
                                                                     Taxability of various salary components
Contributions – Payments made by the employer on behalf of their employees towards EPF, NPS, insurance or gratuity for the retirement benefits or otherwise
  • Employee’s provident fund (EPF) – Contributions made by the employer and employee (which are deducted from the CTC) is tax-free. The same is not included as a part of your taxable salary. Please refer to our Article – Taxability of EPF to understand the same in detail.
  • National Pension Scheme (NPS) – Deductions made from your salary each month towards NPS and your employers’ contribution is tax-free. In fact, NPS provides additional tax benefits to the employees. We have discussed the same in detail in our Article – Taxability of NPS.
  • Gratuity – Gratuity is only received when on resignation (after completion of 5 years of service), death or retirement. A part of the gratuity amount received is exempt based on the formula specified under the Income-tax Act. We have discussed the same in detail in our Article – Taxability of Gratuity.
  • Insurance – Any premium paid by your employer towards your health insurance, life and others which is included in your CTC is tax-free and the same is not included in your total taxable salary.
Variable salary i.e. Bonus paid in any form is taxable. Bonus is added to your total taxable salary and taxed based on the slab rate you fall under after the receipt of the bonus. Fixed Salary Components: This includes the basic salary, special allowance, Dearness allowance etc. They are generally fully taxable.
  • Basic salary is generally is 40% – 50% of the CTC amount.
  • Dearness allowance is not paid by many private companies; it is generally paid by government companies.
  • Special allowances are the balancing number in your CTC. Whatever may be the amount, it is fully taxable.
Professional Tax – Professional tax is the tax levied by Governments of certain states on salaried employees. The states where professional tax is applicable are Karnataka, Bihar, West Bengal, Andhra Pradesh, Telangana, Maharashtra, Tamil Nadu, Gujarat, Assam, Chhattisgarh, Kerala, Meghalaya, Odisha, Tripura, Madhya Pradesh, and Sikkim. The amount of profession Tax that is deducted varies from state to state where they are applicable. You get a credit of the professional tax paid while computing your income-tax liability. From this article,  you would have understood the simple ways (if applied) that can reduce the taxes without making any additional insurance or investments. These ways are inbuilt in your salary components and not many people know how to make most of it. Understand your salary structure and work on reducing your taxes. It is the first step towards a healthy financial life. In our salary series of articles, we have discussed the taxability of each component.

Transfer from EPF to NPS

Need/Benefit of switching EPF to NPS

EPF and NPS both are the retirement saving scheme and have a provision of pension. Then, what is the need for EPF transfer to NPS? I am listing the reason.

Shift to a government company

 When you work in a private company, you have to subscribe to the EPF. But if you switch to the government department, you have to contribute to the NPS. In this case, your EPF balance is not used for retirement saving. Often you have to withdraw it citing unemployment for 2 months. Also, EPF withdrawal may be subject to tax if you have not completed 5 years in the private job.

Want Better Return

EPF is designed to give a retirement corpus to organized sector workers. It tries to keep your investment safe along with a decent return. Whereas NPS gives you a chance to get a better return with some risk. It invests a greater proportion in the share market. That is why NPS may be a better option for those who want to build wealth by taking some risk.

More Transparency

Normally EPF gives more return than the bank deposit. However, you don’t know how did EPF earn. where it invests? Whereas in the NPS, every investment is transparent. You know the mutual fund plans where your money is invested. Every week you get to know the NAV of your mutual fund plan.

Active change of Portfolio

If you want to actively manage your retirement corpus then NPS is a better option. In the NPS you can change your asset allocation twice in a year. Thus you can affect the return of your NPS investment. It is not possible with the EPF.

Extra Tax Benefit

The government has given the extra tax benefit to the NPS (80CCD-1B). You can get an extra tax deduction of up to 50 thousand because of the NPS. This tax deduction of 50 thousand is over and above the 80C limit.

Issues of transferring EPF to NPS

EPF to NPS switch was not very easy. It is not like transfer of money from one account to another account. Following are the hurdles of this switch.

  1. EPF withdrawal before completing 5 years in service becomes taxable. The EFPO deducts tax before giving you the corpus.
  2. EPFO does not permit premature withdrawal. Neither it recognizes the withdrawal for NPS.

The given process Involves only acceptance of EPF corpus into an NPS account. The PFRDA has released these steps.

Open NPS Tier-I Account

To receive the EPF amount, you must have an NPS account. You can open NPS account through your employer. Those people who don’t have an employer or NPS facility with them can open an NPS account through the POP. There are many POPs available. An online NPS account opened through the e-NPS is also eligible for getting the EPF balance.

Submit Request To Employer

If you are a government or private sector employee, you have to approach the recognized provident fund or superannuation fund. It can be done through the employer.

EPFO or Trust Would Process Application

The provident fund or superannuation fund initiate the fund transfer process. After the due process, it would release the EPF corpus.

Cheque or DD Issuance

The cheque or demand draft would be issued in the name of either of the following.

In the case of government employee: Nodal Office Name (PAO or CDDO Name)<>Employee Name <> PRAN

In case of Subscriber is a private employee or self-employed:  POP collection account-NPS trust <>Subscriber Name<>PRAN

Get Letter of EPF Transfer

The EPFO or Trust would also issue a letter telling about the EPF to NPS transfer. You have to get this letter and submit to the present employer or POP. This letter is a proof that your lump sum NPS contribution belongs to the EPF account.

The Contribution into NPS account

Once you submit the EPF transfer letter along with the cheque, the NPS nodal office or POP updates your NPS account with the latest contribution.

Points To Note

The EPF transfer amount would not be eligible for the tax deduction as it is not the original investment. It is just a transfer so does not enjoy any extra tax benefit.

You must have an active NPS account. The EPF transfer amount would go into Tier-I account.

The EPF transfer amount should be routed through the employer or POP-PS. The NPS subscribers have to go to POP-SP for submitting EPF cheque/DD.

Unlike EPF, you would not get the whole corpus after the retirement, rather you would get only 40% amount. The 40% -60%  amount would be used to give you a regular pension. You can get 20% of the amount in 10 installments to the age of 70.

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Lesser known facts about Employee Provident Fund (EPF)

We have discussed the basic of EPF.

Listed below are the specific rules regarding EPF for your reference.

You can increase the contribution to EPF

You can contribute more than 12% mandatory contribution to your EPF account. You can contribute up to 100% of your basic pay if you want but the employer is under no obligation to match your EPF contribution. You will get the benefit of your personal contribution (in excess of the basic limit) in section 80C of the Act. All other rules of EPF will apply to the additional contribution.

EPF withdrawal is taxable

The investment in the provident fund is tax-free. According to the rules of EPF, the maturity proceeds and interest on it are tax-free. We take the tax benefit of EPF contribution. We never think of the tax on EPF Withdrawal amount.

If you try to withdraw the EPF balance before 5 years, you must pay back the tax benefit, you had availed at the time of investment. EPF  will deduct the TDS on the withdrawn amount before depositing the same in your bank account (where money is withdrawn before 5 years).

An employer cannot withhold your EPF balance

After resignation, many employees leave the company without serving the notice period and sometimes on a bad note with their employer. In such a situation, the EPF balance is the only handle to arm-twist the employee. Some employer’s never forward the PF withdrawal form to the regional PF office.

The Employer has no right to do so. The Rules of EPF say that an employer can never withhold the EPF balance. The money never remains with them. The employers are the mere facilitator of the EPF scheme. The erring employer can be also punished for this behaviour.

You can withdraw your EPF balance without the signature of the employee. You can do the same by taking signatures and other formalities from the banker.

You cannot withdraw 100% of your EPF corpus

You can withdraw the EPF corpus if you have been unemployed for 2 months. But this withdrawal would not be for the full amount. The is a new rule of EPF withdrawal. Now, you can withdraw only your contribution to the EPF and interest on it. The employer’s contribution and interest will remain in the PF account till the retirement age  (58 years).

You can opt out of EPF

We generally think EPF is a mandatory contribution. However, this is not the case. EPFO guidelines say that if an employee’s salary is more than INR 15,000 per month he/she can avail the option of not being a part of the EPF scheme. If this scheme has opted, the entire salary is paid out to the employee, without any deduction, towards EPF every month.

Having said that, it is important to note here that an employee has to opt out of Provident Fund at the start of his job and if he/she is part of EPF programme even once in his life, this option of opting out stands null and void.

EPF provides life insurance as well

A lot of people are not aware of this benefit. Let us explain how this works. If a company does not provide insurance coverage to its employees under the group life insurance plan, then the companies are required to contribute 0.5% of monthly basic pay towards Employees’ Deposit Linked Insurance (EDLI) scheme. This contribution is capped at INR 15000. Companies that are already covering employees for insurance are exempted from this plan of EPFO.

Check your personal details with EPFO

Many times people realize at the time of withdrawal or transfer of EPF that incorrect personal details are submitted with EPF. In such cases, you must check and rectify the same while creating an account with the UAN. You must inform your employer to get the same updated.

We will be posting a detailed article on how to change the same through UAN.

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EDLIS – Employee Deposit Insurance Scheme

We have discussed the basic contributions of EPF and how the money is invested, contributed and received by the employees. There is a component called EDLIS (Employee Deposit Insurance Scheme) of EPF contributions. We have discussed the features of EDLIS as under:
  • The EDLI scheme was launched in 1976, and applies to all employers who provide the Employee’s Provident Fund (EPF) provisions to their employees. The point of the scheme is to provide life insurance coverage to all their employees.
  • The EDLI Scheme is clubbed and linked to the EPF Scheme and EPS scheme. All employees who subscribe to the EPF scheme are automatically enrolled in the EDLI scheme.
  • All of the employees’ contribution goes towards the EPF scheme. The employees do not contribute towards EDLIS. Contributions are made by the employer.
  • EDLI contribution by Employer: 0.50% (subject to a maximum of INR.15,000)
Features and benefits of the EDLI scheme:
  • Claim amount under the EDLI Scheme is 30 times the salary. Salary is calculated as (D.A. + Basic Salary).
  • A bonus of INR 1,50,000 is also payable along with the claim amount.
  • The quantum of coverage is directly linked to the salary of the employee.
  • Premium payable is similar for all employees.
  • Payments are made by the employer to the Provident Fund Authorities.
  • Under Section 17 (2A) of the Act, the employer can opt out of contributing to this scheme if the employer has already opted for a better insurance policy for its employees under a different scheme.
  • In lieu of EDLI, the employer can also opt for schemes like the LIC Group Insurance Scheme.
EDLI claim procedure:
  • The amount payable can be claimed by the nominee of the employee.
  • In case there has been no nominee named, the surviving family members of the deceased can claim the amount.
  • Under the claims to be made by surviving family members, claims cannot be made by the oldest son or married daughters whose husbands are still alive.
  • In case there is no nominee or eligible surviving family member, the claim can be made by the legal heir.
  • In case the nominee, surviving family member, or legal heir is a minor – the claim can be made by the legal guardian.
  • In order to initiate the claims process, Form 5(which can be found here http://www.epfindia.gov.in/site_docs/PDFs/Downloads_PDFs/Form5IF.pdf) should be duly filled out and submitted.
  • While filling out the claim, it should be kept in mind that: The EDLI Claims are only admissible if the deceased person was actively employed at the time of death. The application for the claim must be attested by the employer.
In case the employer is not available to attest the claim application, attestation must be done with the official seal of either: Documents required for a claim under the EDLI scheme
  • Death certificate:of the EDLI member.
  • Guardianship Certificate: If the claim is being made on behalf of a minor family member, nominee, or legal heir, the legal guardian must also submit a guardianship certificate.
  • Succession certificate: If the claim is being made by a legal heir of the deceased.
  • Cancelled cheque:of the bank account of the claimant in which claim funds are to be deposited.
Example Mr. Nath was employed and was actively contributing the EPF, EPS and EDLI schemes. He drew a monthly salary of Rs.15,000. Upon his death, his nominee claimed the EDLI insurance benefit which was equal to (30 x Rs.15,000) + (Rs.1,50,000) = Rs.6,00,000.
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Basic of Employee Provident Fund (EPF)

“Every month I save my salary into EPF and it is a great form of investment” I have heard this way too many times. When I asked them if they knew what EPF is and how is EPF a great investment? Not many people were able to answer this question.

People just know that 12% of their salary goes into an EPF account and it is  a great form of investment and savings.  EPF being a primary investment for salaried individuals, you must know everything about it. Hence, we have written a detailed article about everything that you would want to and must know about your EPF investments.

What is EPF?

EPF is retirement benefit scheme that is generally available to all salaried employees and forms an important tool for financial planning.

Basically, EPF is like a guaranteed investment as the amount is deducted from your salary before the same is paid to you and invested. You might skip on your SIP or Insurance premium, but your EPF will be deducted from your salary each month.

Regulatory guidelines

Under Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, EPF has two components namely Employees’ Provident Fund Scheme 1952 and Employees’ Pension Scheme 1995 (EPS). These are two different retirement saving schemes under which any salaried individual is covered if he/she is drawing more than INR 6,500 per month as basic salary.

Structure

There are 2 contributions into the EPF.

  • Employee, 12 % of your basic salary (and DA if any) is invested into the EPF account.
  • Employer contributes further 12% of your basic pay from his side into the EPF.
  • Thus, total of 24% of your basic pay (plus DA, if any) is invested each month..

Contribution to EPF & EPS

There are a few components of EPF such as below.

SchemeEmployee’s Contribution of basic pay (+ DA if any)Employer’s Contribution of basic pay
EPF12% of basic pay3.67% (where salary is upto INR 15,000)
  12% of basic pay less 1250 towards EPS (where salary is more than INR 15,000)
EPSNil8.33% of basic (where salary is upto INR 15,000
  INR 1250 per month (where salary is more than INR 15,000)
EDLISNil0.5% (capped at maximum of INR 15,000)

EPF – Employee Provident Fund

  • The money contributed towards EPF is invested and managed by a trust and the employee earns interest from 8% to 12% on the same (depending on the results of a specific year).
  • The corpus of EPF is received as a lumpsum amount on fulfillment of certain conditions.
  • Entire Employee’s contribution goes towards EPF.
  • A part of employer’s contribution goes towards EPF.
  • Where the salary is INR 15,000 3.67% of the same is contributed towards EPF.
  • Where the salary is more than INR 15,000, the employer has an option of investing INR 1250 towards EPS and balance towards EPF and EDLIS. The same depends upon the Employer.

EPS – Employee Pension Scheme

(Refer our Article on EPS )

  • EPS offers pension on disablement, widow pension, and pension for nominees.
  • No interest is earned on EPS. If your corpus of INR 3 lakhs is accumulated through EPS, you would get INR 3 lakhs as pension money.
  • No amount from the employee contribution goes towards EPS.
  • A part of employer contribution goes towards EPS.
  • Where salary is INR 15,000 or more, 8.33% of INR 15,000 is compulsory contributed towards EPS i.e. INR 1250 each month is to be contributed to EPS.

EDLIS – Employees Deposit Linked Insurance Scheme

(Refer our Article  on EDLIS )

  • Provides for a lump sum payment to the insured’s nominated beneficiary in the event of death due to natural causes, illness or accident, while in job.
  • Premium for the EDLI is entirely funded by the employer, which contributes 0.5% of monthly basic pay (capped at a maximum of INR 15,000) as premium for life cover in case the organization does not have a group insurance scheme for its employees.
  • Maximum amount insured under EDLIS is INR 6 lakhs.
                                                                                                  is a risk free, tax free long term debt investment.

Tax benefits

The employer contribution is exempt from tax up to 12% contribution while employee’s contribution is eligible for tax benefit under Section 80 C of the Income-Tax Act, 1961. EPF is under the EEE norm currently indicating that the money invested, interest earned and the money withdrawn after a specified period (5 years) are all exempted from income tax in the hands of the employee.

Nomination

EPF provides you with nomination facility whereby mother, father, spouse or children can be nominated for receiving the proceeds at the time of death of an employee. Government, currently, doesn’t allow nominating siblings.

Transfer and withdrawal policy

  • If a person is not employed for two months at a stretch, there is a provision by which he/she can choose to withdraw EPF.
  • It is advisable to transfer the existing EPF with previous employer to new employer while switching jobs.
  • The process of transfer of EPF is now seamless with the introduction of Universal Account Number (UAN) which is discussed in detail in subsequent para.
  • If you withdraw the EPF amount before completion of five years with an employer the corpus withdrawn is taxed as per your current income tax slabs as the amount withdrawn is then added to your gross salary.
  • Further, withdrawal is generally not permissible if the person is still working.
  • Withdrawal is possible in following cases: children’s higher education, marriage, medical treatment, home loan repayment, construction of house, purchase of flat, etc.
  • Non-refundable advances are also allowed after having completed minimum five years of membership.
  • In case your service is less than 10 years and you have opted for withdrawal on account of no job, an employee is entitled for 100% of EPF including interest on EPF. In addition, employee is also entitled for receiving EPS contribution that is computed based on withdrawal benefit (on pension). Refer our Article on EPS to understand the same in detail.

Receiving pension

An employee start receiving pension from EPS amount after completion of minimum 10 years of service and attaining the age of 58 or 50 years. The pension amount is payable to the subscriber until he is alive and in the event of death of the employee, members of his family -whoever is nominated is entitled for the pension. Monthly pension is determined based on ‘pensionable service’ and ‘pensionable salary’ for which the following formula is generally used:

Monthly pension = (Pensionable salary X Pensionable service) ÷ 70

It is worth noting here that the pensionable salary is nothing but your basic salary on which you have paid EPS premium. Thus, monthly pension will have received will be nowhere closer to real CTC.

Top-up on EPF (Voluntary Provident Fund)

Yes, you can always invest more than 12% of regular contribution. However, any amount over and above EPF is termed as Voluntary Provident Fund or the VPF. In this case the excess amount is invested in EPF and is eligible interest benefit.

UAN services and other recent developments

UAN is a unique number assigned to an employee and it indicates that the subscriber is availing Employees’ Provident Fund Organization (EPFO) service. EPFO generally manages the money in your EPF account.

UAN number is fixed throughout the lifetime and has portable flexibility. Thus, when an employee changes job his new EPF account which will have different account number and will be opened by new employer can be linked directly to UAN.  Thus, UAN acts as an umbrella of multiple EPF IDs allotted to an employee by different firms.

EPFO, in a recent development, introduced the facility of linking Aadhar (unique id) to UAN. This would help the member avail facility in a better and seamless manner. The facility is available at the official website http://www.epfindia.gov.in under Online Services section.

Benefits of Linking UAN With Aadhaar

  • Receive monthly updates on registered mobile number
  • Download e-passbook anytime
  • Submit claims directly to EPFO without any mediation of employer
  • Link multiple EPF accounts allotted over the years
  • Edit and update personal details

Refer our Article to understand the interest calculation on EPF and the amount due to you over a period of time.

EPF contribution is definitely one of the best investments for retirement. It is risk free, tax free, long term debt investment which gives approximately a return of 9.7% post taxes and helps salaried people to build on a corpus for retirement or any other financial need over the long term.

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