Glossary

    If you pay a donation to any recognised charity or relief fund, a part of the donation can be claimed as an expense. This means that the donation paid is reduced from your salary, so your tax liability reduces. The charity needs to give you a certificate to this effect, which it would if it were recognised under this section.

    A few organisations like the Prime Minister's Disaster Fund enjoy 100% deduction- which means the entire donation paid is deductible from your salary. However, most other donations including several religious organisations enjoy only a 50% deduction. If you pay Rs.1,000 to such an organisation, you can show Rs.500 as expense.

    When you sell a property for a profit, you need to pay capital gains tax. In case you have held the property for three years or longer, it becomes long term capital gains. Section 54 gives income tax rebate on this long term capital gains tax liability in case of residential property.

    To qualify under Section 54 of Income Tax, you need to either buy another residential property within two years of sale of the old one or construct a residential property within three years of sale of the old one. This new house should not be sold for a minimum of three years (if it is, capital gains tax is applied there).

    When you sell a capital asset for a profit, you need to pay capital gains tax. In case you have held the asset for three years or longer, it becomes long term capital gains. Section 54 EC gives income tax rebate on this long term capital gains tax liability in case of property or any other capital asset.

    To qualify under Section 54 EC, you need to invest in bonds of the Rural Electrification Corporation (REC) or National Highway Authority of India (NHAI) within six months of sale of the property. The maximum amount of such investment that gives you tax relief is Rs 50 lakh.

    Section 24a allows flat deduction of 30% for calculating income from house property. This is towards repairs and maintenance of the house.

    Section 24b of Income Tax Act allows tax deduction on interest payable on home loan. In case the property is self-occupied, this exemption is limited to a maximum of Rs.1,50,000 in a Financial Year. In case the property is let out, the entire interest paid is eligible for deduction.

    A penny stock is the share of a listed company that is not doing too well. As a result, such a share trades at very low prices, often below its face value. Such shares are also thinly traded in the market due to their unpopularity. Penny stocks are dangerous to buy, since prices there can be notoriously unpredictable and even manipulated by promoters or brokers. Investors should steer clear of penny stocks and stick to more reputed companies with large traded volumes of shares.

    Under Section 80C of the Income Tax Act, the Government provides tax relief (i.e. subtracts the investment from income for the year, thereby reducing tax outflow) on investments made in certain schemes and certain expenses incurred by you for long term benefits. This is subject to a maximum of Rs 1 lakh a year and includes:

    • Provident Fund (PF)
    • Public Provident Fund (PPF)
    • Tax Saving Mutual Funds (ELSS)
    • Unit Linked Insurance Plans (ULIPs)
    • National Savings Certificate (NSC)
    • Post Office Time Deposits
    • 5 year Scheduled Bank Fixed Deposits
    • Tuition fee
    • Home loan principal repayment

    Under Section 80D, you get tax relief on premiums paid towards Medical Insurance for yourself and dependents:

    • The total tax relief covers the premium paid for covering yourself and your dependents, to a maximum of Rs 15,000 in a year
    • In case there are dependent parents, an additional Rs 15,000 of premium paid towards their medical insurance is also given the tax relief
    • In case the dependents parents are above 60 years, the above limit is Rs 20,000

    One important precaution is that 80 d deduction is available only on the medical insurance part of the premium. So beware of any bundled products sold, wherein part of the premium goes for other purposes. Such portion will not get you the tax benefit.

    Tax Deducted at Source (TDS) is a method of collecting tax at the source where income is generated. A number of incomes such as salary, interest, commission, etc attract TDS. TDS is also known as withholding tax and is deducted by the one making payment to you.

    Section 80CCF of Income Tax was an added in the Financial Year 2010-11, under which an investment of upto Rs 20,000 in certain infrastructure bonds qualified for additional tax deduction. Three long term infrastructure bonds were eligible - those of the Life Insurance Corporation (LIC), Infrastructure Development and Finance Corporation (IDFC) and IFCI. This deduction was over and above the regular 80C and 80D deductions available respectively for tax-saving investments and medical insurance.

    Exemption under section 80 CCF has not been extended for the year 2012-13. Individuals and HUFs can continue to make investments in theses bonds but cannot claim income tax exemptions for their investments. 

    Income tax return is the document to be filed with Income Tax department by those whose income is taxable. Income tax return gives information about one's tax dues (from one's income sources) and tax paid in a financial year. Whatever tax is left to be paid is to be paid while filing income tax returns or if excess has been paid, it can be claimed for refund.

    Income tax is a tax imposed on individuals and businesses by the government on earnings and income made in India in a financial year. Income tax rates are higher for higher incomes. Rates are fixed every year by the Finance Minister.

    Assessment Year (AY) is a jargon used in the context of income tax. All income tax calculations go by the Financial Year (FY), which stretches from 1 April of one year, to 31 March of the next. Say we are dealing with the accounts of the FY 2012-13. While the tax for income in this FY itself is typically paid in the same FY itself, the process of filing returns and closing books happens in the following year, in this case 2013-14. This following year is called Assessment Year (AY).

    A simple thumb-rule to remember is that the AY is always the year following the year in which income was earned. While filing returns or otherwise corresponding with the Income Tax department, it is important to understand and quote the correct Assessment Year to avoid confusion.

    Previous Year is a financial term used in the context of Income Tax filing. As you know, all Income Tax calculations in India go by the Financial Year (FY), which stretches from 1 April of one year, to 31 March of the next. The filing of returns for this Financial Year happens in the next year, which is called the Assessment Year. Thus, while filing, the Financial Year for which returns are filed, is sometimes called Previous Year.

    For example: you are filing returns on 20 July 2013 for income earned between 1 April 2012 and 31 March 2013. The year 2012-13, where the income was earned, is called Previous Year. The year in which you are filing returns (2013-14) is called Assessment Year.

    On all tax payments, including Income Tax, Service Tax and VAT, the Government collects an additional amount, ostensibly to pay for a fund that invests in India's educational sector. This consists of two components:

    1. Educational Cess, amounting to 2% of the tax calculated
    2. Secondary and Higher Educational Cess, amounting to 1% of the tax calculated

    This cess, in effect, increases your tax rate by 3% of the tax paid. The only reason it is separately calculated and indicated is to demonstrate the specificity of its use on part of the Government.

    Items like a company provided accommodation, a company provided car, or a soft housing loan given by the company are actually part of your CTC. The company claims them as expenses, but you do not need to declare them as part of your income, since they are not part of your salary. To remove this 'loophole' the Government had introduced a tax called the Fringe Benefit Tax (FBT) on all such benefits. It had devised a method of calculating the value of all such benefits, and assigned rates of tax to each of them.

    However, there were widespread protests on difficulties in calculating the value of FBT. Some items like sales promotion expenses, which were included in FBT, were deemed to be unfair. Following all this, the FBT has now been abolished from Financial Year 2009-10.

    Financial Year (FY) is a jargon used in the context of Income Tax in India. All Income Tax calculations go by the Financial Year (FY), which stretches from 1 April of one year, to 31 March of the next. All income, expense, savings, filing and investment calculations as far as tax are concerned, go by this definition of Financial Year.

    Ours is a socialist country, as per the Constitution. One place where we practice what we preach is in Income Tax. The poorest of our country, as defined by what they earn in a Financial Year, are not taxed. Thereafter, the rate of taxation increases with increase in income. In this graded method of taxation, the limits of income at which the rates change, and the rates themselves, are called tax slabs.

    The computation of 'income' itself, as per tax laws, can get complicated. But for the purposes of this definition, suffice it to say that your slabs depend on two things:

    • What you earn in a year
    • Whether you are a man, woman or a senior citizen above 60 yrs (the last two get lenient taxation)

    As individual, you would most likely encounter the TDS Certificate if you have fixed deposits in a Bank. The Bank would deduct tax before paying interest, and deposit this tax to the Government. As proof of this, it would give you a TDS certificate. The tax paid by the Bank on the your behalf can then be adjusted with your own tax liability when you file returns. In order for this to work correctly, the Bank should have your PAN number, so that it deposits the money correctly in your account.

    Since the deadline for tax filing for salaried persons is 31 July and for others is 30 September, make sure you get your TDS Certificate, if any, well before that. In case the tax deducted is higher than your tax liability, you can claim a refund.

    When a company or a mutual fund pays out a dividend, the Government steps in to collect a share of the proceeds. It collects a tax called the dividend distribution tax (DDT). The specifics may vary:

    • Each type of investment (shares, equity mutual fund, debt mutual fund, etc) has a different rate of DDT. Currently the government is more lenient towards equity, while it taxes cash funds heavily
    • Sometimes the government makes it a responsibility of the company or mutual fund to compute and pay this tax; and sometimes that of the investor. But in either case, remember that money is finally coming from your corpus, so the end result is the same!

    The Income Tax rules function as a balance between what you need to pay (based on your earnings) and what is credited to your account (as TDS or Advance Tax). After the end of the Financial Year, you are required to balance these two sides through the process of Filing Tax Returns. During the filing, you need to compute the exact amount of tax due. If there is a shortfall in your credits, you need to pay the balance as the Self Assessment Tax.

    This is called Self Assessment Tax, to distinguish it from the tax you may need to pay through an Income Tax demand later. In Self Assessment Tax, you yourself admit that your tax credit is insufficient, and pay up the balance (usually along with an interest for delayed payment).

    The last couple of decades have seen explosive growth of services in India – logistics, IT, accounts, consulting, etc. The Government taxes every transaction that happens in the realm of services, through the Service Tax. Today, this is separate from the Value Added Tax (VAT) on sales. However, the proposed Goods and Services Tax (GST) hopes to bring both these streams of economic activity under a common umbrella.

    For instance, if you are a Consultant having a turnover in excess of Rs.8 lakh in a year, you need to pay Service Tax of 12.36% on every bill you raise on your clients. Typically you would bill this Service Tax separately to the client, and pay the same to the Government. Any Service Tax that you pay to your vendors (for instance on your office rent) would be deductible against your liability.

    The Securities Transaction Tax (STT) is a charge you pay to the Government, every time you buy or sell a share, derivative or an equity mutual fund. The Government annually plays around with the rates, and sometimes with whether it is to be borne by the seller or the buyer. In any case, it serves as deterrent to frequent churning of the portfolio.

    For NRIs investing in mutual funds, in lieu of capital gains tax payable, the mutual fund deducts a certain rate of tax, and only pays the balance back to the investor. This TDS is paid by the fund to the Government, and is called Withholding Tax. In case the investor's residence country has a Double Taxation Avoidance Treaty with India, this tax withheld is available as credit to the tax he has to pay there.

    NRIs may thus use the statement of account provided by the mutual fund (which shows tax withheld), and use it in their returns filing in their country of residence.

    Unlike Income Tax, which is charged on your annual income in a particular year, Wealth Tax is charged on the total assets you hold. The method of calculation of total assets is somewhat involved and has several exceptions, but two broad points are worth noting:

    1. The Wealth Tax is charged at 1% of assets over Rs 30 lakhs. It is to be paid and filed along with Income Tax every year
    2. Typically, it focuses on 'unproductive assets' - such as a vacant plot of land, a house lying vacant, jeweler beyond what you wear, etc. Assets earning income (and hence being taxed) such as shares or bonds as well as assets that you use (your own house and personal jeweler) are excluded.

    Increasingly, the Permanent Account Number (PAN) is your single important number that defines you as Indian. Originally, the PAN was meant to be a unique identification number for all Indian individuals and companies of all hues for the purpose of Income Tax. Increasingly, it has become a ubiquitous requirement - to buy stocks, mutual funds, real estate, insurance, to do anything significant in your bank account, etc.

    Even if you fall below the tax bracket or are not liable to pay tax, you would still do well to get a PAN. In fact, it is worthwhile getting a PAN even for your newborn kid - she will need it very soon anyway. The process of getting a PAN has become smooth and efficient; you can apply for it here: https://tin.tin.nsdl.com/pan/form49A.html

    If you haven't done so already, intimating your PAN to your Banks immediately is a good idea.

    Form 16 is just like your annual salary statement that your employer gives you. It contains such details as are required for you to fill your Income Tax Returns. Most of the items from Form 16 need to be copied as-is into your I-T Returns sheet, so do not worry even if you do not understand some of the terms used in the Form!

    Since the deadline for tax filing for salaried persons is 31st July, make sure you get your Form 16 from your employer well before that. In case employer has not deducted any tax from your salary (this can happen if your income fell below tax limit), they may not issue a Form 16, and only give you a Salary Advice Slip instead.

    Several retirees above 60 years of age fall below the tax bracket - i.e. since their only source of income is their pension or income from interest/dividend, their tax slab tends to be zero. However, fixed deposits and post office schemes in general deduct TDS on interest. If TDS is deducted for such a person, claiming back the tax paid becomes a tedious and time-consuming process.

    Form 15H allows such an individual to declare to the Bank or Post Office that she is below the tax bracket. When they receive this declaration, they do not deduct TDS on interest thereafter. Of course, a wrong declaration by a person who falls in the tax bracket is a punishable offence!

    If you fall below the tax bracket (i.e. your annual income is below the taxable limit set for the year), you obviously want to avoid a situation where you pay tax first and then try to recover it from the tax department later. One such case is Tax Deducted at Source (TDS) - fixed deposits and post office schemes in general deduct TDS on interest and pay it to the Government.

    Form 15G allows you to declare to the Bank or Post Office that you fall below the tax bracket. You can use this for yourself or for your Hindu Undivided Family (if you have one). When they receive this declaration, they do not deduct TDS on interest thereafter. Of course, a wrong declaration by a person who falls in the tax bracket is a punishable offence!

    'You are as young as you feel' - goes a popular saying. But thankfully, the law has a more objective definition of senior citizens.

    - For all income tax related issues (tax slabs, forms, etc), any person aged  60 years or above is considered a senior citizen. He/she is given a more lenient treatment.

    - For deriving benefit of higher interest rates in Bank fixed deposits or investing in senior citizens savings schemes, any person aged 60 years or above is considered a senior citizen. Indeed, even Indian Railways recognise 60 as the age for giving senior citizen concession.

    - Needless to say, this is applicable only to individuals. Hindu Undivided Families, Proprietorships or Partnerships cannot claim senior citizen benefits.

    In some earlier years, if your taxable income in the year exceeded Rs.10 lakhs, you had an additional burden. On top of your regular tax calculation, you had to pay an additional 10% of the amount of tax calculated thus. This additional amount was called surcharge. The FM talks of reintroducing surcharge for those whose income exceeds Rs 1 crore for 2013-14. This is, in effect, a higher tax rate - no different from increasing the tax slab itself.

    If you live in a rented house, the Government allows you to show the rent you pay as an expense against your salary. This means that your net income comes down, and so does your tax liability. For this, your salary typically has a component called the House Rent Allowance (HRA). It sets the upper limit to which your rent can be claimed as an expense.

    While you are free to pay any rent depending on the house you choose, the amount that is allowed to be claimed as expense is the minimum of the following three numbers:

    1.     Your House Rent Allowance (HRA)

    2.     Rent paid minus 10% of Basic Pay

    3.     50% of Basic Pay (40% in case you live outside the four metros Mumbai, Delhi, Chennai and Kolkata)

    The Indian Income Tax system functions on the rule that you pay Income Tax on a quarterly basis, on the basis of estimated income in the entire year. If you are salaried, this is not an issue, since your employer would deduct TDS from salary every month. But if you have other sources of income like capital gains or professional income, you need to calculate and pay tax on this income every quarter, as per the schedule given below. This quarterly payment of Income Tax on the basis of estimated receipts is called Advance Tax.

    Deadline

    Payment schedule (for individuals)

    15 September

    30%

    15 December

    30% (total 60%)

    15 March

    40% (total 100%)

    Tax bracket is the range of income which attracts tax at a certain rate. Income tax rate rises as tax brackets change from lower to higher income levels.

    Capital asset is any kind of property held by a tax payer for investment or any other useful purpose (in terms of generating income) except for consumption items, special bonds issued by the central government, gold deposit bonds and agricultural property.

    Capital gain means profit made on selling or transferring a capital asset.

    Long term capital gain (LTCG) is the profit made on selling or transferring a capital asset after 1 year of acquiring it or 3 years in case of certain assets like land, house and gold. The benefit of indexation is available in computing long term capital gains.

    Capital gains tax is charged on profit made on selling or transferring a capital asset. Tax on long term capital gains is lower than tax on short term capital gains.

    Short term capital gain (STCG) is the profit made on selling or transferring a capital asset generally before 1 year of acquiring it or before 3 years in case of certain assets like land, house and gold.

    National Securities Depository Ltd (NSDL) in association with Income Tax department's Tax Information Network (TIN) facilitates PAN applications. New PAN card applications and verification of PAN application status can be made online through its portal at https://www.tin-nsdl.com/

    In addition verification of Form 16, Form 16A of TDS statement, tax challan status enquiry and Income Tax Refund status can be checked at the portal.

    You get a tax deduction when your taxable income has been lowered for certain investment you made or certain expenses you incurred, in line with the tax laws.

    You get tax exemption when your income from certain sources is exempted from attracting income tax. No tax is to be paid on income from tax exempt sources.

    According to Income Tax rules a relative could be a spouse, brother or sister, brother or sister of spouse, lineal ascendant (parent, grandparent, great grandparent, etc), lineal descendant (child, grandchild, great grandchild, etc), or spouse of any of the relatives mentioned.

    When income is received as a chance or by luck, like if you win from lotteries, crossword puzzles, horse race, card game, gambling, betting, etc it is termed as casual income under Income Tax laws. Casual income generally refers to those incomes which cannot be anticipated or calculated beforehand and is considered as income from other sources for tax purposes. A flat tax rate of 30% applies to such casual incomes.

    Gross total income is the total income before any deductions under chapter VIA have been made. Alternately it is the sum of income from all possible sources in a year. Thus gross total income is the sum of income from salary, income from house property, profit from business, capital gains and income from other sources.

    Gratuity is a voluntary payment made on resignation, termination of service or death to an employee who has served in an organization for at least 5 years. Gratuity amount has tax deductions subject to certain conditions.

    Leave travel allowance (LTA) is a remuneration made by employers to employees for their long distance travelling costs. LTA could either be on reimbursement basis or as allowance with salary. LTA can be claimed for income tax deduction.

    Entertainment allowance is a grant given to Central and State Government employees and is meant for their hospitality expenses on guests. Part of entertainment allowance is tax deductible under section 16(ii) of Income Tax Act.

    Professional tax on employment is a tax charged by State Governments. It is paid either by the employer or reimbursed in salary or is to be paid by the employee. Professional tax or employment tax can be deducted from salary for computing income tax under section 16(iii).

    Although Gift Tax Act does not exist anymore in India, any gift received in cash or kind (like property, jewelry) of value over Rs 50,000 becomes part of one's total income and is taxable as per income tax slab. However some exemptions are permitted- gifts from relatives, gifts on wedding or as a will, inheritance, etc are not charged tax.


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