It’s Time To File Your Income Tax Return – Part 2

The second part of ‘It’s Time To File Your Income Tax Return’ will now provide an example of how to go about calculating the income and deductions so as to arrive at the tax liability. In part 1 our readers would have got a fair idea about the nitty-gritty and also would have understood the myriad aspects for filling an income tax return. This part has taken an example of how a person assesses his income from all sources and then arrives at a figure which he is liable to pay as tax. The following table describes the tax liability computation for Mr Tax Burner and below that is a detailed explanation of the same.

Let us suppose that Mr Tax Burner is a working professional. His income from salary works out to Rs 6 lakhs i.e. Rs 50,000 per month for 12 months. Also, during the year he worked part-time which fetched him Rs 20,000. Mr Burner is a very risk-averse investor and hence does not have much investment in shares. He has a majority of his savings in fixed deposits. He has a fixed deposit of Rs 5 lakhs with the State Bank of India which gives him an annual return of around 9 per cent. This computes to be Rs 45,000 p.a.

As far as income tax deductions are available for individuals, Mr Burner is very smart and he has made the use of most of them which will further help the tax liability to become minimal. Under section 80C, he pays regular premium for life insurance which is Rs 5,000 per month for 12 months i.e. Rs 60,000. He also has a PPF account with SBI and had deposited Rs 50,000 during the year 2011-12. He made an investment in ELSS which is also allowed as deduction up to a sum of Rs 24,000. However, the total investments of Mr Burner under Section 80C are Rs 1.34 lakhs as opposed to the maximum deduction limit of only Rs 1 lakh.

Further, he paid a medical premium of Rs 10,000 each for himself and for his dependent parents. One should note that it is under the allowed deductions of Rs 15,000 for himself and also for his parents. On the advice of his close friend he also invested in a long-term infrastructure bond of IDFC in March 2012, a sum of Rs 50,000 which will further help to reduce his tax liability. Here our readers should note that only Rs 20,000 is allowed as deductions.

Now comes the final computation of the tax liability of Mr Burner. His total income is Rs 6,65,000 and the permissible deduction is Rs 1,40,000. Hence he has to pay tax on the remaining of his income which is Rs 5,25,000. Here readers should understand carefully that up to Rs 1,80,000 is exempted from tax and then the tax is calculated according to the slab or bracket. Mr Burner’s taxable income is Rs 5.25 lakhs and hence it will come in two slabs. The first slab is of income up to Rs 5 lacs which is taxable at the rate of 10 per cent while that above Rs 5 lakhs to Rs 8 lakhs is at 20 per cent.

Therefore, it will be Rs 3.2 lakhs at the rate of 10 per cent (5 lakhs less 1.8 lakhs which is exempted from tax) and the remaining Rs 25,000 at the rate of 20 per cent. This will give a tax liability of Rs 37,000. To this we add education cess of 3 per cent which will come up as Rs 1,110. Together, the net tax payable for Mr Burner works out to be Rs 38,110. In conclusion, Mr Burner needs to pay this sum of Rs 38,110 as tax on or before July 31, 2012. How to pay this amount was briefly explained in our previous article named It’s Time To File Your Income Tax Return – Part 1

Having said that, we would once again advise our readers to take the help of a chartered accountant or a tax consultant before filing the income tax return.