Tax Basics..

Come July, Indian tax payers are reminded of tax and tax returns. Indians pay tax on a variety of income sources and the tax rates in India are progressive, i.e, lower income earners pay less tax and higher income earners pay higher tax. While salaried employees get their income after deduction of tax, non-salaried income earners pay advance tax after self-assessment. TDS is also applicable to other payments such as interest income, contract payments, professional charges, insurance commission etc.

What are the various income heads?
There are 5 heads under which income is charged to income tax. They are:

• Income u/h salary
• Income u/h house property
• Income u/h capital gains
• Income u/h business profession
• Income u/h other sources

Depending on the sources of income, assesses would have to use appropriate tax forms (ITR forms) to consolidate their income and file returns. There are provisions in the IT Act to set-off and/or carry-forward losses under one head against another so that the gross income and tax liability are appropriately reduced.

What are the deductions u/s 80?
Deductions are basically tax reliefs given to assessees to incentivize and/or encourage them to save and/or invest in specified instruments. For example, section 80D was introduced to encourage assessees to take medical insurance for their self & family for an amount up to Rs.15,000 p.a. Similarly any principal amount paid towards home loan repayment could be claimed as deduction u/s 80C upto a max of Rs.1 Lac.

How is your tax computed?
Sum up income under various heads
Less all applicable reliefs under section 80
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Net Income
Less 2 Lacs (min tax slab)
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On the balance amount apply corresponding tax rates to compute tax liability
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Refer to: http://law.incometaxindia.gov.in/DIT/Xtras/taxcalc.aspx
http://law.incometaxindia.gov.in/taxcal/income_taxcalc.aspx
If you have not filed your returns by July 31, 2013, but have paid your taxes, you could still file your returns till Mar 31, 2015 and claim your refunds. 

Why Tax planning is important?

There are numerous instruments available to optimize and/or minimize your tax liability. Some of them could be self-availed such as 80C, 80D and 80G, while some are sold to you by Insurance agents and tax saving mutual funds in the month of March. While these quick launch products  offer you instant tax-savings, if done without careful Tax planning, over a period of 10 years, you may end up with a mixed bag of insurance policies and market-linked mutual funds that may not only give poor yield but may also become difficult to track and manage.

Instead, upfront planning of your investments with a financial planner could fetch you the double benefit of choosing the right investment products to meet your long term financial needs as well as following a systematic approach to tax planning which could reduce your overall tax liability by a significant 20-80% every year depending on your tax bracket.