Category Archive : Income Tax Planning

Form 16

What is Form 16 – Components & Importance

All about Form 16 – TDS form

Introduction

In this article, we will see key things you need to know about form 16. If you are a salaried employee, and your company deducts tax from your salary, then Form 16 is one of the most important documents you will need when you file your tax returns. Lets discuss what is Form 16, why it is required and about its components.

We have already discussed what is tax deducted at source (TDS) in detail in our earlier article.

Everything You Need To Know About Form 16

Key Things To Know About Form 16
Key Things To Know About Form 16

What is Form 16?

  • Form 16 is a Salary TDS certificate issued under section 203 of the Income tax Act on the deduction of tax by the employer from an employee’s salary and deposit of the same with the government.
  • Thus, Form 16 is a certificate issued to salaried individuals from their employer when he deducts tax from the employee salary. In simple words, it is an acknowledgement which states your deducted tax has been deposited with the income tax department.
  • This certificate contains details of the amount of tax deducted at source (TDS) on salary by your employer along with the salary breakup for the financial year.
  • As per the Income Tax Act, every employer, at the time of paying salaries, is required to deduct Tax (or TDS – Tax deducted at source), which is computed on the basis of the income tax slab rates in force for that financial year. Companies usually calculate the tax payable by the employee, on the basis of the forecasted earnings and investment declarations made by the employee at the beginning or during the course of the year.
  • The TDS, so deducted, by the organization or employer is deposited with the Income Tax department and the Form 16 in turn is a proof of the same. Employers need to issue the Form 16 to their employees on or before 31st May of the financial year immediately following the financial year in which the income was paid and tax deducted.

Why Form 16 is required – Importance

  1. Filing ITR : Form 16 serves as source document during filing of Income Tax Return as it comprises of the details about income, deductions, tax calculated and TDS as per the Income Tax Rules.
  2. Backup proof for TDS : It serves as in important document for claiming credit of Tax deducted by employer and you might require it to produce before Income Tax Authorities if you don’t get credit of TDS properly. Thus it should be retained as backup proof for TDS. 
  3. Loan Application : Many banks and financial institutions demand Form 16 for verification of the person’s credentials while applying for loans.
  4. Visa Application : Form 16 is needed while processing visas. It is an authentication certificate for income proof. Thus, we require it to attach with visa application.

Components of Form 16

The form has to two parts: Part A and Part B.  These components of Form 16 will help us understand the tax paid, probable tax refund and better tax planning.

Part A
  • Part A of Form 16 comprises of the details of tax deducted at source on salary and deposited in the government’s account. It is generated and downloaded from the TRACES portal by the employer. 
  • Part A of Form 16 includes the following:
    1. Personal Information of Employer as well as Employee : Name and address of the Employer, PAN (Permanent Account Number) and TAN of Employer, PAN of the Employee. This information assist the Income Tax Department to keep a track of money flow from our own as well as our employer’s account.
    2. The Assessment Year (AY) : It refers to the year in which the income is getting assessed. The year in which the taxpayer needs to work on the tax return processes. For example, for the income earned between 1 April 2018 and 31 March 2019, the Assessment Year will be 2019-20.
    3. The time period for which the individual was employed with the employer in the concerned Financial Year
    4. Summary of the salary paid and the tax deducted at source (TDS) and deposited with the Income Tax Department
    5. Date of Tax Deduction from salary and tax deposit in the government account
    6. Acknowledgment Number of the TDS Payment
Income Tax Detailed Knowledge Bank By Invest Yadnya
Income Tax Detailed Knowledge Bank By Invest Yadnya
Part B
  • Part B is a consolidated statement covering details regarding salary paid, any other income as disclosed by the employee to his/her organization, amount of tax paid and tax due, if any.
  • It represents the information in a comprehensive and orderly manner stating the income earned by the employee along with the exemptions and deductions applicable thereon, in the prescribed format. Employee details such as name and PAN are mentioned even in Part B.
  • Part B contains following information :
    1. Total Salary Received : Salary structure is further broken down into different components such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), Leave Encashment, Gratuity and others.
    2. Exemptions Allowed : As per Sec (10) of Income Tax Act, 1961 such as allowances given to employees for Conveyance, Housing rent (HRA), Children education and hostel expenditure, medical, etc.
    3. Gross Income : This is the sum of the salary income as received from the employer and any other income declared by the employee such as income earned from house/property etc. Details regarding other income need to be shared by the employee with the employer during the phase of investment proof submission.
    4. Deductions From Salary :
      • Section 80 C / 80 CCC / 80 CCD  includes contributions made towards instruments or schemes such as Public Provident Fund (PPF), Life Insurance policies, tax saving mutual funds (ELSS), pension, Sukanya Samriddhi among others. The maximum limit for the same is Rs.1.5 Lakh.
      • Deductions under other sections such as 80D (premium paid towards health insurance or Mediclaim), 80E (interest payment on education loan), 80G (donations), deductions for disability and other applicable sections are providedThe details for all these deductions need to be submitted by the employee along with the necessary supporting documents to the employer.
    5. Net Taxable Salary : Total deductions are aggregated under “Chapter IV-A” and reduced from the gross income to calculate the taxable income. Your tax liability is calculated on this amount.
    6. Education Cess and surcharges if any
    7. Rebate under Section 87, if applicable
    8. Relief under Section 89, if any
    9. Total amount of tax payable on income
    10. Tax deducted and the balance tax due or refund applicable

Other Important Points

  • If TDS is not deducted, then it is not mandatory to issue Form 16 to the employee.
  • If the organisation does not possess the TAN, it is not entitled to deduct TDS. Thus, in this situation, the organization will not give Form 16.
  • If you are self-employed, then you cannot acquire form 16. In this situation, it is vital for you to submit ITR and show it as your income proof.

Summary

  • Form 16 is a certificate issued by an employer, certifying that the TDS is deducted from the salary of the employee and deposited with the government.
  • The employer is required to issue Form 16 on or before 31 May of the assessment year. Besides, the employer issues Form 16 if there is a mid-year change of job. 
  • Form 16 helps in filing IT returns, is used as proof of income, for loan assessment and sanctioning, attached along with visa application, etc. 
TDS Rates as per FY 2018-19

TDS (Tax Deducted at Source)

What is Tax Deducted at Source? How Does it work?

Introduction

TDS stands for ‘Tax Deducted at Source’. TDS was introduced to collect tax at the source from where an individual’s income is generated. Lets discuss about TDS in detail.

TDS (Tax Deducted at Source)

What is TDS ?

  • Tax Deducted at Source ie. TDS was introduced to collect tax at the source from where an individual’s income is generated. 
  • The government uses TDS as a tool to collect tax in order to minimize tax evasion by taxing the income (partially or wholly) at the time it is generated rather than at a later date. 
  • TDS is applicable on the various incomes such as salaries, bonus, interest received on bank deposits, interest on securities, commission received, rent or purchase of a property etc. 
  • TDS is not applicable to all incomes and persons for all transactions. Different rates of TDS have been prescribed by the Income Tax Act for different payments and different categories of recipients.
  • For example, payment of redemption proceeds by a debt mutual fund to a resident individual is not subject to TDS but for a Non-resident Indian is subject to TDS. 
Example
  • Let us take an example of TDS assuming the nature of payment is professional fees on which specified rate is 10%.
  • Suppose Yadnya Ltd makes a payment of Rs.50,000/- towards professional fees to Mr. Rahil, then Yadnya Ltd shall deduct a tax of Rs.5,000/- i.e. 10% of Rs.50,000/- and make a net payment of Rs.45,000/- (50,000/- deducted by Rs.5,000/-) to Mr. Rahil.
  • The amount of 5,000/- deducted by Yadnya Ltd will be directly deposited to the credit of the government and it will issue a certificate to Mr. Rahil stating the same.
Detailed Income Tax Knowledge Bank by Invest Yadnya
Detailed Income Tax Knowledge Bank by Invest Yadnya
Objectives of TDS

TDS follows the “pay as your earn” concept. Its basic objectives are as follows :

  1. Tax Deducted at Source facilitates the sharing of the tax collection responsibility between the deductor and the government, ensuring a regular inflow of cash to the latter.
  2. It enables salaried individuals to pay taxes in easy installments each month, thus preventing them from the burden of lump sum tax payments.
  3. TDS empowers the government to receive the necessary funds all year round which aids it in running the country smoothly.
  4. It ensures that the tax net is spread wide enough and prevents tax evasion.

How Does TDS Work?

  • TDS works on the concept that every person making specified type of payments to any person shall deduct tax at the rates prescribed in the Income Tax Act at source and deposit the same into the government’s account. 
  • The person who is making the payment is responsible for deducting the tax and depositing the same with government. This person is known as ‘deductor’. On the other hand, the person who receives the payment after the tax deduction is called ‘deductee’.
  • Form 26AS is a statement which shows the amount of tax deducted and deposited in a person’s name/PAN.  Therefore, an individual can view/check the TDS from incomes paid to him by viewing this Form 26AS.
  • Each deductor is also duty bound to issue a TDS certificate certifying how much amount is deducted in the deductee’s name and deposited with the government. 
  • Thus, The entity making a payment (which is subject to TDS) deducts a certain percentage of the amount paid, as tax and pays the balance to the recipient. The recipient also gets a certificate from the deductor stating the amount of TDS. The deductee can claim this TDS amount as tax paid by him (i.e. the deductee) for the financial year in which it is deducted. 
  • The deductor is duty bound to deposit the TDS with the government. Once deposited this amount reflects in the Form 26AS of individual deductee on the TRACES website linked to the income tax department’s e-filing website. 

TDS Rates As per FY2018-19 (AY2019-20)

Tax Deducted at Source - TDS Rates As per FY2018-19
Tax Deducted at Source – TDS Rates As per FY2018-19
  • One must note that TDS on specified transactions is deducted only when the value of payment is above the specified threshold level. No TDS will be deducted if the value does not cross the specified level. 
  • Different threshold levels are specified by the Income Tax department for different payments such as salaries, interest received on bank deposits and as well as securities, commission received etc. 
  • The details regarding TDS rates of different nature of payments and corresponding sections, their respective threshold limits and payee type are mentioned in the above table.

TDS Deduction Exemptions

TDS is exempted from the payment of interest from the following cases :

  • Payments in favor of RBI, or towards the central government
  • Banking companies
  • Financial corporations formed under the finance bill of union government or any state
  • Income Tax refund
  • Direct taxes interest payment
  • LIC, UTI and investments in co-operative societies
  • Interests earned in recurring deposit or any savings account held with any commercial banks or cooperative societies
  • Interest earned on Indira Vikas Patra (IVP), NSC or KVP
  • Interest earned on NRE account
  • Any institutions notified as Nil TDS organization

Summary

  • Tax Deducted at Source (TDS) is a system of taxation where the person/entity responsible for making specific payments deducts the applicable tax before the payment is credited to the receiver. 
  • TDS is applicable on the various incomes such as salaries, bonus, interest received on bank deposits, interest on securities, commission received, rent or purchase of a property etc. 
Section 80E : Tax Deduction on Education Loan

Details of Section 80E | Deduction on Education Loan

Section 80E Interest on Education Loan

Introduction

In this article, we are going to explain the tax deduction under Section 80E. This section can be utilised to avail tax benefit available for education loan.

Section 80E | Income Tax Deduction on Education Loan

  • Thus, Section 80E provides a deduction in respect of interest on loan taken for higher education.
  • The loan taken for higher education would include following major expenses :
    1. Tuition fees for the course proposed to be undertaken
    2. Travel expenses (applicable especially in case of courses outside India)
    3. Expenses towards Lodging
    4. Expenses towards Study material and instruments like a laptop which may be mandatory for the course
  • In short, Education loan is a cost-effective tool to support the higher education of the students. Most of the banks and financial institutions provide educational loans.
  • One can claim deduction of interest on Educational Loan in his Income Tax Return
Section 80E : Tax Deduction on Education Loan
Section 80E Deduction on Education Loan

Eligibility

A. WHO CAN CLAIM DEDUCTION UNDER SECTION 80E?
  • Deduction under this section can be claimed only by an individual who has taken a loan for higher education and paying interest on the same. It cannot claimed by an HUF, company, trusts or partnership firm.
  • Till FY 2006-07, the deduction under this section was limited to loan taken by the assessee himself. However it was then modified to also apply to loans taken:
    1. For self
    2. Spouse
    3. Children of the assessee, including adopted children.
    4. For any student for whom the assessee is the legal guardian
  • Although, the loan can be availed for education of the individual or his relative, deduction can be claimed only by the individual who has availed the loan for this purpose and is responsible for repaying the same out of his income.
B. Which Courses are covered under ‘Higher Education’?

Section 80E provides for deduction in respect of loan taken for higher education. It may be noted that the section applies to ‘higher education’ and not on any loan taken for school admissions.

  • Courses taken up after completing Class 12 Examination like Senior Secondary or its equivalent.
  • The university/board should be the one approved by local authority or the state or central government.
  • The deduction under Section 80E can be availed only for full-time courses. Loan taken for post graduate courses in medicine, management, engineering, applied science, etc. are covered under Section 80E.
  • However, loan taken for part-time courses are not included under Section 80E.
  • It covers vocational courses taken up after the completion of senior secondary examination.
  • Courses undertaken outside India also fall under the purview of the meaning of ‘higher education’, if taken up after completing senior secondary examination.
C. Not all education loans qualify for tax deduction
  • The tax deduction available under Section 80E is applies only to education loans availed from banks, financial institutions notified under the Income Tax Act and approved charitable institutions.
  • You cannot claim tax deduction on funds borrowed from family members or friends for higher education.
  • Similarly, not all NBFC education loans will qualify for tax deduction. Only those education loans availed from NBFCs notified by the central government through official Gazette as a ‘Financial Institution’ for the purpose of education loan tax deduction will qualify for the deduction.
  • This is especially relevant as banks are increasingly getting cautious with education loans due to the rising non-performing assets in the segment. Since the NBFCs are aggressively pushing to fill in this gap, students may get education loans from NBFCs with relative ease. Hence, to ensure that you do not miss out on the Section 80E tax deduction later, check out whether that NBFC has been notified as such through the official Gazette.

Tax Benefit – Deduction under Section 80E

  • The amount of deduction that can be claimed under Section 80E is the interest paid on education loan.
  • Thus, There is ‘no cap’ or no upper limit on the amount of interest that can be claimed as deduction. The deduction is available to the extent of interest paid on loan for higher education, in the financial year.
  • Deduction is available irrespective of the rate of interest that is charged on this loan. Also, the deduction under Section 80E can be availed irrespective of the amount of loan amount.
  • Please note that principal component does not qualify for tax deduction u/s 80E. Only the interest component of education loan EMI qualifies for tax deduction under Section 80E.
  • The lack of tax deduction for principal repayment in education loan has been somewhat compensated by the absence of an upper cap on claiming tax deduction on interest payment.

Tenure for Deduction u/s 80E

  • Deduction of interest on education loan can be claimed for –
    1. Either 8 years, from the year in which the repayment of loan is started
    2. Or The period up to which repayment of interest is made, whichever is earlier.
  • It means the tax benefit can be taken for a maximum period of 8 years.
  • Period of 8 years starts from the year in which repayment of loan is started. Thus, Date of obtaining loan is not relevant.

Section 80G

Explanation of Tax Deduction under Section 80G

Section 80G : Deduction on Donations to Charitable Trusts

Introduction

Section 80G of the Income Tax Act offers a tax deduction on donations or contributions made to certain charitable trusts/ institutions under the Income Tax Act. All donations are not eligible for deductions under section 80G, only donations made to prescribed funds qualify as a deduction.

Section 80G : Tax Deduction on Donations to Charitable Trusts

Eligibility

  1. Deduction can be claimed by anyone who donates to certain funds or charitable institutes. Donor can be an individual, HUF, Partnership Firm or a Company.
  2. Individual can be resident or non-resident in India.
  3. Donations must be made to the Trusts or Institutions operating in India.

What is the Mode of Payment?

  • Starting FY2017-18 any donations made in cash exceeding Rs.2000 will not be allowed as deduction. Therefore the donations exceeding Rs.2000 should be made in any mode other than cash to qualify as deduction u/s 80G.
    1. Donations up to Rs.2000, Mode of payment : Cash/ Cheque/ Draft
    2. Donations > Rs.2000, Mode of payment : Cheque/ Draft
  • Earlier, the maximum limit allowed for donation in cash was Rs.10,000, but the Union Budget of 2017 reduced this to Rs.2,000 in order to curb tax filers from misusing this section by submitting fake donation receipts. 
  • In-kind contributions such as food material, clothes, medicines etc do not qualify for deduction under section 80G.

How to Claim the Deduction?

To be able to claim this deduction the following details have to be submitted in your Income Tax Return. Here, Donee is the institution where you have donated your money.

  1. Name of the Donee
  2. PAN of the Donee
  3. Address of the Donee
  4. Amount of Contribution

As a documentary proof, you should have payment stamped receipt from the donee you have made the payment –

  • Such receipt should have the name, address and PAN of the trust or institution mentioned on it.
  • Receipt should also include the name of the donor and details of amount donated mentioned on it.
  • Registration number of the trust under section 80G and validity of registration (registration period) must be mentioned on the receipt.

Tax Deduction of Donation under Section 80G

There are 2 categories of tax deductions under section 80G. Details are given below :

Section 80G  : Tax Deduction on Donation
Section 80G  : Tax Deduction on Donation
Category I : 100% Deduction Without Upper Limit

Any donation made to funds which are initiated in the name of Prime Minister, Chief Minister or funds raised for a national cause or relief funds are eligible for claiming 100% deduction without any upper limit. Some of the examples are given below –

  • National Defence Fund
  • Prime Minister’s National Relief Fund
  • National Cultural Fund
  • National Children’s fund
  • Prime Minister’s Armenia Earthquake Relief Fund
  • National Sports Fund
  • Clean Ganga Fund
Category I : 50% Deduction Without Upper Limit

There are only 4 funds under this category. Those are listed below :

  • Jawaharlal Nehru Memorial Fund
  • Prime Minister’s Drought Fund
  • Indira Gandhi Memorial Fund
  • Rajeev Gandhi Foundation
Category II : 100% Deduction With Upper Limit
  • Donations to Government or Approved Local Authority, Institution or association for the purpose of promoting family planning
  • Donation by Company for Indian Olympic Association or any other institute established for the development of infrastructure for sports and games in India.
Category II : 50% Deduction with Upper Limit
  • Donations to Government and Authorized Local Authority, Institutions or Associations for the purpose other than family planning.
  • Donation to any authority constituted in India for the purpose of planning, development and improvement of cities, towns, villages.
  • Donation for repairs or renovation of any notified temples, mosque, Gurudwara, Church or any other place.
Ajusted Total Income

Let us understand what is Adjusted Total Income –

Adjusted total income for this purpose is calculated as Gross Total Income minus :

  1. All Exempt Incomes – tax free allowances received like HRA, LTA etc. or agriculture income or dividend income from Mutual Fund, interest on PPF etc.
  2. Short Term Capital Gain from Equity Shares and Mutual Fund
  3. Long-term capital gains (Equity & Debt) and,
  4. All deductions under section 80C to 80U except for 80G. 
Section 80GG : Deduction on Rent Paid

Section 80GG : Deduction on Rent Paid

Claim Deduction on Rent Paid under Sec 80GG

Introduction

Under Section 80GG, an individual can claim deduction on rent paid if he/she does not receive House Rent Allowance (HRA) even if he/she pays rent for accomodation. The individual can be either self-employed or salaried employee who is not eligible to avail the benefit of HRA exemption. Section 80GG is designed for such type of taxpayers.

Section 80GG : Deduction on Rent Paid

This section 80GG provides the deduction of house rent on fulfillment of certain conditions which we are going to dicuss in this article.

Eligibilty

For Whom?
  • Individuals who do not get HRA in their salary which includes even self-employed and professionals who do not get salaries as such. It can be claimed by an individual or a HUF.
  • It is not for those individuals who get HRA in their salaries. HRA is an important component of salary. It is given by employers to their employees to accommodate expenses on rent paid. HRA in salaries is claimed under another section of income tax 10(13A). It can be partially or fully claimed based on your actual expense on rent which is claimed by submitting rent receipts. If you get HRA in your salary and are not living in a rented space, the HRA component of your salary is fully taxable.
Conditions
  • To claim rent paid under section 80GG, you, your spouse, minor child or HUF you are a part of should not own a residential house in any place you are employed, operate your business or profession or in any other city where you are claiming benefit of a self-occupied house.
  • It means benefit of claiming tax deduction for claiming repayment of interest and principle of home loan and claiming 80GG together is not possible.
  • If you own a house in some another city, it is treated as rented out.
  • While claiming tax deduction under this section, you need to fill and submit form 10 BA which is declaration stating you satisfy the first 2 conditions.

What is the Amount that can be claimed?

Deduction under Section 80GG shall be the least of the following-

  1. Rs. 5,000 per month i.e. Rs. 60,000 per year
  2. Rent Paid Less 10% of Adjusted Total Income
  3. 25% of Adjusted Total Income
What is Agjusted Total Income?
  • Adjusted Total Income is calculated by deduction following incomes/deduction from Gross Total Income :
    1. Short Term Capital Gain from Equity Shares and MF
    2. Long Term Capital Gain (Equity as well as debt)
    3. Exempt Income Like Dividend on shares, Interest on PPF etc.
    4. Deductions from section 80C to 80U

Example

 Section 80GG : Deduction on Rent Paid
Section 80GG : Deduction on Rent Paid

If your adjusted total income is Rs.4 Lakhs and annual rent paid is Rs.2.4 Lakhs, then the least of the following will be allowed for deduction:

  1. Rs. 5,000 per month i.e. Rs. 60,000 per year
  2. Rent Paid Less 10% of Adjusted Total Income = (2.4 Lakhs – 10%(4 Lakhs)) = Rs.2 Lakhs
  3. 25% of Adjusted Total Income = 25%(4 Lakhs) = Rs.1 Lakhs

Important Points

  1. While claiming deduction under Section 80GG, employee shall furnish rent receipts or rent agreement. 
  2. Also he needs to fill Form 10BA which will prove that he is not claiming benefit of his self-occupied property.
  3. If Rent paid to the landlord exceeds Rs. 1,00,000, then he needs to furnish PAN to his landlord (Landlord needs to provide tenant details in his income tax return.)
  4. Following are the details required to be submitted for claiming deduction under section 80GG :
    • Name of the assessee
    • PAN
    • Full address of the premises along with Postal Code
    • Tenure (in months)
    • Payment Mode
    • Amount Paid
    • Name of landlord
    • address of the landlord.
    • PAN of the landlord is mandatory if rental is more than INR 1 lakh for the assessment year.
    • A Declaration confirming that no other house property is owned by the taxpayer himself or in the name of Spouse / minor child or by the HUF of which he is a member.

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