Save Tax with Life Insurance

Income Tax is a Direct Tax that is levied on the net income earned by an individual, company or any other person. The amount that is calculated as income tax is calculated as a percentage on the earnings of the said person or entity. Each person is required to declare their earnings to the government by way of an annual income tax return³ and pay their taxes due as per the applicable laws. Non-payment of tax and non-filing of tax returns³ is punishable by the law.

In India – income tax is levied by the Government of India under the Income Tax Act, 1961. The money collected into the government coffers is used to pay for expenses on infrastructure, development, fund other public services and other such expenses needed to perform the government tasks and obligations that are required to run a country.

India, like most other countries, employs a progressive system of taxation, where the rate of tax is higher for high income earners. There are a series of deductions available on the tax payable in respect of certain expenses or investments. The savvy taxpayer makes note of these and does adequate tax planning to optimise their tax liability.

In 1860, income tax was introduced in India for the first time by Sir James Wilson, the pre-independence finance minister of India. He enforced the Income Tax Act, 1860 to cover up for the losses sustained by the government due to the military mutiny of 1857. From time to time, the act was replaced with different licence taxes. In 1886, a separate Income Tax Act was passed, which was further amended by the Income Tax Act of 1918 and 1922. The Income Tax Act of 1922 became highly complicated due to several changes. Hence, the final Income Tax Act of 1961 was introduced on April 1, 1962.

Presently, the Income Tax Act of 1961 is applicable in India. Over the years, the act has undergone several changes, even those of far-reaching nature, as proposed by the Union Budget every year. Currently, the act levies income tax under the following five heads: 

• Income from Salary 

• Income from House Property 

• Income from Profits and Gains of Profession 

• Income from Capital Gains 

• Income from Other Sources 

Income tax rules

Who are taxpayers?

An Indian citizen below the age of 60 years, earning more than ₹2.5 lakhs annually is liable to pay income tax as per a pre-determined percentage. Indian citizens above the age of 60 years and earning more than ₹2.5 lakhs are liable to directly pay taxes to the Government of India.  

Apart from an individual, the following entities also have to pay taxes on their annual income: 

• Hindu Undivided Family (HUF) 

• Association of Persons (AOP) or Body of Individuals (BOI) 

• Local authorities 

• Corporate firms and companies 

• Artificial judicial person 

Broadly, there are two kinds of taxes:

• Direct tax. And

• Indirect tax.

Direct Taxes are taxes levied directly on the person who is ultimately bearing the cost of the tax. Income Tax is the most prominent form of Direct Tax.

Indirect Tax are taxes that are levied indirectly on goods/ services such as Goods and Service Tax on production of goods, transport of goods, sales of goods and services etc. These taxes are levied on the person providing these goods/ services but are borne by the ultimate user of the goods and services. GST, Professional Tax, Customs Duty etc. are examples of Indirect taxes.

Within the purview of Income Tax (IT) which is a Direct Tax, there are certain terms to be understood with respect to taxation. Some of these are:

Long term Capital Gain Tax and Short Term Capital Gain Tax

Assets are considered long term or short term on the basis of what they are and how long they are held.

Shares and securities of a company that are listed on a recognized stock exchange, units of UTI, units of equity oriented mutual funds and zero coupon bonds are considered long term when they are held for a period greater than 12 months.

Immovable property such as land, building, house etc. are considered long term when they are held for a period greater than 24 months.

Movable property such as jewelry and other assets are considered long term when they are held for a period greater than 36 months.

This distinction is important as the income tax rates applied to capital gains differ greatly.

Where short term capital gains are taxed at 15% or the rate of the individuals slab as applicable, long term capital gains are taxed at 10%/ 20%. Also, the long term capital gains provides the option of indexation benefit, which is basically the cost of the asset adjusted for inflation so that only real gains are taxed.

Long term Capital Gain Tax and Short Term Capital Gain Tax

Dividend distribution tax is paid by an Indian Company when it pays the dividend to its shareholders. This tax is paid at the rate of 15% by the company. The dividend income in the hands of the recipient is tax free³. However dividend income exceeding Rs. 10,00,000/- in a year from Indian Companies is subject to a Dividend Tax of 10% in the hands of the recipient. Dividends received from foreign companies are subject to tax as per the slab of income of the taxpayer.

TDS: Tax Deducted at Source

TDS means that the person who is responsible for making payments to you will deduct tax before paying you the balance amount. In this way, tax is deducted at the source of income itself. On deducting the tax, this amount has to be paid by the person deducting into the governments account within the stated time period and they will issue you a TDS certificate.

This TDS certificate is proof of the tax having been deducted from your income and the proof you need to claim the same as credit.

Examples of payments on which Tax is deducted at source is Salary, interest on fixed deposits in banks, other payments to vendors exceeding the limits specified etc.

The new tax regime allows individuals and HUFs to pay lower taxes without claiming deductions under different sections. Unlike the old tax regime, the new tax regime does not differentiate taxpayers into age groups.  

Additionally, new tax regime has not replaced the old tax structure; it is an option available to the taxpayers. 

Earlier there used to be separate income tax slabs for women and men. For instance, back in 2010-11, the basic exemption which women (aged up to 65 years) could claim annually was Rs 1.9 lakhs. Whereas for men (up to 65 years), the basic exemption that could be claimed annually was Rs 1.6 lakhs

Currently there are no separate income tax slabs for men and women. The normal slab rates applicable to individual is applicable to all.

The income tax slab rates are not applicable for all types of income. Income from Capital gains is taxed differently as per the asset owned by the individual and the tenure of ownership – long-term or short-term.

Capital gain tax rates

Life insurance is a great investment because it protects you and your family as well as helps you save tax. As per the Income Tax Act, 1961, the premiums you pay towards a life insurance policy are exempt from taxes up to ₹1.5 lakh under Section 80C. Taxation relief is allowed on life insurance policies purchased for self, spouse, or dependent children.  

However, you must pay premiums against these policies from your income. Moreover, the total policy premiums must not exceed 10% or 20% of the sum assured for policies purchased after April 1, 2012, and before April 1, 2012, respectively.  

Life insurance policies purchased for a disabled family member are free from taxes under Section 80C, provided the premiums do not exceed 15% of the sum assured.  

The following plans enjoy tax benefits under Section 80C of the Income Tax Act against the premiums paid: 

1. 1. Term Insurance Plans
   


2. 2. Unit Linked Insurance Plans
   


3. 3. Guaranteed Returns and Income Plans
   


4. 4. Child Insurance Plans
   


5. 5. Retirement Insurance Plans
   

Maturity proceeds and death benefits received from life insurance plans with maturity benefits are also exempt from taxes under Section 10(10D) if the premiums do not exceed 10% of the sum assured.  

Our plans that help you save tax

Let’s understand the steps in some detail.

Step 1: Calculate your Total income

Income is calculated under the following heads:

Income from Salary – All income from an employer that is received as salary is to be offered as Salary income earned. This is detailed in the Form 16 given by the employer to the employee.

Income from Capital Gains – Income earned on sale of capital assets is taxable under the head of Capital Gains. Capital Assets include assets such as land, building, jewellery, stocks, bonds, etc. The long term capital gain tax rate for AY 2020-21 is 10%/ 20% plus cess.

Income from house property – Rental income earned from owned house property is taxable under this head.

Income from business / profession – The profits and gains earned from any business or profession are taxable under this head.

Income from other sources – All other income that is not included under the other heads of income fall under this residual head of income. This includes interest income, pensions received, dividend received, winnings from lottery or gambling, gifts received etc. The classification of income is important from the perspective of filing returns. All income is calculated on the basis of the financial year as defined in the Income Tax Act as the twelve-month period from April 1st of a year to March 31st of the following year. For example, financial year 2019-20 would mean the period between 1st April 2019 to 31st March 2020.

Step 2: Deductions from Taxable Income

The Income Tax Act allows some deductions from the Income that has to be taxed. This is the step that can help you save a lot of tax on your income for the year. Sections 80C to 80U of the Income Tax Act, 1961 specifies these deductions. In addition, there are other deductions under Section 16, 24 etc which could be availed.

So what are these deductions from taxable income and how can a person get the income tax benefits³ of these?

Spend on a good life insurance policy – not only does a good life insurance policy provide coverage to your loved ones in the event of your death, but it makes for good financial planning as well. The premium paid for life insurance policies of the taxpayer for self and for his dependent wife and children are deductible from tax under Section 80C. This amount is deductible if the annual premium is less than 10% of the sum assured. Section 10(10D) of the Income Tax Act, 1961 provides for certain exemptions with respect to proceeds from life insurance policies. It allows the entire maturity proceeds or surrender proceeds of the policy which include the sum assured along with any bonus⁵ completely tax free³ to the recipient, subject to prescribed conditions. So as you can see payments paid towards life insurance policies have a twofold income tax benefit – for the years while paying the premium as well as for the maturity proceeds.

Tax Saving³ Investments under Section 80C - There are certain financial investments which has been listed by the Income tax laws as deductible from your taxable income. The key motive of this incentive seems to incentivize people to perform proper financial planning and structuring for present and future. The key point to be noted is that you are creating investments for yourself and receiving income tax benefits³ on them. However, this benefit is given to individuals and Hindu Undivided Families only.

Investments can be made under section 80C to the extent of Rs 1,50,000. Apart from this, investment in notified pension schemes provide additional benefit to the extent of Rs 50,000 under section 80CCD(1B). This total of Rs.2,00,000/- in investments can save you an amount of Rs.60,000/- if you fall under the 30% tax bracket.

Some of the key tax-saving investments provided under Section 80C are:

• Premiums paid towards Life Insurance (for self, spouse or dependent children),

• ULIP or deferred annuity plan deposit (for self, spouse or dependent children)

• Fixed Deposits made for a period of five years,

• Public Provident Fund (PPF) contributions or contribution made by employee to approved Superannuation Fund

• Investments in NABARD Bonds,

• Investments with Post Office in their post office saving schemes for tax benefit , or senior citizen savings schemes (SCSS)

• Investments in National Savings Certificates – for current year investment and the accrued interest.

• Investment in tax saving³ mutual fund schemes which are linked to equity markets such as ELSS funds, notified pension funds or others.

• Certain expenses are also included such as for:
  • Tuition fees paid for two children
  • Repayment of Principal component of housing loan
  • Stamp duty, Registration expense or other expenses for residential house

A taxpayer can calculate their income tax manually or use an online income tax calculator. The rate of income tax is determined as per the annual income in the income tax slab. For instance, for a salaried taxpayer, the income from salary is calculated by including:

• Basic income 


• House rent allowance (HRA) 


• Transportation allowance 


• Special allowance 

The Income Tax Act, 1961 levies taxes on income from the following sources:

• Income from salaries: Income received by an employee from an employer is categorised in this head. If the employee is below the taxable income limit, the employer will withhold taxes. All deductions made from the salary, all exemptions granted, and the net income paid are mentioned in Form 16 generated by the employer.


• Income from capital gains: All income earned from the sale of capital assets owned by the taxpayer are categorised in this head. Capital assets include land, building, bonds, stocks, debentures, jewellery, etc.


• Income from house property: Rental income received by the taxpayer from their house property falls in this category. However, the house property must not be used for business or professional purpose.


• Income from business: All profits earned from a business or by providing professional services are included in this category. Such income is taxed as per applicable tax slab rates. 


• Income from other sources: Any income earned by the taxpayer from sources other than the ones mentioned above is listed in this category. Some of these incomes include:
  • Winning from horse race or lottery
  
  
  • Dividends
  
  
  • Pension after the pensioner’s death
  
  
  • Rental income (other than house property)
  
  
  • Gifts
  
  
  • Interest on government bonds, securities, etc.
     
  
  

All Indian citizens with a source of regular or irregular income need to file their income tax return (ITR) every financial year. Even if the person falls below the taxable limit, they should file their ITR. There are different ITR forms for individuals and HUFs as per their income sources and tax-paying status such as individual, HUF, BOIs, AOPs, etc. 

Uses and benefits of filing income tax returns

All Indian citizens should file their ITR because of the following uses and benefits: 

• Smooth loan processing: Filing ITR makes it easier for the lender to assess the borrower’s financial credibility. It helps in the easy and quick processing of loans.
  


• Foreign VISA: Several countries in the world issue a VISA only after submission of valid ITR proofs.
  


• Tax refund: ITR forms are used to file for a tax refund in case of additional advance tax payment.
  


• Carry forward of losses: Losses such as speculation loss, capital loss, business loss, etc., can be carried forward only if the ITR is filed.
  


• Passport approval: Application and approval of a passport are easier when the ITR copy is submitted. 
  


• Insurance claim: ITR is very useful at the time of making an accidental death claim. 
  


• Government tenders: ITR documents will come in handy when applying for government tenders, panel registrations, etc.
  


• High insurance sum: ITR forms are required by the insurance company to provide a high sum assured.  

Income Tax Return is an income tax declaration which is filed by all taxpayers stating the income – sources of income, tax due and tax paid during the year. There are seven ITR form types notified by the Income Tax Department – they are ITR 1Sahaj Form, ITR 2, ITR 3, ITR 4, ITR 5, ITR 6, and ITR 7. An Income taxpayer must know which form they should fill in for filing their income tax returns. Form applicable dependents on the individual entity and their sources of income. 

A simplistic guide is that:

ITR 1 form

- is used by resident individuals with income that is less than 50 lakhs. And people who have income from Salary, income from other sources and have only one house property. It is the most common ITR type for salaried people with income less than 50 lakhs.

ITR 2

- is used by all who would file ITR 1 but have income greater than 50 lakhs. Also people who have Income from capital gains, Income from house property, Hold directorships in a company or hold unlisted equity assets, or foreign assets and/or have foreign income.

ITR 3

- When in addition to income from ITR 2 requirements a person also has Income from Business / Profession or is a partner in a firm and their income is greater than 50 lakhs then ITR 3 must be filed.

ITR 4

- is filed for all sources of income as per ITR 1 and if the Presumptive income is greater than 50 lakhs.

ITR 5

- Is to be used by Firms, LLP’s, AOP’s and BOI’s.

ITR 6

- is to be used by Companies who are not claiming exemption under Section 11.

ITR 7

- is to be used by Persons and companies who claim exemption under Sections 139 of the Income Tax Act, 1961.

There are no separate ITR form for housewife or senior citizens. The forms are the same and based on sources of income. You can look up your sources of income and decide to file ITR for housewife, senior citizens or any other categories. You should file an income tax return³ if your income is above the exempt income tax limit, or you have lottery winnings, or you wish to claim income tax refund on tax paid, to create a proper financial base which helps with obtaining loans and visa etc. and if the tax payer is a company or firm then irrespective of profit or loss it is mandatory to file ITR.

By adhering to these rules you will find it easy to comply with the requirements of the income Tax Act, 1961 and build a good financial base for yourself. You will find online income tax calculators to assist you and you may file ITR return online easily as well. There are detailed instructions on how to file income tax returns³ online for salaried employees and non-salaried taxpayers.

Despite the black reputation that filing tax returns³ have attained – they are an important part of the government process. Not only would you be fulfilling your responsibility by you would create a solid base with your declared income on which you can start collecting legal assets. In case you have missed filing your return you can get income tax extension and there are also instructions on how to file income tax returns³ for last 3 years if you would like to right an earlier wrong.

Filing your tax returns³ is a good idea and one to be embraced to get the income tax benefit. There is an income tax helpline available for various general tax issues 1800 180 1961 as well as other helplines for specific issues.

Income tax returns³ have to be filed by person whose annual income exceedsminimum amount not subject to tax. Companies and firms have to file their income tax return³ without fail and regardless of profits or losses incurred. Filing an income tax return³ is also necessary even if you have no tax to pay but need to claim your tax refund for taxes deducted at source.

So how do you file your Income Tax Return³. You need to first create your computation of Income Tax. You have to file your Income tax return³ online or by using Tax utilities. The correct form as applicable should be use for filing returns.

All details have to be filled out in all the requisite columns of the forms. Be sure that all the fields are filled out carefully. At the time of online filling, TDS section will get auto populated and you will have to verify that it is correct.

Thereafter in case of online filing of ITR - you should check all details and if there is any tax payable immediately pay the same and enter the details of tax paid. Your tax liability should show as nil. Upload the digital signature if needed. And as a last step e verify your return filed.

The Income Tax Act governs and administers the income tax laws in India. As per the act, below are the tax categories:

• Salaries


• Profits and gains from business or profession


• Income from house/property


• Capital gains


• Income from other sources 

The Income Tax Act, 1961 allows several deductions under different Sections to help you reduce your taxable income.

Section 80C:

Section 80CCC:

Section 80CCD:

Section 80D:

Section 80DDB:

Section 80E:

Section 80EE:

Section 80RRB:

Section 80TTA:

Section 80U:

Section 24:

Tax Evasion is covered under Chapter XXII of the Income Tax Act, 1961 and is considered a criminal offence. While filing the return of tax it is important to abide by the intent as well as the letter of the law. There are several acts that are specifically mentioned in the Income tax Act that are considered offences and carry severe fines, penalties as well as prosecution.

These offences may arise on failure to fulfill basic requirements – such as not filing return of income in a timely and honest manner, failure to pay taxes on time, failure to pay tax deducted at source or tax collected at source on time, and such. Or maybe willful – such as a willful attempt to evade tax, failure to comply with notices, failure to produce books of accounts, false statements in return, falsification of books, abetment in filing wrongful return etc.

What is important to know is that all such acts carry a heavy fine and penalty with the possibility of prosecution.

So whether it be a simple error or deliberate falsification – the returns if scrutinized would likely to result to applicability of provisions as mentioned in Sections 275A to Section 280C of the Income Tax Act, 1961.