Advance tax and penalties for indian tax

If you owe more than 5000 in taxes to the indian govt (10000 from AY2010-11) govt expects you to pay their due in advance. (Note: the tax you owe as mentioned above is total tax due after subtracting the TDS). The following is the schedule for paying the advance tax for individuals.

30% of the amount by Sept 15th
60% of the amount by Dec 15th
100% of the amount by Mar 15th

If you don't pay the amount as prescribed in the schedule govt expects you to pay interest on the delayed payments under section 234C (for deferment in payment of advance taxes). The interest is 1% per month (of the amount you paid less than required). For example if you owe Rs.10000 for the govt when you calculate your tax bill and did not pay any advance tax then the interest under 234 C will be as follows (the schedule for adv tax payment is 3k by sep15th, 6k by dec15, 10k by mar15).

3% of 3k (for 3 months sep15-dec15) - 90
3% of 6k (for 3 months dec15-mar15) - 180
1% of 10k (for 1 month mar15-mar31) - 100

Total interest payable under 234c - 370

The govt also expects you to pay interest for the less advance taxes you've paid than expected of you from the end of the previous year to the date you pay under section 234B. This is again 1% interest per month for the amount you owe. Here the govt is little liberal in saying you need to pay this interest only if you have paid less than 90% of the taxes you owe.

For the previous example (10k taxes in due) if the person files it on jul31st then he owes 4% interest (for 4 months from apr-jul) which is 4% of 10k = 400.

Total interest payable under 234B - 400

The quirk in the entire thing is govt does not consider TDS as taxes you have paid. For example if one owes 2 lakhs in tax and TDS deducted 1.9 lakhs even then govt expects you to know you've to pay 10k and calculate and pay advance taxes.

The second quirk is if you've paid advance taxes approximately (90% of the amount you owe) you won't pay any interest under 234B, but will still pay at-least 1% interest under 234C (since it expects you to have paid 100% of the amount by march15th).

The exception to the above rule is if you get unexpected income by ways of capital-gains or lottery winnings etc then the defaults under 234C can be waived provided that you paid the entire tax due on this unexpected windfall when you pay the next installment of advance taxes (by dec15/mar15 or march 31st).

Minimizing your tax bill

There is tax free income and then there is reducing your taxes on your existing income. The motherly scheme for minimizing your tax is section 80C which we covered in one of the earlier posts. There by you can reduce your taxable income by 1 lakh and thus reduce your tax burden lot. Then there are other things provided generously by the government (provided your company supports them)

* Medical bills (for you and your dependents in family) upto 15,000 per year can be claimed tax free
* Leave travel allowance upto 20,000 per year (this is allowed for two years in every four year block as announced by govt.) for you and your family. The bills allowed are only for travel (economy class airfare or second class a/c) within country (and not stay, food).
* Food allowance of daily Rs.50 for 22 working days a month (1100 per month) - this is given as a subsidy of food by the company or as food coupons (sodexho, ticket restaurant)
* Conveyance allowance of max 800 per month (or actual travel expense claimed or company provided transport/car)
* House Rent Allowance (40% of your basic salary OR the rent you paid over 10% of your basic salary, which ever is less)
* Interest against home loan (max of 1,50,000)
* Gift given by your company (max of 5,000)
* Education allowance for your children
* Contribution to prime-minister's relief fund

Other things which you can deduct from your tax while filing are
* Your contribution to recognized tax exempt charity organizations

Tax Free Income

There's a saying "there's no free lunch". But when it comes to taxataion there are some which are free and govt. of india is generous compared to many other countries. Let us try to cover all the potential tax free income you can have

First there's stocks and equity oriented mutual funds which have no tax on long term gains. Thus you buy them and hold them for more than 12 months and they've appreciated you have a tax free money.

Then there is the dividends declared by listed equities (in india) are completely tax free in the hands of the investors. Same is applicable to dividends declared by mutual funds (although the funds itself will have to pay a dividend distrubution tax 10+ percentage - it will eventually affect the value of your fund - hence not completely free of tax for you).

Another golden thing (until the govt figures out Exempt-Exempt-Tax EET model for it - i'll have a post on it later) is your retirement saved money like PF, PPF and even Life insurance policies. The money earned by them are completely tax free (not to mention they might get you a tax exemption on your income earned - look at 80C section post previously). PPF is the best among this since it can be withdrawn lot earlier and no overheads (like life insurance company profits affecting its bonuses). PPF has a limit of 70,000 per individual per tax year.

Then there's this obscure thing lot of us don't know about - your post office savings account interest is tax free - although it pays a measly 3.5 percent or so its same as your normal bank savings account interest (which is taxable) hence can be considered as alternative.

Capital Gains

Assets such as propery, stocks/mutual-funds/bonds can have capital gain (or loss) for which taxation differs compared to normal income.

There are two categories of capital gains

(1) Short term gain
(2) Long term gain

For stocks/mutual-funds/bonds which are held less than 12 months short term gain applies. Otherwise (for ones held more than 12 months) it is long term gain. For other assets (including properties) the limit is 36 months.

Typically short term gains (except for stocks and equity oriented mutual funds) are added to your income and hence liable to be paid tax on the top of your tax bracket. Long term capital gains have preferred treatment. You have three options

(1) Invest the gain in specified capital bonds and you need not pay any tax. This will typically lock your gains for few years at a low interest
(2) Invest within 6 months your gains in a property (keep it in a special capital gains account in a bank if 6 months falls across assesment years)
(3) Pay 10% flat tax on capital gain OR 20% on the gain calculated after indexation whichever is lower (plus surcharge, cess as applicable)

(Note: Indexation is a mechanism by which inflation is taken care. Let us say something is Rs.100 today and next year you sell the same thing for Rs.110. Govt. publishes inflation index every year and inflation has gone by up 4%. Then after account for inflation your cost price is 104, thus the gain after indexing for inflation is only Rs.6).

For stocks and equity oriented mutual funds (Mutual funds which invest mostly in stocks as specified by govt and typically funds disclose them, other type of funds are bond oriented funds , gilt funds etc) - the long term gain is presently Nil (no tax - free lunch from government) and short term gain is 10% (plus whatever surcharge, cess applicable).

Section 80C

From this year 2005-06 (assesment year 2006-07) onwards all the tax saving instruments in india have been clubbed under section 80C with overall limit of 1 lakh (100,000 rupees). There are no more sub section limits (like pension scheme 10,000 or infrastructure bonds 10,000 ) like last year. One the key bonanza for higher income tax payers is there's no longer a limit on your income to claim tax benefit (last year rebates are given only if you're within 5 lakhs etc).

Some of the key things covered by the 80C secion are

(1) Life insurance policies (including pension schemes)
(2) National saving certificates (NSC)
(3) Public Pension Fund (PPF)
(4) House principal repayment to accredited financial institutions
(5) Equity Linked Saving schemes (ELSS from mutual funds)
(6) Unit Linked Insurance Plans (ULIPs from insurance companies)
(7) Infrastructure bonds (from ICICI)
(8) Employee's contribution to Provident Fund (PF)

This allows the flexibility for the tax payer a choice of how to invest his funds and provide tax saving also. The principal repayment which was allowed only upto 40 thousand now can be used to the max 1 lakh limit (and no income limit either) will encourage home ownership.