Income Tax Heading

Disclaimer: I’m neither a financial expert nor a financial advisor.

A surprisingly large number of people ask me about income tax. To a lot of people the whole income tax process seems a bit too complicated. So I thought I’d write a simple but detailed post about the process. This is based on my experience working in the corporate world for about 8 years. I hope this will be useful to someone.

The Indian government’s financial year starts from April and ends in March. So all your incomes and taxes are calculated within this period. For a corporate employee, there are four stages in this Income Tax Cycle.

  1. Investment Declaration
    • Should be done in the beginning of the financial year – preferably in April
  2. Investing
    • Can be done anytime throughout the financial year, but it is advisable to make your investments before December.
  3. Submitting proof of the investments
    • Usually done around December or January
  4. Filing Income Tax Returns
    • Should be done around July of the next financial year

1. Investment Declaration

Before we go further, you should know what Income Tax is. If you earn more than a specific amount of money in a financial year, then a percentage of that has to be given to the government. That’s Income Tax. To avoid paying too much money to the government, you can invest some money into certain schemes to reduce the amount of tax you pay. This article is about that process. The current Income Tax slab is shown below. This is NOT your CTC. This is after all the deductions.

Income Tax Slab Tax Rate
Income up to Rs 2,50,000 No Tax
Income from Rs 2,50,000 – Rs 5,00,000 10%
Income from Rs 5,00,000 – 10,00,000 20%
Income more than Rs 10,00,000 30%

What is Investment declaration?

It’s nothing but you declaring to the company and the govt. what kind of investments you’re planning to make this year to reduce your income tax. Remember that this is just your assumption or plan. You can basically mention whatever you want. Your final investments and this investment declaration don’t have to match at all. But if you do not make any declaration at the beginning of the year, then the company will start to deduct tax from your salary from April onwards.

What to Declare?

My advice is to fill all available options so that you don’t pay any tax in the beginning of the year.

  • For a start, fill in some data to match the 1,50,000 tax break that’s available under 80C (Example: 1,00,000 under Fixed Deposits and 50,000 under Equity Linked Savings Scheme).
  • Make sure to enter your house rent. For house rent of up to 1 lakh per year you don’t need the owner’s PAN.
  • After this, if it still shows that you have to pay some tax, you can also fill in the maximum deductions available under medical insurance and medial bills.
  • Education and housing can also be shown under tax exemption. (But if you’ve reached that age where you can buy a house with your salary, then I don’t think you’ll need this article)

Simple takeaway from this section is – declare your investment plans so that you don’t get taxed right away. By the way, most companies will have some online software to compute this tax thing. Or you can use an online calculator for this.

2. Investing to avoid Income Tax

The next stage is actually investing. Here I have to explain a little bit more about how tax is calculated. Let’s take an example of 5 Lakhs Rupees a year salary.

Taxable income = 5,00,000 – Conveyance Allowance – House rent allowance – Income Tax Exemptions under various schemes – Interest on Loans  – some other things (mediclaim policy etc..).

After this if the value comes to 3 lakhs, then you come under the second row in the tax slab table above. This means that you have to pay 10% of your income above 2,50,000 which is 5000 rupees. This is a simple explanation, there are some other factors that need to be considered here also. I don’t want to go in that deep though. Now if you invest that 50,000 into some tax saving scheme, then you don’t have to pay any tax at all.

Where to invest?

Two of simplest investment options are shown below. Unlike some Insurance policies or ULIPS where you need to take a plan for 3 years or 5 years, both the below options are just one time investments.

  1. Long term Fixed deposits – I think this is the simplest investment. You just need a bank account. The interest rates are fixed by the banks and there is a lock-in period of 5 years. (The final interest you get will be taxed in that financial year though).
  2. Equity Linked Savings Scheme – These are mutual funds specifically assigned for Income Tax Saving. You can buy mutual funds directly through the fund houses or using a demat account. ELSS is a risky option as there is no fixed interest and the final amount you get is based on how that specific fund is doing in the market. ELSS has the shortest lock-in period of just 3 years and the final amount is not taxed.

There are many other options like Insurance, ULIPs, Housing loans and many more.

(In the early part of my career, I usually just paid the tax. To me it didn’t really make sense to invest in some tax saving scheme. To avoid paying 10,000 in tax, I’d have to invest 1,00,000 and I didn’t have that kind of money then. But as I started saving more, it made sense to invest in tax saving schemes).

3. Submitting proof of the Investments

Towards the end of the financial year, you have to show proof of the actual investments made. This is a straightforward process.

  1. For the house rent you’ll have to show a bill from the house owner with a revenue stamp on it. This doesn’t have to be per month. It can be just one bill for the whole year.
  2. For the Fixed Deposits and ELSS (or any other investment) you need to show the bill or invoice generated by the bank or the fund house. You don’t need the hard copy, submitting the soft copy is sufficient for all bills.

Most companies will expect you to submit this around December or January. So from January your tax deduction from the salary (TDS – Tax deducted at source) will be based on your actual investments and not based on your declaration.

4. Filing Income Tax Returns

The final step is filing your income tax returns. This is done after the financial year is completed. For the financial year 2016-2017, you will get something called a Form 16 from your company at around April – May (2017). It will show all the taxes that you have paid for 2016 – 2017. The Form 16 should be used to do your e-filing.

There are many agencies like Clear Tax and others that offer to do your tax returns quickly and efficiently. But I would recommend you to do it yourself. It is very simple. Log in to the Govt. efiling website. Open ITR-1 and fill in the details based on your Form 16 and submit. The document can be e-verified online using a mobile OTP.

I hope this article has given you some idea about the Income Tax Cycle. If you take nothing away, at least understand the basic process.

Income Tax Flow

If you have any doubts do contact me using the comments below or using the contact form.