Hi,
Does anyone know what kind of tax deductions one can avail of, after r2i ?
The most common one I am aware of is the PPF deduction (PPF max is Rs70k I believe). However, I've heard that mortgage interest (EMI) payments are also deductible - and I also recollect reading somewhere that there is a cap on the total amount of deductions one can claim. Anyone know of these rules, or a place where I can educate myself on these ?
Mainly I see myself trying to save tax via the following :
1. PPF
2. EMI Interest Payments on Housing Loan
3. KVP or NSC (Post Office Investments)
4. Tax Saving Mutual Funds
Whats the cap on the amount of money I can invest in the above and claim tax deductions ?
Thanks.
MT: Simple / Silly Indian Tax question
MT: Simple / Silly Indian Tax question
Hi #1,
While the spreadsheet provided will answer your questions, I am providing some information that can serve as an easy reference and also give some tips and in-sight into some of the finer points that only become apparent if you take up Indian-Tax Planning as a subject of study.
1) Housing Loan Interest is deductible upto 1.5 Lakh per annum for Self Occupied Property. If property is taken in the name of 2 people then each can claim upto Rs 1.5 L interest from their income provided each is contributing equally to paying the Loan EMIs from his/her income. There is no limit to the deduction you can claim for property that is rented out as you should show the rent as income and offset that income against the INTEREST [which is a LOSS]. The NET Loss / Income you have add/subtract to your INCOME as applicable.
2) There is a deduction of Rs 1 Lakh available under Section 80C which includes PF, PPF, NSC, LIC Policy Premium, Tax Saving Mutual Funds also called ELSS [Equity Linked Savings Schemes], Housing Loan Principal Repayment also qualifies for 80C Deduction.
Note however that HOUSING LOAN Interest on Self-Occupied Property can only be claimed if you have taken possession of the house/flat and started living there. The interest paid during the time of construction which is also called Pre-EMI Interest cannot be claimed as part of LOSS FROM HOUSE PROPERTY. All the Pre-EMI Interest paid has to be kept track of [summed up] and claimed in 5 equal installments starting from the financial year after which you take possession of the Flat/House.
3) HRA relief is also available to the tune of least of the following assuming you are a salaried employee.
a) HRA paid by your employer through salary
b) 40% / 50% of Basic [40% for Non-Metro, 50% for Metro-Cities]
c) [Rent Paid] - [10% of Basic Salary]
For e.g. If your Basic p.a. is Rs 5 Lakhs, HRA is Rs 2.5 Lakhs p.a. and the Rent Paid Per month if Rs 20000 then HRA Relief will be
(20000*12) - (0.1*500000) = 240000 - 50000 = 190000 [Note that in this case HRA is 2.5 Lakhs, 40% Basic is 200,000 assuming the house in question is in a Non-Metro City say Bangalore]
Please note that entire the HRA Relief amount escapes tax so in the above case you would have saved income tax to the tune of 190000*0.3*1.1*1.02 [assuming your income is > 10 Lakhs where by you pay 10% Surcharge on the Tax and 2% Cess on the TAX+Surcharge] = 63954
Note that one cannot claim HRA Relief and Housing Loan Interest Relief if your house is in City-A and you are also living in a Rented House in City-A. The Logic behind this is that you can claim HRA only if you do not have a house of your own in the city/town where you are working. If you have a house of your own and still chose to rent it out then you can only claim either a) HRA Relief OR b) Housing Loan Interest Relief BUT NOT BOTH.
However there is a twist to the above. If you have a House in City-A and have rented it out [while the house is still on loan] where as you are employed in City-B where you do not have a House and take up a house on Rent then you can claim both HRA Relief as well as Housing Loan Interest Relief. Obviously even though you have a house in City-A you cannot live in it as you are working in City-B where in you do not have a own-house and hence have to rent one. Needless to say you are expected to declare RENT RECEIVED as INCOME and OFFSET the INTEREST PAID [Loss] against the INCOME to arrive at the NET INCOME or LOSS as the case may be. Note that 30% Deduction is allowed on Rent Received as STANDARD DEDUCTION [towards maintenance and repairs for which no bills are required] also you are allowed to deduct any PROPERTY TAX that you have paid on the Rented House before applying the 30% Standard Deduction.
For e.g. Housing Loan Interest is say 3 Lakhs p.a., Rent Received is say 20000 per month, say Property Tax paid is Rs 6000 p.a.
Rent Received in Year = 20000*12 = 240000
Rent Less Property Tax = 240000 - 6000 = 234000
Standard Deduction = 30% of 234000 = 0.3*234000 = 70200
Interest Paid on the Loan [i.e. Loss] = -300000
Nett Income/Loss is in this case -300000 + (234000 - 70200)
-300000 + 163800 = -136200
Therefore it is a loss [being -ve] of 136200 which can be deducted from your INCOME.
4) Note that there is section called 80D which allows deduction for amounts contributed towards MEDICAL/HOSPITILIZATION INSURANCE PREMIUM. Not sure about the limit on this though I vaguely remember it as Rs 40000 per annum.
5) Deduction is allowed to the tune of 50% / 100% on donations made towards charitable institutions that qualify for deduction under Section 80G of the Income Tax Act. [100% of Relief is available for National Relief Funds like those setup for Kargil / Gujarat Quake / Tsunami, where as only 50% deduction is available for Orphanages like CRY, UNICEF, Udavum Karangal, Kaakkum Karangal which are not National Relief Funds]
Bank Interest Relief was available upto Rs 15,000 per month [12,000 for FD / Bank Interest and 3,000 for GOI Bonds] but this was done away with. There is talk that this may re-introduced this year based on the request from banks. The argument in favour of this is that there is too much of money in the system which is causing INFLATION to increase also, with lot of HIGHER INCOME [albiet with higher risk] Options like Mutual Funds available there is no motivation for people to invest in Bank FDs and to add to it if all the interest is taxable, then they will look elsewhere to put their savings into. I hope that 80L will be reintroduced and will make people go back to Bank FDs with their money just to get some tax free returns to the tune of 15K per year. But we have to wait till the budget to see if this happens.
Hope this helps
Regards
Venkat
While the spreadsheet provided will answer your questions, I am providing some information that can serve as an easy reference and also give some tips and in-sight into some of the finer points that only become apparent if you take up Indian-Tax Planning as a subject of study.
1) Housing Loan Interest is deductible upto 1.5 Lakh per annum for Self Occupied Property. If property is taken in the name of 2 people then each can claim upto Rs 1.5 L interest from their income provided each is contributing equally to paying the Loan EMIs from his/her income. There is no limit to the deduction you can claim for property that is rented out as you should show the rent as income and offset that income against the INTEREST [which is a LOSS]. The NET Loss / Income you have add/subtract to your INCOME as applicable.
2) There is a deduction of Rs 1 Lakh available under Section 80C which includes PF, PPF, NSC, LIC Policy Premium, Tax Saving Mutual Funds also called ELSS [Equity Linked Savings Schemes], Housing Loan Principal Repayment also qualifies for 80C Deduction.
Note however that HOUSING LOAN Interest on Self-Occupied Property can only be claimed if you have taken possession of the house/flat and started living there. The interest paid during the time of construction which is also called Pre-EMI Interest cannot be claimed as part of LOSS FROM HOUSE PROPERTY. All the Pre-EMI Interest paid has to be kept track of [summed up] and claimed in 5 equal installments starting from the financial year after which you take possession of the Flat/House.
3) HRA relief is also available to the tune of least of the following assuming you are a salaried employee.
a) HRA paid by your employer through salary
b) 40% / 50% of Basic [40% for Non-Metro, 50% for Metro-Cities]
c) [Rent Paid] - [10% of Basic Salary]
For e.g. If your Basic p.a. is Rs 5 Lakhs, HRA is Rs 2.5 Lakhs p.a. and the Rent Paid Per month if Rs 20000 then HRA Relief will be
(20000*12) - (0.1*500000) = 240000 - 50000 = 190000 [Note that in this case HRA is 2.5 Lakhs, 40% Basic is 200,000 assuming the house in question is in a Non-Metro City say Bangalore]
Please note that entire the HRA Relief amount escapes tax so in the above case you would have saved income tax to the tune of 190000*0.3*1.1*1.02 [assuming your income is > 10 Lakhs where by you pay 10% Surcharge on the Tax and 2% Cess on the TAX+Surcharge] = 63954
Note that one cannot claim HRA Relief and Housing Loan Interest Relief if your house is in City-A and you are also living in a Rented House in City-A. The Logic behind this is that you can claim HRA only if you do not have a house of your own in the city/town where you are working. If you have a house of your own and still chose to rent it out then you can only claim either a) HRA Relief OR b) Housing Loan Interest Relief BUT NOT BOTH.
However there is a twist to the above. If you have a House in City-A and have rented it out [while the house is still on loan] where as you are employed in City-B where you do not have a House and take up a house on Rent then you can claim both HRA Relief as well as Housing Loan Interest Relief. Obviously even though you have a house in City-A you cannot live in it as you are working in City-B where in you do not have a own-house and hence have to rent one. Needless to say you are expected to declare RENT RECEIVED as INCOME and OFFSET the INTEREST PAID [Loss] against the INCOME to arrive at the NET INCOME or LOSS as the case may be. Note that 30% Deduction is allowed on Rent Received as STANDARD DEDUCTION [towards maintenance and repairs for which no bills are required] also you are allowed to deduct any PROPERTY TAX that you have paid on the Rented House before applying the 30% Standard Deduction.
For e.g. Housing Loan Interest is say 3 Lakhs p.a., Rent Received is say 20000 per month, say Property Tax paid is Rs 6000 p.a.
Rent Received in Year = 20000*12 = 240000
Rent Less Property Tax = 240000 - 6000 = 234000
Standard Deduction = 30% of 234000 = 0.3*234000 = 70200
Interest Paid on the Loan [i.e. Loss] = -300000
Nett Income/Loss is in this case -300000 + (234000 - 70200)
-300000 + 163800 = -136200
Therefore it is a loss [being -ve] of 136200 which can be deducted from your INCOME.
4) Note that there is section called 80D which allows deduction for amounts contributed towards MEDICAL/HOSPITILIZATION INSURANCE PREMIUM. Not sure about the limit on this though I vaguely remember it as Rs 40000 per annum.
5) Deduction is allowed to the tune of 50% / 100% on donations made towards charitable institutions that qualify for deduction under Section 80G of the Income Tax Act. [100% of Relief is available for National Relief Funds like those setup for Kargil / Gujarat Quake / Tsunami, where as only 50% deduction is available for Orphanages like CRY, UNICEF, Udavum Karangal, Kaakkum Karangal which are not National Relief Funds]
Bank Interest Relief was available upto Rs 15,000 per month [12,000 for FD / Bank Interest and 3,000 for GOI Bonds] but this was done away with. There is talk that this may re-introduced this year based on the request from banks. The argument in favour of this is that there is too much of money in the system which is causing INFLATION to increase also, with lot of HIGHER INCOME [albiet with higher risk] Options like Mutual Funds available there is no motivation for people to invest in Bank FDs and to add to it if all the interest is taxable, then they will look elsewhere to put their savings into. I hope that 80L will be reintroduced and will make people go back to Bank FDs with their money just to get some tax free returns to the tune of 15K per year. But we have to wait till the budget to see if this happens.
Hope this helps
Regards
Venkat
MT: Simple / Silly Indian Tax question
If USC ROR has rental property in US, can he avail of Indian tax deduction for US rent and morgage
(a) if he rents a home in India
(b) if he owns the home in India where he lives.
If the answer to (b) is no, will forming an LLC in US help the tax burden in India?
(a) if he rents a home in India
(b) if he owns the home in India where he lives.
If the answer to (b) is no, will forming an LLC in US help the tax burden in India?
MT: Simple / Silly Indian Tax question
Can some one let me know what are the Indian tax implications for all this. When I sold, Reliance fund did cut STT. What about long term capital gains tax ? I will be grateful if some one can explain how to show this for Indian tax purposes when I file. What part can be considered principal and what part as gains in case of partial sale. As I understand we don?t get form 1099 kind of information in India.
1. I bought ICICI infrastructure fund-Dividend reinvest option on 31 Aug 2005. Sold some units 2 days back . This fund has gained 60% over the period.
2. I bought Reliance NRI income fund ?Gr. Plan on 15th Nov 2004. Did a lateral shift of all the units to NRI equity-Gr. Plan on 1 June 2006. Sold all of them 2 days back . This fund over the period gained 50%
3. I bought Reliance NRI Equity fund ?Gr. Plan on 15th Nov 2004. Sold some units 2 days back . This fund over the period also gained quite well
Thanks
1. I bought ICICI infrastructure fund-Dividend reinvest option on 31 Aug 2005. Sold some units 2 days back . This fund has gained 60% over the period.
2. I bought Reliance NRI income fund ?Gr. Plan on 15th Nov 2004. Did a lateral shift of all the units to NRI equity-Gr. Plan on 1 June 2006. Sold all of them 2 days back . This fund over the period gained 50%
3. I bought Reliance NRI Equity fund ?Gr. Plan on 15th Nov 2004. Sold some units 2 days back . This fund over the period also gained quite well
Thanks
MT: Simple / Silly Indian Tax question
Indian Tax
Holding period to qualify as LT cap asset is 1 year in the case of Indian mutual funds. Else, it is short term cap asset.
US Tax
If you are a US resident (USC, GC holder or H1B living and working in US, ...) i.e. filing as US resident for US tax purposes, then selling Indian mutual funds or receiving dividends from them invites horrendous US tax consequences, because Indian mutual funds are PFIC. Search on "PFIC" in this forum.
Holding period to qualify as LT cap asset is 1 year in the case of Indian mutual funds. Else, it is short term cap asset.
US Tax
If you are a US resident (USC, GC holder or H1B living and working in US, ...) i.e. filing as US resident for US tax purposes, then selling Indian mutual funds or receiving dividends from them invites horrendous US tax consequences, because Indian mutual funds are PFIC. Search on "PFIC" in this forum.
-
quantumleap
- Posts: 131
- Joined: Tue Jan 23, 2007 4:11 pm
MT: Simple / Silly Indian Tax question
Elaborate and enlightening post Venkat, thanks!
MT: Simple / Silly Indian Tax question
It is taxation time in India, and fund brokers and insurers are busy selling their products.
This industry is changing lot. Many investors now ask lot of questions before they buy any of their products, and even the brokers are also learning and responding well. Still there are several wrong products and wrong people out there. So, one has to be still careful in selecting the advisor and the product.
ULIP products offer more commission, so, this is always on the top of the list of all the banks, insurance companies in selling.
I wish to compare the ELSS with ULIP and show ELSS is much better scheme for tax saving and at the same time for wealth building.
ELSS Vs ULIP
ELSS = Equity Linked Saving Scheme
ULIP = Unit linked Insurance Plan
[LIST=1]
Ask your neighbourhood salesman, if the product he is trying to sell is ULIP, if he is yes. Stop him right there.
Close your eyes and choose ELSS over ULIP.
If you wish to diversify between stocks and bonds, invest 50% in PPF and 50% in ELSS.
If you wish to avail insurance cover, in addition to this investment, buy a separate term insurance and pay directly.
In case it is your friend selling ULIP to you, ask him whether he will sell ELSS to you and buy that. It may be even cheaper to help him directly or take him out for lunch/ dinner.[/LIST]
This industry is changing lot. Many investors now ask lot of questions before they buy any of their products, and even the brokers are also learning and responding well. Still there are several wrong products and wrong people out there. So, one has to be still careful in selecting the advisor and the product.
ULIP products offer more commission, so, this is always on the top of the list of all the banks, insurance companies in selling.
I wish to compare the ELSS with ULIP and show ELSS is much better scheme for tax saving and at the same time for wealth building.
ELSS Vs ULIP
ELSS = Equity Linked Saving Scheme
ULIP = Unit linked Insurance Plan
ULIP offers choice of plans to invest in equities and debts. ELSS is only equities.
ULIP offers insurance and no insurance is offered in ELSS
ULIP products usually have multiple layers of fees, some hidden and some disclosed. Admin charges, fund expenses, insurance premium are some of the expenses.
ULIPS are usually have higher expenses compare to ELSS. Some ULIP starts at 14%-20% as a load for the first year and goes down to 2% in 10 year time. ELSS has 2.0-2.5% initial load and about 2% annual expenses.
Both enjoy upto 1 lakh/annum tax deduction under 80C
Liquidity is nil or very expensive in ULIP;
ULIP maturity period is longer. ELSS has a lock in period of 3 years, after which funds can be withdrawn without any penalty
ULIP- fund manager, fund objective, fund holdings, expenses are very difficult to find out and disclosure is at every quarter. ELSS disclosure is much better, most of the fund houses provide monthly update on holdings
In case of ULIP, on maturity, most likely you will end up taking an annuity at a very low rate of return from the fund house. They rob you all the way to your death.
In case of ELSS, one has an option to do what they want with money.
With ELSS, one can withdraw money after 3 years tax free, and the same money can be redeployed for new tax benefits for that year again. You recycle the same money and avail the 80C benefits again. This is a big plus.
ULIP products are sold in different skins. Some are called Child education plan ( attract lot of suckers, most of the young couples with zero finance knowledge love this name and pay from salary directly and they still dont have enough ), pension plan ( watch out for very low annual rate of return at the time of annuity), retirement plan, growth plan, etc., ( it is the same noodles cooked in different flavour) and some of the indians dont have enough of them and they buy all flavours and still looking for some new receipes..
[LIST=1]
Ask your neighbourhood salesman, if the product he is trying to sell is ULIP, if he is yes. Stop him right there.
Close your eyes and choose ELSS over ULIP.
If you wish to diversify between stocks and bonds, invest 50% in PPF and 50% in ELSS.
If you wish to avail insurance cover, in addition to this investment, buy a separate term insurance and pay directly.
In case it is your friend selling ULIP to you, ask him whether he will sell ELSS to you and buy that. It may be even cheaper to help him directly or take him out for lunch/ dinner.[/LIST]
MT: Simple / Silly Indian Tax question
What are the tax free instruments available in India for a resident Indian?
Basically, I want to invest in the name of my parents and I want to make sure there is tax filling / reporting hassle for them.
I have done some digging and seems like PPF and RBI bond could be those instruments.
PPF has an annual cap of 70K where as RBI bonds doesn't have any cap.
Is the above understanding correct?
Are there any other such tax free instruments available in India?
Basically, I want to invest in the name of my parents and I want to make sure there is tax filling / reporting hassle for them.
I have done some digging and seems like PPF and RBI bond could be those instruments.
PPF has an annual cap of 70K where as RBI bonds doesn't have any cap.
Is the above understanding correct?
Are there any other such tax free instruments available in India?
MT: Simple / Silly Indian Tax question
There are a few tax free options (you have already mentioned a couple).
This also depends on your parents income at this point. If they are senior citizens, any income is tax exempt uptil Rs 150K or so (dont remember how much the exact exemption is)
If you are looking at equity funds as an option, then Long Term Cap Gains tax is 0 (therefore tax free) if you hold for a year. But then again, you would be aware of the risk factor when it comes to equity funds.
All depends on whether you are looking for monthly income genreation or capital appreciation.
Here is a link that might help with POMIS, KVP, RBI bonds, NSS etc
http://www.webindia123.com/finance/intro.htm
This also depends on your parents income at this point. If they are senior citizens, any income is tax exempt uptil Rs 150K or so (dont remember how much the exact exemption is)
If you are looking at equity funds as an option, then Long Term Cap Gains tax is 0 (therefore tax free) if you hold for a year. But then again, you would be aware of the risk factor when it comes to equity funds.
All depends on whether you are looking for monthly income genreation or capital appreciation.
Here is a link that might help with POMIS, KVP, RBI bonds, NSS etc
http://www.webindia123.com/finance/intro.htm