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Understanding Taxes and Planning Effectively

In respect to taxes for a salaried person there are basically four things you need to understand:

  • How much tax you need to pay
  • Income on which you need not have to pay taxes
  • Tax rewards you get for certain behavior of yours
  • Statutory requirements

How will understanding these things help you?

  • You will be able to fulfill your tax obligation
  • You will try to earn incomes that are tax free
  • You will fine tune your behaviors to get tax rewards
  • You will follow the statutory requirement and not be liable for fines etc

Calculation of  your tax obligation

For financial year 2012-2013 percentages of taxes on your income are as follows:

Men and Women under 60 yrs

Annual income

Tax payable

Upto Rs 2,00,000

No Tax

Rs 2,00,000 to Rs 5,00,000

10% of the amount exceeding Rs 2 lacs

Rs 5,00,001 to Rs 10,00,000

Rs 30,000 + 20% of the amount exceeding Rs 5 lacs

More than Rs 10,00,000

Rs 1,30,000 + 30% of the amount exceeding Rs 10 lacs

 Income on which you need not have to pay taxes

1. Conveyance allowance u/s 10 (14) (ii)

     Rs 9,600 per annum maximum

2. House rent allowance u/s 10 (13A)

  • Your house rent allowance (HRA)
  • 50% of your basic salary (40% in case you stay in non-metro cities)
  • (Actual Rent paid)  minus (10% of basic salary)

    Whichever is lower

3. Medical reimbursement

  • Rs 15,000
  • Actual expenses

   Whichever is lower

4. LTA u/s Section 10 (5)

  • Your leave travel allowance
  • Actual expenses on travel

     Whichever is lower and twice for the period 2010-2013

5. Dividends from equity mutual funds

  • All dividends you get from equity mutual funds

6. Gains made in growth option of equity mutual funds

  • Any capital gains made after 1 year

There are few items where you may pay lesser tax

  • Dividends from debt mutual funds
  • Gains from growth option of debt mutual funds
  • Dividend from shares
  • Gains from shares

Tax rewards you get for certain behavior of yours

1. Taking care of your own long term needs

Government wants you to save for your long term needs. Your long term needs can be met by investing in various products like provident fund, pension fund, life insurance policies, equity linked savings scheme, national savings certificates, special bank fixed deposits, post office time deposits, infra bonds etc.

So if you invest in any of these products, government feels you have taken away their burden and hence it lets you pay lesser tax.

2. Educate yourself and your children well

Government feels well educated citizens will be its biggest asset. If you send your child to school take on the burden of fees, it will let you pay lesser taxes.

If you or your child pursues higher education by taking study loan, government shares the burden of the interest by letting you pay lower tax.

3. Take adequate protection for medical emergencies

Mediclaims a useful tool to take care of medical emergencies and help your family during any medical crisis. Government thoroughly likes this behavior of yours. The premium you pay for yourself and family will be rewarded by the government by way of lesser taxes.

4. Contribute money for building roads and other infrastructure projects

The role of the government is to provide infrastructure and it spends huge money on the same. If you fund these infrastructure projects by investing in specified bonds government rewards you with lesser taxes.

5. Donate to charities and welfare organizations

If you contribute money to various qualified charitable organizations, government is relieved of its welfare responsibilities. Hence it lets you pay lesser taxes.

6. How these behaviors are rewarded?

Your taxable income gets reduced by the extent of the money you have spent on the above items. This means lesser taxable income and lesser tax out go.

Government has only selectively rewarded your good behavior. It has kept certain limits and conditions so as to safeguard the abuse of these benefits and also ensure their tax collections are not affected too much.

They have set a limit of Rs1 lacs the maximum reduction an individual can make to their taxable income. However there are few items which allow deductions more than Rs1 lac.

Items that qualify for the Rs 1 lac deductions

  • Contributing to provident fund
  • Contributing to pension Fund
  • Paying premium on your life insurance policies
  • Investing in equity Linked savings scheme
  • Investing in national savings scheme
  • Investing in postal time deposits
  • Investing in a special 5 yr bank fixed deposit
  • School tuition fees for your child's education
  • Principal repayment of your home loan

There are other benefits that can be deducted from taxable income over and above the Rs 1 lac limit. They are as follows:

Registration and stamp duties of your new home purchase

  • Premium paid for your family mediclaim policy- Upper limit Rs 15,000
  • Premium paid for your parent's mediclaim policy- Upper limit Rs 20,000
  • Interest paid on the educational loan taken for higher studies- No limit

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