Meet Aditya – a 25 year old software engineer living in Mumbai. He spends his free time enjoying his new found financial freedom. This is his first job and he’s clueless about tax or savings. But it’s almost the end of January and Aditya heard his friends talking about Section 80C and how they pay zero tax thanks to Section 80C. Aditya earns Rs 4,50,000 annually. Here are his salary details.
Aditya looked up his pay slip and found out that his employer has been deducting a TDS on his salary of Rs 1,545 each month. This shall work out to Rs 18,540 for the whole year. While Aditya has been busy enjoying his new life he has no clue how much tax he needs to pay and whether he can save any tax!
Let’s help him!
Aditya should first find out his total income from all sources. Besides salary income, Aditya has earned savings bank account interest of Rs 2,500. He found this amount in his bank statement. His father had forced him to put aside Rs 50,000 in fixed deposit and from his online FD statement, he found out he will earn an interest of Rs 3,000 on this FD until 31st March 2015. Aditya is not sure whether any TDS has been deducted on his interest income – so he looks up his Form 26AS. Form 26AS has the details of all the tax deducted and deposited against Aditya’s PAN. He found TDS of Rs 1,545 deducted by his employer each month until January. He also noticed that there is TDS of Rs 550 on another FD in his name from long time ago. The interest he will earn from this FD is Rs 5,500 for the whole year. Here is Aditya’s total Income
Aditya also revealed he lives in a rented accommodation in Mumbai along with 4 other roommates and his share of rent is Rs 8,000. If Aditya can organize rent receipts from the landlord and get his PAN number, he can claim exemption on HRA. If Aditya can submit the rent receipts well in time, to his employer – his employer will be able to adjust his tax calculations.
Now let us see Aditya’s revised tax calculation.
Did you notice! If Aditya can manage to claim Rs 1,37,100 under section 80C – no tax shall be payable by him. With this deduction his taxable salary is same as the minimum exempt income. In fact, he will be filing an Income Tax Return to claim refund of any TDS which has been deducted on his income. (A maximum deduction of Rs 1,50,000 can be claimed under section 80C).
Aditya decides that he shall not pay any tax. This is how Aditya claims Rs 1,371,00 under section 80C. Deduction on Section 80C is available for PF @12% of Basic Salary, its Rs 29,520 for him. Since this is already deducted from salary, he simply needs to consider this amount – no additional payout is required. Aditya wants to try his hands in equities and finds the market returns promising so he invests Rs 50,000 in ELSS. He opens a PPF account and deposits Rs 57,580 – all of these add up to Rs 1,37,100.
Aditya is very relieved to pay no tax on his income! He loves Section 80C! Aditya still needs to file his Income Tax Return though since his income before deduction is more than Rs 2,50,000.