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Indian tax laws are complicated — financially independent women often find the different components included in their taxable income difficult to decipher.
Women who achieve financial independence or earn their own income have a lot to deal with. Be it the glass ceiling, grappling with social constraints or trying to make a mark in a world that is often hostile to ambitious women. What constitutes taxable income, in India, is often a puzzle for women.
For one, Indian tax laws are complicated, by far. For another, women who aren’t finance professionals may see limited upside in understanding the basics of taxable income.
After all, your salary gets credited, or you raise an invoice for your freelance gig or your accountant manages your income from business or profession.
So then, why should you care? You should care because your financial life is heavily affected by the tax you pay — be it at the stage of earning (Hello! Tax Deducted at Source) or investment (What’s in a deduction or an exemption?).
It’s also a good idea for women to have an understanding of their financial life, even if they have outsourced its reins to somewhere else.
Understanding regulations around your taxable income is the first step to ensure that:
So, let’s jump into aspects of taxable income you should understand!
Women pay the same taxes as men in our country. That is, you do not need to pay tax up to 2.5 lakh rupees, pay 5% tax till 5 lakh, pay 10% up to 7.5 lakh and so on.
Additional health and education cess are applicable at the rate of 4% and are being added to income tax liability in all cases, irrespective of if you are in the 30% bracket of taxpayers or lower.
There is an old tax regime and a new tax regime. Taxpayers with an annual taxable income of more than Rs 50 lakh will have to pay an additional surcharge on top of their income tax slab. Try this calculator for a simplified understanding.
Broadly, there are five heads. These are; income from salary, income from house property, income from business and profession, income from capital gains and any income from other sources which can include interest accumulated from fixed deposits, savings accounts etc.
If you are a salaried employee, the amount written by the HR team on your appointment letter is not your actual taxable income. Your taxable salary is the sum of the fixed component of salary, commission, bonus and allowances that the employer pays the employee to meet personal expenses.
If you are a freelancer, then TDS or Tax Deducted at Source is deducted by the person making the payment. For instance, your client will estimate the total annual income of an employee and deduct tax on her Income if the taxable Income exceeds INR 2,50,000.
Similarly, if you earn interest from a Fixed Deposit, the bank also deducts TDS. Since the bank does not know your tax slabs, they usually deduct TDS at the rate of 10%.
If you get a Dearness allowance, Compensatory allowance for living in a metro or extra days of work or overtime allowance — those are fully taxed.
If you get a House Rent Allowance and do not have your own housing, then you get an exemption (reduction) which is calculated like this.
There are a few allowances that are exempt partially like expenses for children’s education and hostel and others that are fully exempt such as allowances to UN employees or judges.
Moreover, if you get perquisites or payments over your salary, they can be further taxed such as Concession in accommodation rent, interest free loans, Club fee payments, Insurance premium paid on behalf of employees etc.
While perquisites are not so common, especially in the early stages of your career, retirement benefits are almost always given in the organized sector. Gratuity is given as appreciation of past performance, which is received at the time of retirement and is exempt partially.
If you encash your leaves, they are taxable.
Provident fund is contributed by both employee and employer on a monthly basis. Tax treatment is based on the type of provident fund maintained by the employer.
For most people, tax planning is synonymous with tax saving. However, sometimes saving tax in the short run can be a bad decision in the long run.
For instance, locking 5 year tax saving FDs can eat into your earnings because of inflation. Similarly, buying a house early just for tax saving can eat into your investments.
Also, very often, young earners end up buying a home just to take the example of lucrative tax benefits and find that they end up paying huge EMIs to the bank on which they could have earned disproportionate interest income.
However, to start with, there are a few things you can keep in mind. You must avail exemption of up to ₹1.5 Lakh from any one (or a combination of) the following – 5-year tax-saver fixed deposits, National Savings Certificate, National Pension Scheme, Equity Linked Savings Scheme, Employee’s Provident Fund, Senior Citizens Savings Schemes or Sukanya Samriddhi Yojana.
Your bank credits interest at a nominal rate of around 3% on your savings account balance. If this does not exceed 10,000 across all your accounts – then you are exempt from paying tax on this.
You should also claim exemption on the payment of health insurance policy premium for self, spouse, dependent children, parents, etc. The limit for this exemption is set at 25,000 for self, spouse and dependent children and varies between 25 and 50 thousand depending on parents’ age.
Another exemption is on the total interest paid for any education loan. There is no limit to this exemption — however, it is not applicable to principal amounts.
There are also exemptions for disability, charity or donations.
Selecting the correct Form while filing income tax returns is the most crucial part of your tax journey. Be honest with your accountant or if you are filing yourself, do a thorough scan.
Failure to do so can result in your return not getting processed by the income tax department.
Example: If you are a salaried individual with income below Rs 50 lakhs and with no capital gain income, the appropriate form for you is ITR 1, while it is ITR-3 if you are having income from business or profession (yes, even if you are running a small operation from your kitchen!). Choose your ITR form here.
Understanding the source and nature of your income (be it salary, professional income like a doctor or a lawyer or income from capital gains like dividend received from shares in a company) is the first step in your financial journey. The nature of taxation of that income is then secondary.
Often, young women panic about tax filing and associated aspects if they have not been exposed to this. They think it’s technical or can only be done by qualified professionals.
This is not true.
Today, platforms like ClearTax have made tax filing intuitively easy. If you are a salaried employee, your organization makes this process simplified for you with a Form 16 and bi-annual submissions (once of your proposed tax plan and once of the actuals done).
So, do not worry — it’s only tough the first time! Today, if you choose the simplified new tax regime, it’s even more intuitive than it used to be previously.
And when in doubt, always seek an expert. Fearing taxes and avoiding filling them until deadline is a recipe for disaster and stress.
Your financial future is in your hands — managing your taxable income is just a stepping stone to a long journey ahead!
Image Source: VSanandakrishna, Oko_SwanOmurphy via Getty Images, gstudioimagen, dimpleo-o and eucalyp free on Canva Pro
Ayushi Mona co-leads Broke Bibliophiles Bombay Chapter, India's first offline reader driven community. She is a poet and writer who evangelizes Indian writing in English at the India Booked podcast and has also read more...
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