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How to Calculate Income Tax for FY 2011-2012?

"A prudent person foresees danger and takes precautions. The simpleton goes blindly on and suffers the consequences."
With continuous increase in prices of various commodities, it is essential for an individual to act prudently by having a good financial planning which can balance the increase in prices. Saving on taxes is one method which yields good results in having an efficient financial plan.

It is very common today that most of people are very much keen to know the tax amount they need to pay on their income every month. Some show interest in how tax liability is actually calculated. Therefore, in this article I am trying to explain the various sections available to save taxes and how the tax liability is actually computed.

Let us start with the introduction of various sections available in Income Tax act which provides exemptions from income tax liability under some specific conditions. These sections are described below :

1) Section 80C :

Tax payers can avail an advantage of limit up to Rs 1, 00, 000 by investing in securities which comes under this section. If a taxpayer’s taxable income lies in the highest tax bracket, he/she can take advantage of Section 80C to reduce his/her taxable income by Rs.1 lakh. The following is a list of important ways in which a taxpayer can get benefit of section 80C of Indian Income Tax Act :

  • Public Provident Fund
  • Employee Provident Fund
  • Life Insurance Premium
  • Unit Linked Insurance Plans(ULIP)
  • Equity Linked Savings Scheme(ELSS)
  • National Savings Certificate(NSC)
  • 5 year Fixed deposits with banks and post office
  • Home loan principal payment
  • Tuition fee paid for children’s education (maximum of 2 children)

2) Section 80CCF :

Section 80CCF allows an individual to invest an additional Rs. 20,000 in infrastructure bonds, and have that amount deducted from his/her taxable income in addition to the Rs. 100,000 deduction which the taxpayer gets from other tax saving instruments.

3) Section 80D :

Section 80D of Indian Income Tax Act is especially useful if the employer does not cover their employee’s health or medical expenses. One can avail a benefit of Rs. 15,000 for insuring self spouse and children. Medical insurance for parents above 65 years can avail a benefit up to Rs 20, 000.

4) Section 80DD :

Section 80DD of Indian Income Tax Act provides provision for tax deduction if taxpayer incurs medical expenditure for the dependents who are disabled. Maximum deduction allowed is Rs. 50,000/- in case of normal disability and Rs. 1 Lakh in case of severe disability.

5) Section 80DDB :

Costs incurred for treatment of specified illnesses like Neurological diseases, malignant cancers, Chronic Renal Failure etc, could fetch one a tax benefit under section 80DDB. For individual less than 60 years of age, a deduction limit of Rs. 40,000 is applicable. For a senior citizen, the limit is Rs. 60,000.

6) Section 80E :

Under section 80E of Indian Income Tax Act, any amount of interest paid on educational loan taken for individual higher education or higher education of individual’s husband / wife or children is deductible from taxable income.

7) Section 80G :

Donations made to funds are deductible from taxable income according to section 80G of Indian Income Tax Act.

8) Section 80GG :

Any House Rent Allowance given to an employee is tax free up to the minimum value of the conditions like 50% of basic salary, rent paid over 10% of annual income, actual HRA received etc.

9) Section 80U :

It is deduction in the case of a person with disability. An individual who is suffering from a permanent disability or mental retardation as specified in the Persons with Disabilities Act, 1995 or the National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999, shall be allowed a deduction of Rs 50,000. In case of severe disability the deduction is Rs. 1, 00,000.

10) Section 24(1)(vi) :

Individuals can avail a tax benefit of up to Rs. 1, 50, 000 for Housing loan interest according to this section.

11) Section 10(5) :

This section allows you to avail tax benefit on leave travel allowance which will be available twice in span of 4 years.

12) Superannuation :

Any contribution made by a company to a superannuation fund up to Rs. 1, 00,000 is tax free in the hands of the employee.

13) Medical allowance :

Any Medical Allowance given to an employee is tax free up to Rs. 15,000 /-

We have gone through various sections available for saving on taxes. Now it becomes easier for an individual to implement a good financial plan. In the next part of this article, I will take you through procedure of how actually the tax liability is computed. Let us start with the brief introduction of different categories of people who are entitled for tax liability. According to Income Tax Act, Income Tax Payers (Individuals) are broadly classified into 4 different types

  • Male citizens
  • Female citizens
  • Senior citizens ( 60 years-80 Years)
  • Very senior citizens ( Above 80 Years)

1) Male Citizens : The following table shows the tax rates applicable for as per tax laws.

Annual Income Tax Rates for FY 2011-2012
Up to 180000 Nil
180001 To 500000 10%
500001 To 800000 20%
Above 800000 30%

*Note: No surcharge on income tax is now applicable. However, Education cess and higher education cess is leviable @ 2% and 1% respectively on the tax amount.

The following examples given below will help you to understand the method of tax compilation in an easy way.

Example 1 : Mr. Debal is 30 year old and earning Rs 9, 00,000 annually.

Heads % of Income Tax Income Tax
Tax on income up to 180000 Nil Nil
Tax on income between 180001-500000 10% 32000
Tax on income between 500001-800000 20% 60000
Tax on income between 800001-900000 30% 30000
Total 122000

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