Proofs for Income Tax Declaration

The HR Department of your company is all set to roll up their sleeves and email you asking you to submit proofs of your Income Tax Declaration with the approaching new year. Employees have to submit investment proofs and provide income tax declaration so that their employer deducts the correct amount of TDS. There are things that you must be aware of pertaining to investment proofs that an individual needs to provide to their employer. These details are to be submitted under Form 12BB.

Major Sections to Claim Income Tax Declaration

Section 80C

Maximum deduction available under section 80C is INR 1,50,000. Following are the deductions covered under this section.

  • Life Insurance: Life insurance Premium slips (in the name of self/spouse/children)
  • ELSS/Mutual Fund (Tax Saving): ELSS/Mutual Fund Statement
  • PPF: Copy of PPF Passbook (Self, Spouse, any child)
  • Principal Repayment of Housing Loan: Home loan Statement mentioning principal amount repayment / Certificate from Bank
  • Children Tuition Fees (up to 2 children): Children Education fee receipts
  • Fixed Deposits (Tax Savings): Copy of Tax saving FD receipt
  • Unit linked Insurance Scheme / Plan: Receipts /Certificate / Statement of Account / Copy of passbook of the current financial year (Self, Spouse, any child)
  • NSC: NSC certificate, Interest statements on NSC purchased
  • Sukanya Samriddhi Account: Sukanya Samriddhi Account passbook.
  • Deferred Annuity Plan: Proof for the payment made for a non-commutable deferred annuity on the life of the individual himself or spouse or any child
  • Subscription to any deposit scheme/pension fund set up by the National Housing Bank (NHB): Subscription proof of deposit scheme or any pension fund or home loan account scheme of National Housing Bank

Section 80CCC

  • Pension Plan: Receipts /Certificate / Statement of Accounts / Copy of passbook of current financial year

Section 80D

The section 80D provides deduction for payment of medical health insurance premium.

  • Medical Health Insurance for self, spouse, and children
    • Proofs: Mediclaim policy copy or Copy of Premium receipt, Health- Checkup receipts
    • Deduction Limit: INR 25,000/- (for citizen above 60 years, the limit is INR 50,000/-)
  • Medical Health Insurance for parents
    • Proofs: Mediclaim policy copy or Copy of Premium receipt, Health- Checkup receipts
    • Deduction Limit: INR 25,000/- (If parents are above 60 years then the limit is INR 50,000/-)

Section 80DD

  • Expenditure on Dependents with Disability u/s 80DD.
    • Proofs: Certificate from Prescribed Authority in Form No. 10-IA or as per the applicable prescribed Form.
    • Deduction Limit:
      • INR 75,000 for 40% or more disability
      • INR 125,000 for 80% or more disability

Section 80U

  • Expenditure on own Disability u/s 80U.
    • Proofs: Certificate from Prescribed Authority in Form No. 10-IA or as per the applicable prescribed Form
    • Deduction Limit:
      • INR 75,000 for 40% or more disability
      • INR 125,000 for 80% or more disability

Section 80DDB

Treatment of Specified Diseases u/s 80DDB.

  • Proofs: The prescription in respect of the diseases or ailments specified diseases by the specialists
  • Deduction Limit: INR 40,000 [INR 1,00,000 in case of a senior citizen (aged 60 years or more)]

Section 80G

  • Donations to specified trust u/s 80G: Receipts of donations & PAN of Donee

Section 80E

  • Deduction of education loan interest u/s 80E: Copy of loan certificate reflecting the interest payments

Section 24(b)

  • Interest on Housing Loan:
    • Proofs: Certificate from Bank/Home Loan statement, Self- Declaration whether the house is self-occupied or let-out one, submit completion certificate or occupancy certificate for claiming interest paid on housing loan
    • Deductions: INR 2,00,000 in case of Self-Occupied Property. The total amount of interest paid in case of Let out property

House Rent Allowance (HRA)

Rental agreement or Monthly rent receipts (with Revenue Stamp in case rent in cash is INR 5,000/- or more-). In case, annual rent paid is more than INR 1 Lakh, landlord’s permanent account number should be quoted.

Section 10(5)

  • Leave Travel Allowance: LTA can be claimed in respect of two journeys performed in a block of four calendar years. The current block runs from 2018-2021
  • Proofs: Travel tickets

Section 17(2)

  • Medical Reimbursement
    • Proofs: Original Medical bills (including Parents, Wife/husband, Children)
    • Maximum Limit: INR 15,000
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FAQ

Can a company or a firm take the benefit of Section 80C?

The provisions of Section 80C are applicable only to individuals or a Hindu Undivided Family (HUF). Hence, a company or a firm cannot take the benefit of Section 80C.

What are the tax benefits that I can avail of for repaying a home loan ?

You will be eligible to claim both the interest and principal components of your repayment during the year.

Is the interest received on the tax saving FD taxable?

Yes, the interest received on a tax saving FD is taxable.

Tax Savings & Deductions under Chapter VI A

Individuals and HUFs (Hindu Undivided Family) can claim income tax deductions on certain investments and expenses undertaken during the financial year.

Section 80C: Income Tax Saving Investments & Payments

Section 80C allows deduction on certain investments and expenses mentioned under the Income Tax Act. The maximum limit for this deduction is INR. 1,50,000.

Investments Eligible for Tax Deductions u/s 80C

  • ELSS – Equity Linked Saving Scheme: It is an equity-based tax saving mutual funds. Investments made up to INR 1,50,000 under ELSS qualify for tax benefits. It has a lock-in period of 3 years.
  • PPF – Public Provident Fund: PPF is a government-backed provident fund with a fixed interest rate of approximately 8% p.a. You can invest a minimum of INR. 500 and maximum INR. 1,50,000 in a financial year. The PPF deposit, interest, and withdrawal amount are exempt from tax. The maturity period for a PPF is 15 years.
  • EPF – Employee Provident Fund: is a savings scheme for employees.  Each month a portion of their salary is deducted towards EPF. This fund is made available to the employee when they retire or change jobs. Employee’s contributions to EPF was tax deductible u/s 80C. However, as per the recent announcement in Budget 2021,  Interest earned on annual PF contribution exceeding 2.5 lacs from April 2021 will now be taxable. While the employer’s contribution is completely tax-free Any withdrawal after the specified period (5 years) is exempt from income tax.
  • NSC – National Savings Certificate: is a small savings scheme offered by the Indian Post office earning an interest rate of 8.0% p.a.
  • Tax Savings Fixed Deposits: also known as term deposits are offered by different banks and financial institutions for tax saving investment u/s 80C.
  • Sukankya Samriddhi Savings Scheme: is aimed at the betterment of girl children in India. The deposits earn an interest of 8.6% p.a. with a maturity period of 21 years.
  • ULIP i.e. Unit Linked Insurance Plan: any amount invested by an individual in a pension fund set up by a mutual fund or UTI is allowed as a deduction u/s 80C up to INR. 1,50,000
  • SCSS i.e. Senior Citizen Savings Scheme: is open to any person above the age of 60 years, or 55 years who have opted for retirement. Savings under the SCSS scheme will earn interest at 8.6% p.a with a lock-in period of 5 years.
  • Pension Fund by UTI: investment amount up to INR 1,50,000 by an individual in a pension fund set up by a mutual fund or UTI is eligible for exemption

Payments eligible for Income Tax Deductions u/s 80C

  • Life Insurance Premium: amount paid as a life insurance premium for self, spouse or children is eligible for deduction. However, the amount paid should be less than 10% of the sum assured.
  • Home Loan Repayment: includes repayment of principal amount towards a home loan taken for construction or purchase of residential house property. The
    stamp duty expenses, registration expenses and transfer expenses paid are also eligible for deduction.
  • Children Tuition Fees: Tuition fees paid for a full-time course to any school, college, university or educational institute in India. The deduction is available for up to two children.

Section 80CCD – Tax Deductions for Contribution to Pension Fund

Any individual who contributes towards the National Pension Scheme (NPS) can claim deduction under this section. There are 3 different parts of the section 80CCD, that allows the deduction subject to different for a different condition.

Tax Benefits of NPS (National Pension Scheme)
Section Component Deduction
80CCD(1) Employees Contribution to Pension Fund INR 1,50,000
80CCD(2) Employers Contribution to Pension Fund

10% of Basic Salary 

80CCD(1b) Voluntary Contribution to NPS INR 50,000

Both Section 80C and 80CCD are covered under section 80CCE. The total deduction amount eligible for deduction u/s 80CCE is INR 1,50,000 in a financial year.

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Section 80D – Tax Deductions for Medical Insurance Premium

Section 80D of the income tax allows individuals and HUFs (Hindu Undivided Family) to claim a deduction for the amount paid towards medical expenditure. The medical expenditure includes:

  • Medical insurance premium
  • Medical expenditure
  • Preventive health checkup

An individual taxpayer can claim the deduction for medical expenses paid for the following:

  • Self
  • Spouse
  • Children
  • Parents

In the case of Hindu Undivided Family (HUF), a deduction is allowed for medical insurance premium paid for a member of HUF.

Section 80DD – Tax Deductions for Differently Abled Dependant

A resident Individual/ HUF can claim a deduction for any expenses incurred on the treatment of dependent family member.
The list of diseases covered u/s 80DD is:

  • Autism
  • Cerebral palsy
  • Blindness
  • Low vision
  • Leprosy cured
  • Hearing impairment
  • Locomotor disability
  • Mental retardation
  • Mental illness

The deduction limit u/s 80DD is:

Category Deduction Amount
Disabled Person (40% or more of the disability) INR 75,000
Severely Disabled Person (80% or more of the disability) INR 1,25,000

Section 80DDB – Tax Deductions for Treatment of Specified Diseases

Section 80DDB is for expenses incurred on the treatment of specified diseases. The list of diseases covered u/s 80DDB are:

  • Neurological Diseases with a disability of at least 40%
  • Malignant cancer
  • AIDS
  • Chronic Kidney failure
  • Haemophilia
  • Thalassemia

The deduction limit u/s 80DDB is:

Age Deduction Amount
Individual or a member of HUF, aged below 60 INR 40,000
Individual or a member of HUF, aged 60 years or above INR 1,00,000

Section 80U – Tax Deductions for Individuals with Disability

Deduction u/s 80U can only be claimed by Resident individuals with a disability. HUF cannot claim tax deduction u/s 80U if any of its members are suffering from a disability. An individual suffering from any of the following disabilities is eligible to claim deduction u/s 80U:

  • Autism,
  • Cerebral palsy,
  • Blindness,
  • Low vision,
  • Leprosy cured,
  • Hearing impairment,
  • Locomotor disability,
  • Mental retardation,
  • Mental illness.

The tax deduction limit u/s 80U is

Category  Deduction Amount
Disabled Person (40% or more of the disability) INR 75,000
Severely Disabled Person (80% or more of the disability) INR 1,25,000

 

Section 80E – Tax Deductions for Interest on Education Loan

Section 80E allows a deduction for interest paid on repayment of education loan taken for higher education. The deduction u/s 80E is not available for principal repayment of the education loan.
There is no monetary limit u/s 80E. An individual can claim the total interest amount paid as a deduction. However, a deduction is available only for 8 consecutive years.

Only individuals are eligible to claim deduction u/s 80E if they fulfil the following conditions:

  • The loan must be taken from the financial or charitable institution.
  • The loan repayment must be done by the taxpayer
  • The purpose of the loan taken should be to pursuing higher education for self or for a relative. Relative includes spouse, children, and student for whom an individual is a legal guardian.

Section 80EE – Tax Deductions for First Time Home Buyer

Sections 80EE allows individuals to claim the deduction for interest paid on the home loan taken for the first residential house. The eligible deduction amount for AY 2019-20 (FY 2018-19) is INR 50,000.
This limit of Rs. 50,000 is over and above the deduction of Rs. 2,00,000 allowed for home loan interest u/s 24.

To claim income tax deductions u/s 80EE following conditions must be fulfilled:

  • An individual is a first time home buyer.
  • Value of residential house should not exceed Rs. 50,00,000.
  • A loan has to be sanctioned between 1st April 2016 to 31st March 2017.
  • A loan must be sanctioned by Financial institutions or Housing Finance Company.
  • Sanctioned loan amount should not exceed Rs. 35,00,000.
  • A taxpayer should not own any other residential house on the date of a sanction of a loan.

Section 80G – Donation to Charitable Organisations

Section 80G allows Individuals, HUFs, and businesses to claim income tax deductions for donations made to certain relief funds and charitable institutions. However, only donations made to funds prescribed by the government of India qualify as a deduction.

The qualifying limit eligible for deduction differ based on the charitable organization. Types of income tax deductions on donations u/s 80G are:

  • 100% Income Tax Deduction without any qualifying limit
  • 50% Income Tax Deduction without any qualifying limit
  • 100% Income Tax Deduction subject to 10% of adjusted gross total income
  • 50% Income Tax Deduction subject to 10% of adjusted gross total income
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Section 80GG – Rent paid

Section 80GG allows a tax deduction for rent paid for furnished or unfurnished accommodation. The deduction is allowed to taxpayers who do not receive any HRA from their employer.

Following conditions must be fulfilled to claim deduction u/s 80GG for Rent paid

  • Only an individual can claim deduction u/s 80GG. The individual can be either salaried or self-employed.
  • In the case of a salaried person, they should not be receiving House Rent Allowance from an employer.
  • For claiming a deduction, Form-10BA needs to be submitted with the Income Tax Department.
  • Assessee or spouse or minor child or HUF of which they are a member should not own be owning any residential accommodation at the place where he/she is residing/performing office duties under-employment/carrying business or profession
  • The assessee should not own a house property at any place, for which income is calculated as income from self-occupied house property.

The eligible deduction limit u/s 80GG is lower of the following amounts:

  • Total rent paid less 10% of total income
  • 25% of the annual salary
  • INR 5000 per month i.e INR 60,000 annually

Section 80TTA – Savings Interest

Section 80TTA of the Income Tax Act allows a deduction on savings account interest. Individuals (other than senior citizens) and HUFs can claim a deduction up to INR 10,000 for a financial year. The bank account statements are required to calculate and claim deduction u/s 80TTA.

Following interests are eligible for deduction u/s 80TTA:

  • Interest earned from Saving Account with Bank,
  • Any interest earned from Saving Account with Co-operative Society,
  • Interest earned from Saving Account with Post Office.

Section 80TTB – Interest Deduction on deposits for Senior Citizens

Section 80TTB under the Income Tax Act which allows resident senior citizens to claim a deduction on interest income up to INR 50,000 for a financial year. This section is applicable from FY 2018-19 (AY 2019-20) onwards.

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Following interests are eligible for income tax deductions u/s 80TTB:

  • Interest earned on Bank Deposits i.e, saving account interest, fixed deposits, recurring deposits.
  • Any interest earned on deposits with Co-operative Society engaged in banking.
  • Interest earned from Post Office Deposits i.e, Saving Account Interest, NSC, Senior Citizens Savings Scheme Accounts, Time Deposits, 5-year recurring deposits, and monthly income schemes.

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FAQs

Can I save more than INR 1.5 Lakh in Taxes?

Yes, apart from Section 80C tax deductions, you could claim deductions up to INR 25,000 (INR 50,000 for Senior Citizens) buying Mediclaim u/s 80D. You can claim a deduction of INR 50,000 on home loan interest under Section 80EE. You can save upwards of INR 2,00,000 in taxes.

Can I claim Chapter VIA deductions under the New Tax Regime?

With the majority of income tax deductions slashed in the New Tax Regime, some Deductions are still claimable.
– Rebate u/s 87A
– Standard Deduction on Rent Received
– Agricultural Income
– Life Insurance Income to Beneficiary
– Retrenchment Compensation
– Voluntary Retirement Scheme
– Leave Entrenchment on Retirement

What is the Section 80CCD(2) of Income Tax?

Section 80CCD(2) allows employees to claim up to 10% of basic plus DA for Tax Deductions. This contribution is considered an additional deduction as its not part of Rs 1.5 lakh allowed under Section 80C.

How to claim expenses on Freelance Income?

Income earned by freelancers is covered under the income head income from business and profession. The taxpayer can claim expenses on freelance income while filing their ITR on the Income Tax e-Filing portal. Freelancers/ Professionals also have an option to opt for the presumptive taxation scheme under the income tax act.

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Claim Expenses on Freelance Income

  • RENT
    • If you’ve set up your small office in rented premises. You can claim the rent paid as an expense from your income. If the property was rented for part of a year, No issues. In such cases, the freelancers may claim the actual amount of rent paid as an expense. It’s a good practice to keep the rent paid receipts on record for future references.
  • REPAIRS
    • Nowadays, your laptop or workstation usually becomes your whole office and you need to take the utmost care of it. So if you have incurred any expenses on repairs of the laptop, furniture, or any other equipment. You can claim them as a deduction. For example, any payments made in order to repair the lenses can be claimed as an expense if you are a freelance photographer.
  • OFFICE SUPPLIES
    • Expenditure such as stationery for staff, tea coffee expenses, etc can also be claimed.
  • ELECTRICITY
    • Deduction on electricity costs can be claimed from income. And in case you are working from home, you may claim the electricity expenses proportionally from your income.
  • FUEL EXPENSES
    • If your work involves commutation, you can claim fuel expenses for the same. If in case the fuel expenses are not exclusively for the work purpose, you may claim the fuel expense proportionally.
  • MEMBERSHIP FEES
    • The freelancer can claim the membership fees paid by him as an expense. The membership fees can be claimed only if it is related to his work purpose. For example, a writer can claim the amount paid for becoming a member of the writer’s club. However, if he pays membership fees of a golf club for his recreational purpose, it cannot be claimed.
  • ADVERTISEMENT EXPENSE
    • For example, if you are a website developer or a domain specialist. And you have advertised your talent at various websites to offer your services, you can claim these payments as expenses from your Income.
  • BOOKS, MAGAZINES, REFERENCE MATERIAL
    • The freelancer can claim the expense of both books ordered for recreational purposes and reference purposes.
  • TRAVELING EXPENSES
    • If as a freelancer, you need to travel to places. You can claim the traveling payments like tickets, meal expenses, stay expenses as a deduction from your income.
  • DEPRECIATION
    • Depreciation means claiming the cost of the asset as expense over the life of the asset. As per the income tax act, we cannot claim the cost of the asset as an expense but we can always claim the depreciation on the asset as an expense. For example, You have purchased a high-end computer for Rs 10 lakhs. You can claim the deduction of the computer by way of depreciation at the income tax rates. The depreciation rate is 60%. Hence, you can claim 6 lakhs as depreciation in the 1st year (10,00,000*60%). And can carry forward the remaining amount to next year.

Points to Remember for Freelance / Consultants to Claim Expenses

  • Preserves the bills/acknowledgments or any other proofs of the payments made.
  • Maintain Books of Accounts for incomes earned during the year. However,
    in the Case of freelancers/ Professionals, it is not mandatory to maintain books of accounts if turnover / gross receipts do not exceed Rs. 50 lakhs.
  • It shall be noted that TDS is to be deducted where certain services are availed by the freelancer. For example, Mr. Vivek a freelance web designer obtained the services of a professional Chartered Accountant for auditing his books of accounts and other related services. Now while making payment to Chartered Accountant, Mr. Vivek shall deduct TDS u/s 194J and pay the amount net of TDS.
  • As a freelancer, it is possible that you make a payment for expenses in cash. At that time one needs to keep in mind that cash payment made to a single person in a day does not exceed Rs. 20,000.
  • You can also claim deductions under chapter VI-A of the Income Tax Act. You can claim deductions under section 80C from your salary for payment of ELSS, PPF, FD, etc. Also under section 80D, 80E, etc you can claim the payments made towards medical insurance premium and interest on an educational loan.

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FAQs

Do freelancers get tax refunds?

Freelancers must file an annual tax return on Income Tax Portal, if you overpay your estimated tax, you’ll receive the excess amount back in the form of a tax refund.

At what rate shall freelancing income be taxable?

The same taxation slabs apply to the freelancing individuals as well. Incomes up to INR 2.5 lakhs are not taxed upon, income between the values 2.5 lakhs to 5 lakhs are taxed at 10%, 5 to 10 lakhs at 20%, and above 10 lakhs at 30%.

What do you mean by presumptive income?

Presumptive taxation scheme (PTS) allows you to calculate your tax on an estimated income or profit. However, the assessee is allowed to willingly declare income at a higher rate than the minimum of 6-8% of the total turnover.

Income Tax for Freelancers, Consultants and Professionals

Who is a Freelancer?

Freelancer is a person who is self-employed, and have the freedom to choose their projects and companies they would like to be associated with. Just like every individual who receives income from salary, freelancers are also liable to pay income tax on their income. Some of the common professions for freelancing are:

  • a writer,
  • a software developer,
  • a photographer,
  • an interior decorator,
  • fashion designer, a blogger,
  • a gym instructor, etc.

Freelancers don’t earn a salary but run a business. The benefit that a freelancer gets while preparing income tax details is that expenses of a freelancer are allowed to be deducted from freelancers’ income.

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What does the Income of a Freelancer Include?

The sum of all the money one received against the work done is called gross receipt. If your receipts are received in a bank account then sum them up from your bank account statement. If you have received some money as loan from relatives or friends than it does not count as your income. Payment received towards freelancing work is considered as income from freelancing.

Income received from other sources such as interest on FD, rent from property are not included in the freelancing income. Such incomes are part of other heads of income in your return.

Books of Accounts for Freelancers

There are two methods of accounting to calculate the income of the freelancer:

  • Accrual Basis of Accounting: Here, the income is accounted for when it’s due.
  • Cash Basis of Accounting: Here, the Income is accounted only after it’s actually received.

Accrual Basis v/s Cash Basis Accounting

Let us first understand these methods of accounting. Here are some other aspects of these methods of accounting the Income:

Accrual Basis Cash Basis
Incomes are accounted when the right to receive occurs Incomes are accounted only when the cash is actually received.
For Example, you raise an invoice on your client on 7th February but receive the payment on 10th April, revenue would be booked in your accounts on the basis when invoice is raised to the client i.e, 7th February. Now, in the same case if it’s Cash Basis of Accounting, revenue would be accounted for only on 10th April (the tax year next to the year in which invoice was raised or work got completed) when payment is received.
Similarly, expenses are accounted right when the obligation is incurred. Expenses are accounted only after they’re paid off.
For Example, your Internet bill dated 18th February to 18th March has been received. This will be captured as an expense in the accounts of March, even if you don’t pay this until 31st March (even in the next tax year). Note that on an estimated basis your Internet cost for remaining 13 days of March may also be accrued when your books of accounts are closed on 31st March. Here, the same Internet bill will be booked as an expense in the month of March only if you pay it before the 31st March (in the same tax year). If you pay it in April, it will get booked as an expense in the next tax year (even when the expense pertains to the previous tax year)
Tax liability is considered for the booked income. So even the income yet not recieved may be liable for Tax. As here, the income is not booked until actually receiving it, the income not received yet will not be liable for Tax
This method can be followed for all types of income. In fact, it’s commonly used for Income from Salary, House Property, and Capital gains This method is only applicable to Profits and gains from Business and Profession and Income from Other Sources

It should be kept in mind that once you select a method of accounting, you’re not easily allowed to change it. You need to continue with it. That’s why it is very important to consider the pros and cons of both methods.

The Cash basis of accounting may seem a preferable option from the two, but one must consider that in the long run, it doesn’t help much with tax reduction, instead, it just postpones that particular amount of tax to the next year. If your payment receipts are not so irregular, Accrual Basis is a much logical option. The tax calculation can be done properly for the given year.

Calculate Income for Freelancers

When it comes to Income Tax for Freelancers, here’s how taxable income is calculated:

[Net Taxable Income = Gross Taxable Income – Deductions]

You’re liable to pay tax if your age is less than 60 years and your total taxable income is more than INR 2,50,000.

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Tax Payable for Freelancer

Now, if the total Tax Liability exceeds INR 10,000, the taxes are supposed to be paid every quarter. This is called the Advance tax. Here’s how to calculate Advance tax

  • Add up all your payments and determine your Total Income.
  • Subtract all the work-related expenses.
  • Add income from other sources if any.
  • Identify your slab rate applicable to you and calculate your tax due. (Deduct TDS)
  • If this Tax Due exceeds INR 10,000, you need to make the payment of Advance Tax by Due dates given below:
Due date of installment Advance Tax payable by Individual and Corporate Taxpayers
On or before 15th June 15% of the advance tax liability
On or before 15th September 45% of the advance tax liability
On or before 15th December 75% of the advance tax liability
On or before 15th March 100% of the advance tax liability

Freelancers and Professionals can opt for presumptive taxation scheme u/s 44ADA with effect from AY 2017-18. As a result, they can file ITR 4 and will not be required to maintain books of accounts. In the case of freelancers opting for a presumptive taxation scheme, the Advance Tax will have to be paid in a single installment before 31st March of the Financial year.

ITR for Professions u/s 44ADA (Presumptive Scheme)
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Freelancing Expenses Allowed as a Deduction

Freelancers can deduct expenses incurred exclusively towards the freelancing work. This could be anything from office rent, furniture or expense on a visit to a client. Freelancers cannot claim Personal expenditure as deduction. For example: If you are an app developer, you can deduct expenses on testing app and software purchase. If you have certain expenses like a cost of high speed internet connection that you use both for the personal and professional purpose you can allocate a reasonable percent to your freelancing work and deduct them.

  • Rent Expenses
  • Electricity Expenses/ Telephone Expenses/ Internet Expenses
  • Petrol/ Diesel Expenses
  • Travel Expenses relating to freelancing work
  • Local taxes and insurance of your business property
  • Meal, entertainment or hospitality expenses incurred on client
  • Depreciation on capital asset purchased for work( laptop, printers, car)
  • Office Expenses
  • Any other expenses incurred for the purpose of earning revenue

Deductions allowed under section 80C to 80U

Just like any salaried person, a freelancer can claim all the deductions listed under section 80, by fulfilling the conditions listed therein. For example, if you have made investments to PPF, NSCs, or paid life insurance premiums, you can avail deduction under Section 80C. In case of any medical premium paid by you, you can claim deduction under Section 80D.

TDS for Freelancers

The government of India has made regulations by which an individual/company paying an individual or another company for services offered needs to deduct TDSIn the case of freelance TDS is deducted at 10%. Individual/company from India having valid Tax Deduction Account Number (TAN) can only deduct TDS from your earnings. Unless your client has a TAN they are not eligible to deduct any TDS from your earnings. In many cases companies/individuals from outside India won’t have TAN, no TDS is applicable. In that case, depositing Advance Tax becomes freelancers’ liability. If any of your clients have deducted TDS on payments made to you, you can take credit for this tax deducted from your final tax dues.

You can claim a refund from the Income Tax Department if your income does not exceed the Basic Exemption Limit. You can also become eligible for a refund in case the total TDS exceeds the amount of your tax liability. Here are the other taxes applicable to Freelancers

  • Service Tax
  • Excise Duty
  • Sales Tax

ITR Form and Document Checklist

Freelancers need to either fill out ITR 3 or ITR 4 and need to keep ready the documents required to file the ITR. ITR 3 applies to income from business and profession. However, professionals can opt for the presumptive taxations scheme and declare 50% of their gross receipts as their income by filing ITR 4 from the AY 2017-18.

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FAQs

As a Freelancer, do I need to pay taxes?

Yes, absolutely. You need to pay taxes and file your income tax returns on Income Tax Portal if your total income for a particular financial year exceeds the Basic Exemption Limit prescribed by Income Tax Department

Which ITR do freelancers need to file?

A person earning on his own is considered a Sole Proprietor and needs to file ITR-4. If you have any other income source, you need to include that as well while filing your Income Tax Return.

Is Advance Tax applicable to Freelancers?

If the total tax liability during the financial year exceeds Rs.10,000, the taxpayer is required to pay taxes on quarterly basis. Hence, freelancers also need to pay advance tax if their total tax liability exceeds Rs.10,000.

Do freelancers need to maintain Book of Accounts?

Yes. In order to calculate the income tax, the Freelancers need to maintain them. In fact, the Income Tax Act has specified the books of accounts under section 44AA and Rule 6F.


Section 80C : Deductions for Tax Saving Investments

Section 80C allows individuals and HUFs to claim deductions for certain investments and expenses which are specifically mentioned under the Income Tax Act. The maximum limit for deduction under section 80C is INR 1,50,000.

Deduction under section 80C is not allowed for Financial Year 2020-21 if the taxpayer opts for the new tax regime
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Deduction under section 80C is not allowed for Financial Year 2020-21 if the taxpayer opts for the new tax regime

Investments Eligible for Section 80C Deduction

Contribution to ELSS: When you invest in Equity Linked Saving Scheme or a tax saving mutual fund then you are allowed a deduction under section 80C. Investment in ELSS funds comes with a lock-in period of 3 years.

Investment in Public Provident Fund: It is backed by Government and carries a fixed interest rate (8.0% p.a. subject to change). You can invest a minimum INR 500 and maximum INR 1,50,000 in a financial year. Any investment in Public Provident Fund (PPF) is allowed as a deduction under this section. PPF deposits fall under the EEE (Exempt, Exempt, Exempt) tax category. Of which all three things including deposit, interest, and withdrawal amount are eligible for tax exemption.

Contribution to Employees Provident Fund: Employees contribution to Provident fund is also eligible for deduction under section 80C. This contribution amounts to 12% of the salary. At present, the interest rate in EPF contribution is 8.8%

Investment in Pension Fund by UTI: Any amount invested by an individual in a pension fund set up by a mutual fund or UTI is allowed as a deduction under section 80C up to INR 1,50,000.

Investment in National Savings Certificate (NSC): NSC is a scheme run by Indian Post and carries an interest rate of 8.1%. Although there is no upper limit for investment in NSC, the deduction will be allowed only up to INR 1,50,000 under section 80C

Investment in Tax Saving Fixed Deposit: Different banks and financial institutions offer term deposits which are created for tax saving under section 80C. The lock-in period of such tax saving deposits is 5 years and you can not withdraw money before its maturity.

Investment in Sukankya Samridhhi Savings Scheme: The scheme was launched for the betterment of girl children in India. Deposits in this scheme will earn interest at 8.6% per annum and will be eligible for deduction under this section. The maturity period of the deposit will be 21 years from the date of opening the account.

Investment in Unit Linked Insurance Plan (ULIP): It is a mix of insurance and investment. Since the investment portion is dependent on market performance, there are no fixed returns. Any investment made under this is allowed as deduction u/s 80C

Senior Citizen Savings Scheme (SCSS): Any person who has aged more than 60 years or a person over 55 who has opted for retirement, can invest in a senior citizen savings scheme. Savings under the SCSS scheme will earn interest at 8.6% per annum. This deposit has a lock-in period of 5 years and is eligible for deduction under section 80C.

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Payments Eligible for Section 80C Deduction

Life insurance Premium: Any amount paid as life insurance premium for self, spouse or children is allowed as deduction under section 80C. The premium amount has to be lower than 10% of the sum assured.

Home loan repayment: Repayment of principal amount towards a home loan taken for construction or purchase of residential house property, is allowed as deduction under section 80C. Even stamp duty expenses, registration expenses and transfer expenses are also allowed as deduction.

Children’s tuition fees: Tuition fees paid for up to two children is allowed as a deduction under section 80C. The fees could be paid to any school, college, university, or educational institution in India. The fees have to be for a full-time course.

For FY 2019-20, due to COVID-19 the due date for filing ITR has been extended to 30th November 2020 for all taxpayer.
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For FY 2019-20, due to COVID-19 the due date for filing ITR has been extended to 30th November 2020 for all taxpayer.

ITR Form Applicable for Section 80C

The taxpayer can claim deductions u/s 80C while filing ITR if all the above-mentioned conditions are full-filled. Individuals/HUFs can claim 80C in any of the ITR forms, i.e, ITR 1ITR 2ITR 3, and ITR 4 depending upon their income sources. The due date for filing ITR is 31st July of the next FY if the tax audit is not applicable.

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Supporting Documents

Along with the common documents such as Form 16, you will need to provide these documents:

  • Life Insurance Premium receipts
  • Deferred Annuity receipts
  • NSC Accrued Interest receipts
  • Provident Fund contrition receipts
  • Receipt of Term Deposit for 5 years or more with a scheduled bank
  • Receipt of Public Provident Fund contribution
  • Receipt of Senior citizen saving scheme deposit
  • Receipt of Contribution made to a superannuation fund
  • Receipt of Tuition fees
  • Receipt of Investment in Debentures / Shares of Companies as approved by CBDT, etc.

FAQs

How to claim deductions in ITR?

You have to claim section-wise deductions while filing your income tax return. In every ITR, there is a separate section for Chapter VI-A Deductions where you can enter all your deductions against respective sections. for eg. life insurance premium, ELSS, PPF, etc will go to section 80C where medical insurance premium will go under section 80D.

Who can claim section 80C deductions?

As per income tax act, any Individual or HUF can claim deduction under section 80C. This deduction is not available to corporate assessees

Can I claim the 80C deductions at the time of filing return in case I have not submitted proof to my employer?

Proof of investments is submitted to the employer before the end of a Financial Year (FY) so that the employer considers these investments while determining your taxable income and the tax deduction that needs to be made. However, if you miss submitting these proofs to your employer, the claim for such investments made can be done at the time of filing your return of income as long as these investments have been made before the end of the relevant FY.

Guide: Income from House Property and Taxes

What is House Property?

  • House Property consists of any building and land attached to that building. The land may be in the form of a courtyard or compound or parking, as part of the building.
  • House Property includes flats, shops, office space, factory sheds & farmhouses.
  • An open plot of land isn’t a House Property.
  • Further, House Property includes residential houses, godowns, cinema building, workshop building, hotel building, etc.

Any income generated from the House Property is Income from House Property. Income from House Property shall be taxable only under the following conditions:

  • The assessee must be the owner of the property.
  • The property used for any purpose other than for carrying out Business or Profession. If the property is used for own business or profession, then the income from the same shall be taxed under the head ‘Income from Business and Profession’.
  • Income from House Property will be taxable under the hands of the legal owner of the property. The owner for this purpose means a person who can exercise the rights of the owner on his own and not on someone else’s behalf.
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What is a Self Occupied House Property?

A Self Occupied House Property is the one which you use as your own residence. This property may also be used by your children, spouse and/or parents. Even if your House Property is vacant, it will be considered as your Self Occupied property.

For the purpose of Income Tax, if more than one Self Occupied property is owned by a person, than only one of them will be taken as Self Occupied. The remaining House Property will be considered as Let Out. So the property will be taken as rented property even if it is not given on rent. Of course, you have the option to select which property you want to take as Self Occupied.

From AY 2020-21 you can show 2 properties self-occupied house property.

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How to Calculate the Net Annual Value of Self-Occupied House Property?

For example, Ayush owns a primary residence on which he has taken a home loan. He has paid INR 1,20,000 interest for the most recent financial year. Let’s look at taxable income from self-occupied house property in Ayush’s situation

Net Annual Value = Gross Annual Value – Interest on Home Loan

Particulars Self occupied
Gross Annual Value (GAV) NIL
Less: Property Taxes paid NIL
Net Annual Value (NAV) NIL
Less: 30% Standard deduction on NAV NIL
Less: Interest payable on Home Loan (1,20,000)
Income/(loss) from House Property (1,20,000)

What is a Let Out House Property?

For the purpose of Income Tax, if a House Property is on rent for the whole year or a part of the year than it is considered as Let Out House Property.

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How to Calculate the Net Annual Value of Let Out House Property?

For example, Ayush has rented out a property, with an annual rent of INR 1,80,000. Ayush has paid INR 15,000 in municipal taxes and has also taken out a home loan, and paid INR 1,20,000 interest for the most recent financial year. Let’s look at taxable income from let out house property in Ayush’s situation

Net Annual Value (NAV) = Gross Annual Value – Municipal Taxes

Taxable Income = NAV – (NAV * Standard Deduction) – Interest

Particulars Letout
Gross Annual Value (GAV) 1,80,000
Less: Property Taxes paid 15,000
Net Annual Value (NAV) 1,65,000
Less: 30% Standard deduction on NAV 49,500
Less: Interest payable on Home Loan 1,20,000
Income/(loss) from House Property (4,500)

Home Loan Benefits

Tax benefits for Home Loan are available as under:

Deduction for Home Loan Interest (Section-24)

Current Regime

  • Owner of the House Property can claim a deduction of up to INR 2 Lakhs (INR 1,50,000 in case you are e-filing for FY 2013-14) if the property is Self Occupied as explained above.
  • In the case of a Let Out House Property, the entire Home Loan interest will be allowed as a deduction.
  • The deduction will be restricted to INR 30,000 if any of the following conditions are not satisfied.
    • The loan must have been taken on or after 1st April 1999.
    • The Home Loan must have been taken for the purpose of purchase or construction of a new property.
    • Acquisition or construction must be completed within 5 years from the end of the financial year in which the loan was taken.

Moreover, In case the loan is taken for the repairs or reconstruction of the property, then the deduction for interest will be allowed up to a maximum of INR 30,000. Also if the loan is taken in the pre-construction period interest paid during this period can be claimed as a deduction in five equal installments starting from the year in which the construction of the property is completed.

New regime

No claim of home loan Interest on Self Occupied House Property: Individuals who have taken a home loan on their self-occupied property and are paying interest on it, can not claim that interest deduction under Section 24(b).

For example, Ayush used to claim INR 90,000 as a deduction under 24(b) for interest on the home loan. Now if he goes for the new income tax regime he will not get this deduction of INR 90,000.

A claim of home loan Interest on Rental House Property: Under the new income tax regime, individuals can claim interest on home loans for let out property only up to the amount of their rental income.

For example, Ayush is getting a rental income of INR 80,000 from his let-out property. Therefore, his claim on interest on the home loan cannot exceed his rental income that is INR 80,000.

Deduction for principal repayment (Section-80C):

Current regime

  • Deduction for principal repayment of Home Loan is available up to a maximum of INR 1,50,000 subject to the overall limit Section 80C. Satisfy the following conditions to claim this deduction:
    • Acquire Home Loan for the purpose of purchase or construction of a new property.
    • You must not sell the property within five years of taking possession. If you do so, the deductions for repayment collected will be added back to your income in the year of sale.
  • Stamp duty, registration charges, and other expenses directly related to the transfer of the property are also permissible as a deduction under section-80C subject to a maximum limit of INR 1,50,000. The deduction for this payment will be allowed in the year in which they are paid.

New regime

Deductions for principal repayment under section 80C are not available for taxpayers following the new income tax regime.

Deduction for first-time Homebuyers

Section 80EE

Current Regime

  • Financial budget 2013-14 introduced section-80EE under which first Home Loan from a bank or housing finance corporation up to INR 25 lakh will be eligible for an additional deduction of interest up to INR 1 lakh.
  • Fulfill the following conditions to claim this deduction:
    • The loan sanction must have been between 1st April 2013 to 31st March 2014.
    • The Home Loan amount does not exceed INR 25 Lakhs
    • The value of House Property does not exceed INR 40 Lakhs.
    • The assessee does not own any other residential House Property on the date of sanction of the loan.
  • The benefit of the deduction spans over FY 2013-14 and FY 2014-15. If you are unable to utilize the total limit of INR 1,00,000 in FY 2013-14, then you can claim the balance amount as a deduction in FY 2014-15.
  • It is not necessary that the residential House Property has to be Self Occupied to claim this deduction.

Certain important points to remember while claiming a deduction for Home Loan:

  • You must be the owner of the property to claim the deductions
  • The Home Loan must also be in your name.
  • The same principal applies to the co-owners as well. So the co-owners can also claim the deduction provided
    • They must resgister themselves as co-owners of the property &
    • They must also be co-borrowers for the loan.

New Regime

Deduction under section 80EE is not available for taxpayers following the new income tax regime.

Section 80EEA

Current Regime

Through u/s 80EEA the Income Tax Department has extended the deductible amount from INR 50,000 to INR 1,50,000 for first time home buyers. Only individuals can claim this deduction until they repay their home loan.

For example, Ayush is buying a home for the first time. He can either claim deduction under 80EE or 80EEA. FM in budget 2020 has laid out a vision of “Affordable housing” with the introduction of section 80EEA which can help people like Ayush to get a higher deduction up to INR 1,50,000 against INR 50,000 as per the current regime.

New Regime

Deduction under section 80EEA is not available for taxpayers following the new income tax regime.

Income Tax Deductions for Joint Owners

Co-owners and co-borrowers

  • In the case of co-owners of self-occupied house property who are also co-borrowers of a home loan, each one of them can claim a deduction on interest on the loan limited to Rs. 2 Lakh each.
  • Each of them can also claim the deduction on principal repayments, stamp duty as well as registration charges under Section 80C with the overall limit of Rs.1.5 Lakh. The ratio of the deduction of each benefit will be in the same as the share of ownership in the property.

Co-borrowers but not Co-owners

  • If any one individual is a co-borrower of a loan and is not the owner of the property, he or she is not entitled to claim interest on the home loan paid.
  • Also, he or she is not entitled to any benefits on principal repayment, stamp duty, etc.

Co-owners but not Co-borrowers

  • If one individual is just a co-owner of a loan and is not the co-borrower of the property, he or she is not entitled to claim interest on the home loan paid.
  • However, each of them can claim the deduction on stamp duty as well as registration charges under Section 80C with the overall limit of Rs.1.5 Lakh. The ratio of the deduction of each benefit will be the same as the share of ownership in the property.

Setting off losses from house property

Current regime

As per the current income tax regime, it is possible to set off losses made from house property against any other income head i.e, business and profession or salary income, etc. Moreover, it is also possible to set off brought forward losses and carry forward losses to another FY.

New Regime

As per the new income tax regime, losses from house property can only be set off against other income from house property. Moreover, it is not possible to set off brought forward losses and carry forward losses from income from house property in the new income tax regime.

For example, Ayush has an annual salary of INR 7,00,000. He had INR 2,00,000 loss from house property. It is possible to set off his loss from house property against his salary income as per the current regime. But in the new regime, his loss cannot be set off against any other head except for Income from house property.

Calculation of Income from House Property

The owner of the property charges the annual value of the property under the head ‘Income from House Property’. The income from property used for the purpose of carrying business or profession is not taxable under the head ‘Income from House Property’. Let’s understand the calculations with the help of an example:

Rahul owns a home in Baroda. Calculate income from House Property under both the scenarios i.e Let-out & Self occupied if

  • Rent received INR40,000 per month (in case of let out scenario).
  • Property taxes paid INR 30,000.
  • Interest on Home Loan INR 2,35,000.
Particulars Let-out Self occupied
Gross Annual Value (GAV) 4,80,000 NIL
Less: Property Taxes paid 30,000 NIL
Net Annual Value (NAV) 4,50,000 NIL
Less: 30% Standard deduction on NAV 1,35,000 NIL
Less: Interest payable on Home Loan 2,35,000 (2,00,000)*
Income/(loss) from House Property 80,000 (2,00,000)**

* In case of self-occupied property, the deduction for interest on Home Loan is restricted to the maximum of INR 2,00,000. Whereas in case of let out property, you can claim the entire amount of interest as a deduction.

** This loss can be set off against income from other heads.

Note: Rental income from subletting is not taxed as income from House Property since in that case person receiving the rent income from subletting is not the owner of the property. Subletting income will be charged under the head ‘Income from other sources’.

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Documents Required to File ITR for Income from House Property

The House Property Income Documents Checklist is as follows:

  • PAN
  • Aadhaar
  • Utility Bill
  • Rent Agreement
  • Form 16A
  • Home loan repayment certificate/ Interest Certificate from the bank
  • Municipal Tax Receipts

I receive HRA from my employer, can I also claim a deduction for my Home Loan?

Yes, you can. You can avail of the benefits of HRA and deduction for Home Loan simultaneously.
If you are living in a rental house & your own house is occupied by your spouse, children and/or your parents, you can claim:
HRA for the rent you pay to the landlord &
Deduction for Home Loan interest up to a maximum of INR 2,00,000.
You can claim the following if you are living in a rental house and have rented out your house too:
HRA for the rent you pay to the landlord &
Deduction for Home Loan interest without any limit.

FAQs

How to calculate self-occupied house property income?

​A Self Occupied House Property is the one which you use as your own residence. This property may also be used by your children, spouse and/or parents. Since there is no Income from such House Property, the gross annual value of this property is NIL (zero).
​Since the gross annual value in case of Self Occupied House Property is zero, claiming a deduction for Home Loan interest will result in a Loss from House Property. This loss can be adjusted against income from other heads.

What is Tax Treatment of arrears of Rent?

The amount received on account of arrears of rent (not charged to tax earlier) will be charged to tax after deducting 30% standard deduction. It is charged to tax in the year in which it is received. These arrears will be taxable in the hands of the recipient even if he is no longer the owner of the property.

What is Pre-Construction Period?

​Pre-construction period is the period commencing from the date of borrowing of loan and ends on earlier of the following:
– Date of repayment of the loan
– 31st March immediately prior to the date of completion of the construction/acquisition of the property.
Interest pertaining to pre-construction period is allowed as a deduction in five equal annual instalments, commencing from the year in which the house property is acquired or constructed.

What if the loan is taken for reconstruction/ renewal/ repairs?

In case the loan is taken for the repairs or reconstruction of the property, then the deduction for interest will be allowed up to a maximum of INR 30,000.

What if the loan is taken before the construction of the property is completed? Can I still claim the deduction?

Yes, you can, but only after the construction is completed. The period from taking loan until the completion of construction is called pre-construction period. So interest paid during this period can be claimed as a deduction in five equal instalments starting from the year in which the construction of the property is completed.

Hindu Undivided Family (HUF) and its tax benefits

Hindu Undivided Family, commonly known as HUF is a separate entity from its members for the purpose of Income Tax assessment. It is incorporated for its tax benefits, generally.

The term is defined under the Hindu Law as a family that consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. So basically a Hindu Undivided Family is not created by any Act but by status.

Who can form HUF?

A HUF cannot be formed by an individual or a coparcener (a person who acquires a right in the ancestral property by birth and who has a right to demand partition in the HUF property).

A married male can form a HUF. Members of the family including the Father, his wife, children, their wives and their children will be the members of this Hindu Undivided Family. Now, if a father of two daughters passes away, HUF can be carried forward by the daughters (The elder daughter will be Karta).

The Karta: The eldest male person of this Hindu Undivided Family is called Karta and he usually handles the affairs. He has to apply for a separate PAN as a Karta. With the consent of the other members of HUF, a junior male member can also be the Karta of family.

The Members: People other than Karta are the members of the HUF. The wife, the sons and unmarried daughters can be called as Members of a HUF. Even a father and his unmarried daughter can form a HUF. As mentioned in the beginning, HUF is a separate entity from its members. So the income which is brought to the common pool of it by its members or the income which is generated from the assets in the common pool will also be taxed separately as HUF income and shall not be taxed as members’ income.

Difference between a Member and a Coparcener:

A coparcener and a member of a HUF are two different entities. A coparcener has the right to demand partition in the HUF property. So, in case of a partition, a coparcener would receive his/her share while a member would be entitled to receive maintenance from the HUF. The family property managed by Karta is considered the joint property for all the coparceners until they ask for a division.

Tax applicable on HUF income

Once the separate PAN has been obtained, the Hindu Undivided Family will be required to file Income Tax return every year, just like every other individual. Tax will be applied to HUF income at the slab rate which is applicable to individuals. HUF will also enjoy the basic exemption limit of Rs. 2,50,000 which is available to individuals.

Now, if a Hindu Undivided Family contributes funds to a partnership firm, the profits and interest received from it are considered as income of a HUF, because the investment was done by HUF as a whole, and not just by Karta. However, if the Karta is also paid salary from the same firm for his contributions, such income would be considered his individual income.

The tax benefits of HUF can effectively be utilised for tax planning. To understand it simply, if a member is having income which is taxed at the highest slab rate (30 %) if that income is brought to the common pool of HUF it may be taxed at the lower slab rate and at the same time HUF will also enjoy some of the deductions under chapter VIA thus reducing the tax burden on the individual member.

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Tax Deductions available to HUF

As discussed earlier, HUF is a separate legal entity and it also enjoys the basic exemption limit of Rs. 2,50,000 and deductions that are available to an individual. Here are some of section 80 deduction which is available to HUF:

 

Section Deduction for Allowable if
80C Life Insurance Premium Paid for the Policy of any of the members of HUF
Payment under a contract for a deferred annuity Paid for the Policy of any of the members of HUF
Public Provident Fund (PPF) Any contribution made towards PPF account of a member of HUF
Unit Linked Insurance Plan of UTI & LIC Mutual Fund The contribution made in the name of any of the members of HUF
Tuition fees Paid for children of any of the members of HUF
Certain payments for purchase/ construction of residential House Property, Repayment of Housing Loan Paid for the House Property purchased or constructed by HUF and the expenses are wholly and exclusively for the purchase of the property
Subscription to Equity Linked Saving Scheme Paid for the scheme which is either in the name of the HUF or any of the members of the HUF
Term deposit for a fixed period of not less than 5 years, with a scheduled bank or with Post Office Paid for the deposit in the name of HUF or any of its members
80D Health Insurance Premium / preventive health check-up Paid for any of the members of the HUF
80DD Expenditure on medical treatment of a person with a disability Paid for any of the members (with a disability) of the HUF
80DDB Expenses paid for medical treatment of specified diseases and ailments Paid for the treatment of any of the members of the HUF who are completely dependent on the family
80TTA Interest on deposits in Savings Bank Account The interest is earned on the Savings Bank Account in the name of HUF

If HUF is carrying any business, then the expenses in relation to the business can also be claimed while calculating the tax on HUF income. If the Karta and members of HUF are working for the HUF business, than any salary or remuneration paid to them can be claimed as an expense from the HUF business income.

Tax Planning with HUF

You would have understood by now that apart from its members, HUF also enjoys the basic exemption limit of Rs. 2,50,000 as well as the deductions as mentioned above. This can be utilised to the advantage of the members. Let’s take a look at a situation for better understanding.

Dhruv and Khushboo are married and have a son named Tanay. Khushboo earns a Salary of Rs. 10 Lakh per year. Dhruv earns Rs. 18 Lakh from his business and also has an ancestral property from which he earns rental income of Rs. 5 Lakh. So at present, their Tax Liability is as follows:

Particulars Dhruv Khushboo
Salary Income / Business Income 18,00,000 10,00,000
Rental Income from ancestral property 5,00,000
Total deductions under section 80 1,50,000 1,50,000
Total Taxable Income 21,50,000 8,50,000
Tax Liability as per Slab Rate 4,84,100 97,850
Combined Tax Liability 5,81,950

Now, if they form an HUF, they can

  • Divert Rental Income from ancestral property to HUF.
  • Register a business in the name of HUF and also divert a portion of Dhruv’s business income to HUF (say Rs. 6,00,000).
  • Make investments and payments from HUF to claim a deduction. For example, life insurance premium paid by HUF for the life of Dhruv, Khushboo, and Tanay will be allowed a deduction from HUF income.
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So now the Tax Liability will be as follows:

Particulars Dhruv Khushboo HUF
Salary Income / Business Income 12,00,000 10,00,000 6,00,000
Rental Income from ancestral property 5,00,000
Total deductions under Section 80 1,50,000 1,50,000 1,50,000
Salary Income / Business Income 12,00,000 10,00,000 6,00,000
Total Taxable Income 10,50,000 8,50,000 9,50,000
Tax Liability as per Slab Rate 1,44,200 97,850 1,18,450
Combined Tax Liability 3,60,500

In conclusion, they were able to save Rs. 2,21,450 (5,81,950 – 3,60,500) by forming a HUF and diverting some of the incomes.

HUF transactions should be thought through and planned properly. You can also take help from a CA or a tax expert just to be sure that there are no violations of tax laws.

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Can HUF own any asset?

Any assets received in the following situation would form part of the HUF asset pool:

  • ​Assets received on the partition of a larger HUF of which the coparcener was a member. For eg., Mr B is a coparcener in a HUF in which his father Mr A is the Karta. Now in case of partition of that HUF, the assets received by Mr B will form part of his own HUF.
  • ​Assets received as gifts by the HUF from relatives and friends.
  • ​Assets received by way of inheritance through a will.
  • ​Any member of the HUF can transfer or bring his / her individual assets to HUF asset pool. However, it won’t be beneficial to the individual member since the transfer of asset will not result in the transfer of Tax Liability on income from such asset. So the income from such transferred assets will continue to be taxed in the hands of the individual members.

Partitions of HUF

Partition in HUF is the most common way of reducing the Tax Incidence in HUF.

In Hindu law, these partitions can be either Total or Partial.

In Total Partition, all the members will cease to be the ‘members’ of a HUF and the property will be distributed amongst them. After complete partition, the members will continue to be taxed as individuals.

In Partial Partition, only the members willing to leave will cease to be the members of HUF and the rest will continue to be the members of HUF.

However, according to the Income Tax Act, there’s no concept like Partial Partition. So there’ll either be Total Partition or no partition.

FAQs

Who is responsible for filing HUF return?

Karta is responsible for filing the HUF return. The due date for filing HUF return is the same as individual i.e 31st July. Karta is also required to verify the HUF return.

Can husband and wife form HUF?

Any Hindu, Sikh, Buddhist or Jain can form a HUF. A husband and his wife can form a HUF but the wife only gets to be the member and not a co-parcener. However, if the family has a child, only then they will be able to claim benefits of HUFs.

Can a salaried person open HUF account?

Yes. Salaried Individuals can open a HUF account as soon as he is married. However to enjoy the Tax Deductions he should have a child.

Tax Saving FD (Fixed Deposit) – Features and Eligibility

What are Tax Saving FD?

Tax saving FD (Fixed Deposit) a.k.a Tax saving Term Deposit are Fixed deposits with different maturity periods. To qualify for tax benefits, the lock-in period is 5 years.

The investment objective of term deposits is to provide tax benefits under section 80C of the Income tax Act. It aims at motivating individuals to save since it has the dual benefit of investment and tax saving.

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Features of Tax Saving Fixed Deposit

  • The Minimum Amount you can invest is INR 100 & thereafter in Multiples of INR 100
  • The maximum investment in any financial year is INR 1,50,000
  • The maturity period of a term deposit is 5 years starting from the date of receipt
  • The term deposit shall not be pledged to secure a loan or as security to any other asset
  • You are not allowed to withdraw money from your account until its maturity
  • The interest rate on FD is between 7-9%
  • When the interest is paid by the scheduled bank in a lump sum at the time of maturity, the term deposit receipt shall bear the yearly rate of interest on the term deposit
  • Interest on these term deposits shall be liable to tax
  • Nomination facility is available. You can nominate/authorize someone to withdraw your deposit before or post-maturity in the event of your death

Who can invest in Tax Saving Fixed Deposit?

All Resident individuals and Hindu Undivided Families are eligible to invest under Tax Saving Term deposits. Term deposit shall be of following types, namely:-

  • Single holder type deposits – The single holder type deposit receipt shall be issued to an individual for himself or in the capacity of the Karta of the Hindu undivided family
  • Joint holder type deposits – The joint holder type deposit receipt may be issued jointly to two adults or jointly to an adult and a minor, and payable to either of the holders or to the survivor

No nomination shall be made in respect of a term deposit applied for and held by or on behalf of a minor. In the case of joint holder type deposit, the deduction from income under section 80C of the Act shall be available only to the first holder of the deposit. The interest earned is subject to tax deduction at source as per tax laws.

FAQs 

Is interest on FD taxable?

Yes. Interest earned on any kind of Fixed Deposit is taxable. TDS will be deducted @ 10% in case the total interest income from such deposits exceeds Rs. 10,000 in a year.

Can I withdraw from FD before maturity? 

No. As per Government notification, no premature withdrawal is allowed for the Tax-Saving FD

Is there a lock-in period for a tax saving FD?

Yes, the lock-in period is a minimum of 5 years.

ELSS or Equity Linked Savings Scheme – Meaning, Features and Tax Benefits

ELSS stands for Equity Linked Savings Scheme. It is equity-based tax savings mutual funds that qualify for income tax deductions u/s 80C. Investments made up to INR 1.5 lacs under ELSS qualify for tax benefits. It has a lock-in period of 3 years. Any individual who is KYC verified can invest in ELSS. In the case of minors, the guardian has to be KYC verified while investing in the name of the minor. The minor, upon attaining majority should immediately complete the KYC verification process.

What are the Features of ELSS?

  • ELSS funds have the shortest lock-in period of 3 years compared to different tax saving instruments such as NSC which has a lock-in period of 5 years and PPF which has a lock-in period of 15 years.
  • You can start investing with a low starting amount of just INR 500.
  • The returns earned on ELSS funds are also tax-free.
  • You have different plans and AMCs to choose from. For example, you can opt for a systematic investment plan or a one time option as per your convenience.
  • It gives you the benefit of Tax saving as well as Capital Appreciation. With the power of compounding, you can build your wealth.
  • ELSS funds are essentially Equity-based mutual funds. Hence it offers attractive returns compared to other tax saving options available.
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What are the Advantages of Investing in ELSS?

An individual investing in ELSS can have many benefits, some of the major advantages are as follows:

Income Tax Benefits

The amount invested in ELSS, up to INR 1,50,000 can be claimed as a deduction under section 80C. Apart from getting a tax benefit on the sum that is invested, deductions are also available on the capital gains. It is important to note that ELSS comes with a lock-in period of 3 years hence the long capital gains if less than INR 1,00,000 is exempt from tax. If LTCG is more than INR 1,00,000 then excess gains are taxed at 10%

Short Lock in Period

In comparison with other tax saving schemes, the lock-in period in ELSS is the shortest i.e. of 3 years. On the contrary, the lock-in period in PPF is 15 years and 5 years in FD. ELSS’s main advantage is that it is a scheme that offers high return within a shorter lock-in period.

Compounding Benefit and Higher Return

If investing in equity oriented funds it is always advisable to invest for a longer period of time so that one can benefit from compounding effect. The 3 year lock in period in ELSS comes as an added benefit as it allows the individual to reap the benefit of compounding. Investemnets made in ELSS is majorly in equity oriented funds and hence the returns are higher when compared to other saving schemes.

What are the Documents Required to Invest in ELSS Funds?

The investor needs to be KYC verified to start investing in funds. If you are KYC verified, you can start investing right away. If you are not KYC verified, you will have to complete the verification process before you can start investing. The documents required for KYC verification are:

  • Copy of Address Proof
  • Copy of PAN card

What are the ways to invest in ELSS?

There are mainly 3 ways in which you can invest in ELSS:

Growth Option

Under this option the investor will be able to gain the benefit only at the time of redemption. There is no dividend availabe under growth option. However, redeming total gains at the same time helps to appreciate the total NAV and as a result, multiplies the profit.

Dividend Option

Dividend option as the name suggets offers the investors the advantage of recieving dividends at a regualr itervals provided that dividend is declared. Additionaly, the dividend is completely tax free in the hands on the investor.

Dividend Reinvestment Option

Under this option, the dividend amount is invested back to the NAV. Investors choose this option when when the market is observing an upswing and is likely to continue the same way.

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FAQs

Is there any limit for investment in ELSS? 

There is no upper limit for investment into Equity Linked Savings Scheme. However, only Rs. 1,50,000 will be qualified as a deduction under section 80C. The minimum amount you can invest in ELSS is Rs. 500.

Is return on ELSS taxable? 

No. Both principal amount of investment and return on maturity are exempt from tax.

Is there any tax on capital gains from ELSS?

The Long-Term Capital Gains on ELSS are tax-exempt up to Rs 1 lakh, and dividend received is tax-free in the hands of investors.

Is it mandatory to redeem the investment amount after completion of 3 years?

No, there is no maximum investment duration, if an investor is satisfied with the returns he/she can continue with the scheme.

Is SIP as an option available under ELSS?

Yes, while investing one can

Withdraw EPF balance – Rules, TDS Applicability, Updates and Process

EPF (Employee Provident Fund) is a retirement benefits scheme for salaried individuals. Employee’s contribution to EPF was eligible for deduction under section 80C. However, as per the recent announcement in Budget 2021, interest earned on annual PF contribution exceeding INR 2.5 lacs from April 2021 will now be taxable. Employers also contribute towards EPF and their share is tax-free in the hands of the employees.

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EPF withdrawals have always been a topic of discussion. Frequent changes in EPF withdrawal rules keep employees on the edge. The major concern for them is whether the EPF withdrawal amount is taxable or not.

So let’s take a look at the EPF withdrawal rules to understand this better:

EPF Withdrawal Rules

Withdrawal of the EPF account by a salaried employee between switching jobs is illegal. As per EPF withdrawal rules, a salaried employee can withdraw from a provident fund account on two counts;

  • If a person has no job and
  • If two months have elapsed since last employment (not attached to any organization or unemployed for 2 months).

Members whose service has been terminated due to ill health, contraction or discontinuance of business of the employer or other cause beyond the control of the member shall not be required to submit PAN, Form No. 15G/15H along with Form No. 19. In such cases, no income tax (TDS) shall be deducted as per Rule 8 of the Fourth Schedule to the Income Tax Act, 1961.

Conditions to Withdraw EPF Balance for Salaried Employees

Salaried employees can withdraw money from EPF accounts for various purposes, subject to the following conditions.

  1. A salaried employee can withdraw up to either six times of his monthly salary or total amount towards medical treatment of self, spouse, children and parents.
  2. One can withdraw for the purpose of marriage of him/herself, siblings and children provided that one has completed a minimum of seven years of service to withdraw 50% of the contribution. (3 times in the entire career)
  3. A salaried person can withdraw from EPF account for the purpose of house renovation or alteration if a person has completed a minimum of five years of service and the house should be registered in his name, his spouse’s name or be held jointly.
  4. An individual can withdraw from EPF account for the purpose of home loan repayment provided he has completed 10 years of services and the house should be registered in his name, spouse or be held jointly. Then an individual can withdraw up to 36 times of his salary.
  5. An individual can withdraw from EPF account for the purpose of Higher education of children.
  6. If a salaried person wishes to withdraw from EPF account for the purpose of either construction of house or purchase of a plot, the property must be registered in his name, spouse or jointly held. A minimum of five years of service is required to withdraw an amount which is 24 times the salary of an account holder. For the construction of a house, 36 times of the salary of an account holder can be withdrawn. This withdrawal can be done only ONCE during the service of an account holder.
  7. An individual can choose to withdraw from their EPF account for various reasons such as settling down in a foreign country or premature retirement as a result of any physical or mental disability.
  8. An individual must be 57 years old to withdraw up to 90% of the amount of his PF account( Earlier the age limit was 54 years).
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TDS on EPF Withdrawal

Before Budget 2015, TDS was not applicable on withdrawal from EPF account. But now, TDS is applicable on EPF withdrawals where balance is more than 50,000 and the employee has worked less than 5 years from 1st April 2016 onwards( Earlier the threshold limit was Rs.30,000).

TDS is not applicable in the following cases:

  • When an employee terminates his services due to ill-health and withdraws his accumulation.
  • On Transfer of PF from one account to another PF account.
  • When PF withdrawal is less than Rs 50,000/-. (Before 1st April 2016 it is 30,000/-)
  • On discontinuation of Business by the Employer or any cause beyond the control of EPF Scheme member (Employee).
  • If withdrawal amount more than or equal to Rs. 50,000/- & service period is less than 5 years then TDS will not be applicable if an employee submits Form 15G /15H along with his / her PAN. Form 15G & 15H cannot be accepted if the amount of withdrawal is more than Rs. 2,50,000/- and Rs. 3,00,000/- respectively.

TDS is applicable in the following scenarios:

If an employee withdraws amount more than or equal to Rs. 50,000/-, with service for less than 5 years, then:

  • TDS will be deducted @ 10% if Form-15G/15H is not submitted provided PAN is submitted.
  • TDS will be deducted @ maximum marginal rate (i.e., 35.535%) if an employee fails to submit PAN.

Members who have rendered continuous service of 5 years or more, including service with a former employer, shall not be required to submit PAN and Form No. 15G/15H along with Form 19.

If TDS is not applicable then it does not mean that the EPF withdrawals are not taxable. If you withdraw your EPF balance before the expiry of five years of continuous service, then it is taxable in the year of withdrawal. In addition to this, your employer’s contributions along with the accumulated interest amount will be taxed as “profits in lieu of salary”. Interest accumulated on your (employee’s) contributions will be taxed under the head “Income from other sources”.

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Recent Updates in EPF Withdrawal Rules

  • Retirement Age has been increased from 55 years to 58 years

    Earlier the age of retirement for EPF was 55 years. But now it has been increased to 58 years. At present retirement age is 58 years across all organization and now the same will be applicable for EPF.

  • You can not withdraw an Employer’s contribution to EPF before 58 years

    An individual can not withdraw the EPF contribution by the employer before the retirement age of 58 years. The withdrawals from the EPF within 5 years of joining are still taxable.

  • You can withdraw 90% of EPF balance once you reach the age of 57 years

    Earlier, a withdrawal was allowed up to 90% of the EPF balance, one year prior to retirement i.e. at the age of 54 years. But now account holder will have to wait till attaining the age of 57 years to withdraw 90% of the accumulated balance

  • EPF membership does not end with leaving the job

    An Individual cannot withdraw the EPF contribution by the employer before the retirement age. The employer’s portion can be withdrawn only after attaining the retirement age (58 years). Therefore, until you withdraw 100% of the PF balance, your EPF account is will not be closed.

How to withdraw EPF Balance?

Employee PF can be withdrawn in following different ways:

  1. EPF withdrawal via UAN (Online claim submission)

    If you know your Universal Account Number (UAN), then you can directly apply for pf withdrawal without the need for employer attestation.
    a. Link your Aadhaar to UAN
    b. Submit an application to withdraw EPF online

  2. EPF withdrawal using Form 19.

    Form-19 can be downloaded from the EPFI website. Once filled the application can be submitted to the regional EPF Office to claim the EPF balance.
    a. EPF withdrawal form attested by one of the following:
    i. Bank Manager
    ii. A Gazetted Office
    iii. Magistrate/Post Master/Sarpanch/Notary Public
    b. A letter stating a reason for the direct application:
    i. Non-cooperation from an employer is a valid reason

You can check your withdrawal claim status from the Employee’s Provident Fund Organization.

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FAQs

How can I avoid TDS on PF withdrawal?

If your PF amount is between Rs. 50,000 – 250,000 and you have provided your PAN then TDS will not be deducted. However, if you don’t submit your PAN you will be charged tax on the highest rate of tax slab.

Is KYC mandatory for PF withdrawal?

No, it is not mandatory to update KYC details online. However, updating KYC will keep your data up to date. It will also help in reducing the time required for transfer of EPF money from one account to another and for EPF withdrawal amount.

Does EPF membership end with termination of employmnet?

An Individual cannot withdraw the EPF contribution by the employer before the retirement age. The employer’s portion can be withdrawn only after attaining the retirement age (58 years). Therefore, until you withdraw 100% of the PF balance, your EPF account is will not be closed.