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What is Form 16 and How Does one Benefit From it?



You must be knowing of the three main seasons in our country. After summer comes the monsoon and after monsoon comes winter. You must be knowing of another season as July 31st 2013 rapidly approaches. Yes I am talking of the taxation season. There is also another defining factor involved here. You will receive money from the Government if you are one of the fortunate ones. Yes I am talking about the contract employees who work for organizations in India whose tax is deducted at source as they are regarded in the professional category. They can fill up the Form 16 A and claim refunds at a later date provided their salary is less than INR 2 Lakhs per annum.Next To Being Shot At And Missed There Is Nothing Better Than An Income Tax Refund. Let us now talk of the other unfortunate subjects of this country who have to pay the Government their Income Taxes. You have to first collect that Form 16 which is the very basis of you filing your tax returns. This form is given to you by your employer .Don’t Know What Is This Form 16? Care To Find Out? The team of Financial Planners at Moneymindz.com are always there for you to plan your taxation needs in a most effective and efficient manner. You can explore this unique Free Advisory Service just by giving a missed call on 022 6211 6588.

So What Is This Form 16?

Let us first understand what is meant by Tax Deducted At Source. This is mainly a tax collection mechanism where tax is deducted by your employer and directly deposited with the Government. It is assumed that you an employee of the company and a tax paying citizen of India will have some tax liability. Your TDS is deducted directly from your salary by your employer. Your employer estimates your tax liabilities taking into account your tax deductions under Section 80 C, LTA and HRA and deducts a certain amount directly from your salary and pays it as income tax to the Government. You then calculate your actual tax liability. If your tax liability is more than the TDS you pay the balance amount and if the tax to be paid is less than the TDS then you can claim a refund. Your Company issues you the Form 16 which contains the details of the tax deductions made by your employer on behalf of you the employee. The Form 16 consists of the income earned by you in the previous year, your tax liabilities as well as your tax deductions. The Form 16 gives your salary for the entire assessment year or for the duration of your stay in the Company. The Form 16 is given to you by your employer in the month of May or June. The deadline for filing your income tax return is July 31st.You need to make sure that the Form 16 is in your hands well in advance of this deadline.Your Form 16 consists of the details of the PAN (Permanent Account Number) and the TAN (Tax Deduction And Account Number) of your employer who deducts the tax at source. If your company does not have a TAN Number it cannot deduct tax at source and cannot issue you a Form 16.You might be thinking that the mere fact of receiving the Form 16 is proof that your income tax has been paid. This is not the case. Your work begins after the Form 16 has been issued to you .You now have to file the income tax returns. You need to note that if you have worked for more than a single Company in a financial year you need to obtain two Form 16’s

What Are The Components Of Form 16?
Permanent Account Number

This is basically a 10 digit alphabetical as well as numerical code generated by the Income Tax Department Of India. This contains your name, Your date of birth, Your father’s name as well as your gender.

Tax Deduction And Collection Account Number

This is basically a 10 digit alphabetical as well as numerical code generated by the Income Tax Department Of India. These TAN Numbers are unique to each Company. These are required by all Companies which are responsible for collecting and deductions of tax.

Gross Salary

You must be knowing that this is basically your total remuneration which includes allowances, overtime, commissions, and bonuses and so on before deductions are made.

Prerequisite

You must be knowing about the perks provided to you by your employer such as rent free accommodation as well as loans at subsidized rates and certain other perks in addition to salaries and wages .These are known as prerequisites.

Profits In Lieu Of Salary

This is mainly the gratuity, retrenchment compensation received or not received to the extent which is not exempt and which does not consist of the contributions made by the employer or interest is mainly subjected to taxation as profits in lieu of the salary.

Allowances

House Rent Allowance
House Rent Allowances are given to you by your company to meet your rent expenses. It is exempt from tax subject to the following conditions.

  • House Rent Allowance Received By The Employer.
  • Rent paid minus 10 % of the Salary
  • 40% or 50% of the salary depending on the city you reside in. It is 50% if you reside in a Metropolitan city.

Whichever is least among the three is considered and deducted from the HRA and tax is paid on the difference.

Conveyance allowance
This is mainly paid to the employee as commuting expenses whenever he travels on behalf of the Company and the expenses covering the commuting to office every day. This amount is tax exempt to the extent of INR 800 per month.

Medical Allowances
You must be incurring medical expenses in your day to day life. Your company pays you a certain amount yearly or half yearly known as medical allowances towards these expenses. This is known as medical allowance and is fully taxable. Medical allowance is taxable but medical reimbursement is tax exempt up to INR 15000.

Children’s Education Allowances
Children’s educational allowance is exempt up to INR 100 per month for a maximum of 2 children.

Some Of The Deductions Available To You Shown On Form 16

There are various subheadings available in Form 16.The deductions available to you are an important feature of Form 16.

Deductions Available Under Section 80 C

These mainly include Public Provident Fund ,Bank Fixed Deposits, Payment Towards Education Fee Of Children,National Saving Certificates of five and ten year tenure, Payment Towards Employee Provident Fund, Life Insurance Benefits,Home Loan Benefits, Five Year Post Office Time Deposits, National Pension Saving Scheme ,Equity Linked Saving Schemes,Ulips, Nabard Rural Bonds and NHB Suvriddhi among others.

Deductions Available Under Section 80 D

Under this section, health Insurance premium paid under a scheme framed by any insurer approved by the Insurance Regulatory & Development Authority (IRDA) can be deducted up to INR 15,000 from your taxable income. For senior citizens, this limit is INR 20,000.

Deductions Available Under Section 80 E

You can claim deductions on the interest of a loan taken by you from any financial institution or any approved charitable institution for the purpose of pursuing your higher education .Here, you get a deduction for the interest paid during the year for that particular year. Tax benefit is only for the interest paid and not on the principal amount. Tax benefit can be availed only for 8 years from the date you start your first instalment. After 8 years you will not be eligible for further tax benefit. So, it is better to repay before 8 years.

Deductions Available Under Section 10:Leave Travel Allowance

You also have the Leave travel allowance which is obtained by the Employee from the Employer for vacation travel. In order to obtain leave travel allowance the employee needs to actually travel. The employee is entitled to a tax exemption under Section 10(5) in respect of the value of travel concession or assistance received by him, due to him by his employer or former employer for himself and his family in connection with his proceeding
(a) On leave to any place in India.
(b) To any place in India after retirement from service or after termination from service.

Deductions Available Under Section 80 CCC

You could avail deductions on the payment of premium for an annuity plan of LIC or any other insurer. This deduction is available up to a maximum of INR.100,000.

Deductions Available Under Section 80 GG

The minimum of the following three is available as exemption from your income

  • The actual HRA received from your employer
  • The actual rent paid by you for the house minus 10% of your salary (this includes basic + dearness allowance, if any)
  • 50% of your basic salary (if you live in a metro) or 40% of your basic salary (if you live in a non-metro)

Let us consider Mr. Ramesh 30 Years of age works for an IT Company. He is a citizen of India and resides at Bangalore. He is paying a rent of INR 60000 per Annum. His Salary slip is shown below :

Salary slip per annum

Basic INR 200000
DA (Dearness Allowance) INR 20000
House Rent Allowance (HRA) INR 40000
Conveyance INR 15000
Medical Allowance INR 10000
Other Allowances Nil
Leave Encashment INR 12000
Reimbursement Of Expenses INR 15000
Bonus/Increment INR 20000
Children Education Allowance INR 6000
CTC Total Earnings (Gross Salary) INR 338000

Calculations Of The Exemption Amounts Of The HRA
1.)HRA received is INR 40000
2.) Rent paid minus 10 % of the Salary = INR 60000-10% of 220000=INR 38000
3.) 40% of the Salary (As Bangalore is not a Metropolitan City) = 40% of INR 220000=INR 88000.

Whichever is lesser among the three is tax exempt
The lesser amount among the three is INR 38000.So the taxable HRA is INR 40000-INR 38000=INR 2000.
Note : Calculation of salary for the purpose of calculating the exemption amount of HRA : Basic Salary is INR 200000 .Dearness Allowance is INR 20000 (Assuming DA is included in retirement benefits) Salary is INR 220000

Professional Tax

You are charged a tax based on the income you earn as a professional. This tax is charged to you based on the income tax slab you fall under. The maximum amount you can be charged as professional tax under any State in India is INR 2500.

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