This Article on FORM 16 focuses on understanding each component of Form 16 and how to exempt the Tax. By now most of us must have received our Form 16 and now it’s time to file the return. Though we know that Form 16 is for tax filing but many of us still find it hard to understand the components of Form 16 while filing the return. Understanding Form 16 is the key to a better tax planning.
What is Form 16?
It is certificate issued by the employer to employee stating the details of income earned and the tax deducted on your behalf and paid to the government. Every employee who is subjected to TDS is supposed to receive their Form 16 by April 30 every year.
Components
of FORM 16:
1) PAN No.
- (Permanent Account Number).
2) TAN No. - Tax Deduction and
Collection Account Number is a 10 digit alpha numeric number obtained by all companies
who are responsible for deducting or collecting tax. TAN nos. is unique to
companies.
Under Gross Salary we have 2 more components namely Perquisites and Profit in lieu of Salary. A perquisite is an additional benefit provided by the employer to the employee in addition to the salary or wages e.g. Loans at a subsidized rate. A Profit in lieu of Salary is any payment received by employee from his employer in connection with the termination of employment or due to modification in terms and conditions.
4) Allowances to the extent exempt u/s 10:- It includes sum of HRA (House Rent Allowance) and Conveyance Allowance.
A) HRA is a special allowance given to an
employee to meet his rent expenses. It is exempt from tax to the extent of
least of the following:
i. 40% or 50% on Basic Salary. (40% is
for Non-metro residents and 50% is for Metro)
ii. Actual HRA received.
iii. Rent paid in excess of 10% of Basic
Salary. (Yearly Rent – (10% of Basic Salary))
Let us understand this with an
example. Consider the following Salary structure for a year.
i. Total Basic - Rs 85,500, so 50% of it will be Rs 42750.
ii. Total HRA received - Rs 42,756.
iii. Yearly rental expenses – Rs 84,000, so rent paid will be
(84,000-10% of 85500) which equals
Rs 75450.
So least of all is Rs 42750
and it will be considered as the HRA exemption.
B) Conveyance
allowance is an allowance granted to the
employee by his employer to meet the expenses incurred on commuting from home
to the place of his residence. Conveyance allowance is exempt to the extent of
Rs 800. An orthopedically handicapped employee enjoys a higher exemption of Rs
1,600. So for a normal employee it is Rs
9600 for a year.
5) Tax on Employment: - It is also known as Professional Tax and maximum of Rs 1095 is deducted every half-yearly i.e. Rs 2190 per year. This amount is also exempted from the tax and hence it is also reduced from the gross salary.
6) Deduction under Chapter VI A: - This chapter includes Section 80C, Section 80CCC, Section 80CCD and Section 80CCE. Section 80C gives us the leverage of reducing our total income by 1 lakh, as investments under this section is exempted from tax. However maximum of 1 lakh is only considered for exemption no matters how much an employee declares.
Components which come under these sections are:-
A) Provident Fund- It is PF amount deducted by company every month.
B) Insurance Premium- It is life cover premium and is eligible for a tax deduction up to Rs 1 lakh under Section 80C.
C) PPF- It stands for Public Provident Fund which is a self-directed investment option. It is essentially a 15-year investment that gives a tax-free return of 8.7% as of now. Investments of Rs 500-1,00,000 qualify for a tax deduction under Section 80C.
D) Equity-linked savings schemes (ELSS)/Mutual Fund -These are mutual fund products and carry market risk. Like all tax saving options, these plans have a lock-in period of three years. Therefore, it makes sense to go in for funds with good track records rather than the new fund offers, especially in this category.
E) National Savings Certificates (NSC) - These are for those who are less averse to risk. This government-backed security is available at post offices and gives an interest rate of 8.6%, compounded half-yearly as of now. The interest is entirely taxable. NSCs are good for those in lower tax slabs with an investment horizon of six years.
F) Educational Expenses of Children: - An employee can declare their children’s education expense maximum of 1 lakh for tax exemption.
G) Term Deposit: - Term Deposit is money deposited once for a fixed term in a bank and it is also exempted from the tax.
So it is advisable for an employee to invest in any one or more of the components mentioned above under Section 80C and enjoy the tax exemption of 1 lakh from its total Gross Salary.
7) U/S 80D: - Any amount paid by an Individual to an Insurance company as Medical Insurance Premium i.e. premium paid in respect of Mediclaim Policy can be claimed as deduction under section 80D. However Life Insurance Premium is not covered under this category. A maximum amount of Rs 15000-20000 is considered under this section.
8) U/S 80E: - The interest on loans taken for higher education is eligible for deduction from your total income under Section 80E. Loan should have been taken for the purpose of pursuing higher studies of Individual , Spouse, Children of Individual or of the student of whom individual is legal Guardian. Hence parents are also eligible to claim deduction of interest paid by them on loan taken for their children’s education.
9) U/S 80G: - If an employee makes donation to a charity or a trust then he/she is entitled for tax deduction under Section 80G. But the donation should not be made towards any political party or a foreign trust/charity.
10) U/S 80U: - If an individual is Handicapped then he/she can claim for Tax Exemption of Rs 50000 and if disability is severe then of Rs 75000 under Section 80U. One can qualify for Tax Exemption under Section 80DD if he/she is investing money on the treatment of a handicapped person or a disabled person.
11) Total Taxable Income: - This is the final amount on which tax is calculated. This amounts equals Total Gross Salary – {(Rs.1 lakh if declared under Section 80C) + HRA Allowance + Conveyance Allowance + Professional Tax + (Amount declared under different Section mentioned above from 7 to 10)}.
12) Tax on Total Income: - It is the Actual Tax calculated from Total Taxable Income based on Income Tax Slab provided by Government in the Union Budget every financial year.
13) Education Cess: - It is 3% of Tax on Total Income and is added to Total tax. So if Tax is Rs 30000 then Total Tax deducted will be Rs 30900.
Always keep the records of your investments and tax deduction certificates as a matter of best practice because these need to be attached with Income tax returns.
Hope the blog will be useful for Salaried professional.
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