Last month ended with one of my good friends ringing me after a long time. “Simar, just got peanuts this month. Almost my entire salary got deducted as taxes. My only mistake was that I missed the tax proof submission deadline by a couple of days.” The conversation didn’t have the usual hellos and the sadness of paying more taxes was very evident.
“It’s okay, brother. You might be having a little financial hardship for a month or so, but you need not worry. Income Tax Department refunds the excess tax paid quickly these days.” I tried to console Aman.
I further continued, “Apart from what the employer considers, there some other deductions that the employer may not consider but can be claimed in Income Tax Returns. One such deduction is the amount donated to registered NGOs/specified funds.” This was another attempt to soothe Aman’s tax woes.
“But how will I calculate the eligible tax deductions? How do I claim to have paid extra tax to the Income Tax Department? Do I have to submit an application to Income Tax Department intimating such extra tax paid?” Aman fired the questions one after the other.
I moved on to answer all the queries one by one.
Most Common Tax Deductions
Exemption in respect of House Rent Allowance (HRA) – To provide relief to salaried people living on rent, Income Tax Act offers tax deductions towards the rent paid as per a prescribed formula. The amount of rent paid as reduced by 10% of the basic salary can be claimed as a deduction from salary, which is, however, subject to the amount of HRA received and further, subject to 50% of the basic salary, in case the rented property is located in Metros and 40% in other cases.
Just to illustrate, you are living in a rented apartment in New Delhi, paying a monthly rent of Rs. 10500. Further, your basic salary is Rs. 20000 and HRA received is Rs. 7,500. So, the exemption shall be the minimum of following:
- 50% of Salary, as the house is in Delhi 10,000
- Rent paid – 10% of Salary = 10,500 – 2,000 8,500
- HRA Received 7,500
So, the exemption shall be Rs. 7,500 per month.
Investment/ Payment Linked Deductions – Section 80C of the Income Tax Act provides for deductions in respect of certain payments and investments. Some of the eligible investments are 5-year tax saver FD, equity MFs with 3-year lock-in, National Savings Certificates (NSCs), Public Provident Fund (PPF), Employees’ Provident Fund (EPF) etc. Different investment avenues come with different lock-in period, different restrictions and different returns. Similarly, certain payments qualify for tax deductions e.g. life insurance premium, school tuition fees of children, repayment of the principal amount of housing loan etc. Even if you did not declare the same to your employer, you can always claim the same in your ITR and get your taxable income reduced to that extent. In most of the cases, the deduction is to the extent of the amount paid/ invested. However, the total amount of such deductions, including the PF deducted out of your salary is restricted to Rs. 1,50,000.
Deductions towards Donations – There is a specific section providing for deductions from taxable income towards amounts donated to registered NGOs/certain specified funds like PM National Relief Fund. For donations to NGOs, 50% of the amount so donated can be claimed as a deduction, subject to a maximum of 10% of the total income.
How to Claim these Deductions from Income?
One need not apply separately to Income Tax Department to claim such deductions from income. The details are only required to be filled in the Income Tax Return form to be filed with Income Tax Department. Even the proofs of such payments are not required to be attached with the Return form. However, the same should be kept in records for future reference.
Once you file the return with Income Tax Department, the same will be processed as per the provisions of the Income Tax Act, and refund, if any, will be made to your bank account. One might also get interest @6% per annum on such refunds, which is actually higher than what is earned by just keeping the amount in Savings Account.
“So, there is at least something to cheer about even in this situation.” Aman seemed relieved now.
Besides Aman, this may be the story of thousands of employees who may have missed submitting their tax proof deadlines. However, all is not lost as one can easily claim refund for the excess tax deducted by filing all the requisite details in the Income Tax Return form.
So, worry less, have no stress, claim the tax deducted in excess at the time of filing ITR. Do comment below for any questions.
Simardeep Singh is a Chartered Accountant based in Delhi. He loves sharing his knowledge about personal finance and investment. He blogs regularly at www.simardeep.com.