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[Economy] Calculating Income Tax, Tax Exemption vs Tax Deduction, Rajiv Gandhi Equity Saving Scheme Mrunal
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What are the Income tax slabs in Budget 2012? How to Calculate income tax? 3% educational cess What is the difference between Tax exemption and tax deduction? #1: Tax exemption #2: tax deduction Union budget 2012: provisions of Tax Deduction and Tax Exemption What is Tax Planning? Who is TaxConsultant ? Black Money and AgroIncome Recent Comments
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[Economy] Calculating Income Tax, Tax Exemption vs Tax Deduction, Rajiv Gandhi Equity Saving Scheme Mrunal UPSC Civil Service IAS IPS exam

Income

How does RGESS save Rs.5000 In Tax? Case #1: dont invest in RGESS Case #2: investmen t maximum in RGESS

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Rajiv Gandhi Equity Saving What does it mean? Scheme Before we can talk about (RGESS) that, lets see the basics will give of Income Tax maximum calculation, Exemption benefit of and Tax Deduction. Rs. 5,000 What in tax- are the Income saving. tax slabs in Budget 2012?
You know about this already: Income tax slab (in Rs.) 0 to 2,00,000 2,00,001 to 5,00,000 5,00,001 to 10,00,000 Above 10,00,000 Tax No tax 10% 20% 30%

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(We are skipping senior citizen provisions) Time for a very simple question:

if your income is Rs.15

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[Economy] Calculating Income Tax, Tax Exemption vs Tax Deduction, Rajiv Gandhi Equity Saving Scheme Mrunal

15 lakhs is above Rs.10 lakhs, lakhs, so you fall in 30% how incomemuch tax slab. 30% of income 15 lakhs equals to 4.5 lakhs income tax. tax do Sorry 4.5 lakhs you have is Incorrect Answer . to pay? Infact youre income tax will be quite less than Rs.4.5 lakhs. Why? Because income tax is not calculated like that.

Then how to calculate income tax?

Suitcase approach Imagine there are four suitcases labeled one, two, three, four. You have to fill up each suitcase with your cash. But there are some conditions you have to fill these suitcases in serial order: 1,2,3 then 4 First suitcase can contain maximum two lakh rupees only. Once it is fully packed, you move to the next suitcase. Second suitcase can hold maximum three lakh rupees Third suitcase can contain maximum five lakh rupees Fourth suitcase can contain any amount of money. No maximum limit. Step #1: Distribute money in suitcases Now start distributing your 15 lakh rupees into these four suitcases suitcase number
mrunal.org/2012/05/income-tax.html

Money packed
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[Economy] Calculating Income Tax, Tax Exemption vs Tax Deduction, Rajiv Gandhi Equity Saving Scheme Mrunal

One Two Three Four Total

2,00,000 3,00,000 5,00,000 5,00,000 15 lakhs

Step #2: Make a new column and apply those four tax slabs suitcase Money number packed One Two Three Four Total Tax slab

2,00,000 0% 3,00,000 10% 5,00,000 20% 5,00,000 30% 15 lakhs

Step #3: Calculate the income tax to be paid for each suitcase suitcase Money number packed One Two Three Four Total Tax slab Tax to be paid Zero

2,00,000 0%

3,00,000 10% 30,000 5,00,000 20% 1,00,000 5,00,000 30% 1,50,000 15 lakhs 2,80,000

The total sum of income tax on all four suitcases =2,80,000 lakhs So, if your income is 15 lakhs, you have to pay 2.8 lakhs as income tax. But we forgot some important things: educational cess, tax exemption, tax deduction.

3% educational cess
Cess means tax on the tax. Union budget 2012, has provision of 3% educational cess.

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[Economy] Calculating Income Tax, Tax Exemption vs Tax Deduction, Rajiv Gandhi Equity Saving Scheme Mrunal

educational cess. Meaning 3% of 2.8 lakhs, equal to Rs.8400 Hence the total incometax that you to pay = 2.8 lakhs +8400= Rs.2,88,400 Now time for two most important parts in the income tax calculation.

What is the difference between Tax exemption and tax deduction? #1: Tax exemption
Income tax= the tax on your income, but you dont have to pay income tax on certain type of income. For example Policemen and Army jawans get uniform maintenance allowance: Suppose Rs.1000 to wash and iron their uniforms and to polish their boots every month. Rs.1000 every month multiplied with 12 months equals to Rs.12,000 every year, apart from the regular salary. But Budget-2012 says this Uniform Allowance income is exempted from taxation. So, If an army jawan earns Rs. 2,12,000, then his taxable income is 2 lakhs minus Rs. 12000 exempted= Rs. 2,00,000. Now calculate his income tax on Rs. 200,000 based on our suitcase approach. (ans. Zero tax, because Cash finished at first suitcase.) Crux: Tax exemption is given on INCOME.

#2: tax deduction

mrunal.org/2012/05/income-tax.html

If you spend your

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[Economy] Calculating Income Tax, Tax Exemption vs Tax Deduction, Rajiv Gandhi Equity Saving Scheme Mrunal

If you spend your income on certain activities, you wont have to pay income tax on that much amount of your income. E.g.50% deduction, if you invest in Rajiv Gandhi Equity Savings Scheme. (RGESS) Suppose you earn nine lakh rupees a year and invest Rs.20,000 in RGESS, Thus , your taxable income = nine lakh rupees minus 50% of Rs.20,000 (invested in RGESS) = 9 lakhs-10,000 = Rs. 8,90,000 Now calculate the income tax on Rs.8,90,000 using our suitcase approach. Crux: Tax Deduction is given on SPENDING

Union budget 2012: provisions of Tax Deduction and Tax Exemption

Here are a few examples. Note: Im not filling up the minute details and you

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[Economy] Calculating Income Tax, Tax Exemption vs Tax Deduction, Rajiv Gandhi Equity Saving Scheme Mrunal

minute details and you dont have to mug this list. Tax Exemption (on INCOME / Salary) Tax Deduction (on SPENDING) Rajiv Gandhi Equity Saving scheme. Tax saving mutual funds (ELSS) Five year tax-saver bank Fixed deposits Public provident fund (PPF) National Savings Certificate (NSC) or National Service Scheme (NSS) Employer contribution into New Pension Scheme (NPS) Life insurance/Unit Linked Insurance Plan (ULIP) premium Employees contribution towards Employee provident fund (EPF) Home loan principal amount payment. Post office tax saving deposit or tax saving bonds Pension scheme/Retirement plans (Secion 80CCC) Tuition fees paid for children education Medical Treatment of family (upto Rs.40k)

Transport / Conveyance Allowence Child education allowence Leave travel allowance (LTA) Medical Allowance Uniform / Dress allowance Gift from relatives Agricultural income House Rent income

What is TaxPlanning?
It means use of TaxExemption and TaxDeduction provisions in such a way that you can save maximum amount of tax.
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[Economy] Calculating Income Tax, Tax Exemption vs Tax Deduction, Rajiv Gandhi Equity Saving Scheme Mrunal

Who is TaxAdviser / TaxConsultant?

These are extremely knowledgeable and experienced Chartered Accountants, MBA and Tax Lawyers. They make customized taxsaving plans according to your requirements. Big players in Tax Consulting = Ernst & Young, KPMG, Price waterhouse Coopers (PwC). Recall that Vodafone Essar deal: Saving Capital Gains tax in Caymens Island. These Big Players help in such huge tax-saving deals.

Black Money and Agro-Income

In above table, you can see that Agriculture income is exempted from income-tax. Lot of film stars forge documents and show they own farm-lands and theyre farmers. Game is simple. They take 5 crores from film producers or 50 lakhs to dance in Dubai. But on paper they show only few lakhs as legit payment received and pay income tax on that part only. Remaining money is shown as income from that agricultural land and thus totally exempted from income-tax. So this is also one

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[Economy] Calculating Income Tax, Tax Exemption vs Tax Deduction, Rajiv Gandhi Equity Saving Scheme Mrunal

So this is also one type of TaxPlanning, just illegal. Black money = income on which tax is not paid. Coming back to the opening sentence of this article:

How does RGESS save Rs.5000 In Tax?

You already know the main provisions of Rajiv Gandhi Equity saving scheme Only first-time investors, with annual
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[Economy] Calculating Income Tax, Tax Exemption vs Tax Deduction, Rajiv Gandhi Equity Saving Scheme Mrunal

investors, with annual income less than Rs.10 lakh can invest in the scheme. One person can invest maximum Rs.50,000 only

Ya but still how is Rs.5000/- saved? Youve to compare two cases to find that out.

Case #1: dont invest in RGESS

Your income is Rs.9 lakhs, and you dont invest in RGESS and dont get any other tax deduction or tax exemptions. The total taxable income is Rs. 9 lakhs. suitcase Money number packed One Two Three Four Total Tax slab Tax to be paid Zero

2,00,000 0%

3,00,000 10% 30,000 4,00,000 20% 80,000 0 9 lakhs 30% 0 1,10,000

Thus, in case#1: youre paying Rs. 1.1 lakh as income tax

Case #2: investment maximum in RGESS

Your income is Rs.9 lakhs, and you invest to the maximum limit (Rs.50,000/-). Thus, the taxable income is = Rs. 9 lakhs minus 50% of Rs.50,000 ;because RGESS gives 50% Deduction. =9 lakhs 25,000 =Rs. 8,75,000 Now calculate income tax for Rs.8,75,000 using same suitcase approach
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[Economy] Calculating Income Tax, Tax Exemption vs Tax Deduction, Rajiv Gandhi Equity Saving Scheme Mrunal

suitcase Money number packed One Two Three Four Total

Tax Tax to slab be paid 0 30000 75000 0 105000

200000 0 300000 10 375000 20 0 875000 30

Thus, in case#2, you pay 1,05,000 as income tax. Difference between Case #1 minus Case #2 =1,10,000 minus 1,05,000 = Rs. 5,000 Therefore all the newspapers, magazines and TV channels shout all the time that youll save Rs.5,000 by investing in RGESS. But here is a fine-print. This Rs.5000-magic works only if you fall under the 20% tax slab. If your income is rupees two lakhs and you invest Rs.50,000 in RGESS, you will not save any tax. Why? Because you fall in zero% tax slab. Your annual are not taxable in the first place! Similarly, if you are in the 10% tax slab, you will get different answers.

Homework:
(No, theyll not ask this in your exam, this is only for brain exercise)

mrunal.org/2012/05/income-tax.html

Calculate the maximum possible Shortcut tip: tax saving You can get max with deduction of 25,000 (that if of is 50% RGESS, Deduction Rs.50000 invested in your RGESS) annual And your given income 4 income is lakhs fall under 10%. Rs.4 So, 10% of lakhs.

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[Economy] Calculating Income Tax, Tax Exemption vs Tax Deduction, Rajiv Gandhi Equity Saving Scheme Mrunal

So, 10% of lakhs. 25,000=Rs.2500 saved in tax. Why does this shortcut method work? Think about it.

Anyways, whether you can save 5000 or 7000 that is not the important question for UPSC, IBPS (Bank PO) or MBA admission interviews.

The important questions are following

Why did Pranab come up with Rajiv Gandhi Equity saving scheme? Why are only firsttime investors allowed to save money in the scheme? Why is Pranab not allowing people with annual income of Rs.10 lakh or above, to invest in this scheme? Why did Pranab say this move will improve the depth of domestic capital market? What is No-Frills demat account and why is Pranab talking about it? If you were in place of Pranab, How will you design the Tax Exemptions and Tax Deductions for the Aam-Aadmi and how will you help the Indian Economy?

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[Economy] Calculating Income Tax, Tax Exemption vs Tax Deduction, Rajiv Gandhi Equity Saving Scheme Mrunal

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[Economy] Calculating Income Tax, Tax Exemption vs Tax Deduction, Rajiv Gandhi Equity Saving Scheme Mrunal

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[Economy] Calculating Income Tax, Tax Exemption vs Tax Deduction, Rajiv Gandhi Equity Saving Scheme

naveen lohar
Reply to this comment give answer please

Mahendra
Reply to this comment Really Nice one to understand the income tax

Mahendra
Reply to this comment Thanks for info!

kaushal jha
Reply to this comment hi mrunal sir,rajiv gandhi equity savings scheme.max benefit is 50000rs??????????

ashok
Reply to this comment sir kindly give the explanation of the above question also
mrunal.org/2012/05/income-tax.html

ashok

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[Economy] Calculating Income Tax, Tax Exemption vs Tax Deduction, Rajiv Gandhi Equity Saving Scheme Mrunal

ashok
Reply to this comment sir kindly give the explanation for abve also

s.k.t
Reply to this comment GUYS IMPORTANT DO NOTE DOWN THE CHANGES IN THE RGESS IMPORTANT FOR THE UPSC EXAM *1)THE INCOME LEVEL OF AN INVESTOR HAS BEEN RAISED FROM 10 TO 12 LAKH PER ANNUM AND THE TAX BENEFIT WHICH WAS 50% FOR INITIAL MIN komal INVESTMENT OF 50,000 HAS Reply this comment BEEN to INCREASED FOR 3 YRS FROM 1 YR(EARLIER) how to calculate for 6 lakhs *=ANY DOUBT IN THE EARLIER PROVISION OF THE SCHEME REFER TO OUR JASPAL BRILLIANTS(MRUNAL) Reply to this comment ART AND THEN COMPARE IT Sir..for RGESS, now the max limit is 12 lakhs (for earlier 10L) and this 12L is gross total income (and not net notal income , hence no role of JASPAL deductions play in RGESS) , Reply to this comment am i right? Correct me if i am wrong.. And also as the max limit is now 12L, then the max possible tax saving from RGESS would now be more than rs 5000? Am i right sir?

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