Salaried employees have numerous avenues to save tax. But self-hired men and women do not have options like popular deduction, worker provident fund, the deduction for house hire allowance, and many others. However, there are a few tax blessings/investment avenues to be had to self-employed as nicely. Let us see what these are.
House rent paid
Section 10(13A) of the Income Tax Act offers for tax exemption to a salaried character in appreciate of hire paid for a rented lodging occupied with the aid of him if he is in receipt of House Rent Allowance (HRA) known as by way of in any way call. In order to assist self-employed taxpayers and salaried taxpayers who do no longer receive any HRA for rent paid for lodging occupied through them, tax laws have Section 80 GG. This category of taxpayers, who pay hire, but do no longer acquire any HRA, are entitled to assert a deduction as much as Rs five,000 consistent with month, an extra of 10% of their overall earnings, issue to a maximum 25% in their gross overall income. Both these deductions can simplest be claimed, provided the accommodation occupied via them is located inside the area in which they’re employed or sporting on their commercial enterprise or career.
Since self-hired don now not have the advantage of saving tax by means of contributing to Employee Provident Fund (EPF), they could open a Public Provident Fund (PPF) money owed. A PPF account may be opened by salaried and self-hired each. Both the EPF and PPF entitle the contributor for tax deduction underneath Section eighty C, up to Rs 1.50 lakh. Moreover, the hobby received as nicely maturity proceeds of each scheme are completely tax-free. The current rate of interest for PPF is 8% in step with annum, for the October-December region. For PPF you can declare tax benefits even if you make contributions to the bills of your partner or kids.
National Pension System (NPS)
Government employees, as well as the ones running in undertakings owned by using government, get the pension after retirement. Likewise, salaried people additionally get the pension out of provident fund contribution made, as a part of it goes in the direction of pension. Self-employed do no longer have any such facility.
National Pension System (NPS) gives an opportunity to a self-employed individual to build up the budget and get the pension after retirement. Self-hired can make a contribution to NPS and declare tax benefits up to twenty% of gross general earnings. Though NPS contribution is eligible for deduction under Section eighty CCD(1) in the ordinary limit of Rs 1.50 lakh in line with annum as stipulated beneath Section 80 CCE, taxpayers can claim additional blessings underneath Section 80 CCD(1B) up to Rs 50,000 for NPS, in case the existing limit of Rs 1.50 lakh gets exhausted without NPS contribution. With this additional benefit, even you could make contributions up to Rs 2 lakh (1.50 lakh simple and Rs 50,000 additional benefit) to NPS.
The subscriber to NPS account has to mandatorily purchase an annuity with 40% of the corpus from an existence coverage agency and 40% can be withdrawn tax unfastened. I admire of the stability 20% of the corpus the subscriber can both withdraw it and pay tax on it or he should buy the annuity with it. The annuity obtained from coverage organization is taxable as and while obtained. Though the salaried can declare the usual deduction up to Rs 40,000 in recognize of pension received, no such benefit is to be had to self-employed who obtain the pension from the insurance business enterprise for annuity offered under the NPS.
Calculating Income Tax: The Tax Formula
The Tax Formula for Individuals:
This is just a fundamental rationalization of the tax formulation for character taxpayers. I wish someone can discover this fact beneficial whilst looking to apprehend taxes better. Individual taxpayers calculate their tax according to a tax formulation. Understanding the formulation is critical, considering all tax determinations are based totally on the result. The formula is as follows:
-DEDUCTIONS FOR AGI (adjusted gross income)
-GREATER OF ITEMIZED DEDUCTIONS OR STANDARD DEDUCTION
x TAX RATE (using appropriate tax tables or charge schedules)
=GROSS TAX LIABILITY
-TAX CREDITS AND PREPAYMENTS
=TAX DUE OR REFUND
The calculation of taxable profits begins with gross income. Gross earnings include ALL profits until the tax law provides for a selected exclusion.
Deductions for Adjusted Gross Income:
The first class of deductions consists of the deductions for AGI. These deductions encompass scholar mortgage interest, a training and prices deduction, sure educator expenses, alimony payments, trade or commercial enterprise prices, certain reimbursed employee business costs paid underneath a responsible plan, transferring charges, the penalty on early withdrawal from financial savings, and contributions to qualified retirement plans. I am now not going to enter element about those deductions however if I can offer more element in a later hub if sufficient humans request it.
Adjusted Gross Income:
The quantity of adjusted gross profits is occasionally called the “magic line”, considering that it’s for the idea for several deduction obstacles. For instance, the difficulty on medical costs is one. A tax payer’s AGI is used to determine the segment out of the otherwise allowable itemized deductions and private dependency exemption quantities.
Standard Deduction or Itemized Deductions:
Itemized deductions are private objects that Congress has allowed as deductions. Included in this class are medical costs, certain hobby prices, positive taxes, charitable contributions, casualty losses, and different misc. Items. Demand payers have to itemize their deductions most effective if the amount exceeds the same old deduction quantity. The desk below gives the usual quantities for 2010.
The personal exemption and the dependency exemption have been $3650 for 2009 and feature remained the same for 2010. Keep in thoughts that there is a Phase-out tax bracket for high-income households. (This can also be discussed in detail in a later hub if asked)
The Gross Tax Liability:
A tax payer’s gross tax legal responsibility is obtained through connection with the tax table or use of a tax charge agenda (that is supplied below). Tax credit and prepayments are subtracted from gross tax legal responsibility to calculate the net tax due to the government or the refund due to the taxpayer.
2010 Tax Rate Tables
Married Individuals Filing Joint Returns and Surviving Spouses
If Taxable Income Is:
The Tax Is:
Not over $sixteen,750 10% of the taxable earnings
Over $sixteen,750 however no longer over $68,000 $1,675 plus 15% of the extra over $16,750
Over $68,000 however now not over $137,three hundred $nine,362.50 plus 25% of the extra over $68,000
Over $137,300 but not over $209,250 $26,687.50 plus 28% of the extra over $137,300
Over $209,250 however not over $373,650 $46,833.50 plus 33% of the extra over $209,250
Over $373,650 $101,half.50 plus 35% of the excess over $373,650
Unmarried Individuals (apart from Surviving Spouses and Heads of Households)
If Taxable Income Is:
The Tax Is:
Not over $eight,375 10% of the taxable earnings
Over $eight,375 but now not over $34,000 $837.50 plus 15% of the extra over $8,375
Over $34,000 but now not over $82,four hundred $4,681.25 plus 25% of the extra over $34,000
Over $82,four hundred but now not over $171,850 $sixteen,781.25 plus 28% of the excess over $eighty two,four hundred
Over $171,850 but now not over $373,650 $41,827.25 plus 33% of the excess over $171,850
Over $373,650 $108,421.25 plus 35% of the excess over $373,650