Taxexcel: Income Tax Relief U/s 89(1)

Sunday 2 October 2016

Generally, all of us think that taking a loan to buy a residential property is not a good idea and so, they start saving some amount from their monthly income into recurring investment or a Systematic Investment Plan (SIP) offered by mutual funds. But the financial planners recommend that for acquiring a house for self-use, one should go for a housing loan and pay EMIs in place of going for recurring investment or SIP in other investment product.

Download Automatic Arrears Relief Calculator U/s 89(1) with Form 10E from F.Y.2000-01 to F.Y.2016-17 [ Up to date Version]

A payee can get income tax benefits through home loan under two different Sections of Income Tax Act.

Under Section 24B– Deduction on interest on home loan for self-occupied property up to Rs 2 lakh.

Under Section 80C– Deduction on repayment of principal amount of home loan up to Rs 1.5 lakh.

Tax Benefits under Section 24 and Section 80C: Mr. X is eligible to claim tax benefits under Section 80C for the principal repayment of the home loan and under Section 24 for interest components. He can claim deduction up toRs 1.5 lakh along with all other permissible instruments like life insurance premium, PPF, ELSS, NSC etc under Section 80 C and up to Rs 2 lakh under Section 24.

Income Tax Benefits on Joint Home Loan: One can avail income tax benefit on home loan up to Rs 1.5 lakh under Section 80C and 2 lakh under Section 24. But if you go for a joint home loan along with your spouse in the ratio of 50: 50, then both of you can claim these benefits separately. So the combined limit will be Rs 3 lakh under Section 80C and 4 lakh under Section 24B. This can reduce your overall cost of the loan for the family considerably.

The total deduction will be Rs 7 lakh and if both spouses are in the highest income tax slab, they will get an income tax benefit of Rs 210000/- which is just double compared to an individual home loan, although this provision may vary from person to person.

Before going for a joint home loan, you should mutually work out your ownership share if you wish to optimize the income tax benefit. That is, if you and your spouse own the house jointly in the ratio of 50:50, both can claim deductions in equal proportion. Therefore, if your income tax slabs are different, you need to work out your ownership share in a manner that the spouse in the higher income tax bracket owns a bigger share.

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Saturday 3 September 2016

In Seventh Pay Commission bonanza, lakhs of central government employees will soon receive higher salaries and arrears in one go. This may result in an increase in the tax slab of many employees as they will receive arrears from January 1, 2016.

Suppose an employee's annual salary is Rs 9.50 lakh and receives Rs 1 lakh as arrears, of which Rs 50,000 is for the previous fiscal year. His/her tax slab will change. The total income for this year will be Rs 10.50 lakh as against Rs 10 lakh (including the arrears of this year). Income of individuals above Rs 10 lakh is taxed at the rate of 30 percent while income between Rs 5 lakh and Rs 10 lakh is taxed at the rate of 20 per cent.

Download Excel Based Automated Arrears Relief Calculator including Form 10E for the Financial Year 2016-17

So will employees have to pay an extra tax? No.

There are provisions which provide tax relief to employees due to delay in the receipt of the arrears.

"If an employee or his family receives pension arrears or salary arrears, he or she can claim tax relief under Section 89(1). This Section makes sure you don't end up paying the higher tax due to moving up a tax slab from receipt of arrears. Or because tax slab rates in the year of receipt are higher as compared to the year to which arrears belong to.

How the tax relief is calculated

The tax break is arrived at by recalculating the tax for the both the years in which the arrears are received and the year to which arrears pertain to.

1) Calculate the tax payable on the total salary including and excluding the arrears in the year in which it is received. Calculate the difference between the two and assume it is 'A'

2) Calculate the tax payable on the total salary including and excluding the arrears for every year of which the arrear relates to and sum it up. Calculate the difference between the two and assume it as 'B'.

3) If 'A' is more than 'B', the employee will get tax break equivalent to 'A'.

How it can be claimed

To avail the tax break, it is mandatory under the income tax laws to file Form 10E. The form includes details like the PAN, arrear and advance salary details. This form has to be uploaded on the website of the Income Tax Department.