Dec 20, 2008

Income Tax - 5 Common Sources of Confusion

Here are five major FAQs and sources of confusion about income tax:

1. Citizenship and residential status
The two are entirely different concepts. You may be an Indian citizen but may not be a resident in India and vice versa. Besides, a person may be resident of more than one country in a particular year for income tax purposes.


2. Non-resident under I.T. Act and under FEMA
Under Income Tax Act, 1961, residential status is determined based on your ‘actual stay’, whereas under Foreign Exchange Management Act, it is determined primarily based on your ‘intention to stay’ in India/abroad. It is quite possible that while you may be a non-resident/NRI under FEMA and not under Income Tax Act and vice versa.

But what is the significance and relevance of these two different definitions? While residential status under income tax is used for calculating your tax liability under the Indian tax laws, the FEMA definition is relevant for banking, foreign exchange and investment purposes.


3. Senior citizen under Income Tax Act and under SCSS
Under the Senior Citizen Savings Scheme 2004 (SCSS) one is considered a senior citizen on turning 60. But under I.T. Act, a person is considered senior citizen on the completion of 65 years at any time during the previous year.


4. Pension and annuity
Pension from employer:
Pension received by an individual from employer is taxable as ‘salary’ and no standard deduction is allowed.

On the death of the individual, family pension received by the family of the deceased is taxable as ‘income from other sources’ and standard deduction to the extent of 33.33% or Rs 15,000 whichever is less is allowed.

Annuity from Insurance Company: Pension received from an insurance company under an annuity plan is called an annuity. When you buy an annuity plan you get deduction under section 80C/80CCC. When you either surrender the plan or receive the pension/annuity, the whole of the amount received gets taxed under “income from other sources”.



5. Medical reimbursement and medical insurance premia
Please note that fixed medical allowance is taxable but reimbursement of medical expenses (even OTC medicines & OPD medical expenses are covered) from employer is exempt subject to an annual limit of Rs 15,000 and submission of proof.

For medical insurance premium paid by you for taking a mediclaim/health policy on your own/family (spouse & dependent children) health, you’re eligible for deduction under section 80D, subject to maximum limit of Rs 15,000 p.a. (in case of a senior citizen the limit is 20,000 p.a.).



From current financial year i.e., PY 08-09 (AY 09-10), you’re also entitled for additional deduction up to Rs 15,000 for payment of medical insurance premium for parents (Rs 20,000 in case the parents are senior citizens) irrespective of whether parents are dependent on you or not.


ALSO READ:
1. Top 10 myths/misconceptions about Income Tax
2. 10 Smart Tips for Tax savings Planning under Section 80C

2 comments:

  1. When you buy an annuity plan you get deduction under section 80C/80CCC. When you either surrender the plan or receive the pension/annuity, the whole of the amount received gets taxed under “income from other sources”.
    Refer above: Suppose the plan has been bought by me in the name of my child. In whose hands it will be taxed, when recd.
    s_bhargava2005@rediffmail.com
    01122629024/09911426357

    ReplyDelete
  2. Surendra, I’m not aware that such a product (pension plan in the name of child) exists. And, if in fact it is available in the market then it’s height of non-sense.

    Anyway, it will be taxable in your hands.

    ReplyDelete

You’re welcome to post a comment if you’d like to air your views, or if you’ve any further question to ask, but please stick to the topic and don’t forget to write your name.