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Thursday, December 18, 2008

HRA - House Rent Allowance Calculation for income tax calculation

How to Calculate the Income Tax Exemption on House Rent Allowance (HRA)?
HRA - House Rent Allowance
It forms a one of prominent portion of your salary earnings. Many people think that they will get excemption from tax whatever they pay as rent. But is not true and there is a lot of complex calculation done before actually deducting from taxable income.
If you look at your pay slip, you will see an amount specified under HRA column. This is the amount given by your employee as Housing Rent Allowance. This entire amount is not tax free. In fact if you dont submit your rent reciept this amount will become taxable.

There is a calculation to be done before actually getting the exact figure.

The Rule is the value which is minimum of following three will be exempted from income tax
1. Hra received
2. 50% of salary (Basic Salary + DA) in case of residential accommodation taken on rent is situated in Mumbai,Kolkata,Delhi, Chennai and 40 % of salary in in any other case.
3 Rent paid in excess of 10 % of salary (Basic Salary + DA)

For Example

If your basic salary + DA= 10000

HRA = 4000

Rent Paid = 2000

calc 1 = 4000

calc 2 = (Metro) 5000 or (non-metro) 4000

calc3 = 2000- 1000 = 1000

The min of these three calculation is Rs.1000 .. So 1000 Rs it the amount excempted from tax ( ofcourse if you submit your bills :) )

There are also lot of free tax calculator available to do this .. but always better to what goes inside.

See ya

- Vinay

Tuesday, December 9, 2008

A penny saved is a penny earned

The world around us today is completly different from what we have a few months back. Everybody is talking about bad global economic condition, layoffs, cost cuttings, reduced employment oppurtunities and many more things. All these lead to only one thing, less money to spend for people. This is what the ultimate result of recession and slow down in economy.

When earning money is hard, then only we can see or notice some part of our expenses which is burning a silient hole in our pocket..... The Tax.

We all get our pay checks or salary credited and till now we enjoyed it without thinking much about savings for future. This is what causing most of the Americans to feel the heat and they are now realizing how important savings is.

We have to keep in mind that we cant except everything to be fine throughout our life and we have to be always prepare of the worst. The scenario will change in matter of months or weeks.

Income tax forms a major component of deductions made in our salary. But there are lot of ways we can make this expense as saving. Without our knowledge, if we make simple plans to save tax, we can end up saving huge amount of money.

Here are some tips to save tax effectively.

ELSS : Equity linked Saving scheme : Equity may sound like a bad word after all the stock market crashes. But mark my words, equity is the best way to make money. ELSS is best way to save tax .. make savings and hence make money.

Here is a simple calculation.
Say you are in a 30% tax bracket.
For each 100 Rs you earn, you end up paying 30 rs as a tax. This 30 will never come back.... Its gone.
Now say you invest the same 100 Rs in ELSS. If will not pay any tax to this money ( ofcourse there is a limit for investing in ELSS after which it is taxable).
Now we can say that we effectively invested 70 rs and you are already in 30 rs profit.
Wait .. consider the worst case of market.. The stock market crashes and yours ELSS loses 50%. Here your effective loss is much less than that of market. More over the interesting point here is the loss is not actual loss unless you sell them.... i.e this money has not gone anywhere. Instead of loosing money, you have invested money in ELSS which has lost some of its value.
Over time, it has proven that stock markets always bounce back and reach newer highs. Here the patience play a very important role.
So, go for it and do some research on ELSS and invest some money into it.... It will always pay back.
Here is a simple trick.
1. Invest in ELSS for 3 years .. Use direct investment option which saves some money which was charged as broker commission.
2. After 3 years lockin period, withdraw the money invested in 1st year which is absolutely tax tree and use it to invest again in ELSS and claim tax benifit for this.
3. Always go fro divident pay out option and use this money for further investments.. mostly in other ELSS or if you dont want to take risk, put them in bank deposits or some save debt instruments.

Again .. write these words in golder letters.

-- A penny saved is penny earned -- ( tax free :) )

See you soon with some more tips ....

Cheers,
Vinay