Basics of Personal Finance

What is Personal Finance

In our day-to-day lives, we deal with many things related to money. These are: - Incomes Tax - Investment: Stocks, Mutual Funds, ULIPs, Gold, Real Estate, etc - Insurance: Term Insurance, Endowment Plans, ULIPs, etc - Loans: Home Loans, Personal Loans, etc

These are different from money-related issues for businesses, and concern each and every one of us irrespective of the nature of our occupation. The management of these money-related matters that touch our personal lives is broadly termed Personal Finance.

What is Income Tax

The government spends money on different things like infrastructure, education, public healthcare, etc. For this, it needs to first get the money, so that it can spend. The government gets money from people and businesses in the country. There are various duties and taxes levied on income, goods and services. The tax levied on incomes of people and businesses is called income tax. While talking about Income Tax, there are certain terms that we keep hearing about very often. Here is an explanation of some of these terms:

Definitions
Financial Year (FY) : The financial information is reported on a yearly basis, and the year for which this information is reported is called a Financial Year, or FY in short. The actual start and end of a financial year varies from country to country. The financial year in India starts on 1st April every year, and ends on 31st March of the following year. Thus, the last financial year in India started on 1st April 2009, and ended on 31st March 2010. This is usually denoted as FY 09-10, or FY 10. Assessment Year (AY) : Income from a particular financial year is assessed for income tax in the following year. The financial year in which this assessment takes place is called the Assessment Year (AY). Thus, we file the income tax returns for the Financial Year 09-10 (or FY 09-10) in the Assessment Year 2010-11 (or, AY 10-11). Previous Year (PY) : In an assessment year, the income from the year preceding it is assessed for income tax. This year is called the Previous Year, or PY in short. So, simply speaking, Previous Year is the financial year for which your income is being assessed. Thus, we file the income tax returns for the Financial Year 09-10 (or FY 09-10) in the Assessment Year is 1011 (or, AY 10-11). For Assessment Year 10-11, the Previous Year is 2009-10 (PY 09-10). Rate of Income Tax : As we saw, the income we earn is subject to income tax by the government. The rate of income tax is different for different income levels, and thus, the income tax that you pay depends on your total earnings in a given year. These slabs are also different for men, women and senior citizens.

Income Tax slabs for men for FY 2010-11:

Income less than 1,60,000 : 0% Income from 1,60,001 to 5,00,000 : 10% Income from 5,00,001 to 8,00,000 : 20% Income above 8,00,001: 30%

Apart from this, there is an educational cess of 3%. This is to be added to the total income tax liability after computation of income tax.

Income Tax slabs for women for FY 2010-11

Income less than 1,90,000 : 0% Income from 1,90,001 to 5,00,000 : 10% Income from 5,00,001 to 8,00,000 : 20% Income above 8,00,001: 30%

Apart from this, there is an educational cess of 3%. This is to be added to the total income tax liability after computation of income tax.

Income Tax slabs for Senior Citizens for FY 2010-11:

Income less than 2,40,000 : 0% Income from 2,40,001 to 5,00,000 : 10% Income from 5,00,001 to 8,00,000 : 20% Income above 8,00,001: 30%

Apart from this, there is an educational cess of 3%. This is to be added to the total income tax liability after computation of income tax.

How to Save Income Tax - Deductions Under Section 80C

No one likes to pay tax - after all, it is our hard earned money! But there are different ways in which we can reduce our income tax liability. The most important of these are deductions permitted under section 80C of the income tax act. The government encourages certain types of savings - mostly, long term savings for your retirement - and therefore, offers you tax breaks on such savings. Sec 80C of the Income Tax Act is the section that deals with these tax breaks. It states that qualifying investments, up to a maximum of Rs. 1 Lakh per year, are deductible from your income. This means that your income gets reduced by this investment amount (up to Rs. 1 Lakh), and you end up paying no tax on it at all! This benefit is available to everyone, irrespective of their income levels. Thus, if you are in the highest tax bracket of 30%, and you invest the full Rs. 1 Lakh, you save tax of Rs. 30,000. Isn't this great?

Some of the the qualifying investments u/s 80C are: - Provident Fund (PF) - Voluntary Provident Fund (VPF) - Public Provident Fund (PPF) - Life Insurance Premiums - Investments in Equity Linked Savings Scheme (ELSS) of mutual funds - Home Loan Principal Repayment (To know more about saving income tax using sec 80C, please read "Saving Income Tax - Understanding Section 80C Deductions")

How to Save Income Tax Using a Home Loan

Income Tax can also be saved if you have taken a home loan. The EMI that you pay towards your home loan consists of two portions - the principal amount, and the interest for the home loan. Although both these components help you save tax, the tax treatment of these two is different. Income Tax treatment of Principal Repayment: The Principal Repayment for home loans is included in Section 80C of the Income Tax Act as one of the permissible investments. This means that principal repayment up to Rs. 1 Lakh is totally deductible from your income if you have not made any other investments under section 80C. There is only one condition here - principal repayment can be considered as a valid investment under section 80C only if it is made for a self occupied house. That is, you should be living in the house for which you are making the principal repayment. The only exclusion is if the house is not in the city in which you are working - in which case you can claim the principal repayment as an investment under sec 80C even if you are not living in the house.

Income Tax treatment of Interest Payment: The interest you pay as the part of your EMI is considered an expense under the head "Income from House Property", and is deductible up to a maximum of Rs. 1.5 Lakhs under Section 24 of the Income Tax Act. The interest amount would appear as a negative amount under the head "Income from House Property", and would thus be deductible from your total income under Sec 24. The best part is that there is no restriction of "self occupied property" for claiming the tax break on interest paid under sec 24. In fact, if you have rented out the house, and the rent you receive is more than Rs. 1.5 Lakhs per year, ALL interest paid (even if it is more than Rs. 1.5 Lakhs) is deductible from the rent received - provided that the interest paid is not more than the rent received. (To know more about saving income tax using a home loan, please read "Income Tax (IT) Benefits of a Home Loan / Housing Loan / Mortgage")

Filing of Income Tax Returns - Which Income Tax Return (ITR) Form To Use

Form ITR1 ITR-1 is for individuals having income from: - Salary / Pension / Family Pension - Interest Thus, it is for people having a salary (or pension) and having savings bank accounts, fixed deposits, National Savings Certificates (NSCs), or other interest bearing instruments. ITR1 is not for you if: - You are filing on behalf of a Hindu Undivided Family (HUF) - You have sold shares / mutual funds in the past year - You have sold house / land in the past year - You have paid EMI for your house to repay your home loan - You have rented out your house - You have income from your business or profession

Form ITR2 ITR2 is for you if: - You have income from salary or pension - You have savings bank accounts, fixed deposits, National Savings Certificates (NSCs), or other interest bearing instruments - You have sold shares / mutual funds in the past year - You have sold house / land in the past year - You have paid EMI for your house to repay your home loan - You have rented out your house - You are filing on behalf of a Hindu Undivided Family (HUF) that doesn't have income from business or profession ITR2 is not for you if: - You have income from your business or profession

Filing of Income Tax Returns - Which Income Tax Return (ITR) Form To Use

Form ITR3 ITR3 is for you if: - You are a partner in a firm - You are filing on behalf of an HUF that is a partner in a firm ITR3 is not for you if: - You have a proprietary business - You are filing on behalf of an HUF, and it has a proprietary business - You or your HUF are not a partner in any firm

Form ITR4 ITR4 is for you if: - You have a proprietary business - You are filing on behalf of an HUF, and it has a proprietary business ITR4 is not for you if: - You or your HUF do not have a proprietary business

(To download various income tax return forms, and to know more about which ITR form to use, please read "Income Tax (IT) Return Filing - Which ITR form to use?")

E-Book: Personal Finance for the Young Professional

The field of personal finance is vast, and it can take years to get acquainted with its various aspects. So, what should a young professional like you do? Take years to learn the basics of personal finance before starting to take financial decisions? Wouldn't that be too late? Wouldn't it help if there is a crash-course in personal finance that would give you a head start in the field of personal finance? Of course, it would. And that's exactly what this e-book is! The following topics are covered in the book: Basics of Income Tax (IT) Saving Income Tax Life and Health Insurance Purchasing a House Through a Home Loan Importance of Saving and Investing Early Best Investment Strategies for the Long Term Best Investment Avenues