 What are the Income tax slabs in Budget 2012?
 How to Calculate income tax?
 3% educational cess
 What is the difference between Tax exemption and tax deduction?
 Union budget 2012: provisions of Tax Deduction and Tax Exemption
 How does RGESS save Rs.5000 In Tax?
 The important questions : Food for Thought
You may have read this statement in newspaper, tvchannels.
Rajiv Gandhi Equity Saving Scheme (RGESS) will give maximum benefit of Rs. 5,000 in taxsaving.
What does it mean? Before we can talk about that, let’s see the basics of Income Tax calculation, Exemption and Tax Deduction.
What are the Income tax slabs in Budget 2012?
You know about this already:
Income tax slab (in Rs.)  Tax 
0 to 2,00,000  No tax 
2,00,001 to 5,00,000  10% 
5,00,001 to 10,00,000  20% 
Above 10,00,000  30% 
(We are skipping senior citizen provisions)
Time for a very simple question:
if your income is Rs.15 lakhs, how much income tax do you have to pay?
15 lakhs is above Rs.10 lakhs, so you fall in 30% income tax slab.
30% of 15 lakhs equals to 4.5 lakhs income tax.
Sorry 4.5 lakhs is Incorrect Answer. Infact you’re income tax will be quite less than Rs.4.5 lakhs.
Why?
Because income tax is not calculated like that.
Then how to calculate income tax?
Suitcase approach
Imagine there are four suitcases labeled one, two, three, four.
You have to fill up each suitcase with your cash.
But there are some conditions
 you have to fill these suitcases in serial order: 1,2,3 then 4
 First suitcase can contain maximum two lakh rupees only. Once it is fully packed, you move to the next suitcase.
 Second suitcase can hold maximum three lakh rupees
 Third suitcase can contain maximum five lakh rupees
 Fourth suitcase can contain any amount of money. No maximum limit.
Step #1: Distribute money in suitcases
Now start distributing your 15 lakh rupees into these four suitcases
suitcase number  Money packed 
One  2,00,000 
Two  3,00,000 
Three  5,00,000 
Four  5,00,000 
Total  15 lakhs 
Step #2: Make a new column and apply those four tax slabs
suitcase number  Money packed  Tax slab 
One  2,00,000  0% 
Two  3,00,000  10% 
Three  5,00,000  20% 
Four  5,00,000  30% 
Total  15 lakhs  — 
Step #3: Calculate the income tax to be paid for each suitcase
suitcase number  Money packed  Tax slab  Tax to be paid 
One  2,00,000  0%  Zero 
Two  3,00,000  10%  30,000 
Three  5,00,000  20%  1,00,000 
Four  5,00,000  30%  1,50,000 
Total  15 lakhs  —  2,80,000 
The total sum of income tax on all four suitcases =2,80,000 lakhs
So, if your income is 15 lakhs, you have to pay 2.8 lakhs as income tax.
But we forgot some important things: educational cess, tax exemption, tax deduction.
3% educational cess
Cess means tax on the tax.
Union budget 2012, has provision of 3% educational cess.
Meaning 3% of 2.8 lakhs, equal to Rs.8400
Hence the total incometax that you to pay = 2.8 lakhs +8400= Rs.2,88,400
Now time for two most important parts in the income tax calculation.
What is the difference between Tax exemption and tax deduction?
#1: Tax exemption
Income tax= the tax on your “income”, but you don’t have to pay income tax on certain type of income. For example
Policemen and Army jawans get uniform maintenance allowance: Suppose Rs.1000 to wash and iron their uniforms and to polish their boots every month.
Rs.1000 every month multiplied with 12 months equals to Rs.12,000 every year, apart from the regular salary.
But Budget2012 says this Uniform Allowance income is exempted from taxation.
So, If an army jawan earns Rs. 2,12,000, then his taxable income is
2 lakhs minus Rs. 12000 exempted= Rs. 2,00,000.
Now calculate his income tax on Rs. 200,000 based on our “suitcase approach”. (ans. Zero tax, because Cash finished at first suitcase.)
Crux: Tax exemption is given on INCOME.
#2: tax deduction
If you spend your income on certain activities, you won’t have to pay income tax on that much amount of your income.
E.g.50% deduction, if you invest in Rajiv Gandhi Equity Savings Scheme. (RGESS)
Suppose you earn nine lakh rupees a year and invest Rs.20,000 in RGESS,
Thus , your taxable income
= nine lakh rupees minus 50% of Rs.20,000 (invested in RGESS)
= 9 lakhs10,000
= Rs. 8,90,000
Now calculate the income tax on Rs.8,90,000 using our suitcase approach.
Crux: Tax Deduction is given on SPENDING
Union budget 2012: provisions of Tax Deduction and Tax Exemption
Here are a few examples.
Note: I’m not filling up the minute details and you don’t have to mug this list.
Tax Exemption (on INCOME / Salary)  Tax Deduction (on SPENDING) 


What is TaxPlanning?
It means use of TaxExemption and TaxDeduction provisions in such a way that you can save maximum amount of tax.
Who is TaxAdviser / TaxConsultant?
 These are extremely knowledgeable and experienced Chartered Accountants, MBA and Tax Lawyers.
 They make customized taxsaving plans according to your requirements.
 Big players in Tax Consulting = Ernst & Young, KPMG, Price waterhouse Coopers (PwC).
 Recall that Vodafone Essar deal: Saving Capital Gains tax in Caymen’s Island. These Big Players help in such huge taxsaving deals.
Black Money and AgroIncome
 In above table, you can see that Agriculture income is ‘exempted’ from incometax.
 Lot of film stars forge documents and show they own ‘farmlands’ and they’re ‘farmers’.
 Game is simple. They take 5 crores from film producers or 50 lakhs to dance in Dubai.
 But on paper they show only few lakhs as ‘legit payment received’ and pay income tax on that part only.
 Remaining money is shown as ‘income from that agricultural land’ and thus totally exempted from incometax.
 So this is also one type of ‘TaxPlanning‘, just illegal.
 Black money = income on which tax is not paid.
Coming back to the opening sentence of this article:
How does RGESS save Rs.5000 In Tax?
You already know the main provisions of Rajiv Gandhi Equity saving scheme
 Only firsttime investors, with annual income less than Rs.10 lakh can invest in the scheme.
 One person can invest maximum Rs.50,000 only
Ya but still how is Rs.5000/ saved? You’ve to compare two cases to find that out.
Case #1: don’t invest in RGESS
Your income is Rs.9 lakhs, and you don’t invest in RGESS and don’t get any other tax deduction or tax exemptions.
The total taxable income is Rs. 9 lakhs.
suitcase number  Money packed  Tax slab  Tax to be paid 
One  2,00,000  0%  Zero 
Two  3,00,000  10%  30,000 
Three  4,00,000  20%  80,000 
Four  0  30%  0 
Total  9 lakhs  —  1,10,000 
Thus, in case#1: you’re paying Rs. 1.1 lakh as income tax
Case #2: investment maximum in RGESS
Your income is Rs.9 lakhs, and you invest to the maximum limit (Rs.50,000/).
Thus, the taxable income is
= Rs. 9 lakhs minus 50% of Rs.50,000 ;because RGESS gives 50% Deduction.
=9 lakhs – 25,000
=Rs. 8,75,000
Now calculate income tax for Rs.8,75,000 using same suitcase approach
suitcase number  Money packed  Tax slab  Tax to be paid 
One  200000  0  0 
Two  300000  10  30000 
Three  375000  20  75000 
Four  0  30  0 
Total  875000  105000 
Thus, in case#2, you pay 1,05,000 as income tax.
Difference between Case #1 minus Case #2
=1,10,000 minus 1,05,000
= Rs. 5,000
Therefore all the newspapers, magazines and TV channels shout all the time that you’ll save Rs.5,000 by investing in RGESS. But here is a ‘fineprint’.
This Rs.5000magic works only if you fall under the 20% tax slab.
If your income is rupees two lakhs and you invest Rs.50,000 in RGESS, you will not save any tax. Why? Because you fall in zero% tax slab. Your annual are not taxable in the first place!
Similarly, if you are in the 10% tax slab, you will get different answers.
Homework:
(No, they’ll not ask this in your exam, this is only for brain exercise)
Calculate the maximum possible tax saving with RGESS, if your annual income is Rs.4 lakhs.
Shortcut tip:
You can get max deduction of 25,000 (that is 50% Deduction of Rs.50000 invested in RGESS)
And your given income 4 lakhs fall under 10%.
So, 10% of 25,000=Rs.2500 saved in tax.
Why does this shortcut method work? Think about it.
Anyways, whether you can save 5000 or 7000 that is not the important question for UPSC, IBPS (Bank PO) or MBA admission interviews.
The important questions are following
 Why did Pranab come up with Rajiv Gandhi Equity saving scheme?
 Why are only firsttime investors allowed to save money in the scheme?
 Why is Pranab not allowing people with annual income of Rs.10 lakh or above, to invest in this scheme?
 Why did Pranab say “this move will improve the depth of domestic capital market?”
 What is NoFrills demat account and why is Pranab talking about it?
 If you were in place of Pranab, How will you design the Tax Exemptions and Tax Deductions for the AamAadmi and how will you help the Indian Economy?
43 Comments on “[Economy] Calculating Income Tax, Tax Exemption vs Tax Deduction, Rajiv Gandhi Equity Saving Scheme”
give answer please
Really Nice one to understand the income tax…
Thanks for info…!
hi mrunal sir,rajiv gandhi equity savings scheme…….max benefit is 50000rs??????????
sir kindly give the explanation of the above question also…
sir kindly give the explanation for abve also
GUYS IMPORTANT DO NOTE DOWN THE CHANGES IN THE RGESS IMPORTANT FOR THE UPSC EXAM
*1)THE INCOME LEVEL OF AN INVESTOR HAS BEEN RAISED FROM 10 TO 12 LAKH PER ANNUM AND THE TAX BENEFIT WHICH WAS 50% FOR INITIAL MIN INVESTMENT OF 50,000 HAS BEEN INCREASED FOR 3 YRS FROM 1 YR(EARLIER)
*=ANY DOUBT IN THE EARLIER PROVISION OF THE SCHEME REFER TO OUR BRILLIANT’S(MRUNAL) ART AND THEN COMPARE IT…
how to calculate for 6 lakhs
2,00,000 = zero
3,00,000 = 10% = 30,000
1,00,000 = 20% = 20,000
Total = 50,000
With investment in RGESS,
Net Taxable income will be 5,75,000(if invested 50,000 in RGESS)
2,00,000 = 00
3,00,000 = 30,000
75,000 = 15,000
Total = 45,000
Sir..for RGESS, now the max limit is 12 lakhs (for earlier 10L) and this 12L is gross total income (and not net notal income , hence no role of deductions play in RGESS) , am i right? Correct me if i am wrong..
And also as the max limit is now 12L, then the max possible tax saving from RGESS would now be more than rs 5000? Am i right sir?
DOUBT in the difference between Tax exemption and tax deduction.
Interest on Savings Bank deposit is allowable as DEDUCTION upto Rs.10000 under section 80TTA of the Income Tax Act,1961.Interest on savings deposit is an income and not spending,then why is that called/termed as “DEDUCTION” and NOT as “EXEMPTION”.
how much money is to be invested to save 7000 income tax for the calender year 201314
hi,
my salary is 500001 and monthly tax is deducting incometax 800 and 200 other tax.
i want to save this money.pleaes guide me what procedure needs to be follow.
and already i have done ING insurance policy of rs 1,35,000. and per year need to pay 55,000.
Check out PPF or VPF..
please provide answers
Why is Pranab not allowing people with annual income of Rs.10 lakh or above, to invest in this scheme?
Ans:because above 10 lakhs the profit a person gains is only 7500/(u can check a person getting 11 lakhs and 15 lakhs where they get the same profit by investing in RGESS ==7500/)
Why is Pranab not allowing people with annual income of Rs.10 lakh or above, to invest in this scheme?
Ans:because above 10 lakhs the profit a person gains is only 7500/(u can check a person getting 11 lakhs and 15 lakhs where they get the same profit by investing in RGESS ==7500/)
thank u sir plrase post the answers for the above questions also
The income tax is calculated on the “Qualifying Amount” after all your savings, exemptions and deductions. NOT on your whole gross annual salary. Say for example, your CTC is Rs.1000000 p.a and you have shown investment declarations for tax exemptions upto Rs.500000, then the tax will be calculated on the balance qualifying amount which is Rs.500000.
But you can tax deduction is allowed only up to 100000 savings
I have been paid Rs.50000 for getting coaching for IAS main examination whether the amount will give rebate for income tax or not
answer for the shortcut tip tax deduction is calculated on spending so even if the person had spent 50000 on the scheme the total spending is only 25000 so ,acc. to tax deduction 10% of 25000=2500 and that much is deducted from the income.
nicely explained ,,,must be appreciated
sir , how can i get old basic economy articles of yours ???
sir if income is 4lacs then 4lac X 10% = 40,000
if it is 5lacs then 2lacs X 0%
3lacs X 10% = 30000
is this correct …………… less income less tax to be paid na sir
Sir if income is Rs. 4,00,000
then on 1st 2,00,000 Nil
and on next 2,00,000 @10%= 20000
Total Tax payable= 20,000/ 0n Rs.4,00,000 (in no decuction is allowed).
got to know sir
Sir my annual salary is INR 2000000 (Twenty Lakh). I have LIC for INR 90000 per anum, My daughter school fee INR 9000 per month, I pay rent at two place like in delhi where my family staying INR 10000 per month, in mumbai I stay alone INR 6500 per month. My wife had undergone kidney transplant operation last month so I have spent couple of lakhs in hospital. How much tax I need to pay and how I can save some more money from TAX according to a legal law in our country
spectacular job 4 enlightening
very much helpful for me.
@Banani Das the ioc girl….
my annual income is 7lakhs and 25thousand
how much I have to pay for tax
Kya LIC policy krvsne k baad b tax pay krna pdta hai.
My annual income is 10 Lakhs. please guide how much i have to pay for tax.