Question

Somu earned a monthly salary of Rs 17500 . He contributed Rs 5250 per month towards LIC premium. Find the income tax paid by him (in \(\mathrm{Rs}\) ). (1) \(20094.50\) (2) \(21016.50\) (3) \(21052.50\) (4) \(21078.50\)

Short answer

Answer: (1) 0

Step-by-step solution

Calculate Somu's Taxable income

Somu's total income in a year is his monthly salary multiplied by 12, and the LIC premium he pays each month is Rs 5250. We'll subtract his total LIC premium in a year from his total income for the year to find his taxable income: Total Income = Monthly salary × 12 = Rs 17500 × 12 Taxable Income = Total Income - (LIC premium × 12) = 17500 × 12 - 5250 × 12

Apply Tax Brackets to Calculate Income Tax

In this step, we'll apply the tax brackets according to the Indian Income Tax Act. Assume the following tax slabs (these are subject to change, please check for current tax slabs): Tax Slab: - Up to Rs 2,50,000: No tax - From Rs 2,50,001 to Rs 5,00,000: 5% - From Rs 5,00,001 to Rs 10,00,000: 20% - Above Rs 10,00,000: 30% First, we need to calculate the amount of income that falls under each tax slab: Taxable Income = Rs 17500 × 12 - Rs 5250 × 12 = Rs (17500-5250) × 12 = Rs 12250 × 12 Taxable Income = Rs 1,47,000 Now, we will apply tax rates on the taxable income: Since the taxable income is less than Rs 2,50,000, there is no tax payable. Therefore, based on the given options, the income tax paid by Somu is: (1) 0 None of the given options is the correct answer, so we can conclude that either the question is incorrect or incomplete.

Key concepts

Taxable Income

Understanding taxable income is essential for any individual trying to navigate their fiscal responsibilities. In essence, taxable income refers to the amount of a person's income that is subject to tax, after all deductions and exemptions have been subtracted from their gross total income.

Taking the case of Somu, whose monthly earnings are Rs 17500, we start by calculating his annual income, which amounts to Rs 17500 multiplied by 12. However, not all of this constitutes taxable income. Deductions play a crucial role in determining the final taxable amount. For instance, premiums paid towards life insurance policies, such as the LIC premium in Somu's situation, are eligible for deduction under Section 80C of the Indian Income Tax Act. These deductions effectively lower the overall taxable income and thus potentially the tax liability as well.

In Somu's case, the annual LIC premium paid is Rs 5250 per month, which leads to an annual deduction of Rs 5250 times 12. To find the taxable income, this total deduction is subtracted from Somu's gross annual income, resulting in his taxable income for the year.

LIC Premium

Life insurance is not just a tool for financial security but can also provide tax benefits. A premium paid for Life Insurance Corporation (LIC) policies is one such avenue. Under the Indian Income Tax Act, specifically Section 80C, premiums paid towards LIC policies are eligible for a deduction from the gross total income before computing taxable income.

This serves dual purposes: it ensures that individuals are encouraged to invest in life insurance for their long-term financial well-being, and it offers a way to reduce tax liability legally. For a clearer picture, consider Somu's monthly LIC premium of Rs 5250. Over the course of the year, this amounts to Rs 5250 x 12, which he can claim as a deduction from his total income. It is instrumental to note that there are limits and conditions to such deductions, so it's essential for policyholders to be aware of the current regulations.

Indian Income Tax Act

The Indian Income Tax Act serves as the cornerstone for income tax regulation in India, establishing the framework for calculating and collecting taxes from individuals and corporations. One of its critical aspects is defining tax slabs, which determine the tax rates applicable to various ranges of income after deducting eligible savings and investments like the LIC premium.

The act prescribes different percentage rates for different income brackets, ensuring a progressive tax system. For example, based on the tax slabs provided in the exercise, if Somu's taxable income falls under Rs 2,50,000 after deductions, he would not be subject to income tax. This is often referred to as the tax exemption limit.

To stay compliant and optimize tax liability, understanding the tax slabs, deductions, and exemptions outlined in the Indian Income Tax Act is vital. Moreover, since tax laws may change annually, keeping abreast of these developments is crucial for accurate tax calculation and filing.