Benefits of Credit Cards

This article will provide you a crisp idea, "why you should have a credit card". A credit card, typically issued by a financial institution like a bank, is a plastic card enabling the cardholder to borrow funds for purchases or services. It serves as a widely used and convenient payment method, extending a line of credit to the user. When utilizing a credit card for a transaction, one essentially borrows money from the card issuer and is obligated to repay the borrowed amount within a specified period, usually on a monthly basis.

Key characteristics of credit cards encompass:

Credit Limit: The maximum amount that can be borrowed using the credit card, determined by the card issuer based on factors like creditworthiness, income, and financial considerations. You can also modify, increase or decrease your limit any time within the permissible limit provided by the service provider.

Interest Rates: If the full balance is not paid by the due date, the remaining amount accrues interest. Credit cards often feature variable interest rates, which may be relatively high compared to other credit forms. One major point here is that the in case of non-payment the interest charged is immensely high and charged on per day basis. 

Grace Period: Many credit cards provide a grace period, typically spanning from 21 to 25 days after the billing cycle ends, during which the borrowed amount can be repaid without incurring interest charges.

Fees: Various fees, including annual fees, late payment fees, and cash advance fees, may be associated with credit cards. Awareness of these fees and card terms is crucial. Read the charges schedule attached with the card carefully. 

Rewards and Benefits: Some credit cards offer rewards programs, cashback, or perks such as travel rewards, discounts, or redeemable points for merchandise and services. You can book flights, travel tickets, hotels. With redeemable points you can also shop or convert them in cash (in specific facilitator case like HDFC).  

Security Features: Credit cards commonly include security features like fraud protection, zero-liability policies, and the ability to dispute unauthorized transactions.

It is imperative for cardholders to use credit cards responsibly, managing expenditures within their means, and ensuring timely bill payments to avoid accumulating debt and facing high-interest charges.

Advantages of Credit cards

Advantages of Credit Card Bifurcation

Credit cards provide several advantages when used responsibly, including:

Convenience: Offering a hassle-free way to make purchases without the need for large amounts of cash, credit cards are widely accepted globally, facilitating online shopping and travel.

Building Credit History: Responsible credit card use, such as timely payments, contributes positively to one's credit history, essential for favorable terms on loans and mortgages.

Building Credit score: Use of credit card helps you to build your credit score and enhance your Credit rating, CIBIL score. Which helps to get better future finances at economic rates. To understand  better go my specific blog Taxolawgy With Priyanka Tiwari: Credit Score

Emergency Fund: Serving as a financial safety net during unforeseen expenses, credit cards offer quick access to funds in times of need.

Rewards and Perks: Many credit cards feature rewards programs, providing benefits like cashback, travel rewards, and various perks, enhancing the overall cardholder experience.

Security Features: With fraud protection, zero-liability policies, and dispute mechanisms, credit cards offer security layers for transactions.

Grace Period: The grace period allows interest-free use of the credit card if the balance is paid in full each month.

Building Financial Discipline: Managing a credit card entails budgeting, timely payments, and understanding credit terms, fostering responsible financial habits.

Travel Benefits: Certain credit cards offer travel-related advantages, including insurance, rental car coverage, and airport lounge access, enhancing the travel experience. People mostly enjoy the lounge access at airports the most.  

It's crucial to recognize that while credit cards offer numerous benefits, responsible use is essential to avoid accumulating debt and negatively impacting one's credit score through actions such as maintaining a high balance or missing payments.

Relevant blogs : 

Introduction to Mutual Funds : Taxolawgy With Priyanka Tiwari: Introduction to Mutual Funds

How to improve your CIBIL or Credit score : Taxolawgy With Priyanka Tiwari: How to improve your CIBIL or Credit score

How to Safe Tax over Arrears or Advance of Salary Received

 

"Every Penny saved is Every Penny Earned". Salary is the sole source of income for many people. Many of the time salary increment is made due and afterwards paid as arrear salary in the next financial year or subsequent financial year. There might be other reasons as well for this arrear salary receipt. In this Covid 19 pandemic it is most likely to expect that many employees are going to receive their salary in the form of arrears in upcoming financial year. These arrears of salary attracts Extra Tax burden. And many of the people unknowingly pay this extra tax. With this blog I ‘am going to share the tax saving tool with the help of which you can save this extra tax.

YES, this EXTRA TAX payout over arrears of salary can be SAVED by claiming relief. Right now your mind must be full of curiosity, like what, how, when etc. Let’s understand everything in simple and easy manner without wasting any more time.  Lets discuss the whole concept.

Arrear Salary

Arrear Salary is the salary for any past previous financial year, which is received in the current financial year. For example, as central government has paid their employees the 7^th grade pay salary in the current financial year (2019-2020) in the form of arrear salary.

How does Arrear Salary Troubles Employees ?

It is a very clear concept that you have to pay tax on your current year earnings and every person does that as a normal routine in very financial year. But when it comes to receiving arrears the income of the financial year in which it is received turns to increase, which results in increase in salary of the respective financial year. Due to this increase in salary the tax liability increase after receiving Arrears :-

—  As it is an EXTRA SALARY over your usual SALARY, its increases the taxable income of the employee and conclusively ATTRACTS more tax.

—  It might take your income from exempt income level i.e. non-taxable income to taxable income level.

—  It might disown/disallow you from the tax rebate of Sec. 87A, which is a kind of tax discount provided to assessee. Tax Rebate for F.Y. 2020-21 is Ruoees 12500. 

Usually the employer deducts tax on employee’s salary in the form of TDS (Tax Deducted at Source). And this usual routine happens in the year of receipt of arrear salary as well. The employer deducts TDS in the year of receipt of arrear salary which is a higher tax amount as is deducted over arrear salary too.

Why High Tax Burden ?

In case of receiving arrear salary the irony is that in one hand you are receiving extra salary but on the hand you are also receiving extra tax burden. The actual fact is that arrear salary belongs to a previous financial year but is received in the current financial year. The employer deducts the TDS on the basis of current year salary receipt.

Now the big question is how we can save this extra tax liability. In the normal course of business if this arrear salary would have been received by the employee in the previous year to which it belong the tax burden might had been mitigated or lessen. If it was received in the previous year of its belonging the tax might be less as the respective year income was less, but it is paid as an add-on the current year income it results in higher tax liability.  

How to save this Extra Income Tax  ?

The answer is “Claim Relief under Section 89 (1) of the Income Tax Act”. Its says that if an assessee receive salary in arrear or advance in a financial year or receive more than 12 month salary in a financial year may be given relief for the same under the section by the Assessing Officer. The Assessing officer provide relief on the basis of Form 10E Filed and Income Tax return submitted. It provide relief from the tax which is excess as compared to the actual tax liability. For this it has the below explained calculation.

How to Claim Relief under Section 89 ?

File “Form 10 E” online to avail the benefit under Section 89. After filing “Form 10 E” file your income tax return for the respective financial year and claim relief under Section 89 in the respective income tax return.

How the calculation is done for the relief ?

The calculation can be understood in the following steps :

Step  1 : The Excess Tax paid/deducted in the current financial year :

• First calculate the Tax Liability of the current year including the arrears of salary and excluding arrears of salary. 
  
• Then take the difference between the tax which is paid on total income including the arrear salary, and Tax Which is to be paid on total income excluding the arrear salary. 
• This gives the Excess Tax paid/deducted in the current financial year. 

Step  2 : Calculate tax which is to be paid over the arrears Salary,  considering it as the Income of the year to which it belongs :

• Now calculate Tax Liability of the financial year to which arrear salary belong, considering it is received in that year. 
• This will give actual tax to be paid in that year including arrear salary in total taxable income.

Step  3 : Then it calculate the Tax dues of the respective year to which arrear salary belong :

• As you had already paid tax or reported your income in the previous financial year to which arrear belongs by filing Income Tax Return. 
• The arrear salary will result in certain tax due which has to be paid in the current financial year.

Step 4 : Tax Relief :

• Calculate excess Tax paid/deducted in the current financial year (as per Step 1) Less Tax dues of the respective year to which arrear salary belong (as per Step 3) 
• (Step 1) less (Step 3).
•  This will give you Tax Relief

Benefit

The tax relief will be provided to you in the form of refund. As your will file your income tax return after filing Form 10 E and then claim Section 89 Relief. You will be provide a INCOME TAX REFUND.

If wish to see practical example with explanation in simple way then go to the link and see the real life example with values and refund amount : https://youtu.be/vN1gqT-yXpE

This is how one can save tax over his arrears of salary and advance. I hope you all liked the blog. Please don't forget to like and subscribe.

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Disclaimer :

The above blog is purely for educational and  guidance purpose. It's just the reflection of the author's personal experience and judgment. The author has just provided the general information & understanding and its not at all an alternative of any legal advice or practitioner. The content stated in the blog should be used by the reader at his own discretion and sole responsibility. The content of the blog can be only used for any other document, write-up, article, blog and any written or printed material whether on paper or digitally in any form, with the prior permission of the author.