Our whole lives, we run towards adding extra figures to our salaries, but the key to financial freedom lie in being able to manage whatever number of figures your career has and making your money work for you.
The more you will know about money and utilize the learnings, the easier will it get to make money! This month we bring you two important did you know facts, which will make you more informed about your money and help you take right financial decisions.
1. Did you know it isn’t true that the more you earn, the more you will have to pay in taxes on whole of your income?
Recently I received a message from a reader saying, “I am thinking of spending my spare-time in earning extra money, but once I do that my income will jump the present tax bracket and reach a higher bracket, and all the gains I will receive from this extra work will get nullified. What should I do?”
Looking for tax gains is good, but it’s important to have complete information first. Most people don’t understand how income taxes are calculated.
The tax bracket you fall into is NOT the tax rate you will pay on all of your income. If you fall into 20% tax bracket, this doesn’t mean you will have to pay 20% of your income in taxes. Then, how one’s taxable income is determined?
Let’s understand tax slabs with an example.
Say, Ram earns an annual income of INR 2.5 Lakhs. To increase his income, Ram teaches in his spare-time and his income rises by 30%. So, how his income will now be taxed?
In India, income tax slabs for individual taxpayers go like this:
Income Slab Tax Rate
For Income up to INR2,50,000 No Tax
Income from INR2,50,001 to INR5,00,000 5%
Income from INR5,00,001 to INR10,00,000 20%
Income above INR10,00,000 30%
Before income rise, Ram’s annual income was INR 2.5 Lakhs which comes under No Tax slab. So here, he wouldn’t pay any taxes.
After an income rise of 30%, Ram’s annual earnings will become INR3.25 Lakhs. So how Ram’s taxes will be calculated now?
Here’s the math:
For Income up to 2.5 lakhs, Ram will pay= No Tax
For remaining income, i.e. 75,000 (3.25 lakhs – 2.5 lakhs), Ram will pay= 75,000 × 5% = INR 3,750, because any income earned above 2.5 lakhs and goes up to 5 lakhs comes under 5% slab.
Thus, Ram will give 5% tax on the extra income earned, not on the total income.
What most people fail to understand is, they don’t have to count all of their income into the tax bracket they are falling; they only have to consider the extra income they are earning.
For example, if somebody is falling under 5 to 10 lakhs tax slab, they will be charged no tax up to 2.5 lakhs of their income and will be charged 5% on the income between 2.5 lakhs to 5 lakhs and 20% on income earned above 5 lakhs.
Thus, a higher tax bracket doesn’t mean you will have to pay higher taxes on all of your income.
2. Did you know in electronic money transfer, only account number matters, neither IFSC code nor beneficiary’s name?
Online transfer of funds has grown because of the convenience involved in digital transfer. But have you ever thought what would happen if you wrongly type the account number and money gets transferred to a wrong account?
Well, let me break it to you- You cannot do much if you mistakenly make a wrong electronic transfer because most banks use only account number to approve a transaction and ignore all other details provided during the transfer.
Even RBI guidelines states: “Responsibility to provide correct inputs in payment instructions, particularly the beneficiary account number, rests with the remitter/originator. While Beneficiary’s name shall be compulsorily mentioned…reliance will only be on the account number. The name field will only be…used for post-credit checking or otherwise.”
This means, it is not compulsory for banks to match the names before approving an online transaction. It is payee’s responsibility to enter right sender’s details. The transaction will go through even if beneficiary’s name doesn’t match. The trouble with name-mismatch will arise only later, if at all.
So, what can you do if you erroneously transfer the money to a wrong account?
You will be confronted with three situations.
First- You punched in an account number which doesn’t exist. In this case, the money will automatically come back to your account.
Second- You punched in a wrong account number which exists, but the beneficiary name you entered doesn’t match with the account holder’s name. In this case, if the beneficiary bank has a name-matching mechanism, they would reject the credits and money will come back otherwise the transfer of credit will be accepted. Please note, the practice of name validation is neither mandated by RBI nor widely used by banks. In case bank don’t have a name matching mechanism, they will transfer the funds to the wrong beneficiary, and you would be left with no option but to submit requests at your and beneficiary’s bank for the reversal of funds. Will you get the funds back or not, entirely depend on the discretion of bank and end-beneficiary.
Third Situation- You punched in a wrong account number which exists and the beneficiary name you entered coincidentally matched with the account holder’s name. If this happens, you will have no recourse, but legal or moral. You can try to contact the wrong beneficiary and ask him/her to send your money back on moral grounds, and if that fails, all you can do is filing a legal case.
Note: If you enter a wrong account number, nobody will be liable to pay your money back. Be prepared to go through a long mediation process of filing request applications, contacting banks and requesting the wrong beneficiary, etc.
Our suggestion: While typing account number, check & re-check. And if you have to transfer a large sum to somebody, first transfer a very small amount and when that goes successful, go for the bigger amount.
Knowledge is Power! Knowing these lesser known facts, you have just raised your understanding about money.