Difference between Service Tax and Service Charge in Restaurant bills

A lot of people don’t understand the difference between Service Charge and Service Tax levied in Restaurants and end up questioning (even fighting) with the restaurant manager. This is becoming more of a problem now that the Government has said that the public doesn’t have to pay Service Charge if they are unhappy about the service.


Lets clear this quite popular and controversial question for all. Let me draw a sample restaurant and bar bill. Lets assume you had some food for Rs.1000 and some cocktails for Rs.1000. Now how much extra are you going to pay and to whom does this money go to?

Restaurant/Bar Bill
Particulars Amount
Food 1000
Alcohol 1000
Sub Total 2000
Service Charge (10% of sub total) 200
Service Tax (5.6% of sub total + service charge) 123.2
Swacch Bharat Cess (0.2% of sub total + service charge) 4.4
Krishi Kalyan cess (0.2% of sub total + service charge) 4.4
VAT (12.5% on food items) 125
VAT (20% on on Alcohol) 200
Total 2657

Service Tax

Service tax is a levy collected by the Central Government for the provision of certain services. The service tax has to be paid by the service provider to the government, and in turn the service providers pass on the amount to the customers.

Taxable services include travel agency, courier services, chartered accountancy, banks, fashion designing, internet cafes, cab rentals, architectural services, telecommunications, and health clubs. Applying service tax on restaurant bills is slightly trickier. If the restaurant has only a non air-conditioned room for its patrons, they don’t have to pay service tax to the government. But if they have a air-conditioned room, they will have to pay service tax to the government even if you didn’t eat in the air-conditioned room. The government wants its money from everyone they can get their hands on.

As of FY 2016-17, the Service Tax component is 14% and it the same across India. Add on a Swach Bharat Cess (money that the government should use build a cleaner India) of 0.5% and a Krishi Kalyan Cess (for improving agriculture and farmer’s welfare) of 0.5%. The total service tax you would have to pay is a round 15%

For restaurants, it is still tricky (they don’t want us to eat in peace, do they?). The government has decided that of the entire amount 60% of it is raw materials of the food/beverage and remaining 40% is the service part. And it makes sense to only levy service tax on the 40% service part, right?

So applying 15% of service tax on 40% of a total comes to another round 6%. Eg: Lets say you eat something for Rs.100. You have to pay 15% service tax on 40% of the Rs.100 = 15% * Rs.40 = Rs.6. This Rs.6 is paid by the restaurant to the government.

Do remember to check for the service tax number at the top of the restaurant bill. If it isn’t mentioned, the restaurant has no business charging it and they might just pocket that money.

Value Added Tax

Value Added Tax or VAT as it is popularly called is levied on any item that are sold in an improved form, meaning some value was added before selling to you. Lot of goods and services are charged VAT at various stages before it reaches the consumer.

In restaurants, VAT is not chargeable on packaged items such as drinking water, bottled alcohol and food. But it is applicable on food and drinks/cocktails prepared in the restaurant kitchens/bar.

VAT is a state tax, so the rate differs from each state and on the type of product. VAT on food items might be different from VAT on alcoholic beverages.

Service Charge

Now coming to the controversial part of the bill. Service Charge is NOT a government charge. It is just another fancy word for Tip. In many countries the waiters and restaurant staff are not paid enough and have to live on the tip they receive from the patrons. It is common to pay anything from 10%-25% of the total bill in those countries.

Now in India since there are no strict working hours, many restaurant staff work for more than 14 hours daily. And naturally they aren’t be paid hourly wages and the salary depends on your experience.

Only a very small percentage of people give tip and the restaurant either had to pay more salary or lose the employee. Some high-end restaurants began charging a mandatory 5% or 10% service charge so that the customers clearly know how much money they are giving to the staff.

Few years back only very few restaurants added a service charge and it was reasonable. People were also happy with the service received to give that service charge. But there are a few restaurants who became greedy and since customers weren’t educated on the difference between service charge vs service tax, began to add more service charge even without providing good service.

So the government had to come in and regulate this saying if the customer felt that the service he received wasn’t satisfactory, he can refuse to pay the service charge.

What will happen in the future?

Now whenever the government tries to regulate any free market, the market will course correct itself. With the new law if more and more customers are going to reject the service charge and also refuse to pay a tip because they are miserly, the restaurant will increase the price of the food item. Instead of being transparent, now the price will be factored into the bill somehow.

People should be reasonable and if they liked the service of the wait staff, they should happily pay a nominal tip. That few hundred rupees you give as tip would make sure that the waiter remembers you and gives you better service the next time around.

Remember this the next time you eat and whenever someone is confused about the charges in a restaurant bill, point them to this article.

How much taxes should you pay on dividends?

Dividends are a way to get easy profits, without even having to work in a company. But lot of people have the question of how much taxes does one owe to the government. Here is the easy answer:


Yes, you read that right. Shareholders do NOT have to pay any taxes on dividends earned. That is great right? You get all the profits from the company and you also don’t have to give to the government any share.

But the government wouldn’t give up on such an easy money, right? True. That is why the government asks the company to pay something called a Dividend Distribution Tax (DDT). The company needs to pay a flat 15% DDT on all dividends that it wants to distribute to the shareholders, even before it pays out the dividend. On the 15% DDT, they also need to pay 10% surcharge and an education cess of 3% – leading to a total of 16.995% (FY 2013-14).

You as a shareholder do not have to worry about all this, as the DDT is paid for you by the company directly. So any money you get as dividend in your bank account is tax-free. You may think that it is great, right? Company handles all the taxation and you also get nice profit as an investor.

But remember you do lose 16.995% of your money to the government. Since dividend is calculated on after-tax profit of the company, DDT is an extra expense for your company. Remember, Income tax on profits is 30% (+surcharge +cess) and whenever the company declares dividends, an extra 15% (+ surcharge +cess) is paid.

Almost 50% of your money (earned in the business) is given away to the government whenever you get dividends. That is why there are two kinds of companies:

  1. which gives regular dividends to the shareholders
  2. which retain the maximum profits for developing more value out of the system (best example was Apple when Steve Jobs was alive)

Both of these companies are important and shareholders need to have both types of companies to get the best returns out of his investment. Since, India doesn’t tax dividends in the hands of shareholders, many experts will suggest investing in companies which give regular dividends with high dividend yield. At least you get back some money from your investment – almost like a FD in some cases.

Getting back a nice fat cheque (of Rs. 6 crores) tax-free every year is a good enough reason, if you ask me. And as long as the government uses all this money to improve the infrastructure and for the general public, it is a win-win situation for everyone.

5 reasons to start your tax planning today

Many salaried employees suddenly wake up in January and begin investing in various assets for tax planning for the financial year (which in India is from April to March of next year). They rush to take numerous insurance policies (usually from some LIC agent in their office) and by March they are pretty pissed out.

Reason: Almost all their salary for the three months (Jan/Feb/Mar) has gone to these unwanted tax savings and this is one of the main reason they begin to hate Income Tax.

It need not be like that. There is a reason it is called “tax planning“. The best time to begin planning your tax savings is in April – the beginning of the new financial year. Here’s why:

Easy on your pocket

If you split your investments into 12 months instead of trying to cram it all up in 3 months, the total outgo on your salary becomes manageable. Lets say your salary is Rs.50,000 per month and you have to invest Rs.1,00,000 in 80C. Investing Rs. 1 Lakh in 3 months is more than Rs.33,000 per month. While spread in 12 months is slightly above Rs.8300.

Which is easy? Taking home Rs.41700 per month for the entire year? or Rs. 16000 per month in the last 3 months? What would you do if you need some money for an emergency in February?

Which would you like? The first image? Or the second image?

Last Minute Tax Saving
Salary affected maximum in last 3 months
Regular Tax Planning
Salary affected minimum per month

Easy on your mind

Last minute rush can be taxing on your brain and you don’t want to be running all around the place to get your finance right. Especially if your Annual Performance Review is around the corner, you better spend all your creative power on your work and get a better pay raise than fighting the tax headache. Getting that higher salary can be much easier and more beneficial to the growth of your investments than you trying to save few hundreds of rupees here and there.

Investing Early

There is a saying “The best time to invest was Yesterday (or last year or 34 years back). The second best time to invest in today.” I have already shown you examples of how starting your investments early can make a significant difference to your retirement corpus. By beginning to invest today, your investments would be growing at a much faster rate than 90% of others around you. Remember this site is about getting richer than what you were yesterday, also richer than your friends/colleagues around you.

Investing in the correct products

Investment decisions cannot and should not be taken in a split second. You need to spend lot of time thinking about the various investments products and assets before putting your hard-earned money. Whatever asset classes you invest in, there will be a lot of volatility in the price – be in stocks, bonds, gold, real estate. Even your bank FD interest rates can change any day. When you have the time to think, you can invest your money in the correct products at the right time.

Systematic Investment

If you are young, majority of your investments should be equities. And equities is one of the most volatile asset. So what is the best method to invest in such products? Systematically. That is why mutual funds have monthly mode as the most common SIP (Systematic Investment Plan) option. If you put in your money every month, you are going to get on average much higher number of units than doing a lump sum payment.

Also if the markets are at the peak like in January 2008 you made a lump sum investment you would have gotten back your money only recently (after this election rally). You would have lost 6 whole years and that is a risk no one should take.


Remember these reasons when you think about tax planning or any investment for that matter. It is not that difficult as you can set almost everything up as automatic investments and you wouldn’t even have to think about it at all for the rest of the year.

ULIP? Pfft, get better returns & insurance cover on your own

Lot of people get misguided into buying Unit Linked Insurance Policy (ULIPs) by insurance agents. I happened to read the application form of a person who recently applied for HDFC SL ProGrowth Flexi Plan. Reading that, I wondered if I could come up with a better plan than this ULIP plan – with better returns and better insurance cover.

First let me give a brief introduction about the person. He is a 41-year-old male living a few streets down from my home. He has his own fruits shop in the Koyembedu Wholesale Market Complex (the largest in Asia). He is a healthy person, married and has a 7-year-old kid. His income is about Rs. 800,000 per year everything from his business.

Unit Linked Insurance Policy

His policy is for 10 years with a cover of Rs. 600,000 with his kid as the nominee. For this he pays a monthly premium of Rs. 5000 (Rs. 60000 per year). End of 10 years he would have paid Rs. 600,000 as his premium with a life coverage of just Rs. 600,000.

Since this is a unit linked policy, if the market performs better, his fund value and his investment also increases. But by how much? The insurance companies need to show a projected statement of premium, fund value, death benefits, etc., for 4% and 8% returns. If he dies anytime when his policy is valid, his son would minimum Rs.600,000. No problem with that.

Lets look for the most likely scenario – he lives through the term of the insurance and after 10 years gets back his investment. At 4% return he would get back Rs. 623,135 and at 8% rate he would get back Rs. 764,405 after 10 years. Lets take the higher 8% as our calculation from here on. So he earns Rs. 164,405 extra from an investment of Rs. 600,000 over 10 years. But that looks a bit low isn’t it? Can we do better?

I am assuming he wants to invest the same money (Rs. 600,000) for about same number of years (at least 10 years) and get same insurance cover (minimum Rs. 600,000). There are two parts to this investment. Part of the money needs to be for insuring his family/son against his sudden death. The remaining money can be invested in some other instrument. Remember, he might have applied for this ULIP to get tax benefit under the section 80C. So our proposed investment should also get benefits under 80C.


First, he should take a term insurance to protect his family in case of his death. Using HDFC Life’s Click2Protect calculator, for an insurance policy cover of Rs. 10,00,000 (the minimum available) and 10 years, he has to pay a premium of just Rs. 2980/year. Lets round it up to Rs. 3000 for easy calculation.

Term Insurance Premium Calculation
Term Insurance Premium Calculation

This is the amount he needs to pay for just insurance and he gets extra cover of Rs. 400,000 than the ULIP. I would suggest he go for at least 15-20 years as his son would’ve just joined college (at age 17) when the policy term completes. If he dies at year 11 (age 52), his family would have no income as the kid hasn’t yet started earning. Increasing the term to 20 years would just increase the premium by extra Rs. 900 only (Rs. 3880).

But just for the  sake of comparison with the ULIP let’s go with the 10 years policy of Rs. 10,00,000.
Premium paid: Rs. 3000/year.
Remaining money to invest: Rs. 57000/year.


There are many forms of investment under 80C, like PPF, Home loan principal repayment, National Savings Certificate, ELSS mutual fund, etc. Let me just take two of such investments. One is the most safest and the other will be investing in equities (just like the ULIP scheme). Lets see how they compare against ULIP.

Public Provident Fund (PPF)

This is the most safest and best investment if you want assured returns. An individual can invest a maximum of Rs. 100,000 per year in it. He needs to be invested for minimum 15 years. However the minimum deposit needed to keep the account active is just Rs. 500. So lets assume he invests all Rs. 57,000 in PPF for 10 years and from year 11-15 he deposits just Rs. 500 to keep the account active. He can make monthly deposits of Rs. 4750 and his PPF account keeps accumulating all the money.

How much do you think the money grows to, if he puts in Rs. 57,000 per year till 10 years at the current rate of 8.7%? At the end of 10 years he would have Rs. 927,966 and if he just keeps putting in the minimum deposit for 5 more years, at the end of year 15 he would have a cool Rs. 1,411,484. What? 14 lakhs? That is more than double his investment, in fact Rs. 811,484 more than the Rs. 572,500 he puts in.

PPF Returns PPF Returns graph

ELSS Mutual Fund

ELSS or Equity Linked Savings Scheme puts your money in the stock market and the government gives 80C benefits for money put in this scheme. Lots of mutual funds have ELSS schemes and while not everyone is good, there are some better performing schemes also. It is locked in for 3 years and since long-term capital gains in Equities aren’t taxable, any money he takes out after the lock-in period is totally tax-free.

I know it is not fair to do an investment just based on previous fund performance, but we can’t predict the markets to do a future performance calculation too. So let me take a fund which has been in existence for at least 10 years and lets see how much a monthly investment of Rs. 4750 would’ve grown. I chose ICICI Prudential Tax plan and the investment was from April 1, 2004 to March 1, 2014. We stayed on this scheme throughout the bull and bear markets. This is just for a comparison and the performance might not be sustainable in the future and this isn’t a recommendation for this fund/scheme.

ICICI Tax Plan SIP Returns

See how much it would’ve grown in 10 years? Rs. 1,208,195. Rs. 12 lakhs in 10 years. Which is significantly more than what he would’ve got in PPF (remember it was just Rs. 9.27 lakh in 10 years). Even more interesting is, how it is phenomenally more than what he would’ve got if invested in the ULIP’s feeble 8% rate. Plus ELSS has the lowest lock-in period of just 3 years among all 80C investments. 

Even assuming that ULIP gives better than the 8% rate, lot of the initial money he invested goes into managing the fund, agent’s fees, etc. But direct investment into ELSS means no such losses and all his money is invested under his name. So it’s returns will be definitely less than you investing directly in other mutual funds.

How does all three options stack up?

At the end of year 10, his investment in the three options will have grown to Rs. 7,64,405 in ULIP vs Rs. 9,27,966 in PPF vs Rs. 12,08,195 in ELSS Mutual Fund (based on past performance). Even if we add 1 or 2 lakhs to ULIP because the markets might have performed well, it would be definitely lower than investing on your own.

1 55195 61959 81487
2 114011 129308 231046
3 178432 202517 273011
4 247092 282095 356335
5 320285 368597 265687
6 397984 462623 678394
7 480893 564831 809133
8 569413 675930 838142
9 663886 796695 952014
10 764405 927966 1208195


What if he dies before 10 years?

Now lets see what happens if he dies before the term completes – for example, on the last month of his 10th year into the policy/investment.


From seeing the official illustration of the ULIP application, I see that on death the nominee gets back just the insured amount, in this case Rs. 600,000. If he happens to die on year 9 the payout is Rs. 663,886 and on year 10 is Rs. 764,405 if the fund performs at 8%. His family doesn’t get anything more than that.

Term Insurance + PPF

If he had invested as suggested above, his insurance is separated from his investment. So on death his insurance company will pay Rs. 10 lakh (remember how Rs 10 lakh was the minimum in term insurance). But his PPF account is separate and all his investments will also be available for the nominee immediately upon his death.

So if he dies on year 1, the amount received is Rs. 10 lakh + Rs. 61959 and on year 10 his son will get Rs 10 lakh + Rs. 927,966. Double Benefit. That is the advantage of keeping your investment and insurance separate.

Term Insurance + ELSS

The logic behind this is similar to Term Insurance + PPF. Only catch is instead of immediately getting the invested money, the nominee has to wait for a 1 year lock-in to complete since the buying of the original units by his father. His kid will get both Rs. 10 lakh from the insurance company and the money he invested in the mutual fund. He could let it grow in the same scheme or switch to a different scheme if needed.

How difficult to set this up?

Actually it isn’t that different from starting a ULIP. You can use the help of an agent or even do most of this online. Both your term insurance and PPF/ELSS can be setup to take money from your savings account automatically. Insurance payment is done once a year, so that is quite easy. PPF/ELSS has the advantage of investing either monthly as SIP or investing in lump sum each year.

Investing monthly is better as one doesn’t have to worry about cash crunch in a particular month. Rs. 4750 every month for some one who earns more than Rs. 60,000 every month isn’t a very high amount. Also SIP gives the benefit of Rupee Cost Averaging to get more units when the market is at the lows.


Instead of accepting what an insurance agent (should we say “insurance seller”) says, it’s better to think on our own and see if we can get better returns. Remember “Do Not mix Insurance and Investment.” Next time someone tries to sell you an insurance policy, ask them how they can give better returns & coverage than your own term insurance + investment plan.

Ask them to give in writing that their plan is safer than term insurance + PPF or gives better returns than term insurance + ELSS. I am sure no insurance agent will be able to do it.


If you want safe returns: Buy a term insurance and invest the remaining money in PPF.
If you are willing to take some risks: Buy a term insurance and invest the remaining money in ELSS Mutual Fund.
If you want the best of both world: Buy a term insurance and invest half the money in PPF and remaining half in ELSS mutual fund.

Mistakes I made trying to save tax

When I started on my first job, I didn’t know much about income taxes and how to save money on paying it. So I let my Dad to handle all my tax savings. There were many mistakes that were made as a result of that.

Buying traditional LIC policies

Technically my dad can’t be blamed for taking these LIC policies. Because thats what he did when he started earning. During those times Life Insurance Corporation of India was the only company which provided life insurance and it was the only way to save a bulk on your income tax.

That is no longer true as there are numerous other companies which provide Term Life Insurance with quite a large amount of life cover at very low prices. Spending almost Rs.45,000 per year on LIC policies to get the 80C deductions is a complete waste of money.

At least my dad invested in 5 separate policies in a staggered manner (one every year) and they were money back policies. So every year one policy will return back a portion of the money invested. This reduced the amount of outgo every year, as the cheque I receive from LIC will pay a part of the premium every year. This is much better than the endowment policy which gives your money only at the end of the term.

Investing in ULIP

ULIPs are a very bad form of investment/insurance. It is evident with all the mis-selling that were done by the brokers and SEBI finally putting in more rules. Rs.5000 was put in a Unit Linked Insurance Policy by UTI because my dad’s friend suggested it. The amount I paid every year and the life cover & returns that I got wasn’t worth it.

Both the insurances I had bought returns less than what inflations eats from my savings. Must’ve opted for term insurance and skipped all the other forms of insurances.

Investing in ELSS funds in bulk at the same time

ELSS or Tax saving Mutual Funds allow you to invest in equity and also save tax. The only restriction is a lock-in period of 3 years. I invested in about 5 ELSS funds in the end of year 2007 for a huge amount.

While investing in equities is a good thing, I made three mistakes here:

  1. Invested just when the market was touching its all time highs.
  2. Putting all the money at the same time. The goal I had was to save taxes – not invest the money.
  3. Investing in 5 funds is a bit too much. Especially when all 5 were ELSS funds and almost had the same goals. I didn’t diversify in the right way.

Result? The returns I received was dismal. Even though NIFTY/Sensex is back to its highs, the funds haven’t reached the old NAVs. Meaning I am still in negative.

Tomorrow I will write how I could have done a better job in the Mutual Funds by using something called SIP (Systematic Investment Plan).