Tax Planning

By Samira Rao, Chartered Accountant Co-founder Paybooks www.paybooks.in

Is a good job and fat pay packet enough to keep you happy?

Ignorance is not bliss !

Before we start :
1. This webinar is scheduled for 1 hour 50 minutes for the talk and a 10 minute session to take questions 2. You will need to use your headphones or computer speaker 3. Type your questions in the right hand panel in your screen 4. The recorded version of this webinar will be put up on our website www.paybooks.in after 5 business days

Key take away from this webinar

1. 2. 3. 4. 5.

General rates and effective rates Tax planning Vs. Tax avoidance Vs. Tax evasion Tax planning and financial planning Taxable Income heads Deductions allowed with tips

Tax rates for FY 2013-14

Income Slabs Where the total income does not exceed Nil @@ Rs. 2,00,000/Where the total income exceeds Rs. 2,00,000/- but does not exceed Rs. 5,00,000/Where the total income exceeds Rs. 5,00,000/- but does not exceed Rs. 10,00,000/Where the total income exceeds Rs. 10,00,000/-. 10% Less: Tax Credit - 10% of taxable income upto a maximum of Rs. 2000/-. Rs. 30,000/- + 20% Tax Rates

Rs. 130,000/- + 30%

Surcharge: 10% of the Income Tax, where total taxable income is more than Rs. 1 crore. Education Cess: 3% of the total of Income Tax and Surcharge @@ For 60+ aged basic exemption is 2.5 lakhs and for 80+ aged it is 5 lakhs

Example of tax calculation:

Assume taxable income is 12 lakhs 0-2 lakhs ( basic exemption) No tax 2-5 lakhs on 3 lakhs*10% = 30,000 5.01-10 lakhs on 5 lakhs *20% = 100,000 10.01- 12 lakhs on 2 lakhs*30% = 60,000 Total basic tax = 190,000 Add: Education cess @ 3% = 5,700 Total tax = 195,700 Effective tax rate = 195,700/12,00,000= 16.31%

Tax planning, Tax avoidance, Tax evasion

Tax planning
Reducing tax liability by using the various tax provisions in the law Is 100% legal

Tax avoidance
Reducing tax liability by making use of different loopholes in the law Thin line of difference between planning and avoidance in many cases

Tax evasion
Illegally reducing tax liability by breaking the law Done usually by deflating income and inflating expenses

Tax payers are advised to use this to reduce tax burden by maximum usage of exemptions and deductions

Not generally advisable as tax Not advised at all. Has payer is making use of a penal and criminal provision which the Govt didnt ramifications anticipate. Retrospective changes can defeat tax avoidance schemes Is done before tax liability arises Is done after tax liability arises

Is done before tax liability arises

Tax planning and financial planning

Tax planning is only a sub set of the more general Financial planning. The purpose of tax planning is to see how best to accomplish all the other elements of the financial plan in the most tax efficient manner.

Financial planning covers chiefly cash flow management, education planning, portfolio management, retirement planning, real estate matters, insurance coverage, succession planning and last but not the least tax planning.
Tax planning decisions should always be taken with the overall financial plan in mind. It is important not to allow the tax tail to wag the financial dog. E.g. buying a insurance plan at fag end of the year just to save tax.

Taxable earning heads

1. 2. 3. 4. 5. Income Income Income Income Income from salaries from house property from business/profession from capital gains from Other sources

Main deductions/exemptions from salaries

These are allowed as a deduction from salary income only if it forms part of the salary components received.
Uniform allowance, Children Education allowance, Children Hostel allowance etc

HRA, LTA, Conveyance allowance, Medical reimbursement

Main deductions/exemptions from salaries

HRA Least of the following is exempt Rent paid over and above 10% of Basic+DA 40% or 50% of Basic+DA Actual HRA received in salary You need to submit the rent receipts in original to your employer. If the rent paid is more than 1 lakh p.a, the PAN of your landlord or a declaration that he has no PAN should be submitted. Else, HRA exemption will not be given by employer.

If the rent paid is less than Rs 3,000 pm, you need not submit the rent receipts and the employer is bound to give exemption without insisting on the rent receipts.

Tips on HRA claim

1. If your company has a FBP or basket of allowances policy, always choose 40%/50% of Basic as your HRA component 2. You can pay rent to your parents provided they own the house and claim HRA deduction. Ensure they disclose this in their personal returns. 3. You cannot pay rent to your spouse 4. Remember to keep the rent receipts safely if your rent is less than 3,000 pm. You need to submit these in original to the dept if you get assessed. 5. Both you and your spouse can claim HRA deduction if you provide separate rent receipts and rent is paid from a joint account. Based on total incomes and applicable slabs, decide who will claim the HRA both or only 1

Illustration on tax saving on HRA

In a case where rent is paid to parents
You Taxable income without HRA claim 13,50,000 0 Parent aged 61 years

Rent paid/received
Standard exemption Taxable income Tax thereon

360,000
0 990,000 131,840

360,000
108,00 252,000 200

Original tax on 13.50 lakhs

Saving

242,050
110,210

0
-200

Illustration on tax saving on HRA

Planning on who will claim HRA when both husband and wife are working and rent is assumed at Rs 20,000 p.m
You
Total income before HRA (I) 12,00,000

Spouse
800,000

Total tax

A) HRA you in full

Tax on net income (I) A B) Equal claim Tax on net income (I) - B C) Spouse in full Tax on net income (I) - C

240,000
125,660 120,000 158,620 0 195,700

0
92,700 120,000 67,980 240,000 43,260 226,600 218,360

238,960

All things remaining same, the difference between the best and worst options equals 1 months rent!

Tips on HRA claim

On the new requirement of submitting PAN of landlord where rent claim exceeds Rs 1 lakh per annum
1. In future, always remember to get the PAN of landlord while signing the rent agreement or renewing the same 2. If your landlord is not having a PAN, ask him to sign a declaration no specified format for this. Can be in simple English 3. If landlord has PAN but is not willing to share, consider getting a rent receipt for just under 8,333 pm instead of losing out on the entire HRA deduction 4. If the rent is substantially more than 8,333 pm and landlord is not willing to share the PAN, claim this outside your employers deductions. Recompute your income after claiming the full HRA deduction and claim the refund. Send a registered communication to landlord asking him his PAN and preserve this for future use and submit when asked by the dept in the assessment/notice in lieu of declaration of no PAN by landlord.

Tips on HRA claim

The Income Tax Act treats HRA and home loan deductions under separate sections independently. The two are not interconnected to each other and hence you can claim both the deductions as long as you satisfy the conditions for each of them independently.
Live in own house on which you have home loan Live in City A in a rented house and own house in City B with a home loan Live in City A in a rented house and own under construction house in City A with home loan a Interest deduction of Rs 1.50 lakhs and Principal repayment of Rs 1 lakh. No HRA a You can claim both HRA and interest/principal deductions a You can claim both HRA and interest/principal a deductions. You can claim tax benefits only for your principal before the completion of your house. Once your house is completed, you can claim tax benefits on the total interest paid up to the date of completion in five equal instalments in five years beginning from the year of completion Live in City A in a rented house and own a You can claim both HRA and actual interest and house in City A with a home loan which is upto 1 lakh principal deductions. However, you rented out need to offer the rent you receive to tax

Situation

Deduction

Tips on LTA claim

1. LTA claim covers only cost of travel and does not cover accommodation and food 2. Travel can be in any mode rail, bus, air and taxi 3. International travel is not covered under LTA 4. LTA can be claimed on family spouse, parents, siblings and children
Tips 1. If you have a FBP/Basket of allowances option in your company, ensure that you have chosen the maximum allocable in the years in which you are planning for the travel. 2. If you havent claimed LTA in the notified block, claim this in the first year of the next block. A total of 3 claims is possible in the block in such cases 3. Both husband and wife can claim LTA for the same journey by satisfying the requirement of submitting original tickets in a case where tickets are booked online.

Medical Reimbursement
Expenditure for your medical treatment or the treatment of any member of your family or any of your dependent relatives up to Rs. 15,000 p.a. is tax exempt There is no condition that the medical treatment should be at any of the approved hospitals and it could be at any place and from any type of doctor belonging to Allopathic, Ayurvedic, Unani, Homeopathy or Naturopathy system of medicine. Even amount spent by you in the local medical shop on purchase of pills and supported by a bill is eligible for exemption upto Rs 15,000 Maintain the discipline of collecting all the medical bills and be sure to submit all bills to your employer.

Medical Insurance
1. 2. 3. 4. Deduction u/s 80D, 80DD is available over and above the 1 lakh exemption u/s 80C Amount paid to CGHS ( Central Govt Health Scheme) or premium paid on a medical insurance policy for spouse and dependent children upto 15,000 Rs p.a ( Rs 20,000 for 60+ age) AND Amount of premium paid for coverage of your parents upto Rs 15,000 ( Rs 20,000 if they are aged 60 +) Expenditure on preventive medical check up for self, spouse and dependent children and parents upto Rs 5,000. This is part of the overall 15,000 Rs limit as told in point 2 above.

Total claim allowed If none are 60+ 30,000 Rs If parents are 60+ 35,000 Rs If all are 60+ 40,000 Rs

House property deductions

1. Housing loan principal repayment upto Rs 1 lakh u/s 80C. This 80C includes other deductions like PF, life insurance premium, children tuition fee, tax saving FDs etc 2. Even expenditure like stamp duty and registration fee is also eligible u/s 80C 3. Interest payment deductions under 2 sections sec 24 and sec 80EE
Property Is self occupied you are staying in the house for which loan is taken Deduction Upto Rs 1.50 lakhs

You have rented the house

Actual interest paid

If the house for which loan is taken is not acquired or construction complete within 3 years from the FY in which loan is taken, interest deduction will be reduced to only 30,000 Rs instead of Rs 150,000

House property deductions

Additional benefit of Rs 1 lakh on Interest on home loans over and above 1.50 lakhs. Conditions to be met 1. Loan is sanctioned between 01.04.2013 and 31.03.2014 2. Loan should not be more than 25 lakhs. 3. Value of house on which loan is taken should not be more than 40 lakhs 4. You do not own any other house in your name ( spouse name is allowed)

House property deductions

Important ! The house on which you have claimed deduction of principal payment u/s 80C cannot be sold within 5 years from when you obtained possession.

If you sell the property within 5 years, then the amount you have claimed as deduction u/s 80C in the previous years shall be added to your normal income and taxed.

House property deductions

Treatment of interest payment when house is under construction
Purpose of loan
Repairs/reconstruction Purchase/ new construction

Treatment
No deduction until completion Add all interest paid during construction and claim 1/5th of this amount for 5 years after completion of construction

Important! 1.
2.

Deduction is available only if construction is completed within 3 years from the year in which loan was taken Be aware that you will be paying Service tax when buying a under construction apartment which is not the case when you buy a fully constructed apartment

Principal on loan for under construction houses is allowed as deduction

House property deductions

Particulars Principal Deduction basis Available on payment basis irrespective of the year to which it pertains to. If you are paying for the last year too, you can claim deduction.

Interest

Available on payable (accrual) basis . So you can claim deduction even if you havent actually paid interest but it is due as per loan terms.

It is advisable to buy a house in joint name so that the deductions can be maximized. Both husband and wife can claim deduction of interest and principal payment if paid from a joint account for the same property.

Various deductions

Investment s
Expenditure
Loans

Chapter VI A

Donations

Medical spend

Earnings

Donations
Political parties upto Rs 60,000
Approved trusts and funds upto Rs 40,000

Approved Research and rural development upto Rs 1 lakh

Loans
Educational loans no limit

Home loans already discussed in HRA section

Medical Spend
Maintenance Treatment of certain Insurance for of specially Specially family and abled people abled specified parents as dependents upto Rs 1 diseases discussed lakh upto Rs 1 upto Rs lakhs 60,000

Investments
Rajiv Gandhi Equity Savings Scheme upto 25,000
Equity linked savings scheme (ELSS) combined limit of Rs 1 lakh

New Life Pension Scheme Insurance combined (NPS) combined limit of Rs limit of Rs 1 lakh 1 lakh

Pension plans from Insurance companies / C. Govt combined limit of Rs 1 lakh

Investmentscontd.
Public Provident Provident Fund Fund combined combined limit of Rs limit of Rs 1 lakh 1 lakh Senior National Tax saving Citizens Savings 5 year FDs Saving Certificate Scheme (NSC) combined combined combined limit of Rs limit of Rs limit of Rs 1 lakh 1 lakh 1 lakh

Expenditure
Tuition fee of children Paying rent when not - combined limit of Rs in receipt of HRA 1 lakh upto Rs 24,000

Income
Interest income from Interest on NSC savings accounts in combined limit of Rs 1 banks upto Rs lakh 10,000

A small step ahead from confusion to confidence Be aware of the various tax provisions concerning your incomes and deductions. Make tax planning an integral part of your overall financial plan

Thank You