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 This webina webinarr is sched schedule uled d for 1 hour hour – 50 minutes for the talk and a 10 minute session to take questions 2. You will will need to to use your your headphone headphoness or computer speaker 3. Type your your questions questions in in the right right hand panel panel in in your screen 4. The recor recorded ded version version of of this webinar webinar will will be be put up on our website www.paybooks.in www.paybooks.in after after 5 business days
Key take away from this webinar
1. 2. 3. 4. 5.
Gene Genera rall rates rates and and effe effect ctiv ive e rate ratess Tax planning planning Vs. Tax avoidance avoidance Vs. Tax evasion evasion Tax pla plann nnin ing g and and fina financ ncia iall plan planni ning ng Taxab axablle Inc Incom ome e head headss Dedu Deduct ctio ions ns all allow owed ed with with tips tips
Tax rates for FY 2013-14 Income Slabs
Tax Rates
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/-
10% Less: Tax Less: Tax Credit - 10% of taxable income upto a maximum of Rs. 2000/-.
Where the total income exceeds Rs. 5,00,000/- but does not exceed Rs. 10,00,000/-
Rs. 30,000/- + 20%
Where the total income exceeds Rs. 10,00,000/-.
Rs. 130,000/- + 30%
Surcharge: 10% Surcharge: 10% of the Income Tax, where total taxable income is more than Rs. 1 crore. Education Cess: 3% 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% * 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= 195,700/12,00,000= 16.31%
Tax planning, planning, Tax avoidance, avoidance, Tax evasion evasion Tax planning
Tax avoidance
Tax evasion
Reducing tax liability by using the various tax provisions in the law
Reducing tax liability by making use of different loopholes in the law
Illegally reducing tax liability by breaking the law
Is 100% legal
Thin line of difference between planning and avoidance in many cases
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 didn’t ramifications anticipate. Retrospective changes can defeat tax avoidance schemes
Is done before tax liability arises
Is done before tax liability arises
Is done after 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. manner. Financial planning covers chiefly cash flow management, education planning, portfolio management, m anagement, retirement 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 f ag end of the year just to save tax.
Taxable earning heads 1. 2. 3. 4. 5.
Inc Income fro from salar laries Inco Income me fro from hous house e pro propert pertyy Inco Income me from from busi busine ness ss/p /prrofess fessio ion n Inco Income me fro from capi capittal gain gainss Inco Income me fro from Othe Otherr sour source cess
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, LT 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 PAN of your landlord or a declaration that he has no PAN PAN should be submitted. submi tted. Else, HRA exemption will not be given by employer. employer. If the rent paid is less than Rs R s 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 company has a FBP or basket basket of allowances allowances policy policy,, always always choose 40%/50% of Basic as your HRA component component 2. You can pay pay rent rent to your your parents parents provided provided they own own the house house and claim HRA deduction. Ensure Ensure they disclose this in their personal returns. 3. You canno cannott pay pay rent rent to your your spous spouse e 4. Remember to to keep keep the rent rent receipts receipts safely safely if your your rent rent is less than 3,000 pm. You need to submit these in original to the dept if you get assessed. 5. Both you you and your your spouse spouse can claim claim HRA deduct deduction ion if you you provide 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
Parent aged 61 years
Taxable income without HRA claim
13,50,000
0
Rent – paid/received paid/received
360,000
360,000
Standard exemption
0
108,00
Taxable income
990,000
252,000
Tax thereon
131,840
200
Original tax on 13.50 lakhs
242,050
0
Saving
110,210
-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)
Spouse Spou se
Total tax
12,00,000
800,000
A) HRA – you in full
240,000
0
Tax on net income (I) – A
125,660
92,700
B) Equal claim
120,000
120,000
Tax on net income (I) - B
158,620
67,980
0
240,000
195,700
43,260
C) Spouse in full Tax on net income (I) - C
218,360 226,600
238,960
All things remaining same, the difference between the best and worst
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, future, always always remember remember to to get the the PAN PAN of landlor landlord d while signing signing the rent agreement or renewing the same 2. If your landlord landlord is not not having a PAN, PAN, ask him him to sign sign a declarat declaration ion – no specified format for this. Can be in simple English 3. If landlord landlord has PAN but is not willing willing to share, share, consider consider getting getting a rent receipt for just under 8,333 pm instead of losing out on the entire HRA deduction 4. If the rent rent is substant substantially ially more than 8,333 8,333 pm pm and landlor landlord d is not willing to share the PAN, claim this thi s outside your employer’ employer ’s 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 f or future use and submit when asked by the dept in the assessment/notice ass essment/notice in lieu of declaration of no PAN by landlord.
Tips on HRA claim The Income Tax Tax Act treats HRA and home loan deductions under separate sections independently. 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. independently. Situation 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
Deduction
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
Tips on LTA claim 1. LTA claim covers covers only only cost cost of travel travel and does does not cover cover accommodation and food 2. Trave ravell can can be be in any any mode mode – rail, bus, air and taxi 3. Internatio International nal travel travel is not covered covered under LTA 4. LTA can can be claime claimed d on family family – spouse, parents, siblings and children Tips 1. If you have have a FBP/Basket FBP/Basket of allowanc allowances es option option in your compa company ny,, ensure ensure that you have chosen the maximum allocable in the years in which you you are planning for the travel. 2. If you haven’t claimed LTA LTA in the notified block, 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 husband and wife wife can claim claim LT LTA for the the same journey journey by satisfying the requirement of submitting original tickets in a case where tickets are booked online.
Medical Reimbursement Expenditure for for your medical treatment or the treatment treatment of 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 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.
Deduct Deduction ion u/s 80D, 80D, 80DD 80DD is is avail availabl able e over over and and abov above e the the 1 lakh exemption u/s 80C Amount Amount paid paid to CGHS ( Centr Central al Govt Govt Health Health Scheme) Scheme) or pre premiu mium m paid on a medical insurance policy for spouse s pouse and dependent children upto 15,000 Rs p.a ( Rs 20,000 for 60+ age) AND Amount Amount of premi premium um paid paid for covera coverage ge of of your your par parent entss upto upto Rs 15,000 ( Rs 20,000 if they are aged 60 +) Expend Expenditu iture re on on preve preventiv ntive e medica medicall check check up for self self,, spouse 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 are 60+ 30,000 Rs If parents are 60+ 35,000 Rs If all all are are 60+ 40,000 Rs
House property deductions 1. Housing Housing loan loan prin princip cipal al rep repaym ayment ent – upto Rs 1 lakh u/s 80C. This 80C includes other deductions like PF, PF, life insurance premium, children tuition fee, tax saving FDs etc 2. Even expend expenditur iture e like stamp duty and and registr registration ation fee is also also eligible eligible u/s 80C 3. Inte Interrest est pay payme ment nt – deductions under 2 sections – sec 24 and sec 80EE Property
Deduction
Is self occupied – you are staying in the house for which loan is taken
Upto Rs 1.50 lakhs
You have rented the house
Actual interest paid
If the house for which wh ich loan is taken is not acquired or construction complete within 3 years from the FY in which loan is taken, 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 sanctioned between between 01.04.2 01.04.2013 013 and and 31.03.201 31.03.2014 4 ( loan loan can be disbursed even after 31st March) 2. Loan Loan shou should ld not not be more more than than 25 lakhs. lakhs. 3. Value of of house on on which loan loan is taken taken should should not be be more more than 40 lakhs 4. You do not not own any any other other house in your name ( spouse spouse name 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 withi n 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
Treatment
Repairs/reconstruction Repairs/reconstructi on
No deduction until completion
Purchase/ Purchase/ new construction
Add all interest paid during construction and claim 1/5th of this amount for 5 years after completion of construction
Important! 1. 2.
Deduct Deduction ion is is avai availab lable le only only if con constr struct uction ion is comp complet leted ed withi within n 3 years years from the year in which loan was taken Be aware aware that that you you will will be payin paying g Service Service tax tax when when buyi buying ng a un under der construction apartment which is not the case when you buy a fully constructed apartment
Principal on loan for under construction houses is not allowed as deduction
House property deductions Particulars
Deduction basis
Principal
Available on payment basis irrespective irrespect ive of the year to which it pertains to. If you are paying for the last year too, you can claim deduction.
Interest
Available Available on payable (accrual) basis . So you can claim deduction even if you haven’t actually paid interest but it is due as per loan terms.
It is advisable to buy a house in joint name so s o 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
Medical spend
Donations
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 Insurance for of specially Specially certain family and abled specified abled people parents – as dependents diseases – – upto Rs 1 – upto Rs 1 upto Rs discussed lakh lakhs 60,000
Investments Rajiv Gandhi Equity Savings Scheme – upto 25,000
Equity linked savings scheme (ELSS) – combined limit of Rs 1 lakh
Pension New plans from Pension Life Insurance Scheme Insurance companies combined (NPS) / C. Govt combined limit of Rs combined 1 lakh limit of Rs limit of Rs 1 lakh 1 lakh
Investments…contd. 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
