Tax planning for salaried emp. 8.8.2012(final)

TAX PLANNING FOR SALARIED EMPLOYEES

By CA (Dr.) Alok shah

AT Electrical Research and Development Association (ERDA) On 8th August, 2012

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It is difficult to believe that some 35 years ago, the Indian tax payer was required to follow a system of direct taxes, where the maximum Income Tax Rate was of 97.5%, Wealth tax @ 5%, Estate Duty @ 85%, and Gift Tax @75 %.

Indian Taxation History

CA. Alok shah


Earnings from the Salary

Basic Pay -SalaryBasic Pay -SalaryAllowancesAllowancesBonusBonusPerquisitesPerquisitesSalary in lieu of profitSalary in lieu of profitRetirement BenefitsRetirement Benefits

CA. Alok shah

Tax Planning

Followings are forms of the income under the head Salary

taxable


First understand salary Income

Income from salary:

Income under the head ‘salary’ comprises of remuneration in any form (including perquisites) received by an employee from employer. Thus, there should be contractual Employer-Employee relationship. The contract may be express, oral or implied.

Salary is chargeable on due or receipt basis. Arrears of salary paid or allowed are includible if not charged to income tax for any earlier previous year.

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Fixed Medical Allowance

Dearness Allowance and Dearness Pay

Fully Taxable Allowances

City Compensatory Allowance

Tiffin / Lunch Allowance (Fixed Amount)

Non Practicing Allowance

Warden or Proctor Allowance

Deputation Allowance

Overtime Allowance

Servant Allowance


House Rent Allowance (H.R.A.) :

Partly Taxable Allowances

Entertainment Allowance

Special Allowances for meeting official expenditure

Special Allowances to meet personal expenses :

b. Children Hostel Allowance

c. Transport Allowance

a. Children Education Allowance


HRA exemption calculation is dependent on Four variable:

1.House Rent Allowance received

2.House Rent paid

3.Salary

4.Location of the house.

Partly taxable Allowances

House Rent Allowance (H.R.A.) :-House Rent Allowance (H.R.A.) :-


As per section 10(13A) read with rule 2A ,least of following three will be exempted:

1.House Rent allowance (HRA) received.

2.50% of salary in case of residential accommodation taken on rent, if situated in Bombay, Calcutta, Delhi, or Chennai and 40% of salary in in any other case.

3.Rent paid in excess of 10% of salary.

Salary for this purpose means :-

Basic Salary + Dearness Allowance + Commission which is based on turnover achieved.


Deduction under section 80GG :-

Under Sec. 80GG of the Act an assessee is entitled to a deduction in respect of house rent paid by him for his own residence. Such deduction is permissible subject to the following conditions:

1.The assessee has not been in receipt of any house rent allowance specifically granted to him which qualifies for exemption under Sec. 10(13A) of the Act.

2.The assessee files the declaration in Form No. 10BA.

3.The assessee do not own Residential House

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Tax Planning


Deduction under section 80 GG :-

3. Assessee will be entitled to a deduction in respect of house rent paid by him in excess of 10 per cent of his total income, subject to a ceiling of 25 per cent thereof or Rs. 2,000 a month, whichever is less. The total income for working out these percentages will be computed before making any deduction under Sec. 80GG.

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Tax Planning


Partly taxable Allowances

Entertainment allowance is fully taxable for all private sector employees. However, Government employees are eligible for exemption if the allowance is included in the gross salary.

Entertainment Allowance :-Entertainment Allowance :-


Certain allowances are given to the employees to meet expenses incurred exclusively in performance of official duties and hence are exempt to the extent actually incurred for the purpose for which it is given. These include travelling allowance, daily allowance, conveyance allowance, helper allowance, research allowance and uniform allowance.

Special Allowances for meeting official expenditure :Special Allowances for meeting official expenditure :


There are certain allowances given to the employees for specific personal purposes and the amount of exemption is fixed i.e. not dependent on actual expenditure incurred in this regard.

These allowances include:

a. Children Education Allowanceb. Children Hostel Allowancec. Transport Allowanced. Out of station allowance

Special Allowances to meet personal expenses :Special Allowances to meet personal expenses :


a. Children Education Allowance :

This allowance is exempt to the extent of Rs.100 per month per child for maximum of 2 children

b. Children Hostel Allowance :

Any allowance granted to an employee to meet the hostel expenditure on his child is exempt to the extent of Rs.300 per month per child for maximum of 2 children.


c. Transport Allowance :

This allowance is given to employees to compensate the cost incurred in commuting between place of residence and place of work. An amount up to Rs.800 per month paid is exempt. However, in case of blind and orthopedically handicapped persons, it is exempt up to Rs. 1600 p.m.


d. Transport Allowance to Employees working in any Transport System :

An allowance granted to an employee working in a transport system to meet his personal expenses in performance of his duty in the course of running of such transport from one place to another is exempt up to 70% of such allowance or Rs.10,000 per month, whichever is less.


Foreign allowance :

This allowance is usually paid by the government to its employees being Indian citizen posted out of India for rendering services abroad. It is fully exempt from tax.

Fully Exempt Allowances

Allowance to High Court and Supreme Court Judges

Allowances from UNO organization :


Perquisites

Taxable

1. Rent free hotel or residential accommodation :

2. Use of Motor Car

3. Reimbursement of Medical Expenditure

4. Expenditure on Foreign Travel :

5. Supply of Gas , Electricity & Water

6. Free or concessional Education Loans


Perquisites

(A) Unfurnished Accommodation :

For purpose of valuation of the perquisite of unfurnished accommodation, all employees are divided into two categories:

(I) Central Govt. & State Govt., employees; and (ii) Others.

1. Rent free Residential Accommodation :


Perquisites

For employees of the Central and State governments the value of perquisite shall be equal to the license fee charged for such accommodation as reduced by the rent actually paid by the employee.

Valuation of perquisite = the license fee charged --actual rent paid

(I) Central Govt. & State Govt., employees :

(ii) For all Others : In the Next Slide


Perquisites

Population of CityOwned by Employer

Taken on leased by Employer

Exceeding 25 lakh 15 % of the salary

Amount of leased paid or payable or

15 % of salary whichever is lower

Exceeding 10 lakh but not exceeding 25 lakh

10 % of the salary Same as above

Any other place 7.5% of the salary Same as above


Perquisites

(B). Furnished accommodation :

For furnished accommodation, the value of perquisite as determined by the above method shall be increased by-

i)10% of the cost of furniture, appliances and equipments, or

ii)Where the furniture, appliances and equipments have been taken on hire, by the amount of actual hire charges payable.


Perquisites

"Accommodation" includes a house, flat, farm house, hotel accommodation, motel, service apartment, guest house, a caravan, mobile home, ship etc. However, the value of any accommodation provided to an employee working at a mining site or an on-shore oil exploration site or a project execution site or a dam site or a power generation site or an offshore site will not be treated as a perquisite.


Perquisites

If an accommodation is provided by an employer in a hotel the value of the benefit in such a case shall be 24% of the annual salary or the actual charges paid or payable to such hotel, whichever is lower, for the period during which such accommodation is provided as reduced by any rent actually paid or payable by the employee. However, where in cases the employee is provided such accommodation for a period not exceeding in aggregate fifteen days on transfer from one place to another, no perquisite value for such accommodation provided in a hotel shall be charged.


Perquisites

Salary for this purpose of this means :

1. Basic salary 2. Dearness allowance/pay(if it is taken in to

account in computation of retirement benefits)

3. Bonus 4. Commission 5. Fees 6. Taxable amount(excluding portion of non

taxable)


Perquisites

2. Use of Motor Car : Car owned by the employee and expenses are reimbursed by the employer


Perquisites

Use of Motor Car : Car is owned/ hired by the employer and expenses met by the employer.

Private purpose Official purpose Both

1.Actual Expenses by employer2. Plus depreciation (10% of the original cost of car)/ hire charges(if car is hired) 3.Less :amount recovered from the employee

Not a perquisite

If car hp < 16, perquisite is Rs. Rs. 1800p.m.., if hp>16 Rs. 2400 p.m. with 900p.m. chauffeur salary.

Note :nothing is deductible in respect of any amount recovered from employee.


Perquisites

Use of Motor Car : Car is owned/ hired by the employer and expenses met by the employee

Private purpose Official purpose Both

1.Depreciation(10 % of the original cost of the car)/ hire charges + chauffeur salary.2,less : amount recovered from the employee

Not a perquisite

If car hp < 16, perquisite is Rs. 600 p.m., if hp>16 Rs. 900 p.m. with Rs. 900 p.m. chauffeur salary.

Note :nothing is deductible in respect of any amount recovered from employee.


Lets plan tax on your salary :

Financial planners contend that couples should ideally combine their finances. The meshing together of the investments of the husband and wife not only strengthens the household’s financial fiber but gives them a comprehensive view of the real situation.

Tax department has no problems if one spouse gives money to the other. After all, it’s their money and spouses are in the list of specified relatives whom you can gift any sum without attracting a gift tax. But if that money is invested and earns an income, the clubbing provisions of the Income Tax Act come into play.

CA. Alok shah

Tax Planning

1. Cut the tax by investing in your spouse name :


Section 64 of the Income tax Act states that income derived from money gifted to a spouse will be treated as the income of the giver. It will be clubbed with his (or her) income for the year and taxed accordingly. For instance, if one buy a house in your wife’s name but she has not monetarily contributed in the purchase, then the rental income from that house would be treated as your income and taxed at the applicable rate. Similarly, if you give money to your wife as a gift and she puts it in a fixed deposit, the interest would be taxed as your income.

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Tax Planning


Continue……

If you think you can get away by clever ploys involving other relatives. For instance, one may think of gifting money to his mother in law, a transaction that has no gift tax implications. Then a few days later, the lady gifts the money to her daughter, which again does not have any tax implications. The money can then be invested without attracting clubbing provisions, right? Wrong. Given that most big ticket transactions are now reported to the tax department by third parties (banks, brokerages, mutual funds, insurance companies), it may not be difficult to put two and two together. If the tax man discovers this circuitous transaction, you may be hauled up for tax evasion.

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Tax Planning

Don’t get over smart :


Continue…….

Than what to do ????

i. If you want to buy a house in your wife’s name but don’t want the rent to be taxed as your income, you can loan her the money. In exchange, she can give you her jewellery.

For example, if you transfer a house worth Rs. 10 lakh to your wife and she transfers her jewellery for the same amount in your favor, then the rental income from that house would not be taxable to you.

ii. One can also avoid clubbing of income by opting for tax exempt investments. There is no tax on income from the Public Provident Fund.

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Tax Planning


Continue…….

iii. There is also no tax on gains from shares and equity mutual funds if held for more than a year. So, if one invests in these options in the name of the spouse, there is no additional tax liability.

iv. Incidentally, a wife can help her husband to save tax even before they get married. If a couple is engaged, and the girl does not have any taxable income or pays tax at a lower rate, her fiancé can transfer money to her. (However one need to look at gift tax implication)

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Tax Planning


Continue…….

The income from those assets won’t be included in his income because the transaction took place before they got married. One can give up to Rs.1.90 lakh (the tax exempt limit for women) without putting any tax liability on the girl.

The clubbing rule also applies in case of investments made in the name of minor children (below 18 years).

BEAWERE

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Tax Planning


Interest on home loan is deductible from your salary, provided you have possession of the house.

If your house is under construction, then interest will be accumulated till you get possession. Thereafter, deduction will be allowed in five equal installments for next five years, along with the interest of that financial year.

The interest rate of home loan has been on the rise. However, even today the effective interest rates are attractive i.e. home loan interest at 11% effectively gets reduced to 7.70% assuming you are in 30% tax bracket

2. Benifit of having a home loan :


You can prepay home loan if the interest being charged is @12% or more, instead of keeping your money in fixed deposits, bonds etc. (@9%).

You can claim full interest as deduction in the case of let out property, even if it exceeds Rs. 1.5 lakh.

Buying a house using home loan is also an investment for retirement. It is like a disciplined saving for your safe retirement. You can reverse mortgage the house after attaining 60 years of age. Your monthly expenses could be met by the tax-free amount you will receive from reverse mortgage.


Borrow for house and get insured too

You need to remember to take term insurance to cover home loan. One should take life insurance plan to ensure repayment of home loan in the event of untimely death. Generally, banks include insurance premium in your EMI, which makes it convenient to pay. So even if you are not around to pay off the installments, your family will never have to be without a home.


Another way of saving money is to take home loan with overdraft facility so that you can save interest by depositing additional funds in the home loan account. Banks like SBI, HDFC, and HSBC offer these loans as home saver, smart home etc.


The investor not only enjoy deduction on the amount invested in this scheme but the interest received on maturity is also exempt from tax.

Characteristics :

PPF scores on all grounds as it is one of the very few investment options that fall under EEE (exempt-exempt-exempt) tax regime.

3. Beat your tax by PPF :

PPF offers an interest rate of 8% compounded annually, with the maximum investment restricted to Rs 1,00,000 a year and mandatory investment tenure of 15 years.


Invest in the parent’s name if they are in a lower tax bracket: Every adult enjoys a basic tax exemption limit. For senior citizens (above 60 years), the basic exemption limit is Rs. 2.5 lakh a year. If any or both of your parents do not have a high income but you have an investible surplus, you can avoid tax by transferring money to them which can then be invested in their name.

There is no tax on such gifts and the income from the investments will be treated as theirs.

CA. Alok shah

Tax Planning

4. Cut the tax by investing in your parents name :


How we can get tax benefit ??

i. Pay them rent if you live in their house: If you live in your parent’s house , You can pay them rent

to claim House Rent Allowance exemption. This is possible only if the property is registered in the name of

your parent. The owner will be taxed for the rental income after a 30% deduction. So, if you pay your father a rent of Rs. 3 lakh a year ( Rs. 25,000 a month), he will be taxed for only Rs. 2.10 lakh. It gets better if the property is jointly owned by both parents.

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Tax Planning


ii. Sell shares and offset losses:

Tax laws allow you to adjust short term losses from stocks against certain gains. But what if you have been holding junk stocks in your portfolio for more than a year? If you ask your broker to sell them, you won’t be able to adjust the long term capital losses against any gain. However, if you sell them through an off market transaction where no securities transaction tax is paid, you are not only allowed to adjust the loss against a gain, but also carry forward the unadjusted loss for up to eight financial years.

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Tax Planning


•That’s easier said than done. It’s already tough finding buyers for junk stocks on the exchanges. Finding one for a private deal is infinitely more difficult. It’s here that your parents can help you. Sell the junk stocks to them in an off market transaction. An off market transaction is a private deal between the buyer and seller without the exchange as an intermediary.•The losses you book can then be adjusted against capital gains from other assets such as property, gold, debt funds, etc. It can also be carried forward for up to eight financial years. Keep a few things in mind while you go about this. The sale should be at the market price of the shares and the buyer should pay the sum by cheque. Otherwise, the tax man might treat the transfer as a gift.

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Tax Planning


iii. Buy them a health insurance policy :

This is the simplest and most commonly used strategy to save tax through your parents. Buy a health insurance policy for them and get deduction for the premium paid under Section 80 D. Up to Rs. 15, 000 a year is deductible from your taxable income if you buy a health insurance policy for your parents. If the parents are senior citizens, the deduction is even higher at Rs. 20,000.

This deduction is over and above the Rs. 15,000 that one can claim as deduction for the health insurance premium paid for himself and his family(spouse and children). Also, this deduction is available irrespective of whether the parents are financially dependent on the tax payer or not.

CA. Alok shah

Tax Planning


WHETHER the tax benefits you have/have not, one should not avoid buying a health insurance cover for your parents. After all, they looked after your needs when you were a child. Now it is time you repay that debt.

CA. Alok shah

Tax Planning


• If you are "purchasing" a new house from the capital gains, to save tax, either you can purchase the new house within one year of selling the old house or you can purchase the new house within two years after you have sold the old house.

• If you are "constructing" a new house from the capital gains, then to save tax you can construct it within three years of selling the old house.

• You should not sell your new house within a period of three years from the date of purchase or construction.

5. Cut tax by buying a home :


• If you sell any asset including equity and invest the full proceeds of sale in purchasing/constructing a house, then income tax on capital gains can be saved. You must hold the new house for at least 3 years.

•No income tax will be charged if you sell a residential property and invest the net capital gains (difference in the selling price and the indexed cost of the property) in the purchase or construction of another residential property.

Following condition should be satisfied:-The house, on which the capital gain has arisen, must have been held for more than 3 years.

Here comes your footerCA. Alok shah

Tax PlanningIncome from Other Sources :

1. Interest on Bank FDR, Bonds, NSC, KVP, post MIS etc.

2. Dividend (Tax Free)

3. GIFT

4. Winning from Lotteries, Card game, puzzles etc.

5. Income from machinery, Plant, furniture on line.

6. Unexpired Cash-Credit, Investments, Jewellery etc.

Tax planning for salaried emp. 8.8.2012(final)

Economy & Finance

Transcript of Tax planning for salaried emp. 8.8.2012(final)