Financial Planner

Tax Planning

What is the maximum you can earn without paying any taxes?

TaxTax is a payment made to the government of a country without “quid pro quo” i.e. nothing in return.

Objectives:-

The objective of taxation may be expressed as 4 R’s

(1)Revenue to the government

(2)Redistribution of wealth

(3)Reprising

(4)Representation

Financial YearA period starting from April 1 and ending on March 31 of the next year.

Previous YearThe year in which income is earned is known as previous year. For e.g. the year 2013-14 in which income is earned is known as previous year.

Assessment YearThe next year in which income is taxable is known as assessment year. For e.g. the year 2014-15 in which income from 2013-14 is taxed is known as assessment year.

Charge of Income Tax• Income tax is charged in assessment year at rates

specified by the Finance Act applicable on 1st April of the relevant assessment year.

• It is charged on the total income of every person for the previous year.

• Total Income is to be computed as per the provisions of the Act.

Income tax is to be deducted at source or paid in advance wherever required under the provision of the Act.

When to file tax??• 31st July of the assessment year is the last date for

filing Income Tax.

In that case, you will have to pay a fine of 1% per month on the

computed tax.

What if I forgot to

file tax on time?

Tax Slabs(2014-15)Income tax slabs 2014-2015 for General tax payers and WomenUp to 2,50,000 -No tax2,50,001 to 5,00,000 -10%5,00,001 to 10,00,000 -20%Above 10,00,000 -30%

Income tax slabs 2014-2015 for Senior citizens (Aged 60 years but less than 80 years)0 to 3,00,000 -No tax3,00,001 to 5,00,000 -10%5,00,001 to 10,00,000 -20%Above 10,00,000 -30%

Income tax slabs 2014-2014 for very senior citizens (Aged 80 and above)0 to 5,00,000 -No tax5,00,001 to 10,00,000 -20%Above 10,00,000 -30%

Simple…Gross Income= ₹ 8,00,000Tax up to ₹ 2,50,000 = ₹ 0Tax up to ₹ 5,00,000=10% of 2,50,000 = ₹ 25,000Tax up to ₹ 8,00,000= 20% of 3,00,000

= ₹ 60,000Tax on income = ₹ 85,000Education Cess(@3%) = ₹ 2550

Total Tax = ₹ 87550

How does one calculate

tax?

Heads under which income is calculated

Salaries

Income from house property

Profits and gains of business or profession

Capital Gains

Income from other sources

EXEMPTIONS , DEDUCTIONS & RELIEF

UNDER THE HEAD “SALARY”

HOUSE RENT ALLOWANCEH.R.A• Employees generally receive a house rent

allowance (HRA) from their employers. This is a part of the salary package

• An employee can claim exemption on his HRA under the Income Tax Act if he stays in a rented house and is in receipt of HRA from his employer.

• In case one stays in an own house, nothing is deductible and the entire amount of HRA received is subject to tax.

HOUSE RENT ALLOWANCEH.R.A

• Least of the following shall be exempted :

• Actual amount received

• Rent paid less 10 % of the SALARY

• 50% of the Salary (if the house is located in

Delhi/Mumbai/Kolkata/Chennai)

• 40% of the Salary (if the house is located

elsewhere )

• NO EXEMPTION SHALL BE GIVEN, IF RENT PAID

DOESNOT EXCEED 10 % OF SALARY.

HOUSE RENT ALLOWANCE (H.R.A)

Calculation of

exemption/deduction

of HRA

Suppose that you’re residing in

Mumbai and paying

a rent of Rs 150,000 p.a. and that

your salary package

comprises, the following:

• Basic — Rs. 5,00,000 p.a.

• DA — Nil

• HRA — Rs. 200,000 p.a.

Now, the exempted amount of

HRA will be least of the

following three figures:

• HRA received i.e., Rs. 200,000

• Rent above 10% of basic i.e.,

Rs. 100,000 (Rs. 150,000 – Rs.

50,000)

• 50% of basic i.e., Rs. 2,50,000

• The least of the three is

Rs100,000 is exempt from tax

ALLOWANCES RECEIVED OR LIMIT WHICHEVER IS LESS

CHILDERN EDUCATION ALLOWANCES :Exempted up to ₹100/- per month per child (up to maximum 2 children).

• HOSTEL EXPENDITURE ALLOWANCES :Exempted up to ₹ 300/- per month per child (up to maximum 2 children)

• TRANSPORT ALLOWANCES :Exempted up to ₹ 800/- per month,For handicapped employees - ₹1,600/- permonth

ALLOWANCES RECEIVED OR LIMIT WHICHEVER IS LESS

ALLOWANCES ALLOWED TO TRANSPORT EMPLOYEES :

Granted to an employee working in any transport system to meet his personal expenditure

The amount of exemption shall be :- ₹10,000/- or 70% of such allowances (whichever is less)

ALLO -AMOUNT RECEIVED OR UTILISED (WHICHEVER IS LESS)

1. Conveyance allowances(in performance of

duties of an office )

2. Research allowances

3. Travelling / transfer allowances

4. Helper allowances

5. Uniform allowances

6. Daily allowances

LEAVE TRAVEL CONCESSION• Exemption can be claimed for 2 journeys in a

block of 4 years i.e. 2014-17.

• Carry over concession-if assesse has not

availed travel concession in any of the

specified four year block period, then

exemption can be claimed in the first

calendar year of the next block.

NOT COVERED BY GRATUITY

ACT

GRATUITY

Govt. Employee

Fully Exempt

Other Employees

1. Amount Received2. ₹ 1,000,000/-

3. 15/26 * Last drawn Salary * no. of years of service in excess of 6 months

1. Amount Received2. ₹ 1,000,000/-3. 15/30 * Avg. Salary of 10 months* No. of completed years

LEAST OF THE ABOVE WILL BE EXEMPT AS THE CASE MAY BE

Basic + DA

COVERED BY GRATUITY ACT

LEAVE SALARY. . .

During the jobOn Retirement

FULLY TAXABLEGovt. Employee

FULLY EXEMPT

OTHERS

Least of the following shall be exempt :-

a) Actual amount received

b) ₹ 3,00,000/-

c) Salary* for a period of 10 months

d) Period of earned leave to the credit of

employee at the time of retirement or

leaving the job*average monthly salary

@30 days leave for each year of service

Salary meansBASIC + DA+ Comm.

RESTRUCTURE THE SALARY

1) Food in office premises or through food coupons like Sodexo

and Ticket Restaurant; they are exempt from tax up to Rs 50 per

meal .

2) As fixed medical allowance is always chargeable to tax

MEDICAL PERQUISITE

Health Insurance Premium incurred or reimbursed for insurance on

the health of employee or any member of his family is FULLY

EXEMPT.

Reimbursement by employer of any amount actually spent by the

employee for obtaining his or his family member’s treatment in any

hospital, nursing home or a clinic up to maximum ₹15,000/- for P/Y.

DEDUCTION FROM SALARY INCOME UNDER SECTION 16

• ENTERTAINMENT ALLOWANCE :• Only available to GOVERNMENT EMPLOYEE• Least of the following shall be exempt :

1. ₹ 5,000/- 2. 20 % of the Basic Salary3. Actual amount received

DEDUCTION FROM SALARY INCOME UNDER SECTION 16

• PROFESSIONAL TAX / TAX ON EMPLOYMENT :• Deduction is only available on the year of

actual payment.• If professional tax is paid by the employer,

then it is first included and then deducted from the Gross Salary.• There is no monetary ceiling on the amount

of deduction. . . Only condition it should have been actually paid.• e.g. : ₹ 2,500/- is the Professional Tax p.a.

Relief Sec 89 (in respect of salary in Arrears or Advance)

Example-• X is employed by A ltd.• Previous year 2007-2008 salary income

=230000 • Income tax paid=20600• Previous year 2012-13 salary income

=1200000 • Income tax paid=195700•  On 1 Dec. 2012 ,X has received an arrears of

bonus ₹ 60,000 pertaining to the previous year 2007-2008

Relief Sec 89 (in respect of salary in arrears ,Advance)Relief under sec 89 Rs. 18540- Rs 16480=Rs 2060

Py 2007-2008

Py 2012-2013

Taxable income without including arrears of bonus

230000 1200000

Tax 20600 195700

Taxable income after including arrears of bonus

290000 1260000

Tax 37080 214420

Difference 16480 18540

Income from house property

• The income earned from let out property and self occupied house are covered under this head.

• Income is computed after giving certain deductions from the net annual value of the let out property.

Computation of net value of let out property:- For let out properties, the gross annual value will be the greater of the following three amounts. • Municipal value of the property• Actual rent received during the year;• Fair rent i.e. rent of similar properties in the same or

similar locality.• Standard rent is the maximum rent which a person

can recover from the tenant, under the rent control act.

Entitled deductions for let out property

Under section 24 the following expenses will be allowed as deductions from the net annual value arrived at after deducting municipal taxes from the gross annual value:-

• 30% of the net annual value for repair and maintenance and rent collection expenses for the property

• Interest on money borrowed to build, buy or repair the property;

Capital Gains

Any gain arising on the transfer of a capital asset is chargeable to tax under section 45. Capital Gain’s tax liability arises only when the following conditions are satisfied:• There should be a capital asset.• The capital asset is transferred by the

assessee• Such transfer takes place during the previous

year.• Any profit or gains arises as a result of

transfer.• Such profit or gains is not exempt from tax

under section 54, 54B, 54D, 54EC, 54F, 54G, and 54GA

Capital Assets“Capital asset” includes property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible. However, following are excluded from the definition of “capital assets”:• Any stock-in-trade.• Personal effects of the assessee• Agricultural land in India provided it is not situated.• 6½ percent Gold Bonds, 1977 or 7 percent Gold

Bonds, 1980 or National Defense Gold Bonds, 1980 issued by the Central Government.

• Special Bearer Bonds, 1991.• Gold Deposit Bonds issued under Gold Deposit

Scheme, 1999.

Short-term Capital Assets“Short term capital asset” means a capital asset held by an assessee for not more than 36 months, immediately prior to its date of transfer.

Long-term Capital Assets“Long term capital asset” means a capital held by an assesee for not more than 36 months, immediately prior to its date of transfer.

Determine whether short term or long term?1) Mr. Dravid had purchased a house property on 31/01/2009 & sold it to sham in 23/01/2012.2) Mr. Amir purchased shares of m/s Bongaigaon refinery on 10/01/2010 &sold the same on 09/07/2011.

Solution:1)For nonfinancial assets ,holding period is not more than 36, months it is short term, in this case it is only 35 months &24 days. Therefore this is STCG.2) FOR FINANCIAL ASSETS it is one year ,therefore, this is LTCG.

Important Terms

Transfer of Capital Asset

Full Value of Consideration

Expenditure on Transfer

Cost of Acquisition

Cost of improvement

Indexed Cost of Acquisition

Indexed Cost of Improvement

Capital Gain Exemption

• Profit on sale of property used for residence [S. 54]:- Available to Individual & HUF on transfer of Long-term Residential Property and new residential House property is purchased or constructed.

• Capital gains on transfer of agricultural land [S.54B]:- Available to Individual on transfer of Agricultural land used by individual or his parent for agricultural purposes during 2 year preceding date of transfer and Agricultural land (urban or rural) is purchased.

CONTD…

• Investment in certain bonds [S.54EC] :- Available to all assesses on transfer of any long-term capital asset for purchase of Bonds, redeemable after 3 years issued by

(a) National Highway authority of India; or (b) Rural Electrification Corporation

• Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house [S. 54F]:- Available to Individual & HUF on transfer of Long-term Asset other than Residential house Property and residential House property is purchased or constructed.

Computation of Short-term Capital Gains

Computation of long term capital gains

Computation of long term capital gains

INDEXED COST OF ACQUISITION/IMPROVEMENT

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Cost Inflation Index (CII) for the first year in which the asset was

held by the assessee or for the year

beginning on 1.4.1981,

whichever is later / the

year of improvement

Setting off of LTCG and STCGI have incurred a capital loss of Rs.5 lakh on sale of shares. Can I set this off? —Chiranjeev If you have held the shares for less than 12 months from acquisition date, then the resulting loss of Rs.5 lakh shall be termed as short-term capital loss (STCL). This can be set off against the taxable short-term capital gain (STCG) or long-term capital gain (LTCG), if any, resulting from sale of any capital asset in the same fiscal. If it cannot be done in the same fiscal, then the balance STCL can be carried forward to subsequent eight fiscals. In each of these, the said STCL can be set-off against only STCG or LTCG.

Income from other sources

Any income which does not fall under any other head of income is taxed under the head “ Income from other sources”.

Section 56 specifies following incomes which are always taxable under the head “income from other sources”

• Dividend• Winning from lotteries, races, card games, etc.• Interest on securities- Debentures, Govt.

bonds/securities• Gift

Etc.

Contd.…

Dividend- Not taxed in case of individuals

Winning from lotteries, etc.- 30% of the winnings

Bonds- There are taxable and tax-free bonds.

Interest from savings accounts- Interest above ₹ 10,000 will be taxed according to the tax slab.

Gifts:-

Any sum of money or property received without consideration or with inadequate consideration by an individual exceeds ₹ 50,000 the whole of such amount is taxable.

₹ 50,001!!!Can you please reduce ₹ 2?

Exemptions vs DeductionsExemption is that part of the income that is exempt from tax.e.g. income up to ₹ 2,50,000 is exempt from taxes

Deduction is a reduction of the income subject to tax.e.g. income not liable to be taxed under section 80C, 80U etc. are deductions

DeductionsSection 80C-The aggregate amount of deduction under section 80C, 80CCC and 80CCD(1) shall not exceed ₹ 1,50,000/-. Instruments included in the same are- • life insurance• contribution to Provident Fund set up by the Government• recognized Provident Fund• subscription to National Savings Certificates• Deduction for contribution in pension scheme notified by the

Government to the extent of 10% of salary in case of employees and 10% of total income in case of others.

• tuition fees• payment/ repayment for purposes of purchase or construction of a

residential house and many other investments. • Investment under Rajeev Gandhi Equity Linked Scheme. Deduction

is available up to 50% of the amount invested.( Maximum Deduction available ₹ 25,000/- )

(For full list, please refer to section 80C of the Income-tax Act. )

80D

Deduction in respect of Medical Insurance Premium for Self and family members.(Maximum Deduction available ₹ 20,000/- for Senior Citizens and ₹ 15,000/- for others.)

Deduction in respect of Medical Insurance Premium for Parents (Father or mother or both).( Maximum Deduction available ₹ 20,000/- for Senior Citizens parents and ₹ 15,000/- in other cases. )

80DD-Deduction in respect of maintenance including medical treatment of dependent who is a person with disability. ( Maximum deduction ₹ 100,000/- in case of severe disability (more than 80%) and ₹ 50,000/- in other cases. )

80DDB-Deduction to the extent of ₹ 40,000/- or the amount actually paid, whichever is less for expenditure actually incurred on self or dependent relative for medical treatment of specified disease or ailment.

80E

Deduction in respect of interest on loan taken for pursuing higher education. The deduction is also available for the purpose of higher education of a relative.

80GDeduction in respect of donations to certain funds, charitable institutions, etc. The various donations specified in Sec. 80G are eligible for deduction up to either 100% or 50% with or without restriction as provided in Sec. 80G

80GG-Deduction in respect of House Rent Paid. ( Maximum Deduction ₹ 24000/- )

80GGA-Deduction in respect of certain donations for scientific research or rural development.

80GGC-Deduction in respect of contributions given by any person to political parties.

80TTA

Deduction in respect interest on Saving accounts. ( Maximum Deduction ₹ 10,000/- )

80U

Deduction in case of a person with disability. ( Maximum Deduction: General disability - ₹ 50,000/-, Severe disability - ₹ 1,00,000/-. )

87A

Rebate of ₹ 2,000 for resident individuals having total income up to ₹ 5 Lakhs.

Tax Deduction at Source (TDS)Tax deduction at source means the tax required to be paid by the assesses, is deducted by the person paying the income to him.

Tax deduction at source means the tax required to be paid by the assesses, is deducted by the person paying the income to him.

The income from the following sources is subjected to tax deduction at source• Salary and all other positive incomes under any head on

income.• Interest on securities.• Interest other than interest on securities.• Payments to contractors and sub-contractors.• Winnings from Lottery or crossword puzzles.

Know the do's and don'ts of forms 15G and 15H

When can the bank deduct tax at source?

Who can submit form No. 15G?

• Let’s take the example of Shah Rukh, who is 55 years old. Shah Rukh’s total income is Rs2,90,000, of which Rs2,10,000 is earned by way of interest from bank deposits. Shah also invests 1,00,000 under Section 80C and pays a medical insurance premium of Rs15,000. Is Shah eligible to furnish Form 15G?

• The first condition is that Shah Rukh’s final tax liability should be nil. Gross income is Rs2,90,000, on account of his Section 80C and Section 80D deductions of Rs1,00,000 and Rs15,000 respectively, the net income falls to Rs1,75,000 and consequently he is not liable to pay any tax.

• Therefore, Shah Rukh satisfies the first condition. However, we find that since his interest income of Rs2,10,000 is more than the basic exemption limit of Rs200,000. Shah doesn’t satisfy the second condition and hence he is not eligible to furnish Form 15G to the interest paying organisation.

Who can submit form No. 15H?

• For example, say Mehta, 68 years old, has a total income of Rs3,00,000, out of which Rs45,000 is earned from the senior citizens saving scheme and the rest from bank deposits. He invests Rs50,000 in PPF. Now, is he eligible to furnish Form 15H?

• Mehta’s net income works out to Rs2,50,000 (Rs3,00,000 - Rs50,000). As the basic exemption limit for Mehta is also Rs2,50,000 (on account of him being a senior citizen), his net tax liability is nil and hence he is indeed eligible to submit Form 15H.

What precautions to be taken while submitting form no. 15G and 15H? 

What if the bank has already deducted tax before submission of the form?

What is PAN?• Permanent account number.• Mandatory for paying income tax.• Identifier of Indian income tax payers.

Form 16Form 16 is a certificate or a document that is issued to salaried personnel in India by their respective employers.

Case Study:-

Mr. Rajnikanth draws a total salary of ₹ 12,00,000 from his employer. He is not married and lives with his parents. He recently bought a house with a loan of ₹ 15,00,000. He rented the property at ₹ 20,000 per month. His short term capital gains in equities are ₹ 25,000. How should we plan Rajnikanth’s tax returns?

Tax Calculation

A. Income from Salary/Pension

1.

Total salary/ pension as per Form 16 12,00,000

Total Income from Salary chargeable to Income Tax

12,00,000

B. Income/Loss from House Property

1.

Annual Rent 2,40,000

2.

Interest payable on borrowed capital 1,50,000

Income from House Property chargeable to Income Tax

18,000

C. Income from Capital Gains

1.

Short Term Capital Gain-Taxable @ 15% 25,000

2.

Long Term Capital Gain

Total Income from Capital Gains 25,000

D. Income from other source

1.

Income- Taxable at Normal Rates 15,000

Taxable Income from other sources 15,000

G. Aggregate Income( A+B+C+D) 12,58,000

H. Eligible Deductions

1. Deductions Under Sec. 80C 1,50,000

2. Deductions under Sec. 80D –Self & family

15,000

3. Deductions under Sec. 80TTA 10,000

Total Deductions from Taxable Income

1,75,000

Total Taxable Income 10,58,000

Taxable Income and Tax Liability details

Description Income Income Tax

Exempt Income 2,50,000 Nil

Income Chargeable @ 10% 2,50,000 25,000

Income Chargeable @ 20% 5,00,000 1,00,000

Income Chargeable @ 30% 58,000 17,400

Income chargeable at Special Rates

25,000 3750

Total 10,83,000 1,51,150

Education Cess @ 3% (1%+2%) 4535

Tax Payable 1,55,685

Q. So what do you think? What is the maximum you can earn without paying any taxes?

A. Unlimited. If you are a

Questions

Thank You