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Tax Planning
By Samira Rao,Chartered AccountantCo-founder Paybooks
www.paybooks.in
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Is a good job and fatpay packet enough tokeep you happy?
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Ignorance is not bliss !
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Before we start :
1. This webinar is scheduled for 1 hour 50 minutesfor the talk and a 10 minute session to takequestions
2. You will need to use your headphones orcomputer speaker
3. Type your questions in the right hand panel inyour screen
4. The recorded version of this webinar will be putup on our website www.paybooks.inafter 5business days
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Key take away from this webinar
1. General rates and effective rates2. Tax planning Vs. Tax avoidance Vs. Tax evasion
3. Tax planning and financial planning4. Taxable Income heads5. Deductions allowed with tips
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Tax rates for FY 2013-14
Income Slabs Tax Rates
Where the total income does not exceedRs. 2,00,000/-
Nil @@
Where the total income exceeds Rs.2,00,000/- but does not exceed Rs.5,00,000/-
10%Less:Tax Credit - 10% of taxable incomeupto 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% 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
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Example of tax calculation:
Assume taxable income is 12 lakhs
0-2 lakhs ( basic exemption) No tax2-5 lakhs on 3 lakhs*10% = 30,0005.01-10 lakhs on 5 lakhs *20% = 100,00010.01- 12 lakhs on 2 lakhs*30% = 60,000Total basic tax = 190,000Add: Education cess @ 3% = 5,700Total tax = 195,700
Effective tax rate = 195,700/12,00,000= 16.31%
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Tax planning, Tax avoidance, Tax evasion
Tax planning Tax avoidance Tax evasion
Reducing tax liability byusing the various taxprovisions in the law
Reducing tax liability bymaking use of differentloopholes in the law
Illegally reducing taxliability by breaking the law
Is 100% legal Thin line of difference betweenplanning and avoidance inmany cases
Done usually by deflatingincome and inflatingexpenses
Tax payers are advised to usethis to reduce tax burden bymaximum usage ofexemptions and deductions
Not generally advisable as taxpayer is making use of aprovision which the Govt didntanticipate. Retrospectivechanges can defeat taxavoidance schemes
Not advised at all. Haspenal and criminalramifications
Is done before tax liability
arises
Is done before tax liability
arises
Is done after tax liability
arises
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Tax planning and financial planning
Tax planning is only a sub set of the more general Financial planning. Thepurpose of tax planning is to see how best to accomplish all the otherelements of the financial plan in the most tax efficient manner.
Financial planning covers chiefly cash flow management, educationplanning, portfolio management, retirement planning, real estate matters,insurance coverage, succession planning and last but not the least taxplanning.
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 financialdog.E.g. buying a insurance plan at fag end of the year just to save tax.
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Taxable earning heads
1. Income from salaries2. Income from house property3. Income from business/profession4. Income from capital gains5. Income from Other sources
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Main deductions/exemptions fromsalaries
These are allowed as a deduction from salary income only if itforms part of the salary components received.
Uniform allowance, Children Education allowance, ChildrenHostel allowance etc
HRA, LTA, Conveyance allowance, Medical reimbursement
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Main deductions/exemptions fromsalaries
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 therent receipts and the employer is bound to give exemption
without insisting on the rent receipts.
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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 provideseparate rent receipts and rent is paid from a joint account. Based
on total incomes and applicable slabs, decide who will claim the
HRAboth or only 1
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Illustration on tax saving on HRA
You Parent aged 61years
Taxable incomewithout HRA claim 13,50,000 0
Rent 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 13.50lakhs
242,050 0
Saving 110,210 -200
In a case where rent is paid to parents
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Illustration on tax saving on HRA
Planning on who will claim HRA when both husband and wifeare working and rent is assumed at Rs 20,000 p.m
You Spouse Total tax
Total income before HRA (I) 12,00,000 800,000A) HRA you in full 240,000 0
Tax on net income (I) A 125,660 92,700 218,360
B) Equal claim 120,000 120,000
Tax on net income (I) - B 158,620 67,980 226,600
C) Spouse in full 0 240,000
Tax on net income (I) - C 195,700 43,260 238,960
All things remaining same, the difference between the best and worstoptions equals 1 months rent!
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Tips on HRA claim
The Income Tax Act treats HRA and home loan deductions underseparate sections independently. The two are not interconnected toeach other and hence you can claim both the deductions as long asyou satisfy the conditions for each of them independently.
Situation Deduction
Live in own house on which you have ahome loan
Interest deduction of Rs 1.50 lakhs andPrincipal repayment of Rs 1 lakh. No HRA
Live in City A in a rented house and own ahouse in City B with a home loan
You can claim both HRA and interest/principaldeductions
Live in City A in a rented house and own aunder construction house in City A with ahome loan
You can claim both HRA and interest/principaldeductions. You can claim tax benefits only foryour principal before the completion of yourhouse. Once your house is completed, you canclaim tax benefits on the total interest paid upto the date of completion in five equalinstalments in five years beginning from theyear of completion
Live in City A in a rented house and own a
house in City A with a home loan which isrented out
You can claim both HRA and actual interest and
upto 1 lakh principal deductions. However, youneed to offer the rent you receive to tax
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Tips on LTA claim
1. LTA claim covers only cost of travel and does not coveraccommodation and food
2. Travel can be in any mode rail, bus, air and taxi3. International travel is not covered under LTA4. 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, ensurethat you have chosen the maximum allocable in the years in which youare planning for the travel.
2. If you havent claimed LTA in the notified block, claim this in the firstyear of the next block. A total of 3 claims is possible in the block insuch cases
3. Both husband and wife can claim LTA for the same journey bysatisfying the requirement of submitting original tickets in a case where
tickets are booked online.
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Medical Reimbursement
Expenditure for your medical treatment or the treatment of anymember 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 ofthe approved hospitals and it could be at any place and from anytype of doctor belonging to Allopathic, Ayurvedic, Unani,Homeopathy or Naturopathy system of medicine. Even amount spentby you in the local medical shop on purchase of pills and supportedby a bill is eligible for exemption upto Rs 15,000
Maintain the discipline of collecting all the medical bills and be sureto submit all bills to your employer.
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House property deductions
1. Housing loan principal repayment upto Rs 1 lakh u/s 80C. This 80Cincludes other deductions like PF, life insurance premium, childrentuition fee, tax saving FDs etc
2. Even expenditure like stamp duty and registration fee is also eligibleu/s 80C
3. Interest payment deductions under 2 sections sec 24 and sec80EE
If the house for which loan is taken is not acquired or constructioncomplete within 3 years from the FY in which loan is taken, interestdeduction will be reduced to only 30,000 Rs instead of Rs 150,000
Property Deduction
Is self occupied you arestaying in the house for
which loan is taken
Upto Rs 1.50 lakhs
You have rented the house Actual interest paid
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House property deductions
Important !
The house on which you have claimed deduction of principal paymentu/s 80C cannot be sold within 5 years from when you obtainedpossession.
If you sell the property within 5 years, then the amount you haveclaimed as deduction u/s 80C in the previous years shall be added toyour normal income and taxed.
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House property deductions
Treatment of interest payment when house is under construction
Important!
1. Deduction is available only if construction is completed within 3 yearsfrom the year in which loan was taken
2. Be aware that you will be paying Service tax when buying a underconstruction apartment which is not the case when you buy a fullyconstructed apartment
Principal on loan for under construction houses is not allowed as deduction
Purpose of loan Treatment
Repairs/reconstruction No deduction until completion
Purchase/ new construction Add all interest paid during constructionand claim 1/5thof this amount for 5years after completion of construction
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House property deductions
Particulars Deduction basis
Principal Available on payment basis irrespective of the year towhich it pertains to. If you are paying for the last yeartoo, you can claim deduction.
Interest Available on payable (accrual) basis . So you canclaim deduction even if you havent actually paidinterest 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 ofinterest and principal payment if paid from a joint account for thesame property.
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Various deductions
Chapter VI A
Investments
Loans
Medicalspend
Earnings
Donations
Expenditure
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Donations
Political
parties uptoRs 60,000
Approvedtrusts and
funds uptoRs 40,000
ApprovedResearch and
rural
developmentupto Rs 1
lakh
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Loans
Educational loans
no limit
Home loans already
discussed in HRAsection
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Medical Spend
Insurance forfamily and
parents asdiscussed
Maintenanceof specially
abled
dependentsupto Rs 1
lakhs
Treatment ofcertain
specified
diseases upto Rs60,000
Speciallyabled people
upto Rs 1lakh
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Investments
RajivGandhiEquity
SavingsScheme
upto25,000
Equitylinked
savingsscheme
(ELSS) combinedlimit of Rs
1 lakh
NewPensionScheme(NPS) -
combinedlimit of Rs
1 lakh
LifeInsurance -combinedlimit of Rs
1 lakh
Pensionplans fromInsurancecompanies
/ C. Govt -combinedlimit of Rs
1 lakh
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Investmentscontd.
ProvidentFund -
combinedlimit of Rs
1 lakh
PublicProvident
Fund -
combinedlimit of Rs
1 lakh
Tax saving5 year FDs
-
combinedlimit of Rs
1 lakh
SeniorCitizensSaving
Scheme -combinedlimit of Rs
1 lakh
NationalSavings
Certificate(NSC) -
combinedlimit of Rs
1 lakh
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Expenditure
Tuition fee of children
- combined limit of Rs1 lakh
Paying rent when not
in receipt of HRA upto Rs 24,000
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A small step aheadfrom confusion toconfidence
Be aware of the varioustax provisions concerningyour incomes anddeductions.
Make tax planning anintegral part of youroverall financial plan
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