Individual Tax Planning

Indian Income Tax Provisions for Individual Tax Planning

(Salary Perspective)

- By Asst. Prof. B S Sharath

JSS-CMS, Mysore.

Outline

• Concepts, Meaning & Definitions.

• Categories of Allowance.

• Tax Exemption & Tax Deduction.

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Income Tax

Concepts, Meaning & Definitions

What is an Income? • Income means a receipt in the form of money

or money’s worth which is derived from definite source with some sort of regularity or expected regularity.

• Income could be classified into 2, they are –

Active / Linear – Earnings from one’s time, skill & hard work.

Passive / Exponential – Earnings from one’s savings or investments.

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Salary • Any remuneration paid by an employer to an

employee in consideration of his services is called salary.

• It includes monetary value of those benefits and facilities, which are provided by the employer and are taxable.

• Salaries include wages, allowances, fees, commission, bonus, perquisites or profits in lieu of salary, annuity / pension, gratuity, advance of salary, amount transferred from unrecognized PF to a recognized PF, PF contribution by employer in excess of the prescribed limit, leave encashment.

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Allowances

• Allowance is a fixed monetary amount paid by the employer to the employee (over and above the basic salary) for meeting certain expenses, weather personal or for the discharge of his duties.

• These allowances are generally taxable and are included in gross salary unless specific exemption is provided in respect of such allowance.

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Perquisites

• Perquisite may be defined as any casual emolument or benefit attached to an office or position in addition to salary or wages.

• Perquisite is defined u/s 17(2) of the income tax act as including – Value of rent-free / concessional rent accommodation,

benefits / amenity provided by the employer. Any sum paid by the employer in respect of an obligation

which was actually payable by the assessee. Value of Sweat Equity allotted / transferred free of cost or

at a concessional rate to an assessee. Contribution made to an approved superannuation fund

by the employer in respect of the assessee, to the extent it exceeds one lakh rupees.

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Arrears

• Arrears are fully taxable.

• Employee has a provision to claim exemption u/s 89(1).

Employee will have to compute income tax on arrears if it would have been received in the actual year.

Difference of income tax between payment year and actual year would be allowed for deduction from tax liability.

Illustration

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Gratuity

• Gratuity is non-taxable up to Rs. 10 lakh in case of non-government servants.

• In case of Government service employees, it would be fully non taxable.

• If amount is received before completion of five years of service with employer, it would be taxable.

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What is Tax?

• A fee charged / levied by a government on a product, income or activity.

• If tax is levied directly on personal income or corporate income it is termed as “Direct Tax”.

• If tax is levied on the price of a good or service, it is termed as “Indirect Tax”.

• Our Direct Taxation system is based on “Ability to Pay”, i.e. the more we earn, the more taxes we pay. The opposite is also true.

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“Ability to Pay” – Tax Slabs (For the FY / PY 2014 – 15 & AY 2015 – 16)

Rs.00,00,000 to Rs.02,50,000 - NIL

Rs.02,50,001 to Rs.05,00,000 - 10%

Rs.05,00,001 to Rs.10,00,000 - 20%

Rs.10,00,001 & above - 30%

Additional Cess - 3% on Income Tax

(2% Education Cess, 1% Higher Education Cess) 11

General Public (There are no separate slabs for Male & Female assessee)

“Ability to Pay” – Tax Slabs (For the FY / PY 2014 – 15 & AY 2015 – 16)

Rs.00,00,000 to Rs.03,00,000 - NIL

Rs.03,00,001 to Rs.05,00,000 - 10%

Rs.05,00,001 to Rs.10,00,000 - 20%

Rs.10,00,001 & above - 30%

Additional Cess - 3% on Income Tax

(2% Education Cess, 1% Higher Education Cess) 12

Senior Citizen (Aged above 60 years)

(There are no separate slabs for Male & Female assessee)

“Ability to Pay” – Tax Slabs (For the FY / PY 2014 – 15 & AY 2015 – 16)

Rs.00,00,000 to Rs.05,00,000 - NIL

Rs.05,00,001 to Rs.10,00,000 - 20%

Rs.10,00,001 & above - 30%

Additional Cess - 3% on Income Tax

(2% Education Cess, 1% Higher Education Cess)

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Super Senior Citizen (Aged above 80 years)

(There are no separate slabs for Male & Female assessee)

Tax Evasion &

Tax Avoidance

What is Tax Evasion?

Tax Evasion is –

• An exercise involving an element of deceit

• Misrepresentation of facts

• Falsification of accounts

• Indulging in downright fraud.

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What is Tax Avoidance?

• Tax Avoidance / TAX Planning is not Tax Evasion.

• Tax planning is merely availing, strictly in accordance with the law, tax exemptions or privileges offered by the government.

• Tax planning could also be termed as tax avoidance within the purview of government rules and regulations with an intention to reduce one’s tax liability.

• Tax planning / tax avoidance is legal.

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Income Tax

Categories of Allowances

Categories of Allowances For the purpose of tax treatment, the allowances could be categorized into 3 heads as follows –

1. Fully Taxable Cash Allowances – a) Dearness Allowance / Dearness Pay b) Grade / Special / Management / Supplementary Allowance c) City Compensatory Allowance d) Tiffin / Lunch Allowance e) Non Practice Allowance f) Warden or Proctor Allowance g) Deputation Allowance h) Overtime Allowance i) Fixed Medical Allowance j) Servant Allowance k) Other Allowances which are not addressed under specific

exemption category. Cont.

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Categories of Allowances (cont.)

2. Partly Exempt Allowances –

a) House Rent Allowance (H.R.A.) – Allowance given to an employee by the employer to meet expenditure incurred on payment of rent in respect of residential accommodation occupied by him.

(exempted H.R.A. calculation discussed in subsequent slide).

b) Entertainment Allowance (applicable only to government employees, Rs.5,000 or 20% of salary or actual amount whichever is less).

Cont. 19

Categories of Allowances (cont.)

c) Special allowance for performance of official duties.

d) Special allowance for meeting personal expenses like:

i) Children Education Allowance (Rs.100 pm per child, max for 2 children)

ii) Children Hostel Allowance (Rs.300 pm per child, max for 2 children)

iii) Transport Allowance (Rs.800 pm or Rs.1600 for blind or handicap employee)

iv) Out of Station Allowance (70% or Rs.10,000 pm, whichever is less)

Cont. 20

Categories of Allowances (cont.)

3. Fully Exempt Allowances –

a) Foreign Allowance (applicable only to government employees posted abroad).

b) Allowance to Supreme Court or High Court Judges.

c) Allowance from UNO to its employees.

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Tax Exemption (on Income / Salary) &

Tax Deduction (on Spending)

Income Exemption from Tax • Leave Travel Allowance (L.T.A.) (Partial Exemption)

• Medical Allowance.

• Uniform / Dress Allowance.

• Dividends from Equity & Equity Related Instruments.

• Profits received from a partnership firm.

• Profits received by a member of H.U.F from H.U.F. earnings.

• Long Term Capital Gains from Equity & Equity Related Instruments.

• Interest received on PPF investment.

• Interest received on Tax Free Bonds.

• Disability Pension (Defense).

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Tax Deductions u/s 80C – Savings,

80CCC – Pension Plans and 80CCD – Contributory Pension Plan

(max of 10% of salary) 80CCG – RGESS

Aggregate amount of deductions under all the above sections (except 80CCG) are

subject to an overall ceiling of Rs. 1,50,000 only.

Investments Eligible u/s 80C Equity Linked Savings Scheme (ELSS), notified u/s

10(23D) Five Years Tax Saver Bank Deposits Public Provident Fund (PPF) National Savings Certificate (NSC) Life Insurance Premium Unit Linked Insurance Plans (ULIP) Employee Provident Fund (EPF) Home Loan Principal Repayment (only in case the

assessee has got the possession) Tuition Fees Paid for Children Education, for a

maximum of 2 children.

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Rajiv Gandhi Equity Saving Scheme u/s 80CCG

Provides income tax deduction of 50% for a “New Retail Investor”.

Maximum investment upto Rs.50,000 directly into equities. An assessee whose income is less than Rs.10 lakh is eligible to

claim under this scheme. Subject to a three -year lock in. ETFs and Mutual Funds listed on stock exchange or equity

shares, on the day of purchase falling in the list of equity declared as a BSE 100 / CNX 100 stock.

Acquiring Equity shares or subscribing to IPO / FPO of PSUs which are categorized as Maharatna, Navaratna or Miniratna by the Central Government.

IPO of a PSU wherein the government shareholding is at least 51%, which is scheduled for getting listed and whose turnover is not less than Rs.4,000 crores during each of the preceding 3 years.

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Tax Deductions u/s

80D – Medical Insurance Premium, 80DD – Medical Treatment

(dependent handicapped relative)and 80DDB – Medical Treatment (self or dependent relative)

Deduction u/s 80D Medical Insurance Premium

Upto Rs.15,000 for self / family.

Additional of Rs.15,000 / Rs.20,000 (if either of the parents are senior citizen) for parent(s) of the assessee.

Deduction u/s 80DD

Medical Treatment of Handicapped Dependant

Upto Rs.50,000

Upto Rs.1,00,000 (expenditure incurred on handicapped dependant with severe disability).

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Deduction u/s 80DDB

Medical Treatment of Specified Diseases

Upto Rs.40,000.

Upto Rs.60,000 in case of a senior citizen assessee.

Applicable for self, spouse, children, siblings and parents, wholly dependent on assessee.

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Tax Deductions u/s

80G – Donations Towards Social Cause &

80GG – House Rent and H.R.A

Deductions u/s 80G - Donations Categorization of donations u/s 80G for claiming

deductions –

Donations with 100% deduction without any qualifying limit.

Donations with 50% deduction without any qualifying limit.

Donations with 100% deduction subject to 10% of the Adjusted Gross Total Income.

Donations with 50% deduction subject to 10% of the Adjusted Gross Total Income.

(AGTI = Gross Total Income – Capital Gains – all deductions u/s 80CCC to 80U other than 80G)

Details 31

Deduction u/s 80GG • If the assessee is not receiving H.R.A. and

stays in a rented house, least of the following could be claimed –

25% of the total income.

Rs.2,000 per month, or

Excess of rent paid over 10% of total income.

This deduction would not be applicable if the assessee, spouse or minor child of the assessee owns a residential accommodation in the location where the assessee resides or performs office duties.

Cont. 32

Deduction u/s 80GG (cont.) • If the assessee is receiving H.R.A. and stays in a

rented house, then the minimum of the following 3 is available as exemption – i. The actual H.R.A. received from the employer.

ii. The actual rent paid, minus 10% of salary (basic + DA)

iii. An amount equal to 40% (non-metro) / 50% (metro) of salary.

This deduction would not be applicable if the assessee, spouse or minor child of the assessee owns a residential accommodation in the location where the assessee resides or performs office duties.

Cont. Illustration 33

Other Deductions Under Various Sections

• Professional / Employment Tax paid.

• Interest on loan taken for higher studies, allowed as deduction over a period of 8 years, u/s 80E

• Interest from savings bank account upto Rs.10,000/-, u/s 80TTA.

• In some cases, deduction for both H.R.A. and home loan interest (u/s. 24) can be taken together in case own house is not in the same city or not at a commutable distance to workplace.

• Interest on housing loan for self occupancy deduction upto Rs.2,00,000 u/s 24.

• Contributions to political parties by an assessee. 34

There are 3 types of people when it comes to

Money. They are –

SPENDERS – Who don’t even try to walk their way to wealth creation.

= SAVERS – Who walk their way towards wealth creation but, put their savings in wrong assets.

INVESTORS – Who drive their way towards wealth creation.

~~~ Thank You ~~~ 35