Session 3 Print

FINERVA Cognizant Technology Solutions 28 SEPT 2007

Three Power Steps Three Power Steps to to

Financial SuccessFinancial Success

SAVE

INVEST PROTECT

COGNIZANT TECHNOLOGY SOLUTIONS | 28-SEPTEMBER 2007COGNIZANT TECHNOLOGY SOLUTIONS | 28-SEPTEMBER 2007


We are HereWe are Here

• Fundamentals of Financial Planning – 1

• Fundamentals of Financial Planning – 2• Income Tax Management• The Way Forward


Tax Tax PlanningPlanning


Two things are definite in life: Death Two things are definite in life: Death and Taxes – Benjamin Franklinand Taxes – Benjamin Franklin

• Tax burden is most heavy on the

Salaried Class in India.

• Two sides to it:

– The good Side

– The negative side


The NegativesThe Negatives

• Income is Transparent – Salary is the

prime source of Income.

• There is TDS – Onus is on the Individual

to claim excess tax.

• Cumbersome process and procedures to

deal with officials.


The PositivesThe Positives

• Tax sops do exist – Tax payout can

be reduced.

• Forced Savings / Investment –

Future can be made secure.

• All this can be fun – With Finerva


The Big pictureThe Big picture• Receipts• Less Exempted Tax• Gross Total Income• Less Deductions• Total Income• Compute Tax• Final Tax Liability • (Add Surcharge (if Applicable) + Add Educational Cess)


Receipts (Heads of Income)Receipts (Heads of Income)

• Income from Salaries

• Income from House Property

• Profits and Gains from Business

or Profession

• Capital Gains

• Income from Other Sources


Exempted IncomeExempted Income• 10(1)Agricultural Income

• 10(10A) Commutation of Pension – Subject to – 1. Age > 45 years– 2. Commuted Amount not more than 1/3rd of

the total amount

• 10(10D) Amount Claimed from Insurance Companies on Maturity and Death subject to Life Cover being > 5 times Annual Premium.


Exempted Income…Exempted Income…• 10(13A) House Rent Allowance:

– Lower of HRA Paid– 40% of Basic or 50% of Basic in Metros– Rent Paid minus 10% of Basic Salary

• 10(14) Conveyance Allowance – Rs.800/- per month


Exempted Income…Exempted Income…• 10(34)Dividend where dividend

distribution tax has been paid

• 10(38) Long Term Capital Gains Tax on Units of Equity Oriented Mutual Fund


DeductionsDeductions• 80C Maximum Rs.100,000/-

– EPF– PPF– Insurance Premiums– Pension Plans– Education Fees– Principal of Housing Loan– ELSS, – NSC,– Infrastructure Bonds– Bank Deposits of 5 years with lock in.


Deductions…Deductions…• 80D - Medical Insurance upto

Rs.15,000/- (Rs.15,000/- for Senior Citizens > 65 years old)

• 24 - Interest on Housing Loan upto Rs.150,000/-

• 80E - Interest paid on higher education loan


Deductions…Deductions…• 80G

– Donation to Charitable Funds– 100% for Prime Minister’s Relief Fund– 50% for all other eligible funds

• 80GG– Deduction for rent paid where HRA is not paid.

Least of• 25% of Total Income• Rent Paid minus 10% total income


Deductions…Deductions…• 80U - Persons with specified

disabilities Rs.50,000/-. For Severe Disability Rs.75,000/-


Deductions on ReimbursementDeductions on Reimbursement

OnlyOnly (Original Bills Submission)(Original Bills Submission)

• Medical Reimbursement – upto Rs.15,000/-

• Leave Travel Allowance – Twice in Four Years subject to limitation on travel.

• Food Coupons and Vouchers (Sodexo)

• Business related travel and entertainment

• Actual Expenses for Higher Education


Tax SlabsTax SlabsTax Rate

Tax Slab Male Tax Slab Female Tax Slab SeniorCitizens

0% 0 to 110,000 (First 110,000)

0 to 145,000 (First 145,000)

First 195,000 is 0%

10% 110,001 to 150,000(Next 40,000)

145,001 to 150,000 (Next 5,000)

20% 150,001 to 250,000 (Next 100,000)

150,001 to 250,000 (Next 100,000)

195,001 to 250,000 (Next 65,000)

30% Above 250,000 Above 250,000 Above 250,000


Case StudyCase Study::• Mr. Rakesh aged 30, has a gross salary income of

Rs.500,000. His salary split up is given below. He has

shifted to Chennai from his native Trichy. He lives with

his wife and son who is 1.5 years old. He has an

additional income of Rs.132,000/- from his rice fields

at Trichy. Calculate Mr. Rakesh’s tax liability.

• He has made investment in a Pension plan for

Rs.25,000/-.Rs.5000/- for health insurance premium.

Rs.25,000/- in a Life insurance plan. And Rs.27,000/-

in an ELSS Mutual Fund.


Basic 2,04,539

HRA 81,816

PF 17,045

CCA 38,000

LTA 10,000

Medical Reimbursement 15,000

Conveyance 9,600

Child Education Allowance 12,000

Utility Allowance 12,000

Performance linked bonus 100000

Total 500000


The Nay, NaysThe Nay, Nays


Please avoidPlease avoid

There are a few financial transaction

which an investor should avoid at all

times. They may add to the tax

burden (which already will be high)

or be a negative cash flow.


Mutual Funds < 365 daysMutual Funds < 365 days

A mutual fund with less than 365 days

(1 year) of investment will attract 10%

Capital Gains Tax Plus Exit Charges from

the Fund Manager


Car Loan / Personal LoanCar Loan / Personal Loan

A car loan adds interest to an item which

depreciates over time (whether used or

not).


Fixed DepositsFixed Deposits

• The interests will add to your tax burden. The interests anyway are low.

• Not recommended except for Retired Senior Citizens (> 65 years old).


The Yeah, YeahsThe Yeah, Yeahs


A Farm House A Farm House Relax, Earn, Zero Tax TooRelax, Earn, Zero Tax Too

• Technically a farm house is one which is

25km from the nearest Corporation,

Municipality, etc. – Relax and Party on holidays.– Earn 100% Tax free income from

agricultural activities.


My My HOUSEHOUSE

Rent or Buy?Rent or Buy?


Benefit on Buying HouseBenefit on Buying House

• Property value is appreciating

• Property can be pledged to take loan latter

• Pride of owning a house

• Tax is saved on principal & interest

• Rental income possible post retirement


Tax benefitTax benefit

Under Rent

– 40% of Basic Salary /

HRA / Rent Paid in

Actual which ever is

lowest

– 50% in case of metros

Under Housing Loan

– Tax Benefit on Principal

(Amount Exempted)= Rs

100000 @30%

– Tax Benefit on Interest

(Amount Exempted) =

150000 @30%

But this is negative CASH

FLOW.


Benefit on Rented HouseBenefit on Rented House

• Amount saved can be invested at higher returns

• Better life style, flexibility to spend and save.

• Can switch to better locality and larger house based

on salary increase

• Tax saved on rent expense

• Can buy house on down payment latter

• No maintenance cost

• There can be savings on difference between actual

rent and HRA


Min Max Min Max Min Max Min Max

850,000 2,000,000 3500 10000 8,126 19,120 10,319 24,280

Wealth Tax 1% 8,500 20,000 708 1,667 708 1,667

Maintenance Cost of Own House

1% 8,500 20,000 708 1,667 708 1,667

6,043 12,453 8,236 17,613

Yearly Payouts 42000 120000 114,512 249,440 132,328 311,360

72,512 149,440 98,828 211,360

2,104,445 4,337,051 8,017,104 17,145,902

Min Max

750 1500

100 500 344.0366972

3.5 10

956 1214 286800

18.55%

Market returns on amount saved for respective periods

Reference

Amount Saved When Rented

Amount Saved Yearly When Rented

EMI/lakhHistorical Market

Retuns Sensex returns since 1969 is considered

Rates

Building

Land

Rent

EMI 10 years EMI 15 yearsParticulars

Area of house (sq feet) 1000

Build Rent


AssumptionsAssumptions

• House bought for own occupation

• Amount saved are reinvested at market returns

• Profile considered is that of a salaried

employee

• Down payment made for acquiring the house is

not considered as it may be equal to deposit for

the rented house


Assumptions…Assumptions…

• Rent increase is not considered. Neither is the cost of

increase in maintenance and increase in HRA. As these

can be considered to be negated against each other

• Interest rate risk is not considered

• Market return risk is not considered as the terms (10

years , 15 years) are sufficiently long

• Salary structure is considered to be flexible for tax

planning