Tax planning for salaried emp. 8.8.2012(final)

TAX
PLANNING

FOR SALARIED EMPLOYEES

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

By CA (Dr.) Alok shah

Indian Taxation History

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 %.

CA. Alok shah

Here comes your footer

Earnings from the Salary

Tax Planning

Followings are forms of the income under the head Salary

 Basic Pay -Salary
 Allowances
 Bonus
 Perquisites
 Salary in lieu of profit
 Retirement Benefits

le
b
a
x
ta

CA. Alok shah


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.

CA. Alok shah


Fully Taxable Allowances
Dearness Allowance and Dearness Pay
City Compensatory Allowance
Tiffin / Lunch Allowance (Fixed Amount)
Non Practicing Allowance
Servant Allowance
Warden or Proctor Allowance
Deputation Allowance
Overtime Allowance
Fixed Medical Allowance

Partly Taxable Allowances

House Rent Allowance (H.R.A.) :
Entertainment Allowance
Special Allowances for meeting official expenditure
Special Allowances to meet personal expenses :
a. Children Education Allowance
b. Children Hostel Allowance
c. Transport Allowance


Partly taxable Allowances

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

HRA exemption calculation is dependent on Four variable:
1.House Rent Allowance received
2.House Rent paid
3.Salary
4.Location of the house.

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.


Tax Planning

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
CA. Alok shah


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.

CA. Alok shah


Partly taxable Allowances

Entertainment Allowance :Entertainment Allowance :-

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.


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

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 to meet personal expenses ::
Special Allowances to meet personal expenses
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 Allowance
b. Children Hostel Allowance
c. Transport Allowance
d. Out of station allowance


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.


Fully Exempt Allowances

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.
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
1. Rent free Residential Accommodation :

(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.

Perquisites
(I) Central Govt. & State Govt., employees :
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
(ii) For all Others : In the Next Slide


Perquisites

Population of City

Owned by
Employer

Exceeding 25 lakh

15 % of the salary

Exceeding 10 lakh but not
exceeding 25 lakh

10 % of the salary

Any other place

7.5% of the salary


Taken on leased
by Employer
Amount of leased paid or
payable or
15 % of salary whichever
is lower

Same as above

Same as above

Perquisites
(B). Furnished accommodation :
For furnished accommodation, the value of perquisite
as determined by the above method shall be increased
byi)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

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

Official purpose

Not a perquisite

Both
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

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

Official purpose

Not a perquisite

Both
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 :

Tax Planning

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

 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.
CA. Alok shah


Continue……

Tax Planning

Don’t get over smart :
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.
CA. Alok shah


Continue…….

Tax Planning

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.
CA. Alok shah


Continue…….

Tax Planning

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)

Ca Alok shah
CA. Alok shah


Continue…….

Tax Planning

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.

BEAWERE

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

CA. Alok shah


2. Benifit of having a home loan :

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

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.


3. Beat your tax by PPF :

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

Tax Planning

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

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.

CA. Alok shah


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.

CA. Alok shah


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.
CA. Alok shah


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


5. Cut tax by buying a home :

•

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.

• 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.

Income from Other Sources :

Tax Planning

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.

CA. Alok shah


Tax planning for salaried emp. 8.8.2012(final)

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (14)

Similar to Tax planning for salaried emp. 8.8.2012(final)

Similar to Tax planning for salaried emp. 8.8.2012(final) (20)

More from ishan parikh production

More from ishan parikh production (7)

Recently uploaded

Recently uploaded (20)

Tax planning for salaried emp. 8.8.2012(final)