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Tax PlanningWhat is tax planning?Tax Planning: Tax planning is arrangement of finances and investments in such a way that maximum tax benefits, as provided in the income-tax act are availed of.It envisages use of certain exemption, deductions, rebates and reliefs provided in the act.Tax PlanningThe Central Government has power to levy taxes like Income Tax, Wealth Tax, Gift Tax, Excise duty, Custom, Service Tax etc.The taxes levied by the Central Government can be broadly categorized into Direct Taxes and Indirect Taxes .Direct Taxes are the ones which go directly from the pocket of the taxpayer and into the coffers of government.Indirect taxes are the taxes which are paid by some one else but subsequently passed on to final consumer. Examples of Direct Taxes are, Income Tax, Wealth Tax, Gift Tax, Security Transaction Tax , Capital Gains Tax etc. Examples of Indirect Taxes are Custom, Excise, Service Tax , VAT etc.Tax PlanningIncome Tax ActEntry 82 of List I of the Seventh Schedule to the Constitution empowers Parliament to levy taxes on income other than agricultural income. Accordingly, the parliament enacted Income-tax Act 1961 to tax income. The provisions of income-tax Act extends to the whole of India and became effective from 1st April 1962. The Income-tax Act is divided into various chapters and sections. The rates of income tax or for tax deduction at source are not provided either in the Income-tax Act or in Income-tax Rules. They are prescribed every year separately in the Finance Act.

Tax PlanningRESIDENTIAL STATUS AND SCOPE OF INCOMEThe scope of the total taxable income for a person for a previous year is dependent on his residential status which may be (a) resident and ordinarily resident, (b) resident but not ordinarily resident, and (c) non-resident Indian.A residents total income comprises all his income accrued/ received within and outside India. In simpler words, a residents global income is taxable in India.A non-residents total income comprises only that income which has accrued/received in India. In other words, a non-resident shall not be liable to pay tax in India for any income accruing or arising outside India.The total income of a resident but not ordinarily resident is the same as that of NRI.Tax PlanningAssessee It means a person by whom any tax or any other sum of money is payable under this act . Assesse also includes some other person as assesse , though they may not have any tax payable.Assessment Year: The tax is levied, in each assessment year, with respect to or on the total income earned by the assesse in the previous year. Previous Year is the financial year immediately preceding the assessment year. It is the year in which income is earned.Thus for Financial (Previous) year 2012-2013, Assessment year will be 2013-14.Gross Total Income : Is the aggregate of income under all heads of income.Taxable Income : Is the income arrived at, after allowing all deductions and exemptions.

Previous year & Assessment YearPrevious Year (PY) is the year in which the income is earned and tax paid. Assessment Year (AY) is the year in which the income of previous year assessed and tax return is filed. For income earned in PY 2013-14 tax return is filed in AY 2014-15Note-financial year is considered for PY & AY

7Tax PlanningIncome: The definition of the income in section 2(24) of the Income-tax act is inclusive definition. As per the definition, the income includes the following:Income from SalaryIncome from House propertyIncome from Business and ProfessionIncome from Capital GainsIncome from other sources like Dividend/interest income/lottery

Person: This is also an inclusive definition. It includes an individual, HUF, company, firm, Association of Person (AOP), Body of Individual (BOI), local authority, and artificial juridical person.Total IncomeGross Total Income is sum of below income heads:Salaries Income from House PropertyProfits & Gains of Business and ProfessionCapital GainsIncome from Other SourcesTotal Income is arrived after deduction u/s 80 c to 80u from Gross Total Income.9Deduction u/s 80CFor both investments and expenses10Deduction u/s 80COwn contribution to P.F. (SPF, RPF only)Contribution towards life insurance premiumAmount deposited under NSS and NSC VIII issueHome deposit account of National Housing BankAmount deposited with housing/town/rural development authorities or housing finance institutionsEquity Linked Savings Schemes [ELSS]Unit Linked Insurance Policies [ULIP]Post office 5 years term depositA term deposit with nationalized banks for duration of at least 5 years.Senior Citizen Savings Scheme 2004 (SCSS)NABARD Rural bondsStamp duty and registration charges on home purchasesPrincipal amount repaid under home loanAmount paid as annual tuition fees of any two children

11Deduction u/s 80CCC & 80CCDPension fund or annuity scheme of LIC or other insurers (80 CCC)Contribution to Central Government New Pension Scheme (80 CCD)Qualifying Amount-Least of Total savings in 80C, 80CCC and 80CCD Aggregate of Rs.1 lakh in 80C, 80CCC and 80CCD

12Deduction u/s 80CCG-RGESSThe deduction was 50 % of amount invested in such equity shares or 25,000, whichever is lower. Conditions Gross total income should be less than or equal to 12 lakh.The assessee should be a new retail investorThe investment should be made in such listed scriptsThe minimum lock in period three years (1+2)Demat account is compulsoryMax investment eligible for deduction is Rs.50,00013Deduction u/s 80D & 80DDMediclaim insurance (80D)Qualifying Amount-Least of Actual amount paid or Rs.15000 p.a. for self & family and additional Rs.15000 for parents. (Rs.20000 in case of senior citizen)

Medically handicapped dependent (80DD)Qualifying Amount-Rs.50,000 in normal case and Rs.1,00,000 in severe case. 80% severe disability including blindness and mentally retarded. For rehabilitation, training and nursing14Deduction u/s 80DDB & 80EExpense on treatment for self or dependent relative (80DDB)Qualifying Amount- Least of Actual expense or Rs.40000 p.a. (Rs.60000 in case of senior citizen) for diseases like cancer or kidney failure, after deducting the amount obtained from insurerInterest on loan taken for higher education (above X standard) for self, spouse and children (80E)Qualifying Amount-Actual interest amount paid for a maximum period of 8 years.

15Deduction u/s 80EEAn additional rebate [over and above of concession of Rs 1.50 lac available as per section 24] on housing loan interest announced in budget for the year 2013-14.1 lac additional interest benefit on houses purchased/ constructed in 2013-14 where property cost not to exceed 40 lac and loan amount not exceeds 25 lacAvailable as a one time measure for AY 2014-15 only. Can be carried over to AY 2015-16 if full exemption not availed in AY 2014-15.

16Deduction u/s 80G & 80TTADonation to approved funds and institution (80G)Qualifying Amount-Actual donation Social causes Some cases 100% and some cases 50% PM Relief fund, medical reliefPayment of house rent in certain cases (80GG)Do not get HRA from any source. Qualifying amount-Least of the Rs.24000 p.a. or Rent paid-10% of adjusted GTI or 25% adjusted GTIInterest on savings account (80TTA) Qualifying amount-Maximum of Rs.10000

17Section 24 - Housing Loan interestIf the house is Self OccupiedMaximum amount eligible for deduction is Rs 1.5 lakhs if loan is taken on or after April 1st, 1999 for acquisition or construction. [Rs 30,000 if borrowed before April 1st, 1999]Let outNo limitAcquisition or construction - should have been completed within three years from the end of the financial year in which the capital is borrowed.

18Income tax ratesSenior Citizens (age 60 & above) no tax up to income of 2.50 lacsSuper Senior Citizens ( Age 80 & above) no tax up to income of 5 lacsDeduction of Rs 2000/- from total tax for those who are with taxable income below 5 lacs. 87ASuper rich surcharge (10% of tax amount) for taxable income above 1 croreEducation/HE cess of 3 % of tax amount

19Taxable IncomeUp to 2 Lakhs2-5 lacs5-10 lacsAbove 10 lacsTax RateNo Tax10%20%30%Payment of income tax Payment of Advance Tax

No advance tax in the following casesIf total tax payable is less than Rs.10,000If employer deducts tax from salarya senior citizen not having any income from business/professionNOTE: Non-payment or short payment of advance tax will attract interest

20InstallmentPercentageDue dateFirst 30%15th SeptemberSecond30%15th DecemberFinal40%15th MarchComputation of income from salarySalary [Basic Pay + taxable allowance]Perquisites excluding fringe benefitsProfits in lieu of salaryXXXXXXXXXXXXXXXXXXGross SalaryLess Deduction u/s 10 (HRA/transport)Less : Deduction u/s 16 (Entertainment allowance and Prof tax)XXXXXXXXXXXXxxxxxxNet salaryXXXXXX21Computation of income from HPAnnual Rental ValueLess: Municipal TaxesXXXXXXXXXXXXNet Annual ValueLess : Deduction u/s 24XXXXXXXXXXXXIncome from house propertyXXXXXX22Computation of Capital GainShort term capital gainLong term capital gainXXXXXXXXXXXXTotal Capital GainXXXXXX23IndexationIndexation BenefitIt is a very well known fact that the prices of goods and services we consume keep moving up over the years. The price inflation is measured by the annualized percentage change in the general price index, normally CPI (Consumer Price Index) is used but in India reference point is the WPI (Wholesale Price Index).The Central Board of Direct Taxes (CBDT) calculates Cost Inflation Index (CII) and declares it every year.While calculating capital gains the plain way is to deduct cost price from selling price. Let us understand this through an example.Investment PlanningYou bought IOB shares for Rs. 5lakhs.. Three years later, you sold the same for Rs.8lakhs. In this case, the capital gain would Rs.8lakhs- Rs.5lakhs= Rs.3lakhs.However, the purchasing power has not remained the same over these years. Therefore there is this need to index the cost based on cost inflation index. Indexation is this process of adjusting the cost price by using the CII.Capital gainInvestment typeSTCGLTCGPhysical Assets like Real Estate, GoldLess than 3 yearsAs per tax slabBeyond 3 years10% without indexation20% with index + 3% cessDebt Mutual funds including ETFsLess than 1 yearAs per tax slabBeyond 1 year10% without indexation20% with index + 3% cessShares and Equity MFsLess than 1 year15% + 3% cessBeyond 1 yearNIL if STT is paid. If STT is not paid, then the taxation will be like debt investments.Calculation of STCG and LTCGMr. X bought two investmentsa house for Rs. 15 lakhs and stocks worth Rs. 1lac in March 2004sells the stocks in January 2005 for Rs.2 lakhs and the house in April 2008 for Rs.60 lakhs.Calculate Short term and long term capital gains tax on both these investmentsCalculation of STCG and LTCGStocks: The holding period for stocks is 10 months therefore capital gains will be of short term nature and will be taxed @ 15%Selling Price= 200000Buying Price = 100000Capital Gains = SP- BP= 200000-100000Capital Gains =100000Tax thereon = 15% of Capital Gainsi.e. 15% * 100000= Rs. 15000/-Calculation of STCG and LTCGHouse: The house is bought in March 2004 for Rs. 15lakhs and sold in April 2008 for Rs 60lakhs. As the holding period is for more than 36 months it qualifies for long term capital gains. The treatment for gains on capital asset as for tax aspect is 10% without indexation and or 20% with indexation whichever is lower. (CII* for various Financial Years are 2002-03: 447; 2003-04: 463; 2007-08: 551; 2008-09: 582)Investment PlanningWithout Indexation taxSelling price =60lakhsLess cost of acquisition= 15lakhsCapital Gains(A-B) = 45lakhs10% tax on C = 4.50lakhsWith Indexation taxSelling price =60lakhsLess indexed cost of acquisition (1500000x582/463*) = 18,85529 ^ Capital Gains (A-B) =41,14,47120% tax on C = 8,22894* Cost Inflation Index^ Cost of acquisition X CII in the year of selling the land /CII in the year of purchaseIn this case without indexation tax is lower but we often come across casesAfter Indexation to save on real estateUnder section 54 EC of the Indian Income Tax Act, part of the funds can be invested in certain bonds. Whole or part of the gain must be invested within six months from the date the transaction is completed subject to a maximum limit of Rs. 50 lakh per financial yearAfter Indexation to save on real estateThe second option is the investor can invest the cap gains to buy a flat or house within 2 years from the date of sale of previous property. Or he can use the proceeds towards construction of a house on a plot he has within 3 years from date of sale of previous property. In the mean while he has to open a capital Gains savings account with a nationalized bank and use the proceeds towards construction or purchase of a new house. Computation of Income from other sourcesGeneral Incomes 56 (1) (Dividends/Interest)Specific incomes 56(2)(gifts received from friends and relatives)XXXXXXXXXXXXLess: Expenses allowed u/s 57(commissions paid for the above)XXXXXXXXXXXXIncome From Other SourcesXXXXXX34Computation of Taxable IncomeGross Total IncomeLess : Deduction u/s 80XXXXXXXXXXXXTaxable IncomeXXXXXXIncome From Other SourcesXXXXXX3515G/15HNeeds to be collected in Duplicate. Some Banks take it in Triplicate to give the customer an acknowledgementIt is to ensure that there is no TDS on an FD15G- General Category15H-Senior Citizen CategoryTDSTDS is only an interim taxThe interest earned on FD is fully taxable. If the interest amount exceeds 10,000 in a year, the bank or corporate house will deduct 10.3% tax at source before you get the amount. Your tax liability doesn't end here. If your annual income is over 5 lakh, you will have to pay more tax on this income. Even if the TDS has not been deducted, you should mention the income from fixed deposits and bonds in your tax return. The tax on the interest is levied on an accrual basis.FD income will be clubbed with yoursYou cannot avoid tax if you invest in the name of your spouse or children. While you won't have to pay tax on the money given to a spouse or a child, if it is invested, the resulting income is added to the income of the giver and taxed. So, if a husband invests in fixed deposits in the name of his wife, interest earned will be treated as his income. RDThere is no TDS in terms of RDRD is taxed on Maturity as per Tax Bracket

10(33)The dividend received by the investors from the scheme will be exempt from income tax for all categories of investors under Section 10(33) of the Income Tax Act, 1961. 10(10)DMaturity Proceeds are tax free for all insurance products except pension products u/s 10 10D.For Pension/Retirement Policies only One-Third of the maturity amount is tax free. The remaining two-thirds will be taxed as per tax bracket or go into a superannuation fund which will give the insured a pension.

Tax Planning What is left after deducting these deductions from Gross Total Income is the Taxable Income under the Income-tax Act. On this, income tax is calculated in accordance with the rates prescribed in Finance Act.

Tax PlanningTax Rates for IndividualsFY 2013-14IncomeTax RatesUp to Rs 200000NILRs200001 to Rs50000010%Rs500001 to Rs100000020 %Rs1000001 and above30 %Surcharge @ 10% is applicable on income exceeding Rs. 1 crore.Education cess is applicable @ 3% on income tax plus surcharge.Finance Bill 2013 proposes a rebate of Rs 2,000 for individual s having total income up to Rs5lakhs.Tax PlanningTax Rates for Senior CitizensFY 2013-14IncomeTax RatesUp to Rs 250000NILRs250001 to Rs50000010%Rs500001 to Rs100000020 %Rs1000001 and above30 %Tax PlanningTax Rates for Super Senior CitizensFY 2013-14IncomeTax RatesUp to Rs 500000NILRs500001 to Rs100000020 %Rs1000001 and above30 %