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Tax Planning Tips, Ideas

Tax Planning is most important part of Finance Planning for Tax Payers in India especially for Individual and Salaried tax Payers. In this Article we are discussing some Tax Planning Tips mainly for Individual and Salaried tax payers by which they can minimise their tax burden.

Income from Salary:-Section 17 of the Income Tax (IT) Act is all about taxation under the head ‘salary’. In most of the cases, it is impossible for a salaried person to avoid tax on his income, except by way of deduction under chapter VI A of the IT Act.

There are ways that can help you minimise or postpone your total tax outgo if you plan accordingly.

Expecting a bonus? Everyone waits for that time of the year when they receive that lump sum called bonus from their employer. However, bonus is fully taxable on receipt basis and is included in your gross salary for the year in which you receive it. You can limit the tax outgo on your bonus while structuring the CTC. As bonus is a fully taxable component of an individual’s salary, tax is applicable on it whenever it is paid. An individual can get his/her employer to make the bonus payment in the subsequent year, thereby also pushing the tax liability to the subsequent year. This might benefit the employee if tax rates have been reduced or the tax slabs have been modified favourably.

LTA/LTC, Take that trip. Under Section 10 (5) of the IT Act, you can claim tax exemptions using your leave travel allowance (LTA). In a favourable development for taxpayers, the Supreme Court recently ruled that employers are not obligated to collect and examine proofs related to LTA.

However Finance Act 2015 introduced a new section 192(2D) which came after Supreme Court decision, by virtue of which the person responsible for making the payment of salary are obliged to collect the necessary evidence or proof in the prescribed form and manner to allow any claim for any deduction and/or tax. The Central Board of Direct Taxes (CBDT) has prescribed the form i.e. Form 12BB, in which salaried employees would now require to furnish evidence of claims and tax saving investments to the employer.

So the employer is obliged to maintain all supporting documents as proof of spending the amount which will be required to be submitted by the employee to the Employer.

Theoretically, the LTA exemption rule stipulates that such exemption from tax can be claimed by an individual twice in a block of four calendar years (The current block runs from 2018-21 (i.e., 1st Jan 2018 to 31st Dec 2021). One requires to produce domestic travel bills evidencing the fact of having undertaken a single journey.

Many individuals are unable to go on any vacation and, hence, end up losing the benefit of tax exemption on LTA. Such individuals can claim an additional exemption in the next block of four years. Here’s an example to illustrate this point:

Suppose X, an employee, did not travel in the block of 2014-17 and, so, could not claim any exemption in this block. However, he can carry forward one journey to the succeeding block (2018-21) and can claim it in the first calendar year, i.e., 2018. Thereafter, he can also claim the remaining two journeys of the block 2018-21. Accordingly, he may be eligible to avail three exemptions in the block 2018-21.

If both spouses are getting the LTA benefit in their respective places of work, they can both claim the separate exemptions for separate journeys for travel with their respective set of dependent parents.

Get the most out of those perks. For the salaried, perquisites make work a pleasure but tax plays a dampener. If an employee has the option of choosing between an employer-provided accommodation and an independent rented accommodation, a cost-benefit analysis will help him find the option that’s more conducive to his tax outgo.

HRA: Generally, having a house rent allowance (HRA) component in the salary and paying rent is the better option.

Car: If one is using a motor car for official purposes as well as personal use, rather than use your own vehicle, it is advisable to take an employer-provided vehicle. In that case, the taxable perquisite value is restricted to a maximum of Rs 3,300 per month (car with a driver) as against the actual expense being taxed when the vehicle is owned by the employee.

Tuning it right: Not many have the option to change their salary structure, but if your company is progressive or you are on good terms with your HR department, you just might be able to squeeze in a few additions and deletions and save some tax in the process

Here are some suggestions:

1. Opt for salary components (CTC) such as reimbursement of attire expenses (many jobs such as marketing, CXOs require to wear certain type of clothes), books and periodicals, telephone expenses and medical expenses provided they are incurred for respective purposes. These can yield small but profitable results.

2. Change the arrangement from using your own car to a company-provided vehicle with driver this will go a long way in cutting your tax bill. If you want to use your own car, but do not want the related high perquisite taxation, you can buy the car in your spouse’s name and lease it to your company, which in turn can let you use it. (Such an arrangement needs to be approved by your company as it may not want any tax-related hassles.)

3. Small components such as food coupons, education allowance may bring in small but effective respite from taxes.

4. Employee Stock Options (ESOPs) are preferred by many blue-chip company employees but, unfortunately, they are taxable. Subject to provisions of ESOP plans and within the exercise period, the employee can choose to exercise his shares (where an option is available to the employee), at a time when the fair market value (FMV) of the shares is low. In such a case, the taxable salary income on allotment of ESOPs would be lower as it is directly proportional to the FMV of the shares on the date of exercise. For Start-ups, Employees will now have to pay tax not at the time of allotment of securities but at the time of exit from the company or selling the shares or for a period of 5 years whichever is earlier.

5. Use house rent allowance (HRA) — it is partially exempted from tax, provided rent is actually paid (HRA+10% of Basic Pay). If you are paying to your relative like Wife, parent or HUF, then ensure to enter in to Lease contract, register the agreement and actually make the payment. Ensure that Tax Return of the rent receiver is also filed.

6. Avail tax exemption on HRA, and principal repayment of home loan under Section 80C.

7. Furnish current employer details with Form 16 from the previous employer.

8. Ensure that you furnish bills to claim reimbursements (e.g., medical).

9. Remember to withdraw your house hold expenses from your Salary Bank Accounts. Quantum should justify your life style.

Income from Business or Profession

Section 28 of the IT Act pertains to income from business or profession. As per the income tax laws in India, a self-employed person can be a freelance writer/journalist, independent consultant, businessman, or a professional.

There are a few things that you should keep in mind. All expenses related to business or professions are deductible from the gross profit. In case you have any work-related capital assets, you can claim depreciation on them.

Carrying forward losses is allowed for the next eight years. Bills of capital expenditure should be maintained for the sake of record.

Managing taxes: Give priority to tax-saving instruments that do not demand long-term commitment. Incomes from business and profession are generally uneven, so it is in your best interest to avoid any large commitment at a particular point in time.

Remember to keep your personal investments and business surplus apart. Keep a list of the tax deducted at source (TDS) throughout the year.

If your source of income is a business or a profession, these are the key things you should know:

· Keep personal investments and business surplus apart.

· Business loss can be carried forward and set off against future profits for up to eight assessment years.

· As business income is not steady, avoid long-term financial commitments towards tax-saving products.

Income from Profession

As per scheme of Presumptive Taxation, A professional having gross revenue up to Rs 50 lakhs can opt for the presumptive scheme of tax wherein he can straightaway offer 50% of the gross revenue as his taxable income and pay taxes as per his slab rates on such income.

Profession” may be defined as a vacation, or a job requiring some thought, skill and special knowledge like that of C.A., Lawyer, Doctor, Engineer, Architect etc. So profession refers to those activities where the livelihood is earned by the persons through their intellectual or manual skill.

Following are some of professions as per Rule 6F of the I.T. Rules, 1962:

Architectural, Accountancy, Authorised representative, Engineering, Film Artist, Interior Decoration, Legal, Medical, Technical Consultancy.

The expression “profession” involves the idea of an occupation requiring purely intellectual skill or manual skill controlled by the intellectual skill of the operator, as distinguished from an occupation or business which is substantially the production or sale, or arrangements for the production or sale, of commodities. “Profession” is a word of wide import and includes “vocation” which is only a way of living and a person can have more than one vocation, and the vocation need not be for livelihood or for making any income nor need it involves systematic and organised activity. Person having completed MBA from reputed Institution and self-employed could become beneficiary of this provision. Even Technocrats & Engineers rendering service as Consultant would get covered under this classification.

Income from House Property

It is calculated by taking into account the annual value. Annual value is the highest of the actual rent received, rent as per the municipality’s valuation and fair rent as determined by the IT department.

However, there are a few exemptions such as municipality tax and 30 per cent of net annual value (annual value less municipality tax for the year), which are deducted from the annual value to arrive at the taxable annual value. It is then added to other income and taxed according to the normal slab rate.

Any income that’s derived from a house property is taxable. Here are the things to keep in mind:

· Avail unlimited deduction for interest payment on the loan for your second house.

· Claim tax deduction on principal repayment under Section 80C of the Income Tax Act.

· Keep rent receipts for proof of rental income for tax filing purpose.

· Make sure that you collect the ‘interest paid’ and ‘principal repayment’ certificates from the home loan provider

Income from Capital Gains

Any gains arising from the transfer of capital assets are capital gains. A capital asset can be an asset of any kind held by an individual whether or not connected with his business or profession. However, capital gains can be of two types according to the time for which the asset is held by the individual.

Long-term capital assets are assets held by an individual for a period of more than 24 months (36 months in few cases). However, in case of shares, equity mutual funds and debentures, the holding time period is 12 months.

On sale of any of these assets before a year and upon payment of a security transaction tax (STT), the flat tax rate is 15 % (plus HEC of 4%). One does not require to pay any taxes if these assets are transferred after one year of holding.

However as per the newly inserted section 112A via Finance Act 2018, if the amount of long- term Capital gain exceeds Rs 1, 00,000 than the amount in excess of Rs 1, 00,000 shall be chargeable to tax @ 10% without indexation (plus health and education cess and surcharge). However the application of sec 112A is subjected to certain conditions, one of it being the transfer should have taken place on or after 1stApril, 2018.

On sale of other assets such as property and physical gold, the short-term capital gain is added to other income and taxed accordingly.

However, the taxable amount is calculated after a few considerations: cost of acquisition (indexed cost in case of long term), cost of improvement (indexed cost of acquisition in case of long term), and expenditure incurred at the time of acquisition and expenditure incurred wholly and exclusively in connection with such transfer.

A few things that you need to keep in mind if you have any income from capital gain:

Long-Term Capital Gains

· No tax on gains from sale of equity shares and equity mutual funds if sold after a year. Ensure that security transaction tax (STT) has been paid while making such transactions. However as per the newly inserted section 112A via Finance Act 2018, if the amount of long- term Capital gain exceeds Rs 1, 00,000 than the amount in excess of Rs 1, 00,000 shall be chargeable to tax @ 10% without indexation (plus health and education cess and surcharge). However the application of sec 112A is subjected to certain conditions, one of it being the transfer should have taken place on or after 1st April, 2018.

· For assets such as real estate and gold, 20 % tax after indexing.

Short-Term Capital Gains

· Tax of 15 %( plus HEC 4%) on gains from sale of equity shares and equity mutual fund if sold within a year. ensure that STT has been paid while making such transactions.

· From other assets such as real estate and gold — as per your tax slab.

· Saving Capital Gains

· Reinvest the gains in residential property or bonds such as NHAI/REC.

· Set off any short-term capital loss against short-term capital gains or taxable long-term capital gains.

Income from Other Sources

Section 56 of the IT Act says that you need to pay taxes on income that does not fall under any of the above heads. These include winnings from contests, gifts received and dividend income. Here’s how to handle taxes on such incomes.

1. According to the current tax provisions, dividend income from listed securities and units of equity and debt mutual funds is exempt from tax. Try to invest in these to avoid tax on dividends.

2. Make investments in the name of major children so that the entire income is not taxed in the hands of a single member, exposing the income to the highest tax slabs.

Keep those gifts coming: Gifts are taxable, but there are certain exceptions to this. For example, gifts from the employer not exceeding Rs 5,000 are not taxable in the hands of the individual.

Certain categories of gifts, such as those received from relatives on the occasion of the marriage of the individual, under a will/inheritance, and in contemplation of death by the donor are tax-exempt.

However A husband should avoid giving a gift to his wife as otherwise clubbing provisions may be attracted and the income from such gift could be included in the husband’s income.

There are certain incomes that are not covered under the previous heads.

· Remember, any gift that one receives from specified relatives is exempt from income tax.

· Take advantage of the fact that cash gifts during special occasions such as marriage, from ‘anybody’, are tax-exempt.

· Don’t forget that any gift received up to Rs 50,000 per annum from a person other than specified relatives is also exempt from tax.

Tips for the working couple

The number of working couples in the country is on the rise and so is their tax outgo. But, says Mahesh, there are several ways to bring down the tax liability.

· House property-related deduction: Buying multiple house properties (except one that is treated as self-occupied) and letting them out could fetch good tax breaks owing to the interest payment on the home loan for buying the property.

· Joint home loans: Even a couple owning one property can maximise tax breaks by independently claiming interest payment on the loan taken for the purchase. In case of a self-occupied house, the limit of home loan interest individually available to each spouse for claiming exemption is Rs2 lakh

· LTA – related deduction. Each spouse should time the claim of their LTA component in such as way that they claim the exemption in alternate years. This way, each spouse can claim two journeys in a block of four years.

· HRA – related deduction. If the couple resides in a rented house, the exemption for the rent paid can be claimed by both spouses proportionately. Such shared exemptions or deductions can be claimed by the couple under various other heads such as children’s school tuition fees, principal repayment of home loan, medical insurance premium and medical expenses.

Tips for high-income individuals

Citizens in the higher tax bracket of 30 % have little respite from taxation. However, these small tips might help.

· Invest in low- or zero-tax options Investments that ensure a fixed lower tax rate or those that generate zero tax income are the best bet. Property, works of art, shares and mutual funds are a good choice.

· Create separate tax entities. For high net worth individuals, another way is to diversify their investments in multiple entities so as to spread the income and reduce the tax outgo.

· An effective and popular tool is to create a separate Hindu Undivided Family (HUF) and make investments in such HUF, which has a distinct Permanent Account Number (PAN) and existence. However, an HUF cannot be created by one’s own money. The initial corpus has to come as a gift from a non-member like parents, in-laws. HUF gets Basic Exemption of Rs.2.50 lakh, plus lower taxes on Income between Rs.2.50 lakhs & Rs. 15 lakhs. HUF is also eligible to 80C & 80D deductions. You can buy a house in the name of HUF and pay rent to claim HRA rebate. HUF can also rent out property and you can claim 30% Standard Deduction plus Interest expense on loan taken for buying the property.

Tax experts suggest that you be punctual in making your tax investment declarations to your employer and submitting your investment proofs, and make your general investments in tax-efficient instruments.

Consult a good tax practitioner before you take any major financial decisions, maintain your yearly financial documents properly and fulfill all compliance requirements (such as timely filing of tax returns). These measures will enable you to lead a peaceful life, free of tax worries.

Tips from experts for senior citizens (Aged between 60 to 80 Years) and super senior citizens (Ages 80 years or more)

· Tax-saving Schemes. If the income exceeds the zero tax mark of Rs 3 lakh (Rs 300,000) annually in case of senior Citizens or Rs. 5, 00,000/- in case of super senior citizens they can invest in eligible investments such as Senior Citizen Savings Scheme and eliminate any potential tax liability.

· Tax saving for couples. If both the spouses are senior citizens, spreading investments between them could fetch a zero-tax status for a combined income of Rs up to Rs. 10 lakh depending upon the status of both the spouse. If investments are made in Section 80C eligible investments, then the zero-tax status can apply to a combined income as high as Rs 12 lakh (Rs 12, 00,000).

· Avoid TDS on interest. Senior citizens should make it a point to submit Form 15H to the entity where the investment is made at the beginning of the year so as to ensure that no tax is deducted at source. The income should be within the threshold limit.

· If suitable, commute pension. Those receiving pension should commute the entire eligible pension (withdraw in lump sum) and keep the uncommuted portion (which is received, say, on a monthly basis) as small as possible. That’s because the uncommuted portion of pension is fully taxable. However, in case of commutation, for government employees, the entire commuted value is tax-exempt. For other employees, a portion of the same (ranging between one-third and half) is exempt from tax.

· Tax-efficient reinvestment. On receipt of such a lump sum, it can be re-invested in some tax-friendly avenues, which can ensure that the resulting income itself is not taxable.

The Income Tax Act allows a salaried individual to claim certain deductions in order to save on taxes. However, to avail the benefits of such deductions, the individual must ensure proper tax planning during the year.

Such deductions are allowed on the Gross Total Income (GTI), and income tax is levied on the balance income, as per the tax slabs in force.

It is obvious that everyone would want to save their incomes from being subjected to extremely high taxes. Tax planning is not very difficult if you follow certain guidelines. There are many ways to save tax, and they are all legal. Let us discuss few of them here.

1. Save Tax U/s 80C, Section 80CCC, and Section 80CCD of the Income Tax Act

To encourage the habit of saving, and to direct the savings of taxpayers into lawful channels, the Central Government permits certain investment- linked deductions, provided the amount is invested in instruments as specified in Section 80C, Section 80CCC & Section 80CCD of the Income Tax Act.

The maximum collective deduction allowed under Section 80C, Section 80CCC & Section 80CCD is Rs. 1, 50,000.

2. Reduce Income tax via Home Loan

If an individual has taken a Home Loan, then he/she is entitled to claim the deduction for repayment of the principal amount (Deduction of the Principal amount under section 80C), as well as the interest of the home loan (Deduction of the Interest amount under section 24). The maximum deduction allowed under section 80C is Rs. 1, 50,000 and under section 24 is Rs. 2, 00,000

3. Save Income Tax U/s 80D of the Income Tax Act

Medical/health insurance works as a shield and protects a person and his family from any financial crisis during a medical emergency. It’s the insurance company which bears the cost of treatment, and ensures that the policy holders can avail the best medical assistance. Based on the nature and type of medical insurance policy, in addition to hospitalization charges, the policy may also cover ambulance charges, domiciliary expense, pre and post hospitalization expenses, etc.

The Income Tax Act permits an individual to save tax through deductions if the taxpayer has paid a premium for insuring his/her own health or the health of his/her family members (parents, dependent children or spouse).

4. Tax Saving with House Rent paid

If the individual is staying in a rented house and is receiving House Rent Allowance (HRA) from his employer, he/ she can claim deduction U/s 10(13A) of the Income Tax Act.

5. Tax Saving through Education Loan under section 80E of the Income Tax Act

Under section 80E of the Income Tax Act, an individual can claim tax deduction on an education loan (for higher studies),if the loan is for himself/ herself, his/ her children, spouse or even for a student of whom he/she is the legal guardian.

However, only repayment of Interest on the Education Loan is allowed as deduction. That means no deduction on the repayment of the principal amount of loan is allowed. However, the good thing is that there is no maximum limit to claim deduction U/s 80E of the Act for the interest repayment of education loan. The deduction U/s 80E for the education loan is available to an Individual assessee and not to a Hindu Undivided Family (HUF).

CA Harshad Shah,

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