Tax planning is legitimate reduction of tax liability to minimum. Taxes reduce disposable income and so restrict the ability to achieve financial goals.
Tax planning is therefore an integral aspect of the personal financial process. Tax liability can be reduced by arranging financial incomes and investments to avail maximum tax benefits. This can be done by making use of beneficial provisions and tax incentives incorporated in tax laws that entail an individual to tax concessions.
Tax planning is one of the major and most important part in tax planning. Proper tax planning will make a financial plan more effective. An effective tax planning has to consider the present tax rules and regulations as well as the individuals financial status, type of citizenship, tax rebates and deductions.
Previous year and Assessment year.
For the purpose of income tax, accounting year is uniform from 1st April to 31st March; each year is referred to as previous year. FY starting
from 1st April 2006 to 31st March 2007 is the previous year of Assessment Year of 2007-08. Income of the previous year is taxed during the following assessment year at the rates prescribed for such assessment year by relevant finance Act.
Heads of Income.
Various heads under which income is charged to tax.
2. Income from house property.
3. profits and gains of business and profession.
4. capital gains.
5. income from other sources.
Basis of change
Salary is chargeable to tax either on "due" basis or receipt basis, whichever is earlier.
A payment cannot be taxed under the head salaries unless the relationship of the employer and employee exists between the payer and payee.
Salaries include the following
b. Any annuity or pension
c. Any gratuity
d. Any fees, commission, perquisites or profits in lieu of or in addition to salary or wages
e. Any advance of salary
f. Any payment received in respect of leave not availed by him
g. The portion of the annual accretion in any previous year to the balance at the credit of an employee participating in a recognised provident fund to the extent it is taxable
h. Transferred balance in a recognised provident fund to the extent it is taxable
Professional tax on employment levied by a state on the employee is allowed as deduction from salary income.
Leave travel concessions
Exemption on leave travel concession is available to an employee from the employer for himself and his family in connection with his proceeding
on leave to any place in India.
The exemption is available in respect of two journeys performed in a block of four calender years commencing from 1986.
Amount received from Insurance Policies
The amount is fully exempt from tax including bonus thereon, other than sum received under Key man Insurance Policies, annuity plans for
HRA received by an employee will be exempt from the tax if the employee incurs expenditure towards payment of rent. The exemption allowed is
the least of the following
a. Amount equal to 40%of the salary (50% in case of Mumbai, Delhi, Kolkata and Chennai)
b. Excess of rent paid over 10% of the salary
c. HRA actually received
Exemptions denied where an employee lives in his own house or in a house for which he does not pay any rent or pays rent which does not
exceed 10% of salary.
Allowance for travel, tour transport is exempted up to Rs. 800 per month.
Children education allowance
Exempted amount Rs. 100 per month per child up to maximum of 2 children.
Children hostel allowance
Exempted amount Rs. 300 per child up to maximum of 2 children.
Perquisites are gain or profit incidentallly made from employment in addition to regular salary or wages; especially one of a kind expected or
promised. The phrase perquisite denotes something that benifits a man by going into in his own pocket. They may be provided in cash or kind and
are included in salary income only if they are received by an employee from his employer.
A profit or advantage would be taxable as perquisites only if it has a legal origin. A unauthorized advantages taken by an employee without his
employers authority would create a legal obligation to restore such advantages , it would not amount to perquisites taxable under the Act.
Valuation of perquisites is to be done in accordance to the rules framed under Indian Income Tax Act. For instance, value of benefit to employee
resulting from supply of gas, electricity, water, value of free or concessional education facilities, value of benefit to the employee resulting
from the services of a sweeper, Gardener and a watchman will be valued based on actual cost borne by the employer.
Some of the Exempted PerquisitesReimbursement by employer of amount spend by employee in obtaining medical treatment for himself or any member of his family from any Doctor,
not exceeding in the aggregate Rs. 15000 in the year.
- Refreshment provided to all employees during working hours in office premises.
- Recreational facilities extended to a group of employees (not being restricted to selected few employees)
- Subsidised lunch or dinner provided to an employee
Any income arising from house property (floor area usage) is chargeable to tax under this head. Under this head not only the actual rent
received is taxable, but also the notional rent.
Profit or Gain From Business or Profession
Any income arising to any person by the way of profits and gains from business and profession or vocation carried on by him at any time
during the year will be taxable under this head.
Business is defined to include all trade, commerce or manufacture or any adventure or concern in nature of trade, commerce or manufacture.
While computing the net profits of a business or profession, certain deduction enshrined in the Income Tax Act, some of which are Rent,
rates, taxes, insurance, repairs of building, plant, machinery and furniture, depreciation on asset. This deduction can be availed only
if the asset is used for the purpose of business or profession.
Capital gain/loss which is computed on the transfer of a capital asset, which is chargeable to tax.
Some of the capital gains are
Capital asset is defined to include property of any kind whether fixed, circulating, movable or immovable, tangible or intangible.
Transfer in relation to capital assets includes sales, exchange and relinquishment of the assets or the compulsory acquisition under any Law.
For the purpose of capital gain tax, certain transactions are not regarded as transfer. Therefore no liability arises towards capital gain, e.g.,any distribution of capital assets on partition of HUF, transfer under a gift or will. Tax incurrence for short term and long term capital gains is different.
For shares, listed securities, units of mutual holding period is 12 months or less. For other than above assets, the holding period is 36 months or less.
Those assets, which are not short term capital assets, are long term capital assets.
Gains arising from the transfer of short term capital assets are added to the total taxable income in the year in which transfer is done and taxed at the applicable tax slabs. The gains or differences of sale value and cost of purchase of the asset. While in case of transfer of securities it taxed at a flat rate of 10%. Long term capital gains are taxed at flat rate of 20%. Long terms are determined by deducting indexed cost of acquisition and index cost of improvement from the full value of consideration. Indexed cost is adjusted cost to the cost of inflation index on the date of transfer. The cost of inflation index is notified in the official gazette every year.
Long term gains tax on securities transfer is fully exempted.
Any income other than incomes not forming a part of any head of income will be taxed under this head.
Income chargeable under this head is computed in accordance with the method of accounting regularly employed by the assessee.
Mr. C S Sudheer is the founder and CEO of IndianMoney.com – India’s largest Financial Education Company. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.
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