TAX PLANNING- INDIVIDUALS PERSPECTIVE- PART 1

Income tax, the two words which gives us nightmare. We wonder why we should pay tax on our hard earned income. However despite all the efforts we cannot escape from taxes. We pay taxes for the development of country as a whole such as infrastructure, rural development, industrial development, social development, security and in many other areas.

Let us now have a look at the tax benefits from individual’s perspective

Income Tax Rates

Normal Rates of Tax

Tax Slab	Tax Rate
Where the total income does not exceed Rs. 2,00,000/-	Nil
Where the total income exceeds Rs. 2,00,000 but does not exceed Rs. 5,00,000/-	10 per cent of the amount by which the total income exceeds Rs.2,00,000/-
Where the total income exceeds Rs. 5,00,000/- but does not exceed Rs. 10,00,000/-.	Rs. 30,000/- plus 20 per cent of the amount by which the total income exceeds Rs. 5,00,000/-.
Where the total income exceeds Rs. 10,00,000/-.	Rs. 130,000/- plus 30 per cent of the amount by which the total income exceeds Rs. 10,00,000/-.

Are these tax rates applicable to all persons? No, it is taxable to persons depending upon their residential status.

A person is resident in India if he satisfies any of the following two conditions

1.    He is in India in the previous year for a period of 182 days or more.

2.    He was in India for a period of 60 days or more in previous year and 365 days or more during the four years preceding the previous year.

If the individual does not satisfy any of the following two conditions mentioned above, he shall become a non resident.

SALARIES

·         Salaries are chargeable to tax u/s 15 of Income Tax Act, 1961.

·         For salaries to be taxable there must be employee-employer relationship.

Meaning of Salary u/s 17(1)

Salaries is defined to include wages, annuity, pension, gratuity, leave salary, profit in lieu of salary, advance salary, employees contribution to RPF in excess of 12% of salary of employee, interest credited to RPF in excess of 8.5%, transferred balance from unrecognised provident fund to recognised provident fund being employers contribution, contribution made by any employer on behalf of employee towards pension scheme u/s 80CCD.

 SECTION 17(3)

·         Any amount received by employee from employer upon termination of employment or modifications in terms of employment.

·         Any amount received under keyman insurance policy scheme is taxable  under 3 heads if it is received by

                       I.        Employee- Income from Salary

                     II.        Employer- Income from business or profession

                    III.        Employers wife- Income from other sources

·         It includes any sum received by employee from employer before joining employment or after cessation of employment.

EXEMPTIONS U/S 10

1.    Section 10(5) Read with Rule 2B- Leave Travel concession/ Allowance

·         Any leave travel allowance granted by employer to employee in connection with employee and his family members going on leave to any place in India is exempted subject to flowing conditions

·         LTA shall be given while on service or upon retirement

·         Exemption is applicable only in respect of travelling/ journey expenses.

There are certain restrictions

              i.        If journey is performed by air, reimbursement shall be economy fair of a national carrier.

            ii.        If journey is performed by rail, exemption shall be restricted to 1^st class AC fair by shortest route.

           iii.        If journey is performed in a recognised public transport system, exemption shall be deluxe fair by shortest route.

           iv.        If journey is not covered by any recognised transport system, it is assumed that the particular place is covered by railways. Reimbursement shall be first class AC fair by shortest route.

·         Exemption can be claimed by employee and his family members. Family includes self, spouse, children, dependent parents, brothers and sisters.

·         However w.e.f 01.01.1998 onwards exemption u/s 10(5) can be claimed for two children.

·         But this restriction is not applicable for children born before 01.01.1998 and multiple births after first child.

·         Exemption u/s 10(5) can be claimed any two times in a block of four calendar years.

·         With effect from 1986 onwards calendar years are uniform.

·         If any exemption is carried forward, it should be utilised in the first succeeding block else it will lapse.

·         For exemption employee must take leave and actually incur leave travel expenditure.

·         For claiming exemption employee must maintain proof of expenditure.

·         Actual travelling expenses less exemption will be restricted to that amount.

·         Currently we are in block of 2010-2013. If any person has not used his LTA during this block, then he may use the same during the current year as well as in next year.

2.    Section 10(10)  Gratuity

·         Gratuity received while in service is fully taxable.

·         Gratuity received at the time of death or termination is eligible for exemption.

·          For employees covered under the payment of Gratuity Act, 1972, exemption is least of the following

                      i.        Rs 10,00,000

                    ii.        Gratuity Actually received

                   iii.        Last drawn salary*15/26* completed years of service or part thereof in excess of 6 months. (Salary – basic + DA)

·         Gratuity received from two or more employers in the same year, then the aggregate amount of gratuity is exempted from the tax cannot exceed the prescribed limits.

·         Where employee has received gratuity in any earlier year from his former employer and also receives gratuity from another employer in later year, the limit of Rs 10 lakhs will be reduced by amount of gratuity exempt from tax in the earlier years.

3.     Section 10(10AA) Leave Encashment

·         Leave Salary received while in service is fully taxable.

·         It is exempt at the time of death, termination or retirement.

·         For non government employees it is least of the following,

·         Lump sum payment Rs 3, 00,000

·         10 months average salary*10

·         Leave encashment actually received

·         Leave to his credit/ year * completed years* average salary

·         Salary= basic+ DA + commission as a % of turnover

4.    Section 10(10C) VRS/VSS

·         VRS exemption can be claimed only once in lifetime of an employee

·         The scheme applies to an employee who has completed 40 years of age or 10 years in service whichever is earlier.

·         The scheme is applicable to all employees by whatsoever name called but shall not be applicable to directors.

·         Main aim of the scheme is to reduce the workforce, i.e. vacancy created should not be filled.

·         Employee opting for the scheme should not be appointed in any orgainsation under same management.

·         Exemption is least of the following

                      i.        Actual amount received

                    ii.        Lumpsum Rs 5,00,000

                   iii.         Last drawn salary*3* completed years of service or last drawn salary *  remaining  months of service

5.    Section 10(12) Recognised provident Fund

• RPF is PF recognized by provident fund commissioner
• Employee can contribute any amount to RPF but if employer’s contribution exceeds 12% of salary of employee, excess will be taxable in the hands of employee.
• Employer can contribute any amount to PF on behalf of employee.
• Interest credited to RPF in excess of 8.5% per annum will be taxable.
• Any amount received from RPF is fully exempted subject to satisfaction of certain condition.
• Employee must have rendered continues service of 5 years. This is not applicable if employee has vacated in case of death or incapacitation.
• Employee contribution to RPF can be claimed as deduction under section 80C.

6.    Sec 10(13A) House Rent Allowance HR

• Exemption is least of the following.
• Excess of rent paid over 10% of salary. Salary = Basic + DA + Commission as a % of turnover.
• 40% of salary applicable for all cities & 50% for metros.
• Actual HRA received
• Exemptions are not available to an assessee who lives in his own house or in house for which he does not pay rent.

7.    Sec 10 (14) General Exemptions

• Any allowance in nature of tour & travels, helper allowance, uniform allowance, academic & research perquisites allowance is exempted to the extent it is actually spent for official purpose.
• Children education allowance – exemption is Rs100/month/child for maximum for 2 children.
• Children hostel expenditure allowance Rs. 300/ month / Child for 2 children.
• Transport allowance Rs. 800/ month for commuting between residence & office.