Personal Tax Management

Abhiraj Patel (IM-2K8-01)Ankur Pandey (IM-2K8-007)Devpreet Kaur (IM-2K8-24)

Jasneet Kaur Khanuja (IM-2K8-37)Khushwant Singh (IM-2K7-47)

MBA (MS) 5yrs. Sem VIII

PFM or Personal Financial Management is the application of the principles of finance to the monetary decisions of an individual or family unit. It addresses the ways in which individuals or families obtain, budget, save, and spend monetary resources over time, taking into account various financial risks and future life events. Components of personal finance might include checking and savings accounts, credit cards and consumer loans, investments in the stock market, retirement plans, social security benefits, insurance policies, and income tax management.

What is PFM ???

Components of PFM

DebtSaving

s

Spending habits

Cash flow

Budget line

DisciplineInvest

Asset

Liabilities

Planning

Key components of Planning

Speculation

Financial Goals & Priorities

Protecting Financial Security

Income Statement

Income

Expense

Balance Sheet

Asset Liabilities

Elements of PFM

Personal Taxes Income Tax Wealth Tax Property Tax

Personal Taxes are the taxes levied on an Individual regardless of his/her Business or Profession.

Income Tax The government of India imposes an income tax on taxable

income of individuals, Hindu Undivided Families (HUFs), companies, firms, co-operative societies and trusts (identified as body of individuals and association of persons) and any other artificial person. Levy of tax is separate on each of the persons. The levy is governed by the Indian Income Tax Act, 1961. The Indian Income Tax Department is governed by the Central Board for Direct Taxes (CBDT) and is part of the Department of Revenue under the Ministry of Finance, Govt. of India. There are close to 35 million income tax payers in India.

In India, individual income tax is a progressive tax with three slabs. About 10 per cent of the population meets the minimum threshold of taxable income.

Heads of IncomeThe total income of a person is divided into

five heads, viz. taxable heads:

Income from Business or Profession Income from Salary Income from Other Sources Income from Capital Gains Income from House property

I  TAX RATES FOR INDIVIDUALS  OTHER THAN II, III & IV BELOW Upto 1,80,000                         - Nil

1,80,000 to 5,00,000               - 10% of the amount exceeding 1,80,0005,00,000 to 8,00,000               - Rs.32,000 + 20% of the amount exceeding 5,00,000 8,00,000 & above                    - Rs.92,000 + 30% of the amount exceeding 8,00,000

II TAX RATES FOR RESIDENT WOMEN BELOW 60 YEARS Upto 1,90,000                         - Nil

1,90,000 to 5,00,000               - 10% of the amount exceeding 1,90,0005,00,000 to 8,00,000               - Rs.31,000 + 20% of the amount exceeding 5,00,0008,00,000 & above                    - Rs.91,000 + 30% of the amount exceeding 8,00,000

III TAX RATES FOR INDIVIDUAL RESIDENTS  AGED 60 YRS AND ABOVE & BELOW 80 YEARS (SENIOR CITIZEN) Upto 2,50,000                         - Nil

2,50,000 to 5,00,000               - 10% of the amount exceeding 2,50,0005,00,000 to 8,00,000               - Rs.25,000 + 20% of the amount exceeding 5,00,0008,00,000 & above                    - Rs.85,000 + 30% of the amount exceeding 8,00,000

IV TAX RATES FOR INDIVIDUAL RESIDENTS  AGED 80 YRS AND ABOVE  (VERY SENIOR CITIZEN) Upto 5,00,000                         - Nil

5,00,000 to 8,00,000               - 20% of the amount exceeding 5,00,0008,00,000 & above                    - Rs.60,000 + 30% of the amount exceeding 8,00,000

There is no surcharge in the case of every individual, Hindu undivided family, Association of persons and body of individuals.

EDUCATION CESS The amount of Income-tax shall be increased by Education Cess of  3% on Income-tax.

Tax Rates (ASSESSMENT YEAR 2012-2013)

Property Tax Property tax or 'house tax' is a local tax on buildings, along with

appurtenant land, and imposed on owners. It resembles the US-type wealth tax and differs from the excise-type UK rate. The tax power is vested in the states and it is delegated by law to the local bodies, specifying the valuation method, rate band, and collection procedures. The tax base is the annual ratable value (ARV) or area-based rating. Owner-occupied and other properties not producing rent are assessed on cost and then converted into ARV by applying a percentage of cost, usually six percent. Vacant land is generally exempt. Central government properties are exempt. Instead a 'service charge' is permissible under executive order. Properties of foreign missions also enjoy tax exemption without an insistence for reciprocity. The tax is usually accompanied by a number of service taxes, e.g., water tax, drainage tax, conservancy (sanitation) tax, lighting tax, all using the same tax base. The rate structure is flat on rural (panchayat) properties, but in the urban (municipal) areas it is mildly progressive with about 80% of assessments falling in the first two slabs. By all accounts, the property tax is under-utilised in the municipalities and not effectively used in the panchayats, mainly due to tax payer resistance.

Wealth Tax Wealth tax came into existence on 1st April 1957. Wealth tax is derived

from the property owned by the proprietor. The proprietor needs to pay tax every year on property owned by them. The residential property that does not yield any income to its owner is also subjected to wealth tax.Wealth tax is termed as most significant direct tax.

As per the wealth tax act, wealth tax is applicable to the following:

An individual person A group of people who own a property A company or organization A Hindu undivided family (HUF) Person belongs to 1-by -6 categories A representative or heir of a dead person Non corporative tax payer

What Tax Planning is ??? Tax planning is a broad term that is used to describe the processes utilized

by individuals and businesses to pay the taxes due to local, state, and federal tax agencies. The process includes such elements as managing tax implications, understanding what type of expenses are tax-deductible under current regulations, and in general planning for taxes in a manner that ensures the amount of tax due will be paid in a timely manner.

Thus, planning for taxes involves knowing which types of income currently qualify for as exempt from taxation. The process also involves understanding what types of expenses may be legitimately considered as deductions, and what circumstances have to exist in order for the deduction to be claimed on the tax return.

For individuals, this can mean income sources such as interest accrued on bank accounts, salaries, wages and tips, bonuses, investment profits, and other sources of income as currently defined by law.

What tax planning is not... Tax Planning is NOT tax evasion. It involves sensible

planning of your income sources and investments. It is not tax evasion which is illegal under Indian laws.

Tax Planning is NOT just putting your money blindly into any 80C investments.

Tax Planning is NOT difficult. Tax Planning is easy. It can be practiced by everyone and with a very little time commitment as long as one is organized with their finances.

Why Tax Planning ??? It is because Tax planning is an essential

part of your financial planning. Efficient tax planning enables you to reduce your tax liability to the minimum. This is done by legitimately taking advantage of all tax exemptions, deductions rebates and allowances while ensuring that your investments are in line with your long term goals.

The first is to reduce the adjusted gross income for the tax period. This is where understanding current tax laws as they relate to allowances and exemptions come into play.

A second approach to tax planning is to increase the amount of tax deductions. Again, this means knowing current laws and applying them when appropriate to all usual and normal expenses associated with the household or the business. Since these can change from one annual period to the next, it is always a good idea to check current regulations.

One final approach that may be applicable to effective tax planning has to do with the use of tax credits. This can include credits that relate to retirement savings plans, college expenses, adopting children, and several other credits. One common example of a tax credit is the Earned Income Credit, which is intended to relieve the tax burden for persons who earn less than a certain amount within a given calendar year.

Common Approaches to tax planning

Selecting tax saving investments

You should think about the following criteria, before selecting your tax saving investments for the year:

Liquidity: How quickly will you need the money? Will you need to access the money within the next year or two years or over what duration ?None of the above instruments let you withdraw your money quickly, in fact there is a minimum three year lock in for all tax saving investments.

Risk and Return: How much risk do you want to take. There is a trade off between the two, some instruments are very low risk, but as a result they give low returns which are capped.

Inflation protection: The instruments that give you a low return typically are the worst type of investments regarding inflation. This is important because many of the instruments give you a fixed rate of interest, and lock in your money for a long period. This is not a good protection against inflation.

Tax Exemption: All tax saving investments under Section 80C are alike in one respect that they are tax exempt when they are invested. But they differ with respect to the tax on the income you earn from such an investment as well as the tax on the maturity of the investment.

Some Tax-planning tips…1. Make full use of the entire Section 80C deduction

The maximum reduction available in Section 80C is Rs.100,000 and salaried citizens whose gross salary is Rs.250,000 or more are entitled to use the full Rs.100,000 limit. 

Individuals who make monetary infusions of over  Rs.100,000 in Section 80C in selected areas fail to understand that the advantages are limited. In spite of investing  Rs.70,000 and  Rs.40,000 in Public Provident Fund and ELSS respectively, the amount entitled by the investor is only  Rs.100,000. 

Following investments/contributions meet the criteria for Section 80C reduction: 

Public Provident Fund Accrued interest on National Saving Certificate Life Insurance Premium National Saving Certificate Tuition fees paid for children's education (maximum 2 children) Principal component of home loan repayment 5-Year fixed deposits with banks and Post Office Equity Linked Savings Schemes (ELSS)

2. Reduction of tax liability beyond Section 80C deductions

If your salary surpasses Rs.250,000 pa and the reductions under Section 80C are not enough to minimize the general tax liability consider the following:

Home loan: Interest payments of upto Rs.150,000 pa are entitled for reduction under Section 24.

Medical insurance: A deduction of upto  Rs.15,000 pa under section 80D is applicable under this.

Donations: Tax advantages under Section 80G entitle the donations to particular funds/institutions.

3. Assert tax advantages on house rent paid

If HRA is not included in the salary structure then the salaried individuals can asset rent paid by them for residential lodging. This reduction is accessible under Section 80GG and is smallest amount of the following:

25% of the total earnings or,2,000 every month or,Surplus of housing charge paid over 10% of total salary.

4. Reorganize the salary

Reorganizing the salary and incorporating certain apparatus can help in the long run in minimizing the tax liability. In order to assert tax benefits salary reform is a more competent measure. The following can be included in an individual's salary structure: 

Food coupons can release up to Rs.60,000 per year from tax. Medical expenses which are compensated by the employer spare up to Rs.15,000 per year. House Rent Allowance (HRA) should be incorporated in the salaries of individuals who stay

in rented houses Transport allowance discharge upto Rs.800 per month.

5. Go for a combined home loan

The primary reimbursement on a home loan is entitled for a reduction of up to Rs.100,000 pa and the interest rewarded is entitled for a reduction of up to Rs.150,000 pa. When a home loan is for a considerable amount then the interest and chief reimbursement surpass the allotted limit. A salaried individual can go for a combined joint home loan with his parent, spouse or sibling, to guarantee the best utilization of tax advantages. 

In this way both the owners can assert tax reductions in the percentage of their stake holding in the loan.

If you fail to plan… Inefficient use of resources. Risk of not meeting financial objectives. Unprepared for the storms of life. Pay higher taxes than necessary. Delay retirement; live on less money. May be difficult fulfilling God’s purpose

for your life.

A good Tax Planner is always happyHave a happy financial year with a

burden of increased Taxes.