TAX PLANNING WITH EXAMPLE, COMPENSATION MGMT

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    UNIT V- Taxation

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    SALARY Salaries is the remuneration received by an employee for the

    services rendered by him to that employer. The primary

    criteria of classifying an income under Salaries is that of

    Employer Employee Relationship.

    Example :

    (i)Directors of the company regarded as Employees.

    (ii) A Doctor visiting a company on a particular day of a week

    and paid a fixed remuneration will still not be regarded as an

    employee.

    (iii) High Court, Supreme Court Judges They will be regarded

    as Employees (Government Servants).

    MPs and MLAs They will not be regarded as employees as

    they are Public Servants. The Honorarium received by them

    will be taxable under Income from Other Sources.

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    Definition of Salary Sec. 17(1)

    Salary Includes

    Wages

    Annuity or Pension

    Gratuity

    Any fees, commission, perquisites and profit in

    lieu of salary

    Advance Salary

    Leave Salary

    Annual Accreation to the Credit of a

    recognized Provident Fund in excess of

    specified limits.

    Transfer of Balance in recognized Provident

    Fund.

    Contribution made by Central Government

    under a Pension Plan.

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    For the purpose of taxing salary, the study is under 5 Heads.

    A. General

    B. Allowances

    C. Perquisites

    D. Terminal Benefits

    E. Profit in lieu of salary

    General :-

    Basic Pay This is the primary source upon which other computations are

    made. It is computed in 2 ways. Acrual Amount Where specific amount is given

    Grade system of Basic Pay Predetermination of increment

    Bonus / Commission

    These may be paid annually or periodical basis. This is fully taxable.

    Incentive Fully taxable

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    ALLOWANCES

    Fixed monetary payments for an ear marked purpose. In other words, payment

    made by an Employer to an employee and employer also specified for what purpose

    payment should be utilized.

    Allowances are taxable based upon its utilization. For this purpose allowances

    bifurcated into Three

    1) Fully taxable allowances

    2) Fully exempt Allowances

    3) Partly taxable allowances

    Fully taxable allowances -

    It means that the whole of the amount received is taxable

    i. Dearness Allowances (DA) Allowance paid for meeting the cost of employmen

    known as DA. DA is fully taxable irrespective of the fact that it is forming part or not.

    ii. City Compensatory Allowance (CCA) Allowance paid for meeting the high cos

    living of a particular place is known as CCA.

    iii. Medical Allowance : Fully taxableiv. Lunch Allowance : Fully taxable

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    Fully Exempt Allowance :-

    i. Allowances paid to High Court / Supreme Court Judges

    ii. Allowances paid to High Commissioners / Ambassadors outside

    India.

    Partly Taxable Allowances

    House Rental Allowances (HRA) : Allowance paid for meeting

    the cost of accommodation is known as HRA. U/s 10(13A)

    exemption in HRA is as follows:-

    Actual HRA received

    Excess of rent paid over 10% of Salary (Rent Paid 10% ofSalary)

    50% (Metros) or 40% (Non-Metros) of Salary

    Salary = Basic Pay + DA (forming part) + commission paid as a

    fixed % of turnover

    For determining the HRA exemption four factors are being

    considered

    HRA received

    Rent Paid

    Salary; and

    Place of stay

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    Children Education Allowance :Exempt up to Rs.100/- per month per child for maximum of

    2 Children.

    Hostel Allowance : Exempt up to Rs.300/- per child per month for maximum

    of 2 children.

    Travelling Allowance : If it is officially spent wholly exempt.(Between cities)

    Conveyance Allowance : officially spent wholly exempt.(within city)

    Transport Allowance : Rs.800/- pm is exempt. Irrespective of actual spent

    Uniform Allowance : Officially spent is wholly exempt.

    Hill Area Allowance : Varies from Rs.300/- to Rs.7000/- based upon the altitude of

    the hill.

    Border Area Allowance : varies based upon the intensity of the border.

    Underground Allowance : Whatever is actually paid is fully exempt.

    Transport Allowance for Physically Challenged :Exempt up to Rs.1600/- irrespect of

    actual spent.

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    PERQUISITES The other component of an employers

    remuneration is perquisites. A perquisites is

    defined as a gain or profit incidentally made from

    employment in addition to regular salary or wages,

    especially of a kind expected or promised.

    Their main characteristic is that they are payable

    only during the continuance of employment andare directly dependent on the service.

    The normal meaning of the word denotes

    something that benefits an employee by going

    directly to his pocket. It therefore does not apply to

    reimbursement of expenses actually incurred in

    the interest of official work.

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    Perquisites

    Free Gas, Water, Electricity provided by an employer.

    Provision of watchman, sweeper, gardner and

    personal attendant to the employee. General Perquisites

    1.Medical Facility This perquisites discusses theprovision of taxation w.r.t. Medical facility provided by

    the employer to employee or his family members.1.Where the facility provided in a hospital owned by

    the employer, then also it is wholly exempt.

    In all other cases exemption is applicable up toRs.15,000/- p.a.

    Medical facility also includes Mediclaim Insurancepremium paid. Hence it is wholly exempt.

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    3. Leave Travel Concession Facility :-

    LTC is a facility provided by an employer, where the employer takes care of the

    expenditure for the personal tour of employee and his family members (same like

    medical). For the purpose of this benefit, 4 years are together known as a block.

    An employee is eligible for 2 such trips in a block of 4 years. Where the employee

    fails to avail one trip or both the trips then he can carry forward one such trip to next

    block of 4 years.

    d. Exemption is as follows :-

    If the trip is undertaken in a flight Amount exempt will be economy class fare by

    the national airlines by the shortest route.

    If the journey is performed by train Amount exempt will be first class A/C fare by

    the shortest route.

    If the journey is performed by any other transport system deluxe class fare of

    such transport system.

    Where there is no recognized transport facility, first class A/C fare, had there

    been a recognized train facility.

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    Income from SalaryGross salary -Special deduction under sec.10& sec 16 = Net salary Income

    + Income from House property

    Gross House property Income Special deduction = Net House propertyIncome

    +

    Income from Business or professionGross business or profession income Special deduction = Net business orprofession income

    +

    Income from Capital GainsGross Capital Gains income Special deduction = Net Capital Gains income

    +

    Income from other sourcesGross other sources income Special deduction = Net other sources income

    ==GROSS TOTAL INCOME

    CALCULATION OF INCOME TAX

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    GROSS TOTAL INCOME GENERAL DEDUCTION u/s80 = Taxable Income

    TAX + 3% educational Cess = Amount to be paidtowards tax

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    INCREASING POST VALUECOMPENSATION AFTER TAX

    A proper understanding of various tax shelters will help

    individuals to minimize their tax liabilities and companies to

    review the tax benefits they give to their employees with a view

    to reduce their own cost, increase employee's satisfaction and

    reviews the tax burden for both.

    Remuneration received by the employees should qualify for

    concessional rate of taxation so that their post tax income is

    maximized. This is an important consideration because the post

    tax income is perceived as the real income by the employees and

    therefore, as significant implication for his morale, motivation and

    commitment to the organization.

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    TAX PLANNING

    Tax planning includes all financial arrangement which allow a tax-

    payer to reduce to the minimum his tax liability without violating

    any legal provision and without resorting to any colorable device.

    Although tax planning and tax avoidance are two distinct legal

    concepts, the line of demarcation is very thin and substantially

    blurred. There is an element of malafide intent behind the tax

    avoidance. Any tax planning though done strictly according to law

    would amount to tax avoidance if the basic intention of the

    legislature is defeated.

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    While considering tax planning from the angle of the employer, provisions relating to

    disallowances should be carefully examined to ensure that any payment made as salary or

    perquisite is not disallowed as permissible business expense. Apart from complying with the

    requirement of the above provisions, employer has to ensure that tax is deducted at source.

    TAX EFFICIENT COMPENSATION PACKAGE

    1. Medical Reimbursement :

    Medical expenses reimbursed by your employer are tax-exempt up to Rs.15000 per year.

    Such payment should be a reimbursement against the production of bills or vouchers, and

    not on allowance, which you may or may not spend.

    Besides reimbursement, hospitalization of you and your family members borne by your

    employer are also exempt provided disease is notified by chief commissioner of income tax.

    Instead of reimbursing hospitalization expenses, some employers prefer to reimburse the

    premium paid by you on a mediclaim policy. such Reimbursement of medical insurance

    premium is a tax-free perquisite without any limit.

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    Interest free loan:

    A loan taken by you from your employer for any purpose

    on which you dont pay interest, or pay a concessional

    rate of interest, is not a taxable perquisite.

    Transport Allowance :

    This is meant to compensate you for the cost incurred

    in commuting to your place of work. Transport allowance

    is exempt to the extent ofRs.800 per month, irrespective

    of the amount actually spent by you in commuting to yourwork place. This exemption is not available to you if your

    employer has provided you free conveyance.

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    DIFFERENT FORMS OF SALARY-RETIREMENT BENEFITS

    1. Leave encashment salary

    2.Gratuity

    3.Pension

    4.Retrenchment compensation 5.Provident Fund

    17

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    LEAVE ENCASHMENT

    It is not related to casual leave

    For every completed year of service employee is

    entitled to receive a certain number of days of

    paid leave. Employee either can take leave or en

    cash it while in service or after retirement.

    Note: Any thing received while in service is

    normally taxable. After retirement there are someconcessions given.

    18

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    MR.A PAY SLIP WORKING INMADURAI/MONTH

    Basic pay = Rs 10000 (1,20,000)

    Dearness allowance =Rs 5000 (60,000)

    HRA=Rs 3000 (36,000)

    CCA= Rs 1000 (12,000)

    Medical allowance = Rs 500 (6000)

    Entertainment allowance =Rs 600 (7,200)

    He pays a house rent of 7000/per month. He pays Rs1500 as

    professional tax. He contributes Rs 700per year to the Prime

    minister relief fund. He subscribes Rs.40000 to GPF. He invests

    Rs.30,000 in mutual fund. He purchases a NSC for Rs 20,000. He

    pays LIC policy premium of Rs.15, 000. He pays Rs.5000 as

    mediclaim premium. Calculate the income tax ?

    19

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    Gross salary Income = 2,41,200

    (BP+Alowances+Perks)

    1st deduction under sec 10(13)

    Actual HRA =Rs 36000

    Rent paid in excess of 10% =Rs 66000

    40% of (BP+DA) =Rs 72000 =Rs 36000

    2nd Deduction under sec 16

    a. Deduction for entertainment Allowance -

    Deduction is Minimum of followingActual EA received

    1/5th of Basic

    Rs.5000/- p.a.

    Entertainment allowance =Rs 5000

    Professional Tax =Rs 1500 =Rs 6500

    Net salary Income =Rs 1,98,700

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    Income from House property =NIL

    Income from business pr prof =NIL

    Income from Capital gains =NIL

    Income from other sources =NILGross Total Income =Rs 198700

    3rd deduction U/s 80

    80 C

    Towards Gratuity provident fund =Rs 40,000Towards Mutual Fund =Rs 30,000

    Towards NSC =Rs 20,000

    Towards LIC Policy =Rs 15,000

    Total =Rs 105

    Limited to 1 lakh so =Rs 100000

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    80D

    Towards Medi claim policy = Rs 5000

    Limited to 10,000

    80G

    Towards PMFR =Rs 700

    Total =Rs 105700

    Taxable income =Rs 198700-Rs 105700 =Rs93000

    Tax

    3% education cess

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    Assessment year 2010-2011 Individual /HUF

    Upto Rs 160000= NIL

    160000 to Rs 300000=10%

    Rs 300000 to Rs 500000 =20%+14000

    Above Rs 500000 =30% + 54000

    Assessment year 2010-2011 for women

    Upto Rs 190000= NIL

    190000 to Rs 300000=10%Rs 300000 to Rs 500000 =20%+11000

    Above Rs 500000 =30% + 51000

    Assessment year 2010-2011 senior citizens above 65 years

    Upto Rs 240000= NIL

    240000 to Rs 300000=10%

    Rs 300000 to Rs 500000 =20%+6000

    Above Rs 500000 =30% + 46000

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    Basic RulesRule 1

    The aggregate amount ofdeductions under sections 80C

    to 80U cannot exceed grosstotal income.

    Rule 2

    These deductions are to beallowed only if the assesseeclaims these and gives theproof of such investments/ex enditure/ income.

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    CATEGORIES OFDEDUCTIONS

    1. To encourage savings

    2.For certain personal expenditure

    3.For socially desirable activities

    4.For physically disabled persons

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    Deduction u/s

    80CApplicable only to Individual &HUF.

    This section provides fordeduction in respect of certainexpenditure/ investments paid ordeposited by the assessee in theprevious year.

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    The gross qualifying amount under this section refer tothe payment/investment under some of the followingschemes:-

    Life Insurance Premium Paid.

    Deferred Annuity Contract.

    Statutory Provident Fund and Recognized ProvidentFund.

    15 Year Public Provident Fund.

    Approved Superannuation Fund.

    National Savings Certificates.

    Unit-linked Insurance Plan (Ulip).Dhanraksha Plan of LIC Mutual Fund.

    Jeevan Dhara, Jeevan Akshay, New Jeevan Dhara.

    Notified Units of Mutual Fund or UTI.

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    Amount of Deduction

    100% of the amount invested or Rs. 1,00,000/-whichever is lower.

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    Deduction u/s

    80CCC

    Deduction in respect of Contribution to

    Certain Pension Funds.

    Individual

    Eligible Amount amount paid/depositedunder an annuity plan of the Life InsuranceCorporation of India or any other insurer forreceiving pension.

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    ConditionsTaxable income.

    This must not be allowed as deduction u/s80C.Any amount withdrawn or pension receivedfrom the plan is taxable in the hands of

    the assessee or nominee in the year ofreceipt.

    Amount of Deduction

    Amount paid or Rs. 10,000/- whichever islower.

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    Deduction u/s

    80CCDDeduction in Respect of Contribution toPension Scheme of Central Government.

    Individual who is an employee of CentralGovernment on or after 1.1.2004.

    Eligible Amount Deposit made under apension scheme notified by the CentralGovernment.

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    The aggregate amount of deductions under80C, 80CCC and 80CCD put together

    cannot exceed

    Rs.1,00,000

    Ded ction /s

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    Deduction in respect of MedicalInsurance Premia.

    Individuals/HUF.

    Eligible Amount - Insurancepremium paid in accordance withthe scheme framed by theGeneral Insurance Corporationof India and approved by theCentral Government.

    Deduction u/s80D

    Conditions

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    ConditionsThe amount should be paid by cheque out ofthe taxable income.

    The policy is taken on the health of theassessee, on the health of spouse, dependentparents or dependent children of the assessee.In case of HUF on the health of any member of

    the family.

    Amount of Deduction100% of premium paid subject to a maximumof:

    Rs. 15,000 in case of senior citizens (above65 years)

    Rs. 10,000 in case of others.

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    Deduction u/s80EDeduction in respect of repayment of loantaken for higher education.

    Individual

    Eligible Amount any amount paid by way of

    interest on loan taken from any financialinstitution or any approved charitableinstitution for higher education.

    Conditions

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    Conditions

    Amount is paid out of his income chargeable totax.

    Higher education means full-time studies for anygraduate or post-graduate course in engineering,medicine, management or for post-graduatecourse in applied science or pure sciencesincluding mathematics and statistics.

    the deduction shall be allowed for the previous year in which the assessee starts repaying the

    loan or interest thereon and seven previous yearsimmediately succeeding it or until the loantogether with interest thereon is paid by theassessee in full ,whichever is earlier.

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    Amount of Deduction

    Actual interest paid or Rs. 40,000 whichever

    is lower.

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    Deduction u/s

    80UDeduction in case of person with disability.

    Individual resident of India.

    Eligible amount Flat deduction to a person

    with disability.

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    Conditions

    He is certified by the medical authority to be a

    person with disability, at any time during theprevious year.

    He furnishes a certificate issued by themedical authority in the prescribed form along

    the return of income.

    Amount of Deduction

    A fixed deduction ofRs. 50,000 in case of a person with disability

    Rs. 75,000 in case of a person with severedisability.( having any disability over 80%)

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