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 for Financial Year 2018-19 or Assessment year 2019-20.
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.
However, there are ways that can help you minimise 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. Can you limit the tax outgo on your bonus? Yes.
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.
If the bonus is to be paid in the current year, the best that can be done is to spread the resulting tax liability on the bonus over the remaining months in that financial year. By deferring the tax outflow over the remaining months on a piecemeal basis instead of lump sum tax payment, this will ensure that the individual’s overall cash flow is better managed.
In certain cases, the employer deducts tax on the bonus before handing it over to the employee. In such cases, ensure that you give your tax-saving investment details to the employer so that you can get the maximum bonus on hand.
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 required 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.
Generally, having a house rent allowance (HRA) component in the salary and paying rent is the better option. 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 human resource 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:
Sops! 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.
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.
Tax calculations are easier for the salaried compared to those for the self-employed.
There are a few things that you should keep in mind. All expenses related to business or profession 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:
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:
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 per cent (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 heath 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), 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:
Saving Capital Gains
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. 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.
Tips from experts 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.
Tips from experts for high-income individuals
Citizens in the higher tax bracket of 30 per cent have little respite from taxation. However, these small tips might help.
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.
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)
(Republished with Amendments)