TAX MANAGEMENT

and
INVESTMENT PLANNING
For
SALARIED EMPLOYEES

VISHWA RANJAN GUPTA.

 INTRODUCTION
zThe law of income tax is contained in
income tax Act-1961.
zApplicable to all assessee whether
individual, firm, HUF, Company, Co-
operative society, etc.
zSalaried Employees come under the
category of individual.
zPublic Sector employees pay the
maximum tax.
zTax Management includes tax planning
but does not include tax avoidance and
tax evasion.
 TAX MANAGEMENT
zTax Management implies the use of
legitimate tax shelters: deductions,
exemptions and allowances to reduce
tax liability.
zNoteworthy in the above stated
definition is the key word “ legitimate”.
zIt also includes Filing of tax return
timely and properly.
zEvery taxpayer can, with some thought,
care and study, legitimately reduce his
tax burden.
 Basic Concepts of Income-tax
zIncome of Previous year is chargeable to
tax in the immediately following
assessment year.
zThere are 5 main heads of Income:
-Salary
-House Property
-Profits/Gains of Business/Profession
-Capital Gains
-Other Sources
 Income From Salaries
- Taxable either on due or on receipt basis.
- Basic Pay, DA, Bonus, are fully taxable.
- HRA, Transport Allowance, Children
education allowance are partly taxable.
- Perquisites are the benefits in cash or in kind
attached to an office or position in addition
to salary or wages . It includes rent-free or
concessional rate accommodation, motor car,
gas, electricity, water, etc.
Computation of Income From Salaries

- Salary means Basic Pay+D.A., Bonus,

Incentives, etc.
- Add Taxable Allowances
- Add Taxable Perquisites
- Sum of above will be called ‘Income
from Salary’
 SALARY
-Basic Pay
-Personal/Stagnation Pay
-Non Practicing Allowance
-Dearness Allowance
-Production Incentive/Reward
-Hindi Increment
-Ex-gratia
-Leave Encashment
 Allowances

-House Rent Allowance

-Children Education Allowance
-Uniform Allowance
-Transport Allowance
 PERQUISITES
-Rent Free/Concessional Accommodation
-Provision of Car/LTE
-Entertainment-Bill Submission
-Telephone Bills-Reimbursement
-Free Educational Facilities/Tuition Fee
-LTC/LLTC
-Concessional Loans
-Lunch/refreshment
-Medical Reimbursement
-Furnishing Facility
-Group Super Annuation Scheme
-Gift in kind
 Income From Salaries-Allowances
House Rent Allowance:
- If employee lives in his own house or
does not pay any rent, no exemption.
- Least of the following:
• 50% of salary if house is situated in
Delhi, Mumbai, Kolkatta or Chinai and
40% in any other case.
• Actual house rent allowance.
• Excess of rent paid over 10 % of
salary.
Salary means Basic Pay + D.A.
 Income From Salaries-Allowances
CHILDREN EDUCATION ALLOWANCE
- Rs. 100/Child/month, Max. 2 Children.
- Rs. 300/Child/Month, Max. 2 Children for Hostel Exp.
TRANSPORT ALLOWANCE
- Rs. 800/month to meet the expenditure to commute
between the place of residence and place of duty.
UNIFORM ALLOWANCE
-To meet the expenditure on purchase or
maintenance. Exempt to the extent utilized for
the specified purpose.
 NON TAXABLE PERQUISITES
- Refreshment during working hours in office
premises/Canteen coupens.
- Free meals provided or paid through non
transferable voucher up to Rs. 50/meal, during
business hours.
- Gift in kind up to Rs. 5000.
- Conveyance facility to office and residence.
- Computer/Lap top given to employees.
- Use of health club/sports facilities maintained
by the company.
- Entertainment Reimbursement - Vouchers
- Premium on group accident insurance.
- Premium of Group Medicaim
 NON TAXABLE PERQUISITES
- Free education facility to children up to Rs.
1000/Child/Month-Institute owned by Employer.
- Free telephones including mobile phone.
- Goods manufactured by employer and sold at
concessional rate.
- LTC: Only 2 journeys in a block of 4 years.
Only 2 children borne after 1.10.1998.
MEDICAL FACILITIES
- Provided in Hospital maintained by employer.
- Hospitalization of approved hospitals.
- OPD up to Rs. 15,000/-.
 Taxable Perquisites
Rent Free or Concessional Accommodation
- For Govt. employees only licence fee.
- 15%(>25 lakh population) ,10%(>10 lakh
population) or 7.5% of salary -Rent paid. Salary
means, Basic+D.A., Bonus+ Incentives+All
monetary benefits and taxable allowances.
Interest Free or concessional Loan
- Up to Rs. 20,000, fully exempt.
- The rate notified by SBI at the beginning of the
year minus the rate of interest charged.
 Taxable Perquisites
Movable Asset
- 10% of the value of the asset or actual rent paid
by the employer. Furnishing facility falls under
this head.
Movable Asset Sale
(Actual Cost minus Depreciation –actual
realization)-is a taxable perquisite.
- Computers and Electronic Items-50% reducing
balance method.
- Motor Car-20% reducing balance method
- Other Assets-10% of cost.
 Retirement Benefits

Leave Encashment
- Govt. employees-10 months salary fully exempt.
- Others- 10 months salary or Rs. 3,00,000-
whichever is lower. Limit fixed in April 1998.
- Half Pay Leave Encashment-Fully taxable.
Gratuity (Sept. 1997)
- Govt. employee/Gratuity Act- Rs. 10,00,000.
Voluntary Retirement
- Exempt up to Rs. 5,00,000. Limit fixed long back.
 TAX PLANNING –SALARY INCOME
z Provision of tax free perquisites and allowances
instead of taxable perquisites and allowances.
z Fill the format and select tax free
allowances/perquisites
z Obtain medi-claim policy for Rupees 5 lakh even if
premium is to be paid by the employee.
z Pre-paid vouchers for food as meal allowance and gift
voucher-Rs. 15600+Rs. 5000
z Contribute towards Pension Fund and don’t
commute.
z Accumulate leave Rs. 3 lakh encashment.
 Income From House Property
z If an employee is the owner of a house property
(consisting of any building or land appurtenant
thereto) is taxed on the income received from
such house property.
z If a person transfers house property otherwise
than for adequate consideration to his or her
spouse or to his minor child is treated as deemed
owner of the house property.
z First gross annual value is to be determined,
which is highest of the actual rent, expected rent
or municipal valuation.
 Income From House Property-Computation
zFirst determine Gross Annual Value.
zDeduct municipal taxes paid. This will be
NAV.
zFrom Net Annual Value -Deduction u/s 24-
i.e. 30% for repairs and interest on capital
borrowed is allowed.
zPre construction interest is allowed in 5 equal
installments.
zThis is Taxable Income from House Property.
 Income From House Property
z For Self Occupied Properties (SOP), Interest (pre-
construction & current) is deductible subject to max.
of Rs. 150000/-
z For SOP, Interest on borrowings for reconst/
improvements is allowed –Max. Rs. 30,000.
z In case of let out properties, actual interest is allowed.
Negative income from house property can be used to
reduce taxable income from any other source
including income from salary.
z Where the person has occupied more than one house
for his own residence, only one house (according to his
own choice) is treated as SOP. Other houses are
deemed to be let out.
 TAX PLANNING
z Construct the house with borrowed capital only.
z Loan can be taken from spouse/relative. Pay
reasonable rate of interest.
z In any case don’t build the house by permanent
withdrawal from PF.
z Reimbursement of municipal taxes on actual
payment basis and are allowed if paid by the owner.
Tenant should not pay the municipal taxes.
z Pre construction interest to be claimed in the year
the possession of house is taken. Pre construction
starts from the date of borrowing and ends on March
31 immediately prior to the date of construction.
z Loans for renewal/ construction and interest thereon
is allowed.
 TAX PLANNING
z Co-ownership of property U/s 26 of the Income
Tax is allowed only when the shares of co-
owners are definite and ascertainable and this
should be done before the construction of the
property or even purchase of plot.
z If pocket permits go for bigger house.
z Loans from financial institutions may include
insurance premium also.
z Financial Institutions are also providing the
facility where a separate bank account, along
with normal home loan account is given. This
can be your salary account. Your outstanding
loan amount gets reduced to the extent of
balance in your bank account on a daily basis.
z Preference for Loans from Public Sector
Banks/LIC.
 Income From Capital Gain
z Any profit or gain arising from the sale or
transfer of a capital asset is chargeable to tax
under this head
z It is deemed to be income of the previous year in
which the transfer of the capital asset takes
place.
z Capital asset includes property of any kind,
whether movable or immovable, tangible or
intangible except personal effects and
agricultural land.
z Jewellary is treated as capital asset even though
it is meant for personal use of the assessee.
 Income From Capital Gain
z Capital assets are divided in to two types-
Short-term & Long-term .
z Short term capital asset means a capital asset
held by an assessee for not more than 36
months.
z However, in case of shares, debentures, Govt.
Securities listed in Recognized stock exchange
and units of UTI and Mutual Fund this period
shall be 12 months.
 Capital Gain-Computation
zFrom the sales consideration we deduct the
following to calculate capital gain:
-Expenditure incurred wholly and
exclusively in connection with such
transfer
-Cost of acquisition
-Cost of improvement
zIn case of Long-term capital asset, Cost of
acquisition and improvement has to be
indexed to incorporate the impact of
inflation.
 INFLATION INDEX
1981-82 100
1982-83 109
1991-92 199
2001-02 426
2003-04 463
2008-09 582
2009-10 632
2010-11 711
2011-12 785
 Contd.
zIf assessee receives the capital asset under a
gift or will, or by succession,inheritance or
devolution or on partition of HUF etc., the
cost of the previous owner is deemed to be
the cost of acquisition.
zIf the capital asset is acquired before 1-4-81,
the assessee may take at his option, either
the actual cost or the fair market value of
the asset as on 1-4-81 as cost of acquisition.
 Deductions
z Certain deduction U/S 54, 54B, 54EC and 54F are
available from the long-term Capital gains calculated
as above.
z Long term capital gain on sale of property used for
residence. New residential house acquired within a
period of one year before or 2 years after or
constructed within 3 years from the date of transfer.
New asset should not be sold within 3 years of
acquisition or construction. Amount equal to capital
gain or more to be deposited in ‘Capital gains
accounts scheme 1988’ of a Public Sector Bank
before the due date of the filing of Income Tax
return. U/S 54
 Deductions
z 54 B, Short/long term capital gain on transfer of
agricultural land and within 2 years agricultural
land is purchased.
z Any long term capital gain is exempt from tax if
within 6 months of transfer, investment (equal to
capital gain) is made in minimum 3 years eligible
bonds/debentures issued by National Highway
Authority or Rural Electrification Corporation-54
EC
z Any long term capital gain other than residential
house is exempt if full consideration is invested (one
year before or 2 years after or constructed within 3
years from the date of transfer) in house property-
54 F
 Deductions
z Tax on long term capital gains is applicable @
20% with indexation or can be paid @ 10%
without indexation benefit.
z Capital gain on transfer of equity shares and
being chargeable to securities transaction tax:
- exempt from tax in case of long term capital
gain;
- subject to 15% of tax incase of short term
capital gain.
 TAX PLANNING-CAPITAL GAINS
z Long term capital gain-lower tax rate & benefit of
indexation. Plan transfer of capital assets after 36
months and Securities after 12 months.
z Each asset is a separate asset for indexation benefit.
For certain assets, in stead of going for indexation
benefit, paying tax at 20% may be beneficial
z Your De-mat account has been linked with PAN.
Though, long term capital gain is exempt from tax,
but in your tax return, the details of long term
capital gain must be provided.
 TAX PLANNING-CAPITAL GAINS

z Adopt actual cost or 1.4.81 market price, whichever

is beneficial. The valuation may be done by the
approved valuer.
z In case of gifted asset, the period for which the asset
was held by the previous owner is to be added back.
z Any long term capital gain is exempt from tax if
within 6 months of transfer, investment (equal to
capital gain) is made in minimum 3 years eligible
bonds/debentures issued by NHA or REC (54 EC).
Don’t wait for purchase or construction of house.
 Income From Other Sources

zLast and residual head of charge of

income.
zA source of income which does not fall
under any one of the other heads of
income, bought to charge under this
head of income.
zAll sort of interest incomes, ground
rent, dividend income, income from
subletting, winning from lottery, etc.
are included under this head.
 TAX MANAGEMENT-OTHER SOURCES

z Interest on Fixed Deposits and NSC is

taxable. Interest accrued every year is to be
taken as income other wise in the maturity
year full interest amount will be taxable.
z Dividend income should be declared though
it is tax free.
 Clubbing of income
zIn some cases, assessee may be taxed
in respect of incomes which legally
belong to some other person:
-Transfer of income without transfer of
assets
-Revocable transfer of assets
-Income from assets transferred to
spouse/son’s wife
-Income of Minor Child
 Set off of losses
z House property loss can be set off against any other
head of income in the same year. Can be c/f to next 8
yrs. and set off from the income under same head.
z Long term capital loss can be set off against long
term capital gains only. Can be carried forward to
next 8 assessment years and set off against the
income from long term capital gains only.
z Short term capital loss can be set off against any
(Short term or long term) capital gain in the same
year. Can be c/f to next 8 years and set off against
income under both short or long term capital gains.
 Clubbing of Income -Tax Planning
z No gift tax is payable on gift from relative
(father, mother, brother, sister, brother or
sister in-law, mama, mami, uncle and aunty)
z Gift from friend above Rs. 50,000 is taxable.
But given on marriage, child birth is tax free
to any extent.
z If you already have a house then gift of cash
to wife and purchase of house for residence
with that money. Charge reasonable
interest.
 Clubbing of Income -Tax Planning
z Create income for your spouce. Married lady’s
income must be from her own separate and
independent source:
a) Income from asset created out of gift from a relative
other than spouce, father-in-law or mother-in-law;
b)Gift at the time of marriage;
c) Give loan to wife to purchase a house or for
investment in shares and charge reasonable interest.
d)Money given to wife for household expenses, wife
saves something and invest, income not to be clubbed
z Income from the Accretion to the assets not to be
clubbed.
 Clubbing of Income -Tax Planning
z Creation of HUF:
a) The status of HUF is enjoyed by every Hindu married
individual. However, to claim that a particular
income belongs to HUF, its source may be ancestral,
assets gifted by relatives/friends or received by the
HUF through a will.
b)If you give your personal asset to HUF, income will be
clubbed with your income. Gifts above Rs. 50,000/
would be taxable as HUF income. Best way is to
receive assets as part of a will.
c) Prepare a separate deed on stamp paper giving details
viz. name of Karta, co-parceners and source of funds
and then Karta should apply for PAN.
d)A separate bank account should be maintained in the
name of HUF and income should be deposited in that
account.
 Clubbing of Income-Tax Planning
z Cash gift to wife and investment in PPF. Limit of
Rs. 1,00,000 can be avoided.
z If asset transferred to child above 18 years, income
is taxable in child’s hand. Gift to Major child.
z Income of child will be clubbed in the hands of that
parent whose total income is greater. Once clubbed,
it will continue to be so unless assessing officer
approves the change. However, an exemption of Rs.
1500 will be granted. If child attains majority or
income earned through his /her talent or suffers
from major disability viz. blindness, mental
retardation, clubbing provision is not applicable.
z File the tax return to take the benefit of C/F of long
term and short term capital losses.
 Deductions
z Deductions U/s 80C to 80U are allowed from GTI.
z Deduction U/s 80 C is allowed upto Rs. 1 lakh paid or
deposited in the following specified schemes:
- Life Insurance Premium-Self, Spouse, Children
- CPF/VPF/PPF/ Postal Life Insurance
- NSC including interest accrued thereon
- ULIP of UTI/LIC (Dhanraksha)
- Notified units of Mutual Funds.
- Installment towards cost of purchase or repayment of
housing loan taken from Bank/ Financial Institutions.
-Bonds of notified infrastructure company
 Deductions
U/s 80 C
- Tuition Fees for any 2 children (excluding
payment for any development fees or donation)
paid to school, college, university situated
within India for full time course.
- Investment in fixed deposits (not less than 5
years ) in scheduled banks/Post Office.
U/s 80 D
- Deduction in respect of Medical insurance on
the health of taxpayer, spouse, dependant
parents/ children - Rs. 15,000/annum. Senior
citizen-Rs. 20,000/-
 Deductions
z Deduction in respect of expenditure incurred for
medical treatment (incl. nursing), training and
rehabilitation of handicapped dependent or any
premium or amt. Paid to LIC,UTI or any other
insurer for maintenance of handicapped
dependent. Deduction Rs. 50,000 & Severe
Disability 1,00,000 (80 DD)
z Repayment of interest (without limit) on loan for
self, spouce or child from approved financial
institution or bank for higher education is allowed
for 8 years from the repayment of loan. Any
graduate, post graduate full time course is
included. Expenses connected with education,
purchase of computer, travelling etc are covered
(80E) Interest to be paid by the person who has
taken the loan.
 Deductions
z A deduction of Rs. 10,000 of interest earned
on savings account of a bank, co-operative
society or post office(80TTA)
z Deduction to handicapped individual.
Deduction Rs. 50,000 & 1,00,000 (80 U)
 How to Calculate Tax Liability
- First Calculate taxable income under
various heads of income
- Sum of above will give us Gross Total
Income (GTI)
- From Gross total Income deduct various
deductions u/s 80C to 80U
- It will give Total Taxable Income
- Tax will be calculated on the total
taxable income
 Tax Rates
Income up to Rs. 200,000 Nil
Above Rs. 200,000 to Rs. 500,000 10%
Above Rs. 500,000 to Rs. 1,000,000 20%
Above Rs. 1,000,000 30%
Sr. Citizen
Up to Rs. 250,000 Nil
Super Sr. Citizen
Up to Rs. 500,000 Nil
 Investment Schemes-Taxable
z MIS Post Office: Interest 8.5% monthly payable
(ER 8.8%). Period 6 years. Interest taxable.
Maximum investment Rs. 4.5 lakh (single name
account) and Rs. 9 lakh (Joint account). Investment
not exempt U/S 80C. Contractual obligation on
interest rates.
z 5 year Recurring Deposit Post Office: Quarterly
compounded interest 8.4% (ER 8.7%) payable on
maturity. Interest taxable. Deduction U/S 80C not
available. Most suitable with MIS.
z 5 Year Senior Citizen Saving Scheme-Maximum
limit Rs. 15,00,000. Interest 9.3% payable quarterly
(ER 9.6%). Contractual obligation on interest rate.
Interest taxable. Deduction U/s 80 C available. VR
employees -55 years otherwise 60 years.
 Investment Schemes-Taxable
z 1,2,3 and 5 year Time Deposit: Interest @8.2%,
8.3%, 8.4% and 8.5% p.a. Quarterly
compounded. No limit. Income taxable. 80C
benefit for deposits above 5 years
z 8% (Taxable) 6 Year Government Bonds:
Interest compounded half yearly (ER 8.16%).
No upper limit on investment. Contractual
obligation on interest rate. No Tax benefit.
z Fixed Deposits of Banks: Up to 9.5%.
Contractual obligation. Interest taxable. 80C
benefit if FD for more than 5 years. 0.25-1%
higher interest for senior citizen.
 Investment Schemes-Tax Free
z PPF: Interest 8.8%, yearly compounding fully
exempt. Minimum deposit Rs. 500 and
maximum Rs. 1,00,000. First withdrawal from
7th financial year and subsequent every year.
Period 15 years can be extended every time for
5 years. Deduction U/S 80C- Rs. 1 lakh. No
contractual obligation on interest rates.
z NSC: Interest 8.9% compounded half yearly
(ER 9.1%). Investment including interest
allowed deduction U/S 80C. Period 6 years.
Interest chargeable to tax. Contractual
obligation on interest rates.
 Investment Schemes-Tax Free
z LIC Jeevan Bharti: Scheme open for ladies
only. Interest 5%+, tax free. 80C benefit
available. One can opt for 15/20 years scheme.
Covers six critical illness. On diagnosis of
specified critical illness or birth of child with
specified congenital disability one gets the
insurance money (Max. Rs. 2 lakh).
z Komal Jeevan: Interest 7.5%+, tax free. 80C
benefit available
z Postal Life Insurance-Interest 9%+insurance,
Tax free. 80C benefit available.
z Systematic Investment Plan (SIP)
Tax Planning-Deductions & Investments
z Retired persons need not to pay tax up to Rs.
30,000/month. PPF interest is additional. If
income is less, invest in high return taxable
securities.
z Amongst tax free schemes, Postal Life
Insurance and Public Provident Fund are
very good schemes.
z Don’t close PPF Account after retirement.
z Minimize your tax liability through PPF.
Withdraw Rs. 1,00,000/- each year and
deposit back to claim 80 C benefit.
 Tax Planning-Deductions & Investments
z PPF Account matures after 15 years and it can
be extended by 5 years but any number of times
by filling form H within one year of maturity.
z Deposit in PPF before 5th of the month.
z Banks offer .25 to 1% higher interest to senior
citizen (>60 year age). Benefit must be availed.
z To claim 80 D benefit, Mediclaim premium must
be paid by cheque only.
z Investments to be made at the beginning of the
year. Don’t keep money in savings account.
z Higher age, oriental insurance in child’s name.
z PF withdrawal possible 1 year before retirement.
 OTHER POINTS

z Return must be filed on time. If filed late,

revised return is not allowed.
z Refund can be claimed in the revised
return even if it is not claimed in the
original return.
z Keep watch on refund even if bank
account details have been given.
z Keep details of major expenditure and its
financing.
z Records must be kept for six years.
 WILL
zIt is the shortest known valid and
honoured legal document for self
acquired property. Giving property
through WILL is known as bequeathing
and such gift is called ‘bequest’ or a
‘Legacy’.
zIn absence of WILL/Joint
holder/Nominee succession certificate
from court will be needed which may
take any time between 2-5 years along
with other harassments.
 How to make WILL:
zIt does not require any stamp paper.
zIt may be typed or hand written.
zIt needs signature of two witnesses,
preferably one doctor.
zPreferably registered.
zKeep it in safe custody.
zDo updating/revise if needed.
zLegal help not necessary for simple
‘WILL’
 How to make WILL
zSelect executor/witnesses with care –
younger than you.
zAny subsequent ‘WILL’ over rides
previous ‘WILL’. Do updating if
needed.
Remember:
z It is never too early “Making a WILL”
z “Do it NOW”
 WILL FORMAT
I………………………Son of …………..…………….aged
…….years, residing at……………………..declare this
WILL made at my above residence in sound disposing
state of mind on this …………day of …………month in
the year………as my WILL.
I hereby devise and bequeath all my properties both
movable & immovable including money in bank and
other places, debts and money due to me, shares &
securities, ornaments and all other forms of assets
which may become entitled to in future and remain
undisposed at the time of my death in favour of my wife
Mrs………. aged …….years residing at
……………….with absolute ownership and full power of
disposal.
 WILL FORMAT

In witness whereof I have signed this WILL in the

presence of the undersigned persons who have
attested this WILL, as witness thereof in my presence.
Place……………… Signature of Testator
Date ……………… (Name of Testator)
Witnesses:
1) Signature……………… 2) Signature………………
Name…………………… Name …………………
Address………………… Address ……………
 An advice for Senior Citizens
z Always keep Medical Data Card in your wallet. It is
useful when you are in emergency room and
unable to answer medical information.
Medical Data Card
• Name & Address with Phone No ---------
• Medical Information:
-Significant Disease ------------
-Medicine being taken -----------
-Allergic from ----------------------
-Blood Group --------------------
-Doctor’s Name & Contact no. ----------------
 An advice for Senior Citizens

zKeep few tablets of Sorbitrate in wallet.

zIn case of pain in chest etc. & sweating
lie down where you are.
z Keep Sorbitrate under your tongue.
 Further Humble Advice
zPosition not the same as before
retirement. Accept the change.
zThere is generation gap. Don’t interfere.
zKeep yourself busy and fit. Reduce your
expectations.
zInvestments 150 to 180 times of your
average monthly expenditure.
zKeep house and investments in your own
name. How so ever good your children
may be. Make a will.