The government cleared the Finance Bill 2010. Now that rules of the tax game are clear, it's important for you to establish your tax planning strategy, which should essentially be linked to your medium- and long-term financial goals.
As an early start gives you the edge of achieving the right balance between your investment growth and tax management, clearly, it is important to start right away.
Here's how you can effectively plan your taxes for the Financial Year (FY) 2010-11.
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.
Says Mahesh Padmanabhan, principal advisor, relaxwithtax.com, a taxation solutions provider: "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.
Theoretically, the LTA exemption rule stipulates that such exemption from tax can be claimed by an individual twice in a block of four years. 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 2006-09 and, so, could not claim any exemption in this block. However, he can carry forward one journey to the succeeding block (2010-13) and can claim it in the first calendar year, i.e., 2010.
Thereafter, he can also claim the remaining two journeys of the block 2010-13. Accordingly, he may be eligible to avail three exemptions in the block 2010-13.
Says Parizad Sirwalla, partner at BSR & Co, a chartered accountants' firm: "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 that experts like Mahesh have to offer:
* Opt for salary components such as reimbursement of attire expenses, books and periodicals, telephone expenses and medical expenses. These can yield small but profitable results.
* Change the arrangement from using your own car to a company-provided vehicle with driver this will go a long way in cutting your tax bill. If you want to use your own car, but do not want the related high perquisite taxation, you can buy the car in your spouse's name and lease it to your company, which in turn can let you use it. (Such an arrangement needs to be approved by your company as it may not want any tax-related hassles.)
* Small components such as food coupons, education allowance and transport allowance may bring in small but effective respite from taxes.
Sops! Employee Stock Options (ESOPs) are preferred by many blue-chip company employees but, unfortunately, they are taxable.
Says Parizad: "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 Salary
* For a salaried employee, restructuring salary in his favour may not be easy. But you can still soften the tax blow:
* Use house rent allowance (HRA) -- it is partially exempted from tax, provided rent is actually paid.
* Avail tax exemption on HRA, and principal repayment of home loan under Section 80C.
* Furnish current employer details with Form 16 from the previous employer.
* Ensure that you furnish bills to claim reimbursements (e.g., medical).
* LTA is tax-exempt twice in four years upon furnishing requisite bills, if the employer asks for them.
* Remember, food coupons are exempt from tax.
* Get maximum tax benefit from employer-owned motor car that comes with reimbursement.
* After getting ESOPs, hold on to them for a year to avoid taxes. However, the lock-in period varies across employers.
As an early start gives you the edge of achieving the right balance between your investment growth and tax management, clearly, it is important to start right away.
Here's how you can effectively plan your taxes for the Financial Year (FY) 2010-11.
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.
Says Mahesh Padmanabhan, principal advisor, relaxwithtax.com, a taxation solutions provider: "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.
Theoretically, the LTA exemption rule stipulates that such exemption from tax can be claimed by an individual twice in a block of four years. 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 2006-09 and, so, could not claim any exemption in this block. However, he can carry forward one journey to the succeeding block (2010-13) and can claim it in the first calendar year, i.e., 2010.
Thereafter, he can also claim the remaining two journeys of the block 2010-13. Accordingly, he may be eligible to avail three exemptions in the block 2010-13.
Says Parizad Sirwalla, partner at BSR & Co, a chartered accountants' firm: "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 that experts like Mahesh have to offer:
* Opt for salary components such as reimbursement of attire expenses, books and periodicals, telephone expenses and medical expenses. These can yield small but profitable results.
* Change the arrangement from using your own car to a company-provided vehicle with driver this will go a long way in cutting your tax bill. If you want to use your own car, but do not want the related high perquisite taxation, you can buy the car in your spouse's name and lease it to your company, which in turn can let you use it. (Such an arrangement needs to be approved by your company as it may not want any tax-related hassles.)
* Small components such as food coupons, education allowance and transport allowance may bring in small but effective respite from taxes.
Sops! Employee Stock Options (ESOPs) are preferred by many blue-chip company employees but, unfortunately, they are taxable.
Says Parizad: "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 Salary
* For a salaried employee, restructuring salary in his favour may not be easy. But you can still soften the tax blow:
* Use house rent allowance (HRA) -- it is partially exempted from tax, provided rent is actually paid.
* Avail tax exemption on HRA, and principal repayment of home loan under Section 80C.
* Furnish current employer details with Form 16 from the previous employer.
* Ensure that you furnish bills to claim reimbursements (e.g., medical).
* LTA is tax-exempt twice in four years upon furnishing requisite bills, if the employer asks for them.
* Remember, food coupons are exempt from tax.
* Get maximum tax benefit from employer-owned motor car that comes with reimbursement.
* After getting ESOPs, hold on to them for a year to avoid taxes. However, the lock-in period varies across employers.
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