Tax Planning Tips

1. Five Tax-planning tips for salaried people

It has been observed that individuals (often salaried ones) end up paying more
taxes than they are obligated to pay.

While lack of sufficient time to conduct the tax-planning exercise is a reason,

largely, this can be attributed to lack of awareness about different incentives,
allowances and rebates under the Income Tax Act. Apart from the Section 80C
deductions which are quite popular, there are various other sections which can help
salaried individuals save taxes.

We believe there is a need for salaried individuals to devote adequate time and
effort to the tax planning exercise and be aware of the various benefits that they can
avail of. In this article, we present 5 tax-planning tips that can aid salaried
individuals minimize their tax liability.

1. Utilize the entire Section 80C deduction

Under Section 80C, the maximum deduction available is Rs 100,000 pa. Ideally,
salaried individuals whose gross total income is equal to or more than Rs 250,000
should utilize the entire Rs 100,000 limit.

Consider the case of an individual whose taxable income is Rs 600,000 and who only
utilizes half of the available Rs 100,000 limit. He would end up paying an additional
tax of Rs 15,450 as opposed to an individual with the same taxable income, but has
utilized the entire limit.

Also, at times, individuals make investments of over Rs 100,000 in Section 80C

designated avenues, since they fail to understand that the benefits are capped. For
example, despite making investments of Rs 70,000 in Public Provident Fund and Rs
40,000 in ELSS, the amount eligible is only Rs 100,000.

Following investments/contributions qualify for Section 80C deductions,

* Public Provident Fund

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

(The above list of investment/contributions is not exhaustive. For a complete list,

please consult a tax- advisor)

2. Think beyond Section 80C

For salaried individuals whose gross total income exceeds Rs 250,000 pa, deductions
under Section 80C may not be sufficient to reduce the overall tax liability. In such
cases they can consider the following:

Home loan: Individuals intending to buy a house should consider opting for a home
loan. Interest payments of up to Rs 150,000 pa are eligible for deduction under
Section 24.

Medical insurance: An individual who pays medical insurance premium for self or
spouse/dependent children is allowed a deduction of upto Rs 15,000 pa under
section 80D.

An additional deduction of up to Rs 15,000 pa is allowed for premium payment made

for parents. In case the parents are senior citizens, then the maximum deduction
allowed is Rs 20,000 per year.

Donations: Subject to the stated limits, donations to specified funds/institutions are

eligible for tax benefits under Section 80G.

Salaried individuals who plan to pursue higher education should avail of an

education loan as the entire interest is eligible for deduction under Section 80E. The
loan can be for self, spouse or child from an approved charitable institution or a
notified financial institution.

3. Restructure the salary

# Restructuring the salary and including certain components can go a long way in
reducing the tax liability. Unlike eligible investments which lead to an additional
cash outflow, restructuring the salary is a more 'efficient' means of claiming tax
benefits. The following can form a part of one's salary structure: Food coupons like
Sodexo and Ticket Restaurant; they are exempt from tax up to Rs 60,000 per year.
# Medical expenses which are reimbursed by the employer are exempt up to Rs
15,000 per year.
# Individuals living in a rented accommodation should have House Rent Allowance
(HRA) as part of their salary.
# Transport allowance is exempt up to Rs 800 per month.
# Leave Travel Allowance (LTA) can be claimed twice in a block of four years for
domestic travel.

4. Claim tax benefits on house rent paid

Salaried individuals can claim rent paid by them for residential accommodation, if
HRA doesn't form part of their salary. This deduction is available under Section 80GG
and is least of the following:
# 25% of the total income or,
# Rs 2,000 per month or,
# Excess of rent paid over 10% of total income

Please note that the above deduction will be denied if the taxpayer or his spouse or
minor child owns a residential accommodation in the location where the taxpayer
resides or performs his office duties.

5. Opt for a joint home loan

As discussed earlier, the principal repayment on a home loan is eligible for a

deduction of up to Rs 100,000 pa and the interest paid is eligible for a deduction of
up to Rs 150,000 per year.

In cases where the home loan is for a substantial sum, it is not uncommon for the
interest and principal repayment to exceed the stated limit. To ensure that the tax
benefit is optimally utilized, an individual can consider opting for a joint loan with
his spouse or parent or sibling.

This will ensure that both the co-owners can claim tax deductions in the proportion
of their holding in the loan. The co-owner falling in the higher tax bracket should
hold a higher proportion of home loan to ensure that the tax benefits are maximized.

2. Other Tips for Tax Saving of Salaried persons

The employer and the employee should fix the salary structure in such a way so that
the maximum benefit of saving tax is entertained. There are few steps for saving the
tax and fixing the pay structure of the salaried persons.

1. Advance salary: - tax is calculated on the receipt basis and not the accrual basis.
So the employees should avoid taking the advance of salary. for example if a person
has the annual salary of three lakh and he also takes 50000 rupees in advance , he
needs to pay income tax on rupees 350000 and not on 300000. so an employee
should take advance of salary only in emergency

2. commutation of pension:- pension is taxable on recurring basis so an employee is

advised to get pension commuted so that he can get exemption on the commuted
value of pension under sec. 10 (10a) for the government employees the commuted
value of the pension is fully exempt. For other employees they can get the relief on
the excess of commuted value of pension under section 89(1) relief of the income
tax.

3. Employment change before 5 years service under recognized provident fund: -

according to section 10(12) of income tax rule 8 of part A of the fourth schedule, it is
advisable to get accumulated balance transferred from old employment to new
employment to reduce the incidence of tax.

4. Deposit money in recognized fund:- the employees is advised to deposit and deals
in recognized fund instead of unrecognized fund for getting the full benefits of
taxability of the accumulated balance in future.

5:- Perquisite value of furniture:- in case when employer gives rent free
accommodation to the employee, the perquisite value of the furniture is taxed @
10% of the original buy value. And if it on rent, rent is the perquisite value. So the
employer may grant an interest free loan to the employee for buying furniture (not
exceeding 20000) so that the taxability of the employee is reduced to zero.

6- Choosing from perquisite and the allowances: - sometimes it is optional for

employees to choose one from perquisite and the allowance. So employees should
choose the one which is more beneficial in the contrast of saving the tax.
7-Leave travel concession: - employees should choose leave travel concession rather
than leave travel allowance because leave travel allowance is taxable even if is fully
spent or not whether leave travel concession is reimbursed as per section 10(5) of
the income tax. Know more about leave travel allowance.

8- Gratuity: - employees always take in mind the limit of gratuity limit which is
exempted. The exemption limit was 350000 earlier which are increased to 10 lakhs
from 01-04-2010. So if employees do work multiples places and the amount of
exempted gratuity is full, the employees may choose the gratuity amount to
provident fund of which the amount of provident fund will be exempt after 5 years.

9- Surrender if no use of the facility: - if an employee is granting any facility,

whether he is using it or not, need to pay the perquisite of the facility as tax [CIT vs.
Bawa Singh Chauhan (1984)16 taxman 180(Del)]. So the employees are advised to
surrender the facility if the facility is in no use. Like if you are granting a house by
the employer, and you have own residence, whether you are using that house or not,
you need to pay the perquisite of the house as tax.

10- investments: - an individual can save his tax up to 100000 by investing various
schemes under section 80(C). View various scheme of section 80(c). However, if the
full exemption is not utilized by the employees he can opt for other schemes under
section 80CCC or 80CCD. View all about Section 80CCC and Section 80CCD.

11- Pay structure: - the employer may bifurcate the salary into exempted perquisites
and allowances. Bifurcation of salary structure into tax-free perquisites and
allowances which are wholly exempt or partially exempt will help to reduce the tax
incidence of the employees with no extra cost to the employer

12- Dearness allowance or dearness allowance: - employee should keep in mind that
D. A or D.P is a part of the salary or not. If these allowances are the part of the
salary, these will leave less tax incidence in the of the employee .as employees
already planned for the saving of gratuity, pension and house rent allowance.

13-Salary earned outside India: - when a person earns from outside India, he is
advised to clear the residence status as he is resident of India or non resident. In
the non resident condition, the person should assure that any remuneration should
not receive in India by him.

14- Relief under section 89:- if an employee is working more than 12 months, he can
claim a relief under the section 89 of income tax act. Section 89 is all about the relief
of tenure as well as gratuity.
15- exemption claim:- many exemption on income tax available to employees under
various section of income tax section 10 on different kind of work like income of an
individual in connection with technical assistance under section 10(8B). These
income are exempted and if any employees earn any exempted income, he must get
the exemption to reduce the tax burden on him.

16- Interest on educational loan: - any repayment on the education loan interest
taken is exempt under section 80E of income tax act. So the employees can get
benefit of it. Know more about interest on education loan section 80E.

17:- contribution under pension scheme: - under section 80CCD any contribution to
the pension scheme of central government is entitled to claim exemption. So
employees can get avail this exemption. Know more about this section 80CCD.

18:- medical expenditure:- under section 80 DD any expenditure on medical

insurance premium paid for him, spouse, children or the parents is exempted under
the section 80DD of income tax. Employees can avail this benefit. Know more about
Section 80DD

19- The employers contribution towards recognized provident fund is exempt from
tax up to 12 per cent of salary. Therefore, the employee should insist on the
employer for fixing his contribution to 12 per cent of salary.

20- As uncommuted pension is always taxable, employees should get their pension
commuted. Commuted pension is fully exempt from tax in the case of govt.
employees and partly exempt from tax in the case of non govt. employees who can
claim relief u/s 89(1).

21- Rent Free Accommodation or House Rent Allowance should be availed particularly
in case of employees who do not own a house or a flat.

22- Expenses on purchases and maintenance of employees uniform can be paid or

reimbursed by the employer and the same is not considered as a perquisite u/s 10
(14).

23- If any allowance is received for education and hostel stay of employees children
from the employer, exemption can be claimed u/s10 (14).

24- Telephone facility received by an employee at his residence is not taxable in the
hands of the employee as against telephone allowance which is fully taxable.

25- The employee should avail the facility of motor car (as also its maintenance and
running expenses) from the employer. The perquisite value is nominal considering
actual expenses on car.

26- An employee should opt for medical reimbursements which are exempt up to
Rs.15, 000.00 p.a. as against any medical allowance which is fully taxable.

27- In case, the employer is liable to pay Fringe Benefit tax (FBT), then amount of
fringe benefits, shall not be taxed in the hands of the beneficiary employee. Again, if
salary is received in arrears or in advance, one can claim relief u/s 89 (1).
 3. Innovative Tips on Tax Planning

- Excerpt from How to Save Income Tax through Tax Planning (AY 2009-10) by R. N.
Lakhotia and Subhash Lakhotia, two of India's top taxation experts

Taxpayers can lower the incidence of income tax by means of legal transfer of their
sources of income among family members, so that each unit of the family enjoys the
basic personal income tax exemption limit, which the Finance Bill 2008 has revised
for financial year 2008-09 to Rs 150,000 for male individuals and HUFs; Rs 180,000
for resident women tax payers and Rs 225,000 for resident senior citizens.

The first step in tax saving through family tax planning is to adopt the concept of
divide and rule. The simple rule is that each family member must have his or her
independent source of income so as to legally become an independent tax payer
under the provisions of the income tax law.

In case the entire income of a family belongs to just one member, the tax liability is
much higher than when the same income is spread among different members of the
family.

Now, under the income tax law it is not possible to arbitrarily divide one's income
amongst different members of the family - and then pay lower tax in the names of
different family members. However, this goal can be achieved by intelligent use of
the facility of gifts and settlements.

Thus, for example, even if a taxpayer's parents are not paying income tax today but
if they receive some gift from friends or relatives or from anyone else in the world,
the income so generated would belong to them.

In this manner, independent income tax files can be started for different family
members by developing independent funds for each person through gifts thereby
resulting in separate independent sources of income which would then be taxed
separately to income tax.

Once the income is spread among more people, chances are some of them would
attract lower rates of tax. Also, each one would then be entitled to independently
claim exemptions, deductions, rebates, etc.
Generally, any gift you receive from various members of your family and specified
relatives is not considered your income but a capital receipt. Thus, no income tax is
payable on gifts received from relatives - and also gifts received from parties other
than relatives up to a sum of Rs. 50,000 and at the time of marriage up to any
amount.

Care should, however, be taken to ensure that any gift which is received should be a
genuine one. The person making the gift, called the donor, should have proof of his
or her having the source for making the gift.

The other important point to keep in mind in the case of gifts is that the provisions
of Section 64 of Income Tax Act prohibit any direct or indirect transfer of funds
between an assessee and his/her spouse.

Thus, a husband should not make any gift to his wife; likewise, the wife should not
make a gift to her husband. If the gift is made between spouses, it would attract the
provision of Section 64 and lead to clubbing of the incomes of the spouses.

To achieve the best results of gift, and to avoid clubbing of income, you may receive
gift from any relative other than your spouse, and, in the case of a daughter-in-law
from her father-in-law.

A trust for minor children eliminates clubbing of income

The gifts made to a minor child would similarly result in clubbing of income. Hence,
from the point of view of tax planning a trust could be created for the welfare of the
minor child with a specific condition that no part of income should be spent on the
minor child during the period of minority.

If this simple technique is adopted then there will be no clubbing of income of the
minor child with the income of the parents. The clubbing provisions do not apply
when you make gifts to your major children.

Your major children are your great tax savers

All your major children can help you save your income tax. You can freely gift money
to your major children without attracting the payment of gift tax. This amendment
makes it a good idea to make liberal gifts to your major children so that the income,
if any, arising from these investments in years to come can be taxed in the hands of
your major children.

For example, if you have fixed deposits let us say of Rs 20 lakh (Rs 2 million) and
you have a major son as well as a major daughter then it makes sense to gift away
Rs 500,000 to each of them.
After receiving the gift amount the children also make investment in bank fixed
deposit and each of them receives yearly interest of say, Rs. 45,000. On this amount
the son as well as the daughter will not pay income tax because the amount is below
the exemption limits of Rs 150,000 and Rs. 180,000, respectively.

Thus your major children can now be great source of tax saving and you can enjoy
the benefit of lower income tax incidence in the family as a whole. If, however, due
to some reasons you do not feel inclined to make huge gifts to your major children,
then you may give interest-free loans to your major children so as to legally reduce
your taxable income. It is lawful to grant interest-free loans to your major children
from your own funds.

Your parents and in-laws can save you taxes

Might sound incredible to most readers but the fact is that your own parents as well
as your own in-laws can become legal tools of tax planning for you and your family.
If you want to achieve this dictum then all you are requested to do is just to give
away a portion of your funds either as a gift or a loan to your parents as well as your
in-laws so that in years to follow your income tax burden become light as the income
on funds transferred by you to them which would bring in income would be taxed in
their hands.

With the increase in the limit of exempted income for individuals, women tax payers
and senior citizens, it is now a great time for having income tax files for all.

Separate income tax file for a daughter-in-law

Under Section 64 (1) (a) of the IT Act, if the father-in-law or mother-in-law makes
any gift to his or her daughter-in-law, i.e., their son's wife, on or after 1 June 1973,
the income arising to the daughter-in-law in respect of the gifts so made would be
liable to be included in the total income of the father-in-law or the mother-in-law
making the gift.

However, where such a daughter-in-law receives a gift not from her father-in-law or
mother-in-law or her husband but from her father or mother or uncle or aunt or
uncle-in-law, etc. then the income arising to such daughter-in-law in respect of such
a gift would be liable to be assessed as the income of the daughter-in-law
separately.

Such income would not be included in the total income of the father-in-law or the
mother-in-law or the husband of such a lady.
Besides, if the daughter-in-law makes an investment of such gifted amount, the
income arising to her out of such investment would also be liable to be assessed
separately.

Similarly, if she were to join a partnership firm as a partner with the help of such
gifted money, the interest arising to her would be assessable to tax in her separate
assessment.

Such interest or salary as a working partner would not be liable to be included in the
income of her husband or father-in-law or mother-in-law or any other relative. If she
is a partner of any firm carrying on any business, her husband could also be a
partner in the same firm.

Now, from assessment year 1993-94 her share income from the firm would not be
clubbed with the income of the husband. This is illustrated in the following example.

Tax planning for a nuclear family

The concept of joint family is cracking down. Nuclear family concept is on a rise.
Under the present scenario for a nuclear family there is imperative need of tax
planning so as to cut down taxes.

The simple methodology of tax planning for a nuclear family is to have separate
income tax file for self, spouse and all children as well as the Hindu Undivided
Family.

For major children the tax planning is easy and simple, namely to resort to the
concept of gifts and loans. As far as the minor child is concerned the best answer
could be achieved by having a separate income tax file of the minor child through his
100 per cent specific beneficiary trust as mentioned in the preceding paragraph.

The Hindu Undivided Family file can also be opened. In case the nuclear family
adopts tax planning by having income tax files for different family members and
thereafter takes liberal advantage of the provisions relating to tax deduction, then it
would be possible to achieve best tax planning for a nuclear family.

Tax planning by DINKs

Working couples who have no children are known as DINKs (Double Income No
Kids). Substantial tax planning is needed for them even in the initial years of their
married life. The best tax planning which DINKs should adopt is that each one of
them should take full advantage of income tax exemptions and deductions.
The present exemption limit for the financial year 2008-09 is Rs 150,000 for every
individual male tax payer. In addition, for a woman tax payer the exemption limit
would be Rs 180,000. Thus, for the financial year 2008-09, DINKS would be able to
enjoy a combined exemption limit of Rs. 330,000.

Never in the past were the tax exemption slabs so very attractive. They should also
make investments in a residential house by taking a loan and thus save income tax
up to the maximum extent (each of them). They should also plan a separate income
tax file of HUF.