Tax Planning 

Tax planning is legitimate reduction of tax liability to minimum. Taxes reduce disposable income and so restrict the ability to achieve financial goals. 
Tax planning is therefore an integral aspect of the personal financial process. Tax liability can be reduced by arranging financial incomes and investments to avail maximum tax benefits. This can be done by making use of beneficial provisions and tax incentives incorporated in tax laws that entail an individual to tax concessions.

Tax planning is one of the major and most important part in tax planning. Proper tax planning will make a financial plan more effective. An effective tax planning has to consider the present tax rules and regulations as well as the individuals financial status, type of citizenship, tax rebates and deductions.

Basic of Income Tax. 
Previous year and Assessment year. 
For the purpose of income tax, accounting year is uniform from 1st April to 31st March; each year is referred to as previous year. FY starting 
from 1st April 2006 to 31st March 2007 is the previous year of Assessment Year of 2007-08. Income of the previous year is taxed during the following assessment year at the rates prescribed for such assessment year by relevant finance Act.

Heads of Income. 
Various heads under which income is charged to tax. 
1. Salaries.  
2. Income from house property. 
3. profits and gains of business and profession. 
4. capital gains. 
5. income from other sources.

Salaries
Basis of change
Salary is chargeable to tax either on "due" basis or receipt basis, whichever is earlier.

Relationship between Payer and Payee
A payment cannot be taxed under the head salaries unless the relationship of the employer and employee exists between the payer and payee.

Scope
Salaries include the following
a. Wages
b. Any annuity or pension
c. Any gratuity
d. Any fees, commission, perquisites or profits in lieu of or in addition to salary or wages
e. Any advance of salary
f. Any payment received in respect of leave not availed by him
g. The portion of the annual accretion in any previous year to the balance at the credit of an employee participating in a recognised provident 
fund to the extent it is taxable
h. Transferred balance in a recognised provident fund to the extent it is taxable

Deductions and Exemptions
Professional Tax 
Professional tax on employment levied by a state on the employee is allowed as deduction from salary income.

Leave travel concessions
Exemption on leave travel concession is available to an employee from the employer for himself and his family in connection with his proceeding 
on leave to any place in India. 
The exemption is available in respect of two journeys performed in a block of four calender years commencing from 1986.

Amount received from Insurance Policies
The amount is fully exempt from tax including bonus thereon, other than sum received under Key man Insurance Policies, annuity plans for 
receiving pension.

House Rent Allowance
HRA received by an employee will be exempt from the tax if the employee incurs expenditure towards payment of rent. The exemption allowed is 
the least of the following
a. Amount equal to 40%of the salary (50% in case of Mumbai, Delhi, Kolkata and Chennai)
b. Excess of rent paid over 10% of the salary
c. HRA actually received

Exemptions denied where an employee lives in his own house or in a house for which he does not pay any rent or pays rent which does not 
exceed 10% of salary.

Special Allowance
Allowance for travel, tour transport is exempted up to Rs. 800 per month.
Children education allowance
Exempted amount Rs. 100 per month per child up to maximum of 2 children.
Children hostel allowance
Exempted amount Rs. 300 per child up to maximum of 2 children.

Perquisite
Perquisites are gain or profit incidentallly made from employment in addition to regular salary or wages; especially one of a kind expected or
 promised. The phrase perquisite denotes something that benifits a man by going into in his own pocket. They may be provided in cash or kind and 
are included in salary income only if they are received by an employee from his employer.

A profit or advantage would be taxable as perquisites only if it has a legal origin. A unauthorized advantages taken by an employee without his 
employers authority would create a legal obligation to restore such advantages , it would not amount to perquisites taxable under the Act.

Valuation of perquisites is to be done in accordance to the rules framed under Indian Income Tax Act. For instance, value of benefit to employee 
resulting from supply of gas, electricity, water, value of free or concessional education facilities, value of benefit to the employee resulting 
from the services of a sweeper, Gardener and a watchman will be valued based on actual cost borne by the employer.

Some of the Exempted Perquisites
Reimbursement by employer of amount spend by employee in obtaining medical treatment for himself or any member of his family from any Doctor, 
not exceeding in the aggregate Rs. 15000 in the year.
- Refreshment provided to all employees during working hours in office premises.
- Recreational facilities extended to a group of employees (not being restricted to selected few employees)
- Subsidised lunch or dinner provided to an employee

Income From House Property
Any income arising from house property (floor area usage) is chargeable to tax under this head. Under this head not only the actual rent 
received is taxable, but also the notional rent.

Profit or Gain From Business or Profession
Any income arising to any person by the way of profits and gains from business and profession or vocation carried on by him at any time 
during the year will be taxable under this head.
Business is defined to include all trade, commerce or manufacture or any adventure or concern in nature of trade, commerce or manufacture.

While computing the net profits of a business or profession, certain deduction enshrined in the Income Tax Act, some of which are Rent, 
rates, taxes, insurance, repairs of building, plant, machinery and furniture, depreciation on asset. This deduction can be availed only 
if the asset is used for the purpose of business or profession.

Capital Gain
Capital gain/loss which is computed on the transfer of a capital asset, which is chargeable to tax.

Some of the capital gains are
Capital Assets
Capital asset is defined to include property of any kind whether fixed, circulating, movable or immovable, tangible or intangible.

Transfer
Transfer in relation to capital assets includes sales, exchange and relinquishment of the assets or the compulsory acquisition under any Law. 
For the purpose of capital gain tax, certain transactions are not regarded as transfer. Therefore no liability arises towards capital gain, e.g.,any distribution of capital assets on partition of HUF, transfer under a gift or will. Tax incurrence for short term and long term capital gains is different.

Short term Capital Assets
For shares, listed securities, units of mutual holding period is 12 months or less. For other than above assets, the holding period is 36 months or less.

Long Term Capital Assets
Those assets, which are not short term capital assets, are long term capital assets.

Tax on Capital Gain
Gains arising from the transfer of short term capital assets are added to the total taxable income in the year in which transfer is done and taxed 
at the applicable tax slabs. The gains or differences of sale value and cost of purchase of the asset. While in case of transfer of securities it taxed at a flat rate of 10%.
Long term capital gains are taxed at flat rate of 20%. Long terms are determined by deducting indexed cost of acquisition and index cost of 
improvement from the full value of consideration. Indexed cost is adjusted cost to the cost of inflation index on the date of transfer. T
he cost of inflation index is notified in the official gazette every year.

Long term gains tax on securities transfer is fully exempted.

Income from Other Sources
Any income other than incomes not forming a part of any head of income will be taxed under this head. 
Income chargeable under this head is computed in accordance with the method of accounting regularly employed by the assessee.

How to Calculate Income Tax 

As you may know, I shared with you the income tax rates for the financial year 2008-09 in my earlier article. I received hundreds of requests from readers to explain the method of income tax calculation in an easier way. And even they requested for Income Tax calculator to calculate the tax liability on their own. Therefore, I am trying to explain the methods of calculating Income tax in an easier way. I am also giving you a link to access the Income Tax Calculator which we developed at IndianMoney.com to calculate your tax liability.

 

First of all, I would like to brief about the status of different categories of Individuals for the purpose of calculating Income tax. Income Tax Act has categorized all Income Tax Payers (Individuals) into 3 different types:

1. Ordinary Individuals
2. Female Citizens
3. Senior Citizens

 1. Ordinary Individuals: as per the applicable tax laws, the Income tax rates for ordinary individuals are:

Annual Income	Income Tax rates for FY 2008-09
Up to 150000	Nil
150000 – 300000	10%
300000 – 500000	20%
500000 and above	30%

*A surcharge of 10 per cent of the total tax liability is applicable where the total income exceeds Rs. 1,000,000.

 

Note: -

• Education cess is applicable @ 3 per cent on income tax, inclusive of surcharge if there is any.
• A marginal relief may be provided to ensure that the additional IT payable, including surcharge, on excess of income over Rs 1,000,000 is limited to an amount by which the income is more than this mentioned amount.
• Agricultural income is exempt from income-tax.

Now, let me explain the method of calculating income tax in detail with few examples:

Example 1: Mr. Rajan is 35 year old and earning 8 lac annually.

Calculation:

Heads	% of Income Tax	Income Tax
Tax on Income up to 150000	Nil	Nil
Tax on Income between 150000-300000	10%	15000
Tax on Income between 300000-500000	20%	40000
Tax on Income between 500000- 800000	30%	90000
Total		145000
Educational Cess	3% of the total tax	4350
Net Tax Payable		149350

 

Example 2: Mr. Avinash 40 year old and earning 12 lac annually.

Calculation:

Heads	% of Income Tax	Income Tax
Tax on Income up to 150000	Nil	Nil
Tax on Income between 150000-300000	10%	15000
Tax on Income between 300000-500000	20%	40000
Tax on Income between 500000- 1200000	30%	210000
Total		265000
Surcharge	10% of the Income Tax	26500
Total		291500
Educational Cess	3% on the total tax including surcharge	8745
Net Tax Payable		300245

2. Female Citizens: as per the applicable income tax laws, the income tax rates for female citizens are:

Annual Income	Income Tax rates for FY 2008-09
Up to 180000	Nil
180000 – 300000	10%
300000 – 500000	20%
500000 and above	30%

*A surcharge of 10 per cent of the total tax liability is applicable where the total income exceeds Rs. 1,000,000.

 

Note: -

• Education cess is applicable @ 3 per cent on income tax, inclusive of surcharge if there is any.
• A marginal relief may be provided to ensure that the additional IT payable, including surcharge, on excess of income over Rs 1,000,000 is limited to an amount by which the income is more than this mentioned amount.
• Agricultural income is exempt from income-tax.

Now, let me explain the method of calculating income tax in detail with few examples:

Example 1: Ms. Rachana is 35 year old and earning 8 lac annually.

Calculation:

Heads	% of Income Tax	Income Tax
Tax on Income up to 180000	Nil	Nil
Tax on Income between 180000-300000	10%	12000
Tax on Income between 300000-500000	20%	40000
Tax on Income between 500000- 800000	30%	90000
Total		142000
Educational Cess	3% of the total tax	4260
Net Tax Payable		146260

 

Example 2: Ms. Savitha 40 year old and earning 12 lac annually.

Calculation:

Heads	% of Income Tax	Income Tax
Tax on Income up to 180000	Nil	Nil
Tax on Income between 180000-300000	10%	12000
Tax on Income between 300000-500000	20%	40000
Tax on Income between 500000- 1200000	30%	210000
Total		262000
Surcharge	10% of the Income Tax	26200
Total		288200
Educational Cess	3% on the total tax including surcharge	8646
Net Tax Payable		296846

 

 

3. Senior Citizens: as per the applicable tax laws, the Income tax rates for Senior Citizens are:

Annual Income	Income Tax rates for FY 2008-09
Up to 225000	Nil
225000 – 300000	10%
300000 – 500000	20%
500000 and above	30%

*A surcharge of 10 per cent of the total tax liability is applicable where the total income exceeds Rs. 1,000,000.

 

Note: -

• Education cess is applicable @ 3 per cent on income tax, inclusive of surcharge if there is any.
• A marginal relief may be provided to ensure that the additional IT payable, including surcharge, on excess of income over Rs 1,000,000 is limited to an amount by which the income is more than this mentioned amount.
• Agricultural income is exempt from income-tax.

Now, let me explain the method of calculating income tax in detail with few examples:

Example 1: Mr. Ganesh Prasad is 67 year old and earning 8 lac annually.

Calculation:

Heads	% of Income Tax	Income Tax
Tax on Income up to 225000	Nil	Nil
Tax on Income between 225000-300000	10%	7500
Tax on Income between 300000-500000	20%	40000
Tax on Income between 500000- 800000	30%	90000
Total		137500
Educational Cess	3% of the total tax	4125
Net Tax Payable		141625

 

Example 2: Ms. Lakshmi 66 year old and earning 12 lac annually.

Calculation:

Heads	% of Income Tax	Income Tax
Tax on Income up to 225000	Nil	Nil
Tax on Income between 225000-300000	10%	7500
Tax on Income between 300000-500000	20%	40000
Tax on Income between 500000- 1200000	30%	210000
Total		257500
Surcharge	10% of the Income Tax	25750
Total		283250
Educational Cess	3% on the total tax including surcharge	8497
Net Tax Payable		291747

I hope this will help you to understand income tax calculation better. Please click on the below link to access Income Tax Calculator.