How to do Tax Planning under Salary head
Income from salary is remuneration or fixed, the regular payment received by the person under the employer-employee contract. Salary Income also Includes: wages, Pension, Annuity, Gratuity, Advance Salary, fees, the commission in place of salary, leave encashment, Contribution by the employer to Employee pension A/c, Transferred balance Recognized Provident Fund.
- House Rent Allowance
- Leave Travel Allowance (LTA)
- Company Leased Car
- Sum Received as Gratuity
- Meal Coupons, Telephone & Internet Bill Reimbursement
- Futures and options Trading
House Rent Allowance
House Rent Allowance -Sec- 10(13)HRA Exemption benefit is available to Salaried Individuals having HRA Component as part of their salary structure and is paying rent. You can claim HRA on house rentals paid to save taxes.
Eligibility:
a. Actual HRA received;
b. 50% of [basic salary + DA] for those living in metro cities (40% for non-metros); or
c. Actual rent paid minus 10% of basic salary + DA
Conditions:
1.Rent paid receipts to be submitted.
2.PAN No of Landlord to be submitted when Annual Rent paid is more than Rs 1 lacs.
Patron Accounting Tip: You can claim HRA exemption and save income tax even if you live with your parents and do not own the house. You can claim HRA exemption by showing rent paid to the parents. Enter into a Rental Agreement with Parents and transfer the rent to them on a Monthly/Annual Basis. Parents will have to show Rental Income in their income tax returns fillings. However, this may lead to save a lot income tax for the family as whole. Contact us for Tax Planning
Leave Travel Allowance (LTA)
You can claim LTA exemption for the allowances received from the employer for traveling on domestic vacation.
Eligibility: Exemption available is the least of the following.
1. LTA provided by the employer;
2. Domestic travel Ticket Fare Incurred, i.e., air, rail, or Bus fare
.
Note: Expenses incurred on hotel stay, food, local conveyance, etc. is not eligible for exemption
Condition:
1. The actual journey is a must by the employee to claim exemption.
2. The exemption is allowed only on fare incurred for travel within India.
3. Travel expenses incurred for a self plus spouse, two children, and parents are only allowed if they are part of the journey. Brother and sister expense allowed if they are dependent on the employee.
4. You can avail LTA exemption facility two times in a block of four years. In one calendar year, you can claim one trip exemption. The current block period is January 2018 to December 2021
5. If any LTA remains unclaimed in a four-year block, it can be carried forward and claimed in the first year of the next block.
Patron Accounting Tip: If both the spouse is working, you can claim this section's benefit every year. In a block of 4 years, in 2 years, it can be claimed by one spouse, and in the other two years, it can be claimed by another spouse. This will help you save taxes each year. Contact us for Tax Planning
Company Leased Car
The company leased car is the option where the employer provides you the vehicle on the lease. Instead of owning a car and paying EMI out of the post-tax income, you should consider availing of the car lease option as it would be Tax efficient.
In-car lease option lease rentals deducted from the employee salary to the leasing company is allowed as a deduction from the gross salary, thereby reducing the taxable salary income. Furthermore, the reimbursement of driver salary ( up to Rs 15000 per month), car running, and maintenance expenses ( up to Rs 10000 per month ) are not taxable.
The prerequisite values of this facility are added to the salary Income. If the car is used both for official and personal use, the Prerequisite value is Rs 1,800 per month if the car's cubic capacity is up to 1.6 liters. For cars cubit capacity exceeding 1.6 liters, the perquisite value is Rs 2,400 per month. Further, Rs 900 per month is added if a driver facility is also provided.
Patron Tax Planning Tip: If you are in the highest tax slab and runs the bigger/costlier car, more is the tax savings. However, the exact tax benefit can be calculated on a case to case basis only. You can check with your HR on the car lease policy and hire expert to evaluate whether it will advantage to take car using company lease policy or buy it directly.
Sum received as Gratuity
Gratuity is the employer's benefit to an employee on retirement or resignation, death, or disablement.
Eligibility:
Exemption available is least of the following:
1. Gratuity Received
2. Rs 20 lakhs
3. Last salary (basic + DA)number of years of employment 15/26;
In maximum amount exempt is Rs 20 lakhs. Gratuity received by government employees from the government is fully exempt. The employee must have completed a minimum of five years in service to receive Gratuity.
Patron Tax Planning Tip: You can channelize this money by creating HUF and income from HUF will get slab benefits and will be taxable at lower income then your income leading to income tax saving. The compliance cost of HUF will be lower than the tax benefit you will get. However, we recommended Hire Expert to evaluate monetary saving for you.
Meal Coupons, Telephone & Internet Bill Reimbursement
Food coupons given by the employer are tax-exempt at Rs 50 per meal for two meal coupons. On the calculation of 22 working days, the maximum amount claimed as the exemption is Rs 2600 per month.
Telephone and Internet expenses reimbursement covers both telephone and mobile bills as well as an internet connection. Reimbursements of these expenses are exempt from Tax. Law does not prescribe any limit; however, it has to be reasonable.
Patron Tax Planning Tip: These small perks will help you save some income tax
Proper Reporting of Futures and options losses in ITR
Trading in F&O is becoming very popular these days. Many traders have very little knowledge of how these trades are taxed and reported in the Income-tax return. They skip reporting it, especially salaried class.
Trading in F& O can be reported as business income/loss in the ITR. Expenses related to it like brokerage, internet expenses, salary paid relating to this, subscriptions, etc. can be claimed as business expenses. Claiming expenses can lead to losses, and traders are benefited by saving taxes on them. In the case of F&O loss, it is vital to file returns as you will set off those losses from other head of income like rental income/ interest income. Even unadjusted losses can be carried forward, and in the case of profits in future years, it can be setoff and results in tax savings.
Patron Tax Planning Tip: If you are dealing with F& O and are having profits /loss, it is important to show them in ITR to have proper tax planning and save taxes. In some cases, tax audit becomes compulsory in case of such Income /losses.
How to do Tax Planning under House Property/rental
It is a dream for every Indian to own a house, but when it comes to buying a house first thing is the cost of purchasing a home comes to mind. Patron Accounting assists you to lower the tax liability while purchasing a home. We have summarised the tips to save income tax on house property:
- Benefit of Interest payment of a home loan (Sec 24)
- Benefit of Principal Repayment on loan (Sec 80C)
- Benefit of deduction of Municipal taxes paid
- Deduction of stamp duty and registration charges
Benefit of Interest payment of a home loan (Sec 24)
The interest payment on housing loan can be claimed as a deduction from the total income.
For self-occupied property -The maximum deduction allowed is Rs 2 lakh.
Let Out Property -No maximum Limit. Whole interest paid is allowed as deduction.
However, the overall loss that can be setoff of House Property is Rs 2 lakhs only.
Eligibility:
1. You can claim interest deduction if you are the owner of the property and borrower of the loan as well, and interest is paid by you.
2. You can start claiming interest only after the construction of the property is complete. Interest paid during the construction period can be claimed in five equal installments starting from the year in which property construction is completed or property is acquired.
3. If the property is jointly owned, each co-owner of the property can claim the deduction of interest up to Rs 2 lakhs for self-occupied property and no upper limit for let out property.
The interest deduction is allowed if the co-owner of the property is a co-borrower of the loan as well, and payments of interest are made from all co-borrowers account.
1. The construction or purchase of property is completed within five years from the end of the financial year in which the loan is taken
2. Carry forward loss can be made for eight years, and setoff in the remaining eight years can only be from income from house property
Patron Accounting Tip: If you are planning to purchase the property, purchase and take the loan on the property jointly to claim the tax benefit by all individuals, which will result in huge tax savings. Contact us for Tax Planning
Benefit of Principal Repayment on loan (Sec 80C)
The principal amount paid on the home loan is allowed as a deduction under sec 80c maximum up to Rs 1.5 lakhs. There is lock-in period of 5 years wherein house property for which you have claimed the deduction should not be sold within five years of possession.
Each co-borrower of the loan is eligible to claim this deduction individually provided he is co-owner. Therefore, it is advisable to have property on joint ownership and % of ownership can be chosen which give maximum tax saving for you. Hire Expert to evaluate monetary saving for you.
Benefit of deduction of Municipal taxes paid
Property/Municipal taxes paid on the property is allowed as a deduction from house property income. Taxes are allowed as deduction if they are actually paid and not on an accrual basis. It is advisable to pay taxes from a bank account.
Deduction of stamp duty and Registration charges
You are also allowed the deduction of Stamp duty and registration charges u/s 80c within the overall limit of Rs 1.5 lacs. Charges paid is allowed as deduction only in the year in which they are paid.
How to do Tax Planning under Business Income
Every business person is focused on growing their business and wants to save income tax. But income tax laws keep changing from one time to another. Therefore a business person needs the right professional who can guide them well from business registration from the right structure, saving income tax, and doing proper filling of income tax returns. We have highlighted some tips which can save money for you:
- Expenses above Rs 10,000 to be done through Bank
- Travel/Hotel Stay Expenses
- Food/Entertainment expenses
- Presumptive Taxation Scheme
- Proper Recording of Cash expenses
- Depreciation on Fixed Asset
- Correct deduction of Tax at source (TDS)
- Utilisation of Tax slabs of directors and partners
- Futures and Options ( F&O) loss is shown as business loss
Expenses above Rs 10,000 to be done through Bank
Any expenses paid in Cash above Rs 10,000 in a single day to the same person is disallowed as an expense. Whenever any amount is to be paid for purchases/expenses above Rs 10000, always pay by bank/cheque to maximize tax savings. If any amount above Rs 10000 is paid in cash, it is disallowed in the books at the time of filling Income tax return. Therefore, do any expenses above Rs. 10,000 through bank account which will help to save income tax. Talk to our expert
Travel/Hotel Stay Expenses
Businessmen can claim his travel and hotel stay expenses for business purposes and save taxes. Pay for travel and hotel expenses from the business account and not personal account.
Contact us for Tax Planning
Food/Entertainment expenses
Business owners need to meet vendors, customers, employees, etc. for business purpose Expenses incurred on foods and beverages by business owners can be claimed as business promotion expenses. Pay for these expenses from the business account and not a personal account and claim it as expenses at time of filling ITR return.
Presumptive Taxation Scheme
Presumptive taxation is where the taxpayer does not have to maintain books of account and declare income at a 6% rate for turnover receipts through the digital mode of payments or 8% for turnover receipts in cash. For a person engaged in professionals, income is considered at 50% of gross receipts.
Conditions:
1. Individuals and HUF can only opt for this scheme.
2. Business owners other than professional having turnover up to 2 crores can opt for this scheme.
3. Professionals having gross receipts up to 50 lakhs can opt for this scheme. The profession includes engineering, Legal, Architect profession, Accountant, Medical, Technical Consultant, Interior decoration.
4. Life insurance agents, commission income, Running a business of leasing cant opt for this scheme.
Benefits:
1. No books of accounts have to be maintained
2. A tax Audit is not required ( Even if turnover is above one cr)
3. The advance tax is not to be paid quarterly. Can be paid at one go before 31st march if tax liability exceeds Rs 10000
4. Simplified ITR Return – ITR 4. Contact us for Tax Planning
Proper Recording of Cash expenses
Many businesses in our country have unorganized labor, and wages are mostly paid to them in cash. E.g., daily wage earners on the factory. If these cash payments are not recorded properly, it results in under-recording of cash expenses, resulting in higher profits and high taxes costs. A proper wage register is to be maintained to claim such expenses.
Depreciation on Fixed Assets
Income tax acts provide the benefit of additional depreciation of 20% to the manufacturing units in the year when machinery is put to use. Many businesses are unaware and lose the chance of claiming additional depreciation of 20% over and above the normal depreciation of 15%. Additional depreciation is only available in the first year of use.
Also, car or fixed assets bought in second half of each year (Post September) one can claim half year depreciation even if assets is bought in March.
Correct deduction of Tax at source (TDS)
As per Income tax law, TDS is to be deducted while making payments by the payer/Buyer to the receiver/seller for the specified transactions like rent, commission, professional fee, etc. In case TDS is not deducted or deducted and not deposited, the timely whole of the expense shall be disallowed, resulting in an increase in profits and more outgo of taxes.
It is important from tax planning to deduct proper TDS and deposit it and do timely filing of TDS Returns. You can check TDS rate on income tax website.
Utilisation of Tax slabs of directors and partners.
One of the most important ways to do tax planning is the optimum utilization of tax slabs available of directors/partners/owners/relatives.
Many times for e.g., partners in LLP don't have any other source of income. Hence their tax slabs are empty. LLP Income is taxed at a flat rate of 30%. However, the individual gets slabs benefits of lower taxes. Substantial tax savings can be done by putting partners' salaries.
Patron Accounting Tip: Put salaries to all partners/ directors in the LLP/ Partnership/Companies until the optimum utilization of tax slabs is done. For e.g., if the director in co does not have any other income, hence we put a salary of Rs 10 lacs to directors, his taxability as an individual will be much lower than taxes paid by the company. Even salary can be shown to close relatives having empty tax slabs on a reasonable basis as per their qualification to save taxes in the business.Talk to us for Tax Planning
Futures and Options ( F&O) loss is shown as business loss
Trading in F&O is becoming very popular these days. Many traders have very little knowledge of how these trades are taxed and reported in the Income-tax return. They skip reporting it. Trading in F& O can be reported as business income/loss in the ITR. Expenses related to it like brokerage, internet expenses, salary paid, subscriptions, etc. can be claimed as business expenses. Claiming expenses can lead to losses, and the trader is benefited by saving taxes on them. In the case of F&O loss, it is very important to file returns as you will be able to set off those losses from other business income. Even unadjusted losses can be carried forward for eight years, and in the case of profits in future years, it can be setoff and results in tax savings.
Patron Tax Planning Tip: In case you are dealing with F& O and are having profits /loss, it is important to show them in ITR to have proper tax planning and save taxes. In some cases, tax audit becomes compulsory in case of such Income /losses.
How to do Tax Planning under Capital Gain
Capital gain is profit/loss arising from the sale of capital assets lime land, building, vehicles, machinery, shares, mutual funds, bonds, etc
Short term Capital Assets: Assets held for less than 36 months is a short term capital asset. For immovable properties like land, building, and house property period is 24 months. For e.g., if a house property is sold within 24 months, income from it will be short term capital gain.
Long Term Capital Assets: Assets held for more than 36 months is long term capital assets. However, Equity Shares, listed Bonds, Equity oriented Mutual Funds, etc. assets, if held for more than 12 months, are considered as long-term assets. Debt Mutual Funds to be held for more than 36 months to qualify as Long term assets
Tax savings on sale of Equity shares/Equity Oriented MF
On the sale of equity shares/units of equity-oriented funds, there is no tax on income up to 1 lakhs. Above one lakhs tax rate of 10% is applicable.
Note: In case you are investing Mutual Fund SIP monthly after 12 months, only 1st-month installment will be eligible for exemption under this section. On rest installments, Short term capital gain will be charged as they have not crossed 12 months. So always, while selling your MF SIP units, do it on a FIFO basis to claim tax exemption and avoid short term capital gain
- Cost of Improvement
- Long-term capital gain on the sale of the residential house
- long-term capital gain on the sale of a capital asset other than a residential house
- Investment in Bonds of NHAI or REC
Tax Savings by deducting Cost of Improvement
Cost of Improvement means the expenditure of capital nature incurred to make any additions or alterations in the capital assets, for e.g., If, on a vacant plot, you incurred expenditure for making sheds and boundary walls. It is important that you maintain proper records of the cost of improvement to claim it as a deduction at the time of sale of the assets. It can result in reducing capital gain income and saving taxes when you sold the assets .
Tax savings on Long-term capital gain on the sale of the residential house Sec 54
Benefit/Exemption under this section is available to an Individual or HUF. Profit on the sale of a residential house held by an assessee for more than 24 months is exempt if he/she
• purchase a new residential house from the capital gain within one year before the date of sale or;
• two years after the date of sale of the original house or;
• construct a new house within three years from the date of sale of the original house.
To claim the exemption in this section capital gain amount is to be invested and not Sale proceeds. The exemption is allowed by investing in up to 2 House Properties provided capital gain does not exceed two crores.
Tax savings on long-term capital gain on the sale of a capital asset other than a residential house
Benefit/Exemption under this section is available to an Individual or HUF.
Profit on the sale of a capital asset other than a residential house held by an assessee for more than 24 months is exempt if he
• purchase a new residential house from the sale proceeds within one year before the date of sale or;
• two years after the date of sale of the original house or;
• construct a new house within three years from the date of sale of the original house.
Exemption in this available if entire sale proceeds are to be invested and not only capital gain. If you invest part of sale proceeds, the capital gain exemption will be in proportion.
Tax saving on long term capital gain by investing in Bonds of NHAI or REC
If you sold land or building or both and did not want to invest its capital gain in another property, you can invest gain up to 50 lakhs in bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC)
Note: This deduction is available to all the assessee.
Condition:
• Capital gains are to be invested within six months from the sale of the property and before the income tax filing deadline
• The maximum deduction allowed is Rs 50 lakhs in all the years
• Lock-in period of 5 years in bonds
How to do Tax Planning under other sources
This head inclue income which is not covered in other heads like interest income , gifts etc
- Tax Savings on Interest Income
- Tax Savings on Interest Income from NRE A/c
- Tax exemption of insurance claim/maturity proceed
- Tax exemption of scholarship received for education
- Tax exemption on the amount received as gifts on marriage
- Tax Exemption on Agriculture Income
- Tax Exemption on amount Inherited through Will
- Tax Exemption on Withdrawal of PPF amount
Tax Savings on Interest Income
Available to Individual and HUF on interest earned on saving accounts of bank or post office or cooperative society. Max tax-saving limit RS 10000. For senior citizens (>60yrs ) limit is Rs 50000. This exemption is not available on interest on fixed deposits.
Tax savings on Interest Income from NRE Account
Individuals who are having deposits in NRE accounts and earning interest income on these deposits are not required to pay taxes on the interest income.
Tax Exemption on Maturity or claims proceeds of Life Insurance
Any amount received on the maturity or claim settlement of life insurance is exempt from Tax provided premium paid in respect of such policies does not exceed 10% of the sum assured.
Tax exemption of scholarship received for education
The full amount of scholarship received for education is exempt from Tax. It can be granted by the government or any private trust.
Tax exemption on the amount received as gifts on marriage
If you receive any amount as gifts from your relatives, friends, and family on the occasion of marriage, it is totally exempt from Tax. Mode of Gifts can be any cash/cheque/gifts
Tax Exemption on Agriculture Income
Agriculture income earned from below three activities is exempt from Tax:
1. Rent or revenue got from agricultural land situated in India:
2. Income of Agriculture produce
3. Income derived from farm building required for agricultural operations:
Tax Exemption on amount Inherited through Will
Anything received through WILL is not taxable in your hands. When you sell it, further taxability will come.
Tax Exemption on Withdrawal of PPF amount
Amount withdrawn from the PPF account on maturity is exempt from Tax. Additionally, interest received on PPF account balance is also exempt from Tax. Partial withdrawals are allowed after completion of 5 years in certain cases like the purchase of land, purchase/construction of the house, repayment of home loan, education of children and marriage and medical treatment of family members, job loss, etc.
Any amount withdrawn before five years is fully taxable in the year in which the amount is withdrawn.
How to Tax Planning using Investments
This chapter covers how to make different investments to reduce your income tax burden. It would be best if you made investments during the financial year to claim these benefits when filing the ITR.
- Tax savings in Sec 80C
- National Pension Scheme
- Payment of health insurance premium (80D)
- Expenses on a handicapped dependent
- Treatment of Specified Illnesses
- Repayment of an education loan
- Interest paid on loan taken for the purchase of an electric vehicle
- Donations to charitable institutions
- Rent paid for accommodation (80GG)
Tax savings in Sec 80C
Sec 80C provides various options to invest in Tax savings scheme. Maximum Overall deduction allowed is Rs 1.5 lakhs
• Payments Towards Life Insurance Premium ( LIC)
• Investment in Fixed Deposits ( Tax Savings )- Lock in period of 5 years
• Investments in Tax Savings Mutual Fund or ELSS- Lock in period 3 years
• Investments in PPF Account- Lock in period of 15 years
• Investments in EPF -Tax free if withdrawn after 5 years of continuous service
• Investments in NPS – Lock in period of 15 years
• Invesments in ULIPS – Withdrawals on maturity are tax free
• Investments in Sukanya Samriddhi Yojana- Withdrawals on maturity are tax free
• Payments of Children’s School fee – Upto 2 children
• Repayment of Principal of Home loan – Also included stamp duty, registration fees and transfer expenses.
National Pension Scheme
One can invest an additional Rs 50,000 in NPS beyond the contribution of Rs 1.5 lakh under Section 80C.
Payment of health insurance premium (80D)
• This section allows you to claim a maximum deduction of Rs 25,000 per year on premiums paid on health insurance for yourself, spouse, and your children.
• You are eligible for an additional deduction of Rs 25,000 if you are paying medical insurance premiums for your parents, taking your total deduction to Rs 50,000.
• But if the parents for whom premium is paid is of above 60 years of age, the maximum exemption limit under this section is Rs 75,000. And, if both the individual and his/her parents are above 60 years, then a total of Rs 1,00,000 can be claimed under this section.
• The amount spent on preventive health check-up is also eligible for deduction under section 80D – maximum limit of Rs 5,000 for self or family, including parents.
Expenses on a handicapped dependent
• Deduction can be availed under Section 80DD if any handicapped is dependent upon you. Deduction allowed under this section is Rs. 75,000 if dependent person is disabled upto 80%, if severe disabilities then deduction of Rs. 1,25,000 can be availed under this section.
• For claiming under this deduction, an individual requires a disability certificate as given by prescribed medical authority.
Treatment of Specified Illnesses
Under this section, a resident individual or a HUF can claim a deduction of Rs. 40,000 for expenses incurred towards treatment of certain specific ailments for himself or his dependents. In case both the individual or HUF is a senior citizen, then the deduction of up to Rs. 1,00,000can be availed.
Repayment of an education loan
• The amount paid as interest for an education loan for self, spouse, children, or any student to whom you are a legal guardian, can be claimed as a tax deduction under this section.
• There is no limit to claim as a deduction for interest paid in a financial year.
• Deduction is allowed from the year one start repaying the education loan till the next seven years or until the total interest is paid, whichever is earlier.
Interest paid on loan taken for the purchase of an electric vehicle
If you have taken loan for the purchase of electric vehicle between April 1, 2019, and March 31, 2023 then you can claim a deduction of up to Rs 1,50,000 under Section 80EEB.
Donations to charitable institutions
• Donations made to government-approved charitable institutions can be claimed as a deduction under this section.
• To avail the tax deduction under this section, one should donate by cheque as cash donation above Rs 2,000 do not qualify as deductions.
• Some of the funds approved by the government include the National Defence Fund, Prime Minister’s National Relief Fund, Clean Ganga Fund, National Children Fund, etc.
Rent paid for accommodation ( 80GG)
• Deduction under 80CG can only be claimed if one does not get house rent allowance (HRA) as part of salary or is a self-employed person.
• To avail this deduction, one need to submit Form 10BA. Maximum deduction that can be claimed under this section is up to Rs 60,000.
