Basics of taxability of salary income (FY 2008-09). Tax slabs and rates of tax. Some avenues of tax planning. Role of insurance in tax planning.

Salary Includes: Wages Annuity or Pensions Gratuity Fees, Commission, Perquisites or profits in lieu of or in addition to any salary or wages Advance of Salary Contribution of Employer to any recognized provident fund in excess to prescribed limit Leave Encashment Compensation as a result of variation in service contract etc.

Remember 80D{ Total : One Lacs }

80C

Instruments

80C

Instruments(Pension)

80CCDInstruments(Central Govt.Employee only)

10(10D)Exemption on Maturity

10(10A)CommutationBenefit(1/3rd ofCorpus)

80DHealth cover

INDIA

Section 80 D

Under Sec. 80D, total Rs. 1 lac deductions can be claimed under the following items

1. Life Insurance premium2. ELSS3. NSC4. Tuition Fee paid on Children’s

education up to two children.5. Housing Loan Principal6. Public Provident Fund7. Recognized provident Fund8. Bank FD’s (tenure of 5 years

or more) 9. Recognized superannuation

Fund10.Specified Infrastructure

bonds

An investment which decreases the amount of money used in calculating the tax due A break granted by the government in order to encourage investment to fulfill certain long term and socially desirable objectives (e.g. infrastructure development, life cover for the individual, pension savings etc.) Various Sections of Income Tax Act deal with tax deductions namely section 80CCE, 80D & 80E.

Under Sec. 80D premium paid for Health Insurance Policies is tax deductible:

In case of individual assessee – Himself/herself, spouse, dependant children. In case of HUF assessee – any member of HUF. Max. limit is Rs. 15,000 if age < 65 and if age >=65, then deduction upto Rs. 20,000 is allowed in case of self, spouse & dependant kids. Additional deduction of upto Rs. 15,000 if age < 65 and if age >=65, then deduction upto Rs. 20,000 for dependent parent, so upto Rs. 30,000 (15,000+ 15,000) or Rs. 35,000 (15,000+20,000) can be availed.

Under Sec. 80E interest amount paid for education loan is tax deductible. Interest is deductible without any limit for 8 years. No deduction allowable on principal.

Premiums paid for Life insurance - Deduction under Sec. 80C subject to total cap of Rs. 1lac under all avenues of Sec. 80CCE. 20% limit : If the amount of premium paid in a financial year for a policy is in excess of 20% of the actual sum assured, then deduction will be allowed only for premiums up to 20% of the sum assured, exception in case of Pension plans which is governed by Sec. 80CCC. The 20% rule ensures that adequate life cover is obtained by the individual.

Eligible Savings : Premiums paid or deposited by assesses to effect or to keep in force insurance on the life of following persons:

In case of individual assessee –Self/Herself, spouse, children In case of HUF assessee – any member.

As per Sec. 10(10D) of the Income Tax Act. The premium cannot exceed 20% of sum assured throughout the term of the policy.

All withdrawals/surrender/ maturity proceeds/death benefit are tax exempt under this section

Contribution to PPF (over and above your mandatory PF) should not exceed Rs. 70,000. If wife & kids are dependent then all combined PPF contribution not to exceed Rs. 70,000 or else there will be no interest paid & principal is refunded.* For Pension policies, sum assured limit for tax benefit does not apply.

* * Central Govt. amendment: GSR 908(E), dated Dec 06, 2000

Options once a pension insurance policy matures:

Full withdrawal (taxable). Commutation u/s 10(10A) - 1/3 exempt from tax, remaining 2/3rd as taxable pension. Full pension (taxable in the financial year in which pension is received). No tax deduction at source.

Any pension received (yearly/half-yearly/ quarterly/ monthly) forms a part of the taxable income for that financial year.

Capital borrowed for acquisition of a self occupied house property is deductible upto a maximum of Rs. 1 lac under Sec. 80C from taxable income.

Under Sec. 24(b) of the IT Act the interest paid in case of a house loan taken for acquisition is deductible subject to:

In case of loan availed before 1st April, 1999, interest paid is deducted subject to a maximum of Rs. 30,000/- p.a. In case of loan availed after 1st April, 1999 deduction is subject to a maximum of Rs. 1,50,000/- p.a.

Taxable income is computed as follows:

A) SalaryB) AllowancesC) Perquisites D) Gross Salary ( A+B+C)E) Professional Tax F) Net Salary (D-E)G) Income Tax DeductionsH) Taxable Income (F-G)

Total Income (Rs.)

Rate of Tax

Senior Citizen Women below 65 years Others

Upto Rs. 150,000/- Nil Nil Nil

Rs. 150,001/- to 180,000/- Nil Nil 10%

Rs. 180,001/- to 225,000/- Nil 10% 10%

Rs. 225,001 to Rs 300,000 10% 10% 10%

Rs. 300,001 to Rs 500,000 20% 20% 20%

Rs. 500,001/- and above 30% 30% 30%

Surcharge @ 10% if taxable income exceeds Rs. 10 lac.Education cess @ 3% on the tax payable (including surcharge, if any).

Annual net salary of Mr. Raj is Rs. 5,75,000. What will be

his tax? As shown above, the tax payable comes to Rs.

77,500(15000+40000+22500) Not only this your customer has to pay education cess @

3% on the tax amount so calculated.

Therefore it comes to 77,500 x .03 = Rs. 2,325

Hence total tax payable is 77,500 + 2325 = Rs.79,825

Wait… Is that all??? Tax Deductions?? Mr. Raj: Dear advisor, my employer deducts Rs. 14,400 every year towards PF. He also contributes an equal amount Now if I invest Rs. 25,000 in Insurance, how much tax will I be able to save? I have no other form of tax planning… Assuming, that he has a life cover of atleast Rs.1,25,000, (i.e. 5 times) (refer slide #9) his entire insurance premium is tax deductible His contribution to pension is also tax deductible Hence total taxable income is now Rs. 5,35,600 (Rs. 5,75,000-Rs. 25,000-Rs.14,400)

Tax comes to Rs. 65,680 Education cess @ 3% of Rs. 65,680 = Rs. 1970 Therefore total tax payable (65,680+1970) = Rs. 67,650 Now he pays Rs. 12,175 lesser tax than earlier (79,825-67,650) Hence we may say he has EARNED Rs.12,175 through smart TAX PLANNING

An insurance advisor is on a sales call at Mr. Prasad’s office. Mr. Prasad: I have paid Rs. 21,280 towards my daughter’s education (tuition fees), invested Rs. 20,000 in ELSS scheme and Rs. 20,000 towards insurance premium. I am convinced with your pension plan. How much can I invest to save tax?

First step is to calculate income from salaryBasic is fully taxable = 1,68,000Transport Allowance (Tax free up to 9600) (12,000-9,600) = 2,400Medical Allowance = 0

(Reimbursement exempt up to Rs 15000) Performance pay = 2,16,000(fully taxable)Taxable income = 3,86,400 (1,68,000+2,400+2,16,000)

Remember 80 CCE{ Total : One Lacs }

80C

Instruments

80CCC

Instruments(Pension)

80CCDInstruments(Central Govt.Employee only)

Rs. 21,280 towards his daughter’s education (tuition fees) - Sec. 80C Rs. 20,000 in ELSS scheme –Sec. 80C Rs. 20,000 towards- life insurance premium - Sec. 80C Pension Plan - Sec. 80CCC So, under Sec. 80CCE Rs. 61,280 Hence, maximum tax deductible amount under pension plan is Rs. 38,720 (Rs. 1,00,000-Rs. 61,280)

An insurance advisor is on a sales call at Mr. Vijay’s office Mr. Vijay: My taxable income is Rs. 12,00,000. I have made investments of Rs. 1,00,000 eligible for tax deduction under Sec. 80C. I have also paid a professional tax of Rs. 1,200 How much tax will I have to pay? Is there any other Investment option which will provide tax benefit?

One more easy option to save tax is investing in Health Insurance plans offered by both Life Insurance as well as General Insurance Companies Insurance can be done for self, spouse, dependent children and parents

80DHealth cover

Rs. 15,000(age<65 yrs)

Rs. 20,000(age>=65 yrs)

Mr. Vijay: This is how I have calculated my tax liability

0 - 1,50,000 - @ 0% 0 1,50,001 - 3,00,000 - @10% 15,0003,00,001 - 5,00,000 - @20% 40,0005,00,001 - 11,00,000 - @ 30% 1,80,000

----------------------- Total Tax Payable 2,35,000Education Cess @ 3% (2,35,000 x3%) 7,050

-----------------------Total Tax payable 2,42,050

Salary 12,00,000Less: Professional tax paid 1,200

------------Taxable Salary income 11,98,800 Less: Deduction u/s 80C 1,00,000 Less: Deduction u/s 80D 15,000

------------- Taxable income 10,83,800

-------------

First Rs. 1,50,000 0Next Rs. 1,50,000 will attract 10% 15,000Next Rs. 2,00,000 will attract 20% 40,000Remaining Rs. 5,83,800(10.83 Lac-5.0 Lac) @30% 1,75,140

-----------------------Total 2,30,140Surcharge @ 10% on Rs. 2,30,140 23,014

-----------------------Total 2,53,154 Education Cess @ 3% of Rs. 2,53,154 7,595

-----------------------Total Tax 2,60,749

An Insurance advisor is on a sales call at Ms. Reema’s office. Ms. Reema: My net salary is Rs. 11,50,000. I have borrowed home loan from April 10, 2001, for which I pay Rs. 1,20,000 per year( Rs. 30,000 towards principal and Rs. 90,000 towards interest). I have a PF Investment of Rs. 18,000 and also pay an Insurance premium of Rs. 12,000 every year How much tax will I have to pay?

Net Salary 11,50,000Less: Provident Fund (Sec. 80C) 18,000 Less: Housing Loan Principal 30,000

(Sec. 80C)

Less: Housing Loan Interest 90,000 (Sec. 24(b))

Less: Insurance Premium 12,000 (Sec. 80C)

---------------- Taxable income 10,00,000

----------------

For women, the tax slabs are different, hence:

First Rs. 1,80,000 will not suffer tax 0Next Rs. 120,000 will attract 10% 12,000Next Rs. 2,00,000 will attract 20% 40,000Remaining Rs. 5,00,000(10 lac-5 lac)@30% 1,50,000

----------------Total 2,02,000

----------------No Surcharge @ 10%as taxable income does not exceed Rs. 10 lac

Education Cess @ 3% of Rs. 2,02,000 6,060 ------------------

Total Tax 2,08,060 ------------------

An insurance advisor is on a sales call at Mr. Rajan’s office. Mr. Rajan: I am a senior citizen aged 66 years, with no pension. My life insurance policy has matured and I have received Rs. 10,00,000. I also received a bank interest of Rs. 3 lac from ICICI Bank. Will I have to pay tax on Rs.13,00,000?

Proceeds from an insurance policy is completely tax-free under Sec. 10(10D) provided that Sum Assured is at least 5 times of premium. In case this condition is violated then the entire proceeds of Rs. 10,00,000 becomes taxable as income from other sources. Bank Interest of Rs. 3 lac is fully taxable.

** Tax benefits are as per the Income Tax Act, 1961, and are subject to any amendments made thereto from time to time.

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