tax planning with example, compensation mgmt
TRANSCRIPT
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UNIT V- Taxation
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SALARY Salaries is the remuneration received by an employee for the
services rendered by him to that employer. The primary
criteria of classifying an income under Salaries is that of
Employer Employee Relationship.
Example :
(i)Directors of the company regarded as Employees.
(ii) A Doctor visiting a company on a particular day of a week
and paid a fixed remuneration will still not be regarded as an
employee.
(iii) High Court, Supreme Court Judges They will be regarded
as Employees (Government Servants).
MPs and MLAs They will not be regarded as employees as
they are Public Servants. The Honorarium received by them
will be taxable under Income from Other Sources.
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Definition of Salary Sec. 17(1)
Salary Includes
Wages
Annuity or Pension
Gratuity
Any fees, commission, perquisites and profit in
lieu of salary
Advance Salary
Leave Salary
Annual Accreation to the Credit of a
recognized Provident Fund in excess of
specified limits.
Transfer of Balance in recognized Provident
Fund.
Contribution made by Central Government
under a Pension Plan.
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For the purpose of taxing salary, the study is under 5 Heads.
A. General
B. Allowances
C. Perquisites
D. Terminal Benefits
E. Profit in lieu of salary
General :-
Basic Pay This is the primary source upon which other computations are
made. It is computed in 2 ways. Acrual Amount Where specific amount is given
Grade system of Basic Pay Predetermination of increment
Bonus / Commission
These may be paid annually or periodical basis. This is fully taxable.
Incentive Fully taxable
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ALLOWANCES
Fixed monetary payments for an ear marked purpose. In other words, payment
made by an Employer to an employee and employer also specified for what purpose
payment should be utilized.
Allowances are taxable based upon its utilization. For this purpose allowances
bifurcated into Three
1) Fully taxable allowances
2) Fully exempt Allowances
3) Partly taxable allowances
Fully taxable allowances -
It means that the whole of the amount received is taxable
i. Dearness Allowances (DA) Allowance paid for meeting the cost of employmen
known as DA. DA is fully taxable irrespective of the fact that it is forming part or not.
ii. City Compensatory Allowance (CCA) Allowance paid for meeting the high cos
living of a particular place is known as CCA.
iii. Medical Allowance : Fully taxableiv. Lunch Allowance : Fully taxable
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Fully Exempt Allowance :-
i. Allowances paid to High Court / Supreme Court Judges
ii. Allowances paid to High Commissioners / Ambassadors outside
India.
Partly Taxable Allowances
House Rental Allowances (HRA) : Allowance paid for meeting
the cost of accommodation is known as HRA. U/s 10(13A)
exemption in HRA is as follows:-
Actual HRA received
Excess of rent paid over 10% of Salary (Rent Paid 10% ofSalary)
50% (Metros) or 40% (Non-Metros) of Salary
Salary = Basic Pay + DA (forming part) + commission paid as a
fixed % of turnover
For determining the HRA exemption four factors are being
considered
HRA received
Rent Paid
Salary; and
Place of stay
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Children Education Allowance :Exempt up to Rs.100/- per month per child for maximum of
2 Children.
Hostel Allowance : Exempt up to Rs.300/- per child per month for maximum
of 2 children.
Travelling Allowance : If it is officially spent wholly exempt.(Between cities)
Conveyance Allowance : officially spent wholly exempt.(within city)
Transport Allowance : Rs.800/- pm is exempt. Irrespective of actual spent
Uniform Allowance : Officially spent is wholly exempt.
Hill Area Allowance : Varies from Rs.300/- to Rs.7000/- based upon the altitude of
the hill.
Border Area Allowance : varies based upon the intensity of the border.
Underground Allowance : Whatever is actually paid is fully exempt.
Transport Allowance for Physically Challenged :Exempt up to Rs.1600/- irrespect of
actual spent.
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PERQUISITES The other component of an employers
remuneration is perquisites. A perquisites is
defined as a gain or profit incidentally made from
employment in addition to regular salary or wages,
especially of a kind expected or promised.
Their main characteristic is that they are payable
only during the continuance of employment andare directly dependent on the service.
The normal meaning of the word denotes
something that benefits an employee by going
directly to his pocket. It therefore does not apply to
reimbursement of expenses actually incurred in
the interest of official work.
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Perquisites
Free Gas, Water, Electricity provided by an employer.
Provision of watchman, sweeper, gardner and
personal attendant to the employee. General Perquisites
1.Medical Facility This perquisites discusses theprovision of taxation w.r.t. Medical facility provided by
the employer to employee or his family members.1.Where the facility provided in a hospital owned by
the employer, then also it is wholly exempt.
In all other cases exemption is applicable up toRs.15,000/- p.a.
Medical facility also includes Mediclaim Insurancepremium paid. Hence it is wholly exempt.
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3. Leave Travel Concession Facility :-
LTC is a facility provided by an employer, where the employer takes care of the
expenditure for the personal tour of employee and his family members (same like
medical). For the purpose of this benefit, 4 years are together known as a block.
An employee is eligible for 2 such trips in a block of 4 years. Where the employee
fails to avail one trip or both the trips then he can carry forward one such trip to next
block of 4 years.
d. Exemption is as follows :-
If the trip is undertaken in a flight Amount exempt will be economy class fare by
the national airlines by the shortest route.
If the journey is performed by train Amount exempt will be first class A/C fare by
the shortest route.
If the journey is performed by any other transport system deluxe class fare of
such transport system.
Where there is no recognized transport facility, first class A/C fare, had there
been a recognized train facility.
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Income from SalaryGross salary -Special deduction under sec.10& sec 16 = Net salary Income
+ Income from House property
Gross House property Income Special deduction = Net House propertyIncome
+
Income from Business or professionGross business or profession income Special deduction = Net business orprofession income
+
Income from Capital GainsGross Capital Gains income Special deduction = Net Capital Gains income
+
Income from other sourcesGross other sources income Special deduction = Net other sources income
==GROSS TOTAL INCOME
CALCULATION OF INCOME TAX
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GROSS TOTAL INCOME GENERAL DEDUCTION u/s80 = Taxable Income
TAX + 3% educational Cess = Amount to be paidtowards tax
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INCREASING POST VALUECOMPENSATION AFTER TAX
A proper understanding of various tax shelters will help
individuals to minimize their tax liabilities and companies to
review the tax benefits they give to their employees with a view
to reduce their own cost, increase employee's satisfaction and
reviews the tax burden for both.
Remuneration received by the employees should qualify for
concessional rate of taxation so that their post tax income is
maximized. This is an important consideration because the post
tax income is perceived as the real income by the employees and
therefore, as significant implication for his morale, motivation and
commitment to the organization.
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TAX PLANNING
Tax planning includes all financial arrangement which allow a tax-
payer to reduce to the minimum his tax liability without violating
any legal provision and without resorting to any colorable device.
Although tax planning and tax avoidance are two distinct legal
concepts, the line of demarcation is very thin and substantially
blurred. There is an element of malafide intent behind the tax
avoidance. Any tax planning though done strictly according to law
would amount to tax avoidance if the basic intention of the
legislature is defeated.
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While considering tax planning from the angle of the employer, provisions relating to
disallowances should be carefully examined to ensure that any payment made as salary or
perquisite is not disallowed as permissible business expense. Apart from complying with the
requirement of the above provisions, employer has to ensure that tax is deducted at source.
TAX EFFICIENT COMPENSATION PACKAGE
1. Medical Reimbursement :
Medical expenses reimbursed by your employer are tax-exempt up to Rs.15000 per year.
Such payment should be a reimbursement against the production of bills or vouchers, and
not on allowance, which you may or may not spend.
Besides reimbursement, hospitalization of you and your family members borne by your
employer are also exempt provided disease is notified by chief commissioner of income tax.
Instead of reimbursing hospitalization expenses, some employers prefer to reimburse the
premium paid by you on a mediclaim policy. such Reimbursement of medical insurance
premium is a tax-free perquisite without any limit.
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Interest free loan:
A loan taken by you from your employer for any purpose
on which you dont pay interest, or pay a concessional
rate of interest, is not a taxable perquisite.
Transport Allowance :
This is meant to compensate you for the cost incurred
in commuting to your place of work. Transport allowance
is exempt to the extent ofRs.800 per month, irrespective
of the amount actually spent by you in commuting to yourwork place. This exemption is not available to you if your
employer has provided you free conveyance.
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DIFFERENT FORMS OF SALARY-RETIREMENT BENEFITS
1. Leave encashment salary
2.Gratuity
3.Pension
4.Retrenchment compensation 5.Provident Fund
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LEAVE ENCASHMENT
It is not related to casual leave
For every completed year of service employee is
entitled to receive a certain number of days of
paid leave. Employee either can take leave or en
cash it while in service or after retirement.
Note: Any thing received while in service is
normally taxable. After retirement there are someconcessions given.
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MR.A PAY SLIP WORKING INMADURAI/MONTH
Basic pay = Rs 10000 (1,20,000)
Dearness allowance =Rs 5000 (60,000)
HRA=Rs 3000 (36,000)
CCA= Rs 1000 (12,000)
Medical allowance = Rs 500 (6000)
Entertainment allowance =Rs 600 (7,200)
He pays a house rent of 7000/per month. He pays Rs1500 as
professional tax. He contributes Rs 700per year to the Prime
minister relief fund. He subscribes Rs.40000 to GPF. He invests
Rs.30,000 in mutual fund. He purchases a NSC for Rs 20,000. He
pays LIC policy premium of Rs.15, 000. He pays Rs.5000 as
mediclaim premium. Calculate the income tax ?
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Gross salary Income = 2,41,200
(BP+Alowances+Perks)
1st deduction under sec 10(13)
Actual HRA =Rs 36000
Rent paid in excess of 10% =Rs 66000
40% of (BP+DA) =Rs 72000 =Rs 36000
2nd Deduction under sec 16
a. Deduction for entertainment Allowance -
Deduction is Minimum of followingActual EA received
1/5th of Basic
Rs.5000/- p.a.
Entertainment allowance =Rs 5000
Professional Tax =Rs 1500 =Rs 6500
Net salary Income =Rs 1,98,700
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Income from House property =NIL
Income from business pr prof =NIL
Income from Capital gains =NIL
Income from other sources =NILGross Total Income =Rs 198700
3rd deduction U/s 80
80 C
Towards Gratuity provident fund =Rs 40,000Towards Mutual Fund =Rs 30,000
Towards NSC =Rs 20,000
Towards LIC Policy =Rs 15,000
Total =Rs 105
Limited to 1 lakh so =Rs 100000
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80D
Towards Medi claim policy = Rs 5000
Limited to 10,000
80G
Towards PMFR =Rs 700
Total =Rs 105700
Taxable income =Rs 198700-Rs 105700 =Rs93000
Tax
3% education cess
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Assessment year 2010-2011 Individual /HUF
Upto Rs 160000= NIL
160000 to Rs 300000=10%
Rs 300000 to Rs 500000 =20%+14000
Above Rs 500000 =30% + 54000
Assessment year 2010-2011 for women
Upto Rs 190000= NIL
190000 to Rs 300000=10%Rs 300000 to Rs 500000 =20%+11000
Above Rs 500000 =30% + 51000
Assessment year 2010-2011 senior citizens above 65 years
Upto Rs 240000= NIL
240000 to Rs 300000=10%
Rs 300000 to Rs 500000 =20%+6000
Above Rs 500000 =30% + 46000
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Basic RulesRule 1
The aggregate amount ofdeductions under sections 80C
to 80U cannot exceed grosstotal income.
Rule 2
These deductions are to beallowed only if the assesseeclaims these and gives theproof of such investments/ex enditure/ income.
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CATEGORIES OFDEDUCTIONS
1. To encourage savings
2.For certain personal expenditure
3.For socially desirable activities
4.For physically disabled persons
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Deduction u/s
80CApplicable only to Individual &HUF.
This section provides fordeduction in respect of certainexpenditure/ investments paid ordeposited by the assessee in theprevious year.
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The gross qualifying amount under this section refer tothe payment/investment under some of the followingschemes:-
Life Insurance Premium Paid.
Deferred Annuity Contract.
Statutory Provident Fund and Recognized ProvidentFund.
15 Year Public Provident Fund.
Approved Superannuation Fund.
National Savings Certificates.
Unit-linked Insurance Plan (Ulip).Dhanraksha Plan of LIC Mutual Fund.
Jeevan Dhara, Jeevan Akshay, New Jeevan Dhara.
Notified Units of Mutual Fund or UTI.
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Amount of Deduction
100% of the amount invested or Rs. 1,00,000/-whichever is lower.
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Deduction u/s
80CCC
Deduction in respect of Contribution to
Certain Pension Funds.
Individual
Eligible Amount amount paid/depositedunder an annuity plan of the Life InsuranceCorporation of India or any other insurer forreceiving pension.
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ConditionsTaxable income.
This must not be allowed as deduction u/s80C.Any amount withdrawn or pension receivedfrom the plan is taxable in the hands of
the assessee or nominee in the year ofreceipt.
Amount of Deduction
Amount paid or Rs. 10,000/- whichever islower.
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Deduction u/s
80CCDDeduction in Respect of Contribution toPension Scheme of Central Government.
Individual who is an employee of CentralGovernment on or after 1.1.2004.
Eligible Amount Deposit made under apension scheme notified by the CentralGovernment.
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The aggregate amount of deductions under80C, 80CCC and 80CCD put together
cannot exceed
Rs.1,00,000
Ded ction /s
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Deduction in respect of MedicalInsurance Premia.
Individuals/HUF.
Eligible Amount - Insurancepremium paid in accordance withthe scheme framed by theGeneral Insurance Corporationof India and approved by theCentral Government.
Deduction u/s80D
Conditions
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ConditionsThe amount should be paid by cheque out ofthe taxable income.
The policy is taken on the health of theassessee, on the health of spouse, dependentparents or dependent children of the assessee.In case of HUF on the health of any member of
the family.
Amount of Deduction100% of premium paid subject to a maximumof:
Rs. 15,000 in case of senior citizens (above65 years)
Rs. 10,000 in case of others.
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Deduction u/s80EDeduction in respect of repayment of loantaken for higher education.
Individual
Eligible Amount any amount paid by way of
interest on loan taken from any financialinstitution or any approved charitableinstitution for higher education.
Conditions
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Conditions
Amount is paid out of his income chargeable totax.
Higher education means full-time studies for anygraduate or post-graduate course in engineering,medicine, management or for post-graduatecourse in applied science or pure sciencesincluding mathematics and statistics.
the deduction shall be allowed for the previous year in which the assessee starts repaying the
loan or interest thereon and seven previous yearsimmediately succeeding it or until the loantogether with interest thereon is paid by theassessee in full ,whichever is earlier.
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Amount of Deduction
Actual interest paid or Rs. 40,000 whichever
is lower.
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Deduction u/s
80UDeduction in case of person with disability.
Individual resident of India.
Eligible amount Flat deduction to a person
with disability.
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Conditions
He is certified by the medical authority to be a
person with disability, at any time during theprevious year.
He furnishes a certificate issued by themedical authority in the prescribed form along
the return of income.
Amount of Deduction
A fixed deduction ofRs. 50,000 in case of a person with disability
Rs. 75,000 in case of a person with severedisability.( having any disability over 80%)
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