TAX PLANNING WITH EXAMPLE, COMPENSATION MGMT

8/14/2019 TAX PLANNING WITH EXAMPLE, COMPENSATION MGMT

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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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Documents

TAX PLANNING WITH EXAMPLE, COMPENSATION MGMT