5 Golden Rules Of Tax Planning
Just as rules are important for good living so also there are some golden rules of tax planning. The five simple yet effective golden rules of tax planning are:
1. Spread the taxable income among various members in your family;
2. Take full advantage of tax exemptions available under the law;
3. Take full advantage of permissible tax
deductions and rebates available on stipulated tax-saving investments;
4. Make
optimum use of tax-exempted incomes; and
5. Simple tax planning is smart tax planning.
Rule 1: Spread Your Income Among Your Family Members
The first step in tax saving is to adopt the concept of divide and rule. The simple rule is that each family member must have his or her independent source of income so as to legally become an independent tax payer under the provisions of the income tax law. In case the entire income of a family belongs to just one member, the tax liability is much higher than when the same income is spread among different members of the family.
Now, under the income tax law it is not possible to arbitrarily divide one’s income amongst different members of the family and then pay lower tax in the names of different family members. However, this goal can be achieved by intelligent use of the facility of gifts and settlements.
Some Gifts You Receive Are Not Your Income
Generally, any gift you receive from various members of your family and specified relatives is not considered your income but a capital receipt. Thus, no income tax is payable on gifts received from relatives
and also gifts received from parties other than relatives upto a sum of ` 5O,OOO during one year and at the time of marriage up to any amount.
All gifts received from ‘other parties’ are subject to tax by including them as “Income from other sources (See Chapter VIII). Care should also be taken to ensure that any gift which is received should be a genuine one. The person making the gift, called the donor, should have proof of his or her having the source for making the gift.
The other important point to keep in mind in the case of gifts is that the provisions of Section 64 of Income Tax Act prohibit any direct or indirect transfer of funds between an assessee and his/her
No income tax on your inheritance
No income tax is payable on any amount
received or inherited by you, whether in the form of movable assets or
immovable assets, consequent to the demise of your friend or relative.
Moreover, there is no upper limit to this exemption. Hence, whenever you receive
either bank fixed deposit, shares or immovable property consequent to the
demise of a person, you don’t have to pay any income tax at all on the value of
all inherited assets The simple rule is that the asset so inherited by you is
not your income; it is a capital receipt. Hence you are not liable to pay any
income tax on the money and assets you inherit.
However, you will be required to pay income tax in subsequent years on any income arising to you from the use of assets you inherit. For example, a person receives a bank fixed deposit of ` 52 Lakh on the demise of his grandfather. No income tax would be payable by him on this amount. The recipient of this amount will be required to make income tax payment only on the interest income of, say, ` 4 Lakh thereafter arising from the said bank fixed deposit.
spouse. Thus, a husband should not make any gift to his wife; likewise, the wife should not make a gift to her husband. If the gift is made between spouses, it would attract the provision of Section 64 and lead to clubbing of the incomes of the spouses.
To achieve the best results f gift, and to avoid clubbing of income, you may receive gift from any relative other than your spouse, and, in the case of a daughter-in-law from her father-in-law and mother-in-law.
The first rule of tax planning requires that one develops income tax files for oneself, one’s spouse, one’s major children, the Hindu Undivided family, and for all other major relatives in the family, including one’s parents. The development of different files of major family members can be achieved through the process of gifts and settlement. Even if, the parents of the taxpayer are not paying income tax today but if they receive some gift from friends or relatives or from anyone else in the world, the income so generated would belong to them. Thus, independent income tax files can be started for different family members by developing independent funds of each person through gifts thereby resulting in separate independent sources of income which would then be taxed
A
Trust For Minor Children Eliminates Clubbing Of Income
The gifts made to a minor child
would similarly result in clubbing of income. Hence, from the point of view of
tax planning a trust could be created for the welfare of the minor child with a
specific condition that no part of income should be spent on the minor child
during the period of minority. If this simple technique is adopted then there
will be no clubbing of income of the minor child with the, income of the
parents. The clubbing provisions do not apply when you make gifts to your major
children.
separately to income tax. Once the income is spread among more people, chances are some of them would attract lower rates of tax. Also, each one would then be entitled to independently claim exemptions, deductions, rebates, etc.
Rule 2: Take Full Advantage Of All Tax Exemptions
The second step of tax planning lies in claiming all the exemptions and deductions which are permissible under the Income Tax Law. A list of most such exemptions and deductions is contained in Section 10 of the Income Tax Act. This list has to be optimised depending on your facts and circumstances. If you and your family members are not claiming the optimum benefit of exemptions and deductions, then it is time to focus on investment planning in the group so that every family member gets full benefit of tax exemptions and tax deductions which covered in detail in Chapter VIII
Rule 3: Take Full Advantage Of Tax Deductions
Various tax deductions are available under the I.T. Law. One should try to avail of the benefit of these deductions for each and every member of the family. The various investment options that offer tax rebates should be reviewed keeping in mind various aspects like the age factor, etc. A check-list should be prepared of the various deductions permissible under the Income Tax Law (See Chapter X). Check whether each and every tax paying family member is claiming these. If special care is taken of this aspect, then it is legally possible to save a lot of income tax.
It is suggested that a chart be prepared of tax, deductions and exemptions for every family member for purposes of overall tax planning of the family. It would be worthwhile if a group tax chart is prepared containing details relating to income tax, tax deductions, net taxable income, tax deducted at source, rebate of tax, and, finally, the net amount of income tax paid in the case of each family member. With the help of this one simple chart, you can achieve substantial tax planning as it will show up those who have not made optimum use of tax deductions.
TAX DEDUCTIONS
Tax payers now enjoy straight deduction in terms of Section 80C in respect of stipulated investments and expenditure to the tune of ` 1 Lakh. Moreover, such investment can be made in any single stipulated item, or a combination of the stipulated avenues of investment. Similarly, within the above limit the investment can also be made in Pension Plans in terms of Section 8OCCC. Likewise, a further tax deduction of ` 20,000 is available on investment in Infrastructure Bonds as per Section 8OCCF.
TAX RATES
The Finance Bill, 2012 provides that the rates of income tax for the assessment year 2012-2013 (financial year 2011-2012) for all categories of tax payers (Corporate as well as non-corporate) would be the same as laid down in the Finance Act, 2011 (Part- III of the I Schedule) for the purpose of advance tax and TDS on salaries, etc.
The initial exemption limit for male
individuals, HUFs, AOPs, etc.,
-
for
women below 60 years,
-
for
senior citizens of 60 years or more and
-
for
senior citizens above 80 years in each case would be `1,80,000, `1,90,000, `2,50,000 and `5,00,000
respectively.
The rates of I.T.
for co-operative societies are the same as for the A.Y. 2012-2013.
Partnership firms
will continue to pay I.T. at the same rates as for A.Y. 2012-2013.
However, the rates
for TDS from “Salaries” and Computation of “advance tax” payable during the FY
2012-13 relevant to AY 2013-14 in the case of all categories of assessees have
slightly been changed. Thus, the basic exemption for every individual, HUF,
A.O.P., body of individuals, artificial juridical person would be `2,00,000 (both for
men and women).
Likewise, the
exemption limit for senior citizens would continue to be `2,50,000 (men and
women over 60 years age) and
` 5,00,000 for
senior citizens (men and women) of the age of 80 years and above.
No surcharge would
be levied on I.T. The I.T. rates for firms and companies would be the same. However,
there would be no S.C. on I.T. for firms.
Substantial changes have been made by the Finance Bill, 2012, for tax slabs and the rates of tax for TDS on “Salaries”, computation of “advance tax” during the F.Y. 2012-13 (relevant to the A.Y. 2013-2014).
For the financial year 2012-2013 relevant to the assessment year 2013-2014 the basic income-tax exemption limit has now been changed. However, the tax slabs have been changed which would go to reduce the incidence of income-tax payment by the individual tax payers. The revised, enhanced and enlarged income-tax slabs for the A.Y. 2013-2014 (financial year 2012-2013) for individual tax payers are as under:
Up to ` 2,00,000 Nil
From ` 2,00,001 to ` 5,00,000 10 per cent
From `5,00,001 to `10,00,000 20 per cent
Above `10,00,000 30 per cent
In the case of every individual, being a
resident in India, who is of the age of sixty years or more but less than
eighty years at any time during the previous year:
Up to ` 2,50,000 Nil
From ` 2,50,001 to ` 5,00,000 10 per cent
From ` 5,00,001 to ` 10,00,000 20 per cent
Above ` 10,00,000 30 per cent
In
the case of every individual, being resident in India, who is of the age of
eighty years or more at any time during the previous year:
Up to ` 5,00,000 Nil
From ` 5,00,001 to ` 10,00,000 20 per cent
Above ` 10,00,000 30 per cent
In all the above cases there will be no Surcharge. The Education Cess of 2% and the “Secondary & Higher Education Cess” of 1% would continue in all cases.
For the cooperative societies, firms, local authorities, domestic companies, the rates of I.T., S.C. & two cesses for the F.Y. 20 12- 2013 (relevant to A.Y. 2013-2014) would continue to be same as for the A.Y. 2012-2013.
The companies having income in excess of 1 crore would pay surcharge of 5%.
Rule 4: Exempted Incomes
There are innumerable incomes under the Income Tax Law which are exempted from the purview of tax. These incomes are known as exempted incomes.
For example, interest income from tax-free bonds as also any income from agriculture are some items of exempted incomes.
There are other exempted incomes also which
are discussed in Chapter IV of this book. Proper planning of your investments
in a way so as to generate tax exempt incomes is another golden rule of tax
planning.
Zero-tax status
Oh, yes! You can achieve zero-tax
status if all your income taken together in one financial year does not exceed ` 2,00,000. Thus,
income tax is payable only when the net taxable income of financial year 201
2-2013 for an individual tax payer, exceeds ` 2,00,000. Besides, there are
innumerable options when you may have annual income much higher than ` 2,00,000 — it may
even run into a few Lakh and Crore — but still you may not be required to pay
income tax. This is possible only when your income in excess of ` 2,00,000 in a
financial year arises from tax-free sources. One such example is the interest
income arising to an individual from Tax free Bonds issued by various public
sector companies. The interest on these bonds, irrespective of the amount would
be completely exempt from income tax notwithstanding the fact that the income
may far exceed `
2,00,000
in the FY 2012-2013 relevant to the AY 2013-2014. Similarly, the dividends
received from companies are also tax exempted.
Rule
5: Don’t Overdo It — Keep Tax Planning Simple
Easy, simple, hassle-free should be the objectives of your tax planning approach. The message which we want to bring to you is that you should adopt tax planning but never overdo it; just remember the key points highlighted in this book which will help you fulfill your tax planning mission without going overboard.
Saving tax legally is a reality but only for those who plan their taxes based on such principles. This would also result in avoiding all the worries and tensions as all their incomes, assets and investments are duly accounted for from the point of view of taxation.