Session 3 Print

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Session 3 Print

  1. 1. Three Power Steps to Financial Success SAVE INVEST PROTECT COGNIZANT TECHNOLOGY SOLUTIONS | 28-SEPTEMBER 2007
  2. 2. We are Here <ul><li>Fundamentals of Financial Planning – 1 </li></ul><ul><li>Fundamentals of Financial Planning – 2 </li></ul><ul><li>Income Tax Management </li></ul><ul><li>The Way Forward </li></ul>
  3. 3. Tax Planning
  4. 4. Two things are definite in life: Death and Taxes – Benjamin Franklin <ul><li>Tax burden is most heavy on the Salaried Class in India. </li></ul><ul><li>Two sides to it: </li></ul><ul><ul><li>The good Side </li></ul></ul><ul><ul><li>The negative side </li></ul></ul>
  5. 5. The Negatives <ul><li>Income is Transparent – Salary is the prime source of Income. </li></ul><ul><li>There is TDS – Onus is on the Individual to claim excess tax. </li></ul><ul><li>Cumbersome process and procedures to deal with officials. </li></ul>
  6. 6. The Positives <ul><li>Tax sops do exist – Tax payout can be reduced. </li></ul><ul><li>Forced Savings / Investment – Future can be made secure. </li></ul><ul><li>All this can be fun – With Finerva </li></ul>
  7. 7. The Big picture <ul><li>Receipts </li></ul><ul><li>Less Exempted Tax </li></ul><ul><li>Gross Total Income </li></ul><ul><li>Less Deductions </li></ul><ul><li>Total Income </li></ul><ul><li>Compute Tax </li></ul><ul><li>Final Tax Liability </li></ul><ul><li>(Add Surcharge (if Applicable) + Add Educational Cess) </li></ul>
  8. 8. Receipts (Heads of Income) <ul><li>Income from Salaries </li></ul><ul><li>Income from House Property </li></ul><ul><li>Profits and Gains from Business or Profession </li></ul><ul><li>Capital Gains </li></ul><ul><li>Income from Other Sources </li></ul>
  9. 9. Exempted Income <ul><li>10(1)Agricultural Income </li></ul><ul><li>10(10A) Commutation of Pension – Subject to </li></ul><ul><ul><li>1. Age > 45 years </li></ul></ul><ul><ul><li>2. Commuted Amount not more than 1/3rd of the total amount </li></ul></ul><ul><li>10(10D) Amount Claimed from Insurance Companies on Maturity and Death subject to Life Cover being > 5 times Annual Premium . </li></ul>
  10. 10. Exempted Income… <ul><li>10(13A) House Rent Allowance: </li></ul><ul><ul><li>Lower of HRA Paid </li></ul></ul><ul><ul><li>40% of Basic or 50% of Basic in Metros </li></ul></ul><ul><ul><li>Rent Paid minus 10% of Basic Salary </li></ul></ul><ul><li>10(14) Conveyance Allowance – Rs.800/- per month </li></ul>
  11. 11. Exempted Income… <ul><li>10(34)Dividend where dividend distribution tax has been paid </li></ul><ul><li>10(38) Long Term Capital Gains Tax on Units of Equity Oriented Mutual Fund </li></ul>
  12. 12. Deductions <ul><li>80C Maximum Rs.100,000/- </li></ul><ul><ul><li>EPF </li></ul></ul><ul><ul><li>PPF </li></ul></ul><ul><ul><li>Insurance Premiums </li></ul></ul><ul><ul><li>Pension Plans </li></ul></ul><ul><ul><li>Education Fees </li></ul></ul><ul><ul><li>Principal of Housing Loan </li></ul></ul><ul><ul><li>ELSS, </li></ul></ul><ul><ul><li>NSC, </li></ul></ul><ul><ul><li>Infrastructure Bonds </li></ul></ul><ul><ul><li>Bank Deposits of 5 years with lock in. </li></ul></ul>
  13. 13. Deductions… <ul><li>80D - Medical Insurance upto Rs.15,000/- (Rs.15,000/- for Senior Citizens > 65 years old) </li></ul><ul><li>24 - Interest on Housing Loan upto Rs.150,000/- </li></ul><ul><li>80E - Interest paid on higher education loan </li></ul>
  14. 14. Deductions… <ul><li>80G </li></ul><ul><ul><li>Donation to Charitable Funds </li></ul></ul><ul><ul><li>100% for Prime Minister’s Relief Fund </li></ul></ul><ul><ul><li>50% for all other eligible funds </li></ul></ul><ul><li>80GG </li></ul><ul><ul><li>Deduction for rent paid where HRA is not paid. Least of </li></ul></ul><ul><ul><ul><li>25% of Total Income </li></ul></ul></ul><ul><ul><ul><li>Rent Paid minus 10% total income </li></ul></ul></ul>
  15. 15. Deductions… <ul><li>80U - Persons with specified disabilities Rs.50,000/-. For Severe Disability Rs.75,000/- </li></ul>
  16. 16. Deductions on Reimbursement Only (Original Bills Submission) <ul><li>Medical Reimbursement – upto Rs.15,000/- </li></ul><ul><li>Leave Travel Allowance – Twice in Four Years subject to limitation on travel. </li></ul><ul><li>Food Coupons and Vouchers (Sodexo) </li></ul><ul><li>Business related travel and entertainment </li></ul><ul><li>Actual Expenses for Higher Education </li></ul>
  17. 17. Tax Slabs Above 250,000 Above 250,000 Above 250,000 30% 195,001 to 250,000 (Next 65,000) 150,001 to 250,000 (Next 100,000) 150,001 to 250,000 (Next 100,000) 20% 145,001 to 150,000 (Next 5,000) 110,001 to 150,000 (Next 40,000) 10% First 195,000 is 0% 0 to 145,000 (First 145,000) 0 to 110,000 (First 110,000) 0% Tax Slab Senior Citizens Tax Slab Female Tax Slab Male Tax Rate
  18. 18. Case Study : <ul><li>Mr. Rakesh aged 30, has a gross salary income of Rs.500,000. His salary split up is given below. He has shifted to Chennai from his native Trichy. He lives with his wife and son who is 1.5 years old. He has an additional income of Rs.132,000/- from his rice fields at Trichy. Calculate Mr. Rakesh’s tax liability. </li></ul><ul><li>He has made investment in a Pension plan for Rs.25,000/-.Rs.5000/- for health insurance premium. Rs.25,000/- in a Life insurance plan. And Rs.27,000/- in an ELSS Mutual Fund . </li></ul>
  19. 19. 500000 Total 100000 Performance linked bonus 12,000 Utility Allowance 12,000 Child Education Allowance 9,600 Conveyance 15,000 Medical Reimbursement 10,000 LTA 38,000 CCA 17,045 PF 81,816 HRA 2,04,539 Basic
  20. 20. The Nay, Nays
  21. 21. Please avoid <ul><li>There are a few financial transaction which an investor should avoid at all times. They may add to the tax burden (which already will be high) or be a negative cash flow. </li></ul>
  22. 22. Mutual Funds < 365 days <ul><li>A mutual fund with less than 365 days </li></ul><ul><li>(1 year) of investment will attract 10% Capital Gains Tax Plus Exit Charges from the Fund Manager </li></ul>
  23. 23. Car Loan / Personal Loan <ul><li>A car loan adds interest to an item which </li></ul><ul><li>depreciates over time (whether used or not). </li></ul>
  24. 24. Fixed Deposits <ul><li>The interests will add to your tax burden. The interests anyway are low. </li></ul><ul><li>Not recommended except for Retired Senior Citizens (> 65 years old). </li></ul>
  25. 25. The Yeah, Yeahs
  26. 26. A Farm House Relax, Earn, Zero Tax Too <ul><li>Technically a farm house is one which is 25km from the nearest Corporation, Municipality, etc. </li></ul><ul><ul><li>Relax and Party on holidays. </li></ul></ul><ul><ul><li>Earn 100% Tax free income from agricultural activities. </li></ul></ul>
  27. 27. My HOUSE Rent or Buy?
  28. 28. Benefit on Buying House <ul><li>Property value is appreciating </li></ul><ul><li>Property can be pledged to take loan latter </li></ul><ul><li>Pride of owning a house </li></ul><ul><li>Tax is saved on principal & interest </li></ul><ul><li>Rental income possible post retirement </li></ul>
  29. 29. Tax benefit <ul><li>Under Rent </li></ul><ul><ul><li>40% of Basic Salary / HRA / Rent Paid in Actual which ever is lowest </li></ul></ul><ul><ul><li>50% in case of metros </li></ul></ul><ul><li>Under Housing Loan </li></ul><ul><ul><li>Tax Benefit on Principal (Amount Exempted)= Rs 100000 @30% </li></ul></ul><ul><ul><li>Tax Benefit on Interest </li></ul></ul><ul><ul><li>(Amount Exempted) = 150000 @30% </li></ul></ul><ul><ul><li>But this is negative CASH FLOW. </li></ul></ul>
  30. 30. Benefit on Rented House <ul><li>Amount saved can be invested at higher returns </li></ul><ul><li>Better life style, flexibility to spend and save. </li></ul><ul><li>Can switch to better locality and larger house based on salary increase </li></ul><ul><li>Tax saved on rent expense </li></ul><ul><li>Can buy house on down payment latter </li></ul><ul><li>No maintenance cost </li></ul><ul><li>There can be savings on difference between actual rent and HRA </li></ul>
  31. 32. Assumptions <ul><li>House bought for own occupation </li></ul><ul><li>Amount saved are reinvested at market returns </li></ul><ul><li>Profile considered is that of a salaried employee </li></ul><ul><li>Down payment made for acquiring the house is not considered as it may be equal to deposit for the rented house </li></ul>
  32. 33. Assumptions… <ul><li>Rent increase is not considered. Neither is the cost of increase in maintenance and increase in HRA. As these can be considered to be negated against each other </li></ul><ul><li>Interest rate risk is not considered </li></ul><ul><li>Market return risk is not considered as the terms (10 years , 15 years) are sufficiently long </li></ul><ul><li>Salary structure is considered to be flexible for tax planning </li></ul>

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