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Income Tax and Financial Plan


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I came across general queries on Income taxation issues from employees and I tried to help them to understand basic taxation rules and better financial plan for middle level salaried employees.

Published in: Economy & Finance

Income Tax and Financial Plan

  1. 1. Income Tax &Financial Planning for salaried person
  2. 2. INCOME-TAX ACT, 1961It came into force on the 1st day of April, 1962Applicable amendments as per Finance Bill 2012
  3. 3. "It was only for the good of his subjects that hecollected taxes from them, just as the Sun drawsmoisture from the Earth to give it back a thousandfold" --Kalidas in Raghuvansh eulogizing KING DALIP.
  4. 4. Slab of Income Tax for 2013 -2014 Total Income Rate of taxWhere the total income does not Nilexceed Rs. 2,00,000/-.Where the total income exceeds 10 per cent of the amount by which the totalRs. 2,00,000 but does not exceed Rs. income exceeds Rs. 2,00,000/-5,00,000/-. - Some tax credit of Rs. 2000 for every person who has an annual income of upto Rs. 5 lakhWhere the total income exceeds Rs. 30,000/- plus 20 per cent of the amountRs. 5,00,000/- but does not exceed Rs. by which the total income exceeds Rs.10,00,000/-. 5,00,000/-.Where the total income exceeds Rs. 1,30,000/- plus 30 per cent of theRs. 10,00,000/-. amount by which the total income exceeds Rs. 10,00,000/-
  5. 5. Cess on Income tax• The amount of income-tax shall be increased by Education Cess on Income Tax @ 2% of the income-tax.• An additional surcharge is chargeable @ 1% of income-tax (not including the Education Cess on income-tax).
  6. 6. Optimal tax planning with section 80C (Overall limit of ` 1 Lakh)Eligible schemes under section 80C 1. Life Insurance Premiums 2. Contributions to Employees Provident Fund 3. Public Provident Fund 4. NSC (National Savings Certificates) 5. Unit Linked Insurance Plan (ULIP) 6. Repayment of Housing Loan (Principal) 7. Equity Linked Savings Scheme (ELSS) of Mutual Funds 8. Tuition Fees including admission fees or college fees paid for full-time education of any two children of the tax payer. 9.5-Year fixed deposits with banks and Post Office Savings Schemes 10.Senior Citizens Savings Scheme (SCSS)
  7. 7. Thinking beyond Section 80CSection Quick Description and Deduction Limit 80D Premium Paid on Medical Insurance Maximum upto `15,000 or ` 20,000 in case of Senior Citizen80DD Maintenance including Medical Treatment of a ` 50,000 irrespective of the amount Handicapped Dependent who is a person with disability80DDB Expenditure Incurred in respect of Actual Incurred with a ceiling of upto ` 40,000 or ` 60,000 in Medical Treatment case senior Citizen whichever is lower 80E Repayment of loan taken for pursuing Maximum deduction for interest paid for a maximum higher education of 8 years or till such interest paid which ever is earlier 80G Donations of certain funds and charitable Maximum deduction allowed can be 50% or 100% of the Institutions donation subject to the stated limits as provided under this section 80U Person suffering from Specific disability ` 50,000 irrespective of the amount incurred or deposited. However incase of disability of more than 80% higher deduction of Flat ` 100,000 is allowed
  8. 8. House Rent Allowance Exemption - How to Calculate?Least of the following.• Rent paid minus 10% of basic salary.• Actual HRA received by the employee.• 50% of basic salary, if the location of the residence is in a metro city. Calculation Sheet
  9. 9. Your home loan and Tax planning• Repayment of principal amount: Makes you eligible to claim a deduction up to a sum of ` 1,00,000 under section 80C.• Interest is eligible for deduction u/s 24(b) as follows: Maximum of ` 150,000• The Union Budget 2013-14 has proposed a deduction of ` 1 lakh on housing loan interest under section 80EE
  10. 10. ` 5,000 ExemptionAccording to the Finance Bill, 2012 – Preventivehealth check-up cost up-to ` 5000/- is eligible forSection 80D (Within ` 15,000/- limit).
  11. 11. LTA Exemption (Leave Travel Allowance)Provide the necessary documents• TWO journeys performed in a block of FOUR calendar years. current block i.e. 01/01/2010 - 31/12/2013.• The Exemption will be limited to the journey from the place of origin to the place of destination by the shortest possible route WITHIN INDIA• Original receipts of Ticket must be submitted along with this claim for example boarding pass in case of flight etc.• The Exemption is strictly limited to expenses on Air/Rail/Bus fares only. No other expenses will qualify for the exemption.
  12. 12. Conveyance Allowance` 800/- per month is granted to meet the expenditureincurred on conveyance, while performing official duty i.e.` 9,600/- pa. No Bills are required for this amount.Professional Tax DeductionProfessional Tax Slab based on Net income in 6 MonthsUpto Rs. 21000 NIL` 21,001 to ` 30,000 100/-` 30,001 to ` 45,000 235/-` 45,001 to ` 60,000 510/-` 60,001 to ` 75,000 760/-Above ` 75,001 1095/-
  13. 13. Invest in Equity and Get Tax Benefits• A new equity scheme called Rajiv Gandhi Equity Saving Scheme is being introduced to promote equity investments. The scheme will get income tax deduction, which will be purely applicable to the new retail investors who will invest directly into equity up to ` 50,000, with a lock-in period of three years. The investor’s annual income should not exceed ` 1,200,000.
  14. 14. The benefits of filing income tax return• Standard Income Proof• Speeds your loan application process• Claim your tax refund -Every person with taxable income (over and above the tax exemption limit) should file an income return, even if her/his tax liabilities have been taken care of by the employer through tax deducted at source (TDS)• Filing of ITR can be done in 2 ways -Offline/Traditional paper filing -Online filing
  15. 15. Step to file return online1. REGISTER on e-Filing website using your PAN2. Download the applicable ITR Form from Downloads3. Fill it as per your form 164. Generate XML and safe it on the desktop5. LOGIN the portal6. Go to e-file –Income Tax Return –upload return7. Take print out Sign and post it by normal post (No Courier)
  16. 16. Benefits of file return online1. Easy to access your IT Returns for every year from anywhere2. Easy to keep records3. Saving of Time & money to take services from filing agent4. Fast and smooth refund (if applicable)
  17. 17. Financial Planning
  18. 18. Why Should you Develop a Personal Financial Plan?• Achieve your financial goals.• Achieve financial independence.• Invest intelligently• Minimize your payments to tax• Cover your assets.
  19. 19. Goals : The Cornerstone of a Financial Plan• Goals keep the future in mind by reminding you of the rewards.• Goals entice you to keep the plan in effect.• Goals provide tangibility for the question. “Why?” • No point in telling the dietician that you are going to have idli…..and then saying ‘Oh my friends forced me…so I had butter chicken’ .
  20. 20. Inflation• The effect of inflation is the prices of everything going up over the years.• Do not keep your money stagnant. If you just save money by putting it your safe it will loose value over time.• When investing, you have to make sure that the rate of return on your investment is higher than the rate of inflation.
  21. 21. Brokerage and taxation!• Brokers make money on whatever transaction you make. Whether you buy or sell, brokers will make money.• Brokers tend to encourage you to trade.• For a short term (less than one year) you have to pay tax on any capital gain you make
  22. 22. Investment benchmark• As a general rule, just for the sake of simplicity, your investments must grow at a minimum rate of 15% per year to stay ahead of inflation, tax and brokerage!! Remember this when making all your investments.
  23. 23. Ideal allocation for salaried person• Begin by protecting yourself from the three main risks – Health – Income and – Life (Know your Life Value)• How big should my life insurance policy be? – One basic rule of thumb is that the death benefit on your policy should equal seven to 10 times the amount of your annual salary.
  24. 24. Ideal allocation for salaried person• Have a good medical cover as it helps in the long terms (costs like medical emergencies for self and family members, especially if there is insufficient company cover)
  25. 25. Ideal allocation for salaried person• Make sure 20% of income is set aside for investment• Maintain a six-month expense in liquid form for emergency (in form of cash, bank FDs, liquid mutual fund)• Give priority to retirement – a combination of systematic investments in mutual funds would be the best option
  26. 26. Ideal allocation for salaried person• Jewellery cannot be considered as investment. So in this asset class invest in gold funds, gold coins or at best, plain gold jewellery.• Balance your plan with a combination of low and high risk investments
  27. 27. Ideal allocation for salaried person• Treat All Goals independently such as – Life Insurance – Retirement Plan – Investment for set goals – Permanent Asset – Liquid Fund
  28. 28. Ideal allocation for salaried person• Education may be the best single investment you will ever make!
  29. 29. Retirement Planning• Things to remember while planning for retirement. • Decide how much income you require to live comfortably in your post-retirement years. • Determine how much you need to save regularly, starting today, to have the right amount. – Calculation Sheet • Select the right retirement plan, which will help you meet your post-retirement requirements. • Start saving now! • Systematically invest a fixed amount every month for your post-retirement years and lead a tension free healthy retirement.
  30. 30. Retirement PlanningSave 10% of your income for retirement Dont underestimate the significance of the savings in the first few years. Assuming that a 25-year-old person puts away a fixed amount every month, his savings in the first five years will account for 44% of his total corpus when he is 60 years old. The later you start, the more you will need to save. If you have started late, say in your 40s or 50s, you will have to invest up to 20-25 % of your income if you want a comfortable retirement. SMART TIP: Start an SIP in a mutual fund and automate the process by giving an ECS mandate to your bank. In this way, your retirement planning will stay on track.
  31. 31. Retirement PlanningIncrease investment as your income grows SMART TIP: Whenever you get a raise, allocate half of it to savings.Dont dip into corpus before you retire SMART TIP: Instead of withdrawing your EPF balance when you change jobs, transfer it to the new account by filling Form 13 and submitting it to the new employer. This should be at the top in your list of priorities at the new workplace.
  32. 32. Retirement Planning• Borrow for education, save for retirement – Under Section 80E, income tax deduction is available only if the education loan has been taken for yourself, your spouse or children – SMART TIP: An education loan helps inculcate financial discipline in the child. If he is responsible for the repayment, he gets into the saving habit early in life.• SMART TIP: Buy a health insurance cover that continues till you are 70-75 years old. It is difficult to buy one afresh when you are older and not so healthy.
  33. 33. Are your investments suitable toyour Risk Profile?• What works for friends and relatives, no matter how well meaning, may not work for us.• Broadly risk personalities can be categorized at 3 levels – Conservative, Balanced and Aggressive.
  34. 34. Well Balanced Portfolio• Well balanced portfolio means the portfolio which contains all the asset class in well balanced proportion. Say for Example, Equity, Debt, Gold, Real Estate, Liquid, Jewellery…etc..• Here is the example of well balanced portfolio. – Equity 30% – Debt 30% – Gold 10% – Real Estate 30%• However, the above is only one example of well balanced portfolio. In reality, you can build well balanced portfolio according to your needs, financial goals and risk appetite.
  35. 35. Well Balanced Portfolio• The main logic to build a well balanced portfolio is that, it will stabilize your wealth in any market conditions. Usually Equity, Debt & Gold have negative correlation. When Equity is down, Debt and gold will protect your portfolio and when the equity will be up, it will give you good capital gains and growth of your portfolio.• You should construct your portfolio according to your age, risk appetite and financial goals and balance it periodically. If you don’t like any asset class than you can simply omit it from your portfolio.• So build your own portfolio and become financially free
  36. 36. Final Tips• Don’t get carried away by what others are doing. Educate yourself about money management and investing.• Starting early is the best strategy.• Set Goals• Shake off the old myths• Avoid take LOANS• Spend less than you earn - its the secret to creating wealth.
  37. 37. Final Tips• Dont use money to make yourself feel good. Instead, do things that promote self-respect and creativity so you dont have to seek those feelings through spending money.• Dont let the fear of losing money, fear of failure, or fear of the unknown stop you from investing.• Learn from your money mistakes. Dont let them hobble you.
  38. 38. Thank You