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What are the steps involved in tax planning?

"The hardest thing in the World to understand is the income tax". This is a famous saying by Albert Einstein. How true this saying is if no attention is paid to one’s income tax. Last minute rush to file the income tax return. Purchasing of any insurance policy to save on tax just to avail the deductions under Section 80 C. This is the norm during this season. Any difficult tax begins with a single step and the best place to start is at the beginning. Break up income tax into simple steps and learn which income tax bracket you fall under .Remember a great journey starts with a simple step. Always know your income taxes. Just earning a salary and paying all of it in taxes means you earn nothing. There is a big difference between tax evasion and tax avoidance. Tax evasion is illegal and carries a severe penalty. Tax avoidance is learning how income tax is calculated and then availing deductions to save on your taxes. This is the essence of tax planning.

How does one calculate his income tax?

STEP 1 : Compute the gross total income (that could be from any or combination of the following sources)

  • Income from salary
  • Income from house or property one possesses
  • Profit from the transfer of a capital asset known as Capital Gains
  • Earnings and profits from a business or a profession
  • Income from other sources

STEP 2 : Compute the net taxable income – [i] after taking into account the exemptions provided by the Govt. for the above mentioned income sources and [ii] utilizing the following additional tax saving avenues provided by the Government.

  • Invest in various tax saving instruments mainly those under Section 80 C
  • Rajiv Gandhi Equity Saving Scheme
  • Rent paid for a residence (if one doesn’t have House Rent Allowance in his salary package)
  • Premium on health insurance
  • Expenditure incurred on a handicapped relative or a dependent
  • If one is suffering from a specific disease then the expenditure incurred can be deducted
  • Donation towards charitable causes

STEP 3 : Calculate the actual tax payable

(a) Individuals in India are classified under different income tax slabs based on their age and salary. If a male or female citizen of India is below 60 years of age he or she falls under the income tax slab shown. This rule also applies to a HUF (Hindu Undivided Family).

Annual Income Tax Rate
0- INR 2 Lakhs NIL
INR 2 Lakhs-INR 5 Lakhs 10%
INR 5 Lakhs - INR 10 Lakhs 20%
INR 10 Lakhs and above 30%

(b) If a male or a female is a senior citizen of India in an age group between 60-80 years of age he or she falls under an income tax slab as shown below.

Annual Income Tax Rate
0- INR 2 Lakhs NIL
INR 2 Lakhs-INR 5 Lakhs 10%
INR 5 Lakhs - INR 10 Lakhs 20%
INR 10 Lakhs and above 30%

(c) If a male or a female is a super senior citizen of India and falls under an age category greater than 80 years the income tax slab is shown below.

Annual Income Tax Rate
0- INR 5.0 Lakhs NIL
INR 5 Lakhs-INR 10 Lakhs 20%
INR 10 Lakhs and above 30%
  • Education cess is charged at 2% and higher education cess at an extra 1%.
  • A 10% surcharge for a year on income above a crore per annum in order to tax the super rich has been introduced. This one time surcharge is applicable for the assessment year 2014-2015.
  • The union budget 2013 introduced Section 87 A under which one gets a tax credit of INR 2,000 if one has an income up to 5 Lakhs. This rebate will be applicable only to the extent of one’s tax liability. If ones tax liability is INR 1,000 then only this amount will be credited and not INR 2,000.

Case Study for Tax Planning: If one has a net taxable income of INR 11 Lakhs in the financial year 2013-2014 and is of the age group below 60 years of age then the tax liability is computed as follows :

Heads % of Income Tax Income Tax
Up To INR 2 Lakhs NIL NIL
INR 2 Lakhs -INR 5 Lakhs 10% INR 30,000
INR 5 Lakhs - INR 10 Lakhs 20% INR 1,00,000
INR 10 Lakhs - INR 11 Lakhs 30% INR 30,000
Total INR 1,60,000
Educational Cess 3% of total tax INR 4,800
Net Tax Payable INR 1,64,800

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