Tax Planning

TAX PLANNING 2008

• TAX EVASION

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• TAX AVOIDANCE • TAX PLANNING

TAX PLANNING • Take advantage of tax provisions and tax incentives • Tax incentives are investment oriented • Build a long term corpus. • All facts reported to Tax authorities • No bogus transactions or make believe devices to circumvent legal provisions.

Example of tax planning • Arun gets a salary of Rs. 25000 pm, Long term capital gains on sale of shares of Rs. 20000 pa and interest from Bank Fixed deposits of Rs. 50000/-. He contributes Rs. 36000 pa to PF, Rs. 10000 to Insurance Premium. Rs. 1200 is paid as Profession tax. What would be his tax liability? (AY 2008-09)

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1.Salary Income 25000 x 12 Less: PT Net salary income Add: Income from other sources Gross income Less: Deduction U/s.80 C Taxable Income Income tax (AY 2008-09) 2. Capital gains LT 20000 Tax @ 10% 3. Total tax payable A+B

Rs. 300000 1200 298800 50000 348800 46000 302800 A 39840 B

2000 41840

To Save or Not • Funds available after tax planning • Funds available without tax planning. Depends upon the assessee’s life stage and his commitments.

II. Maintaining a zero tax status by investing in Fixed Income securities. • Pay No tax or reduce overall tax liability • Invest in Tax free bonds, PPF, PF and other fixed income securities. • Suppose Arun can invest only in 11% taxable debentures, or 7% Tax free RBI Bonds, or 8% PPF, or 9% Bank FDRs. • You are given Rs. 500000 to invest.

Investing Rs. 5 lacs Investment Income a.7% Tax free Bonds 445000 31150 b.8% PPF 55000 4400 500000 35550 The entire amount of 35550 is tax exempt. Sec.10 Post tax return = 7.11% By investing in PPF, the taxable income will reduce to Rs. 302800-55000=247800. Tax liability = Rs. 29340

III Tax planning thru Long term capital gains • Long term CG attract 10% tax without indexation benefit and 20% tax with indexation. • Short term capital gains taxed at 30% + surcharge. • Sell shares after a holding period of 12 months.

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• Arun purchases 100 equity shares of EID parry on 1st july 1999 at Rs. 300/share, and an expense of Rs.1000 and sells them for Rs. 750/share on May 2002. = 30000 x (447/389)= 34470 • Indexed cost of share Add Indexed cost of expense= 1000 x (447/389) = 1150 75000 • Sale value 750x100 35620 • Less cost of acquisition 39380 • Long term capital gain 7876 • Capital gains tax @ 20% II. Sale value Less Cost of acquition (CG) 44000 Capital gains tax @ 10% without indexation 4400 Choose the method without indexation and pay 4400 as tax.

Tax planning through Growth stocks • What are growth stocks • Invest with a long time horizon • Loan money to wife, children at market rates. • Wife, children invest in growth stocks • Recover interest from sale proceeds • The net balance left becomes the property of wife, children etc.

In 2003, Arun gets a Bonus of Rs. 1 lacs which he loans to wife, and two minor children @ 10% simple interest p.a.and the amount is used to invest in growth stocks which grows @ 20 pa.compounded

Wife Son daugther Value of stock in 2003 50000 25000 25000 2013 value (compounded20%) 309580 154795 154795 Less and Interest repaid 100000 50000 50000 Net value in 2013 209580 104795 104795

Tax planning for family • • • •

Create HUF Number of assessment files Separate account of gifts received Make gifts before wedding to would be spouse, or daugher in law • Gift to members of HUF • Gift to minor children so that income is received after attaining majority. • Exchange assets with spouses.

A comprehensive example I. Gupta living in surat earns the following monthly income: • Basic Rs. 15000, HRA Rs.3000, Travel reimbursement Rs. 2000. He lives in a flat owned by his wife and pays rent to his wife Rs. 5000. PF deducted 10% of basic, Mrs. Gupta pays Rs. 7500 as Municipal taxes. • Gupta’s take home pay: Salary income(15000+3000-1500) 18000 II. Gupta purchases a flat in his name with a loan of Rs. 500000 from his employer @ 6%pa repayable in 20 years. Annual instalment Rs. 25000 and the interest paid for the year Rs.30000. Gupta rents out the property for Rs. 7500 pm, pays Rs. 15000 as Municipal taxes

. • Gupta’s income from House property: • Annual value (Rs.7500 x 12) =90000 Less Municipal taxes = 7500 Net Annual value =82500 Less: 30% standard dedn. =24750 Less: Interest on loan =30000 27750

Contd. • Gupta’s requires Rs. 15000 for household expenses. Mrs. Gupta’s Bank deposits of Rs. 10.00 lac earn 8% pa. • Gupta opens a PPF account in his minor son’s name and deposits Rs. 25000. • Gifts totalling Rs. 100000 received by his son were invested in 500 shares of L&T @200/ share in 1997. The company issues bonus shares 1:1 in 1998. The son sells the shares @ Rs. 500/share in 2003 when he is 20 years old. • Sale value (1000 x 500) 500000 Less cost of acquisition 200 x 500 100000 Capital gains without indexation 400000 Less: Tax @ 10% 40000 Post tax proceeds 360000 By the time son became a major, a corpus of Rs. 3.6 lacs created

Total Picture • Gupta’s Income (AY 2008-09) Salary ((15000+3000) x 12)) Less exempted HRA Gross 180000 Less: 80 C deduction (PF) Salary income II. Income from house property Annual value Less; MT 15000 75000 Less: 30% std dedn. 21500 Less: Interest on loan 30000 Taxable Income 186750 Tax thereon (4000+7350)

216000 36000 18000 162000 A 90000

51750

24750 B 11350

Mrs. Gupta’s income • Income from House property Annual value ( 5000 x 12) 60000 Less MT 7500 52500 Less: 30% std dedn. 15750 36750 Income from other sources: Int. on Bank FDR 80000 TOTAL 116750 Fully exempted from tax.

Son’s income • The investment sold in 2003 amounting to Rs. 3.60 lacs invested in RBI tax free bonds would have grown to Rs. 4.90 lacs.(4 years) • In PY 2007-08, this would fetch a tax free income of Rs. 39200.