Mukesh Patel.in
practical tax & investment planning online
international tax expert / columnist / author / speaker

GOLDEN SECRETS OF TAX PLANNING!

Just light up bright lamps of tax saving for your family this Diwali, by understanding these simple basics!

In the words of the celebrated legal luminary and former Judge of the Supreme Court of India, Mr. Justice V.R. Krishna Iyer, “The citizen must pay his taxes but is entitled to plan his affairs to keep as much of his earnings as the policy of the law permits. This is neither avoidance nor evasion but prudence. Informed intelligence and honest fore-thought are virtues of a taxpayer.”

SIGNIFICANCE OF TAX PLANNING

In a tax system that taxes income and wealth at a flat rate, without providing for any exemptions, deductions or reliefs, ‘tax planning’ would be an alien term. The study of tax planning assumes significance in a tax system like ours which has graded rates of tax and which provides the taxpayer opportunity to avail of incentives in the nature of exemptions, deductions and reliefs.

The Indian taxpayer is indeed fortunate to be in an enviable tax system around the turn of the millennium. It is difficult to believe that some 35 years ago, he was required to live with a system of direct taxes, where the maximum rate of Income-tax was 97.5%, Wealth-tax 5%, Estate Duty 85% and Gift-tax 75%. That was the time, when the eminent Jurist Shri Nani Palkhiwala used to describe India as the ‘highest taxed nation in the world.’

Over the years, we have seen the total abolition of Estate Duty and Gift-tax and Wealth-tax being reduced to mere name sake. Current Indian Income-tax rates, both for personal and corporate taxation can be favourably compared with some of the most progressive economies of the world.

        Just consider some tax facts of the past nine years as highlighted hereunder:

  • In FY 2004-05, the basic Income-tax exemption limit was Rs.50,000 and taxable income exceeding Rs.1,50,000 attracted the maximum tax rate of 30%.

  • Today in FY 2013-14, the basic Income-tax exemption limit is Rs.2,00,000 and the maximum tax rate of 30% is attracted only if the taxable income exceeds Rs.10,00,000.

  • In FY 2004-05, the Income-tax payable on taxable income of Rs.10,00,000 was  Rs.3,07,428, on the basis of which the average rate of tax worked out to 30.74%.

  • Today in FY 2013-14, the Income-tax payable on the same taxable income of Rs.10,00,000 is Rs.1,33,900, resulting in an average tax rate of just 13.39%.  

  • Thus, during the past eight years, taxpayers earning taxable income of Rs.10,00,000 or more, have effectively enjoyed a tax relief of Rs.1,73,528.

Based on the two Golden Secrets of Tax Planning mentioned hereunder, it is today possible to achieve the goal of maximizing personal income and minimizing personal tax:

  • Share your income and lower your tax rate.

  • Avail of incentives and augment your tax savings.

As the following illustration will highlight, it is now possible for a family of an Individual, his Wife and his Hindu Undivided Family (HUF) to earn collectively taxable income of Rs.33,00,000 and end up paying income-tax of only Rs.4,01,700, at an average rate of just around 12.17%

Illustration:  Mr. TP, Mrs. TP and the HUF of TP plan to earn taxable income of Rs.11,00,000 in each case, totaling to Rs.33,00,000 in all.  They plan to make savings and allocations of Rs.1 lakh in each case and avail the benefit of deduction under Section 80C. On the taxable balance of Rs.10,00,000 in the three cases, as per the tax rates as effective for FY 2013-14, the Income-tax (including 3% Education Cess)  payable would be Rs.1,33,900 each, in the case of Mr. TP, Mrs. TP and HUF of TP. Thus the tax for the three would total to Rs.4,01,700 (Rs.1,33,900 + Rs.1,33,900 + Rs.1,33,900), at an average rate of just around 12.17%.

Even after allocating the resources of Rs.3,00,000 for deduction under Section 80C and the tax payment of Rs.4,01,700, the TP family would still enjoy a liquidity of Rs.25,98,300, giving them the freedom to spend more than Rs.2,16,525 per month, the way they like.

The above illustration has not taken into consideration other commonly availed deductions like payment of premium for medical insurance of upto Rs.15,000 under Section 80D, deduction of upto Rs.1,50,000 under Section 24 for payment of interest on housing loan, etc. The above illustration has also not taken into consideration the scope of earning additional incomes by way of PPF interest, dividends and long term capital gains from listed securities, which are totally exempt from income-tax under Section 10.  Moreover, if either Mr. TP or Mrs. TP is a salaried employee, he or she can plan to receive specified allowances and perquisites which are also tax exempt.

The above illustration merely goes to highlight that it is indeed possible to maintain high levels of income with low levels of tax, if imaginative tax and investment planning are resorted to.

 

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