Saturday, December 29, 2007

Article published in

By Subha

The Sunday siesta got disturbed when my friend dropped in and fired a salvo – “What’s common between me, Anil Ambani and Shah Rukh Khan?”

I almost blurted ‘age’ but that would have been a little rude so I tried “olive oil…?”

“Hell! We are in the same tax slab – income tax”, he retorted. I responded with a polite laugh and that fuelled him into “Yes, it’s a cruel joke. Anyone who earns above Rs. 2.5 lakhs per annum pays 30%. I just got a pay hike of 7K p.m. and a month’s pay as bonus – that means I pay around Rs.35000 – the entire bonus as tax. Imagine even a small time businessman gets away – so much depreciation, incidental expenses. My boss is saving 30% on my salary – it is an expense.”

He would have gone all till I could see 30% everywhere so I interrupted – “But you have insurance, housing loan, children’s education expenses – I pay only around 6K in tax. Surely……”

“For you lady folks it’s a big advantage. Anyway, you have Ashok’s salary too. I’m the sole earning member.”

All this outburst pushed me into taking a closer look at income tax. This is usually reserved for eleventh hour in February or March when we try to frantically pull up our socks and try to save something to ward off the taxman. Come June-July we try to play the pompous upright honest tax-payer, left of course, with hardly any alternative. “Thin chance to avoid (read evade) in salary”, my husband had remarked once, dryly.

I gathered from my friend, some tips in planning (this annual exercise is more complicated than Five-Year Plans) and preparing (mentally at least) to part with our hard-earned money.

· Familiarise yourself a little with your tax rules – you don’t need God to help you there. Just check out some good websites/books.

· Start as early as Nov-December (earlier the better even if it is at the cost of some domestic peace) to work out actual liability. It gives time to save something and invest in tax saving instruments like bonds or deposits, if necessary.

· It’s true that in order to save Rs. 1000 on tax paid you have to invest 1000 x 100 / (your slab %), which is locked up for 5 years if deposited in banks or at least for 3 to 5 years in most Unit Linked Insurance Policies (ULIPs). If you are looking for security plus savings, the traditional insurance policy may be attractive.

· If your office/employer regularly torments by deducting tax (TDS) monthly you may not feel the pinch. Else better start keeping a sum apart every month so that you need not lament at the 12th hour.

· In respect of income from house property where house is let out interest on loan is deductible without any limit. In case of self occupied property it is limited to Rs.30000/-. But if the property was acquired or constructed with capital borrowed on or after the 1.04.1999 and the acquisition or construction was completed within three years from the end of the financial year in which capital was borrowed the limit is Rs 150000/-. “Of course if you have two or more houses, you can choose any one them, the most favourable to you to be self-occupied”, my friend counselled. “ This is hardly beneficial to me, I’m squeezing the maximum for my EMI my flat”.

My friend spoke at length about the Fringe Benefit Tax or the FBT - some of it was beyond me, but I gathered that you need to look at the structure of your salary and also whether your employer is deducting FBT correctly. Further, FBT is a presumptive tax and actual expenses or reimbursement in respect of the list of expenses which attract FBT, is immaterial. The liability to pay the same is on the employer. Reimbursement of medical expenses upto Rs 15000/- per annum is not taxable in most cases and also does not attract FBT. Children education allowance upto Rs.100/- per month and children hostel expenditure upto Rs.300/- per month is not taxable. Statutory payments like Group Personal Accident, Workman Compensation Insurance, payment to approved gratuity fund or provident fund are also out of FBT. So you need to watch out for expenses like telephone expenses borne by the employer, use of club facilities, gifts given by employer, scholarships given to children (of employee), entertainment expenses, hotel boarding and lodging. You can see the complete list under the relevant section in Chapter XIIH of Income Tax Act.

My father-in-law had a question for him regarding gifts and capital gains arising out of sale of land. Much to my chagrin, our ignorance came in full view, for we contended that since my father-in-law was a senior citizen and he was not even a pensioner he could get away by transferring some amount to my mother-in-law’s account or take refuge in Section 80C [Total taxable gains worked out to Rs 3.1 lakhs]. Apparently Long Term Capital Gains are taxed separately at a flat rate of 20% irrespective of other taxable income. In respect of individuals (including the nebulous entity of HUF), where total taxable income as reduced by Long term capital gain (that is without adding LTCG) is below basic exemption limit, the shortfall can be used to reduce the taxable Long Term Capital Gains and only balance is subject to the flat rate of 20%. The only two ways to save on tax on LTCG in this case would be to either invest in bonds of National Highways Authority of India or Rural Electrification Corporation Limited. Another option is to deposit in Capital Gains Account in notified banks and invest in residential property within 3 years from the date of transfer.

The sermon went on thus - If he were to transfer the amount to his wife, say to a bank account or some investments, income arising from such transfers would be clubbed with his income. Section 64 (1)(iv) essentially provides for clubbing of income of spouse unless it is attributable to some technical or professional qualification. He cited an interesting case of R. Dalmia v. CIT [1982] 133 ITR 169 (Delhi) wherein the High Court had held a wife could make savings out of household expenses received from the husband and the income arising from investment of such savings would be separate property and should not be clubbed.

Though tax law usually does not provide anything which can be music to our ears, my friend managed to cull out one. Gifts received from certain specified relatives as per Section 56(2)(v) will not be considered as income and taxed in the hands of the recipient. The limit of Rs.50000 in aggregate does not operate in this case and it is only for non-relatives. If this amount exceeds by even one rupee, the entire amount becomes taxable when it comes to non-relatives. As recipient is liable in case of gifts, better be cautious of who is giving and how much he is gifting. Of course, gifts in kind are out of purview.

Going back to my friend’s contention of being in the same boat as high profile millionaires, I felt he was slightly off the mark because income above Rs.10 lakhs carries a 10% surcharge on tax. But yet, he has a point given the fact that disposable income in the hands of the individual presents a picture in contrast to his tax slab. A gentleman with income of say Rs. 3 lakhs will have Rs 2.5 lakhs after taxes (assuming there are no savings) while another with 4 times his income will have Rs. 8.8 lakhs after tax and as we go higher the effective rate of tax increases by less than 0.25%. That doesn’t seem to be a really progressive tax. While relief to working women and senior citizens is welcome, we do need some rationalization in the limits. In recent years there has been just minimal tinkering with the basic exemption, the upper limit of Rs 2.5 lakhs has not been changed. Thus those with income upto say Rs 5 lakh will get hardly any relief. As always the too poor and very rich are insulated from these changes. It is the middle bracket which is taxed more. We need to look for tax structure which will be fairer and really progressive in terms of the assessee’s capacity to bear. After all income tax is a direct tax and more specifically it is the salaried class that lives from one payday to the other, which records maximum compliance.

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