uct # 1 d ro P l ia c n a in F g in T ax S av

“Self Leasing”

By G Sekar, B.Com, FCA — Chennai
Two executives approached a Chartered Accountant for their Tax and Financial Planning for the Financial Year 2012–2013 with the following details – Details of Income Salary and Taxable Allowances other than HRA HRA Housing Loan Availed Interest on Loan Position of the House Chapter VI Deduction – Section 80C Executive – 1(Rs.) 50,000 15,000 30,00,000 11% p.a Self-Occupied 1,00,000 Executive – 2(Rs.) 1,00,000 30,000 75,00,000 12% p.a Self-Occupied 1,00,000

On the basis of above his tax liability computed as follows – Details of Income Salary and Taxable Allowances other than HRA HRA (Being Self Occupied and no rental expenditure incurred – Fully Taxable) Income under the Head Salary Income under House Property – Loss Maximum Allowable Interest being Self Occupied restricted to Rs.1,50,000 Gross Total Income Less: Chapter VI Deduction Total Income Tax Payable Education Cess – 2% & Secondary and Higher Education Cess – 1% Total Tax Payable Executive – 1(Rs.) 6,00,000 1,80,000 7,80,000 (1,50,000) 6,30,000 (1,00,000) 5,30,000 36,000 1,080 37,080 Executive – 2(Rs.) 12,00,000 3,60,000 15,60,000 (1,50,000) 14,10,000 (1,00,000) 13,10,000 2,23,000 6,690 2,29,690

They approached you that their employers agree for any internal adjustments without any additional cash flow from him. In the above circumstances advice them how to reduce the tax liability. Tax Advice: For the above said client we can advice them to go for self-leasing. Self–Leasing: Self-Leasing means an employee who owns a Residential House Property can let-out the property to his employer by entering into a rental agreement with the Employer. The Employer shall pay rent to the employee for that house equivalent to the amount of HRA received.

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Tax Saving Financial Product # 1

In that case, his house property will be treated as letout property and the house property income will be calculated separately. The employer gives back the same house to the employee as Rent-Free Accommodation in-lieu of HRA. This will be taxable as perquisite Under Rule 3(1) of the Income Tax Rules, 1962. The taxable value of Rent Free Leased accommodation is the actual cost incurred by the employer or 15% of Salary whichever is lower. If the above concept is applied in-lieu of HRA, then the Taxable Total Income shall be worked out as follows – Revised Total Income Calculation Details of Income Salary and Taxable Allowances other than HRA Taxable Value of Rent Free Accommodation Least of the Following 15% of Salary Actual Expenditure Therefore, Income under the Head Salary Income from House Property: Rent Received (instead of HRA) Less: Municipal Taxes Paid Net Annual Value Less: Deduction u/s 24 (a) 30% of NAV (b) Interest on Loans – Full Interest being letout property Income / (Loss) from House Property Gross Total Income Less: Chapter VI Deduction Total Income Tax Payable on above Education Cess – 2% and Secondary and Higher Education Cess – 1% Total Tax Payable (Rounded Off) Tax Saving /Additional Cash Flow Executive – 1(Rs.) 6,00,000 Executive – 2(Rs.) 12,00,000

90,000 1,80,000 90,000 6,90,000 Therefore,

1,80,000 3,60,000 1,80,000 13,80,000

1,80,000 5,000 1,75,000 (52,500) (3,30,000) (2,07,500) 4,82,500 (1,00,000) 3,82,500 18,250 547.50 18,800 37,080 - 18,800 = 18,280

3,60,000 10,000 3,50,000 (1,05,000) (9,00,000) (6,55,000) 7,25,000 (1,00,000) 6,25,000 55,000 1,650 56,650 2,29,690 - 56,650 = 1,73,040

The above benefits can be achieved only in case of employer agree for Self-Leasing instead of HRA. The above scheme will be beneficial to an employee who has taxable HRA as well as Huge commitment of Interest on House Property Loan i.e Housing Loan Interest exceeds Rs.1,50,000. Before advising any client on self-leasing the tax consultant shall workout both the option and has to take decision. Where you can apply? Existing employee in Corporate Sector who are in high tax bracket as well as higher commitment to housing loan interest. In case of designing a Salary Structure of Directors of closely held Private Limited Companies. The above consultancy may be provided to your client by charging a reasonable fee. Don’t forget we are Chartered Accountants for the institute and a Charging Accountant to our client and nobody shall think our service as Charitable Accountant.

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