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Project Report On Corporate Tax Plannin1 PDF
Project Report On Corporate Tax Plannin1 PDF
INTRODUCTION
What is Tax Planning?
Tax planning is an essential part of your financial planning. Efficient tax planning
enables you to reduce your tax liability to the minimum. This is done by
legitimately taking advantage of all tax exemptions, deductions rebates and
allowances while ensuring that your investments are in line with your long term
goals.
Tax Planning is NOT tax evasion. It involves sensible planning of your income
sources and investments. It is not tax evasion which is illegal under Indian laws.
Tax Planning is NOT just putting your money blindly into any 80C investments.
Tax Planning is NOT difficult. Tax Planning is easy. It can be practiced by everyone
and with a very little time commitment as long as one is organized with their
finances.
Remember to invest in the below products much before filing your income tax
returns (ITR forms). Also keep in mind that Direct Tax Code (DTC) might or might
not be implemented but don’t fret about it yet – just invest!
While the forced saving acts as a great tool for saving money for investors who
are not disciplined, the fact that investors withdraw the EPF corpus and waste it
away dampens the excitement around this avenue.
Life Insurance Policies
This is one of the most unsuitable, for lack of a better word, ways to save income
tax in India. For those who are caught in the investment cum insurance quagmire,
this will end up being for the easiest option. However, this is not desirable.
It does not make sense to buy Unit Linked Insurance Plans (ULIPs), endowment
plans, money back plans and other types of life insurance policies to save income
tax. These products don’t offer you more than inflation (ULIP might if you stay the
course of 10- 15 years). Term plans can of course and should be bought as they
are the right products for insurance.
While the premium you pay can be used for tax deduction under Section 80C and
while the income is tax free, DTC is mum about how this will change. My advice is
to avoid putting in money in the first 3 quarters of the year in insurance policies.
Remember to take the systematic investment planning route of ELSS while saving
for income tax. I need to caveat the fact that DTC is not very clear about whether
the contribution will continue to be accounted for Section 80C benefits. Wait and
watch.
Five year Bank Fixed Deposits
Bank deposits for 5 years can be used towards Section 80C tax deduction.
Currently, the interest that you can earn is easily a minimum of 9% per annum.
Keep in mind the fact that you still need to pay tax on the maturity value that you
receive after 5 years, so in that sense, your returns are lower then 9%.
Similarly, Senior Citizen Savings Scheme (SCSS) has become market linked and will
offer 9% per annum. Senior citizens (those above the age of 60) can invest a
maximum Rs 15 lakh in this with a 5 year locking with a payout which happens
every quarter. How I wish, this limit was increased.
If one wants to use tax planning with retirement planning, then pension plans
offered by insurance companies are also available as an option. Then there are
pension plans offered by mutual fund houses as well.
The complete list
The above mentioned smart ways to save income tax should be used in alignment
with your asset allocation. Depending on how much you want to save for the
future and your expectation of return, tax planning should be done by investing in
these products. Also note that apart from these, there are other sections that
should be used to save income tax.
Here is a quick listing of the various Sections available to save your income tax
this year.
80C –
Contribution to Unit Linked Insurance Scheme – ULIP (For self, spouse & children)
80D – Medi Claim Policy Premium (For self, spouse, children & dependent
parents)
80E - Payment of interest on loan taken for higher education for a full time course
The following allowances are fully taxable: dearness allowance, city compensatory
allowance, overtime allowance, servant allowance and lunch allowance.
House Rent Allowance (HRA): Hop over the House Rent Allowance article to
check on calculation and exemptions available.
Leave Travel Allowance (LTA): LTA accounts for expenses for travel when you and
your family go on leave. While this is paid to you, it is tax free twice in a block of 4
years.
Medical Allowance: Medical expenses to the extent of Rs 15,000/- per annum are
tax free. The bills can be incurred by you or your family.
Your employer will give you Form 16 which will contain all the earnings,
deductions and exemptions available.
The Annual Value can go through a standard deduction of 30% and if you reduce
the interest on borrowed capital, then you get the value which is charged under
the head income from house property.
Hop over to the Long Term and Short Term capital gains article to read more
about this. Might be worth reading to see how indexation is used in long term
capital gains scenario to reduce tax outgo.
For instance, you might be getting married and need to buy a house. In this
situation you need to get insurance to protect you spouse if they are financially
dependant upon you, as well as you need to get a home loan. What should you
prioritize and what do you have the capacity to afford? If you blindly put money
into an insurance policy, it might not even be sufficient to give you adequate
insurance cover. However, if you choose to pay off the principal on your home
loan, that could be a better option in this situation.
b. Do not blindly invest money with the first agent that you might come across.
You might end up making mistakes. A lot of people end up buying insurance
policies with minimal insurance coverage or putting money in instruments where
they cannot access the money when they need it.
c. Do not make last minute decisions just because your payroll department has
reminded you that the internal deadline for submitting proofs is approaching. Tax
planning involves planning in advance to avoid the last minute scramble.
Liquidity: How quickly will you need the money? Will you need to access the
money within the next year or two years or over what duration?
None of the above instruments let you withdraw your money quickly, in fact there
is a minimum three year lock in for all tax saving investments.
Risk and Return: How much risk do you want to take? There is a trade off
between the two, some instruments are very low risk, but as a result they give
low returns which are capped.
Inflation protection: The instruments that give you a low return typically are the
worst type of investments regarding inflation. This is important because many of
the instruments give you a fixed rate of interest, and lock in your money for a long
period. This is not a good protection against inflation.
Tax Exemption: All tax saving investments under Section 80C are alike in one
respect that they are tax exempt when they are invested. But they differ with
respect to the tax on the income you earn from such an investment as well as the
tax on the maturity of the investment.
He had to deposit the amount within three months or face a penalty. The HMRC
was aware that Shankar had deposited money in a bank account in India, the
amount he had received from selling a house in Chennai in 2008, the same year
that he received British citizenship.
Such shockers are not uncommon when one is either working in a different
country or holds accounts there. Here are five things you should know before you
emigrate or shift temporarily for work.
Global income in your tax return
Governments often demand tax on the global incomes of foreign residents living
in their country on a long-term basis. Says Marnix van Rij, partner at Ernst &
Young Belastingadviseurs LLP: "This is set to become more commonplace as
governments across the globe, strapped for revenue following the economic
crisis, are increasingly exchanging information on tax matters. This is a bid to curb
evasion and track money kept in low tax jurisdictions."
They are also increasing their focus on high net worth individuals as well as
heightening surveillance of accounts held in foreign countries to crack down on
financing of terrorism.
Countries such as the US, the UK and Australia now require immigrants who
become permanent residents or citizens to report their incomes from all global
sources and pay tax accordingly. Temporary residents are not required to declare
their global incomes in these countries, but they have to ensure that taxes are
paid in the home country. India also requires its residents to pay tax on any
income earned overseas, if they ordinarily pay tax in India.
Permanent residents in the US also have to report inheritances and gifts received
in India, though there is no tax liability on such gains either in India or the US.
Conversely, if you are only a temporary resident in these nations, you will have to
continue paying taxes in India on the income earned here. You will also have to
comply with all the reporting requirements under the Indian tax laws, such as
filing the annual information report if a property transaction exceeds Rs 30 lakh.
You won't need to declare this income in the country where you are residing
temporarily.
So, if you have spent more than 182 days in a country, such as India, the UK or
Singapore, during a financial year, or more than 729 days in the previous seven
financial years, you will have to pay income tax in that country. This means that if
you emigrate mid-year, you will pay income tax in India as well as file returns at
the end of the year.
In case, you are a temporary resident of a country, say, the UK, you will pay tax
only on the income you earn in the UK till you become a permanent resident or
citizen, says Kaushik Mukherjee, executive director at PricewaterhouseCoopers.
Once you are a citizen, you will be taxed on your global income. In the US, foreign
residents are taxed as American citizens if they have either acquired a green card
or clear the substantial presence test. This test is far more stringent than the
residency rules that apply in India and the UK.
If, however, taxes paid in India are lower than that required to be paid in the
country where the NRI is residing, additional tax will have to be paid. Before you
claim foreign tax credit, ensure that you have all the relevant documents as proof.
The change will mean that a person will have to pay tax in India if he spends 60
days in the country during a financial year, or 365 days or more in the previous
four financial years.
Checklist for an Emigrant
Retain the tax residency certificate from the host country to avoid double
taxation.
Maintain the income and tax documents of both countries to claim foreign tax
credit.
If you plan to work abroad for a few years and return to India eventually, file
income tax returns in India in the case of incomes from property, equity or other
securities and bank deposits.
Keep your passport handy as tax officials may ask for it to check your residential
status.