TAX MANAGEMENT

What is Tax?
A tax (from the Latin taxo; "rate") is a financial charge or other levy imposed upon a
taxpayer (an individual or legal entity) by a state or the functional equivalent of a state
such that failure to pay is punishable by law. Taxes are also imposed by
many administrative divisions. Taxes consist of direct or indirect taxes and may be paid
in money or as its labour equivalent.
According to Black's Law Dictionary, a tax is a "pecuniary burden laid upon individuals
or property owners to support the government [...] a payment exacted by legislative
authority." It "is not a voluntary payment or donation, but an enforced contribution,
exacted pursuant to legislative authority" and is "any contribution imposed by
government [...] whether under the name of toll, tribute, tallage, gabel, impost, duty,
custom, excise, subsidy, aid, supply, or other name."
[1]


Purpose:-
Money provided by taxation has been used by states and their functional equivalents throughout history
to carry out many functions. Some of these include expenditures on war, the enforcement
of law and public order, protection of property, economic infrastructure (roads, legal tender, enforcement
of contracts, etc.), public works, social engineering, subsidies, and the operation of government itself.
Governments also use taxes to fund welfare and public services. A portion of taxes also go to pay off the
state's debt and the interest this debt accumulates. These services can include education systems, health
care systems, pensions for the elderly, unemployment benefits, and public
transportation.Energy, water and waste management systems are also common public utilities. Colonial
and modernizing states have also used cash taxes to draw or force reluctant subsistence producers into
cash economies.
Governments use different kinds of taxes and vary the tax rates. This is done to distribute the tax burden
among individuals or classes of the population involved in taxable activities, such as business, or to
redistribute resources between individuals or classes in the population. Historically, the nobility were
supported by taxes on the poor; modern social security systems are intended to support the poor, the
disabled, or the retired by taxes on those who are still working. In addition, taxes are applied to fund
foreign aid and military ventures, to influence the macroeconomic performance of the economy (the
government's strategy for doing this is called its fiscal policy; see also tax exemption), or to modify
patterns of consumption or employment within an economy, by making some classes of transaction more
or less attractive.
A nation's tax system is often a reflection of its communal values and/or the values of those in power. To
create a system of taxation.


What is tax management?

Every assessee liable to pay tax needs to manage his or her taxes. Tax
management relates to management of finances for payment of tax,
assessing of advance tax./ liability to pay tax on time.
Tax management is related with the operational aspect of payment of tax.
Tax Management means doing planning, organizing, directing, coordinating
and controlling taxation affairs aimed to improve efficiency. The
improvement of efficiency will in turn increase the companys profit. Thus
Tax planning is part of Tax Management.
Gives you the ability to tax / not tax certain services or customer accounts. This flexible
system also gives you the ability to handle different structures in different ways for
example: 80% exempt from city tax on water; 30% exempt from city tax on gas.

Tax Management includes:-

1) Filling of Returns

2) Tax Planning
a) Individual
b) Corporate




1) Filling of Returns

What is filling of returns?

Filing of Income Tax Return is compulsory if the taxable income exceeds the
basic exemption limit even if the tax
payable is nil or refundable.

As per the Sec 139 of Income Tax Act

Every person,-
(a) Being a company; or

(b) being a person other than a company, if his total income or the total income of
any other person in respect of which he is assessable under this Act during the
previous year exceeded the maximum amount which is not chargeable to
income-tax, shall, on or before the due date, furnish a return of his income or the
income of such other person during the previous year, in the prescribed form and
verified in the prescribed manner and setting forth such
other particulars as may be prescribed.



2) Who has to file the Income Tax Return?

For the Financial Year 2009-10, following persons are required to file their return
of Income Tax :

a. Individuals having taxable income exceeding Rs.1,60,000 per annum.

b. Women having taxable income exceeding Rs.1,90,000 per annum

.
c. Senior Citizens having taxable income exceeding Rs.2,40,000 per annum



3) What happens if I have paid the Income Tax but did not file the Return?

Taxpayers must file their tax returns and pay on time. Each year, a minority of taxpayers
fail to do so.
To ensure fair administration of taxes, those who fail to comply with their filing and
payment obligations will be penalised.
IRAS may take the following recovery actions, if you do not file the Income Tax Return
(Form P1) and the OriginalAudited/Certified Statement of Accounts to the Comptroller
of Income Tax by 15 Apr:
Issue an estimated Notice of Assessment (You will have to pay the tax amount based
on IRAS' estimated Notice of Assessment within 30 days)
Impose a penalty for not filing
Summon you to attend Court
Issue a Warrant of Arrest
Take legal actions
TAX PLANNING
Tax planning is one of the most important aspects of personal finance. People often fail to look at tax
planning objectively and straight away start making investments related to tax saving. Also they
often tend to mix tax planning and investment planning, which are totally different and are made with
varying objective.

ase of the career for most of the professionals, and therefore is the right time to start saving for the
future. The investments made during this phase should have a long-term investment horizon.
Starting to save and investing for retirement will give an edge if started at early age because of
power of compounding.

Investing in a mix of ELSS and pension-related schemes like EPF, NPS or EPF is a good option for
professionals of this age group. By doing so, they ensure that they plan for their retirement from an
early age. It also provides the advantage of providing equity exposure to their retirement fund.

It is also advisable for the professionals of this age group to get required life insurance cover and
health insurance cover. They can take the advantage of low premium rates if they start during this
age. Avoid falling in the trap of endowment plans and unit linked insurance plans.

31-36

During this phase, most of the professionals can generally take advantage of avenues of tax savings
other than investments. Contribution to provident fund by self and employer, required life insurance
cover for self and family form the major portion of 80C. Tuition fee of the children can also be
claimed under the same section.

The average age of an Indian home buyer is 30. Most of the professionals in this age group can take
advantage of tax savings related to a home loan. They can claim the principal repayment under
section 80C and interest repayment under section 24B. For couples who are both liable to pay tax, it
is advisable to take the home loan on a joint account.

It is also advisable to take required health insurance cover for self and family which would account
for section 80D.

For professionals who can still make investments under 80C, they should chalk out the goals they
want to achieve and their respective timelines, before making any tax related investments. Then
based on their risk appetite and time horizon, they can invest in relevant tax saving investments.
Avoid over doing tax-saving investments.

36-45

Non-investment related tax savings will play a major role in tax planning even during this phase.
Principal repayment on existing home loan, employer and self-contribution for PF, tuition fee of
children and life insurance cover for self and family, account for more than 1 lakh under section 80C.
So professionals in this age group need not make any investments for tax saving. In case they have
an option to invest in 80C they can opt for investments pertaining to retirement. They can even claim
the interest repayment of home loan under section 24B and health insurance premium being paid for
self and family under section 80D.

This is also time for the professionals to undo the past mistakes they had made regarding tax
savings. They should assess all their existing tax saving investments and assess the pros and cons
of holding them. It is also important that they avoid over doing tax saving investments. They should
assess all their expenditures and identify the expenses which are eligible for tax savings. This gives
them a fair bit of idea whether they have to make investments or not.

46-60

This is generally the peak earnings phase of the professionals. Most of them try to pay off their
existing debts and channelize their income towards savings for retirement. The same factors of
home loan, tuition fee and PF account for majority of the tax savings. Most of the professionals do
not opt for health insurance other than the one provided by their organisations. But getting a health
insurance at age 60, or after retirement, is an uphill task. Most of the service providers have a cut-off
age of 60. So if have not got a health insurance by now, get one. This can be claimed under section
80D.

The cut-off age for opening a PPF account is also 60. If they do not have a PPF account by now, it is
advisable to start one, as 60 years is the cut-off for opening a PPF account. In case, they have to
make investments, they can choose any of the debt products related to retirement. Avoid buying
excessive insurance or tax-saving investments.

60+

Capital protection should be the motto of the investments being made after retirement. All
investments should be in debt. Retired employees looking for timely pay outs (monthly or quarterly)
can consider investing in senior citizen saving schemes (SCSS). Since SCSS is backed by
government, it provides high security for your capital which is essential for post-retirement
investments.

TAX SAVINGS FOR DIFFERENT TAX SLABS

2-5 lakh

With raising inflation, saving money is getting difficult for the professionals who fit in this income
slab. Because of lack of knowledge about different tax-saving options, some professionals commit
the mistake of making 80C investments even when it is not necessary.

They have to make sure that they deduct HRA and contribution to PF from the taxable income
before calculating their tax liability. This gives an assessment of savings they can make under
section 80C. The tax savings made by investing in 80C is directly proportional to the tax slab. The
maximum amount these professionals can save by making tax saving investments under 80C
is Rs. 10,000. Considering the liquidity issues associated with tax saving investments, it is really
important that these professionals should prioritise between the goals they want to achieve and tax
savings.

6- 10 lakh

The professionals in this salary bracket should try to maximize the benefits they receive from tax-
saving avenues other than 80C. The maximum tax saving they receive under 80C is Rs. 20,000.
Buying a home, especially if both the spouses are liable to tax, is a good option. This gives an
additional option to claim the interest rate paid on home loan under section 24B up to a maximum
amount of Rs. 1.5 lakh.

Above 10 lakh

The professionals in this tax bracket can enjoy a tax benefit up to Rs.30,000 by making the tax
saving investments which account for section 80C. The tax-planning strategy of such professionals
revolves around making use of tax saving options to cut short their income tax rate from 30-20 per
cent or 10 per cent. Taking a home loan if planning to buy a home, can be one of those options.
TAX PLANNING FOR INDIVIDUALS:-
1) Utilise the entire Section 80C deduction
Under Section 80C, the maximum deduction available is Rs 100,000 pa. Ideally,
salaried individuals whose gross total income is equal to or more than Rs 250,000
should utilise the entire Rs 100,000 limit.
Consider the case of an individual whose taxable income is Rs 600,000 and who only
utilises half of the available Rs 100,000 limit. He would end up paying an additional tax
of Rs 15,450 as opposed to an individual with the same taxable income, but has utilised
the entire limit.
Also, at times, individuals make investments of over Rs 100,000 in Section 80C
designated avenues, since they fail to understand that the benefits are capped. For
example, despite making investments of Rs 70,000 in Public Provident Fund and Rs
40,000 in ELSS, the amount eligible is only Rs 100,000.
Following investments/contributions qualify for Section 80C deductions,
Public Provident Fund
National Saving Certificate
Accrued interest on National Saving Certificate
Life Insurance Premium
Tuition fees paid for children's education (maximum 2 children)
Principal component of home loan repayment
Equity Linked Savings Schemes (ELSS)
5-Year fixed deposits with banks and Post Office
. Think beyond Section 80C
For salaried individuals whose gross total income exceeds Rs 250,000 pa,
deductions under Section 80C may not be sufficient to reduce the overall tax
liability. In such cases they can consider the following:
Home loan: Individuals intending to buy a house should consider opting for a
home loan. Interest payments of upto Rs 150,000 pa are eligible for deduction
under Section 24.
Medical insurance: An individual who pays medical insurance premium for
self or spouse/dependent children is allowed a deduction of upto Rs 15,000 pa
under section 80D.
An additional deduction of up to Rs 15,000 pa is allowed for premium payment
made for parents. In case the parents are senior citizens, then the maximum
deduction allowed is Rs 20,000 per year.
Donations: Subject to the stated limits, donations to specified
funds/institutions are eligible for tax benefits under Section 80G.
Salaried individuals who plan to pursue higher education should avail of an
education loan as the entire interest is eligible for deduction under Section 80E.
The loan can be for self, spouse or child from an approved charitable institution
or a notified financial institution.
3. Restructure the salary
Restructuring the salary and including certain components can go a long way in
reducing the tax liability. Unlike eligible investments which lead to an additional
cash outflow, restructuring the salary is a more 'efficient' means of claiming tax
benefits. The following can form a part of one's salary structure:
ood coupons like Sodexo and Ticket Restaurant; they are exempt from tax up to Rs
60,000 per year.
Medical expenses which are reimbursed by the employer are exempt up to Rs 15,000
per year.
Individuals living in a rented accommodation should have House Rent Allowance
(HRA) as part of their salary.
Transport allowance is exempt upto Rs 800 per month.
Leave Travel Allowance (LTA) can be claimed twice in a block of four years for
domestic travel.
4. Claim tax benefits on house rent paid
Salaried individuals can claim rent paid by them for residential accommodation,
if HRA doesn't form part of their salary. This deduction is available under Section
80GG and is least of the following:
25% of the total income or,
Rs 2,000 per month or,
Excess of rent paid over 10% of total income
Please note that the above deduction will be denied if the taxpayer or his spouse
or minor child owns a residential accommodation in the location where the
taxpayer resides or performs his office duties.
5. Opt for a joint home loan
As discussed earlier, the principal repayment on a home loan is eligible for a
deduction of up to Rs 100,000 pa and the interest paid is eligible for a deduction
of up to Rs 150,000 per year.
In cases where the home loan is for a substantial sum, it is not uncommon for the
interest and principal repayment to exceed the stated limit. To ensure that the tax
benefit is optimally utilised, an individual can consider opting for a joint loan
with his spouse or parent or sibling.
This will ensure that both the co-owners can claim tax deductions in the
proportion of their holding in the loan. The co-owner falling in the higher tax
bracket should hold a higher proportion of home loan to ensure that the tax
benefits are maximised.

As can be seen in the table above, making use of the available tax deductions can
go a long way in helping individuals accumulate wealth. Consider the case of an
individual in the highest tax bracket with a gross total income of Rs 600,000.


If he chooses to ignore the tax sops available under Section 80C, his tax liability
will amount to Rs 87,550. Conversely, if he chooses to makes eligible
investments/contributions of Rs 100,000 under Section 80C, his tax liability will
be Rs 56,650 i.e. a saving of Rs 30,900.
The amount saved in turn can be invested in various avenues like fixed deposits,
mutual funds and equities, depending on his risk appetite.
Given that the tax-planning exercise can aid salaried individuals to both save on
tax and accumulate wealth, they would do well to offer the exercise the
importance that it deserves.
Individuals for Men & Women (Below 60 years) and
HUF
Net income
range
Income-tax rates
Upto Rs. 2,00,000 Nil
Rs. 2,00,000 -
5,00,000
Rs. 10% of (total income minus Rs. 2,00,000)
Less : Maximum tax rebate of Rs. 2000/- for
individuals having total income upto 5 lakh.
Rs. 5,00,000 - Rs.
10,00,000
Rs. 30,000 + 20% of (total income minus Rs.
5,00,000)
Above Rs.
10,00,000
Rs. 1,30,000 + 30% of (total income minus
Rs.10,00,000)
Surcharge - 10% of the Income Tax, where total taxable income is more than Rs. 1 crore.
Education cess - 2% of income-tax.
Secondary and higher education cess - 1% of income-tax. Total Cess = 3% of Income-Tax.

Senior Citizens (Age 60 or above but below 80 years)
Individual resident who is 60 years or more at any time during the previous year but not
more than 80 years on the last day of the previous year (i.e. born during 1st April, 1934 and
31st March, 1954)
Net income range /
Income Slabs
Income-tax rates
Upto Rs. 2,50,000 Nil
Rs. 250,000 - 5,00,000
Rs. 10% of (total income minus Rs.
2,00,000)
Rs. 5,00,000 - Rs.
10,00,000
Rs. 25,000 + 20% of (total income minus
Rs. 5,00,000)
Above Rs. 10,00,000
Rs. 1,25,000 + 30% of (total income
minus Rs.10,00,000)
Surcharge - 10% of the Income Tax, where total taxable income is more than Rs. 1 crore.
Education cess - 2% of income-tax.
Secondary and higher education cess - 1% of income-tax. Total Cess = 3% of Income-Tax.

Super Senior Citizens (Age 80 or above)
Individual resident who is 80 years or more at any time during the previous year (i.e. born
before 1st April, 1934)
Net income range /
Income Slabs
Income-tax rates
Upto Rs. 500,000 Nil
Rs. 5,00,000 - Rs.
10,00,000
20% of (total income minus Rs.
5,00,000)
Above Rs. 10,00,000
Rs. 1,00,000 + 30% of (total income
minus Rs.10,00,000)
Surcharge - 10% of the Income Tax, where total taxable income is more than Rs. 1 crore.
Education cess - 2% of income-tax.
Secondary and higher education cess - 1% of income-tax. Total Cess = 3% of Income-Tax.
Top
Association of Persons (AOP) and Body of
Individuals(BOI)
Net income range /
Income Slabs
Income-tax rates
Upto Rs. 200,000 Nil
Rs. 2,00,000 - 5,00,000
Rs. 10% of (total income minus Rs.
2,00,000)
Rs. 5,00,000 - Rs.
10,00,000
Rs. 30,000 + 20% of (total income minus
Rs. 5,00,000)
Above Rs. 10,00,000
Rs. 1,30,000 + 30% of (total income
minus Rs.10,00,000)
Surcharge - 10% of the Income Tax, where total taxable income is more than Rs. 1 crore.
Education cess - 2% of income-tax.
Secondary and higher education cess - 1% of income-tax. Total Cess = 3% of Income-Tax.

Cooperative Societies
Net income range /
Income Slabs
Income-tax rates
Upto Rs. 10,000 10% of the income
Rs. 10,000 - Rs. 20,000
Rs. 1000 + 20% of (total income minus
Rs. 10,000)
Above Rs. 20,000
Rs. 3,000 + 30% of (total income
minus Rs.20,000)
Surcharge - 10% of the Income Tax, where total taxable income is more than Rs. 1 crore.
Education cess - 2% of income-tax.
Secondary and higher education cess - 1% of income-tax. Total Cess = 3% of Income-Tax.

Firm
Income-tax: 30% of total income.
Surcharge - 10% of the Income Tax, where total taxable income is more than Rs. 1 crore.
Education cess - 2% of income-tax.
Secondary and higher education cess - 1% of income-tax. Total Cess = 3% of Income-Tax.

Local Authority
Income-tax: 30% of total income.
Surcharge - 10% of the Income Tax, where total taxable income is more than Rs. 1 crore.
Education cess - 2% of income-tax.
Secondary and higher education cess - 1% of income-tax. Total Cess = 3% of Income-Tax.
Top
Domestic Company
Income-tax: 30% of total income.


Surcharge: The amount of income tax as computed in accordance with above rates, and after being
reduced by the amount of tax rebate shall be increased by a
>> surcharge at the rate of 5% of such income tax, provided that the total income exceeds Rs. 1 crore.
>> surcharge at the rate of 10% of such income tax, provided that the total income exceeds Rs. 10 crore.
Education cess - 2% of income-tax.
Secondary and higher education cess - 1% of income-tax. Total Cess = 3% of Income-Tax.

Company other than a Domestic Company
Income-tax:


@ 50% of on so much of the total income as consist of (a) royalties received from Government or an
Indian concern in pursuance of an agreement made by it with the Government or the Indian concern
after the 31st day of March, 1961 but before the 1st day of April, 1976; or (b) fees for rendering
technical services received from Government or an Indian concern in pursuance of an agreement made
by it with the Government or the Indian concern after the 29th day of February, 1964 but before the 1st
day of April, 1976, and where such agreement has, in either case, been approved by the Central
Government.
@ 40% of the balance

Surcharge: The amount of income tax as computed in accordance with above rates, and after being
reduced by the amount of tax rebate shall be increased by a
>> surcharge at the rate of 2% of such income tax, provided that the total income exceeds Rs. 1 crore.
>> surcharge at the rate of 5% of such income tax, provided that the total income exceeds Rs. 10 crore.
Education cess - 2% of income-tax.
Secondary and higher education cess - 1% of income-tax. Total Cess = 3% of Income-Tax.