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    Why is proper tax planning important

    May 6th, 2010 by
  • Let us see how proper tax planning can actually save you money. Ram and Shyam were two salaried employees, both with an annual compensation package of around Rs 7.5 lakh. Ram received the complete compensation in the following manner:

    • Basic salary – Rs 4,00,000
    • HRA – Rs 3,00,000
    • Employer’s contribution to PF – Rs 48,000
    • Total compensation – Rs 7,48,000

    Shyam’s compensation was structured in the following way:

    • Basic salary – Rs 4,15,200
    • HRA – Rs 1,80,000
    • Transport allowance – Rs 18,000
    • Medical reimbursement – Rs 15,000
    • Lunch coupons – Rs 72,000
    • Employer’s contribution to PF – Rs 49,824
    • Total compensation – Rs 7,50,024

    Ram stayed in a rented house and paid a rent of Rs 14,000 p.m. His HRA deduction can be calculated as under:

    • Actual HRA received – Rs 3,00,000
    • Amount by which rent paid exceeds 1/10th of salary – Rs 1,28,000
    • 50% of the salary – Rs 2,00,000
    • The lowest of the three figures (Rs 1,28,000) is allowed as a deduction.

    Ram’s taxable income was as follows:

    • Compensation – Rs 7,48,000
    • Less HRA deduction – Rs 1,28,000
    • Less employer’s PF contribution – Rs 48,000
    • Less employee’s PF contribution – Rs 48,000
    • Net taxable income – Rs 5,24,000
    As a result, Ram’s tax liability was as follows:
    Slabs (Rs) Income (Rs) Tax Rate (%) Tax Liability (Rs)
    Up to 1,50,000 p.a. 1,50,000 Nil 0
    1,50,001 – 3,00,000 p.a. 1,50,000 10 15,000
    3,00,001 – 5,00,000 p.a. 2,00,000 20 40,000
    Above 5,00,000 p.a. 24,000 30 7,200
    Total 5,24,000 62,200
    Education cess @ 3% 1,866
    Total tax payable 64,066

    Now, let us consider the case of Shyam. From his income Shyam had invested Rs 50,176 in an ELSS scheme of a mutual fund. He had also taken a home loan on which he was paying an interest of Rs 1.8 lakh per annum. He was staying in a rented house for which he was paying a rent of Rs 14,000 p.m. His HRA deduction can be calculated as under:

    • Actual HRA received – Rs 1,80,000
    • Amount by which rent paid exceeds 1/10th of salary – Rs 1,26,480
    • 50% of the salary – Rs 2,07,600
    • The lowest of the three figures (Rs 1,26,480) is allowed as a deduction.

    Shyam’s taxable income was as follows:

    • Compensation – Rs 7,50,024
    • Less HRA deduction – Rs 1,26,480
    • Less transport allowance – Rs 9,600
    • Less medical reimbursement against bills – Rs 15,000
    • Less lunch coupons – Rs 72,000
    • Less employer’s contribution to PF – Rs 49,824
    • Less employee’s contribution to PF – Rs 49,824
    • Less investment in ELSS – Rs 50,176
    • Less interest paid on home loan – Rs 1,50,000
    • Net taxable income – Rs 2,27,120
    As a result, Shyam’s tax liability was as follows:
    Slabs (Rs) Income (Rs) Tax Rate (%) Tax Liability (Rs)
    Up to 1,50,000 p.a. 1,50,000 Nil 0
    1,50,001 – 3,00,000 p.a. 77,000 10 7,712
    Total 2,27,000 7,712
    Education cess @ 3% 2,314
    Total tax payable 10,026

    As you can see, Shyam managed to save Rs. 54,040 due to salary optimisation and intelligent investments.

    Published on May 6, 2010 · Filed under: Income Tax Tips; Tagged as: , , ,
    1 Comment

One Response to “Why is proper tax planning important”

  1. sanjay jagdale said on

    we want tax benifit salary structure
    CTC -2400000

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