How fringe benefits can help you save tax

Is there a way your employer can help you in saving tax on fringe benefits that you get? If yes, then how can you go about it?

How can you save tax using house rent allowance, interest and principal paid on your home loan and letting out property that you own?

In a chat with readers on April 23, Get Ahead tax expert Mahesh Padmanabhan answered these and many more queries related to tax claims on home loans, HRA benefits, capital gains tax and how to plan and invest your money in 2008-09?

For those of you who missed the chat, here is the transcript.

---

DK asked, can i take advantage on Home loan as well as Rent

Mahesh Padmanabhan answers, You can take the benefit of HRA as well as home loan if you are actually staying in a rented premises. However, you would need to note that if your owned house is in the same city then you need to have strong reason to be staying in a rented premises. Employment requirement is one such reason. If your stay in a rented premise is merely to meet your convenience then such reason would not hold good.

---

pramod sahoo asked, Sir, i m a central govt employee. This year my salary will be around 5.5 lakh. How can i be able to save tax besides the maximum limit of 1 lakh savings. Can I gift some amount to any relatives and get benefited from it. I want to make part payment of my home loan, is it the right decision taking into account i m in the 20% income tax bracket.

Mahesh Padmanabhan answers, Gifting does not entitle the donor to any tax deduction. In case you you have your section 80C investment quota of Rs. 1 Lakh covered then you may not be specifically be eligible to any additional deduction for the part payment of home loan. But considering the rising interest rates, it make sense financially to pre-pay atleast some portion of your loan.

---

ak asked, There is a article on Rediff to pay Zero Tax on Rs. 13.10 Lac income by creating an HUF. Can you please provide some details on this and if this is really workable option for salaried class?

Mahesh Padmanabhan answers, HUF can be created by any hindu family. It works as a separate taxable entity and hence if you are in the maximum tax bracket then it might make sense to push some income into the HUF. Having said this you need to note that it is not as easy as it is made out. The principal contribution has to be managed well as it might otherwise be clubbed with your own income. You would need a detailed counseling session with your tax consultant before you go about creating a HUF.

---

sanjeev asked, I WORKING IN JAIPUR [Images], i am staying with my parent alonr AND MY FAMILY STAYING IN Mumbai in the house taken by me on Rent, i am paying rent of Rs 10000 pm by cheque and agreement is there. can i take benefit of HRA exemption for this house?

Mahesh Padmanabhan answers, Though your question is unclear, based on my understanding, i am answering the query. In case you are staying in your parent's house in Jaipur and paying rent to your father then such payment qualifies for HRA deduction. However, if you are referring to the rented house in Mumbai for your family while you are staying in Jaipur on account of your employment then you would not be eligible for any deduction for the Mumbai rented house.

---

Samrat asked, Hi there ... I have 50K that I got as bonus and can invest right now. I am not too adventurous and would like to invest in a safe plan even though the returns are not very high. Lock in pd max of 5 year, what plan shud be best for me and how much return do I expect?

Mahesh Padmanabhan answers, In case you are risk averse, then you should either go for term deposits with banks or in MF FMPs. However, as your investment horizon is 5 years, you could also look at diversified equity MFs.

---

KKA asked, Hello Mahesh, Good Afternoon!! I am currently residing in a rented house and am now planning to buy a flat. I would not be moving into the new flat that i'm buying and would be renting it out. I wanted to know if i can claim tax excemption on home loan for the new flat plus claim HRA for the current residing house.

Mahesh Padmanabhan answers, If you are actually renting out the new house then you would be eligible to claim the entire amount of home loan interest as deduction in addition to the standard deduction of 30%. Moreover, if you are actually staying in a rented house then you could claim HRA deduction also.

---

PKK asked, WHILE SUBMITTING ITR2, PLEASE CLARIFY THAT SHOULD WE FILL UP THE INTEREST RECEIVED IN PPF ACCOUNT IN "SCHEDULE EI" ?

Mahesh Padmanabhan answers, The interest credited for the year as mentioned in your PPF passbook would need to be mentioned here. Please note that this is exempt from tax and appears only as a disclosure.

---

Gopi asked, Hello Mahesh,I would like to purchase a land for constructing a house.Could you please tell me whether can I get tax saving either in purchase or in construction or both

Mahesh Padmanabhan answers, You would get the home loan benefit for the construction of the house. But in case of interest on loan for purchase of land you would not get any deduction.

---

u asked, hello my income is 144000yearhow i t6ax save?

Mahesh Padmanabhan answers, Your income is below the taxable limit and hence you do not need to save from the perspective of reducing tax. However, from the perspective of general investing you could opt for any of the available investment options such as PPF, NSC, Term deposits, Mutual Funds etc.

---

avinash asked, hello sie i want the information about different types of funds or schemes useful for tax saving plz reply me?

Mahesh Padmanabhan answers, Tax saving MFs are more popularly known as Equity Linked Savings Scheme (ELSS) MFs. You would need to check for a fund which is eleigible for such tax deduction. eg. of such funds are SBI [Get Quote] Magnum Taxgain Fund, HDFC [Get Quote] Tax Saver Fund, Birla Sunlife Tax relief Fund.

---

SUNIL asked, I AM A SALARIED PERSON. I'VE JUST BOOKED A FLAT WHICH IS UNDER CONSTRUCTION AND I'VE TAKEN A HOUSING LOAN OF RS. 27,50,000/-. I WILL GET POSSESSION OF THE IN JANUARY, 2010. PRESENTLY I AM STAYING IN A RENTED FLAT. CAN I GET INCOME TAX REBATE ON BOTH RENT AND EMI AND INTEREST OF HOUSING LOAN.

Mahesh Padmanabhan answers, As you are staying in a rented premise, you can claim the benefit of HRA deduction but in case of the property that you have purchased, as the same is under construction you can claim the home loan benefit only after the construction is completed.

---

sameer asked, I want to purchase a commercial property by taking loan from my relative. I am also planning to pay my relative an interest . Will this interest paid qualify for tax deduction under interest on housing loan section?

Mahesh Padmanabhan answers, You would get the benefit of such interest paid to your relative. However, to be very clear, you would be advised to have strong documentation. Which means that you would need to execute an agreement for the loan with the terms of repayment and interest clearly mentioned therein.

---

krnmeena asked, i m goverment sarvant. My income sources are sahre trading, salary, and mutual fund divident. in finacial year, my short term gain is negative in share trading if my total income (1).from salary:160000 (2).from share:-5000 (3).divident:1000. (4).Interast:300. (5). my saving is 18000 under 80c. than what is my total taxable income? what ITR from i should fill for tax return. thanks.

Mahesh Padmanabhan answers, In case these details pertain to financial year 2007-08 then as your taxable income is in excess of Rs. 1.1 lakhs, you would be needed to file your returns in ITR-2. In case this is for the FY 2008-09, then as your taxable income is below the taxable income of Rs. 1.5 lakhs, you would not be needed to file your returns.

---

Prasad_js asked, Hello Sir, This is JS Prasad working in Mumbai. I am getting CTC of 10 lacs (I ma new to Mumbai - so I am not sure where to buy property to save tax on Home loans). Want to know details on Investments. Also I need to know about the tax advantages under section 80 G as I am planning to donate some money to a organisation which is recognized. Thanks.

Mahesh Padmanabhan answers, Though you would get tax breaks for investing in home using a loan, you would need to note that the current property rates are actually overvalued and might come down in the coming few months. Hence it would be wise not to go in for such investment option as of now. In case of deduction on account of donations, you would need to note that only some specified donations qualify for 100% deduction but for most it would be 50% of the amount donated. In some cases there is a restriction of such deduction to the extent of 10% of adjusted gross total income.

---

Ajay asked, Good Afternoon Mahesh, Hope you are doing Great!!! What is the maximum amount per annum non-taxable for LEAVE TRAVEL ASSISTANCE and MEDCIAL ALLOWANCE?

Mahesh Padmanabhan answers, There is no specific tax limitation for LTA apart from the frequency restriction of once in 2 years or twice in a block of 3 years. This would however, be subject to the salary structure defined by your employer. In case of deduction of reimbursement of medical expenses the limitation is Rs. 15,000 per annum.

---

ansar asked, Hollo Sir Pls define fringe benifit tax andt tax burden in the hands of employee.

Mahesh Padmanabhan answers, FBT (excepting on ESOPs) is theoretically the liability of the employer. However, in many cases the employer incorporates FBT liable expense reimbursement component into the salary structure of employees to facilitate lower tax to the employee. In such case, the employer might mark this amount as a cost and include it into the CTC of the employee.

---

agpandey asked, sir is there any benefit in purchasing agricultural land from tax point of view

Mahesh Padmanabhan answers, Agricultural income per se is not taxable. Otherwise there is no specific deduction available for purchase of agricultural land.

---

Brijesh asked, Hi, What is the procedure for filing e-returns?

Mahesh Padmanabhan answers, You could visit the income tax site www.incometaxindiaefiling.gov.in and download the excel utility files for completion and then uploading.

---

Rajesh asked, What would be the upper limit for considering the Interest Amount on Housing Loan when House is Let out?

Mahesh Padmanabhan answers, There is no upper limit for deduction of housing loan interest when the property is let out.

---

nd asked, sir, can the loss against one share be settled against the profit of another while calculating short term capital gain?

Mahesh Padmanabhan answers, Yes it can be adjusted against the profit on sale of other shares.

---

Mahesh Padmanabhan says, Dear friends, it is time for us to sign off. We thank you for your participation and hope to back to answer more queries next time. Team RelaxwithTax

 

6 Top Income Tax Fallacies Disproved

Death and taxes are inevitable: no wonder one tries delaying both as much as possible. But more significant are the misconceptions that people harbour about some key aspects of tax

 

Every year, Mohit Gupta promises me that the next time around, he will file his income tax returns much before the last day. Of course, when it actually comes to it, my office has to start calling Gupta from early July to remind him of his pending returns. It then gets into a last-minute rush featuring papers to be searched for, the shock of finding a higher tax to be paid and, to make matters easier, some papers missing.  Over the last 25 years that I have been in the profession, not a year has passed by when some client or the other has not rushed in at the last hour to get his tax returns filed. Gupta is not a case in isolation. They all solemnly promise that it will not happen the next year, but I am yet to witness a last day of filing when my office does not resemble a wholesale market buzzing with people with files, folders and the works waiting for their turn. The faint of heart would baulk at filing over 250 returns on the last day, as we did this year. And, though my office staff had the schoolboy-like excitement to manage it all,  I was a little uneasy till it got over. I got unnerved at the thought of “what if we are unable to file them all?” and the problems my clients would face afterwards.  While the real personal income tax action heats up in March, I face the impact of it in July. Despite discussions on salary structures, tax optimisation and efficient tax management, I still get to interact with many people with very serious doubts. The most common question I face is: why should I file any return when my employer has already deducted TDS and issued the Form 16 to me? Such innocent questions make me sympathise with people’s inability to understand the most common aspects of their personal taxation duties. For instance, technology, in the past two years, has emerged as a great leveller. Since the assessment year 2007-08, one can file the returns and taxes online. Terrifyingly long queues at special collection counters are now passe, though some still prefer the manual procedure out of sheer habit. With initiatives by the government and organisations, filing will be done more from home in the future. In the first year of e-filing, I found the system was slow with issues related to digital signatures and associated costs. But many people are now finding this system convenient to file returns at the last hour. After all, the deadline is no longer 5 pm: it’s at midnight.  But more than the tax filing process, on the last day I encounter tax payers’ doubts and misconceptions. Many of them feel cheated that their assumptions about post-tax incomes were inaccurate. Some even start doubting their negotiation skills. There are others who get disenchanted with the taxation system and start assuming that my job is to create wealth out of nowhere for them. I can only optimise tax payments for an individual. Beyond this, the individual needs to increase his or her income. I will take you through some common myths and misconceptions harboured by people I came across in July this year.  1. Valuation of perquisites.  Despite the clear guidelines and explanatory notes that I share with high-income clients, they realise rather late that their actual income and what they had fought tooth and nail for during salary negotiations, are far apart.  For instance, Rajesh Kumar, an employee with a growing consulting firm in Gurgaon, negotiated a package of Rs 24 lakh with his employers. Within the package he opted for the rent-free accommodation of Rs 3.06 lakh, which was deducted from the salary package leaving his cash annual salary at Rs 20.94 lakh. This Rs 3.06 lakh was added to his cash salary as a perquisite to calculate the taxable income. On this basis, the total tax liability of Rajesh worked out to Rs 7.24 lakh. Rajesh said he could get a better accommodation for the amount charged by his company. When I suggested he change his option to receiving of HRA and rent a house, he disagreed.  When I calculated and showed his tax liability, from the HRA plus rent route, he fell off his chair. The tax saving was close to Rs 33,000 and he could move to an accommodation of his choice closer to his workplace, thus saving on conveyance and time. The switching, however, may not make much sense if the accommodation outside was more expensive than the perk’s value. Similarly, Niranjan Jha got a cash salary of Rs 22 lakh and a perk value of Rs 3 lakh for interest-free home loan. In his case, too, it would have made more sense to take the total amount as salary and rather raise a housing loan from an institution. When we got down to calculating by exercising the second option he could have saved as much as Rs 84,975 in income tax in one year and not feel obligated to his employer. 2. Multiple employments in an assessment year.  These days job-hopping is common. Even a few extra thousand rupees are tempting. For salaried employees, invariably when they change employment during a financial year, both or all the employers allow them the basic exemptions. This leads to a higher tax liability and even penalties for not paying advance tax.  This happens because of non-disclosure of details of previous income. To avoid unnecessary interest and penalty it is very important to make proper disclosures or pay advance tax. After all, why burden payment at one go, when it can be staggered through the year. 3. Interest from bank deposits.  Regardless of the balance in the savings account in a bank, some amount of interest will always accrue in the account. Since there is no basic exemption for the interest earned, one needs to pay some amount as tax on this earning from interest.  At the last minute, most assessees have to pay some amount as tax on interest income. To avoid this, one can always estimate the income on this account and ask the employer to deduct some extra tax to cover the earning or pay advance tax. 4. Repayment of home loan.  Most taxpayers believe that the deduction related to interest and repayment of principal housing loan is applicable to only one house.  It is true as far as the interest part on a self-occupied property is concerned, but for repayment of principal amount all housing loans will qualify for deduction within of course, the overall limit of Rs 1 lakh. If the other property is rented, then, of course, the entire amount of interest on loan for that property also qualifies for deduction.  5. Capital loss.  Again, most taxpayers know that they can set off the loss under the head of capital gain against the profits under the same head. But if the net result was a capital loss, many did not make it a point to disclose and carry it forward to subsequent years. If the loss is not disclosed and carried forward, next year it will not be available for setting off.  6. Mandatory disclosures.  Hardly anyone is aware of certain mandatory disclosures required to be made by assessees while filing the return. The most common are credit card payments in excess of Rs 2 lakh in a year, purchase or sale of a property worth Rs 30 lakh or more. Its also common and unintentional for taxpayers to withhold information; something that can get anyone in trouble with the IT department. My only advice to all tax payers: do not take it as your accountant’s duty to file your returns. It is important for you to be involved with your tax filing. Make use of the accountants to make taxes work for you and understand what you are paying for and why.

 

About tax-saving funds and SIPs

If the title of this article surprises you, we won’t hold it against you. It’s not common to find tax-planning being discussed this early in the financial year. Then again, good advice isn’t commonly available either.

we have consistently maintained that tax-planning is as much about contributing to your financial goals as it is about saving taxes. So, it shouldn’t be treated as just another activity to be taken care of in a rushed manner, at the end of the financial year. Due thought and time must be accorded to tax-planning. Hence, the need to commence the process early in the financial year.

More specifically on tax-saving funds (also referred to as Equity Linked Savings Schemes – ELSS), let’s discuss what a tax-saving fund is and find out if it differs from a regular equity fund? A tax-saving fund is an equity fund that enables the investor to claim tax benefits under Section 80C of the Income Tax Act; the amount invested is eligible for deduction from gross total income, subject to an upper limit of Rs 100,000 in a financial year. Another distinguishing feature is that unlike conventional equity funds, investments in tax-saving funds are subject to a 3-Yr lock-in. While most tend to frown at this provision, it should be welcomed. Investments in equities should be made over the long-term and the lock-in promotes the same.

Of course, being market-linked, tax-saving funds are high risk-high return investment propositions. Hence, you need to take into account your risk appetite before getting invested. This will help you determine what portion of your tax-planning portfolio (if at all) should be assigned to tax-saving funds. Typically, a risk-taking investor would hold a larger portion of his portfolio in market-linked avenues like tax-saving funds and vice-versa.

·  Click here to rank tax-saving funds

Now for the part about starting off with a systematic investment plan (SIP). An SIP can help you benefit from rupee cost averaging. Simply put, a staggered investment in a tax-saving fund (running over the financial year) is likely to be exposed to market ups and downs. And by investing a fixed sum of money at regular time intervals, you stand to benefit from the downturns by way of higher number of units and a reduced average purchase cost. Also an SIP is lighter on the wallet as opposed to a lump sum investment. Hence, our view that now is as good a time as any to start off with an SIP in a tax-saving fund.

Having discussed the investment proposition offered by tax-saving funds, now let’s discuss a strategy for selecting a tax-saving fund.

1. The fund house should pass muster
We believe that a fund house should make the grade before any of its funds can be considered for investment purpose. In other words, before considering a tax-saving fund, you must scrutinise the fund house on various parameters. For instance, the fund house must be strong on investment processes and philosophy. It should pursue a process-driven investment style (as opposed to one led by a star fund manager). Then, the fund house should have an unblemished track record of having adhered to the investment mandates of its offerings at all times.

2. Opt for a flexible investment mandate
Avoid investing in tax-saving funds that have restrictive investment mandates. For instance, some tax-saving funds are positioned as mid and small cap offerings. Such funds may find themselves in a rather unenviable situation, if the mid/small cap segment hits a rough patch and large cap stocks emerge as the season’s flavour.

3. Seek diversification
It is not entirely uncommon to find a fund house’s tax-saving fund, offering the same investment proposition as the flagship equity fund from the fund house. In other words, the only differentiating factors are the tax benefits and the 3-Yr lock-in. For the sake of diversification, avoid duplication in your portfolio. Look for a tax-saving fund that has a character of its own, distinct from that of other funds in the portfolio.

4. Evaluate the fund’s performance
Evaluate the fund’s performance on the returns front over longer time frames (at least 3 years). Find out how the fund has fared vis-à-vis its benchmark index and peers. The fund’s showing over prolonged downturns should be studied as the same is an indicator of its true mettle.

Of course, there’s much more to a fund’s performance than just returns. Its performance on risk parameters like volatility control and risk-adjusted return must also be studied. Then, the fund should have adhered to its stated investment mandate at all times.

In conclusion – if your risk appetite permits investing in a tax-saving fund, now is the time to scout for one and start off an SIP.

 

Is tax-planning on your 'to do' list?

Here’s a thought – when it comes to investing in the normal course, investors are willing to spend time, evaluate various options and meticulously plan the entire process. But when it comes to tax-planning, handling it in a rushed manner towards the end of the financial year is an acceptable proposition. While investing can be a sporadic activity, tax-planning is an annual exercise and hence can have far greater implications on one’s finances. Finally, when investments are made in designated avenues for the purpose of tax-planning, they deliver dual benefits i.e. reduce the tax liability and generate optimum returns.

Despite the obvious benefits that tax-planning offers, the apathy displayed by some investors towards it is rather surprising. Perhaps these investors continue to look at tax-planning as just another annual obligation that must be fulfilled. As a result, they haven’t fully understood the benefits that the tax-planning exercise can deliver.

Investors would do well to appreciate that tax-planning forms an integral part of their financial planning. Hence, an adequate amount of time and effort must be devoted towards the exercise.

Speaking of time, it’s important that investors commence the tax-planning activity well in advance; waiting for the last moment is certainly passé. This will give them the opportunity to thoroughly evaluate various options. And with the half-way mark of the financial year approaching, we believe it is high time investors got started.

Another popular reason for investors shying away from the tax-planning exercise is that it is perceived as being too complicated. Nothing could be farther from the truth. With good advice (read the services of a competent investment advisor) and time on hand, tax-planning is not half as difficult as it is made out to be.

For example, while tax-planning can assume many forms (i.e. Section 80D, Section 24(b)), Section 80C is the key section for the purpose of claiming tax sops because of the breadth of options it offers. Investments (like Public Provident Fund (PPF), National Savings Certificate (NSC), tax-saving fixed deposits and tax-saving mutual funds, among others) and contributions (like life insurance premium and repayment of principal on a home loan, among others) of upto Rs 100,000 per annum are eligible for deduction from gross total income. All investors need to do is follow some simple steps and the tax-planning exercise can be easily sorted out.

·  Tax-planning: The ‘small savings’ way

To begin with, investors must find out how much (based on their incomes) they need to contribute towards the Section 80C kitty. Tax-advisors and chartered accountants can aid investors on this front.

Once the investment amount is known, the next step is to get a check on the ongoing investments and contributions that are eligible for tax benefits. For instance, if one has availed of a home loan, he needs to find out (from the housing finance company), what his annual contribution towards the principal repayment will be. This is important since the EMI (equated monthly installment) consists of both the principal and the interest components. The interest component is eligible for tax benefits under a different section.

Then the premium payments on existing life insurance policies must be taken into account. For salaried individuals, contributions to EPF (Employees’ Provident Fund) should be factored in; the employer will be best equipped to provide information about this. Finally, investment avenues like PPF wherein annual contributions are mandatory should also be considered. Once the investor gets a fix on the above, he will be unambiguously aware of the additional sum to be invested/contributed towards Section 80C.

Principles of financial planning like asset allocation and investing in line with one’s risk profile should kick in at this stage. For instance, risk-averse investors should ensure that a greater portion of their tax-planning portfolio is held in assured return schemes like PPF, NSC and tax-saving bonds. Conversely, risk-taking investors can have a portfolio skewed in favour of market-linked avenues like tax-saving mutual funds (also known as equity-linked saving schemes - ELSS) and unit linked insurance plans (ULIPs).

The tax-planning exercise can also throw up some ancillary benefits. For instance, it offers the opportunity to take a hard look at one’s portfolio. This might throw up some interesting observations - say the lack of or an inadequate insurance cover, or a portfolio skewed in favour of assured return schemes in a risk-taking investor’s portfolio.

As mentioned earlier, the tax-planning exercise is not half as difficult or dreary as it is made out to be. All one needs to do is be methodical, seek advice and the rest will fall into place. Finally, that it can significantly contribute to one’s finances, should be reason enough to get started at the earliest.