TAX PLANNING BOOK

Tax planning made Simple for FY 2020-21 & FY 2021-22 (based on the budget announcements) Volume 1

Old Regime & New Regime Some changes in income tax have been introduced during the current financial year (Assessment year 2021-22) which continues without many changes during the next financial year also.The changes are: i. The tax payers are given two options for selecting the income tax rates: one with usual deductions under normal rates and another without deductions at a lower rate (115 BAC rate). ii. If a person opts for 115BAC lower tax rates, he cannot claim the normal deductions available like house rent allowance, 80-C deductions, 80-D deduction for health insurance, 80G deduction for donations to approved institutions etc. It is advisable to opt for the existing normal tax rates instead of opting lower tax rates without normal deductions, if you are looking at long term savings. iii. Capital gains from sale of listed equity shares are taxable at lower rates. iv. Tax rates for capital gains (i.e. 10% for STT paid long term capital gains and 15% for STT paid short term capital gains) will apply irrespective of the options exercised or the quantum of capital gains. v. Dividend income which was exempt in individual's hands is now included in computing the total income and taxed at normal tax rates. 1

Comparison between Existing & 115BAC rates Existing rates: Individuals Age below 60 years Net Income Range Rate of tax Up to Rs. 2,50,000 Nil Rs. 2,50,000 to Rs. 5,00,000 5% Rs. 5,00,000 to Rs. 10,00,000 20% Above Rs. 10,00,000 30% Senior Citizen (who is 60 years or more at any time during the previous year) Net Income Range Rate of tax Up to Rs. 3,00,000 Nil Rs. 3,00,000 to Rs. 5,00,000 5% Rs. 5,00,000 to Rs. 10,00,000 20% Above Rs. 10,00,000 30% Super Senior Citizen (who is 80 years or more at any time during the previous year) Net Income Range Rate of tax Up to Rs. 5,00,000 Nil Rs. 5,00,000 to Rs. 10,00,000 20% Above Rs. 10,00,000 30% 2

Comparison between Existing & 115BAC rates Existing rates: Surcharge : Surcharge is levied on the amount of income-tax at following rates if total income of an assessee exceeds specified limits:- Rs. 50 Lakhs to Rs. 1 Crore 10% Rs. 1 Crore to Rs. 2 Crores 15% Rs. 2 Crores to Rs. 5 Crores 25% Rs. 5 crores to Rs. 10 Crores 37% Exceeding Rs. 10 Crores 37% Health and Education Cess : Health and Education Cess is levied at the rate of 4% on the amount of income-tax plus surcharge. Note: A resident individual (whose net income does not exceed Rs. 5,00,000) can avail rebate under section 87A. It is deductible from income-tax before calculating education cess. The amount of rebate is 100 per cent of income-tax or Rs. 12,500, whichever is less. 3

Comparison between Existing & 115BAC rates Special tax Rate (115BAC) for Individual and HUFs The Finance Act, 2020, has provided an option to Individuals and HUF for payment of taxes at the following reduced rates from Assessment Year 2021-22 and onwards: Total Income (Rs) Rate Total Income (Rs) Rate Up to 2,50,000 Nil From 10,00,001 to 12,50,000 20% From 2,50,001 to 5,00,000 5% From 12,50,001 to 15,00,000 25% From 5,00,001 to 7,50,000 10% Above 15,00,000 30% From 7,50,001 to 10,00,000 15% Surcharge : Surcharge is levied on the amount of income-tax at following rates if total income of an assessee exceeds specified limits:- Rs. 50 Lakhs to Rs. 1 Crore 10% Rs. 1 Crore to Rs. 2 Crores 15% Rs. 2 Crores to Rs. 5 Crores 25% Rs. 5 crores to Rs. 10 Crores 37% Exceeding Rs. 10 Crores 37% Health and Education Cess : Health and Education Cess is levied at the rate of 4% on the amount of income-tax plus surcharge. 4

Comparison between Existing & 115BAC rates Special tax Rate (115BAC) for Individual and HUFs Note 1: A resident individual (whose net income does not exceed Rs. 5,00,000) can avail rebate under section 87A. It is deductible from income-tax before calculating education cess. The amount of rebate is 100 per cent of income-tax or Rs. 12,500, whichever is less. Note 2: The option to pay tax at lower rates shall be available only if the total income of assessee is computed without claiming specified exemptions or deductions. To simply put, if your Deductions/ Exemptions in a year exceeds Rs. 2.50 Lakhs, you may stick to old regime. New regime would be suitable for some sections of people such as younger generation who lives along with parents/ own a house and does not have any need for claiming HRA / Home Loan. Also, it might suit some senior citizens who do not get the benefit of standard deduction and does not invest in Bank Deposits to get the benefit of 80TTB. 5

Tax Rate Reconer on different types of Income at different income levels (Applicable rate + Cess + Surcharge) Income Normal Dividend STCG LTCG rate upto Rs.2,50,000 - - -- Rs.2,50,000 - Rs.5,00,000 - - -- Rs.5,00,000 - Rs.10,00,000 20.80 20.80 15.60 10.40 Rs.5,00,000 - Rs.750000 (115 BAC) 10.40 10.40 10.40 10.40 Rs.750000 - Rs.10,00,000 (115 BAC) 15.60 15.60 15.60 10.40 Rs.10,00,000 - Rs.12,50,000 (115 BAC) 20.80 20.80 15.60 10.40 Rs.12,50,000 - Rs.15,00,000 (115 BAC) 26.00 26.00 15.60 10.40 Rs.10 lacs to Rs.50 lacs 31.20 31.20 15.60 10.40 Rs.50 lacs to Rs.1 crore 34.32 34.32 17.16 11.44 Rs.1 crore to Rs.2 crores 35.88 35.88 17.94 11.96 Rs.2 crores to Rs.5 crores 39.00 35.88 19.50 13.00 Rs.5 crores and above 42.74 35.88 21.37 14.25 6

Tax Tips (A) For income earners of less than Rs.5 lakhs: Ÿ Download your 26AS statement from the income tax portal and check for anyTDS or other information. Ÿ The basic income tax exemption limit is retained at Rs.2.50 lakhs only and the tax payable in respect of income up to Rs.5.00 lakhs is given by way of rebate under section 87A of the Act. Ÿ Therefore, you should file the return promptly and claim the rebate under section 87A. Ÿ If tax has been deducted at source and reflected in your 26AS statement, the amount so deducted will also be refunded. 7

Tax Tips (B) For income earners earning between Rs.5 lakhs and Rs.7.5 lakhs: Ÿ Download your 26AS statement from the website of income tax department. Ÿ Verify the details given in your 26AS statements before filing the income tax return. Ÿ Opt for conversion of your HRA into employers direct investment into NPS scheme (if possible). Ÿ Save a minimum of 10% your income towards term insurance, health insurance and NPS (5% towards term and health insurance; 5% towards NPS is ideal). This will enable you to reduce your taxable income to Rs.5 lakhs and avail the 87A rebate. Ÿ File your income tax return promptly and claim 87A rebate. The rebate is available only if you file your return. Ÿ New rates (115BAC rate) are prescribed for persons who cannot save or plan their future and not for others. 115 BAC rates are optional and not beneficial to persons who plan for future. 8

Tax Tips (C) For income earners of more than Rs.7.5 lakhs Ÿ Download your 26AS statement from the website of income tax department. Ÿ Verify the details given in your 26AS statements before filing the income tax return. Convert your HRA into employers direct investment into NPS scheme (if possible). Ÿ Save a minimum of 10% your income towards term insurance, health insurance and NPS Surplus can be used for MF ELSS investment or equity share investment. MF ELSS will take care of your balance 80C requirements. Ÿ Equity share investments can give you capital appreciation with lower tax rates. Another reason is, dividend income is taxable at normal rates. 9

Tax Tips (D) For income earners of more than Rs.10 lakhs up to 15 lakhs and even above: Ÿ Download your 26AS statement from the website of income tax department. Ÿ Verify the details given in your 26AS statements before filing the income tax return. Your marginal tax rate is 31.2% which can tempt you to opt for new 115 BAC rates. Ÿ When you opt for new 115 BAC optional rates, most of the allowances and Chapter VIA benefits will not be available. 115 BAC rates are prescribed for persons who cannot save or plan their future and not for others. 115 BAC rates are optional and not beneficial to persons who plan for future. Ÿ Opt for conversion of your HRA into employers direct investment into NPS scheme (if possible) Ÿ Save a minimum of 10% your income towards term insurance, health insurance and NPS Surplus can be used for MF ELSS investment or equity share investment. MF ELSS will take care of your balance 80C requirements. Ÿ Equity share investments can give you capital appreciation with lower tax rates. From the current financial year, dividend income is fully taxable and long term capital gains will be exempt up to 10

Tax Tips Rs.1 lac only. But the tax rates on short term a long term capital gains in respect of listed equity shares/equity mutual funds is 50%-60% less compared to normal tax rates. If you are familiar with investments in equity shares, you must consider investing a small portion of your income in equity shares or equity linked savings schemes. Volume 2... coming soon ! 11