LAST MINUTE TAX PLANNING? SOME USEFUL HINTS

Do you find yourself in a situation where there are just a bunch of days ahead for the deadline of submission of tax documents? Here is a quick guide to help you sort out your finances last minute!

1. Target full utilisation of Section 80 C: Maximum deduction available is to the tune of Rs. 100,000. Assess your income to arrive at the amount you need to invest in this section. The investment avenues include; Public Provident Fund (PPF) up to Rs. 70,000, National Saving Certificate (NSC), Life Insurance or ULIP premium, tuition fees paid for children’s education
(2 children max), Equity linked savings schemes (ELSS), Post office saving deposit (POSD) and five year fixed deposits with banks among others. For individuals in the higher income bracket, section 80 C which is the most popular one may not be sufficient to reduce overall tax liability. Here is where the other sections will play a key role in reducing tax outflow.

2. Interest on home loan: Individuals intending to buy a house should consider opting for a home loan. Interest payments up to Rs 150,000 pa are eligible for deduction under Section 24

3. House Rent Allowance (HRA): You can take advantage of this if you are renting an accommodation. There are set guidelines determining the amount deductible. Please note that the rent agreement / rent receipts need to be submitted
4. Health Insurance Premium: Annual deduction of Rs. 15,000 is permissible for self, spouse and dependent children. Also and additional Rs. 15,000 is allowed for parents

5. Medical reimbursement: Medical treatment expenses up to Rs. 15,000 can be claimed annually as deduction from salary u/s 17(2). Actual bills need to be produced

6. Donation to Charitable institutions: Subject to the stated limits, donations to specified funds/institutions are eligible for tax benefits under Section 80G. Receipt needs to be produced.
7. Interest paid on educational loans: Deduction can be claimed on interest paid on educational loans taken for higher education of you, your spouse and children under section (u/s) 80 E. There is no limit on the amount of deduction you can claim. However, the loan should be taken for a graduate or post-graduate program in engineering, medicine or management or a post-graduate course in the pure or applied sciencesPoints to remember1. Section 80 C allows deduction of tuition fees spent on children's education

2. If you want to pay rent to your parents or relatives (kindly note this arrangement cannot be done with your spouse), you will need to treat them as landlords and request the owner of the house to declare it in his/her personal income tax return
3. The maturity proceeds of life insurance policies are not taxable
4. Conveyance allowance up to maximum of Rs. 800 can be claimed per month as deduction from salary u/s 10(14)
5. Long term capital gains on listed shares/securities are not taxable
6. Capital gains on sale of house property can be avoided by purchasing another house property within two years after or one year before date of sale
7. Stamp duty charges and registration charges paid while purchasing new house is eligible for tax deduction under Section 80 C
The first step in the direction of tax saving is to assess your tax liability. So start the process so that you can then decide on what all to opt for to save maximum taxes.
Tax incentives are given to encourage savings/ investments. Savings form part of your overall financial plan which in effect means tax planning is a subset of financial planning. Your financial plan will set objectives for you based on your aspirations, your life style, your age group, size of family etc. The question you need to ask yourself is, "Did you adhere to your financial plan while investing in an instrument for tax saving purposes?" Well if your answer to that is "yes", then you’re moving in the direction of attaining your financial goals. If not, it's time for you to take corrective action. The damage may have been done for the past year but the forthcoming is an opportunity for you to plan well. Remember, procrastination is the thief of time. So if you postpone it now, this year will be no different from the last one.

HOUSE RENT ALLOWANCE - SOME USEFUL INFO

Organizations in India follow different methods for arriving at the House Rent Allowance (HRA) exemption, while calculating income tax on employee salary. Each method produces a different exemption amount. This begs the question, “which is the correct method?” Payroll managers have different opinions on how the exemption should be calculated. Let us examine the methods used for the HRA exemption calculation, and see which method goes well with the letters and spirit of Section 10(13A) of the Income Tax Act, 1961.

As per the Indian income tax law, the HRA exemption should be calculated as the least of the following.

1. Rent paid in excess of 10% of basic salary.

2. Actual HRA received by the employee.

3. Forty percent of basic salary, if the location of the residence is in a non-metro city/town or 50% of basic salary, if the location of the residence is in a metro city.

From the above “least of three” rule, it is clear that HRA exemption amount is determined by a number of factors — Basic pay, location of the residence, rent paid by the employee, and the HRA paid to the employee.So far, so good. The “least of three” rule looks easy to understand and implement. However, the same rule can be applied in different ways to create different methods of HRA exemption calculation.

Let us assume that an employee, who lives in a metro city, takes home a monthly Basic pay of Rs 50,000, monthly HRA of Rs 25,000, and pays a monthly rent of Rs 25,000. As long as everything remains constant throughout the year, there is no complication. The problem starts once any of the factors changes. Let us assume that the employee has a loss of pay for a month and half, say from August 1 to September 15, but the employee pays full rent in the months of August and September. Let us look at the different methods of calculating the exemption.

Method 1 – Annualized HRA exemption calculationOrganizations using this method calculate HRA exemption by determining the values of the different factors (Basic pay etc.) for the year and applying the “least of three” rule.a. Basic pay for the year = Rs 50,000 x 10.5 months (on account of loss of pay) = Rs 525,000.b. HRA paid to the employee = Rs 25,000 x 10.5 months (on account of loss of pay) = Rs 262,500.c. Rent paid by the employee for the year = Rs 25,000 x 12 = Rs 300,000.HRA exemption calculation1. Rent paid in excess of 10% of Basic salary = Rs 300,000 – Rs 52,500 = Rs 247,500.2. Actual HRA received by the employee = Rs 262,500.3. Fifty percent of Basic salary (since the location of the residence is in a metro city) = Rs 262,500.The HRA exemption for the year is the least of the above, which is Rs 247,500.

Method 2 – Monthly HRA exemption calculationOrganizations using this method calculate HRA exemption each month, and add the monthly HRA exemption values to arrive at the exemption for the year.1. Monthly HRA exemption amount — after applying the “least of three” rule for each month — from April to July and from October to March = Rs 20,000 per month.2. Monthly HRA exemption amount — after applying the “least of three” rule — for August = Rs 0.3. Monthly HRA exemption amount — after applying the “least of three” rule — for September = Rs 12,500.The total of HRA exemption amounts across all months = Rs 212,500 for the year.

Method 3 – HRA exemption calculation for each period of input changeAs per this logic, whenever any of the input parameters (Basic pay, Rent paid, HRA, and Metro or Non-metro) changes for an employee during a year, the HRA exemption is calculated. In other words, the year is divided into as many periods as dictated by changes in any of the input parameters, and HRA exemption is calculated for each of the periods.

Finally, the HRA exemption amounts for the different periods are aggregated to arrive at the HRA exemption amount for the year.

With regard to the illustration presented earlier, the year is divided into 3 periods, as follows.Period 1: From April 1 to July 31 – when there is no change to any of the input factors.Period 2: From August 1 to September 15 – when Basic pay and HRA change (became zero) on account of loss of pay.Period 3: From September 16 to March 31 – when there is no change to any of the input factors.HRA exemption calculationHRA exemption for period 1– from April 1 to July 31 = Rs 80,000.HRA exemption for period 2 — from August 1 to September 15 = Rs 0.HRA exemption for period 3 — from September 16 to March 31 = Rs 130,000.The total of HRA exemption amounts across all periods = Rs 210,000 for the year.The 3 methods yield different annual HRA exemption amounts – Rs 247,500, Rs 212,500, and Rs 210,000.

Which is the correct method?This is an important question to answer. Depending on the method an organization uses, the tax liability for the employee would be higher or lower, and in turn the government’s receipt from tax on salary income would be higher or lower.

The above illustrations present HRA exemption calculation in the event of changes in Basic salary and/or HRA. In the event of Basic salary or HRA not changing, but the rent amount changing or the location of the residence changing (say, from metro to non-metro), there will still be differences in HRA exemption calculation across the 3 methods.

While there is no explicit instruction from the income tax department as to which method should be used, we believe the “period” method (Method 3, described above) goes well with the provisions of Section 10(13A) of the Income Tax Act.

IRDA suspends sale of Universal Life policies

The Insurance Regulatory and Development Authority (Irda) has suspended sale of universal life policies (ULPs), which were being promoted as an alternative to unit-linked insurance plans, from October 23.

Sales have been suspended until the final guidelines for ULPs are issued. Irda said it had received several complaints on the sale practices of the insurers regarding ULP. “After examining the complaints, the authority is satisfied that the universal life products need a better regulatory framework for protecting policyholders’ interests,” Irda said.

In a draft issued late evening, the regulator defined the Variable Insurance Product, widely known as universal life policies, as life insurance products that provide death and maturity benefits equivalent to the balance in the savings account.

Under this policy, the regulator has proposed to cap the expenses at 25 per cent in the first year and at 5 per cent from second year onwards. Insurance company sources said the commission to agents may also be capped below 5 per cent.

DRAFT PROPOSALS
* Expenses capped at 25% 1st year onwards, 5% from 2nd year
* Agent commission may fall below 5%
* Single premium products under ULPs to be banned
* Minimum policy term to be 5 years
* Lock-in of 3 years
* No top-up premium, riders allowed
* To follow investment norms under traditional policies

Moreover, single-premium products under ULPs will not be allowed.
Like unit-linked insurance plans, the minimum policy term will be five years, with a minimum life cover of 10 times for those below 45 years of age. Above 45, the life cover will be seven times. The lock-in under the draft is kept at three years. Also, insurers will not be allowed to collect top-up premium or offer riders with ULPs.

Insurance companies like Reliance Life and Max New York Life have launched these products as a combination of Ulips and traditional plans. Now, they have to follow the investment norms of traditional policies. Under this product, however, the policyholder will have the flexibility to change the policy term as well as the minimum sum assured.

Insurers will have to show the premium separately as risk premium, expense, commission and savings components.

Also, the draft has proposed that the policyholder will have 12 months to revive the policy from the date of first unpaid premium, while the life cover will cease.

Similarly, the benefit paid on death and maturity will be comparable to Ulips. The balance in the savings account will be paid at the time of maturity. On death, the sum assured chosen by the policyholder, along with the balance in the savings account will be paid.

Irda Chairman J Hari Narayan had said ULPs were the next focus area for the regulator as they wanted only fair products to be sold. Last week, insurance companies expressed their concern over capping of charges in ULPs, as agents did not push products with lower fees.

INTEREST ON DELAYED PAYMENT OF GRATUITY..says Madurai Bench of Madra HC...

An employee becomes eligible for gratuity on the termination of his employment after he has rendered continuous service for not less than five years, according to Section 4(1) of the Payment of Gratuity Act, 1972. He is also entitled for interest on the gratuity in terms of Section 7(3) and 7(3A).

Making these clear, the Madurai Bench of the Madras High Court directed the Arumuganeri Salt Workers Co-operative Production and Sale Society Ltd, Thoothukkudi district, to pay the amount to its worker, Mr A. Rajan, within 30 days from date of receipt of a copy of this order without further driving him to any other forum.

Mr Justice K. Chandru, hearing a writ petition from the Society challenging the order dated January 27, 2009 of the Appellate Authority under the Act, Madurai (R-2), directing it to make interest payment if gratuity was not paid within 30 days from the date of his order, noted that from the beginning, it was the stand of the petitioner Society that R-1 (Mr A. Rajan) was not eligible for gratuity. If Sections 7(3) and 7(3A) were read together, then there was no difficulty in understanding the eligibility for receiving interest.In the present case, the Appellate Authority had correctly construed the legal provisions and there was no case made out to interfere with the interpretation placed by the Authority. The petitioner contended that payment of interest would arise only when there was delayed payment, and in this case, there was no delay since they had paid gratuity as ordered by R-2, and hence the question of payment of interest would not arise.This Court was unable to accept the said statement, since the entire controversy was with regard to the legal provision. Reading Section 4(1) of the Act it would be clear that the date relevant for determination of interest was the date on which gratuity became payable, which in the present case was when R-1 resigned his job on 1-6-2003. When R-1 issued notice for payment of gratuity, petitioner employer did not honour the notice. On the contrary, it was only when R-1 instituted a claim before the Controlling Authority, the petitioner contended about the irregular nature of his employment and his alleged disqualification from receiving gratuity. In the light of these, the writ petition stood dismissed, the Judge held.

PAYMENT EXCEEDING 20000 40(A)3 EXCEPTIONS RULE 6DD

Section 40A(3)(a) of the Income-tax Act, 1961 provides that any expenditure incurred in respect of which payment is made in a sum exceeding Rs.20,000/- otherwise than by an account payee cheque drawn on a bank or by an account payee bank draft, shall not be allowed as a deduction.However if payment is being made for plying, hiring or leasing goods carriages then Limit for these section is Rs 35000/-,instead Of 20000/-
Section 40A(3)(b) also provides for deeming a payment as profits and gains of business or profession if the expenditure is incurred in a particular year but the payment is made in any subsequent year in a sum exceeding Rs. 20,000/- otherwise than by an account payee cheque or by an account payee bank draft.
Section 40A(3) is an anti tax-evasion measure. By requiring payments to be made by an account payee instrument, it is possible to verify the genuineness of the transaction thereby mitigating the risk of evasion.Person are splitting a particular high value payment to a person into several cash payments, each below Rs.20,000/-. This splitting is also resorted to for payments made in the course of a single day.Courts have also held that the statutory limit in section 40A(3) applies to payment made to a party at one time and not to the aggregate of the payments made to a party in the course of the day as recorded in the cash book.According to the judicial opinion, the words used are ‘in a sum’, i.e., single sum.Therefore, irrespective of any number of transactions, where the amount does not exceed the prescribed amount in each transaction,the rigours of section 40A(3) will not apply.
To overcome the splitting of payments (AS GIVEN IN POINT NO 3)to the same person made during a day as referred above and to increase the efficacy of the provision, an amendment was made through Finance act 2008 and after 01.04.2008, where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, the disallowance of such expenditure shall be made under the proposed sub-section (3) of section 40A or the payment shall be deemed to be the profits and gains of business or profession under the proposed sub-section (3A) of section 40A,as the case may be. EXAMPLE :To illustrate with an example, let us assume a taxpayer has incurred an expenditure of Rs 40,000/-. The taxpayer makes separate payments of Rs 15,000/-, Rs 16,000/- and Rs 9,000/- all by cash, to the person concerned in a single day. The aggregate amount of payment made to a person in a day, in this case, is Rs 40,000/-. Since, the aggregate payment by cash exceeds Rs 20,000/-,Rs. 40,000/- will not be allowed as a deduction in computing the total income of the taxpayer in accordance with the proposed amendment.EXCEPTION TO ABOVE PROVISION:The provisions of this section are subject to exceptions as provided in Rule 6DD of the Income-tax Rules, 1962.
Payment to Specified payee Rule 6DD(a)- Where the payment is made to

(i) Reserve Bank of India or any banking company as defined in section 5(c) of Banking Regulation Act, 1949;
(ii) State Bank of India or any subsidiary bank as defined in section 2 of SBI (Subsidiary Banks) Act, 1959;
(iii) any co-operative bank or land mortgage bank;
(iv) any primary agricultural credit society or any primary credit society as defined under section 56 of the Banking Regulation Act, 1949;
(v) Life Insurance Corporation of India.
Payment to Government Rule 6DD(b)- Where payment is made to the Government and, under the rules framed by it, such payment is required to be made in legal tender.
Payment by certain modesRule 6DD(c) - Where the payment is made by
(i) any letter of credit arrangements through a bank;
(ii) a mail or telegraphic transfer through a bank;
(iii) a book adjustment from any account in a bank to any other account in that or any other bank;
(iv) a bill of exchange made payable only to a bank;
(v) the use of electronic clearing system through a bank account;
(vi) a credit card;
(vii) a debit card.
Note: “Bank” means any bank, banking company or society referred to in #(i) to (iv) of rule 6DD(a) and includes any bank [not being a banking company as defined in section 5(c) of the Banking Regulation Act, 1949], whether incorporated or not, which is established outside India.
Adjustment in books Rule 6DD(d)- Where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee.
Purchase of certain productsRule 6DD(e):Where the payment is made for the purchase of -
(i) agricultural or forest produce; or
(ii) the produce of animal husbandry (including livestock, meat, hides and skins)***** or dairy or poultry farming; or
(iii) fish or fish products; or
(iv) the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products.
Cottage industry Rule 6DD(f)- Where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products.
No bank service Rule 6DD(g) - Where the payment is made in a village or town, which on the date of such payment is not served by any bank,to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town.
Note: “Bank” means any bank, banking company or society referred to in #(i) to (iv) of rule 6DD(a) and includes any bank [not being a banking company as defined in section 5(c) of the Banking Regulation Act, 1949], whether incorporated or not, which is established outside India.
Terminal benefit to employee - Rule 6DD(h) Where any payment is made to an employee of the assessee or the heir of any such employee, on or in connection with the retirement, retrenchment, resignation, discharge or death of such employee, on account of gratuity, retrenchment compensation or similar terminal benefit and the aggregate of such sums payable to the employee or his heir does not exceed Rs. 50,000.
Temporary posting of employee - Rule 6DD(i) Where the payment is made by an assessee by way of salary to his employee after deducting the income-tax from salary as per section 192, and when such employee
(i) is temporarily posted for a continuous period of 15 days or more in a place other than his normal place of duty or on a ship; and
(ii) does not maintain any account in any bank at such place or ship.
Bank closed - Rule 6DD(j) Where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike.
Payment to agent Rule 6DD(k)- Where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person.
Foreign currency Rule 6DD(l)- Where the payment is made by an authorised dealer or a money changer against purchase of foreign currency or travellers cheques in the normal course of his business. Note: “Authorised dealer” or “money changer” means a person authorised as an authorised dealer or a money changer to deal in foreign currency or foreign exchange under any law for the time being in force

Exemption from disallowance is not available
on payment for purchase of livestock, meat,hides and skins from a person who is not proved to be the producer of these goods and is only a trader, broker or any other middleman, by whatever name called [Circular No. 4/ 2006, dated 29-3-2006 (14 CAPJ 201)]
Any person, by whatever name called, who buys animals from the farmers, slaughters them and then sells the raw meat carcasses to the meat processing factories or to the traders/retail outlets is considered as producer of livestock and meat.
Exemption is available subject to furnishing of
(i) declaration from person receiving payment that he is a producer of meat;
(ii) confirmation that payment, otherwise than by account payee cheque/draft, was made on his insistence; and
(iii) a further confirmation from a veterinary doctor certifying that person specified in the certificate is a producer of meat and that slaughtering was done under his supervision [Circular No. 8/2006, dated 6-10-2006 (16 CAPJ 381)].

CLARIFICATION REGARDING THE MEANING OF THE EXPRESSION 'FISH OR FISH PRODUCTS' USED IN SUB-CLAUSE (iii) OF CLAUSE (f) OF RULE 6DD OF THE INCOME-TAX RULES, 1962
CIRCULAR NO. 10/2008, DATED 05-12-2008

Representations have been received from various quarters regarding problems being faced by the seafood exporters mainly on account of provisions of Section 40A (3) of the Income-tax Act, 1961.2. Disallowance of expenditure under the provisions of sub-section (3) of Section 40A of the I.T. Act, 1961 is made in the computation of income in a case where a payment or aggregate of payments exceeding twenty thousand rupees is made to a person in a day, otherwise than by an account payee cheque drawn on a bank or an account payee bank draft. However, payment otherwise than by an account payee cheque drawn on a bank or by an account payee bank draft exceeding twenty thousand rupees does not attract the aforesaid disallowance in certain circumstances as prescribed under rule 6DD of the Income-tax Rules, 1962. Such exceptions, inter-alia, refer to payment made to the producer for the purchase of ‘fish or fish products' under sub-clause (iii) of clause (e) of rule 6DD. [Clause (f) of rule 6DD prior to coming into effect of the I.T. (Eighth Amendment) Rules, 2007 w.e.f. A.Y. 2008-09].3. The following clarifications are, therefore, being issued for proper implementation of rule 6DD of the Income-tax Rules, 1962:—(i) The expression ‘fish or fish products' used in rule 6DD(e)(iii) would include 'other marine products such as shrimp, prawn, cuttlefish, squid, crab, lobster etc.'.(ii) The 'producers' of ‘fish or fish products' for the purpose of rule 6DD(e) of I.T. Rules, 1962 would include, besides the fishermen, any headman of fishermen, who sorts the catch of fish brought by fishermen from the sea, at the sea shore itself and then sells the fish or fish products to traders, exporters etc.4. It is further clarified that the above exception will not be available on the payment for the purchase of fish or fish products from a person who is not proved to be a 'producer' of these goods and is only a trader, broker or any other middleman, by whatever name called.