Your Small Steps Can Take you Forward by Leaps.!
by Personal FN Research
There is an old Chinese proverb which says, “It is better to take many small steps in the right direction than to make a great leap forward only to stumble backward.” which in opinion applies even to your “tax planning” exercise.
Remember, it is vital for you to step by step ascertain where you stand, in terms of your Gross Total Income & Net Taxable Income, so that you effectively undertake your tax planning exercise which in turn would deliver you the objective of long-term wealth creation along with capital protection.
In the past if you have taken your tax planning decisions at the eleventh hour, never mind. But, please learn from them & do not repeat the same mistakes again. Adopt the prudent steps while doing your tax planning.
Steps to Income Tax Planning..!
Step 1:- Compute the Gross Total Income..!
The process of tax planning begins with computation of your Gross Total Income. This step enables you to ascertain the total income earned by you during a financial year, from various under mentioned sources of income, and helps you to judge where you stand.
* v Income from salary
* v Income from house property
* vProfits and gains from business and profession
* vCapital gains (short term & long term) and
* v Income from other sources.
Hence, Gross Total Income is the total income earned by one before availing any deductions under the Income Tax Act, 1961. And it is vital to know the same, in order for you to undertake your tax planning effectively, so that you can plan within the sources of income (by using the relevant provisions of the Income Tax Act applicable to the aforementioned sources of income), as well as by availing deductions to Gross Total Income.
Now, one may ask – “how do I undertake this activity if I’m a novice?”
Well, the answer is pretty simple! You can either get it done at your office (many organisation do offer this facility), ask your CA / tax consultant to do it, or / use the convenience of the new and updated tax portals that have emerged in more recent times.
But, along with all this please do not forget to do your self-study to carry out effective tax planning exercise. One must note that it’s vital to know at least those provisions of the Income Tax Act, which directly have an impact on your finances.
Step 2: Compute the Net Taxable Income..!
After having done with computation of Gross Total Income by using the relevant provisions of the Income Tax Act for each source of income, the next step is to compute your Net Taxable Income.
Under Net Taxable Income from the Gross Total Income, the various deductions allowed under the Income Tax Act, should be accounted for (i.e. subtracted from your Gross Total Income), which would thus reduce your taxable income. These deductions enable you to enjoy reduction in tax liability, as it covers Sections under the Income Tax Act for:
& vInvesting in income tax saving instruments (your most loved & sought after Section 80C, along with the recently introduced RGESS - Rajiv Gandhi Equity Savings Scheme)
* vDonations
* v Expenditure on handicapped dependent
* vPremium payment for your medical insurance
* vInterest paid on loan taken for higher education
* v Rent paid for residential accommodation
* vExpenditure incurred on a specified diseases suffered by you
Remember, if you use the respective provisions effectively to do tax planning, it will enable you to achieve the long-term objective of wealth creation.
Step 3: Calculate the tax payable..!
After having effectively saved tax in the prudent way mentioned above, the next step is to compute your tax liability based on the present income tax slabs, and thereafter file your tax returns.
The income tax rates for Individuals & HUFs for FY 2012 - 13 are as follows..!
| Net Taxable Income (in Rs) | Rate |
| Upto Rs 2,00,000 (for general tax payers – male and female) | Nil |
| Upto Rs 2,50,000 (for senior citizens) Nil Upto Rs 5,00,000 (for very senior citizens aged Nil 80 and above) | |
| Rs 2,00,001 to Rs 5,00,000 * | 10% |
| Rs 5,00,001 to Rs 10,00,000 | 20% |
| Above Rs 10,00,000 | 30% |
(Source: Finance Act 2012, Personal FN Research)
* For senior citizens (age 60 but less than 80 years), with Net Taxable Income between Rs 2,50,001 to Rs. 5,00,000 taxable at 10%
Moreover you would also have to pay an education cess at 3 % on your tax liability computed.
So, say if your net taxable income after availing for all deductions available is Rs. 10,00,000 then your tax liability will be computed as under:
Computation of Tax Liability (2012-13) | |||
Taxable Income (in Rs.) | 12,00,000 | ||
Upto Rs. 2,00,000 | Nil | - | |
Rs. 2,00,001 to Rs. 500,000 | 10 % | 30,000 | |
Rs. 500,001 to Rs. 10,00,000 | 20 % | 1,00,000 | |
Rs. 10,00,001 & above | 30 % | 60,000 | |
Tax payable (in Rs.) | 1,90,000 | ||
Education Cess | 3 % | 5,700 | |
Total Tax (in Rs.) | 1,95,700 | ||
(Source: Personal FN Research)
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