Tax-Planning: Shelter Your Srategies

Effective tax-planning will release more cash for investment. For that, pay structures have to be rationalised. Exploit every opportunity.

In the New Millennium, India's main contribution to the world will be our enormous Intellectual Capital (IC). Our country is known globally to have the best brains; there is no doubt that our collective IC is increasing. As the services sector booms, there is a growing need for professionals in fields like banking, consultancy, information technology et al. Professionals from these streams occupy top positions-and earn handsome compensations-due to their intelligence and hard work. But they, often, lose out on the single most important aspect of saving money: effective tax-planning. The maximum marginal rate of income-tax for individuals is 33 per cent. However, effective tax-planning can help reduce it.

Hot tips for 1999-2000

Make use of every possible tax-shelter to optimise your investment strategy

Focus on building tax-exempt incomes under Section 10 of the Income Tax (IT) Act

Create income-streams whose proceeds are deductible under Section 80 L of the IT Act

Minimise your tax payout by claiming as many rebates as you can under Section 88 of the IT Act

Seek appropriate insurance cover by factoring in your age, family-profile, income, and risk

This article attempts to highlight some tax-planning options available to busy professionals who, by means of tax-efficient pay-structures, can save money that can be used to meet their investment objectives. And tax-payout thus saved can be invested to meet the expenditure or investment objectives at each stage of life as shown in Exhibit I.

We can demonstrate the significance of effective tax-planning by taking the 4 Indian families whose investment strategies have been spelt out earlier. We will examine each case by comparing the existing pay-structure of the income-earners with the ideal pay-structure, and the resulting tax-savings.

Rajiv Joshi, 27, works as a junior manager in a foreign bank, drawing Rs 1,38,000 per annum. Rajiv is married to Priyanka, 25, a housewife. They live in a rented flat, and have to pay Rs 36,000 annually as rent. Rajiv and Neha plan to buy a consumer durable. They don't have enough cash to make full payment at one go. They can take a loan for purchasing the item. However, the monthly loan instalment to be repaid works out to Rs 500. We compare Rajiv's present pay structure with the ideal pay-structure to find out how he can save on tax.

Rajiv and Neha can save Rs 5,000 if their employer creates a tax-efficient pay-structure. Thus, they can purchase the desired durable by taking a loan and repaying the monthly instalment from the savings made in the tax-payout. Rajiv's employer can go a step further by providing him with an interest subsidy on the loan taken from an external agency. As the interest subsidy will not be taxable as a perquisite, it will benefit him since the interest costs on the loan for the consumer durable shall be partly reimbursed by his employer.

Pranab Mitra, 30, is working as a Deputy General Manager (Marketing) in a consumer durables company, earning Rs 1,80,000 per annum. Pranab is married to Nabonita, 26, who works as an executive in an advertising agency. Nabonita draws a salary of Rs 96,000 per annum. They have a 2-year-old son, Kunal. Pranab's company has provided them with unfurnished accommodation. His company pays a rent of Rs 84,000 per annum for their accommodation. The Mitras have a dream: a flat and a car of their own. Pranab wishes to pursue higher studies in marketing, which will even benefit his employer. We compare their pay-structures with the ideal package to find out how they can save on tax to realise their dream.

Pranab can realise his immediate goal of higher education as his company can reimburse the cost of his education by making it a of his compensation. This cost would have been incurred by Pranab in any case, but he can now get educated without the additional tax-burden of Rs 3,000 on Rs 15,000. Also, if we look at the savings effected in the aggregate tax liabilities of Pranab and Nabonita, it works out to an amazing figure of Rs 4,000. They can now enjoy the benefit of enhanced monthly savings of Rs 350 due to effective tax-planning.

Pratap Nair, 45, is a Vice-President in an FMCG company, earning a salary of Rs 7,32,000 per annum. Pratap's wife, Anita, 40, is a housewife. They have 2 children, Vikram and Vinita. They are both students, and don't live with their parents due to educational compulsions. Pratap and Anita stay in accommodation (unfurnished) provided by the company, for which Pratap's employer pays a rent of Rs 1,80,000 annually. The couple wants to increase their monthly cash savings so that they can plan their children's higher education, and take a loan to buy their own flat. Pratap has to keep track of the emerging trends in the FMCG industry, for which he has to purchase books and other reference-materials worth Rs 4,000 every month. The Nairs pay a monthly telephone bill of Rs 1,000. We compare Pratap's present pay-structure with the ideal pay-structure to find out how they can save on tax.

In the ideal scenario, it is assumed that Pratap's employer has made the payment in respect of the Lunch Allowance directly to a caterer/restaurant/canteen et al for lunch taken by Pratap outside the office premises. This lunch subsidy is computed for the 325 working days.

Pratap and Anita can save Rs 34,600 annually provided Pratap's compensation package is rationalised. The tax-savings have resulted due to the change in the pay-structure and the shift in the insurance-pattern. In the present scenario, Pratap is covered for life, but has no medical insurance. In the suggested scenario, Pratap is covered for both besides enjoying the deduction from his gross total income for the Medi-claim payment. Pratap and Anita can now plan the higher education of their children and buy a flat-their long-term investment goal-in a better manner since, at the end of the day, they are richer by Rs 34,600.

Ravi Mehta, 55, the CEO of an engineering consultancy company, is drawing a salary of Rs 17,40,000 per annum. Ravi's wife, Shalini, 47, is a housewife. They have 2 children, Rajiv and Renuka. Rajiv is an MBA student, and Renuka is studying medicine. In addition to the pay-package, the employer has provided Ravi with a Maruti Zen car for official and personal use. The employer reimburses the running and maintenance expenditure of upto Rs 36,000, and the driver's salary of Rs 18,000. Ravi and Shalini have 3 important things on their minds. First, they want to save for their retirement. Second, they wish to send their daughter to the UK for higher studies. And third, they want to buy a car for their son. We compare Ravi's present pay-structure with the ideal one to find out how he can save on tax.

Ravi and Shalini can generate Rs 39,000 worth of extra cash annually on the basis of a planned tax structure. They can set aside this amount, apart from their normal savings, for meeting their targets. The bottomline: smart tax-planning will free more resources for you to invest-and earn-in 1999-2000.