The Hindu Business Line : Tax planning avenues

BUDGET 2005, prima facie, seems attractive from the personal taxpayer angle. The basic limit has been enhanced to Rs 1 lakh, and to a further Rs 1.25 lakh for women and Rs 1.50 lakh for senior citizens.

This basic limit with basic tax rate of 10 per cent up to Rs 1.50 lakh is very attractive. A person with income of Rs 1.50 lakh will pay only Rs 5,000 assuming he makes nothing on the tax saving instruments. There is no deduction under Section 80 L in respect of bank interest. Also, tax rebates under Sections 88 B and 88 C meant for senior citizens and women assessees have been omitted.

Rebate in respect of life insurance, national saving certificates, provident fund contributions hitherto contained in Section 88 has been renamed now as Section 80C. The maximum limit is Rs 1 lakh, deductible from the income and it is not a tax rebate.

The deduction under Section 80 CCC relating to pension plans and Section 80 CCD relating to pension funds of Central Government employees will also be totalled and the overall limit of deduction under Sections 80C, 80CC and 80CCD is Rs 1 lakh.

The salary-disbursing employer is now burdened because of the taxation of fringe benefits. The employer will have to pay tax at 30 per cent on taxable fringe benefit value of the employees and this payment is not an allowable business expenditure. Budget 2005 provides a separate chapter relating to computation and taxation of fringe benefits.

For the personal taxpayer, the standard deduction for salaried class is removed, bank interest, if any, out of deposits is also taxable, and the salary earners have to get only cash compensation as salary package to avoid tax burden on the employer.

An assessee must take advantage of the deduction available in Section 80 C. In case he is a Central Government employee eligible for deduction under Section 80 CCD, then the investment under Section 80 C must be limited within the overall limit of Rs 1 lakh.

Woman assessees eligible for the basic slab of Rs 1.25 lakh can invest up to Rs 1 lakh and, thereby, have tax-free income of Rs 2.25 lakh. Similarly, senior citizens having basic limit of Rs 1.50 lakhs can plan `nil' tax liability up to Rs 2.50 lakh by making investments under Sections 80C and 80CCC for Rs 1 lakh.

Salary earners have to receive "fringe benefits" as a salary package deal. This would mean that the employer pays tax on the taxable value of fringe benefits at 30 per cent. For example repair of employee car by the employer will have tax bill of only 6 per cent of the expenditure (30 per cent of 20 per cent being the taxable value of fringe benefit).

Similarly, the telephone bill of the employee paid by the employer would suffer tax at 3 per cent (30 per cent of 10 per cent being the taxable value of fringe benefit).

Gifts from employer would suffer tax at 15 per cent (30 per cent of the 50 per cent fringe benefit value). Hence, the employer will have the additional responsibility of complying with the fringe benefits tax.

(The author is an Erode-based chartered accountant.)

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