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TAX PLANNING DEFINITION

Tax planning is a process individuals, businesses, and organizations use to evaluate their
financial profile, with the aim of minimizing the amount of taxes paid on personal income or
business profit. Effective tax planning entails analyzing investment instruments, expenditures,
and other factors such as filing status for their tax liability impact. Accounting, finance, banking,
and insurance firms all emphasize slightly different aspects of tax planning in accordance with
the types of services they provide and the laws governing their industries. For example, the tax
planning advice banks give clients might revolve around choosing investments that provide the
most favorable return for the lowest tax liability, while an insurer's approach to tax planning
might include using cash value life insurance for its tax-deferral features. Estate planning is a
form of tax planning, in that its intent is to minimize estate taxes after death. A number of
retail income tax software packages provide tax planning tips along with step-by-step guidance
on tax preparation, and tax planning advice is also available online from the IRS and other sites.
Meaning of Tax Planning
INTRODUCTION
The avid goal of every taxpayer is to minimize his Tax Liability. To achieve this objective
taxpayer may resort to following Three Methods:

Tax Planning
Tax Avoidance
Tax Evasion

It is well said that Taxpayer is not expected to arrange his affairs in such manner to pay
maximum
Tax . So, the assesse shall arrange the affairs in a manner to reduce tax. But the question what
method he opts for? Tax Planning, Tax Avoidance, Tax Evasion!
MEANINNG OF TAX PLANNING
Tax Planning involves planning in order to avail all exemptions, deductions and rebates provided
in
Act. The Income Tax law itself provides for various methods for Tax Planning, Generally it is
provided
Under exemptions u/s 10, deductions u/s 80C to 80U and rebates and reliefs. Some of the
provisions
are enumerated below :

Investment in securities provided u/s 10(15) . Interest on such securities is fully exempt from
tax.
Exemptions u/s 10A, 10B, and 10BA
Residential Status of the person
Choice of accounting system
Choice of organization.
For availing benefits, one should resort to bonafide means by complying with the provisions of
law in
letter and in spirit.
Where a person buys a machinery instead of hiring it, he is availing the benefit of depreciation. If
is
his exclusive right either to buy or lease it . In the same manner to choice the form of
organization, capital structure, buy or make products are the assesses exclusive right. One may
look for various tax incentives in the above said transactions provided in this Act, for reduction
of tax liability. All this transaction involves tax planning.
Why Every Person Needs Tax Planning ?
Tax Planning is resorted to maximize the cash inflow and minimize the cash outflow. Since Tax
is kind
of cast, the reduction of cost shall increase the profitability. Every prudence person, to maximize
the
Return, shall increase the profits by resorting to a tool known as a Tax Planning.
How is Tool of Tax Planning Exercised?
Tax Planning should be done by keeping in mine following factors :
The Planning should be done before the accrual of income. Any planning done after the
accrual income is known as Application of Income an it may lead to a conclusion of that there is
a fraud.
Tax Planning should be resorted at the source of income.
The Choice of an organization, i.e. Taxable Entity. Business may be done through a
Proprietorship concern or Firm or through a Company.

The choice of location of business , undertaking, or division also play a very important role.
Residential Status of a person. Therefore, a person should arranged his stay in India such a
way that he is treated as NR in India.
Choice to Buy or Lease the Assets. Where the assets are bought, depreciation is allowed and
when asset is leased, lease rental is allowed as deduction.
Capital Structure decision also plays a major role. Mixture of debt and equity fund should be
balanced, to maximize the return on capital and minimize the tax liability. Interest on debt is
allowed as deduction whereas dividend on equity fund is not allowed as deduction

Tax Planning For Salaried Person:Often, investment for most individuals begins and ends with tax planning. Although it is
pertinent to avail tax breaks, this should not be the sole focus. Start by jotting down your key
financial objectives, the tentative time of money requirement and the corpus needed to achieve
those goals. One can use tax saving investments effectively, to achieve financial goals. For
example, one can take a childrens plan that also provides tax benefit. Consider the impact of
inflation on your needs. After your first few working years, as income goes up, it is wise to
invest beyond ones tax saving investments to achieve your goals. Also, evaluate the life cover
requirement, while planning for your taxes. We are giving below a brief on some of the Popular
allowance / Exemption and deductions, benefit of which can be taken by the salaried taxpayers to
reduce their tax burden.
the case of a minor falls within the exceptions as provided in the proviso to Section 64(1A), that
is, where a minor is disabled or has income derived by virtue of his special skill, talent, etc. then
the income of the minor is not clubbable with the income of his parent.
However, there are certain other cases where a minors income is to be independently assessed
and is not to be included in the income of any other person. Such is the case where the minor is
an orphan, that is, where he has lost his parents.
In such a case, the income of the minor out of the funds belonging to the minor, as a result of
succession or inheritance or gifts, etc. would not be includible in the income of the grandfather,
grand Mother or uncle or aunt or any other guardian. In such a case the income of the minor
would be assessable separately through the guardian of the minor.
If the minor orphan makes an investment in a partnership firm and receives some interest on his
capital, the interest so received would, however, be treated as the business income of the minor

and would be independently assessable in his hands. Of course, his share of the profits from the
firm would be completely exempt from income tax as mentioned above under Section 1 0(2A) of
the IT Act.
Another very interesting and simple formula to let your minor children join your band for tax
planning with a separate income tax file is to have a 100% specific beneficiary trust prepared for
the minor child. The aspect of special hi-tech tax planning would be to mention in the Trust
Deed very clearly that so long as the minor child is a minor, then during such period of minority
no part of the income of such a Trust would be spent on the minor child. This small little care if
is taken into account while drafting a Trust Deed for the minor child then there would be
no clubbing of the income of the minor childs trust with the income of father or the mother of
such minor child. This theme is based on the findings given in a very famous Supreme Court of
Indias decision in the case of CIT v. M R. Doshi [1995] 211 ITR 1 (SC).
Thus, all such persons who are interested to set up a separate independent income tax file of a
minor child should adopt this tax planning of setting up a specific beneficiary trust for a minor
child so as to reap the benefits of tax saving because of a separate independent income-tax file,
the income of which is not liable to be clubbed with the income of the father or mother of the
minor child. It is recommended that there should be separate specific trusts for each minor child
1. Exemptions/reimbursements Identify the reimbursements available from the company and
take maximum advantage of the same. Normal expenses that one incurs could help save tax.
Example- Telephone/fuel reimbursements, meal vouchers and company car. A person in
lower tax slabs can reduce his tax liability to nil with exemptions alone.
Similarly, salaried employees staying in rented apartments can claim exemption under Section
10(5) of the Act in respect of house rent allowance by making the HRA a component of there
salary.
Some of The Popularly Known Exemptions/Reimbursements
House Rent Allowance
Minimum of 1. Actual HRA
2. Rent Paid 10% of Basic
3. 40a% of Basic (Non-Metros) or 50% of Basic (Metros)
Conveyance Allowance
Rs 800 / Month

Leave Travel Allowance


Two trips in a block of 4 Yrs Amount not exceeding Air Economy or Rail AC I Fare shall be for
shortest distance and for a single destination
Medical Reimbursement
Rs 15,000 / Annum
2. Deductions
Section 80C allows a maximum limit of Rs 1 lakh across investments ranging from provident
fund, PPF, infrastructure bonds, fixed deposits (5 years or more), NSC, insurance/pension plans,
unit linked insurance, equity linked savings scheme etc. It also includes tuition fees of your
children and the repayment of principal on your housing loan.
The interest component on your home loan has a separate limit of Rs 1.5 lakh.
Medical premia upto a maximum of Rs 15,000 qualifies for deduction, with an additional Rs
15,000 for parents. Additional deduction of 20,000 could be availed in case of a senior
citizen.You can claim a separate deduction for medical premium of your parents.
A person who have spent money on the maintenance (including medical treatment) of
dependant persons with disability, could avail deductions 80DD of the Act.
Individuals paying interest on education loan should obtain the interest payment certificate
under section 80E of the Act.
Those who are suffering from not less than 40 per cent of any disability is eligible for deduction
to the extent of Rs. 50,000/- and in case of severe disability to the extent of Rs. 100,000/under section 80U of the Act.
Investment options for retirement
Every one of us wants a comfortable and luxurious life after slogging for years at work. One
good option here is to create a corpus for your retirement and enjoy a king-size life after a certain
decided age. Hence, one must work hard for few years to party harder for the rest.
As far as investment for retirement is concerned, everybody lays stress on being an early bird.
The early you start, more you will be able to save. But what exactly are our investment options.
Let's check out:
Public Provident Fund (PPF)
PPF or Public Provident Fund is an attractive fixed-income investment option as it provides 8.8
per cent post-tax returns, besides a tax rebate of 20 per cent on the invested amount, subjected to
a maximum of Rs 1,00,000.

Apart from the returns, another benefit that a PPF has to offer is its tax-free compounded interest.
That means, you don't only earn interest in the invested money, but also on the interest earned.
All the balance that accumulates over the period of time is exempted from income tax.
Moreover, it has a low-risk investment option, available at selected post office and bank
branches. However, the only problem is its lack of liquidity. But when your target is fixed, you
don't have to worry much about it.
The loan on PPF is available from third year onwards. The rate of interest charged on loan taken
by the subscriber of a PPF account shall be 2% p.a. However, the rate of interest of 1 per cent
p.a. shall continue to be charged on the loans taken before 30.11.2011.
The subscription can be paid into the account in one lump sum or instalments not exceeding
twelve in a year.
National Saving Certificate (NSC)
National Savings Certificate is again a tax-saving instrument, offering secure returns at the rate
of 8.6 per cent and 8.9 per cent per annum for the investment for 5 years and 10 years
respectively w.e.f. April 1, 2012, compounded half yearly. As the maturity period is fixed, it is
advisable to buy a new NSC with the maturity amount, especially those who are keeping their
eye set on retirement.
NSCs can be bought either in your name or under the name of minor, trust, two adults jointly or
Hindu Undivided Family. Certificates are available for minimum of Rs 100 up to the amount you
wish to invest.
However, here again, the liquidity issue may haunt people as encashment of the certificate is not
permissible, except in the case of death of the holder(s), forfeiture by a pledge and when ordered
by a court of law.

Tax Planning For Minor:the case of a minor falls within the exceptions as provided in the proviso to Section
64(1A), that is, where a minor is disabled or has income derived by virtue of his
special skill, talent, etc. then the income of the minor is not clubbable with the
income of his parent. However, there are certain other cases where a minors
income is to be independently assessed and is not to be included in the income of
any other person. Such is the case where the minor is an orphan, that is, where he
has lost his parents.

In such a case, the income of the minor out of the funds belonging to the minor, as a result of
succession or inheritance or gifts, etc. would not be includible in the income of the grandfather,
grand Mother or uncle or aunt or any other guardian. In such a case the income of the minor
would be assessable separately through the guardian of the minor.
If the minor orphan makes an investment in a partnership firm and receives some interest on his
capital, the interest so received would, however, be treated as the business income of the minor
and would be independently assessable in his hands. Of course, his share of the profits from the
firm would be completely exempt from income tax as mentioned above under Section 1 0(2A) of
the IT Act.
Another very interesting and simple formula to let your minor children join your band for tax
planning with a separate income tax file is to have a 100% specific beneficiary trust prepared for
the minor child. The aspect of special hi-tech tax planning would be to mention in the Trust
Deed very clearly that so long as the minor child is a minor, then during such period of minority
no part of the income of such a Trust would be spent on the minor child. This small little care if
is taken into account while drafting a Trust Deed for the minor child then there would be
no clubbing of the income of the minor childs trust with the income of father or the mother of
such minor child. This theme is based on the findings given in a very famous Supreme Court of
Indias decision in the case of CIT v. M R. Doshi [1995] 211 ITR 1 (SC).
Thus, all such persons who are interested to set up a separate independent income tax file of a
minor child should adopt this tax planning of setting up a specific beneficiary trust for a minor
child so as to reap the benefits of tax saving because of a separate independent income-tax file,
the income of which is not liable to be clubbed with the income of the father or mother of the
minor child. It is recommended that there should be separate specific trusts for each minor child