Tax Planning

TAX PLANNING
TAX PLANNING
1.1 LIST OF TABLES
Individuals, Hindu Undivided families, AOP, BOIs- The tax rates applicable to individuals are
also applicable to a Hindu undivided family, an association of persons, body of individuals or an
artificial juridical person.
1.1 The rates applicable for the assessment year 2015-16 provided by Finance Act 2015
ASSESSMENT YEAR 2014-15- The tax rates for the assessment year 2014-15 are given below-
FOR A RESIDENT SENIOR CITIZEN ( WHO IS 60 YEARS OR MORE AT ANY TIME
DURING THE PREVIOUS YEAR BUT LESS THAN 80 YEARS ON THE LAST DAY OF
THE PREVIOUS YEAR, I.E. BORN DURING APRIL 1, 1934 AND MARCH 31, 1954 )
Net Income Income Tax Rates Surcharge Education Secondary and

Range Cess Higher Secondary
Cess (SHEC)
Up to Rs. 2,50,000 Nil Nil Nil Nil
Rs. 2,50,000 Rs. 10% of ( total income minus Nil 2% of income 1% of income tax
5,00,000 Rs. 2,50,000 ) tax
Rs. 5,00,000 Rs. Rs. 25,000 + 20% of ( total Nil 2% of income 1% of income tax
10,00,00 income minus Rs. 5,00,000 ) tax
Rs. 10,00,000- Rs. Rs. 1,25,000 + 30% of ( total Nil 2% of income 1% of income tax
10,00,00,000 income minus Rs. 10,00,000 ) tax
Above Rs. Rs 28,25,000 + 30% of (total 10% of total 2% of income 1% of income tax and
10,00,00,000 income minus Rs. income tax tax and surcharge
1,00,00,000) surcharge
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FOR A RESIDENT SUPER SENIOR CITIZEN (WHO IS 80 YEARS OR MORE AT ANY

TIME DURING THE PREVIOUS YEAR, I.E. BORN BEFORE APRIL 1 1934)-
Net Income Income Tax Rates Surcharge Education Cess Secondary and
Range Higher Secondary
Cess (SHEC)
Rs. 5,00,000 Rs. 20% of ( total income minus Nil 2% of income tax 1% of income tax
10,00,00 Rs. 5,00,000 )
Rs. 10,00,000 Rs. Rs. 1,00,000 + 30% of ( total Nil 2% of income tax 1% of income tax
10,00,00,000 income minus Rs. 10,00,000 )
Above Rs. Rs 28,00,000 + 30% of (total 10% of total 2% of income tax 1% of income tax
10,00,00,000 income minus RS. 1,00,00,000) income tax and surcharge and surcharge
FOR ANY OTHER RESIDENT INDIVIDUAL (BORN ON OR AFTER 1, 1954), ANY

NON RESIDENT INDIVIDUAL, EVERY HUF/AOP/BOI/ARTIFICIAL JURIDCAL
PERSON-
Net Income Income Tax Rates Surcharge Education Secondary and

Range Cess Higher Secondary
Cess (SHEC)
Rs. 2,00,000 Rs. 10% of ( total income minus Nil 2% of income 1% of income tax
5,00,000 Rs. 2,50,000 ) tax
Rs. 5,00,000 Rs. Rs. 30,000 + 20% of ( total Nil 2% of income 1% of income tax
10,00,00 income minus Rs. 5,00,000 ) tax
Rs. 10,00,000 Rs. Rs. 1,30,000 + 30% of ( total Nil 2% of income 1% of income tax
1,00,00,000 income minus Rs. 10,00,000 ) tax
Above Rs. Rs. 28,30,000 + 30% of ( total 10% of total 2% of income 1% of income tax and
1,00,00,000 income minus Rs. 10,00,000 ) income tax tax and surcharge
surcharge
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Notes:
1. Rebate under section 87A- A resident individual (whose net income does not exceed Rs. 5,
00,000) can avail under section 87A. It is deductible from income tax before calculating
education cess. The amount of rebate is 100 % of income tax or Rs. 2,000, whichever is less.
2. Surcharge- Surcharge is 10 % of income tax if net income exceeds Rs 1 Cr. It is subject to

marginal relief (in the case of a person having a net income of exceeding Rs. 1Cr, the amount
payable as income tax and surcharge shall not exceed the total income payable as income tax
on total income of Rs. 1 Cr by more than the amount of income that exceeds Rs. 1 Cr.
3. Education cess It is 2 percent of income tax.
4. Secondary and higher secondary education cess- It is 1% of income tax
5. Alternate minimum tax For the assessment year 2013-14, tax payable by a non-corporate
assesse cannot be less than 18.5% (+EC+SHEC, effective rate 19.055 percent ) of adjusted
total income as per section 115JC
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1.2 Tax rates specified in the Income tax Act- The following incomes are taxable at the rates
specifies by the Income tax Act and not at the rates
Section Income Income

tax
rates
(1) (2) (3)
111A Short term capital gain 15
112 Long term capital gain 20
115A(1)(a)(i) Dividend received by a foreign company or a non-resident non corporate assesse 20

[ it is not applicable in the case of dividend referred to in section 115-O]
115A(1)(a)(ii) Interest received by a foreign company or a non-resident non corporate assesse 20
from Government or an Indian concern on moneys borrowed or debt incurred by
Government or the Indian concern in foreign currency
115A(1)(a)(iia) Interest received from an infrastructure debt fund referred to in section 10(47) 5
115A(1)(a)(iiab) Interest of the nature and extent referred to in section 195LD 5
115AC Income from the bonds or GDR or on bonds or GDR of a public sector company 10
sold by the Government and purchased in foreign currency or long term capital
gains arising from their transfer
115ACA Income from GDR held by a resident individual who is an employee of an
Indian company engaged in information technology software/services
Dividend [other than dividend referred to in section 115-O] on GDR 10
issued under employee stock option scheme and purchased in foreign
currency
Long term capital gain on transfer of such receipt 10
115BB Winnings from lotteries, crossword puzzle, or race including horse race (not 30
being income from the activity of owning and maintaining race horse) or card
game and other game of any sort or from gambling or betting of any form or
nature
115BBA(1)(a)/(b) Income of a nonresident foreign citizen sportsman for participation in any game 20
in India or received by way of advertisement or for contribution of articles
relating to any game or sport in India or income of a non-resident sport
association by way of guarantee money
115BBA(1)(c) Income of non-resident foreign citizen ( being an entertainer) for performance in 20
India
115E Income from foreign exchange assets and capital gains of non-resident Indian
a. Income from foreign exchange asset 20
b. Long term capital gain 15
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2.1. Introduction
Taxes have inherently been a complex and confusing subject. To make matters more complicated
the provisions undergo amendments both prospectively as well as retrospectively every
financial year making the entire process of understanding the law even more daunting. Even the
great physicist Albert Einstein couldnt help but remark that the hardest thing in the world to
understand is the income tax This being the case the common man doesnt even try to
understand the nitty-gritty of this baffling subject but prefers to outsource their tax matters to
their advisors or chartered accountants. Hence, this subject assumes paramount importance in the
service offerings of every investment advisor. The foregoing units will give a walk-through of
the significant provisions of the Indian Direct tax laws with the objective of providing basic and
working knowledge of this subject.
Income Tax Act, 1961 is the guiding baseline for all the content in this report and the tax saving
tips provided herein are a result of analysis of options available in current market. Every
individual should know that tax planning in order to avail all the incentives provided by the
Government of India under different statures is legal.
This project covers the basics of the Income Tax Act, 1961 as amended by the Finance Act, 2015
and broadly presents the nuances of prudent tax planning and tax saving options provided under
these laws. Any other hideous means to avoid or evade tax is a cognizable offence under the
Indian constitution and all the citizens should refrain from such acts.
2.1 Income tax, Heads of Income and other Rules:
Taxes basically represent the sum of money charged by the Government at The prescribed rates
in lieu of the various services provided. Taxes form the Basic source of revenue to the
Government. There are mainly two types OF Taxes, direct tax and indirect tax as depicted below:
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Direct Taxes are those which are directly collected from the Tax payers i.e. the impact and
incidence of direct Taxes fall on the same person. On the other hand, the impact and incidence of
indirect Taxes fall on different persons since the Tax payer recovers the indirect Taxes paid from
their consumers/ buyers/ clients, as the case may be.
Indian Direct Tax structure:
Currently the Direct Taxes levied by the Government of India are Income Tax and Wealth Tax.
Previously Gift Tax and Estate duty were also part of the Direct Tax revenue, however, these
were repealed by the Government in its effort to rationalize and simplify the Direct Tax regime.
The Indian Constitution empowers the Central Government to levy and collect the Direct Taxes.
The Income Tax law in India comprises of the following:
i. The Income Tax Act, 1961, (ITA)

The ITA was enacted in 1961, by the Central Government. It came into force w.e.f. 1st April
1962 and extends to the entire country. It contains approximately 400 sections and 12 Schedules.
The ITA incorporates the basic provisions of the Income Tax law in India the chargeability,
scope, exemptions, computation mechanisms, Tax holidays, Tax collection, assessments,
appeals, etc. However the ITA is amended every year through the Finance Act passed by the
parliament.
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ii. The Income Tax Rules, 1962

While the ITA lays down the Tax provisions, the Income Tax Rules are formulated by the
Central Board of Direct Taxes (CBDT) for implementation of these provisions. The Rules are
distinct from the ITA and in case of any difference between the two the provisions of the ITA
prevails. The Income Tax Rules can be amended by the CBDT by means of a notification in the
Official Gazette of the Government. Generally amendments to the Rules are consequential to the
amendments to the ITA.
iii. Finance Acts or Annual Budget

As pointed out above, the Finance Act is passed by the Parliament annually
in order to bring about amendments in the ITA. Further, the Finance Act also specifies the rates
at which Income Tax is chargeable.
iv. CBDT Circulars

The CBDT is empowered to issue circulars in order to clarify certain provisions of the law as
well as to issue directions/ instructions to the Income Tax authorities for proper administration of
the ITA. However, these circulars/ directions cannot in any way contradict or defeat the
provisions of the law. Further, it may also be noted that the circulars issued by the CBDT are
binding only on the Income Tax department in other words neither the Tax payers nor the
Courts are bound by them.
v. Judicial Precedents
As discussed earlier, Income Tax law is a highly complicated subject and a good number of
provisions of the ITA are open for multiple interpretations. Therefore there is constant dispute
between the Tax payers and the Tax collectors on several issues emanating there from. These
disputes are 181 ultimately settled by the Tax tribunals and the Courts and there after act as
precedent for settling a future dispute on similar issues and facts. Thus, judicial precedents act as
a basis for deciding a similar issue arising in future
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3.1. TAX PLANNING, TAX EVASION, TAX AVOIDANCE
Tax Planning is an exercise undertaken to minimize tax liability through the best use of all
available allowances, deductions, exclusions, exemptions, etc., to reduce income and/or capital
gains.
Tax planning can be defined as an arrangement of ones financial and business affairs by taking
legitimately in full benefit of all deductions, exemptions, allowances and rebates so that tax
liability reduces to minimum. In other words, all arrangements by which the tax is saved by ways
and means which comply with the legal obligations and requirements and are not colourable
devices or tactics to meet the letters of law but not the spirit behind these, would constitute tax
planning.
The Honble Supreme Court in McDowell & Co. v. CTO (1985) 154 ITR 148 has observed that
tax planning may be legitimate provided it is within the framework of the law. Colourable
devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it
is honourable to avoid payment of tax by resorting to dubious methods. Tax planning should not
be done with intent to defraud the revenue; though all transactions entered into by an assessee
could be legally correct, yet on the whole these transactions may be devised to defraud the
revenue. All such devices where statute is followed in strict words but actually spirit behind the
statute is marred would be termed as colourable devices and they do not form part of tax
planning. All transactions in respect of tax planning must to be in accordance with the true spirit
of statute and should be correct in form and substance.
Various judicial pronouncements have laid down the principle that substance and form of the
transactions shall be seen in totality to determine the net effect of a particular transaction. The
Honble Supreme Court in the case of CIT v. B M Kharwar (1969) 72 ITR 603 has held that,
The taxing authority is entitled and is indeed bound to determine the true legal relation resulting
from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open
to the taxing authorities to unravel the device and to determine the true character of relationship.
But the legal effect of a transaction can not be displaced by a probing into substance of the
transaction.
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The form and substance of a transaction is real test of any tax-planning device. The form of
transaction refers to transaction, as it appears superficially and the real intention behind such
transaction may remain concealed. Substance of a transaction refers to lifting the veil of legal
documents and ascertaining the true intention of parties behind the transaction.
Before a discussion is made concerning the concept of tax planning in detail it needs to be
understood as to how tax is levied.
Liability of tax depends upon the charging section in the statue vis--vis taxable income,
taxable event and subject matter of taxation. For understanding these inter related but distinct
concepts reference may be made to the Supreme Courts decision in State of Tamil Nadu v. M.K.
Kandaswami (1975, 36 STC 191). No tax is complete nor a change can rise under a fiscal statue
unless the subject, the object and the quantum of tax are prescribed or indicated in the provision.
In doing so, there can be different rates of tax levied upon the nature of business/profession
carried on or depending upon the capacity of the person to pay the tax and/or other relevant
consideration. It is now well settled that a modern State, particularly when exercising the power
of taxation, has to deal with complex factors/ relating to the objects to be taxed, tax to be levied,
the social and economic policies etc. Though wide latitude is given to the legislature in the
matter of levy of taxes, what is needed is that the tax/ statute should be constitutionally valid to
pass the muster of Article 14 of the Constitution of India. Article 265 of the Constitution
prescribes that no tax shall be levied or collected except by authority.
No income should be taxed presumptively. There is no equity about taxation and no income
should be taxed twice.
Over the last eight decades, since the introduction of income tax, it has been observed that there
is a constant struggle between taxpayers and tax collectors, the former trying to reduce(if not
negate) their tax liability, and the latter seriously struggling to plug in the loopholes in the status.
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3.1 Tax Planning, Tax avoidance, Tax evasion:
In India the tax laws are admittedly complicated because of various deductions, exemptions,
relief and rebates. Therefore, it is only logical that taxpayers generally plan their affairs so as to
attract the least incidence of tax. However, practice of avoidance is worldwide phenomenon and
there is always a continuing battle in this regard between the taxpayer and the tax collector. The
perceptions of both are different. The taxpayer spares no efforts in maximising his profits and
attracting the least incidence. The tax gatherer, on the other hand, tries to break the plans whose
sole objective is to save taxes.
In the context of saving tax, there are three commonly used practices, namely (a) Tax Evasion;
(b) Tax Avoidance;(c) Tax Planning. They are being considered in greater details in subsequent
discussion
I. Tax Evasion- All methods by which tax liability is illegally avoided are termed as tax evasion.
An assesse guilty of tax evasion may be punished under relevant laws. Tax evasion may involve
stating an untrue statement knowingly, submitting misleading documents, suppression of facts,
not maintain proper accounts of income earned (if required under law), omission of material
facts on assessment. All such procedure and methods are required by the statute to be abided
with but the assesse who dishonestly claims the benefit under the stature before complying with
the said abidance by making false statements. Would be within the ambit of tax evasion.
An assessee guilty of tax evasion is punishable under the relevant laws. Tax evasion may involve
stating an untrue statement knowingly, submitting misleading documents, suppression of facts,
not maintaining proper accounts of income earned (if required under the law) omission of
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material facts in assessments. An assessee who dishonestly claims the benefit under the statute
by making false statements, would be guilty of tax evasion. Tax evasion is a method of evading
tax liability by dishonest means like suppression, showing lower incomes, conscious violation of
rules, inflation of expenses etc. This device has to be condemned. It is a dubious way of
attempting to get tax gains. A tax evader has to pay not only penalty but he also incurs the risk of
being prosecuted. Tax evasion can never be construed as tax planning because it amounts to
breaking of law whereas tax planning is devised within the legal framework by availing of what
the legislature provides. Tax planning ensures not only accrual of tax benefits within the four
corners of law but it also ensures that tax obligations are properly discharged so as to avoid penal
provisions.
A person may plan finances in such a manner, strictly within the four corners of the taxing
statute that his tax liability is minimized or made nil. If this is done and observed strictly in
accordance with and taking advantage of the provisions contained in the Act, by no stretch of
imagination can it be said that payments of tax has been evaded for. In the context of payments
of tax, evasion necessarily means, to try illegality to void paying taxes- CIT v. Sri
Abhayananda Rath Family Benefit Trust (2002) 123 Taxman 81(Ori).
Example: Mr. A, having rendered service to another person Mr. B, is entitled to receive a sum of
say Rs. 50,000/- from Mr. B. A tells B to pay him Rs. 50,000/- in cash and thus does not account
for it as his income. Mr. A has resorted to Tax Evasion.
II. Tax Avoidance- The line of demarcation between tax planning and tax avoidance is very thin
and blurred. The English courts about eight decades ago recognized the right of a taxpayer to
resort to the legal method of tax avoidance. It is well settled that is unconstitutional for the
Government to attempt tax collection without the authority of law or legal basis. Similarly, a
taxpayer cannot escape tax payment outside the legal frame work, as he renders himself liable for
prosecution as a tax evader.
The types of cases that come under Tax avoidance are those where the tax payer has apparently
circumvented the law, without giving rise to an offence, by the use of a scheme, arrangement or
device though of a complex nature, whose main or sole purpose is to defer, reduce or completely
avoid the tax payable under the law. Sometimes, the avoidance is accomplished by shifting the
liability for tax to other person not at arms length in whose hands the tax payable is reduced or
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eliminated. According to G.S.A. Wheat Craft, tax avoidance is the act of dodging tax without
actually breaking the law. It is a method of reducing incidence of tax by taking advantages of
certain loopholes of tax laws. Thus, the line of demarcation between tax avoidance and tax
planning is very thin and blurred. There is an element of malafide motive involved in tax
avoidance.
The Royal Commission on Taxation for Canada has explained the concept of tax avoidance as
under: For our purposes the expression Tax Avoidance will be used to describe every attempt
by legal means to prevent or reduce tax liability which would otherwise be incurred, by taking
advantage of some provisions or lack of provisions of law. It excludes fraud, concealment or
other illegal measures.
Tax avoidance is reducing or negating tax liability in legally permissible ways and has a legal
sanction. Essential features of tax avoidance are as under-
Legitimate arrangement of affairs in such a way so as to minimize tax liability.

Avoidance of tax is not tax evasion and carries no public disgrace with it.
An act valid in law cannot be treated as fictitious merely on the basis of some underlying
motive supposedly resulting in lower payment of tax to authorities.
There is no element of mala fide motive involved in tax avoidance.
Over and over again, the courts have said that there is nothing sinister in so arranging ones
affairs as to keep taxes as low as possible. Tax avoidance is sound law and certainly not bad
morality for anybody to so arrange his affairs in such a way that the brunt of taxation is the
minimum. If on account of a lacuna in the law or otherwise, the assesse is able to avoid payment
of tax within the letter of law, it cannot be said that the action is void because it is intended to
save payment of tax. So long as the law exists in its present form, the taxpayer is entitled to take
advantage.
If the courts find that notwithstanding a series of legal steps taken by the assessee, in case the
intended legal result has not been achieved, the courts might be justified on overlooking the
intermediate steps. But it would not be permissible for the courts to treat the intervening legal
steps as factious based upon some hypothetical assessment of the real motive of the assesee. The
courts must deal with what is tangible in an objective manner. In other words, an act which
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supposedly valid in law cannot be treated fictious merely on the basis of some underlying motive
supposedly resulting in some economic detriment or prejudice to the national interests.
Example: Mr. A, having rendered service to another person Mr. B, is entitled to receive a sum of
say Rs. 50,000/- from Mr. B. Mr. As other income is Rs. 200,000/-. Mr. A tells Mr. B to pay
cheque of Rs. 50,000/- in the name of Mr. C instead of in the name of Mr. A. Mr. C deposits the
cheque in his bank account and account for it as his income. But Mr. C has no other income and
therefore pays no tax on that income of Rs. 50,000/-. By diverting the income to Mr. C, Mr. A
has resorted to Tax Avoidance.
III. Tax Planning- It means arranging the financial activities in such a way that maximum tax
benefits are enjoyed by making use of all beneficial provisions in the tax laws which entitles the
assessee to get certain rebates and reliefs. This is permitted and not frowned upon by the law.
Thus, tax planning would imply compliance with the taxation provisions in such a manner that
full advantage is taken of all exemptions, deductions, concessions, rebates and reliefs permissible
under the Income tax Act so that tax incidence is the least.
Tax planning can neither be equated to tax evasion nor to tax avoidance with reference to a
person, it is the scientific planning of the persons operations in such a way so as to attract
minimum liability to tax or postponement or for that matter deferment of the tax liability for the
subsequent period by availing various incentives, concession, allowances, rebates and reliefs
provided for in the tax laws. They are meant to be availed of and they have certain velar
objectives to achieve.
Tax planning may, therefore, be regarded as method of intelligent application of expert

knowledge of planning a persons affairs with a view to securing consciously proved tax benefits
on the basis of the national priorities in consonance with the interest of the State and the public.
Therefore, notwithstanding, the legal rulings in cases like McDowell and its English parallels,
real and genuine transactions aimed at a valid tax planning cannot be turned down merely on
grounds of reduction of the tax burden.
While planning a scheme relating to tax affairs, what needs to be assured is that tax planning
device does not lose its efficiency due to changes in laws. It would be a shortsighted perspective
to think of a planning device that is in conformity with the laws as its exists, but get nullified by
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a subsequent change in law especially where the change is of a retrospective in nature. Thus the
tax planning is flexible in nature. Flexibility has to be considered as a practical feature in a tax
system. Hence, a planner has to comprehend about the future scenario too while devising a plan
to save tax.
In the context of corporate taxation since the incidence of tax on Indian companies is considered
quite high the scope for ploughing back of profits for expansion and modernisation of the
existing plant and machinery etc. is considerably narrowed down. Thus the company has to plan
its taxation in such a way that will enable it to avail the tax incentives etc. provided by the
Government to the maximum.
3.2 OBJECTIVES OF TAX PLANNING

Tax planning, in fact, is an honest and rightful approach to the attainment of maximum benefits
of the taxation laws within their framework. Therefore, the objectives of tax planning cannot be
regarded as offending any concept of the taxation laws and subjected to reprehension of reducing
the inflow of revenue to the Governments coffers, so long as the tax planning measures are in
conformity with the statute laws and the judicial expositions thereof. The basic objectives of tax
planning are:
(a) Reduction of tax liability
(b) Minimisation of litigation
(c) Productive investment
(d) Healthy growth of economy
(e) Economic stability
(a) Reduction of tax liability- In this context, a tax payer can derive the maximum savings by
arranging his affairs in accordance with the requirements of law, as contained in the fiscal
statutes. In many a cases, a taxpayer may suffer heavy taxation not on account of the dosage of
tax administered by the Act, but, because of his lack of awareness of the legal requirements.
Since every taxpayer wishes to retain a maximum part of his earnings, rather than parting with it
and facing the resource crunch, it would be to his benefit to plan his tax affairs properly and avail
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the deductions and exemption admissible under the Act (s). He can succeed in doing so by
keeping an awareness of the implications of the various business/other transactions as well as
updation of his knowledge about the various concessions for which he is eligible.
(b) Minimisation of litigation- A general visualisation of the tax administration scenario depicts
a tug-of-war the tax payers trying their maximum to pay the least tax and the tax administrator
attempting to extract the maximum. This also results in, sometimes, protracted litigations. It is in
this context that a sound tax planning pays dividends. Where a proper tax planning is adopted by
the tax payer in conformity with the provisions of the taxation laws, the incidence of litigation is
minimised. This saves him from the hardships and inconveniences caused by the unnecessary
litigations, which at times even stretch upto the High/Supreme Court levels.
(c) Productive Investment- Channelisation, by a tax payer, of his otherwise taxable income to
the various investment schemes too is one of the prime objectives of tax planning as it is aimed
to attain twin-objectives: (i) to harness the resources for socially productive projects, and, (ii) to
relieve the tax payer not only from the initial brunt of taxation, but also to convert the earnings
so made into means of further earnings. Legal awareness of the avenues so provided by the
Government, from time to time, negates the imperative avoidance/evasion ends lend authenticity
to the investments made.
(d) Healthy Growth of Economy- The growth of a nations economy is synonymous with the
growth and prosperity of its citizens. In this context, a saving of earnings by legally sanctioned
devices fosters the growth of both, because savings by dubious means lead to generation of black
money, the evils of which are obvious. Conversely, tax-planning measures are aimed at
generating white money having a free flow and generation without reservations for the overall
progress of the nation. Tax planning assumes a great significance in this context.
(e) Economic Stability -In the context of the case, M.V.Valliapan v. ITO, (1988) 170 ITR 238
(Mad.), by a proper tax planning, a smooth tax flow from the tax payer to the tax administrator,
without recriminations, is ensured. This results in economic stability by way of: (i) availing of
avenues for productive investments by the tax payers and, (ii) harnessing of resources for
national projects aimed at general prosperity of the national economy and reaping of benefits
even by those not liable to pay tax on their incomes.
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3.3 IMPORTANCE OF TAX PLANNING
We cannot deny the fact that tax planning is important for reducing the tax liability. It is also
considered important on account of the following factors:
(i) When an assessee has not claimed all the deductions and relief, before the assessment is
completed, he is not allowed to claim them at that the time of appeal. It was held in CIT v.
Gurjargravures Ltd. (1972) 84 ITR 723 that if there is no tax planning and there are lapses on the
part of the assessee, the benefit would be the least.
(ii) Tax planning exercise is more reliable since the Companies Act, 1956 and other allied laws
narrow down the scope for tax evasion and tax avoidance techniques, driving a taxpayer to a
situation where he will be subjected to severe penal consequences.
(iii) Presently, companies are supposed to promote those activities and programmes, which are of
public interest and good for a civilised society. In order to encourage these, the Government has
provided them with incentives in the tax laws. Hence a planner has to be well versed with the
law concerning incentives.
(iv) With increase in profits, the quantum of corporate tax also increases and it necessitates the
devotion of adequate time on tax planning.
(v) Tax planning enables a company to bear the burden of both direct and indirect taxation
during inflation. It enables companies to make proper expense planning, capital budget planning,
sales promotion planning etc.
(vi) Repairs, renewals, modernisation and replacement of plant and machinery are indispensable
for an industry for its continuous growth. The need for capital formation in the corporate sector
cannot be ignored and heavy taxation reduces the inflow of corporate funds. Capital formation
helps in replacing the technologically obsolete and outdated plant and machinery and enables the
carrying on of manufacturing operation with a new and more sophisticated system. Any decision
of this kind would involve huge capital expenditure which is financed generally by ploughing
back the profits, utilisation of reserves and surplus along with the availing of deductions are
revenue expenditure incurred for undertaking modernisation, replacement, repairs and renewal of
plant and machinery etc. Availability of accumulated profits, reserves and surpluses and claiming
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such expenses as revenue expenditure are possible through proper implementation of tax
planning techniques.
(vii) In these days of credit squeeze and dear money conditions, even a rupee of tax decently
saved may be taken as an interest-free loan from the Government, which perhaps, an assessee
need not repay.
Thus, any legitimate step taken by an assessee (being a company) directed towards maximising
tax benefits, keeping in view the intention of law, will not only help it but also the society since
it promotes the spirit behind the legal provisions. All those companies which practice tax
planning may have the satisfaction that they are contributing their best to the nations broad
objectives and goals in a welfare State like ours. At the same time, the law makes the fulfillment
of certain conditions obligatory before allowing the benefits to be claimed by the companies. In
this way, the companies, besides helping themselves, also help in securing the objectives, tasks
and goals set before them by the country.
3.4 DIVERSION OF INCOME AND APPLICATION OF INCOME
The Supreme Courts verdict in CIT v. Sitaldas Tirthdas (1961) 41 ITR 367 is the authority for
the proposition that where by an obligation income is diverted before it reaches the assessee, it is
deductible from his income as for all practical purposes it is not his income at all but where the
income is required to be applied to discharge an obligation after it reaches the assessee, it is not
deductible. Thus, there is the difference between diversion of income by an overriding title and
application of income as the former is deductible while the latter is not. Thus,when management
of a company is taken over by another person from the existing team in consideration of
percentage of future profits to the latter, in computing the business income of the former, such
percentage of profits is deductible [CIT v. Travancore Sugars and Chemicals Ltd. (1973) 88 ITR
1 (SC). Management agreements must therefore be drafted with caution
The Delhi High Courts verdict in CIT v. Stellar Investments Ltd. (1991) 192 ITR 287 to the
effect that the Assessing Officer in terms of the power available to him under Section 68 of the
Act is not precluded from ascertaining the genuineness of the share capital must be needed.
There have been occasions when unscrupulous promoters have ploughed back their black money
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into new companies by subscribing to shares in thousands of fictitious names. If the bluff is
called, the unexplained credit in the form of share capital would be treated as income under
Section 68 of the Act.
3.5 ESSENTIALS OF TAX PLANNING
Successful tax planning techniques should have following attributes
(a) IT should be based on upto date knowledge of tax laws. Not only is an up-to-date knowledge
of the statute law necessary, assessee must also be aware of judgments made through various
decisions of the courts. In addition, one must keep track of the circulars, notifications,
clarifications and Administrative instructions issued by the CBDT from time to time.
(b) The disclosure of all material information and furnishing the same to the income-tax
department is an absolute pre-requisite of tax planning as concealment in any form would attract
the penalty clauses the penalty often ranging from 100 to 300% of the amount of tax sought to
be evaded. Section 271(1)(c) read together with explanations there to.
(c) Whatever is planned should not simply satisfy the requirements of law by complying with
legal provisions as stated and meeting the tax obligations but also should be within the
framework of law. It means that sham transactions or make-believe transactions or colourable
devices, which are entered into just with a view to circumvent the legal provisions, must be
avoided.
Every citizen is obliged to honestly pay the taxes. Therefore, only colourable devices resorted to
by the tax payers for evading a tax liability will have to be ignored by the court. Accordingly, a
tax planning within the four corners of the taxation laws is not to be turned down only because it
legitimately reduces the tax inflow to the Government. A genuine tax-planning device, aimed at
carrying out the rules of law and Courts decisions and to overcome heavy burden of taxation, is
fully valid.
(d) A planning model must be capable of attainment of the desired objectives of a business and
be amenable to its possible future changes. Therefore, all the important areas of corporate
planning, whether related to strategic planning, project planning or operational planning
involving tax considerations for long-term or short-term management objectives and policies
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should be strictly scrutinised in relative situations. Foresight is the essence of a business. Tax
planning is one of its important attributes.
3.6 TYPES OF TAX PLANNING
The tax planning exercise ranges from devising a model for specific transaction as well as for
systematic corporate planning. These are:
(a) Short-range and long-range tax planning.
(b) Permissive tax planning.
(c) Purposive tax planning
(a) Short-range planning & Long-range planning- Short-range planning refers to year to year
planning to achieve some specific or limited objective. For example, an individual assessee
whose income is likely to register unusual growth in particular year as compared to the preceding
year, may plan to subscribe to the PPF/NSCs within the prescribed limits in order to enjoy
substantive tax relief. By investing in such a way, he is not making permanent commitment but is
substantially saving in the tax. It is one of the examples of short-range planning.
Long-range planning on the other hand, involves entering into activities, which may not pay-off
immediately. For example, when an assessee transfers his equity shares to his minor son he
knows that the Income from the shares will be clubbed with his own income. But clubbing would
also cease after minor attains majority
(b) Permissive tax planning- Permissive tax planning is tax planning under the express
provisions of tax laws. Tax laws of our country offer many exemptions and incentives.
(c) Purposive tax planning- Purposive tax planning is based on the measures which circumvent
the law. The permissive tax planning has the express sanction of the Statute while the purposive
tax planning does not carry such sanction. For example, under Sections 60 to 65 of the Income-
tax Act, 1961 the income of the other persons is clubbed in the income of the assessee. If the
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assessee is in a position to plan in such a way that these provisions do not get attracted, Such a
plan would work in favour of the tax payer because it would increase his disposable resources.
Such a tax plan could be termed as Purposive Tax Planning.
To sum up all these four expressions, we may say that:
Tax Evasion is fraudulent and hence illegal. It violates the spirit and the letter of the law.
Tax Avoidance, being based on a loophole in the law is legal since it violates only the spirit
of the law but not the letter of the law.
Tax Planning does not violate the spirit nor the letter of the law since it is entirely based on
the specific provision of the law itself.
Tax Management is actual implementation of a tax planning provision. The net result of tax
reduction by taking action of fulfilling the conditions of law is tax management.
The Income Tax Equation:
For the understanding of any layman, the process of computation of income and tax liability can
be outlined in following five steps. This project is also designed to follow the same.
Calculate the Gross total income deriving from all resources.
Subtract all the deduction & exemption available.
Applying the tax rates on the taxable income
Ascertain the tax liability.
Minimize the tax liability through a perfect planning using tax saving schemes.
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4.1 BASIC CONCEPTS OF INCOME TAX ACT
I. INCOME- No precise definition of the word Income is attempted under the Income-tax Act,
1961. The definition of Income as given in Section 2(24) of the Act starts with the word includes
therefore the list is inclusive not exhaustive. The definition enumerates certain items, including
those which cannot ordinarily be considered as income but are treated statutorily as such. Income
includes not only those things which the interpretation clause declares. It shall also include all
such things the word signifies according to its natural import.
Entry 82 of List I to the Seventh Schedule of the Constitution of India confers power upon
Parliament to levy taxes on income other than agricultural income.
As per section 2(24), the term income means and includes :
A. Profits and gains;
B. Dividend;
C. Voluntary contributions: Voluntary contributions received by :

(a) a trust created wholly or partly for charitable or religious purposes
(b) a scientific research association; or
(c) a fund or trust or institution established for charitable purposes and notified under
section 10(23C)(iv) or (v) or
(d) any university or other educational institution or by any hospital referred to in
Section 10(23C)(iiad)(vi)(iiiae)(iva); or
(e) An electoral trust.
D. The value of any perquisite or profit in lieu of salary taxable.
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E. Any special allowance or benefit specifically granted to the assessee to meet expenses
wholly, necessarily and exclusively for the performance of the duties of an office or
employment of profit.
F. City Compensatory Allowance/ Dearness allowance: Any allowance granted to the

assessee either to meet his personal expenses at the place where the duties of his office or
employment of profit are ordinarily performed by him or at a place where he ordinarily
resides or to compensate him for the increased cost of living.
G. Benefit or Perquisite to a Director: The value of any benefit or perquisite, whether

convertible into money or not, obtained from a company by: (a) a director, or (b) a person
having substantial interest in the company, or (c) a relative of the director or of the person
having substantial interest, and any sum paid by any such company in respect of any
obligation which, but for such payment, would have been payable by the director or other
person aforesaid;
H. Any Benefit or perquisite to a Representative Assessee: the value of any benefit or

perquisite (whether convertible into money or not) obtained by any representative
assessee under Section 160(1)(iii)/(iv) or beneficiary, or any amount paid by the
representative assessee in respect of any obligation which, but for such payment, would
have been payable by the beneficiary;
I. Any sum chargeable under section 28, 41 and 59 :

(a) Any sum chargeable to tax as business income under Section 28(ii), any amount
taxable in the hands of a trade, professional or similar association (for specific services
performed for its members) as its income from business under Section 28(iii), and
deemed profits which are taxable under Sections 41 and 59 of the Act;
(b) Any sum chargeable to income-tax under clause (iiia) of Section 28, i.e. profits on
sale of a licence granted under the Imports (Control) Order, 1955, made under the
Imports and Exports (Control) Act, 1947 [inserted by the Finance Act, 1990, with
retrospective effect from 1.4.1962];
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(c) any sum chargeable to income-tax under clause (iiib) of Section 28 i.e., cash
assistance (by whatever name called), received or receivable by any person against
exports under any scheme of the Government of India.
(d) any sum chargeable to income-tax under clause (iiic) of Section 28 i.e., any duty of
customs or excise re-paid or re-payable as drawback to any person against exports under
the Customs and Central Excise Duties Drawback Rules, 1971.
(e) the value of any benefit or perquisite whether convertible into money or not; taxable
as income under Section 28(iv) in the case of person carrying on business or exercising a
profession;
(f) any sum chargeable to income-tax under clause (v) of Section 28;
J. Capital Gain: Any capital gains chargeable to tax under Section 45; since the definition
of income in Section 2(24) is inclusive and not exhaustive capital gains chargeable under
Section 46(2) are also assessable as income.
K. Insurance Profit: The profits and gains of any business of insurance carried on by a
mutual insurance company or by a co-operative society computed in accordance with the
provisions of Section 44 or any surplus taken to be such profits and gains by virtue of the
profits contained in the First Schedule to the Income-tax Act;
L. Banking income of a Co-operative Society: The profits and gains of any business of
banking (including) providing credit facilities carried on by a cooperative society with its
members.
M. Winnings from Lottery: Any winnings from lotteries, crossword puzzles, races, including
horse-races, card-games and games of any sort or from gambling or betting of any form.
i. "lottery" includes winnings, from prizes awarded to any person by draw of lots or
by chance or in any other manner whatsoever, under any scheme or arrangement
by whatever name called;
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ii. "card game and other game of any sort" includes any game show, an
entertainment programme on television or electronic mode, in which people
compete to win prizes or any other similar game;
N. Employees Contribution Towards Provident Fund: Any sum received by the assessee
from his employees as contributions to any provident fund or superannuation fund or any
fund set-up under the provisions of the Employees State Insurance Act, 1948 (34 of
1948) or any other fund for the welfare of such employees.
O. Amount Received under Keyman Insurance Policy: Any sum received under a Keyman
Insurance Policy including the sum allocated by way of bonus on such policy. Keyman
Insurance Policy means a life insurance policy taken by a person on the life of another
person who is or was the employee of the first mentioned person or is or was connected
with the business of the first mentioned person in any manner whatsoever.
P. Amount received for not carrying out any activity: Any sum referred to in Section
28(va), i.e. any sum, whether received or receivable in cash or kind, under an agreement
for
i. not carrying out any activity in relation to any business; or

ii. not sharing any know-how, patent, copyright, trade-mark, license, franchise or any
other business or commercial right of similar nature or information or technique
likely to assist in the manufacture or processing of goods or provision for services:
Q. Gift received for an amount exceeding ` 50,000: Any sum of money or value of property
referred to in clause (vii) or clause (viia) of sub-section (2) of Section 56.
R. Consideration received for issue of shares: Any consideration received for issue of
shares as exceeds the fair market value of the shares referred in section 56(2)(viib).
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PERSON [SECTION 2(31)]
Income-tax is charged in respect of the total income of the previous year of every person. Hence,
it is important to know the definition of the word person. As per section 2(31), Person includes:
an individual:
a Hindu undivided family:
a company
a firm
an association of persons or a body of individuals whether incorporated or not:
a local authority:
every artificial, juridical person, not falling within any of the above categories
An individual- a natural human being, i.e. male, female, minor or a person of sound or unsound
mind.
A Hindu undivided family - it consists of all persons lineally descended from a common
ancestor and includes their wives and unmarried daughters.
A company - Section 2(17) defines the term company to mean:
(i) any Indian company, or
(ii) any body corporate incorporated by or under the laws of a country outside India i.e. a foreign
company, or
(iii) any institution, association or body which is or was assessable or was assessed as a company
for any assessment year under the Indian Income Tax Act, 1922 or which is or was assessable or
was assessed under this Act as a company for any assessment year commencing on or before the
1st day of April, 1970, or
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(iv) any institution, association or body, whether incorporated or not and whether Indian or non-
Indian, which is declared by general or special order of the Board to be a company only for such
assessment year or assessment years (whether commencing before the first day of April, 1971 or,
on or after that date), as may be specified in the declaration.
A firm - a partnership firm whether registered or not.
An association of persons or a body of individuals whether incorporated or not
The difference between Association of persons and body of individuals is that whereas an
association implies a voluntary getting together for a definite purpose, a body of individuals
would be just a body without an intention to get-together. Moreover, the members of body of
individuals can be individuals only whereas the members of an association of persons can be
individual or non-individuals (i.e. artificial persons).
A local authority-
means a municipal committee, district board, body of port commissioners, or other authority
legally entitled to or entrusted by the Government with the control and management of a
Municipal or local fund.
Every artificial, juridical person, not falling within any of the above categories:
This is a residuary clause. If the assessee does not fall in any of the first six categories, he is
assessed under this clause. Generally, a statutory corporation, deity or charitable institution or an
endowment for charitable or religious purposes falls under artificial juridical person.
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PREVIOUS YEAR (SECTION 3)
Previous year has been defined to mean the financial year immediately preceding the Assessment
year. The previous year can also be understood as the year in which the income is earned by a
person. For instance, the period from April 1, 2010 to March 31, 2011 will be referred to as the
previous year. All the income earned during this period shall be clubbed at the end of the year
and offered to tax as income from the previous year 2010-11.
ASSESSMENT YEAR [SECTION 2(9)]
Assessment year means the period of twelve months commencing on 1st April every year and
ending on 31st March of the next year. Income of previous year of an assessee is taxed during the
following assessment year at the rates prescribed by the relevant Finance Act.
ASSESSEE
In common parlance every tax payer is an assessee. However, the word assessee has been
defined in Section 2(7) of the Act according to which assessee means a person by whom any tax
or any other sum of money (i.e. interest, penalty etc.) is payable under the Act and includes:
(a) every person in respect of whom any proceeding under this Act has been taken for the
assessment of his income or assessment of fringe benefits or of the income of any other person in
respect of which he is assessable or to determine the loss sustained by him or by such other
person or to determine the amount of refund due to him or to such other person.
(b) every person who is deemed to be an assessee under any provision of this Act.
(c) every person who is deemed to be an assessee in default under any provision of this Act.
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Accordingly, assessee is a person by whom tax or any other sum is payable under the Act.
The expression other sum of money includes
fine, interest, penalty and tax or

person to whom any refund of tax etc. is due under the Act or
if any proceeding under the Act has been taken against any person, he is also an assessee.
Remember, the proceedings must be initiated under the provisions of the Act. In other words, a
single enquiry letter issued by the Income-tax Department without reference to any specific
provision of the Act does not constitute proceeding under the Act and, as such, till proceedings
are initiated under the Act, the person may not become an assessee within the ambit of Section
2(7) of the Act.
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5. RESIDENTIAL STATUS & SCOPE OF INCOME
5.1 Scope of total income
The scope of the total taxable income for a person for a previous year is dependent on his
residential status which may be (a) resident, (b) resident but not ordinarily resident, and (c)
non-resident.
A residents total income comprises all his income accrued/ received or deemed to accrue/
received within and outside India. In simpler words, a residents global income is taxable in
India.
A non-residents total income comprises only that income which has accrued/ received or is
deemed to have been accrued/received in India. In other words, a non-resident shall not be liable
to pay tax in India for any income accruing or arising outside India.
The total income of a resident but not ordinarily resident is the same as that of a non-resident but
with an exception. His/ her foreign income shall be taxable in India if it accrues or arises to him
outside India from a business controlled in or a profession set up in India. In other words, if the
foreign income is from a business controlled in or a profession set up outside India and such
income accrues and is received outside India, it will not be taxable for a resident but not
ordinarily resident.
5.2 Residential status
Residential status is the principal factor on which the tax liability for an assessee is determined.
The rules for determining the residential status for the different categories of persons are
different. The foregoing paragraphs emphasize on the rules for calculating the residential status
of an individual. Please note that the residential status is determined separately for each year and
thus an individual may have different residential status in different years.
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An individual may be either resident or a non-resident. An individual will be resident in any

previous year, if he satisfies at least one of the following basic conditions:
i. He is in India during the previous year for a period of 182 days or more; or
ii. He is in India during the previous year for a period of 60 days or more and has been in India
for 365 days or more days during the four years immediately preceding the previous year.
Exception:
However, if the individual is an Indian citizen and leaves India in any previous year as a member
of the crew of an Indian ship or for the purpose of employment, he will have to stay in India for
at least 182 days (and not 60 days as in condition (ii)) to qualify as a resident.
Similarly, if any Indian citizen or a person of Indian origin2 who is living outside India and
comes on a visit to India in the previous year, he will have to stay in India for 182 days (and not
60 days as in condition (ii)) to qualify as a resident.
If an individual doesnt satisfy any of the two conditions as specified above, he shall be treated
as a Non-resident.
A resident could further be categorized as a Resident and ordinarily resident or a Resident but
not ordinarily resident. A resident individual shall be a resident and ordinarily resident if he
satisfies the following two additional conditions:
1. He has been a resident in India for at least 2 out of 10 previous years immediately preceding
the relevant previous year; and
2. He has been in India for a period of 730 days or more during 7 years immediately preceding
the relevant previous year. If any one of the above 2 additional conditions are not satisfied,
then the individual shall be a resident but not ordinarily resident.
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5.3 Hints for tax planning in respect of residential status
In order to enjoy non resident status, individuals, who are visiting India on a business trip or
in some other occasion, should not stay in India for more than 182 days during the previous
year and their total stay in India during any 4 previous years preceding the relevant previous
year should not exceed 364 days.
If individuals, having been in India for more than 365 days during four years preceding the
relevant previous year, wish to stay in India for more than 60 days, they should plan their
visit to India in such a manner that their total stay in India falls under two previous years. To
illustrate such person can come to India any time in the first week of February and stay up to
May 29 without incurring any risk of losing their non resident status.
An Indian citizen or a person of Indian origin (whether rendering service outside India or
not) can stay for a maximum period of 181 days on a visit to India without losing his non-
resident status. If however, such persons wish to stay in India for more than 181 days, they
should plan their visit in such a manner that their maximum stay of 365 days fall under 2
previous years, stay in each previous year being not more than 181 days.
An Indian citizen, leaving India for the purpose of employment, will not be treated as
resident in India unless he has been in India in that year for 182 days or more. In other words,
Indian citizens going abroad for the purpose of employment can stay in India for 181 days
without becoming resident in that year, even if they were in India for more than 365 days
during the four preceding years. This concession is available only to those who want to leave
the country for the purpose of employment. However, the term employment is not defined
in Act.
A non-resident can escape tax liability in respect of income earned out of India if he first
receives it out of India and then remits the whole or part of it to India, even though the
business is controlled from India.
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A person, who is not ordinarily resident, earning income outside India from a business
controlled outside India, can avoid tax liability if he first receives such income in a foreign
country and then remits the whole or part of it to India, either in the same year or in the
following year(s).
Not ordinarily resident persons can claim set-off of losses sustained in the business
controlled outside India against their income taxable in India, provided they shift the control
of the business to India.
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6.1 EXEMPT INCOME :
The ITA has enumerated a list of incomes under section 10 which are totally exempt from
tax. In other words, these incomes do not get added to a persons total income. The foregoing
paragraphs lists out some of the most common incomes which have been exempted from tax
under section 10 of the Act.
Agricultural income [Section 10(1A)]
Agricultural income means:
a. Any income derived from agricultural land which is situated in India and
used for agricultural purposes;
b. Any income derived from agricultural operations including processing of
the agricultural produce;
c. Any income from farmhouse.
However in case of individuals having net agricultural income exceeding Rs. 5,000 and
non-agricultural income exceeding the basic amount not chargeable to Tax, will have to follow
the prescribed procedure for the partial integration of agricultural income and pay the
incremental Taxes on the same accordingly.
Partners share of profit from a firm [Section 10(2A) ] A partners share of profit in the
income of a partnership firm will be exempt.
Leave Travel Concession [Section 10(5)] Any concession or assistance received by an

individual (and his family) from his employer for proceeding on leave to any place in India is
exempt subject to the prescribed conditions. Similarly, any concession or assistance received by
an individual (and his family) from his employer for proceeding to any place in India after
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retirement from service or on termination from service shall also be exempt (subject to the
prescribed limits) under this section.
Gratuity, Pension, Encashment of Leave Salary, Retrenchment Compensation

and Voluntary Retirement Compensation
All of the above constitute the retirement dues receivable by an employee at the time of
retirement or resignation. Any amount received under these headings would be exempt subject to
the prescribed limits. The Taxable amount shall be taxed under the head Income from Salaries.
The employee is also eligible to claim relief under section 89(1) for these benefits.
Amount received under a Life Insurance Policy [Section 10(10D)]

Any sum received under a life insurance policy, including the bonus, will be exempt.
Income of minor child [Section 10(32)]

Any income of a minor child that is clubbed with the income of parent is eligible for a exemption
of the actual amount or Rs. 1,500, whichever is less, in respect of each child.
Company and Mutual Fund dividends

Any income by way of dividends declared and paid by a company (on which the Dividend
Distribution Taxes under section 115-O of the Act has been paid) and dividends paid by Mutual
Funds (on which the Dividend Distribution Taxes under section 115-O of the Act has been paid)
are exempt in the hands of the share/unit holders.
Long-term capital gains [Section 10(38)]

Any long-term capital gains arising from the sale of equity shares or from the redemption of
units of equity-oriented mutual funds3 shall be exempt if:
i. the shares are sold through a recognized stock exchange after October 1, 2004; and
ii. the applicable Security Transaction Tax has been paid on the same.
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7.1 COMPUTAION OF INCOME
Any income that is taxable has to be categorized into any one of the five heads of income that
have been notified by the ITA. For all purposes of computing the total income or calculating the
Income-tax, income shall be classified under the following heads of income:
1. Salaries;
2. Income from House Property;
3. Profits and gains of business or profession;
4. Capital gains;
5. Income from other sources.
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7.2 INCOME FROM SALARIES
Employer-Employee relationship is a must before charging any income under the head
Salaries. In the absence of this relationship, the income can never be characterized as salary.
For instance, a partner in a partnership firm is not an employee of the firm, so the salary paid to a
partner is not accounted for under the head Salaries. Similarly, a college teacher doing
assessment of papers for the University is not an employee of the University. So any honorarium
paid to her by the University is not salary.
Chargeability
Any salary due to an employee, whether paid to him during that previous year or not, shall be
chargeable to Income-tax for that previous year. Similarly, if any advance salary is paid to an
employee, the same shall be chargeable to tax in the year of payment, even if the same has not
become due to the employee. Thus, salary is taxed on due or receipt basis, whichever is earlier.
The term salary has been defined to include:
a) Wages;
b) Annuity/ pension (received from former employers);
c) Gratuity (to the extent it is not exempt u/s 10);
d) Other retirement benefits like leave encashment to the extent it is not exempt u/s 10;
e) Fees, commissions, perquisites or profits in lieu of salary;
f) Advance salary
g) Allowances
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Allowances
An allowance is payment made to an employee in addition to salary to meet specific expenses

related to the performance of duties. The common allowances that are offered to employees in
their salary structure are House Rent Allowances, Children Education Allowance, entertainment
allowance, transport allowance, telephone allowance, medical allowance, dearness allowance,
overtime allowance, special allowance, etc.
Tax treatment of allowances
The allowances would be fully taxable, exempt to the extent amount spent by the employee or
exempt to the extent notified by the ITA.
Medical allowance, Overtime allowance, special allowances are examples of allowances which
are fully taxable.
Uniform allowance, helper allowance, conveyance allowances are examples of allowances which
are exempt to the extent of amount received by the employee and the amount spent for the
specified purposes, whichever is lower.
Children Education Allowance, Transport Allowances are examples of allowances which are
exempt to the extent of amount received by the employee and the amount notified by the Act,
whichever is lower. In this regard it may be noted that Children Education Allowance is exempt
to the extent Rs.100 p.m. per child up to 2 children while Transport Allowance is exempt to the
extent of Rs. 800 p.m.
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House Rent Allowance (HRA)
Being the most common allowance claimed by employees, merits a brief explanation for the
calculation of exemption here. The HRA received by the employee from the employer is exempt
subject to limits prescribed under Rule 2A of the Income Tax Rules. According to this rule the
lower of the following three parameters will be exempt from Tax and the balance will be Taxable
as salary:
a. Actual amount of HRA received;

b. Amount equal to 50% of salary for the relevant period, in case the rented house is situated in
the four metro cities Mumbai, Delhi, Kolkata and Chennai, and 40% of salary if the house
is situated in any other cities;
c. Rent paid in excess of 10% of salary for the relevant period.
Salary for this purpose means basic salary and dearness allowance; to the extent it forms part of
salary for the purpose of retirement benefits. All other allowances and perquisites will be
excluded. However, it may be noted that HRA exemption is not available in case the residential
accommodation is owned by the employee or in case he is not incurring any expenditure on
rental payment.
However, it may be noted that HRA exemption is not available in case the residential
accommodation is owned by the employee or in case he is not incurring any expenditure on
rental payment.
Perquisites
Perquisites have been defined to mean and include any benefits, amenities, services or facilities
granted to employees over and above the salary. It basically is a personal advantage to
employees.
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Taxable Perquisites
Section 17(2) of the Act includes the following benefits granted to employees as perquisites:
i. Value of rent-free accommodation provided to the employee by his employer;
ii. Value of any concession in the matter of rent in respect of any accommodation provided to
the employee by his employer;
iii. Value of any benefit or amenity granted or provided free of cost or at concessional rate to
any of the following employees:
To a director;
To a employee being a person who has substantial interest in the company (a person
having more than 20% beneficial ownership of shares in a company or more than
20% share in profits in entities other than companies);
To an employee (not covered under a. and b. above) and whose income under the
head Salaries, excluding the value of all benefits or amenities not provided for by
way of monetary payment, exceeds Rs. 50,000.
iv. Any obligations of the employees being met by the employer;
v. Any sum payable by the employer, whether directly or through a fund, other than a
recognized provident fund or an approved superannuation fund or a Deposit-linked
Insurance Fund established under section 3G of the Coal Mines Provident Fund and
Miscellaneous Provisions Act, 1948, or, as the case may be, section 6C of the
Employees Provident Funds and Miscellaneous Provisions Act, 1952, to effect an
assurance on the life of the assessee or to effect a contract for an annuity;
vi. The value of any specified security or sweat equity shares allotted or transferred, directly
or indirectly, by the employer, or former employer, free of cost or at concessional rate to
the assessee;
vii. The amount of any contribution to an approved superannuation fund by the employer in
respect of the assessee, to the extent it exceeds one lakh rupees;
viii. Value of any other fringe benefits.
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Tax-free perquisites
Some of the Tax-free perquisites as provided in the Act are given below for a ready reference:
i. Value of any medical facility provided to the employee or any member of his family in a
hospital, clinic, dispensary or nursing home maintained by the employer;
ii. Medical expenses reimbursed by the employer for any expenditure on medical treatment of
employee or any member of his family in any private hospital , clinic, nursing homes, etc up
to Rs. 15,000 per annum;
iii. Tea, snacks and other refreshments provided by the employer during office hours will be
exempt;
iv. Non-transferable meal vouchers which is usable at eating joints and where the value of each
voucher is up to Rs. 50 per meal;
v. Interest-free or concessional loans to employees up to Rs. 20,000;
vi. Expenditure on telephones, including mobile phones, incurred by employers on behalf of

employees.
Provident Fund
A Provident Fund scheme is intended to provide long-term benefits for employees, particularly
for their retirement kitty. This fund is credited by an amount deducted from the employees
salary every month at pre-specified rate. Statutory provisions make it compulsory for the
employers to also make contributions towards the employees provident fund account. These
funds earn interest at statutory rates, which are declared every year by the Government.
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Public Provident Fund (PPF) is the only provident fund account referred above that is available
for assesses in employment as well as self-employment. The Taxability of the same has been
referred to provide a comparative view of the different provident funds.
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7.3 Hints for tax planning in respect of Salaries
For the purpose of tax planning under the head salaries the following propositions should be
borne in mind. However, these proposition would hold good only in the context in which they
have been made :
It should be ensured that, under the terms of employment, dearness allowance and dearness
pay forms part of basic salary. This will minimize tax incidence on house rent allowance,
gratuity and commuted pension. Likewise, incidence of tax on employers contribution to
recognized provident fund will be lesser if dearness allowances forms part of salary.
The Supreme Court has held in Gestetner Duplicators (P) Ltd. V. CIT that commission,
payable as per terms of contract of employment at a fixed percentage of turnovers achieved
by an employee, falls within the expression salary as defines in rule2 (h) of Part A of the
Fourth Schedule. Consequently, tax incidence on house rent allowance, entertainment
allowance, gratuity and commuted pension will be lesser if commission is paid at fixed
percentage of turnover achieved by the employee.
As uncommuted pension is always taxable, employees should get their pension

commuted.commuted pension is fully exempt from tax in case of Government employees
and partly exempt from tax in case of non Governement employees who can claim relief
under section 89.
An employee, being a member of recognized provident fund, who resigns before completing
five years of continuous service, should ensures that he joins a firm which maintains a
recognized provident fund for the simple reason that the accumulated balance of the
provident fund with the former employer will be exempt from tax, provided the same is
transferred to the new employer who also maintains a recognized provident fund.
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Since employers contribution towards recognized provident fund is exempt from tax up to
12 percent of salary, employer may give extra benefits to their employees by raising their
contribution to 12 percent of salary without increasing any tax liability.
While medical allowances payable in cash is taxable, provisions of ordinary medical

facilities is not taxable if some conditions are fulfilled. Therefore, employees should go in for
free medical facilities instead of fixed medical allowances.
Since incidence of tax on retirement benefits like gratuity, commuted pension, accumulated
balance of unrecognized provident fund is lower if they are paid in the beginning of the
financial year, employer and employee should mutually plan their affairs in such a way that
retirement, termination, or resignation as the case may be take place in the beginning of the
financial year.
An employee should take the benefit of relief available under section 89 wherever possible.
Relief can be claimed even in the case of a sum received from unrecognized provident fund
so far as it is attributable to employers contribution and interest thereon. Although gratuity
received during the employment is not exempt from tax under section 10(10), relief under
section 89 can be claimed. It should, however, be ensured that the relief is claimed only when
it is beneficial.
Pension received in India by a nonresident assesse from abroad is taxable in India. If

however such pension is first received by or on behalf of the employee in a foreign country
and later on remitted in India it will be exempt from tax.
As the perquisites in respect of leave travel concession is not taxable in the hands of
employees if certain conditions are satisfied, it should be ensured that the travel concession
should be claimed to the maximum possible extent without attracting any incidence of tax.
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As the perquisites in respect of free residential telephone, providing use of computer/laptop,

gifts of movable assets by employer using it for 10 years or more are not taxable; employees
can claim benefits without adding to their tax bill.
Since the term salary includes basic salary, bonus, commission, fees and al other taxable
allowances for the purpose of valuation of perquisites is respect of rent free accommodation
it would be advantageous if the employees go in for perquisites rather than for taxable
allowances. This will reduce valuation of rent free house.
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7.4 INCOME FROM HOUSE PROPERTY
Income from House Property is the second head of income as laid down under the scheme of
taxation. The ownership of the property may be direct or even deemed (as per the prescribed
provisions). Computation of income from house property involves determining the annual value
of the property under different scenarios, deductions available from the annual value and some
relevant provisions
Chargeability
Any income earned by a person from properties owned by him/her would be Taxed under this
head. The three most important conditions that are to be fulfilled for charging income under this
head are:
i. The person should own the property;
ii. The property should not be used for the purposes of business by the person;
iii. The property should consist of both land and buildings.
In other words, if a person earns any income from a plot of land, whether vacant or not, such
income cannot be counted under this head of income.
Taxability of income in whose hands
The income is always taxable in the hands of the owner/ deemed owner of the property. The
income is chargeable in the hands of a person, even if he is not the registered owner of the
property. Transfer of property to ones spouse or minor children (except in prescribed
circumstances) without adequate consideration is one example where the transferor is deemed to
be the owner of such property for calculating income under house property.
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Computing income
The annual value of the property is the most important factor for calculating the income under
this head. Annual value begins by calculating the Gross Annual Value (GAV) of the property.
For determining the GAV, the higher of the following values will be considered:
a. The sum for which the property might reasonably expect to be let out from year to year
based on higher of municipal valuation and fair rent;
b. In case the property is subject to the Rent Control Act, then the value, determined as
above, cannot exceed the Standard Rent as set by this Act;
c. Where the property is let out and the rent received or receivable is more than the amount
determined in a. or b. above, then the annual value would be the actual rent received;
d. In case of a let out property, if there is any portion of rent that has remained unrealized,
the same will be deductible from the actual rent subject to fulfillment of prescribed
conditions
e. If an individual is in occupation of a house for the purposes of his residence, the annual
value of the property shall be considered to be nil (provided he does not derive any other
benefit from the property). Such a property is also called as Self Occupied Property;
f. If the individual has more than one house for the purposes of his residence, the annual
value of any one of such houses, at his option, would be considered nil. Notional income
of the other residential house would be liable to tax.
Determination of the Net Annual
The following amounts are required to be reduced while determining the Net Annual Value:
a. Municipal Taxes Taxes levied by the local authorities, only if they are actually paid by the
owner during the relevant previous year. Taxes, if paid, by the tenant will not be allowed as a
deduction for the property owner;
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b. Unrealized Rent in case of a let-out property, where any rent is unrealized during the year,
the same can be deducted from the GAV, provided the prescribed conditions are satisfied by
the defaulting tenant.
Deductions from Net Annual Value
a. For let-out properties In case of let out properties, 30% of the Net Annual Value (also known
as Standard Deduction) and the interest paid/ payable for the acquisition / construction of the
property
b. For self-occupied properties Interest paid/payable for the acquisition/construction of the

property is the only deduction permissible for this category of properties. The Act has laid down
the limits for this deduction as follows:
i. If the property is acquired prior to April 1, 1999, - Rs. 30,000

ii. ii. If the property is acquired after 1 April 1999 Rs. 2,00,000 provided the acquisition/
construction is completed within three years from the end of the financial year in which
the capital is borrowed.
In cases where the property is acquired/ constructed using borrowed funds, the interest payable/
paid up to the period prior to the previous year in which the property is acquired or constructed
would be allowed in five equal installments starting from the year in which the property is
acquired/ constructed (also known as Pre-construction Period Interest) The deductions, as listed
above, are the only deductions permissible under this head of income.
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7.5 Hints for tax planning in respect of house property
For the purpose of tax planning, the following broad propositions should be borne in mind.
However, these propositions would hold good in the context in which they have been made:
If a person has occupied more than one house for his own residence, only one house of his
own choice is treated as self-occupied and all the other houses are deemed to be let out. The
tax exemption applies only in the case of one self-occupied house and not in the case of
deemed to be let out properties. Care should, therefore, be taken while selecting the house to
be treated as self-occupied in order to minimize the tax liability.
As interest payable out of India is not deductible if tax is not deducted at source (and in
respect of which there is no person who may be treated as an agent under section 163), care
should be taken to deduct tax at source in order to avail exemption under section 24(b).
As mount of municipal tax is deductible on payment basis and not on due or accrual
basis, it should be ensured that municipal tax is actually paid duri9ng the previous year if the
assesse wants to claim deduction.
As a member of a co-operative society to whom a building or part thereof us allotted or

leased under a house building scheme is the deemed owner of the property, it should be
ensured that interest payable (even if not paid) by the assesse, on outstanding installments of
the cost of the building is claimed as a deduction under section 24.
If an individual makes a cash gift to his wife who purchases a house property with the gifted
money, the individual will not be deemed as fictional owner of the property under section
27(i). taxable income of the wife from the property is, however, includible in the income of
individual in terms of section 64(1)(iv). Such income is to be computed under section 23(2),
if she uses the house property for her own residential purpose. It can, therefore, be advised
that if an individual transfers an asset, other than house property, even without adequate
consideration, he can escape to the deeming provision of section 27(i) and the consequent
hardship.
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Under section 27(i), if a person transfers a house property without consideration to his/her
spouse , or to his minor child, the transferor is deemed to be the owner of the house property.
This deeming provision was found necessary in order to bring this situation in line with the
provision of section 64. But when the scope of section 64 was extended to cover transfer of
assets without adequate consideration to sons wife or minor grandchild. The scope of section
27(i) was not similarly extended. Consequently, if a person transfers house property to his
sons wife without adequate consideration, he will not be deemed to be owner of the house
property under section 27(i), but income earned from the property by the transferee will be
included in the income of the transferor under section 64. For the purpose of section 22 to 27,
the transferee will, thus, be treated as an owner of the house property and income computed
in his/her hands is included in the income the transferor under section 64. Such income is to
be computed under section 23(2), if the transferee uses that property for self- occupation.
Therefore, in some cases. It is beneficial to transfer the house property without adequate
consideration to sons wife or sons minor child.
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7.6 INCOME FROM BUSNIESS AND PROFESSION
Income from Business and Profession is the third head of income when arranged
chronologically as per the sections. The income offered under this head of income is not the
gross income earned from business or profession, but the profits (losses) computed by deducting
the eligible expenses.
Chargeability
The profits and gains of any business or profession carried on by an individual at any time during
the previous year shall be chargeable under this head of income. The value of any benefits or
perquisites arising from the business or exercise of a profession shall also be chargeable here.
The scope of income under this head also covers any interest, salary, bonus, commission or
remuneration due to or received by a partner of a firm.
Computation of Income
Profits and gains under this head are computed by deducting the admissible expenses from the
gross sale (in case of a business) and receipts (in case of a profession). Expenses under the Act
are broadly classified as follows:
i. Expenses that are expressly deductible;
ii. Expenses that are generally deductible; and
iii. Expenses that are expressly disallowed.
All the expenses which are incurred wholly and exclusively for the purposes of the business/
profession carried on during the previous year are generally allowed to be deducted while
calculating the profits of the business.
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Some of the expenses that are expressly allowed as deductions are as follows:
i. Rent, rates and Taxes, repairs and insurance for building, plant and machinery, furniture;
ii. Insurance premiums paid against risk of damage or destruction of stocks used for the business;
iii. Bonus or commission paid to employees;
iv. Interest paid on borrowed capital;
v. Depreciation
Expenses not deductible
i. Income Taxes paid on profits or gains of any business or profession;
ii. Wealth Taxes paid;
iii. Any payment or payments made towards any expenditure, exceeding Rs.20, 000 in a day,
made by any mode other than an account payee cheque or an account payee bank draft;
iv. Payment of interest on capital to partners in a partnership firm in excess of 12% p.a.;
v. Payment of salary, bonus, commission or any other form of remuneration paid to partners in a
partnership firm in excess of the limits specified under section 40(b) of the Act.
The following incomes shall be chargeable under this head
Profit and gains of any business or profession carried on by the assessee at any time during
previous year.
Any compensation or other payment due to or received by any person, in connection with the
termination of a contract of managing agency or for vesting in the Government management
of any property or business.
Income derived by a trade, professional or similar association from specific services
performed for its members.
Profits on sale of REP licence/Exim scrip, cash assistance received or receivable against
exports, and duty drawback of customs or excise received or receivable against exports.
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The value of any benefit or perquisite, whether convertible into money or not, arising from
business or in exercise of a profession.
Any interest, salary, bonus, commission or remuneration due to or received by a partner of a
firm from the firm to the extent it is allowed to be deducted from the firms income. Any
interest salary etc. which is not allowed to be deducted u/s 40(b), the income of the partners
shall be adjusted to the extent of the amount so disallowed.
Any sum received or receivable in cash or in kind under an agreement for not carrying out
activity in relation to any business, or not to share any know-how, patent, copyright, trade-
mark, licence, franchise or any other business or commercial right of, similar nature of
information or technique likely to assist in the manufacture or processing of goods or
provision for services except when such sum is taxable under the head capital gains or is
received as compensation from the multilateral fund of the Montreal Protocol on Substances
that Deplete the Ozone Layer.
Any sum received under a Keyman Insurance Policy referred to u/s 10(10D).
Any allowance or deduction allowed in an earlier year in respect of loss, expenditure or
trading liability incurred by the assessee and subsequently received by him in cash or by way
of remission or cessation of the liability during the previous year.
Profit made on sale of a capital asset for scientific research in respect of which a deduction
had been allowed u/s 35 in an earlier year.
Amount recovered on account of bad debts allowed u/s 36(1) (vii) in an earlier year.
Any amount withdrawn from the special reserves created and maintained u/s 36 (1) (viii)
shall be chargeable as income in the previous year in which the amount is withdrawn.
Books of Accounts
Every person carrying on legal, medical, engineering or architectural profession, accountancy or

technical consultancy or interior decoration or any other specified professions shall keep and
maintain such books of accounts and other documents so as to enable the assessing officer to
compute his/ her income as per the provisions of this Act.
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Audit
The following persons are required to get their accounts compulsorily audited by a chartered
accountant and obtain the Tax audit report in the prescribed form before the due date of filing the
tax returns:
i. A person carrying on business, if the total sales, turnover or gross receipt in business for
the accounting year or years relevant to the assessment year exceed or exceeds Rs. 1
crore.
ii. A person carrying on profession, if his gross receipts in profession for an accounting year
or years relevant to any of the assessment year exceeds Rs. 25 lakh.
The object of audit is to assist the Assessing Officer in computing the total income in accordance
with different provisions of the Act, and therefore the audit needs to be undertaken even if the
income of a person is below the taxable limit.
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7.7 CAPITAL GAINS
Capital gains is the fourth head of income when arranged chronologically as per the sections.
The income offered under this head of income represents the capital profits earned by an
assessee on transfer of assets.
Chargeability
Profits or gains arising from the transfer of a capital asset is chargeable to tax in the year in
which transfer take place under the head Capital Gains. The Act defines the following
concepts as follows:
Transfer (section 2(47)): Transfer in relation to a capital asset includes the following:
sale;
exchange;
relinquishment of the asset;
extinguishment of any rights in the asset;
compulsory acquisition of an asset under any law;
conversion of the asset into stock-in-trade of a business;
maturity or redemption of a zero coupon bond.
However the following modes are specifically excluded from the definition of transfer:
Gift;
Distribution of capital assets on partition of a HUF;
Transfer under a will or an irrevocable trust;
Conversion of bonds / debentures/ deposit certificates of a company into shares.
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Capital Asset (section 2(14)): Capital Asset means property of any kind - fixed, circulating,
movable, immovable, tangible or intangible - whether or not connected with his business or
profession.
Exclusions
Stock-in- trade, raw materials, consumables stores held for business purposes;
Personal effects of the assessee (excluding jewellery, archaeological col lections, paintings,
sculptures, etc.);
Agricultural land in a rural area;
6% Gold Bonds 1977 or 7% Gold Bonds 1980 or National Defence Bonds 1980 issued by the
Central Government;
Special Bearer Bonds 1991 issued by the Central Government;
Gold Deposit Bonds issued under Gold Deposit Scheme 1999.
Based on the period of holding, capital assets are classified as:
i. Short-term capital asset (section 2(42A)) means a capital asset held by an assessee for not
more than 36 months (i.e. 36 months or less) immediately preceding the date of its transfer.
However, in case of the following assets, the aforesaid threshold is reduced to 12 months:
Quoted or unquoted equity or preference shares in a company;
Quoted Securities;
Quoted or unquoted Units of UTI;
Quoted or unquoted Units of Mutual Funds;
Quoted or unquoted zero coupon bonds.
ii. Long-term capital asset: (section 2(29)) means a capital asset which is not a short-term
capital asset Capital gains are generally charged to Tax in the year in which the transfer takes
place, exceptions being
a. Insurance Claim in the year of receipt.
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b. Conversion of capital asset into Stock-in-trade in the year of actual sale of the stock.
c. Compulsory acquisition when consideration or part thereof is first received.
Computation of capital gains
The method of computation depends on the nature of capital asset transferred, as summarized
below:
Full value of consideration represents the gross consideration receivable in respect the asset.
However in case of the transfer of land or building or both the full value of consideration shall be
the higher of:
a. Full value of the consideration received or accruing

b. Value adopted or assessed or assessable by any authority of a State Government for the
purpose of payment of stamp duty in respect of such transfer.
Cost of acquisition represents the cost incurred by the transferor for acquiring the asset in
question. However, in case the asset being transferred became the property of the assessee by
way of distribution on partition of a HUF or gift or under a will, the cost of acquisition in the
hands of the assesse would be the cost of acquisition of the previous owner. Cost of
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improvement represents the capital expenditure incurred by the assesse in making any additions
or alterations to the capital asset.
Indexed cost of improvement can be arrived at using the same formula by substituting the
denominator with the CII for the year of improvement. However, indexation benefit is not
available in case of Bonds, Debentures, and depreciable assets. Further, non-residents are not
entitled to avail of this benefit.
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Notes
1. In case a new asset is transferred before 3 years from date of purchase/ construction, the
Capital Gains exempted earlier will be chargeable to tax in the year of transfer.
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2. In order to avail the exemption, gains are to be reinvested, before the due date of filing the
return of income. If the amount is not so reinvested, it is to be deposited on or before that
date in account of specified bank/institution and it should be utilized within specified time
limit for purchase/ construction of New Asset.
3. U/s 54F Capital Gains exempted earlier shall be chargeable to tax if
If the assessee purchases within 2 years or constructs within 3 years any residential house
other than the one in which reinvestment is made &
If the new asset is transferred within a period of 3 years from the date of its purchase/
construction.
4. If cost of new house is more than the net consideration of original asset, the whole of the
gains. If cost of specified asset is less than net consideration, the proportionate amount of the
gains will be exempt.
7.8 Hints for tax planning in respect of Capital Gains.
Since long-term capital gains bear lower tax, taxpayers should so plan as to transfer their
capital assets normally only 36 months after acquisition. It is pertinent to note that if capital
asset is one which became the property of the taxpayer in any manner specified in section
49(1), the period for which it was held by the previous owner is also to be counted in
computing 36 months.
The assessee should take advantage of exemption u/s 54 by investing the capital gain arising
from the sale of residential property in the purchase of another house (even out of India)
within specified period.
In order to claim advantage of exemption under sections 54B and 54D it should be ensured
that the investment in new asset is made only after effecting transfer of capital assets.
In order to claim advantage of exemption under sections 54, 54B, 54D, 54EC, 54ED, 54EF,
54G and 54GA the tax payer should ensure that the newly acquired asset is not transferred
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within 3 years from the date of acquisition. In this context, it is interesting to note that the
transfer (one year in the case of section 54EC) of a newly acquired asset according to the
modes mentioned in section 47 is not regarded as transfer even for this purpose.
Consequently, newly acquired assets may be transferred even within 3 years of their
acquisition according to the modes mentioned in section 47 without attracting the capital tax
liability. Alternatively, it will be advisable that instead of selling or converting assets
acquired under sections 54, 54B, 54D, 54F, 54G and 54GA into money, the taxpayer should
obtain loan against the security of such asset (even by pledge) to meet the exigency.
In 2 cases, surplus arising on sale or transfer of capital assets is chargeable to tax as short-
term capital gain by virtue of section 50. These cases are: (i) when WDV of a block of assets
is reduced to nil, though all the assets falling in that block are not transferred, (ii) when a
block of assets ceases to exist.
Tax on short-term capital gain can be avoided if Another capital asset, falling in that block
of assets is acquired at any time during the previous year; or Benefit of section 54G is availed
Tax payers desiring to avoid tax on short-term capital gains under section 50 on sale or
transfer of capital asset, can acquire another capital asset, falling in that block of assets, at
any time during the previous year.
If securities transaction tax is applicable, long term capital gain tax is exempt from tax by
virtue of section 10(38). Conversely, if the taxpayer has generated long-term capital loss, it is
taken as equal to zero. In other words, if the shares are transferred, in national stock
exchange, securities transaction tax is applicable and as a consequence, the long-term capital
loss is ignored. In such a case, tax liability can be reduced, if shares are transferred to a friend
or a relative outside the stock exchange at the market price (securities transaction tax is not
applicable in the case of transactions not recorded in stack exchange, long term loss can be
set-off and the tax liability will be reduced). Later on, the friend or relative, who has
purchased shares, may transfer shares in a stock exchange.
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7.9 INCOME FROM OTHER SOURCES
This is the residuary head of income and sweeps in, all such taxable income, profits and gains
that fall outside the other specific heads viz. Salaries, Income from house property, Profit and
Gains of Business or Profession, Capital Gains.
Chargeability & nature of income
Any item of income which is not covered in any of the earlier heads of income is included under
this head. The Act enumerates the following types of income which would be chargeable to Tax
under this head:
1. Dividends (excluding Dividend income referred to in section 115-O which is exempt);

2. Winning from lotteries, crossword puzzles, races, card games and other games, gambling or
betting etc.);
3. Any sum received from employees by way of contribution to any P.F, ESIC or
superannuation fund;
4. Any sum received under a Keyman insurance policy including amount allocated by way of
bonus on such policy, if not chargeable under the earlier heads;
5. Interest on securities if not chargeable under the head business income;
6. Income from letting of machineries, plants or furniture belonging to assessee, if not
chargeable under the head business income;
7. Income from letting of machineries, plants or furniture belonging to assessee and also
building, where letting of building is not separable from letting of such machineries etc. then
entire income there from, if not chargeable to Tax under the head profit and gains of business
and profession;
8. Deemed gifts (discussed separately).
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Deemed gifts
In terms of clause (vii) to section 56(2) of the Act, specified gifts received by an individual or
HUF is chargeable to Tax, subject to certain exclusions. The deemed gifts covered by the
provision are as follows:
1. Any sum of money received without consideration from persons in excess of Rs. 50,000
during a given year, the whole of such aggregate sum;
2. Any immovable property without consideration the stamp duty value of which exceeds Rs.
50,000, the stamp duty value of such property;
3. Any movable property without consideration, the aggregate fair market value of which
exceeds, Rs. 50,000, the whole of such fair market value;
4. Any movable property for an inadequate consideration, the difference between the fair
market value and the consideration, provided the difference is greater than Rs. 50,000;
Property means capital assets of the assessee in the nature of land or building or both, shares &
securities, jewellery, bullion, paintings, drawings, archaeological collections, sculptures or any
art work.
Exclusions
The above provision would not be applicable to the money or property received:
1. from any relatives

2. on the occasion of marriage of the recipient
3. under a will or inheritance
4. in contemplation of death of the payer
5. Amount received from any local authority
6. Amount received from any fund or foundation or university or other educational institution
or hospital or other medical institution or any trust or institution
7. Any amount received from any trust or institution
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Deductions
Any expenditure (not being in nature of capital expenditure or personal expenditure) laid out or
expended wholly and exclusively for the purpose of making or earning income chargeable under
the head Income from Other Sources, is deductible.
However, in case of income in the nature of winning from lotteries, cross word puzzles, races
including horse race and games of any sorts, etc, no deduction are allowed for expenses or
allowances incurred in connection with such income. Further, in case of pension received by the
family of a deceased employee from the employer the deduction available would be lower of
1/3rd of such pension or Rs.15, 000.
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8.1. CLUBBING OF INCOME
Sometimes an assessee can transfer his property or income to other related people in such a
manner so as to keep the Tax liability to minimum or even avoid paying Taxes. Such transfers
are nothing but attempts to reduce Tax liability by transferring income or sources of income to
people, who are either not paying any Tax currently or are subject to lower Tax rates than the
transferor. In order to curb such practices, the Act has included provisions for clubbing of
income. Any income arising to a person out of any money or assets transferred to him/her by
any other person without adequate consideration, then such income shall be clubbed and assessed
as income in the hands of the transferor.
The various provisions that have been covered in the Act under Clubbing of Income have been
summarized in the table below:
Section Nature of Transfer Clubbed in the Conditions/

of Income/ hands of Exceptions
Assets
64(1)(ii) Any Salary, Spouse whose total Clubbing provisions
Commission, Fees or income (excluding the not applicable if:
Remuneration paid to referred salary income Spouse possesses
spouse from a concern to be clubbed) is technical or
in which an individual greater. professional
has substantial interest qualification; and
remuneration is solely
attributable to
application of that
knowledge/
qualification.
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64(1)(iv) Income from assets Individual transferring Clubbing not

transferred directly or the asset. applicable if the assets
indirectly to the are transferred:
spouse without 1. Under an agreement
adequate to live apart.
consideration. 2. Before marriage.
3. Income earned
when relation of
husband-wife
does not exist.
64(1)(vi) Income from the assets Individual transferring Condition:

transferred to sons the Asset. The transfer should be
wife. without adequate
consideration.
64(1)(vii) Transfer of assets Individual transferring Condition:
by an individual the Asset. The transfer
to a person for should be without
the immediate or adequate
deferred benefit consideration.
of his Spouse
64(1)(viii) Transfer of assets Individual transferring Condition:
by an individual to a the Asset. The transfer should be
person for the without adequate
immediate or deferred consideration.
benefit of his Sons
wife.
64(1A) Income of a minor 1. If the marriage Clubbing not
child subsists, in the hands applicable for:
of the parent whose 1. Income of a
total income is greater; minor child suffering
2. If the marriage does from any specified
not subsist, in the disability
hands of the person 2. Income on account
who maintains of manual work done
the minor child. by the minor child.
3. Income once 3. Income on
included in the total account of any activity
income of either of involving application
parents, it shall of skills,
continue to be talent or specialized
included in the hands knowledge and
of same parent in the experience.
subsequent year unless
the Assessing Officer
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TAX PLANNING
is satisfied that it is
necessary to do so
(after giving that
parent opportunity of
being
heard)
64(2) Income of HUF from Income is included in
property converted by the hands of individual
the individual into & not in the hands of
HUF property. HUF.
8.2 Hints for tax planning in respect of Clubbing of Income.
Under section 64(1) (ii), salary earned by the spouse of an individual from a concern in
which such individual has a substantial interest, either individually or jointly with his
relatives, is taxable in the hands of the individual. To avoid this clubbing, as far as possible
spouse should be employed in which employee does not have any interest. In such a case this
section will not be attracted, even if a close relative of the individual has substantial interest
in the concern. Alternatively, the spouse may be employed in a concern which is inter related
with the concern in which the individual has substantial interest.
Income from property transferred to spouse is clubbed in the hands of transferor. However, it
has been held that income from savings out of pin money (i.e., an allowance given to wife by
husband for her dress and usual house hold expenditure) is not included in the taxable
income of husband. Likewise, a pre-nuptial transfer (i.e., transfer of property before
marriage) is outside the mischief of section 64(1) (iv) even if the property is transferred
subject to subsequent condition of marriage or in consideration of promise to marry.
Consequently income from property transferred without consideration before marriage is not
clubbed in the income of the transferor even after marriage. Income from property transferred
to spouse in accordance with an agreement to live apart, is not clubbed in the hands of
transferor. It may be noted that the expression to live apart is of wider connotation and
covers even voluntary agreement to live apart.
Exchange of asset between one spouse and another is outside the clubbing provisions if such
exchange of assets is for adequate consideration. The spouse within higher marginal tax rate
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TAX PLANNING
can transfer income yielding asset to other spouse in exchange of an equal value of asset
which does not yield any income. For instance, X (whose marginal rate of tax is 33.66%) can
transfer fixed deposit in a company of Rs.100,000 bearing 9% interest, to Mrs. X (whose
marginal tax is nil) in exchange of gold of Rs.100,000; he can reduce his tax bill by Rs.
3029(i.e., 0.3366 x 0.09 x Rs 100000) without attracting provisions of section 64.
Provisions of section 64 (1) (vi) are not attracted if property is transferred by an individual to
his son in law or daughter in law of his brother.
If trust is created for the benefit of minor child and income during minority of the child is
being accumulated and added to corpus and income such increased corpus is given to the
child after his attaining majority, the provisions of section 64 (IA) are not applicable.
Explanation 3 to section 64 (1) lays down the method for computing income to be clubbed on
the basis of value of assets transferred to the spouse as on the first day of the previous year.
This offers attractive approach for minimizing income to be clubbed by transfers for
temporary periods during the course of the previous year.
If a trust is created by a male member to settle his separate property thereon for the benefit of
HUF, with a stipulation that income shall accrue for a specified period and the corpus going
to the trust afterwards, provisions of section 64 are not attracted.
If gifts are made by HUF to the wife, minor child, or daughter in law of any of its male or
female members (including karta), provisions of section 64 are not attracted.
If an individual transfers property without adequate consideration to sons wife, income from
the property is always clubbed in the hands of the transferor. If, however, an individual
transfers property without consideration to his HUF and the transferred property is
subsequently partitioned amongst the members of the family, income derived from the
transferred property, as is received by sons wife, is not clubbed in the hands of the
transferor. It may be noted that unequal partition of property amongst family members is not
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TAX PLANNING
rare under the Hindu law and it does not amount to transfer as generally understood under
law, and, consequently, if, at the time of partition, greater share is given out of the transferred
property to sons wife or sons minor child, the transaction would be outside the scope of
section 64 (1) (vi) and 64 (2)(c).
In cases covered in section 64, income arising to the transferee, from property transferred
without adequate consideration, is taxable in the hands of transferor. However, income
arising from the accretion of such transferred assets or from the accumulated income cannot
be clubbed in the hands of the transferor.
A loan is not a transfer for the purpose of section 64.
Where the assessee withdrew funds lying in capital account of firm in which he was a partner
and advanced the same to his HUF which deposited the said funds back into firm, the said
loan by the assessee to his HUF could not be treated as a transfer for the purpose of section
64 and income arising from such deposits was not assessable in the hands of the assessee.
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IX. SET OFF & CARRY FORWARD OF LOSSES
An assessee may also earn losses during a previous year. The losses that an assessee incurs under
any head of income, is allowed to be set off against other incomes under that head of income or
even other heads of income, subject to certain exceptions. In case the assessee has inadequate or
no profits, against which the losses can be set-off, then the unabsorbed losses may be carried
forward to the subsequent years for setting off against the profits in that year.
9.1 The scheme of setting off of losses and their carry forward has been covered in the table
below:
Losses under the head Income from House Property
These losses can be set-off against income from other house properties as well as income under
any other heads in the same year. The losses can be carried forward for a further period of 8
assessment years.
Losses under the head Business / Profession
The losses under this head can be set-off against income from any other businesses under the
same head or from income under any other head except for Income from Salaries. The
unabsorbed losses can be carried forward for 8 assessment years. Business losses, arising on
account of depreciation (also referred to as unabsorbed depreciation) however can be carried
forward without any limitation of time.
The Act also makes a distinction between speculative and non-speculative business profits and
losses. As per the provisions of the Act, losses arising from speculative businesses can be set-off
only against profits arising from speculative businesses and not against any other income. Any
unabsorbed speculative losses can be carried forward for a period of 4 assessment years only.
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Losses under the head Capital Gains
Any losses arising out of the transfer of short term capital assets can be setoff only against short-
term capital gains and long-term capital gains, if any, during the relevant previous year. Long-
term capital losses, however, can be set-off against long-term capital gains and not against any
short-term capital gains. Any unabsorbed long-term and short-term capital losses can be carried
forward for a further period of 8 assessment years.
Any long-term capital losses, arising out of the sale of equity shares, through a recognized stock
exchange or from the redemption of units of equity oriented mutual funds cannot be set-off
against any capital gains.
This rule is an application of a fundamental rule in Income-tax which says that no

losses/expenditure can be claimed in respect of income that is exempt. Section 10(38) of the Act
has exempted the long-term capital gains arising in both these occasions exempt.
Losses under the head Income from Other Sources
Any losses arising under this head can be set-off against income under any other head, but any
unabsorbed losses are not allowed to be carried forward. A specific source of income covered
under this head profits/losses from the activity of owning and maintaining race horses needs a
special mention here. Any losses from this activity can be set-off only against the income from
the same activity and not against any other income under any other head. The unabsorbed losses
from the referred activity can be carried forward for a period of 4 assessment years.
In terms of section 80 of the Act, the unabsorbed losses as discussed above, other than
depreciation & house property loss, can be carried forward only if the assessee has filed the
return within the time prescribed under section 139(1) of the Act.
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9.2 Dividend stripping provisions
As per section 94(7) of the Act, if any person;
i. buys units of mutual funds/securities within the period of 3 months prior to record date for
dividend; and
ii. transfers/ sells such securities within 3 months of such record date or transfers/sells units
within period of 9 months of such record date, then the loss arising to the extent of the
amount of dividend received or receivable (which is exempt under the prescribed provisions
of the Act) shall be ignored for the computation of his total income.
9.3 Bonus stripping provisions
As per section 94(8) of the Act, if any person;
i. Buys units of mutual funds or UTI within the period of 3 months prior to record date for
issue of bonus units and receives bonus units on such date
ii. Transfers/ sells all or any of the original units within period of 9 months of such record date
while continuing to hold all or any of the bonus units. Then the loss arising in respect of such
purchase & sale transaction shall be ignored while computing his total income. However loss
so ignored shall be deemed to be the cost of purchase or acquisition of such additional units
as are held on the date of sale or transfer.
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X. GROSS TOTAL INCOME
The Gross total income (GTI) of an assessee is arrived at by aggregating the income computed
under the five heads of income and after giving effect to the provisions of clubbing and set-off
(as described above). The GTI plays a very crucial part in the computation of income, as the
liability for the assessee to file his/her return of income is determined on the basis of the GTI. As
per the provisions of section 139(1) of the Act, if any individuals
GTI exceeds the basic limit not chargeable to tax, he/she is liable to file the return of income,
even if the tax liability is nil.
10.1 DEDUCTIONS UNDER Unit VI-A
In computing the total income of an assessee, deductions specified under sections 80C to 80U
will be allowed from his Gross Total Income. All the deductions under these sections are
grouped under Unit VI-A of the Act. However, the aggregate amount of deductions under this
unit shall not, in any case, exceed the gross total income of the assessee. The deductions under
this Unit are allowed for certain specified expenditures & payments made by the assessee during
the previous year. Some of the important deductions are discussed here:
Section 80C: Under this section deduction from total income in respect of various investments/
expenditures/payments in respect of which tax rebate u/s 88 was earlier available. The total
deduction under this section (along with section 80CCC and 80CCD) is limited to Rs. 1,50,000
only.
1. Life Insurance Premium For individual, policy must be in self or spouse's or any child's
name. For HUF, it may be on life of any member of HUF.
2. Sum paid under contract for deferred annuity For individual, on life of self, spouse or any
child.
3. Sum deducted from salary payable to Govt. Servant for securing deferred annuity for
self-spouse or child Payment limited to 20% of salary.
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4. Contribution made under Employee's Provident Fund Scheme.

5. Contribution to PPF For individual can be in the name of self/spouse, any child & for
HUF, it can be in the name of any member of the family.
6. Contribution by employee to a Recognised Provident Fund.
7. Sum deposited in 10 year/15 year account of Post Office Saving Bank
8. Subscription to any notified securities/notified deposits scheme. e.g. NSS
9. Subscription to any notified savings certificate, e.g. NSC VIII issue.
10. Unit Linked Savings certificates.
11. Contribution to notified deposit scheme/Pension fund set up by the National Housing
Scheme.
12. Certain payment made by way of installment or part payment of loan taken for
purchase/construction of residential house property. Condition has been laid that in case
the property is transferred before the expiry of 5 years from the end of the financial year
in which possession of such property is obtained by him, the aggregate amount of
deduction of income so allowed for various years shall be liable to tax in that year.
13. Contribution to notified annuity Plan of LIC (e.g. Jeevan Dhara) or Units of UTI/notified
Mutual Fund. If in respect of such contribution, deduction u/s 80CCC has been availed of
rebate u/s 88 would not be allowable.
14. Subscription to units of a Mutual Fund notified u/s 10(23D).
15. Subscription to deposit scheme of a public sector, company engaged in providing housing
finance.
16. Subscription to equity shares/ debentures forming part of any approved eligible issue of
capital made by a public company or public financial institutions.
17. Tuition fees paid at the time of admission or otherwise to any school, college, university
or other educational institution situated within India for the purpose of full time education
of any two children. Available in respect of any two children.
Section 80CCC: Deduction in respect of Premium Paid for Annuity Plan of LIC or Other
Insurer Payment of premium for annuity plan of LIC or any other insurer Deduction is available
upto a maximum of Rs. 100,000/-. The premium must be deposited to keep in force a contract for
an annuity plan of the LIC or any other insurer for receiving pension from the fund
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Section 80CCD: Deduction in respect of Contribution to Pension Account Deposit made by a

Central government servant in his pension account to the extent of 10% of his salary. Where the
Central Government makes any contribution to the pension account, deduction of such
contribution to the extent of 10% of salary shall be allowed. Further, in any year where any
amount is received from the pension account such amount shall be charged to tax as income of
that previous year.
Section 80D: Deduction in respect of Medical Insurance Deduction is available upto Rs.
20,000/- for senior citizens and upto Rs. 15,000/ in other cases for insurance of self, spouse and
dependent children. Additionally, a deduction for insurance of parents (father or mother or both)
is available to the extent of Rs. 20,000/- if parents are senior Citizen and Rs. 15,000/- in other
cases. Therefore, the maximum deduction available under this section is to the extent of Rs.
40,000/-. From AY 2013-14, within the existing limit a deduction of upto Rs. 5,000 for
preventive health check-up is available.
Section 80DD: Deduction in respect of Rehabilitation of Handicapped Dependent Relative

Deduction of Rs. 50,000/- w.e.f. 01.04.2004 in respect of
1. Expenditure incurred on medical treatment, (including nursing), training and

rehabilitation of handicapped dependent relative.
2. Payment or deposit to specified scheme for maintenance of dependent handicapped
relative. Further, if the defendant is a person with severe disability a deduction of Rs.
100,000/- shall be available under this section. The handicapped dependent should be a
dependent relative suffering from a permanent disability (including blindness) or
mentally retarded, as certified by a specified physician or psychiatrist. Note: A person
with 'severe disability' means a person with 80% or more of one or more disabilities as
outlined in section 56(4) of the 'Persons with disabilities (Equal opportunities, protection
of rights and full participation)' Act.
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Section 80E: Deduction in respect of Interest on Loan for Higher Studies Deduction in respect
of interest on loan taken for pursuing higher education. The deduction is also available for the
purpose of higher education of a relative w.e.f. A.Y. 2008-09.
Section 80G: Deduction in respect of Various Donations The various donations specified in
Sec. 80G are eligible for deduction upto either 100% or 50% with or without restriction as
provided in Sec. 80G .
Section 80GG: Deduction in respect of House Rent Paid Deduction available is the least of
1. Rent paid less 10% of total income

2. Rs. 2000/- per month
3. 25% of total income, provided
Assessee or his spouse or minor child should not own residential accommodation at the
place of employment.
He should not be in receipt of house rent allowance.
He should not have self-occupied residential premises in any other place.
Section 80U: Deduction in respect of Person suffering from Physical Disability Deduction of
Rs. 50,000/- to an individual who suffers from a physical disability (including blindness) or
mental retardation. Further, if the individual is a person with severe disability, deduction of Rs.
100,000/- shall be available u/s 80U. Certificate should be obtained from a Govt. Doctor. The
relevant rule is Rule 11D.
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XI. RETURN FILING PROCEDURES
Permanent Account Number

In terms of section 139A of the ITA every person whose total income exceeds the basic
exemption limit should apply for allotment of a Permanent Account Number (PAN). However, a
person whose income is not liable to tax may also apply for a PAN. PAN represents a unique
number containing ten alpha numeric characters issued by the Income-tax department on a
laminated card. It is the duty of every assessee to quote the PAN in the Tax returns, challans and
all other correspondences with the Income Tax department.
Tax payments
The Tax liability of an assessee for a previous year has to be discharged during the relevant year
itself. The ITA provides for the following modes for collection of taxes:
Tax Deducted at Source (TDS)

Certain items of income (namely commission, interest, professional fees, rent, contractors
payments etc.) are liable for Tax deduction at the prescribed rates at the time of payment thereof.
In other words, the payers of such amount are responsible for deducting Tax in respect of such
payments and deposit the same in the Government treasury while the recipient avails of the
credit for the Tax so deducted against his/ her Tax liability.
Advance Tax
Every assessee should compute his/her estimated Taxable income for the year and discharge the
Tax liability thereon (after considering the TDS credit, if any) in specified proportions, by way
of advance Tax payable on specified due dates. The due dates for payment of advance Tax in
case of non-corporate assessees are as follows:
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Due Date Total amount payable
15 September At least 30% of the total estimated Tax liability for the year
15 December At least 60% of the total estimated Tax liability for the year
15 March Entire Tax liability for the year
Default in payment of advance tax attracts interest liability.

Self-assessment Tax
Where any tax is payable by the assessee on the total taxable income after taking into account the
TDS and advance tax, the same has to be paid by way of self-assessment, along with interest, if
any.
Return filing procedures

Section 139(1) of the ITA provides that every person shall furnish, on or before the due date, a
return of income in the prescribed form and manner. Due date for the purpose of filing the return
of income is as follows:
Assessee Due date
Companies 30 September of the assessment year

Non-corporate under audit 30 September of the assessment year
Non-corporate, non-audit 31 July of the assessment year
Thus, for the financial year 2010-11 the due dates would be September 30, 2011 or July 31,
2011, as the case may be.
Belated return
In case the return is not filed within due date, a belated return can be filed at any time before the
expiry of 1 year from the end of the relevant assessment year.
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Revised return
In case of any error or omission, the assessee is entitled to revise the return, provided the return
has been filed within the aforementioned due date.
Signing of return
The relevant provisions in relation to signing of a return are summarized below:

1. In case of an individuals return, by the individual himself/ herself; however in case s/he
is absent from India, by some person duly authorized in this behalf.
2. In case of a HUF, by the karta and in his absence by any other adult member
3. In case of a firm, by the managing partner and in his absence by any other partner not
being a minor
4. In case of a company, by the managing director and in his absence by any other director
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12 .Questionnaire for Individual Assessees
You belong to which category of Age?
a. Below 20 [ ]
b. 20-30 [ ]
c. 30-40 [ ]
d. Above 40 [ ]
Which Tax Bracket is applicable to you?

a. 10% [ ]
b.20% [ ]
c.30% [ ]
d.None [ ]
Schemes chosen for tax planning/saving?

a. Pension Plan [ ]
b. Public Provident Fund [ ]
c. Fixed Deposits [ ]
d. Mediclaim Policy [ ]
e. National Savings Certificate (NSC) [ ]
Reasons for investing in tax saving schemes?

a. Tax Bracket Requirements [ ]
b. Assured Returns [ ]
c. Less Risky [ ]
d. Meeting Specific Requirements [ ]
e. Others [ ]
What is preferred source of information regarding tax saving schemes?

a. Friends [ ]
b. Internet [ ]
c. Banks [ ]
d. Advertisements [ ]
e. Others [ ]
Amount invested in tax saving schemes?

a. Less than 25000 [ ]
c. 25000-50000 [ ]
d. 50000-75000 [ ]
e. 75000-100000 [ ]
f. More than 100000 [ ]
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Under which heads of income, your income becomes taxable?

a. Income from salary. [ ]
b. Income from house property [ ]
c. Profits and gains of business, profession [ ]
d. Capital gain [ ]
e. Income from other sources [ ]
Do you know:- Yes No
a. Income Tax Act undergoes change every year with additions and deletions brought about
By the Finance Act passed by the Parliament (Governments Annual Budget)? [ ] [ ]
b. When the income of other persons included in assessee's total income? [ ] [ ]
c. Deductions permissible under chapter VI-A of Income Tax Act, 1961? [ ] [ ]
Generally when you do prepare for filing of return?

1 month before due date [ ]
1week before due date [ ]
2-3 days before due date [ ]
After due date [ ]
Since how many years you are filing returns?

0-5 years [ ]
5-10 years [ ]
10-15 years [ ]
15-20 years [ ]
More than 20 years [ ]
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13. Research and Analysis
Do you know that income of some other person is includible in assessees income?
Yes 25 %
No 75 %
Yes(25%)
No(75%)
75 % of respondents have voted for No and 25 % for Yes. Inference can be drawn
that respondents are not aware of clubbing provisions in the Act. Clubbing
provision has a significant impact on the total income of the assesse.
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Are you aware of deductions available under Chapter VIA for the purpose of tax
planning?
Yes 40%
No 60%
Yes(40%)
No(60%)
60% of respondents have voted for No and 40% for Yes. It depicts that people do
not have information regarding the options available for them to reduce their tax
bill. Deductions under Chapter VIA are a part of the Act in which Government
gives the assesse the opportunities to reduce tax amount.
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Generally when do you prepare for filing return?
1 month before due date 50 %

1 week before due date 25 %
2 3 days before due date 25 %
After due date 0
1 month before(50%)
1 week before(25%)
2-3 days before(25%)
After due date(0)
From the above it can be inferred that generally people file their income tax return
well before the due date. It is one of the good practices in regards to tax planning
because they get more time to revise their return and ultimately their overall tax
liability.
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Schemes chosen for tax planning?
Pension Plan 25%

Provident Fund 62.5%
Fixed Deposit 0
Mediclam Policy 12.5%
National Savings Certificate 0
Pension Plan
Provident Fund
Fixed Deposit
Mediclaim Policy
National Savings Certificate
Provident Fund being the most preferred method for tax planning followed by
Pension Plan.25% of respondent invested in pension plan while 12.5% in
mediclaim policy. Percent of respondent investing in fixed deposit is nil for the
purpose that they dont invest in such an option to save tax but to save the money
only.
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Reasons for investing in tax saving schemes?
Tax bracket requirement 37.5%

Assured Return 0
Less risky 12.5%
Meeting specific requirement 12.5%
Others 37.5%
Tax bracket requirement

Assured Returns
Less Risky
Meeting specific requirement
Others
37.5% respondent invests their money for tax planning/ saving. 12.5% people
invest because they are risk averse. Again 12.5% invest to meet some specific
requirements. And 37.5% in others. This depicts that a proper mix of investment
should be done by the assessee for planning the taxes as well for earning returns
with a level of risk
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What is the preferred source of information regarding tax saving schemes?
Friends 37.5%
Internet 25%
Bank 25%
Advertisement 12.5%
Others 0
Friends
Internet
Banks
Advertisements
Others
37.5% of respondent opted for friends as source of information regarding tax

savings schemes.25% from Internet. Again 25% from bank and 12.5% from
advertisement.
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TAX PLANNING
14. CONCLUSION
Tax is always a concern for the individuals for more than one reason. Some do not want to
give tax while others want to minimize the amount to be paid. Latter is legal and is referred to as
tax planning. Tax planning is not a simple and standard process. In fact it is a complex collection
of measures available to reduce ones own tax incidence. Further the tax saving options or
schemes or deductions provided as per Income-Tax Act 1961 are huge in number which further
complicates the process. Thus tax planning has evolved into an intellectual activity.
One of the ways to plan the tax incidence for individuals is to invest in some avenues
where government gives relaxation for various tax schemes. But this again is not as simple as it
may sound to be. Investments in these avenues do not give the same advantage to all the
individuals in the same manner. While some are suited for individuals paying higher taxes few
other suits people belonging to lower tax bracket. Individuals are not always aware of all the
technical details about the scheme which they chose for investment. They might choose a
particular scheme for one benefit while being ignorant about other schemes which provide same
or better benefits with better terms.
So what is important here is to know all the terms related to an investment. Information is
something which is shaping business and world constantly in this century. More is the amount
and quality of information better will be the decision quality. In the absence of critical
information investors end up taking decisions which yield less than potential benefits for them.
So with information comes awareness and with awareness comes thirst for more information and
information in right format at the right time with right people ensures quality decision making
which triggers a virtuous cycle where everything turns out to be nicely synchronized and
productive.
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TAX PLANNING
15.BIBLIOGRAPHY
Taxmanns Master guide to Income tax Act

Taxmanns direct taxes law and practices
CS Executive Tax law and practices Module
National Institute of Securities Market Financial Advisor Workbook
www.caclub.in
Bare Act: Income Tax Act, 1961
88

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1.1 LIST OF TABLES

Net Income Income Tax Rates Surcharge Education Secondary and

Up to Rs. 2,50,000 Nil Nil Nil Nil

FOR A RESIDENT SUPER SENIOR CITIZEN (WHO IS 80 YEARS OR MORE AT ANY

FOR ANY OTHER RESIDENT INDIVIDUAL (BORN ON OR AFTER 1, 1954), ANY

Net Income Income Tax Rates Surcharge Education Secondary and

2. Surcharge- Surcharge is 10 % of income tax if net income exceeds Rs 1 Cr. It is subject to

3. Education cess It is 2 percent of income tax.

4. Secondary and higher secondary education cess- It is 1% of income tax

Section Income Income

111A Short term capital gain 15

112 Long term capital gain 20

115A(1)(a)(i) Dividend received by a foreign company or a non-resident non corporate assesse 20

115A(1)(a)(iiab) Interest of the nature and extent referred to in section 195LD 5

2.1 Income tax, Heads of Income and other Rules:

Indian Direct Tax structure:

The Income Tax law in India comprises of the following:

i. The Income Tax Act, 1961, (ITA)

ii. The Income Tax Rules, 1962

iii. Finance Acts or Annual Budget

iv. CBDT Circulars

3.1. TAX PLANNING, TAX EVASION, TAX AVOIDANCE

3.1 Tax Planning, Tax avoidance, Tax evasion:

Legitimate arrangement of affairs in such a way so as to minimize tax liability.

Tax planning may, therefore, be regarded as method of intelligent application of expert

3.2 OBJECTIVES OF TAX PLANNING

(a) Reduction of tax liability

(b) Minimisation of litigation

(c) Productive investment

(d) Healthy growth of economy

(e) Economic stability

3.3 IMPORTANCE OF TAX PLANNING

3.4 DIVERSION OF INCOME AND APPLICATION OF INCOME

3.5 ESSENTIALS OF TAX PLANNING

Successful tax planning techniques should have following attributes

3.6 TYPES OF TAX PLANNING

(a) Short-range and long-range tax planning.

(b) Permissive tax planning.

(c) Purposive tax planning

To sum up all these four expressions, we may say that:

The Income Tax Equation:

Calculate the Gross total income deriving from all resources.

Subtract all the deduction & exemption available.

Applying the tax rates on the taxable income

Ascertain the tax liability.

4.1 BASIC CONCEPTS OF INCOME TAX ACT

As per section 2(24), the term income means and includes :

A. Profits and gains;

C. Voluntary contributions: Voluntary contributions received by :

D. The value of any perquisite or profit in lieu of salary taxable.

F. City Compensatory Allowance/ Dearness allowance: Any allowance granted to the

G. Benefit or Perquisite to a Director: The value of any benefit or perquisite, whether

H. Any Benefit or perquisite to a Representative Assessee: the value of any benefit or

I. Any sum chargeable under section 28, 41 and 59 :

i. not carrying out any activity in relation to any business; or

PERSON [SECTION 2(31)]

A company - Section 2(17) defines the term company to mean:

(i) any Indian company, or

A firm - a partnership firm whether registered or not.

An association of persons or a body of individuals whether incorporated or not

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