This Article has been edited by Mansi Bathija and written by Ayushi Yadav, a fourth-year law student from Banasthali Vidyapith, Rajasthan. She has discussed tax planning schemes and methods provided by taxation law in India.
Tax Planning – Introduction
As we all know, the Government has imposed tax liability on taxpayers. In the era of high tax rates, everyone wants to save their money for their future plans. To reduce that liability taxpayer do financial plans to save their taxes and future investments. For salaried individuals, it is essential to invest their money in the right way for fruitful consequences. In this article, we will discuss what is tax planning and tax management and how does it help the corporates and individuals.
Tax Planning Meaning
Tax planning is an activity to reduce tax liability. Tax planning is the basic and important part of the financial plan and helps to save our capital. There are many options that provide deduction in the tax liability of the taxpayer, from which Section 80C of the Income Tax Act, 1961 is the most suitable option for an individual to claim the tax deduction. There are many schemes under Sec.80C which provided eligible deduction like under life insurance, contract for a deferred annuity, contribution by an individual provident fund, contribution by an employee to a recognized provident fund and to an approved superannuation fund, contribution in pension fund, etc. but one should reduce his tax liabilities within the framework of law.
As in the case of McDowell & Co. Ltd. v. CTO (1985) 3 SCC 230, McDowell & Co. Ltd. was a licensed manufacturer of Indian liquor. Appellant paid sales tax to the sales tax authority on the basis of turnover but excluded excise duty. The question raised before the SC was that whether the excise duty which was payable by the appellant but had been paid by buyers was actually a part of turnover. Here appellant tried to reduce the burden of sales tax for which the duty burden was directly transferred to the buyers.
SC held that “tax planning may be legitimate if it is within the framework of law, but the colorable device cannot be part of tax planning. It is wrong to say that it is honorable to avoid payment of tax by the dubious method. It is the obligation of every citizen to pay tax honestly without resorting to subterfuges.”
Tax Planning Objective
- Reduce Tax Liability.- The main purpose of tax planning is to reduce tax liability imposed on a person. Every individual wants to reduce their tax burden and save that money for their future plans. So an individual can do so by prior planning and can avail all the benefits to reduce his tax.
- Minimization of litigation.- Taxpayers want to minimize his legal litigations. After consulting his legal advisor and adopting proper provisions of law for tax planning can minimize the litigation. This can save taxpayers from legal harassment.
- Economic stability.- If a taxpayer paid all the taxes without legally due then it will create a more productive investment in the economy. Prior plans help taxpayers as well as the economy.
- Productivity.- If a taxpayer is aware of all the tax compliance and does productive investment planning then it will create more tax saving options for him.
- Financial Growth.- If tax planning is done in the right manner and is going in the right direction, it will help in financial growth with economic growth.
Features of Tax Planning
- Reduction in tax liability.- one of the most important features of tax planning is to reduce tax liability. Every individual has done his financial plan so he can reduce his tax amount and can save for his future plans.
- Advance planning.- one has to arrange his tax plans at the beginning of the financial year because no one can plan to reduce his tax liability day before filing an income tax return.
- Investment in the right direction.- with the help of tax planning one can invest his money in the right direction by choosing the right policy. Investment in any assets or policy will not help in saving money from taxes, for this right investment should be done.
- Dynamic in nature.- tax planning has to be done every year because of the new implementation of policies introduced by the government. One has to modify his tax plans at the beginning of every financial year.
Areas of Tax Planning
For implementing tax planning one can use different ways to save his tax money. There are some areas where we can plan to reduce our tax liability-
- Reducing Taxable Income .- one can use government schemes and programs to reduce his taxable income, it will directly reduce his tax liability. One should try to minimize his taxable income to reduce his tax amount.
- Deduction planning.- there are many deductions provided by a taxation law. One should implement and plan those deductions. The major area of the deduction is available under Sec.80C where one can claim a deduction for life insurance, mutual funds, home loan interest and many more.
- Investment in tax planning.- assessee can invest in policy for future plans and save his money from tax.
- Year-end planning strategies.- one can reduce his tax liability for the next year by prepaying those expenses which will be imposed next year and can make a strategy before starting the new financial year.
Tax Planning Examples
Tax planning is an arrangement to reduce tax liabilities. How can an individual reduce his tax liability by planning at the beginning of the financial year? Let’s take a look at some examples-
- Mr. W who is an individual of age 45 years, whose taxable income is rs.5,00,000 and except a premium of medical insurance of rs.10,000 he has invested no money in any scheme. After calculating all his income details and deduction his gross tax amount will be rs. 16,224.
- Mr. Y who is an individual of the same age as Mr. W and all the income details are similar to Mr. W. But Mr. Y invested his money in schemes offered by the government under Sec.80C, his gross tax amount will be rs.0.
This is how one can reduce his tax liability by investing in the right schemes and programs or otherwise has to pay high tax rates.
Tax planning and Tax Management
Tax planning helps in reducing tax liability, where tax management is to consider all the law provisions and work within those provisions.
The purpose of tax planning is to save tax from reducing tax liability.
Tax management is to work within the provisions of law.
There is an involvement in tax management.
Tax management involves return file, audit, deduction etc.
Tax planning is done for future investments.
Tax management focuses on all the aspects whether for past, present or future.
Tax planning is optional and done for the long term and short term savings.
It is mandatory for all the assessee and focuses on avoiding interest, penalty, etc.
Tax Planning and Tax Evasion
Tax Evasion is not a legal practice to avoid tax liabilities. To avoid tax in an illegal manner like giving untrue statement knowingly, submitting misleading documents, suppression of facts, misguided by not maintaining proper account of income earned will lead to punishment under relevant laws for tax evasion. In this context, The Court in the case of CIT v. Sri Abhayananda Rath Family Benefit Trust  123 Taxmann 81 (Ori.), said that ‘evasion’ necessarily means, ‘to try illegally to avoid paying tax’.
Let’s understand Tax Avoidance and Tax Evasion by an illustration –
In a state say, Punjab, the government has granted exemption from excise duty for five years to the industries with the purpose of increasing industrialization in these areas.
If a manufacturer sets up his industry in Punjab is Tax planning. But he brings an almost ready product to Punjab just for minor operations and sells it in Punjab. This is Tax Avoidance. Here the purpose of government was defeated.
If a manufacturer manufactures the good somewhere else and dispatches it there but shows that product manufacture and sold in Punjab. This is a Tax Evasion.
Tax Avoidance is reducing tax liability in legal ways. Tax avoidance is done by taking advantage of loopholes of the law. Provisions of law interpreted in such a manner that it will avoid payment of tax. No element of mala fide motive present in tax avoidance. Even the Court in the support of the tax avoidance said that tax avoidance is not unlawful and the taxpayer can take its advantages. One can minimize his tax liability within the legal framework even by taking advantage of loopholes in the law.
Essential Features of Tax Avoidance are as follow-
- Legitimate arrangements should be in such a manner that will minimize the tax liability.
- Tax avoidance is in respect of legal provisions and carries no public disgrace with it.
Difference between Tax Avoidance and Tax Evasion
Tax Avoidance and Tax Evasion both practices are done by taxpayers to avoid tax liabilities. But both the practice has different legal provisions.
1. Any tax planning which is done to reduce tax liability by legally permissible ways is tax avoidance.
1. All the illegal methods by which tax liabilities are avoided is tax evasion.
2. Tax avoidance takes into account of loopholes of the law.
2. Tax evasion is done by unfair means like fraud, suppression of facts, etc.
3. Tax avoidance is done within the legal framework.
3. Tax evasion is not legal and assessee who is guilty under evasion will be punished under the provisions of law.
4. Tax avoidance is intentional tax planning.
4. Tax evasion is the intentional avoidance of tax when the tax liability arises.
Need of Tax Planning
Tax planning is essential to point in a person’s life. As the Government imposed high tax rates so, to reduce that tax liability there is a requirement of tax planning. There are many schemes and offers provided in taxation law. One has to choose the right scheme where he can invest and avail the benefits of those schemes. Many Benefits are provided to assesses like-
- Deduction under Section 80C
- Deduction for HRA
- Deduction on education loan
- Investment in senior citizen scheme
- Investment in mutual funds
- Investment in national saving schemes
- Any many miscellaneous schemes.
Tax Planning benefits
Tax planning should be done to reduce tax liability but what are other benefits of tax planning? Let’s discuss here, a very important factor of tax planning and every individual or company focus on this factor i.e, to save tax. The main purpose of tax planning is to save capital from taxes and use it for the more beneficial purposes like invest in some beneficial scheme. Better to save the money at the beginning of the year by planning better to spend it in paying tax. One should avail the offers as much as he can, so he can spend that money in any other way or save for his future plans.
Methods of Tax Planning
- Short-Range Tax Planning.- short-range tax planning involves year to year planning to complete some specific and limited objects. In this type of tax planning, one can invest in PPF or NSCs within the prescribed limit of income.
- Long-Range Tax Planning.- unlike short range tax planning, long-range tax planning are those activities undertaken by an assessee, which does not pay off immediately. This starts at the beginning or the income year to be followed around the year.
- Permissive Tax Planning.- Permissive tax plannings are permissible under a taxation law. In India, there are many provisions of law which offers deduction, exemption, contribution and incentives. E.g. Sec. 80C of the Income Tax Act which offers deduction, contribution, subscription, etc.
- Purposive Tax Planning.- Purposive tax planning refers to those plannings by which taxpayers can avail maximum benefits by applying provisions of law based on national priorities. Section 61 to 65 of the Income Tax Act talks about the income of another person included in the income of the assessee. So, the assessee can plan in such a manner that these provisions do not get attracted and it would increase disposable resources.
Corporate Tax Planning
Tax planning regarding Residential Status
Tax liabilities for non-residents under tax law-
- A non-resident person in India is one who has not completed the basic condition of being a resident of India. A Hindu Undivided family can also be non-resident of India as an individual. If a firm or an association of persons who are said to be resident in India, control or manage the affairs wholly outside India will also be non-resident.
- Foreign income is not taxable in the hands of non-resident in India.
- Under Sec.9 certain income is deemed to arise in India even if it may arise outside India.
- Tax paid on behalf of the non-resident/foreign companies in respect of other income shall not be taxable under Sec. 10(6B).
And many other provisions with respect to non-resident in India like- 115A, 115AB,44BBA, etc.
For non-resident government provide relief of Double Taxation. Double taxation is, the person is liable to pay taxes in two different countries, one is from where he earned and another one is where he is resident. So to avoid this double taxation Government of India has signed avoidance agreement with other countries under Sec. 90. And if there is no agreement exists between the two countries then double tax income governed by the provision of Sec.91.
Section 6 of the Income Tax Act provides Residential status of Indian. As per Sec.6 if any person resident in India in the previous year for 182 days or more, and during the previous four years resident for 365 days or more.
The tax law has categorized the residents into two parts i.e.,
- Resident and non-ordinarily resident (RNOR)
- Resident and ordinarily resident (ROR)
For RNOR, the individual has been Non-Resident in India for at least 9 fiscal years out of 10. In the previous 7 years, he has been in India for 729 or fewer days.
Tax planning for New Business
Any person or company can do their financial planning to reduce their tax liability. An individual can plan his tax liability by contribution in government schemes, deduction, subscription or any other exemption provided by law. But how can be tax planning is done with reference to setting up of new business, financial management decision, employee remuneration, etc. we will discuss it here.
Setting up a new business
To set up a new business, one has to decide the following matters-
Location of the new undertaking
Many factors can affect the location of business for the purpose of better tax planning, there are some tax incentives provided by law-
- Free Trade Zone under Sec. 10A provides a deduction to newly established undertakings for which some conditions should be satisfied like- undertaking must begin manufacture/production in Free Trade Zone, the industrial undertaking should not be formed by the splitting up or reconstruction of a business already in existence except those undertakings which are referred under Sec. 33B.
- Hundred percent export-oriented undertakings under Sec. 10B
- Deduction under Sec. 80-IB in respect of profits and gains from certain industrial undertakings like- business of an industrial undertaking, operation of a ship, hotels, industrial research, production of mineral oils, developing and building housing projects, convention theatre, etc.
- Manufactured product under that undertaking
Many incentive Acts are provided by the law, in regard to the nature of the business on which deduction or exemption will be provided, are as follows-
- Newly established industrial undertakings in Free Trade Zone under Sec. 10A.
- Hundred percent export-oriented undertakings under Sec. 10B.
- Venture Capital Companies (VCC) under Sec. 10 (23FB).
- Infrastructure Capital Companies under Sec. 10 (23G)
- Tea/Coffee/rubber development account under Sec. 33AB
- Site restoration fund under Sec. 33ABA
- Amortization of telecom license fees Sec. 35ABB
- Deduction in respect of expenditure on specified business under Sec. 35AD
- Amortisation of preliminary expenses under Sec. 35D
- Amortisation of expenditure on prospecting of certain minerals under Sec. 35E
- Deduction under Sec. 36(1)(viii) by a financial corporation and a public company.
- Special tax provisions under Sections 42, 44BB, 44AD, 44AE, 44AF, 44B, 44BBA, 44BBB, 44D, 115A, 115AB, 115AC, 115AD, 115BBA and 115D.
- Deduction in respect of profits and gains from industrial undertakings engaged in infrastructure development etc. under Sec. 80-IA
- Profits and gains from industrial undertakings other than infrastructure development under Sec. 80-IB
- Profits and gains of undertakings in a certain special categories of states under Sec. 80-IC.
- Profits and gains from the business of collecting and processing of biodegradable waste under Sec. 80JJA
- Employment of new workmen under Sec. 80JJAA.
- The legal form of Organisation
One can decide tax liabilities under different organization forms while comparing other factors and tax incentives like how a person can reduce his tax liability by availing tax incentives provided under the law.
Tax Planning With Reference To Financial Management decision
Many tax provisions affect financial management decision, some provisions are discussed here-
- Capital Structure
Capital structure is the amount of debt or equity to fund the operation and finance assets of the company. By Capital structure shareholder’s return can be maximized. This structure is known as debt-to-equity or debt-to-capital ratio.
Under taxation law, dividend on shares is not deductible, while the interest paid on interest borrowed capital is allowed as deduction.
- Dividend Policy
A dividend is part of a profit which is distributed among the shareholders of the company. Dividend from an Indian company is not taxable under law but dividend from a foreign company is taxable in the hands of shareholders. As per Sec. 194, no deduction shall be made in the case of a shareholder if-
- The dividend is paid by an account payee cheque;
- The aggregate amount of such dividend distribution of that financial year does not exceed two thousand five hundred rupees.
- Inter- Corporate Dividend
Deduction on the inter-corporate dividend is given under Sec. 85A, where the total income of an assessee being a company includes any income by way of dividend received by it from an Indian company or a company within India shall be entitled to a deduction from the income tax.
- Bonus Shares
Tax consideration for equity shareholders and preference shareholders are as follow-
For equity shareholders, at the time of the issue of bonus share, there is no tax liability of the company as well as shareholders. But at the time of liquidation of the company bonus shares in the hands of the company will be treated as Dividend distribution and company has to pay dividend tax but that amount will be exempted in the hands of shareholders.
In the case of preference shareholders, if the bonus shares issued before June 1, 1997, then there will be no tax liability for the company and for shareholders it will be deemed as dividend, and if bonus shares issued after June 1, 1997, then there will be no tax liability on shareholders and for the company it will be chargeable as dividend tax. At the time of redemption or liquidation, there will be no tax liability on the company and shareholders too.
Tax Planning and Managerial Decision
Tax planning affects managerial decisions too, like-
- Make or Buy- make or buy decision is based on the costing and non-costing considerations. A consideration which affects the decision is –
- Utilization of capacity
- Inadequacy of funds
- Latest technology
- The variable cost of manufacturing
- Dependence upon supplier
- Labour problemOther factors
Provisions under the law are available for the manufacturer to make the right decision. These sections are 10A, 10B,32, 50, 80-IA and 80-IB.
- Own or Lease.- if assessee obtains assets on lease then he can claim the lease rental as a deduction, but if he purchases that assets than he can claim depreciation on those assets under section 32.
- Purchase by Instalment v. Hire.- if assets purchased by installment then the deduction can be claimed under section 32. If assets are hired then the deduction can be claimed on hire charges.
- Renewal or Renovation.- before claiming a deduction for renewal, renovation, repair or replace, one should keep in mind whether the deduction for these considerations is available under section 30, 31, or 37(1). If the deduction for revenue expenditure is allowed then tax liability can be reduced.
Tax Planning With Reference To Employees Remuneration
In the case of remuneration planning one has to consider that while calculating an employer’s income, remuneration paid to the employees is deductible. If such expenditures are not deductible under the employer’s income then the tax bill of the employer will increase. Tax incentives for deduction of remuneration in the hands of an employer-
- Revenue expenditure incurred by an assessee who himself carries on scientific research in regard to business shall be deductible under Sec. 35(1).
- Any premium paid on the health of the employee is allowed as a deduction. But only if that premium paid under the scheme framed under this behalf by General Insurance Corporation of India under Sec. 36(1)(ib).
- A bonus or commission paid to an employee is deductible under Sec. 36(1)(ii) only if that bonus or commission shall not be payable to an employee as profit or dividend.
- Employees contribution to staff welfare schemes under Sec. 36(1)(va).
- If any expenditure incurred by the company for promoting family planning among its employees is allowable as a deduction under Sec.36(1)(ix).
Tax Planning With Reference To Amalgamation of companies
Amalgamation is defined under section 2(1B) of the Act, amalgamation is a merger of two or more companies to form a new company or merger of companies in an existing one. All the Tax liability after merging of companies is on the amalgamated companies. All the properties of amalgamating companies are transferred to the amalgamated company. Some Benefits available to companies after amalgamation are-
- Exemption under section 47(vi) for capital gains of amalgamating companies;
- Exemption under Section 47(vii) in the case of international restructuring;
- Exemption under section 47 (vii) for any transfer by shareholders of a capital asset;
- Section 72A which provide an exemption to amalgamated companies to carry forward and set off of an accumulated loss and unabsorbed depreciation allowance in amalgamation and demerger etc.
Tax planning for Individuals
Tax Planning Strategies
Tax planning strategies are a plan to reduce tax liability by availing the advantages of schemes and programs offered by the government to an individual or an organization. The motive of tax planning strategy is to use the schemes for the reduction of tax liability in the right direction and in a lawful manner. As we have discussed, there are many schemes and programs which are offered by the government. Let’s take a look
- Deduction under Section 80C.- section 80C covers a wide area for a tax deduction which offers a number of schemes and plans where one can invest his money and save it from tax.
- Deduction for HRA.- house rent allowances given under Section 10(13A) where employees are exempted from paying tax who lives in a rented room/apartment.
- Deduction on education loan.- under section 80E one can save his tax, as per this section deduction is allowed on the loan taken by an assessee for his higher education or for the higher education of his relative.
- Rebate for home loan.- one can save his tax on home loan principal repayment or home loan interest payment. Under section 80C assessee can claim for principal repayment and section 24b for home loan interest.
- Planning for Long term capital gain.- under long term capital gain, one can claim for deduction on the sale of long term capital assets. Here, long term capital assets mean by for 3years or more.
- Donation exemptions.- donation exemption can be claimed under section 80G if the assessee has donated any amount for NGOs or for any political party.
Tax Planning Salary
Before planning tax liabilities to reduce tax limit one should know how much salary is taxable and what allowances are not taxable. Just take a look –
- Basic salary.- A basic salary is the fixed amount that is paid to the employee before adding any bonus or surplus charges or reduction in any investment.
- House Rent Allowance.- house rent allowance is that amount which paid to those employees who live in a rented house or apartment for the employment purpose. House rent allowance is not taxable under income tax but if the employee who gets house rent allowance and live in his own house then that amount will be taxable.
- Leave Travel Allowance.- leave travel allowances are exempted under income tax where it is provided that allowance will be claimed on short distance trips within India. Employees directly cannot claim this exemption.
- Bonus.- bonus is the additional amount given by the employer to his employees. Bonus can be given on some occasion or can be based on the performance of employee whatever it is, will be completely taxable.
- Provident Fund.- provident fund is a scheme started for the employees so they can contribute to this scheme and save money for their future. 12% of the basic salary contributed to the pension and provident fund of the employee.
- Standard Deduction.- standard deduction is that amount which is not taxable and can reduce the tax liability. The employee can claim rs.50,000 as a standard deduction from his taxable income.
- Professional Tax.- this is the tax imposed by the State government on a person. The maximum limit which the state government can levy on a person is rs.2,500 which is not taxable under income tax.
One can take help from these allowances and schemes to reduce his tax liability by reducing his salary. There will be a minimum tax on less salary.
Tax planning for Salaried Employees
As we studied above, tax planning is a financial arrangement plan by a taxpayer to get the maximum benefit of their capital. Tax planning should not be confused with complete avoidance of tax, in any of the circumstances one cannot avoid his tax liability completely. Tax planning is a way by which an individual can minimize his tax liabilities and invest his capital for more fruitful results.
For a salaried individual, the tax planning approach should be in a proper manner so one can take advantage of Government Schemes. For taking advantage, firstly one should invest in saving schemes from his current year income to reduce tax liability.
And another is to plan some special measures to invest money in the pre-retirement stage for a post-retirement period. So there will be an assurance of proper and adequate flow of capital and one can enjoy his retirement period.
Tax Planning in Income Tax
To decide whether one should invest his salary in a particular scheme or not depends on what is a more suitable option for that person. To invest income in a particular income an assessee should have enough knowledge about schemes and investment under those schemes. As we have sub-categorized the options for tax planning available to the assessee,i.e.
- Investment in government schemes
There are many tax provisions under which government provide benefit to assessees. So different assessee can choose different options as per their suitability. Like – some invest in life insurance corporation, some under pension fund according to their suitability. Now we will discuss government scheme one by one-
In all the government schemes Section 80C is the most tax-saving scheme under which people claim their taxes. Before the Assessment Year 2006-07, deduction under Sec.80C was provided under Sec.88, 88B, and 88C which has been now replaced. There are some schemes under Sec.80 where deduction allowed out of total income.
One can invest in a different category of schemes, like-
Tax-saving scheme.- there are some tax-saving schemes where contribution in those schemes will not be covered under taxable income and entitled to deduction under Sec.80C. These schemes are-
- Life insurance policy
- Contribution to Provident Funds
- Contribution in Life Insurance Corporation or Mutual Funds
- Investment in National Savings Certificate
- Amount invested in Annuity Plans
- The amount deposited in Pension Funds
- Tuition fee paid
Tax-free return scheme.- in tax-free return schemes, one can invest his capital under the following institutions-
- Post office.- one can invest in schemes offered by post office like- Post Office Saving Account Schemes and Public Provident Fund Schemes.
- Life Insurance Corporation.- an individual can invest in different plans offered by LIC like- Whole Life Plan, Endowment Plans, Money Back Plan, Children Plan, etc.
- Unit Trust of India.- Unit Trust of India governed by the Unit Trust of India Act which was formed to encourage assessee to invest their capital and to avail the benefits of the schemes provided by the government.
- Public Companies and Corporation.- Public companies and corporations provide tax return benefit to an individual assessee under following schemes-
- Investment in equity shares
- Investment in bonds.
The return from the investment is totally exempted from Income Tax under Section 10. Investment in these schemes shall not provide tax liabilities but return from these investments shall be entitled to tax benefits.
- Deduction under other provisions
Number of Deductions provided under Section 80C to 80U of the Act. these deductions are allowed only to some specified assessee. Under these provisions, a deduction is allowed only when payment is made through the taxable income, and the total amount of the deduction shall not exceed the amount of Gross total income. Now, a deduction can be sub-categorized in two parts-
- In respect of payment
Deduction in this category allowed only when there is a payment made by assessee falls under Sec.80C to Sec.80GGC, now we will discuss these provisions one by one for better understanding-
Deductions Under section 80C
This section covers a wider area for the assessee to avail the benefits of all the schemes and provisions. For most people, this is a suitable provision to invest their capital. The deduction limit under this Section is up to Rs. 1,00,000. Sec.80C says Deduction in respect of Life Insurance Premia, deferred annuity, contribution to provident funds, subscription to certain equity shares and debentures, etc. some major Schemes under this Section are-
- Investment under Life Insurance Policy .- any person can contribute to a life insurance policy, where up to 20% deduction is allowed from the Gross total income of the assessee. For eligibility under this Section, one should pay the life insurance premium
- On own life;
- On spouse’s life;
- On the life of all the dependent children minor or major;
- On joint life with any member discussed above.
- Contribution to Provident Funds.- Contribution by an employee to the Public Provident Fund or any other recognized provident fund by the government shall be deductible from his tax liability.
- Investment in National Saving Certificates.- Capital investment in the National Saving Certificate in the name of his own or his wife or children shall be deductible under Sec.80C. Interest other than investment shall also be deductible under Sec.80C.
- Public Deposit Scheme.- contribution in any such pension fund which is set up by the National Housing Bank governed by Sec.3 of National Housing Bank, 1987.
- Investment in Annuity Plans.- the amount paid by an individual under contract for deferred annuity payment on his own life, or spouse’s life or on the life of children or any other member of the Hindu Undivided Family shall be deductible.
- Investment in Mutual Funds or pension funds.- amount paid as contribution in any pension fund scheme set up by mutual funds or Unit Trust of India shall be qualified for deduction under Sec.80C.
- Home loan Installment.- repayment of the Home loan borrowed by the assessee during the purchase or construction of residential house property then the principal component of EMI qualifies for the deduction under Sec.80C.
- Tuition fee.- tuition fee paid by an individual to any university, college or school situated in India for full-time education of any of his two children shall be eligible for deduction under Sec.80C.
Deductions Under section 80CCC
Section 80CCC talks about deduction in respect of contribution to certain pension funds. If an assessee paid or deposited any amount to the annuity plan of Life Insurance Corporation or to any other insurer in respect of receiving pension funds shall be eligible for deduction under Sec.80C but that amount should not exceed Rs.1,50,000 in the previous year.
Deductions Under section 80CCD
Deduction in respect of contribution to pension scheme of the Central Government. Where an assessee, being an individual employed by the Central Government or employee in any other case, as may be notified by the Central Government shall be eligible for deduction, but the amount he paid or deposited shall not exceed 10% of his salary in the case of an employee or in any other case shall not exceed 20% of his gross total income.
Deductions Under section 80D
Premium Amount paid by an assessee from his taxable income in respect of the health insurance for his own or his wife or his children health shall be deductible under this Sec. the amount should not exceed Rs.10,000 and Rs.15,000 in the case of a senior citizen.
Deductions Under section 80GG
An assessee who is not in receipt of House Rent Allowance under Section 10(13A) shall be eligible for deduction in respect of house rent. For deduction under this Section, one should fulfill some conditions like-
- He shall be lived in a rented house due to his employment;
- He shall not get House Rent Allowances;
- He or his wife or his children should not have self-occupied houses in India.
- In respect of receipt
These are the following provision under which deduction is qualified in respect of receipt-
- Deductions Under section 80QQB
The deduction is allowed in the case of royalty income earned by the author, either whole of his income or three lakh rupees, whichever is less.
- Deductions Under section 80R
Deduction in respect of remuneration from certain foreign sources in the case of professor, teacher etc. this section does not include remuneration in gross total income where remuneration received by assessee, outside India from any university or any other educational institution established outside India, for rendered his service as a professor, teacher or research worker.
This section provided that no deduction shall be allowed unless the assessee furnishes the certificate in a prescribed form along with the return of income.
- Deductions Under section 80U
A deduction shall be allowed to a permanent physically disabled person. Assessee, whose earning capacity has been reduced because of disablement, then deduction of Rs. 50,000 in a year shall be allowed to him or in the case of severe disability Rs.75,000 in a year. Provided that assessee should provide a certificate from the medical authority in a prescribed form along with the return of income.
Other than these deduction provisions some other provisions under the Act are-
- Deduction in respect of certain donations for Scientific Research or rural development (Sec.80GGA);
- Deduction in respect of contribution given by any person to political parties(Sec.80GGC);
- Deduction in respect of loan taken for higher education(Sec.80E);
- Deduction in respect of loan taken for residential house property(Sec.80EE);
- Deduction in respect of interest on deposits in a savings account (Sec.80TTA);
Tax Planning Capital Gains
Capital gain is a profit arises from the sale of capital assets. Capital gain can be a long-term capital gain and short term capital gain. The capital gain exemption is provided under section 54 where capital gains tax rates divide by 0%, 15%, and 20%. In the 2019 amendment by the Finance Act under Section 54 where exemption provided for house property it is included that where the amount of capital gain does not exceed 2 crore rupees then assessee by his choice can purchase or construed two residential houses in India.
To avail, this benefit one needs to fulfill the following conditions provided under the Act-
- The time period of purchasing of new property shall be either before 1 year of selling the property or 2 years after selling that property.
- That capital gain should be invested in the construction of property which is necessarily completed within the 3 years of selling.
Other exemptions provided under taxation law are-
- Section 54F provides Exemption for capital assets other than a house property. This section talks about long term capital gain.
- Section 54EC in respect of capital gain not to be charged on investment in certain bonds, where the capital gain arises from the transfer of long term capital assets.
- Section 54B provides that capital gain on transfer of land used for agricultural purposes not to be charged in certain cases.
Tax Planning Calculator
The tax planning calculator is an online tax calculating device so one can calculate his gross total income and the taxable amount and save his tax with the help of that calculator. One can access that calculator from anywhere, anytime. Generally, four steps include in tax saving calculator:-
- In the first step, one has to give his basic details about his age and financial year for which he wants to calculate his tax.
- Further, he has to provide his income details like how much income is taxable, interest on the home loan, etc.
- In next step details in regards to deduction under different schemes shall be provided;
- After calculating all the above details the tax saving calculator calculates the income that how much tax is payable.
Let’s understand this with an example-
An individual let’s say, Mr. S, the age of 35 years has to calculate his income of the financial year 2019-20.
His taxable income is rs.5,00,000 ;
Interest paid on a home loan is 12%;
Rental income received – rs. 10,000
Income from interest – rs. 50,000
Interest paid on loan- 8%
Basic deduction – rs.30,000
Medical insurance – rs.20,000
Interest on educational loan- 8%
Interest from deposits – 8%
Donations to charity – rs. 3,000
After calculating the above details, the tax payable by Mr. S is rs.13,832. If we made some change in income details, let’s say income from interest is rs.10,000, then no amount will be taxable.
Schemes Under Tax Planning
To save the capital and minimize the tax liability government provides numbers of the scheme under Income Tax, so one can make the right decision to invest his money with a low-cost investment and maximum benefit. There are some major schemes where an individual can invest his money for availing its maximum benefit.
- Life Insurance Policy
One can claim the exemption for insurance policy under Section 80C of the Act. The interest rate of this plan is 0-6%. No limit of minimum and maximum investment is fixed. Under this policy, one has to pay the premium on his own life or spouse’s life or on children’s lives or any member in the case of HUF.
- Health Insurance
Under Section 80D of the Act, one can claim an exemption for health insurance, where the assessee as an individual does not pay insurance on the health of the assessee or his family members or his parents on account of preventive health check-up to the Central government which exceeds the sum of twenty-five thousand rupees.
And in the case of medical expenditure incurred on the health of assessee or his family members or his parents, the amount does not exceed fifty thousand rupees.
- Public Provident Fund
One can invest his income under the Public Provident Fund and can claim an exemption under section 80C of the Act. The interest rate under PPF is 8% per annum, where minimum investment is Rs.500 and the maximum investment is Rs.1.5 lakh.
- Equity Linked Saving Schemes (ELSS)
The major plans for saving tax liabilities are mentioned under section 80C. ELSS is one of the two equity mutual funds where its maximum investment limit is Rs. 1.5lakh per annum. One has to invest his capital for at least 3 years. Another equity mutual fund scheme is a Unit Linked Insurance plan.
- National Pension Schemes
The national pension scheme is an employer’s contribution towards employees NPS from his basic salary, which is up to 10% and deductible from tax liability. No maximum limit is fixed for investment and it is a low-cost investment scheme.
- Senior Citizen Saving Schemes
Senior Citizen Saving Schemes is for those individuals who are of age 60 or above and in the case of age between 55-60, a person should be retired under superannuation or VRS rules. The interest rate of the scheme is 8.7% and the minimum investment amount is rs.1000 and the maximum limit is rs.15 lakh. The person who is a non-resident Indian or person of the Indian origin or member of the Hindu undivided family shall not be entitled to open his account under this scheme.
- National Saving Certificates
National Saving Certificate is an investment saving scheme offered by the government to every person who wants to secure his money. Assessee can invest by his own name or spouse’s name or on his children’s name or any member of the Hindu undivided family. The interest rate is 8% and this is a low-risk investment scheme, up to Rs.1.5lakh, which can be invested for a tax deduction under section 80C.
Tax Planning for Partnership Firm
A partnership firm is a business consists of two or more people who have a common goal and invest their money and assets for the accomplishment of that goal and share equal profit and liabilities.
Tax planning for a partnership firm is the most important issue for each and every partner. The primary focus to avoid tax levied by the government is to make proper tax planning. To maintain the growth of the business firm owners has to do arrangements to avail the benefits.
In a partnership firm, income tax is levied on all partners, so all the record and document of their income attached with partnership tax return form. Profit arises from sales of any assets that are taxable too.
There are some exemptions or benefits provided in regards to the partnership firm, these are-
- Section 40(b) talks about that amount which is not deductible in the case of
- Any payment of salary, bonus, commission or remuneration to any partner who is not a working partner;
- Any payment of remuneration to any partner who is a working partner but not authorized by the terms of partnership firm;
iii. Any payment of remuneration to any partner who is a working partner and authorized by the terms of partnership firm but the payment is for such period which is not authorized in any earlier partnership deed;
- Any payment of interest to any partner who is authorized by the terms of partnership deed and relates to any period falling after the date of such partnership deed for which amount calculated exceed by the rate of 12% simple interest per annum;
- Any remuneration to any partner who is a working partner and authorized by the terms of the partnership deed and relates to any period falling after the date of such partnership deed so far as the amount of payment to all the partners during the previous year exceeds the aggregate amount.
- Section 10(38) provides that any income shall not be included in total income if that if that income arises from the transfer of long term capital asset, being an equity share in a company or a unit of an equity oriented or a unit of a business trust where further it is provided that income by the transfer of long-term capital gain shall be taken in account of computing book profit and income tax payable under Section 115JB.
- Deduction for Donation under Section 80G we have studied that no amount shall be included in total income if it is donated as a charity to any NGO or to any political party or to any charitable institution within India. No deduction shall be allowed if the amount exceeds rs. 2000 unless it is payable by any mode other than cash.
- Section 44AD provides exemption on presumptive taxation for any business other than business related to plying, hiring or leasing goods carriages referred under section 44E or any business whose total turnover or gross receipts in the previous year does not exceed Rs. 2 crores.
- Section 54E provides that capital gain not to be charged if the cost of long term specified assets is not less than capital gain arising from the transfer of original asset the whole of such capital shall not be chargeable under Section 45.
If the cost of long term specified assets is less than capital gain arising from the transfer of original asset, so much of the capital gain as bears to the whole of capital gain the same proportion as the cost of acquisition of the long-term specified asset bear to the whole of capital gain, shall not be charged under section 45.
Zero Tax Planning
Zero tax planning is the way to reduce tax liability as much that the payable amount of tax will be zero. As we have studied all the provisions of the taxation law which provides deduction from tax liability. By planning and investment in the right schemes and programs, one can plan zero tax. There are many schemes like one can invest his money in mutual funds or claim deduction under Sec.80C up to 1.5lakh rupees and many more.
As we have discussed many tax incentives under the provision of law which focus and help in the reduction of tax liabilities. An individual or a corporate, who are taxable under the present tax regime can avail the benefits that arise out of these incentives. The income tax regime in India has evolved over time and has made it easier to plan and save their capital accordingly. It is suggested that one should avail of these benefits within the framework of the law.