Income Tax Plaining

WELINGKAR INSTITUDE OF MANAGEMENT &
DEVELOPMENT RESEARCH
FINAL REPORT
ON
INCOME TAX PLANNING IN INDIA
By
MR.SANDESH CHANDRAKANT YERUNKAR
ROLL NO: HPGD/AP15/2889
A REPORT
ON
INCOME TAX PLANNING IN INDIA
BY
MR.SANDESH CHANDRAKANT YERUNKAR
ROLL NO: HPGD/AP15/2889
1
Welingkar Institute of Management & Development Research (September 2017)
___________________________________________________________________________
THIS IS TO CERTIFY THAT
Mr. SANDESH CHANDRAKANT YERUNKAR has Satisfactorily Completed her Project

Work, and appeared for the Presentation & VIVA as required.
External Examiner Internal Examiner Head of Dept.

Chairperson/Dean
Date: 16.09.2017
Place: Mumbai
Seal of University: Mumbai University
COMPLETION CERTIFICATE
This is to certify that Mr. SANDESH CHANDRAKANT YERUNKAR

i. Project Title : Income Tax Planning In India
ii. Date : 16.09.2017
In partial fulfilment of 4th Semester for PGDM (HB) program of WELINGKAR

INSTITUDE OF MANGEMENT DEVELOPMENT & RESEARCH
Place – Mumbai
2
UNDERTAKING BY CANDIDATE
I Declare that project work, entitled “Income Tax Planning In India”

Is my own work conducted as part of my syllabus.
I further declare that project work presented has been prepared personally by me and it is not
sourced from any outside agency. I understand that, a search malpractice will have very
serious consequence and my admission to the program will be cancelled without any refund
of fees.
I am also aware that, I may face legal action, if follow such malpractice
Sandesh Yerunkar
HPGD/AP15/2889
3
TABLE OF CONTENTS
 TITLE PAGE………………………………………………………………………………………………………….1
 CERTIFICATION FROM GUIDE………………………………………………………………………………2
 UNDERTAKEN BY CANDIDATE……………………………………………………………………………..3
(A) INTRODUCTION
 Meaning……………………………………………………………………………………….5
 Types of Taxes………………………………………………………………………………6
 Direct Tax……………………………………………………………………………………..7
 Indirect Tax…………………………………………………………………………………..10
(B) TAX PLANNING
 Individual Planning………………………………………………………………… …..16

 Corporate Planning…………………………………………………………… ………. 26
 Tax Planning Restriction……………………………………………………………….31
 Tax Planning Techniques………………………………………………….. …………35
 Farming Business………………………………………………………………….. … ..38
 Investments………………………………………………………… ……………………...42
 Employees……………………………………………………………….. ………………….49
(C) Rules of Tax Planning

 5 Golden Rules……………………………………………. ……………………… ….…52
(D) LIMITATION………………………………………………………………55
(E) BIBLIOGRAPHY………………………………………………………….. 56
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Introduction
The avoid goal of every taxpayer is to minimize his Tax Liability. To achieve this objective
taxpayer may resort to following Three Methods:
o Tax Planning
o Tax Avoidance
o Tax Evasion
It is well said that “Taxpayer is not expected to arrange his affairs in such manner to pay
maximum tax”. So, the assesse shall arrange the affairs in a manner to reduce tax. But the
question what method he opts for? Tax Planning, Tax Avoidance, Tax Evasion!
Let us see its meaning and their difference.
 Meaning of Tax Planning :

Tax Planning involves planning in order to avail all
exemptions, deductions and rebates provided in Act. The Income Tax law
itself provides for various methods for Tax Planning, Generally it is provided under
exemptions u/s 10, deductions u/s 80C to 80U and rebates and relief’s. Some of the
provisions are enumerated below:
 Investment in securities provided u/s 10(15) . Interest on such securities is

fully exempt from tax.
 Exemptions u/s 10A, 10B, and 10BA
 Residential Status of the person
 Choice of accounting system
 Choice of organization.
What is tax?
Taxes are levied by governments on their citizens to generate income for undertaking projects
to boost the economy of the country and to raise the standard of living of its citizens. The
authority of the government to levy tax in India is derived from the Constitution of India,
which allocates the power to levy taxes to the Central and State governments. All taxes levied
within India need to be backed by an accompanying law passed by the Parliament or the State
Legislature.
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Types of Taxes:
Taxes are of two distinct types, direct and indirect taxes. The difference comes in the way
these taxes are implemented. Some are paid directly by you, such as the dreaded income tax,
wealth tax, corporate tax etc. while others are indirect taxes, such as the value added tax,
service tax, sales tax, etc.
1. Direct Tax
2. Indirect Tax
But, besides these two conventional taxes, there are also other taxes that have been brought
into effect by the Central Government to serve a particular agenda. ‘Other taxes’ are levied
on both direct and indirect taxes such as the recently introduced Swachh Bharat Cess tax,
Krishi Kalyan Cess tax, and infrastructure Cess tax among others.
1) Direct Tax:
Direct tax, as stated earlier, are taxes that are paid directly by you. These taxes
are levied directly on an entity or an individual and cannot be transferred onto anyone else.
One of the bodies that overlooks these is the Central Board of Direct Taxes (CBDT) which
is a part of the Department of Revenue. It has, to help it with its duties, the support of various
acts that govern various aspects of direct taxes.
Some of these acts are:
A) Income Tax Act:
This is also known as the IT Act of 1961 and sets the rules that govern income tax in India.
The income, which this act taxes, can come from any source like a business, owning a house
or property, gains received from investments and salaries, etc. This is the act that defines how
much the tax benefit on a fixed deposit or a life insurance premium will be. It is also the act
that decides how much of your income can you save through investments and what the slab
for the income tax will be.
B) Wealth Tax Act:
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The Wealth Tax Act was enacted in 1951 and is responsible for the taxation related to the net
wealth of an individual, a company or a Hindu Unified Family. The simplest calculation of
wealth tax was that if the net wealth exceeded Rs. 30 lakhs, then 1% of the amount that
exceeded Rs. 30 lakhs was payable as tax. It was abolished in the budget announced in 2015.
It has since been replaced with a surcharge of 12% on individuals that earn more than Rs. 1
crore per annum. It is also applicable to companies that have a revenue of over Rs. 10 crores
per annum. The new guidelines drastically increased the amount the government would
collect in taxes as opposed the amount they would collect through the wealth tax.
C) Gift Tax Act:
The Gift Tax Act came into existence in 1958 and stated that if an individual received gifts,
monetary or valuables, as gifts, a tax was to be to be paid on such gifts. The tax on such gifts
was maintained at 30% but it was abolished in 1998. Initially if a gift was given, and it was
something like property, jewellery, shares etc. it was taxable. According to the new rules gifts
given by family members like brothers, sister, parents, spouse, aunts and uncles are not
taxable. Even gifts given to you by the local authorities is exempt from this tax. How the tax
works now is that if someone, other than the exempt entities, gifts you anything that exceeds
a value of Rs. 50,000 then the entire gift amount is taxable.
D) Expenditure Tax Act:
This is an act that came into existence in 1987 and deals with the expenses you, as an
individual, may incur while availing the services of a hotel or a restaurant. It is applicable to
all of India except Jammu and Kashmir. It states that certain expenses are chargeable under
this act if they exceed Rs. 3,000 in the case of a hotel and all expenses incurred in a
restaurant.
E) Interest Tax Act:

The Interest Tax Act of 1974 deals with the tax that was payable on interest earned in certain
specific situations. In the last amendment to the act it was stated that the act does not apply to
interest that was earned after March 2000.
Below are some examples for all the different types of direct taxes:
Examples of Direct Taxes:

These are some of the direct taxes that you pay
1. Income Tax:
This is one of the most well-known and least understood taxes. It is the tax that is levied on
your earning in a financial year. There are many facets to income tax, such as the tax slabs,
taxable income, tax deducted at source (TDS), reduction of taxable income, etc. The tax is
applicable to both individuals and companies. For individuals, the tax that they have to pay
depends on which tax bracket they fall in. This bracket or slab determines the tax to be paid
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based on the annual income of the assessee and ranges from no tax to 30% tax for the high
income groups.
The government has fixed different taxes slabs for varied groups of individuals, namely
general taxpayers, senior citizens (people aged between 60 to 80, and very senior citizens
(people aged above 80).
New Income Tax Slab Rates for FY 2017-18 (AY 2018-19)
Income tax slab for individual tax payers & HUF (less than 60 years old) (both men &
women)
Income Tax Slab Tax Rate
Income up to Rs.2,50,000 No Tax

Income from Rs. 2,50,000 – Rs. 5,00,000 5%
Income from Rs. 5,00,000 – 10,00,000 20%
Income more than Rs. 10,00,000 30%
Surcharge: 10% of income tax, where total income is between Rs. 50 lakhs and Rs.1 crore.
15% of income tax, where total income exceeds Rs. 1 crore.
Income tax slab for individual tax payers & HUF (60 years old or more but less than 80 years
old) (both men & women)

Income from Rs.3,00,000 – Rs.5,00,000 5%
Income from Rs.5,00,000 – 10,00,000 20%
Income more than Rs.10,00,000 30%
Income tax slab for super senior citizens (80 years old or more) (both men & women)

Income from Rs.5,00,000 No Tax
Income from Rs.5,00,000 – 10,00,000 20%
Income more than Rs.10,00,000 30%
Surcharge: 10% of income tax, where total income is between Rs. 50 lakhs and Rs.1 crore.
15% of income tax, where total income exceeds Rs.1 crore.
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2. Capital Gain Tax:
This is a tax that is payable whenever you receive a sizable amount of money. It could be
from an investment or from the sale of a property. It is usually of two types, short term capital
gains from investments held for less than 36 months and long term capital gains from
investments held for longer than 36 months. The tax applicable for each is also very different
since the tax on short term gains is calculated based in the income bracket that you fall in and
the tax on long term gains is 20%. The interest thing about this tax is that the gain doesn’t
always have to be in the form of money. It could also be an exchange in kind in which case
the value of the exchange will be considered for taxation.
3. Securities Transaction Tax:
It’s no secret that if you know how to trade properly on the stock market, and trade in
securities, you stand to make a substantial amount of money. This too is a source of income
but it has its own tax which is known as the Securities Transaction Tax . How this tax is
levied is by adding the tax to the price of the share. This means that every time you buy or
sell shares, you pay this tax. All securities traded on the Indian stock exchange have this tax
attached to them.
4. Perquisite Tax:
Perquisites are all the perks or privileges that employers may extend to employees. These
privileges may include a house provided by the company or a car for your use, given to you
by the company. These perks are not just limited to big compensation like cars and houses,
they can even include things like compensation for fuel or phone bills. How this tax is levied
is by figuring out how that perk has been acquired by the company or used by the employee.
In the case of cars, it may be so that a car provided by the company and used for both
personal and official purposes is eligible for tax whereas a car used only for official purposes
is not.
5. Corporate Tax:
Corporate tax is the income tax that is paid by companies from the revenue they earn. This
tax also comes with a slab of its own that decides how much tax the company has to pay. For
example a domestic company, which has a revenue of less than Rs. 1 crore per annum, won’t
have to pay this tax but one that has a revenue of more than Rs. 1 crore per annum will have
to pay this tax. It is also referred to as a surcharge and is different for different revenue
brackets. It is also different for international companies where the corporate tax may be
41.2% if the company has a revenue of less than Rs. 10 million and so on.
There are four different types of corporate tax. They are:
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 Minimum Alternative Tax
 Fringe Benefit Tax
 Dividend Distribution Tax
 Banking Cash Transaction Tax
2) Indirect Tax:
By definition, indirect taxes are those taxes that are levied on goods or services. They differ
from direct taxes because they are not levied on a person who pays them directly to the
government, they are instead levied on products and are collected by an intermediary, the
person selling the product. The most common examples of indirect tax Indirect tax can
be VAT (Value Added Tax), Taxes on Imported Goods, Sales Tax, etc. These taxes are
levied by adding them to the price of the service or product which tends to push the cost of
the product up.
Examples of Indirect Taxes:
These are some of the common indirect taxes that you pay.
1) Sales Tax:
As the name suggests, sales tax is a tax that is levied on the sale of a product. This product
can be something that was produced in India or imported and can even cover services
rendered. This tax is levied on the seller of the product who then transfers it onto the person
who buys said product with the sales tax added to the price of the product. The limitation of
this tax is that it can be levied only ones for a particular product, which means that if the
product is sold a second time, sales tax cannot be applied to it.
Basically, all the states in the country follow their own Sales Tax Act and charge a
percentage indigenous to themselves. Besides this, a few states also levy other additional
charges like turnover tax, purchase tax, works transaction tax, and the like. This is also the
reason why sales tax is one of the largest revenue generators for various state governments.
Also, this tax is levied under both central and state legislations.
2) Service Tax:
Like sales tax is added to the price of goods sold in India, so is service tax added to services
provided in India. In the reading of the budget 2015, it was announced that the service tax
will be raised from 12.36% to 14%. It is not applicable on goods but on companies that
provide services and is collected every month or once every quarter based on how the
services are provided. If the establishment is an individual service provider then the service
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tax is paid only once the customer pays the bills however, for companies the service tax is
payable the moment the invoice is raised, irrespective of the customer paying the bill.
An important thing to remember is that since the service at a restaurant is a combination of

the food, the waiter and the premises themselves, it is difficult to pin point what qualifies for
service tax. To remove any ambiguity, in this regard, it has been announced that the service
tax in restaurants will be levied only on 40% of the total bill.
a) GST – Goods & Service Tax:
The Goods and Services Tax (GST) is the largest reform in India’s indirect tax structure since
the market started opening up about 25 years ago. The GST is a consumption-based tax, as it
is applicable where consumption takes place. The GST is levied on value-added goods and
services at each stage of consumption in the supply chain. The GST payable on the
procurement of goods and services can be set off against the GST payable on the supply of
goods and services, the merchant will pay the applicable GST rate but can claim it back
through the tax credit mechanism.
3) Value Added Tax:
VAT, also known as commercial tax is not applicable on commodities that are zero rated (eg.
food and essential drugs) or those that fall under exports. This tax is levied at all the stages of
the supply chain, right from the manufacturers, dealers and distributors to the end user.
The value added tax is a tax that is levied at the discretion of the state government and not all
states implemented it when it was first announced. The tax is levied on various goods sold in
the state and the amount of the tax is decided by the state itself. For example in Gujrat the
government split all the good into various categories called schedules. There are 3 schedules
and each schedule has its own VAT percentage. For Schedule 3 the VAT is 1%, for schedule
2 the VAT is 5% and so on. Goods that have not been classified into any category have a
VAT of 15%.
4) Custom Duty & Octroi:
When you purchase anything that needs to be imported from another country, a charge is
applied on it and that is the customs duty. It applies to all the products that come in via land,
sea or air. Even if you bring in products bought in another country to India, a customs
duty can be levied on it. The purpose of the customs duty is to ensure that all the goods
entering the country are taxed and paid for. Just as customs duty ensures that goods for other
countries are taxed, octroi is meant to ensure that goods crossing state borders within India
are taxed appropriately. It is levied by the state government and functions in much the same
way as customs duty does.
5) Excise Duty:
This is a tax that is levied on all the goods manufactured or produced in India. It is different
from customs duty because it is applicable only on things produced in India and is also
known as the Central Value Added Tax or CENVAT. This tax is collected by the government
from the manufacturer of the goods. It can also be collected from those entities that receive
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manufactured goods and employ people to transport the goods from the manufacturer to
themselves.
The Central Excise Rule set by the central government provide suggest that every person that
produces or manufactures any 'excisable goods', or who stores such goods in a warehouse,
will have to pay the duty applicable on such goods in. Under this rule no excisable goods, on
which any duty is payable, will be allowed to move without payment of duty from any place,
where they are produced or manufactured.
Other Taxes:
While direct and indirect taxes are the two main types of taxes, there are also these small cess
taxes that are also seen in the country. Although, they aren’t major revenue generators and
are not considered to be as such, these taxes help the government fund several initiatives that
concentrate on the improving the basic infrastructure and maintain general wellbeing of the
country. The taxes in this category are primarily referred to as a cess, which are taxes levied
by the government and the funds generated through this are used for specific purposes as per
the Finance Minister’s discretions.
Examples of Other taxes:
 Professional Tax:
Professional Tax, or employment tax, is another form of tax
levied only by state governments in India. According to professional tax norms,
individuals earning income or practicing a profession such as a doctor, lawyer,
chartered accountant, or company secretary etc. are required to pay this tax. However,
not all states levy professional tax and the rate differs across all the states that levy the
tax.
 Property Tax:
Also known as Property Tax or Real Estate Tax, this is one of
the taxes levied by local municipal bodies of every city. These taxes are levied in
order to provide and maintain the for basic civic services. All owners of residential or
commercial properties are subject to Municipal Tax.
 Entertainment Tax:
Entertainment Tax is yet another type of tax commonly seen in
India. It is levied by the government on feature films, television series, exhibitions,
amusement, and recreational parlours. This tax is collected taking into account a
business entity’s gross collection collected from earnings based on commercial
shows, film festival earnings, and audience participation.
 Stamp Duty:
Stamp duty, registration fees, and transfer taxes are collect as a
supplement of property tax. For instance, when an individual purchases a property,
they also have to pay for the cost of stamps (stamp duty), registration fees (fee
charged by local registrar to legalize a property transaction), and transfer tax (tax paid
to transfer the ownership of a commodity.
 Education Cess/Surcharge:
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Education cess is a tax in India primarily introduced to help
cover the cost of government-sponsored educational programs. This tax is collected
independently of other taxes and is applicable to all Indian citizens, corporations, and
other people living in the country. The effective rate of education cess currently
stands at 2% of an individual’s income.
 Gift Tax:
When an individual receives a gift from another person. It is
considered to be a part of their income generated through “other sources” and the
relevant tax is levied. This tax is applicable if the gift amount is more than Rs. 50,000
in a year.
 Wealth Tax:
Wealth Tax was another tax levied by the government, which
was charged based on the net wealth of the assesse. Wealth tax is chargeable with
respect to the net wealth of a property. Net wealth is equal to all the assets an
individual owns minus the cost of acquiring them (any loan taken to acquire them).
Wealth tax is no longer operational as it was abolished during the Union Budget of
2015.
The wealth tax, governed by the Wealth Tax Act, allows the government to impose a
tax on the net wealth of a person, an HUF or a company. This tax is set to be
abolished in 2016 but until then the tax levied on the net wealth is about 1% of the
wealth that exceeds Rs. 30 lakhs. There are exceptions to this tax which are
organisations that don’t have to pay wealth tax. These organisations could be trusts,
partnership firms, social clubs, political parties, etc.
 Toll Tax & Road Tax:

Toll tax is a tax you often pay to use any form of
infrastructure developed by the government, example roads and bridges. The tax
amount levied is rather negligible which is used for maintenance and basic upkeep of
a particular project.
 Swachh Bharat Cess:

This is a cess imposed by the government of India and was
started from 15 November 2015. This tax is applicable on all taxable services and the
cess currently stands at 0.5%. Swachh Bharat cess is levied over and above the 14%
service tax that is prevalent in the present times. One thing worth noting here is that
this cess is not applicable on services that are fully exempt of service tax or those
services covered under the negative list of services. It is collected by the Consolidate
Fund of India and will be used to funding and promoting any government campaigns
concerning the Swachh Bharat initiatives. This tax, however, is independent of service
tax and is charged as a separate line item in invoices.
 Krishi Kalyan Cess:

This is a cess imposed by the government of India and was
started from 15 November 2015. This tax is applicable on all taxable services and the
cess currently stands at 0.5%. Swachh Bharat cess is levied over and above the 14%
service tax that is prevalent in the present times. One thing worth noting here is that
this cess is not applicable on services that are fully exempt of service tax or those
services covered under the negative list of services. It is collected by the Consolidate
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Fund of India and will be used to funding and promoting any government campaigns
concerning the Swachh Bharat initiatives. This tax, however, is independent of service
tax and is charged as a separate line item in invoices.
 Infrastructure Cess:
Infrastructure cess is another tax brought into effect from
the 1st of June 2016. Under this tax, a cess of 1% is applicable on petrol/LPG/CNG-
driven motor vehicles which are 4 meters or less in length and 1200cc or less in
engine capacity. In case the diesel motor vehicles which don’t exceed the 4 metre
length and have engines with capacities less than 1500cc, a tax of 2.5% is to be paid.
For big sedans and SUVs, the cess stands at 4% of the overall cost of the vehicle.
 Entry Tax:
Entry tax is a tax levied in select states across the country
like Uttarakhand, Madhya Pradesh, Gujarat, Assam, and Delhi. Under this, all items
entering the state ordered via e-commerce establishments are taxed. The rate for this
tax varies between 5.5% to 10%.
These are all the types and kinds of taxes that are present in India’s current economic
scenario. The funds collected from these methods don’t just fuel the country’s
revenues but also provides the much-needed impetus to help the lower classes
prosper.
Benefit of Taxes:
Even though most people are always at odds with the idea of taxation, there are some
advantages to taxes, the least of which is that it provides the government the resources it needs for
economic development. Some of the other benefits of taxes are:
 It encourages savings and investments because if a person invests in certain

instruments, then the amount invested is reduced from their taxable income thus
bringing down the tax they have to pay. This investment is subject to certain limits
that are detailed in the IT Act.
 Paying taxes means that you have to file your tax returns which in turn means that
when you apply for a home loan for that home loan, it’s easier to get it because one of
the things many banks require is proof that you have been filing taxes regularly.
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TAX PLANNING
 Income Tax planning is one of the most important aspects of personal finance. It
forms an integral part of our savings plans. However, 90% of financial mistakes by
individuals in India are made during the tax planning season. Most of the individuals
fail to assess their tax liability and postpone the tax savings to last minute. Hence in
India, tax planning is given more importance only during the last two quarters of the
financial year. Due to these reasons, they end up paying unnecessary taxes or opt for
unnecessary tax savings. Strategies for income tax planning in India often concentrate
more on deduction under section 80C of the income tax code. Tax planning should be
considered as an integral part of an overall financial plan. This would help individuals
in optimizing their tax planning strategies.
 You may have often encountered problems in assessing your actual tax liability. As a
result you end up paying more than required amount in form of taxes or buy
unnecessary products. Also taking tax planning tips from friends and family who may
not be experts affects your overall financial plan.
 Good tax planning services advocates paying taxes smartly by utilizing the provisions
in the Tax Laws to minimize the tax liability. The best tax saving plan will include a
holistic view of the impact of your tax savings on your financial goals.
 The tax planning services on Arthos helps you in optimizing tax planning by:
1. Knowing your tax liability
2. Providing Comprehensive assessment of all tax related deductions that are already
available in the form of house rent, provident fund, health and life insurance etc.
3. Knowing the impact of tax savings on your available surplus.
4. Evaluating all your tax saving investments based on their merit.
 Use the tax planning tips from Arthos to design a best tax saving plan. Your
unnecessary tax related purchases can be reduced by 80%. Using our online personal
financial planning platform Arthos, get a detailed tax assessment. Arthos also helps
you evaluate all your existing tax saving investments and makes recommendations on
future tax planning. Avoid unnecessary tax mistakes that cause money outflow in the
name of tax savings by using Arthos.
(A) INDIVIDUAL PLANNING
(B) CORPORATE PLANNING
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(A) INDIVIDUAL PLANNING
1. Save Tax under Section 80C, Section80CCC, Section80CCD
 Investment in ELSS Fund:
ELSS stands for Equity Linked Savings Scheme. These are tax-saving

mutual funds that invest at least 65% of their assets in the stock markets. Investments
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of up to Rs 1.5 lakh in ELSS funds can earn a tax break under Section 80C. The
advantage of ELSS funds is that they come with the lowest lock-in among all tax-
saving investments–just 3 years. Apart from that, because of their equity exposure,
ELSS funds are best placed to help you earn inflation-beating returns over the long-
term. Even though these tax-saving mutual funds don’t offer guaranteed returns, the
best performing ones have generated 12-15% returns over the long-term through the
power of compounding interest. Additionally, since ELSS funds are equity-oriented
funds, all gains on investments held for over one year are tax-free for the investor.
 PPF (Public Provident Fund):
Deposits made in a PPF account are eligible for tax deductions under

Section 80C. A maximum of Rs 1.5 lakh can be claimed in one financial year. PPF
gives guaranteed interest that is fixed by the Finance Ministry for every financial year.
The current interest from the PPF for FY2016-17 is set at 8.1% that is compounded
annually. The PPF has a tenure of 15 years, after which the withdrawals are tax-free.
While the PPF doesn’t allow premature withdrawals, the account holder can take
loans against the corpus in their PPF account.
Additionally, an employer’s contribution to the Employee Provident Fund (EPF)

account also earns a tax break under Section 80C of up to Rs 1.5 lakh.
 Investment in Employee Provident Fund:
An employee’s contribution to the Employee Provident Fund (EPF)

account also earns a tax break under Section 80C of up to Rs 1.5 lakh. This amounts
to 12% of salary that is deducted by an employer and deposited in the EPF or other
recognised provident fund. The current interest rate on the EPF is 8.8%.
 Investment in Tax Saving Fixed Deposit:
Tax-saving FDs are like regular fixed deposits, but come with a
lock-in period of 5 years and tax break under Section 80C on investments of up to Rs
1.5 lakh. Different banks offer different interest on the tax-saving FDs, which range
from 7-9%. The returns are guaranteed and the FDs offer 100% capital protection. But
upon maturity, the interest is added to the investor’s taxable income.
 Investment in National Pension System:
The NPS is a pension scheme that has been started by the

Indian Government to allow the unorganised sector and working professionals to have
a pension after retirement. Investments of up to Rs 1.5 lakh can be used to avail tax
deductions under Section 80C. An additional Rs 50,000 can also be invested in the
NPS for tax deductions under Section 80CCD(1B). The NPS offers different plans
that the subscriber can choose as per their risk profile. But the highest exposure to
equity is capped at 50%. An option to change designated pension fund managers is
also allowed. However, a major disadvantage of the NPS is that the proceeds upon
maturity are taxable. Furthermore, there is no guarantee of the returns that can be
earned from the NPS.
 Purchase of National Saving certificates (NSC):
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NSCs are eligible for tax breaks for the financial year in
which they are purchased. Investments of up to Rs 1.5 lakh in NSCs can be made to
save taxes under Section 80C. NSCs can be bought from designated post offices and
come with a lock-in period of 5 years. The interest is compounded annually but is
taxable. The current interest rate for FY2016-17 on NSC is 8.1%.
 Investment in Unit Linked Insurance Plan:
ULIPs are a mix of insurance and investment. A part of the

invested amount in ULIPs is used to provide insurance and the rest of the amount is
invested in the stock markets. Investments of up to Rs 1.5 lakh in ULIPs are eligible
for tax breaks under Section 80C. ULIPs don’t offer guaranteed returns because they
are an equity market-linked product. The disadvantage of ULIPs is that they don’t
offer clarity on where the investments are made and how much of the invested amount
is deducted for commissions and expenses.
 Investments in Sukanya Samriddhi Yojana:
Deposits of up to Rs 1.5 lakh can be added to a Sukanya

Samriddhi Yojana account for tax saving under Section 80C. The current interest rate
for FY2016-17 on Sukanya Samriddhi Yojana deposits has been set at 8.6%. Deposits
in this scheme have to be made for a girl child by the parent or guardian. The interest
is compounded annually and is fully exempt from tax. The receipts upon maturity are
also tax-free. The Sukanya Samriddhi Yojana account matures 21 years after opening
the account. A partial withdrawal of up to 50% of the previous year’s balance is
allowed after the account holder turns 18.
 Investments in Senior Citizens Saving Scheme:
The SCSS is a scheme exclusively for anyone who is over 60

years old or someone over 55 who has opted for retirement. The scheme has a
maturity period of 5 years and gives 8.6% per annum. Investments of up to Rs 1.5
lakh in SCSS can be made to save taxes under Section 80C.
Guaranteed
Investment Risk Profile Interest Returns Lock-in Period
ELSS funds Equity-related risk 12-15% expected No 3 years
PPF Risk-free 8.10% Yes 15 years
NPS Equity-related 8-10% expected No Till retirement
NSC Risk-free 8.10% Yes 5 years
FD Risk-free 7-9% expected Yes 5 years
ULIP Equity-related risk 8-10% expected No 5 years
Sukanya Samriddhi Risk-free 8.60% Yes 21 years
SCSS Risk-free 8.60% Yes 5 years
Other investments under Section 80C that earn a tax break:
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 5 year deposit scheme in post office
 Subscriptions of notified securities like NSS
 Sum paid to National Housing Bank’s Home Loan Account Scheme
 Contribution to notified LIC annuity plan
 Subscription to notified bonds of National Bank for Agriculture and Rural
Development
Payment Eligible For Tax Saving Deduction Under Section 80C
(A) Life Insurance Premium
The annual premium paid for life insurance in the name of the taxpayer or the
taxpayer’s wife and children is an eligible tax-saving payment under Section 80C. The
deduction is valid only if the premium is less than 10% of the sum assured.
(B) Children Tuition Fees:
The tuition fee paid for the education of two children is eligible for tax
deduction under Section 80C of up to Rs 1.5 lakh. The fee can be paid to any school, college,
university or educational institute situated in India. The fees have to be for a full-time course
only.
(C) Repayment of Home Loan:
The repayment of the principal of a loan taken to buy or construct a

residential property is eligible for tax deductions under Section 80C. This deduction is also
applicable on stamp duty, registration fees and transfer expenses.
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2. Tax Planning For Salaried Employee:
Most of the salaried employees might have received a reminder

from the HR for submission of proofs of tax saving investments.
If you have already made the provisions and investments, then it’s no big deal for you. But in
case you are one of the late movers, time has come to make fast moves.Broadly, there are
three ways to ensure that you pay optimal tax; Claiming tax free income, incidental actions
that bring tax benefits and finally Investing/saving for tax benefits
 Claiming Tax Free Income:
All you need to do here is submit documents to the HR and relax.

Your tax outflow will automatically get managed. These are applicable for salary
components that are tax free in nature. Here is the list of items:
In case you live in a rented apartment and want to make your HRA tax free: Submit
12 month’s rental receipt from owner. For making medical allowance tax free you
need to submit medical bills for the year. To make leave travel allowance (LTA) tax
20
free you need to submit travel proofs.For conveyance allowance to be made tax free
you need to do nothing to prove. Attending work is good enough we guess!
 Incidental actions that bring tax benefits:
Interest payment on your home loan- this qualifies under

section 24.Principal re-payment on your home loan- this qualifies under section 80C
tax rebate. Insurance premium receipts paid for the year- this qualifies for section 80C
tax rebate. Tuition fee receipt paid for your children if any- this qualifies for section
80C tax rebate. Your side contribution to employee provident fund (no proof to be
submitted as the HR already has the records) – this qualifies for section 80C tax
rebate. Mediclaim premium receipt- this qualifies for section 80D tax rebate. Parents’
mediclaim premium receipt- this qualifies for section 80D tax rebate. Education loan
statement (mentioning the interest component)- this qualifies for section 80E tax
rebate
You must be wondering why Insurance is figuring in this

incidental category? Primarily, insurance is supposed to be seen in that manner. We
discourage buying insurance policies as a tax saving tool. Same with mediclaim.
 Investing Saving for tax benefits:
Here is where you need to plan and act for managing your
tax outgo. Broadly here you deal with the provisions of Sec 80C/Sec 80 CCC, 80G
and 80 CCG. You are primarily expected to invest in any of the products listed in
these sections and in return you get the benefit of paying lesser tax. But there is an
upper limit to this. For both section 80C and section 80CCC the upper limit
collectively is Rs 1,00,000.
(A) Maximise Tax Saving:
1. Exemptions/reimbursements – Identify the reimbursements available from the

company and take maximum advantage of the same. Normal expenses that one incurs could
help save tax. Example- Telephone/fuel reimbursements, meal vouchers and company car. A
person in lower tax slabs can reduce his tax liability to nil with exemptions alone.
Similarly, salaried employees staying in rented apartments can claim exemption under
Section 10(5) of the Act in respect of house rent allowance by making the HRA a component
of their salary.
(B) Deductions
 Section 80C allows a maximum limit of Rs 1.50 lakh across investments ranging from
provident fund, PPF, infrastructure bonds, fixed deposits (5 years or more), Sukanya
Samriddhi Account, NSC, insurance/pension plans, unit linked insurance, equity
linked savings scheme etc. It also includes tuition fees of your children and the
repayment of principal on your housing loan. Deduction under section 80C and Tax
Planning
21
 The interest component on your home loan has a separate limit of Rs 2 lakh. Income
Tax Benefits from House Property and Loan
 Medical premier up to a maximum of Rs 15,000 (Rs. 20000/- wef A.Y. 2016-17)

qualifies for deduction, with an additional Rs 15,000 for parents. Additional deduction
of 20,000/- (Rs. 30000/- wef A.Y. 2016-17) could be availed in case of a senior
citizen.You can claim a separate deduction for medical premium of your
parents. Deduction U/s 80D for Mediclaim Premium to Individual, HUF, Senior
Citizens
 A person who have spent money on the maintenance (including medical treatment) of

dependant persons with disability, could avail deductions 80DD of the Act. Section
80DD Deduction- Medical expense of disabled dependent.
 Individuals paying interest on education loan should obtain the interest payment
certificate under section 80E of the Act. Section 80E – Deduction for Interest on
education Loan
 Those who are suffering from not less than 40 per cent of any disability is eligible for
deduction to the extent of Rs. 50,000/- and in case of severe disability to the extent of
Rs. 100,000/- under section 80U of the Act. Deduction U/s. 80Ufor disabled persons
Buy medical insurance for your family –
You can purchase a medical insurance to secure yourself, your spouse

and your children and claim a deduction of maximum Rs 25,000. This is allowed under
section 80D. You can also secure your parents and claim additional Rs 30,000 for their
insurance. If you purchase a policy now, the entire premium can be claimed under section
80D in FY 2016-17 itself, even though the insurance plan may be valid until 2018.
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1. Section 80C:
The maximum tax exemption limit under Section 80C has been retained
as Rs 1.5 Lakh only. The various investment avenues or expenses that can be claimed as tax
deductions under section 80C are as Insurance, PPF, Mutual Funds, 5 years Tax saving
Deposits, Tuition Fees, Housing loan repayments Etc.
2. Section 80CCC:
Contribution to annuity plan of Life Insurance Company for receiving

pension from the fund is considered for tax benefit. The maximum allowable Tax deduction
under this section is Rs 1.5 Lakh.
3. Section 80CCD:
Employee can contribute to Government notified Pension Schemes (like

National Pension Scheme – NPS). The contributions can be upto 10% of the salary (or) Gross
Income and Rs 50,000 additional tax benefit u/s 80CCD (1b) was proposed in Budget 2015.
4. Section 80D:
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Deduction u/s 80D on health insurance premium is Rs 25,000. For
Senior Citizens it is Rs 30,000. For very senior citizen above the age of 80 years who are not
eligible to take health insurance, deduction is allowed for Rs 30,000 toward medical
expenditure.
5. Section 24 (B):
The interest component of home loans is allowed as deduction

under Section 24B for up to Rs 2 lakh in case of a self-occupied house. If your property is a
let-out one then the entire interest amount can be claimed as tax deduction. (Read:
Understanding Tax Implications of Income from house property)
6. Section 80EE:
This is a new proposal which has been made in Budget 2016-17.

First time Home Buyers can claim an additional Tax deduction of up to Rs 50,000 on home
loan interest payments u/s 80EE. The below criteria has to be met for claiming tax deduction
under section 80EE.
1. The home loan should have been sanctioned in FY 2016-17.
2. Loan amount should be less than Rs 35 Lakh.
3. The value of the house should not be more than Rs 50 Lakh &
4. The home buyer should not have any other existing residential house in his name.
7. Section 80GG:
As per the budget 2016 proposal, the Tax Deduction amount

under 80GG has been increased from Rs 24,000 per annum to Rs 60,000 per annum. Section
80GG is applicable for all those individuals who do not own a residential house & do not
receive HRA (House Rent Allowance)
Tax planning for the salaried employees is a matter of planning and

discipline. Planning involves making a set of decisions at the start of the financial year and
discipline comes in when you are required to adhere to the plan come what may. If an
Individual has done proper Tax Planning to save tax, such deductions would be subtracted
from the gross total income and income tax would be levied on the balance income as per the
income tax slabs in force.
The key CTC components which could help reduce your tax liability and boost your take
home pay are outlined below. These apply to all non-government employees.
1. House Rent Allowance (HRA):
HRA is the most common CTC component. Those staying in

rented accommodation can avail of an exemption against the HRA received and only the
balance would be taxable. The exemption is limited to (a) rent paid less 10% of basic salary
24
or (b) 50% of basic salary where the house is situated in any of the four cities of Delhi,
Mumbai, Kolkata or Chennai, and 40% of basic salary in other cities or (c) actual HRA
received, whichever is the lowest.
2. Level Travel Concession (LTC):
Your annual holiday within India can get you a tax break. The
tax exemption on any reimbursement of your travel expense while on leave is limited to the
economy class air fare for the shortest route available to your vacation destination. No
exemption is available for expenses such as hotel, local conveyance, etc. Keep the travel bill
handy to submit to your accounts department to claim the exemption.
3. Medical Allowance:
Medical Allowance is levied up to Rs.15,000 provided all bills

for the same are furnished by the employees to the employer.
4. Conveyance Allowance:
For conveyance allowance to be made tax free you need to

do nothing to prove. Attending work is good enough we guess!
(B) Corporate Tax Planning
Tax Management:
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Just as everyone knows you can count on death and taxes, you know that
you can count on one thing in managing taxes. Tax Management system is designed to
manage change. You define codes, classifications and other data types to match your needs.
Use the import/export capabilities to accept updated appraisals and send data to reporting
agencies. The Tax Management Modules (Real Property and Personal Property) give you the
tools you need for recording, tracking and calculating taxes. Seamless integration with
Financial Management, Bank Reconciliation, Collections, and Budget Preparation keeps your
financials up-to-date and ensures data consistency. User-defined tables, expressions, and
formulas process supplements, unique taxes, or charges. A powerful editor that simplifies the
task of editing individual records when needed Features:
 Powerful on-line editor updates taxpayer, property and assessed value data on-line
 Print detail and summary reports on demand
 User-defined codes and classifications simplify data management
 Land books and property books supported
 Automatically computes tax levies, late payment penalties and simple interest due
 Interface with 3rd party assessors packages to import/export data
 Information accessed via property ID, owner name or property location or other user-
defined criteria
 Creates and maintains detailed records for each transaction including:
 Property ID
 Owner
 Transaction Date
 Tax/Charge Amount
 Payment Charge
 Master files contain the following information, and more:
 District
.  Exempt Amount
 Market Value
 Taxable Value
 Class Code
 Digest Reference Number
 Tax Relief Code
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 Description
 Bill Number
 Tracks unlimited number of information years
 Prior year information is secure and available for review and analysis
Tax Planning:
Tax planning is a broad term that is used to describe the processes utilized by
individuals and businesses to pay the taxes due to local, state, and federal tax agencies. The
process includes such elements as managing tax implications, understanding what type of
expenses are tax deductible under current regulations, and in general planning for taxes in a
manner that ensures the amount of tax due will be paid in a timely manner. One of the main
focuses of tax planning is to apply current tax laws to the revenue that is received during a
given tax period. The revenue may come from any revenue producing mechanism that is
currently in operation for the entity concerned. For individuals, this can mean income sources
such as interest accrued on bank accounts, salaries, wages and tips, bonuses, investment
profits, and other sources of income as currently defined by law. Businesses will consider
revenue generated from sales to customers, stock and bond issues, interest bearing bank
accounts, and any other income source that is currently considered taxable by the appropriate
tax agencies.
Tax Rate For Non-treaty foreign Companies Foreign Companies under

the US Treat
Dividend 20% 15%
27
Interest 20% 15%
Royalties 30% 20%
Interest Gains 20% 15%
Technical Service 30% 20%
Other Income 55% 55%
Taxation of foreign companies also depends on the taxation agreements between India and
the country of the company. The withholding tax requirements, the DTAA and other
agreements should be kept in mind. Did you know that just a few months before the recent
Union Budget, there was a lot of talk of thecorporate tax rate being reduced from the flat 30%
to 25% for domestic companies? Well that did not happen, however you should know that
30% is at par with most other countries in the world.
Corporate tax is a form of tax levied on profits earned by businessmen in a particular period
of time. Various rates of corporate taxes are levied for different levels of profits earned by
business houses. Corporate tax is generally levied on the revenues of a company after
deductions such as depreciation, COGS (Cost of goods sold) and SG&A (Selling general and
administrative expenses) have been taken into account.
Corporate tax or company tax can be assumed as an Income Tax for income earned by
businesses. Many countries levy corporate tax in order to smooth out the tax process for
enterprises. Different countries have different rules that apply to taxing of income.
(A) Corporate Tax In India:
Corporate tax in India is levied on both domestic as well as foreign companies.

Like all individuals earning income are supposed to pay a tax on their income, business
houses too are supposed to pay as tax a certain portion of their income earned. This tax is
known as corporate tax, corporation tax or company tax.
For the purpose of tax calculation, companies in India have been broadly
divided into the following two categories.
(1) Domestic Corporate
(2) Foreign Corporate
 Domestic Corporate:
Any company that is Indian is called as domestic company or if the

company is foreign but the control and management is wholly situated in India then
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also it is termed as a domestic company. An Indian company means a company
registered under the Companies Act 1956
 Foreign Corporate:
Any foreign company is one that is not of Indian origin and has
some part of control and management of affairs located outside India
Dividend Distribution Tax:
Corporate tax is tax paid by companies on revenues earned minus

certain expenses. Similarly, dividend distribution tax is tax paid by corporates on the
dividend that they pay to their shareholders. Corporate dividend tax is a percentage of the
dividend paid. Currently, the dividend distribution tax in India is 15%.
Corporate Tax Rate:
Depending upon the type of company, domestic or foreign and

depending upon the income earned in one financial year, corporate or company tax rates vary
for different companies. Currently for the financial year 2015-16, corporate tax in India has
been reduced by a certain percentage. In the subsequent sections, corporate tax rates for the
current fiscal have been detailed out more clearly.
Corporate Tax Planning:
Corporate tax planning can be understood as strategizing one’s

financial business affairs in such a way so as to maximize profit and minimize payable tax by
taking into account the allowed benefits of deductions, rebates and exemptions. Tax
management is a risky as well as tricky business and most corporates that have a huge money
at stake involve financial experts to take care of their taxation process. In India also there are
various financial players that provide consultation and implementation of corporate tax. Due
diligence and absolute awareness about all tax laws and corresponding rules and regulations,
is a must to ensure healthy tax planning.
Corporate tax planning is different from tax evasion or non-payment. Tax planning refers to
the act of planning one’s finances in such a way that the payable tax amount is reduced while
the gains are maximized. One of the most essential features of tax planning in that it is
absolutely in-line with the legal and financial rules set by the government of India.
Corporate Tax Budget:
Corporate tax budget 2015 was being looked forward too with
eagerness and anticipation. The new government at the center was supposed to reduce the
existing corporate tax rate which the financial industry experts felt would be an extremely
positive move considering the current market structure.
The current government did live up to the expectation and announced a 5% cut in corporate
tax from 30% to 25% for the next 4 years. The move is aimed at encouraging foreign
investment for infrastructure projects like roads, railways and energy as well as for setting up
29
of shops in India by foreign companies. This corporate rate cut will ease out tax burden
resulting in a higher level of investment, growth as well as job creation. The honourable
finance minister of India, while announcing the slash in rate, was of the view that corporate
tax rate had reached a level wherein government was neither receiving revenue nor
investment owing to the high rate of company tax. This deadlock prompted the government
to do something about the high tax rate so as to foster better and higher investment in the
economy.
TAX PLANNING RESTRICTION
In order to achieve the objectives of tax planning listed above, firms face some difficulties
and obstacles. For that reason, they must adopt optimal tax planning, taking into account the
effects of tax planning on "all costs", "all parties", and "all taxes" (Scholes et al., 2008).
Previous studies confirm the importance of the costs of tax planning in several cases; this has
made it possible to interpret the restrictions and their effects through costs and non-tax costs.
Moreover, these costs must be examined before embarking on the activities of tax planning
because the process of tax planning and reduction of taxes can be costly. Thus, the activity
will continue only if the costs are predicted to be less than the expected tax cuts. These
30
conditions would not be favorable if the government later increases the company’s tax rates
in response to minimum tax revenues (Tran-Nam & Evans, 2000; Rego, 2003; Slemrod,
2004; Rego & Wilson, 2012). Generally, the costs incurred by companies due to tax planning
emerge from the current tax planning strategies in place. As discussed earlier, there are two
types of costs incurred in tax planning. The first is the costs that arise as a result of practicing
tax planning now, whilst the other is related to future costs, appearing in accordance with the
additional activities of tax planning through the pursuit of the application of new methods of
tax planning in the future.
(A) Direct Cost:

Corporations bear legal costs as part of the cost of compliance to ensure the
goal of tax planning. This is because of the limitations of judicial branches and legislative in
the planning of taxes. The IRS and the courts may challenge the tax planning strategies
utilizing judicial doctrines and legislative. Legal costs of tax planning can also be associated
with foreign aid, for instance, costs related with tax-associated fees paid to lawyers,
accountants and further relevant parties (Howell O'Neill, 2012). Additionally, in a study to
investigate investments in tax planning (including in home countries), further costs of foreign
aid and expenses in the conduct of tax planning were found (Hanlon & Heitzman, 2010).
(B) Indirect Cost:

A system (production efficiency) of neutral tax makes tax planning
ineffective and avoids both direct costs of tax planning (tax costs and legal advice, as well as
the cost to the government to tackle tax evasion). Indirect costs arise because the taxpayer
changes his financing plans in the existence of taxes and his investments (deadweight loss)
(Schreiber & Fuehrich, 2007; Howell O'Neill, 2012). Furthermore, director compensation and
reputation, political costs, and implicit tax are additional indirect costs that are significant
considerations in tax planning. Executive compensation could suffer in the case of
performance-based remuneration, which decreases remuneration and the reporting income.
This could be looked upon as tax disadvantageous for the corporation's administration that
rely on performance-based rewards for employees, particularly in granting financial motives
for managers (Stapledon, 2004).
Previous literature provides some evidence that managerial incentives
impact tax planning options. Nevertheless, there is only a few evidence associated with the
precise incentives of the tax directors, who directly participates in the tax decisions of a firm
(Armstrong et al., 2012). Conflicts exist because of the reputation that reflects the
compensation of managers, and the political costs and implicit costs. Nevertheless, it is
significant to observe that the impact of financial reporting and tax planning can operate in
two ways, affecting the choices of financial accounting and tax planning (Shackelford &
Shevlin, 2001). However, one important restriction to this model is that shareholders cannot
monitor the compensation contract or know whether managers are engaging in lawful tax
planning or unlawful tax evasion.
(C) Tax Planning Motivation & Advantages:
31
The expected advantages for taxpayers are the primary motivation behind
tax planning. Nevertheless, decision makers may employ widely differing levels of
aggressive tax planning, which may rely on their individual attitudes (Abdul Wahab, 2010).
For example, in the case of risk aversion, decision makers would probably take decisions that
involve less risk and, even, low yields, whilst, on the other hand, risk-takers prefer to aim for
high yields, despite the high risks associated with this decision. The advantages of tax
planning positions are explicit. They decrease tax liabilities, which increase cash flow and
can also raise after-tax net income (King & Sheffrin, 2002).
Discussions on the factors that could stimulate the decision to implement
tax planning provide an incomplete explanation of the moderating effects of tax planning. In
the process of decision-making tax planning, factors of moderation are the factors that
indirectly drive or prevent taxpayers in undertaking tax planning activities (Abdul Wahab,
2010). Utility theory explains that taxpayers’ decisions are made on the basis of an
expectation that they will receive the highest benefits possible when considering the trade-off
between the risks from decisions made and the expected returns (tax saving). Alternatively,
prospect theory explores taxpayers’ decisions beneath safe and guaranteed conditions in
which the taxpayers favor a tax planning strategy that is seen as low risk, even though the tax
saving is lower. These attitudes could be more interpreted in relation to prospect theory and
expected utility theory (King & Sheffrin, 2002). However, risk-takers, in line with probable
usefulness theory, embark on tax planning strategies that offer the highest tax savings,
whereas risk-averse taxpayers, according to prospect theory, favor a strategy that includes
low risk and merely contracts with standard reductions (King & Sheffrin, 2002).
Based on the motivating factors that encourage companies to take tax
planning, corporations engage themselves in tax planning for the primary benefits that result
from a rise in after-tax returns. Likewise, as pointed out by various theories and definitions of
tax planning, it is significant to note that after tax returns could be unenthusiastically
influenced by tax minimization, although tax minimization might be seen as an advantage of
tax planning. This is because of the likelihood of a tax minimization strategy to draft in
important expenses of a non-tax dimension, as discussed in the part of restrictions of tax
planning previously. Additionally, Shackelford and Shevlin (2001) claimed that tax
minimization advantage could result in other non-tax costs, for instance, lower reported
revenue. Besides that, the Scholes-Wolfson framework argues that, because of its possible
negative impact on after-tax returns, tax minimization is not the best benefit in tax planning.
For instance, in order to maximize tax, one could merely not invest in profitable ventures.
Consequently, the addition of after-tax returns is the major objective of efficient tax planning
instead of tax minimization, Furthermore, compared to after-tax income, raised cash inflows
would be an advantage to the taxpayers by a rise of cash obtainable through corporations,
with consideration to only the tax paid rather than tax cost. Besides a rise in after-tax returns,
tax planning is also an advantage to the corporations in the form of cash inflows (Jones &
Rhoades-Cataract, 2005). Based on the foregoing discussion, the cash inflow advantage of
taxation may be connected to the timing or delays of tax planning strategies. Additionally,
incremental cash flow advantage is obtainable by way of lesser tax rates flanked by
interrelated corporations.
32
(D) Tax Planning Measurement:
Tax planning measures used in earlier studies vary, depending on
the accessibility of data and the interest of researchers in the general or specific approach to
tax planning. Prior researchers utilized different measures of tax planning utilizing both
privately and publicly accessible data. In measuring the results of tax planning, they can
assess a tax measure to be appropriate because it exhibits the gap between the taxes burden-
based "book reports" and "taxable income-based". Several studies on tax, either indirectly or
directly, deem a tax saving to be the result of such tax planning. The mainly popular
measures utilized by researchers are book-tax gaps (Plesko, 2003; Hanlon & Heitzman, 2010)
and effective tax rates (Mills, Erickson, & Maydew, 1998; Abdul Wahab, 2011; Rego &
Wilson, 2012). The measure of tax saving is a constant issue amongst researchers due to a
debate on the accuracy of measures in exhibiting tax planning activity (Armstrong et al.,
2012). This is because tax burden-associated data cannot be accessed by external interested
Parties. In addition, effective tax rate is also a suitable measure of tax planning as compared
to book-tax gap measure since it can remove measurement errors associated with tax expense
on tax credit and foreign income.
33
Tax Planning Techniques
With reports of so-called abusive tax shelters constantly in the news, many
taxpayers and practitioners are increasingly wary of even the most fundamental of tax
planning alternatives. However, solid tax planning is an essential component to build
personal wealth and business profits, and not all tax planning is about outrageous or
questionable tax shelters. Based on your business and personal activities, planning can save
you money.
34
The following legitimate, intentional and potentially tax-reducing strategies are intended as a
sampler-not an all-inclusive list of tax-planning ideas. Consider them for your business.
 Take advantage of the newly enacted deduction for income attributable to
domestic production activities:
The final version in 2010 will eventually permit tax deductions for
up to 9 percent of taxable income derived from qualified domestic production
activities, beginning with 3 percent in 2005. These include manufacturing, production,
growth or extraction activities. Deductions also will also be limited by domestic
wages paid.
 Consider the EIE if you manufacture and export U.S. products:

The Extraterritorial Income Exclusion may be for you.
Extraterritorial income is partially excludable from taxable gross income, and
comprises "foreign trading gross receipts" arising from sales of certain qualifying
foreign trade property outside the United States. This includes the sale or rental of
qualifying foreign trade property outside the United States; the performance of certain
services related to the sale or rental; and certain other limited services. Although this
tax benefit was repealed in 2004, it is still available over the next three years as it is
phased out. Eligible taxpayers can still amend returns to claim refunds by taking the
exclusion for prior open tax years.
 If the EIE helped, consider a Domestic International Sales Corporation:

A DISC is another tool available to many exporters, enabling
taxpayers to reduce their taxable income from export sales and activities. Even though
the tax deferral benefits of the DISC may be subject to an annual interest cost payable
to the IRS, the benefits should be of more interest now that other options are on the
way out of the tax law.
 Look for research & development tax credits:

You may be eligible for R&D tax credits-more broadly
available than many taxpayers realize. Frequently businesses assume their activities
do not constitute R&D, and/or overlook costs that can be included in qualifying
expenditures. You do not have to be in a high-tech business to have qualifying R&D
expenditures and do not have to hire high-tech outside expertise.
 Use the cash method of accounting:

To encourage the development and growth of U.S. small
businesses, in part by simplifying tax compliance costs, the IRS recently increased the
size of companies that can operate on cash basis accounting. Cash accounting can
simplify reporting, and save taxes because you typically do not recognize revenue
until the amount is collected. Expenses are typically deductible when paid, and
qualifying businesses are usually those with less than $10 million in annual gross
receipts that do not earn a majority of their income in certain businesses, including
mining, manufacturing, wholesale or retail trade, or certain information activities.
35
 Defer taxes with like-kind exchanges:
Collecting taxes when cash is available to pay is
considered good tax policy; therefore, tax rules permit like-kind exchanges. These
occur when a taxpayer exchanges property for similar new or used property. Like-
kind exchanges are particularly popular with real estate properties. In a qualifying
like-kind exchange, tax on the gain can be deferred through adjustments to the
taxpayer's basis (carrying cost) of the newly acquired property. Taxpayers typically
will pay tax on gain only to the extent that cash or cash equivalents are received in the
swap.
 Increase depreciation deductions using cost segregation:

Tax rules governing depreciation of real estate do not
require that all real estate components and attachments be depreciated over the
lengthy lives required for real property. Cost segregation identifies asset costs that are
often buried in building costs, reclassifying them to a category with a shorter
depreciable life in order to maximize the depreciation deduction in the early years.
Most real property can yield extra near-term depreciation deductions based on the
results of a cost segregation study. Cost segregation studies for properties placed in
service after Sept. 11, 2001, and before Dec. 31, 2004, may yield extra depreciation
benefits due to post-Sept. 11 tax depreciation economic stimulus incentives.
 Make sure your income is not taxed twice:

Unlike most nations, the United States taxes income at
the corporate level and again to individuals when dividends are paid. Recent tax
changes reduced, but did not eliminate, this extra cost, and as a result, many U.S.
small businesses are structured as tax-transparencies such as partnerships and S
corporations so that the income is taxed only once to the owners of the business.
 In solid tax planning, timing is almost everything-the earlier the better:
Most of the solid tax strategies discussed here are
based on simply and legally deferring income and/or accelerating deductions. Many
other opportunities also exist.
For example, have you maximized your personal retirement plan contributions and
benefits? Taxes can be deferred for years, or even eliminated entirely, on income
contributed to or earned within qualified retirement plans or IRAs. Dollars contributed
to a plan today are far more valuable than dollars contributed 10 years from now.
As another example, do you have current estate and/or business succession plan?
There are substantial non-tax reasons to plan your estate and business succession, but
equally valid tax reasons. And, the earlier these are done, the more easily and
effectively they can be executed.
 It's not over till it's over.

In many cases, taxpayers can claim some of the benefits
through amended returns. For example, taxpayers may, in certain circumstances,
36
amend returns to claim additional depreciation deductions from cost segregation;
additional research and development tax credits that were not claimed on the original
return; or additional extraterritorial income exclusion benefits that may have been
ignored or simply overlooked.
 Good constructive ideas do not have to always be of the home run variety:
In fact, the combination of two or three of these ideas
may yield as much benefit over time as the more publicized tax shelters, and at much
lower risk.
 Remember that execution is key:

A poorly executed acceptable tax strategy is no better
than a well-executed abusive one. In either case, the IRS has the upper hand.
FARMING BUSINESS
For tax purposes, farming includes tillage of the soil, live stock raising or
exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming,
fruit growing and the keeping of bees, but does not include an office or employment under a
person operating a farming enterprise.
37
Farming can also include other activities such as forestry operations, the
operation of a hunting reserve, as well as an artificial incubation business, which includes the
purchasing and incubating of eggs and the sale of chicks. Under certain specific
circumstances, farming includes fish breeding, market gardening, the operation of nurseries
and greenhouses, aquaculture and hydroponic culture.
To be able to benefit from the specific farming rules, farming operations have to be of a
business nature. The following are some of the criteria for determining whether a farming
operation is a business rather than a hobby:
 The extent of the activity in relation to businesses of a similar nature and size in the
same locality, in particular the area used for farming;
 The time devoted to farming compared to the time devoted to a job or other means of
earning income;
 The financial commitments for future expansion in light of the taxpayer’s resources;
 The taxpayer’s entitlement to some sort of provincial farm assistance, providing the
assistance requires the recipient to carry on a farm business, or whether it is simply
assumed this is the case.
A farm business that only generates a small amount of gross revenue over a number of years
might be indicative of a hobby rather than a business. However, it has to be remembered that
this could be the situation during the initial years of operation or during certain periods where
there are special circumstances such as prolonged droughts, frost periods or floods.
(A) Raising of Racehorses:

The raising and maintaining of horses for racing is considered a farm
business to the extent the taxpayer can demonstrate it is not a hobby. Moreover, services such
as animal training and boarding are not usually considered of a farming nature, unless they
are considered accessories for such a business.
(B) Sharecropping:
Sharecropping (rent in kind) is an agreement whereby a landowner receives
part of the harvest from the tenant as rent. The portion of the harvest received under a
sharecropping agreement is leasing income and not farming income.
(C) Christmas Tree Producers:

Persons who plant, maintain and harvest conifers in order to sell them
during the Christmas season and persons who purchase land on which trees have been planted
for this purpose are deemed to carry on a farm business.
(D) Marketing Quotas:
38
Payments received by farmers in consideration for the right granted to
other farmers to use their marketing quotas (e.g. eggs, milk, fowl) are considered as income
from a farm business.
(E) Forestry Plantation and Woodlots:

Taxpayers who do not saw or cut down any trees and who reforest land
with the intention of letting the trees grow until they have matured, i.e. from 40 to 60 years or
longer, are considered to carry on a farm business. With the exception of income from
occasional cuttings to make clearings, no income can be earned from this operation until the
trees have matured. In the meantime, the taxpayer has to pay the periodic costs, i.e. property
taxes, planting, fertilizing and cutting clearings. If the facts indicate that reforestation was
carried out on a systematic basis and is managed like a business in accordance with sound
forestry practices and provides hope for profits when the trees have matured, the loss created
by these costs can be deducted as a farm loss, subject to the restricted rules discussed
hereinafter.
If a woodlot operation is carried on jointly with a farm business, the two
together are considered a farm business if the taxpayer elects to report the income from them
on a cash basis.
Method of Reporting Income:

Taxpayers who carry on a farm business can calculate their income using
either the accrual or cash method.
 Accrual Method:
The accrual method is based on generally accepted accounting principles,
which means that revenues should be recorded in the year they are earned, regardless
of when the cash is received. Similarly, expenses are deducted in the year they are
incurred, not when they are actually paid. Inventories at the end of the fiscal year
also have to be taken into account.
 Cash Method:
Under the cash method, revenues and expenses should be recorded when
they are received or paid. The taxpayer is not required to take into account amounts
Receivable or payable or to include inventories in determining income with the

exception of a farmer’s mandatory or optional inventory adjustments.
 Change in Method:
Farmers may switch from the accrual method to the cash method
simply by filing an income tax return using the cash method. Business income must
continue to be calculated using the same method in subsequent years, unless
permission is obtained from the tax authorities to do otherwise.
39
 Inventories:
There are rules for calculating the inventories of a farm business,
which prevent taxpayers from using inventories to create a loss.
 Income Averaging:
In Quebec, for the purposes of income tax and the individual
contribution to the HSF, a temporary mechanism makes it possible to average a
portion of the income generated by non-retail sales of timber produced in a private
forest for a period not exceeding seven years This mechanism applies to a certified
forest producer (or a member of a qualified corporation) for taxation years ending
after March 17, 2016, but before January 1, 2021.
 Farm Losses:
Farm Loss Restricted farm loss

Loss from carrying on a farm business Loss incurred in a farm business that
which constitutes the principal source does not constitute the principal source
of the taxpayer’s income. of income for the taxpayer.
Deductible from all sources of a Only a portion of a restricted farm loss
taxpayer’s income. is deductible from all other sources of
the taxpayer’s income. Any excess can
only be deducted from farming income.
Taxpayers for whom farming is a hobby cannot deduct any loss.
 Restricted Farm Loss:

The amount of the loss deductible against other sources of income
for the year is equal to the lesser of:
o the farm loss for the year;
o $2,500 + (50% × [farm loss - $2,500]);
o $17,500.
40
41
INVESTMENTS
Property income (including dividend, interest and rental income) is often
considered like a return on equity and generally requires very little work and energy. Capital
gains are also generally considered investment transaction:
(1) Nature of Transaction:
When a security is disposed of, it is important to determine whether the transaction

is of the nature of capital or income resembling business income in order to determine the
appropriate tax treatment. Tax legislation does not make a clear distinction between these two
types of transactions. Accordingly, the nature of each transaction will be based on the
particular facts, which will be determined in accordance with the following criteria:
 The intention of the taxpayer at the time of purchase, i.e. quick gain or long-term
investment;
 The duration of the possession of the property;
 The relationship between the transaction and the taxpayer’s usual activities;
 The frequency of similar transactions;
 The circumstances surrounding the transaction.
Disposal of Canadian Securities:
A taxpayer may ensure that losses or profits on a disposition of Canadian

securities (shares, bonds, mutual fund units, notes, mortgages, etc.) are treated as capital
gains or losses by making an irrevocable election, valid for the current and subsequent years,
on prescribed forms filed with his/her federal income tax return. Securities brokers cannot
make this election.
(2) Capital Gain OR Loss:
A capital gain or loss is generally the difference between the proceeds of sale,
net of expenses, and the cost of the property. The taxable capital gain is 50% of the gain and
the allowable capital loss is 50% of the loss. Allowable capital losses can only be deducted
from taxable capital gains. Any capital loss that is not deducted in one year may be carried
over and deducted from taxable capital gains of any of the three preceding years or of any
subsequent year.
 Reserve:
When part of the proceeds of disposition becomes payable after the end of
the taxation year, a taxpayer may normally claim a reserve. This reserve must be
reasonable and limited to a period of five years, i.e. a minimum of 20% of the capital
gain must be included in income annually. In the case of farm or fishing property
and small business corporation shares transferred to a child, the fiveyear reserve
period is extended to ten years.
 Share Exchange:
42
Under certain circumstances, a taxpayer may have an opportunity to
exchange the shares held in one corporation for those of another corporation. Such
an exchange is a disposal and could trigger a capital gain. However, where all
conditions are met, the taxpayer can use rollover provisions to defer reporting the
capital gain until the disposition of the new shares.
 Foreign Currency Transactions:
When a taxpayer reports the disposition of a capital property in a

foreign currency, he/she is required to do so in Canadian dollars, using the exchange
rate in effect on the date of acquisition for the cost of the property and the exchange
rate in effect on the date of disposition for the proceeds of disposition. Only the
amount of an individual’s foreign exchange gain or loss in excess of $200 has to be
taken into consideration.
 Donation:
The capital gain arising from donations of private company shares,

real property or certain securities listed on a Canadian stock exchange to a registered
charity may be exempt from income tax
(3) Capital Gains Deduction:
Taxpayers who realize a capital gain upon disposition of the shares

of a qualified small business corporation are entitled to a deduction of up to $824,176,109 i.e.
taxable capital gain of $412,088. A ceiling of $1M applies to farming and fishing property
(see Section VI). These ceilings constitute the limit of the taxpayer’s lifetime deduction for
this type of property and other properties that were until 1994 subject to a $100,000 limit.
 Small Business Shares:
A taxpayer can take advantage of the capital gains deduction on the

disposition of shares of a qualified small business corporation provided certain
conditions are met, including the following:
43
During the 24 months preceding the At the time of the disposition
disposition
 The share belonged only to the  90% of the FMV of the assets
taxpayer or persons related to of the corporation are used in
him/her; and an active business.
 More than 50% of the FMV of the

assets of the corporation were used
in an active business.
 Cumulative Net Investment Loss:
In general, the cumulative net investment loss account represents the

cumulative excess of investment expenses over investment income since 1988. Only taxable
capital gains in excess of an individual’s cumulative net investment loss qualify for the
deduction.
 Allowable Business Investment Loss:
An allowable business investment loss is one-half of a capital loss incurred

on the disposition of a share or debt of a small business corporation. Unlike capital losses, an
allowable business investment loss is deductible from any other source of income, not just
capital gains.
However, this loss must be reduced by any capital gains deduction claimed
in previous years. In addition, the available capital gains deduction is reduced by such losses
incurred since 1985, including the current year.
(4) Interest Income:
Taxpayers must pay tax every year on the interest earned on investments
(i.e. deposits, certificates, Treasury bills, bonds) on the anniversary date of the acquisition of
the investment. This applies to interest received or interest accrued on compound interest
investments.
 Treasury Bills:
The difference between the purchase cost and the selling price of Treasury
bills is deemed to be interest. A capital gain is realized only if market interest rates
drop and the Treasury bills are sold before maturity. The capital gain equals the
selling price less the purchase cost plus accrued interest up to the date of disposition.
44
 Indexed Securities:
Indexed securities are instruments that bear interest at a rate that is below
the market rate but for which the amount payable upon maturity is generally adjusted
based on the change in the purchasing power determined in accordance with an
index, such as the consumer price index.
If there is an upward adjustment, the increase is included in the

investor’s income as interest. If there is a downward adjustment, the opposite occurs
– the adjustment is deductible by the investor if the conditions governing interest
deductibility are met.
 Hybrid Financial Instruments:
Hybrid financial products provide a capital guarantee, at a determined

date, and a return, based on a stock market index, that are paid at maturity. They may
also include certain other conditions, such as minimum or maximum interest, an
exercise period for freezing the return to maturity, etc. Examples include equity
linked notes, managed future notes, protected indexed notes, etc.
While tax legislation does not specifically provide for this type of
transaction, the tax authorities consider that deemed interest must be calculated
annually. If the return is not determinable before maturity, no amount has to be
included in the taxpayer’s income before it is received or receivable. Moreover, if
the maximum amount can be reasonably determined, the interest has to be included
in the year where it is determinable.
(5) Dividend Income:
The grossed-up amount of dividends received from Canadian corporations is

taxable. However, taxpayers are entitled to a tax credit on the taxable amount of the dividend.
A distinction has been made between two types of dividends paid by Canadian corporations.
Eligible dividend Other dividend
Paying corporation a. Public company a. CCPC from income

eligible for SBD or from
b. Other company from investment income
income not eligible for SBD
(other than investment
income)
45
 Spouse’s Dividend Income:
If a taxpayer who has little income tax to pay cannot claim the
dividend tax credit, the spouse may elect, for federal purposes to include the
dividends in her/his own tax return and claim the related dividend tax credit. This
election is possible only if it enables the taxpayer to claim or increase the claim for
the spousal amount.
(6) Investment Income Comparison:
A number of factors have to be considered when acquiring an investment, in

particular the inherent risk as well as the individual’s risk tolerance. The after-tax rate of
return is still often a determining factor in this regard. The following table presents a
comparison of pre-tax returns on various investment categories in 2016. These calculations
are based on the maximum marginal tax rate. Thus, in Quebec, an eligible dividend of 3.10%
before taxes is equal to a 4% interest return before taxes, for a net tax return of about 1.9% in
both cases.
(7) Foreign Investment:
All Canadian residents are required to declare income from all Canadian and
foreign sources. The full amount of foreign property investment income, such as dividends
and interest, must be included in the recipient taxpayer’s income. The taxable amount is the
gross amount received, without taking into account tax withheld at source by the foreign
country.
 Foreign Tax Credit:
The purpose of the foreign tax credit is to avoid double taxation when
foreign tax is withheld on foreign property income earned by a Canadian resident
(see Section IX). As this income is also taxable in Canada, the taxpayer can
generally claim a tax credit to take into account the tax paid to the foreign country.
The credit may only be claimed in the year the income is included in the taxpayer’s
income and foreign tax was withheld. The foreign tax amount preventing entitlement
to the credit due to the limits prescribed by law may generally be deducted in the
calculation of the taxpayer’s income.
 Declaring Foreign Investments:
Taxpayers resident in Canada must report the specified foreign

investments (by filing form T1135 with his/her tax return) if the total cost of a
Canadian taxpayer’s foreign property exceeds CAN$100,000110 at any time during
the year. Taxpayers who do not comply with these various foreign reporting
requirements are subject to stiff penalties.
46
(8) Leasing:
 Income:
Rental income is income from property if the taxpayer rents space and
provides basic services only, such as heat, light, parking and laundry facilities.
However, if the taxpayer provides additional services to tenants such as cleaning,
security and meals, the taxpayer may be considered to be carrying on a business. The
following comments relate only to rental income from property. Unlike other income
from property, net rental income or loss is included in the calculation of earned
income for RRSP purposes.
 Losses:
A taxpayer has a rental loss if rental expenses, before depreciation, exceed

gross rental income. A rental loss is deductible against other sources of income if the
rental expenses were incurred to earn a profit.
 Expenses:
A taxpayer may deduct any reasonable expenses incurred to earn rental

income. Current expenses may be deducted in the year they are incurred but capital
expenditures, which provide a lasting benefit or advantage, are deducted through
capital cost allowance. When a taxpayer makes major repairs to a rental property,
he/she has to determine whether the expense is current or capital. Capital
expenditures include the acquisition price of rental property, legal fees connected
with the purchase of the property, transfer fees and the cost of furniture and
equipment included in the rental property.
The most common deductible expenses include:
o Municipal taxes, insurance, electricity;
o Commissions paid for finding new tenants;
o Landscaping costs;
o Maintenance and utilities costs;
o Accounting fees, interest expense, advertising costs;
o Fees to reduce the interest rate;
o Lease cancellation payments.
(9) Interest & Financial Expenses:
Taxpayers should plan personal transactions properly so that the proceeds of a loan
are used to earn income from a business or property. Interest will not be deductible if the loan
47
Proceeds are used to earn income from employment, realize a capital gain or for personal
purposes.
 Eligible Expenses:
(a) Bonds
(b) Shares that may pay dividends
(c) Preferred shares of a cooperative (Cooperative Investment Plan)
(d) An interest in a partnership.
The following financial expenses incurred to earn business or property income are also
deductible:
 Investment administration or management fees;
 Safekeeping fees;
 Annual loan fees (obtaining a line of credit, access fees, guarantee fees,
etc.).
48
Employees
It is essential to determine a person’s tax status as self-employed or employee. The
consequences are significant for both the worker and employer. The deductions permitted
when calculating an employee’s taxable income are far more restricted than those applying to
self-employed workers. In addition, mandatory tax deductions by the employer only exist for
employees, which encourages some employers to opt for hiring freelancers.
There is no legislation which clearly defines employed versus self-employed status.

Nevertheless, the case law on the issue makes it possible to identify criteria regarding
employee status, including:
Exclusivity of employee services;
 Non-competition clause;
 Professional responsibilities assumed by employee;
 Tools provided by employer;
 Inability for employee to be replaced;
 Employment-related benefits (insurance, pension plans, etc.)
In general, an employee’s income includes all income received in the year by virtue of his/her
employment in the form of salary, commissions, bonuses, and tips. Unless otherwise
provided, employees are also taxable on the value of the benefits they receive from their
employer.
(1) Taxable Benefits:
(A) Insurance Plans:
While there are numerous rules surrounding insurance plans, generally,

any premiums paid by the employer to a non-group insurance plan are considered a taxable
benefit, whether it is a health insurance, accident insurance, disability insurance, life
insurance or wage-loss insurance plan. Exceptions apply, however, when an employer pays
premiums in respect of certain group plans.
In Quebec, employer contributions to group sickness, drug or dental

plans are considered taxable employee benefits and can be claimed as medical expenses for
purposes of the provincial tax credit for medical expenses.
The tax treatment of the benefits paid to an employee-beneficiary varies

depending on whether all or a portion of the premiums were paid by the employer.
49
(B) Employee Automobiles:
The employee benefit relating to the use of an automobile

includes:
 A standby charge;
 A benefit for operating costs.
(E) Personal Use:
The use of the automobile by the employee to travel from

home to the employer’s place of business is normally considered personal use under
all tax rules, mainly those used to calculate taxable benefits.
(2) Stock Option:
An employee who acquires shares in the employer’s corporation73 under a

stock option plan is deemed to have received a taxable benefit in the year equal to the amount
by which the FMV of the shares when they are acquired exceeds the price paid for them.
However, the employee is generally entitled to a 50% deduction for federal purposes (25%
for Quebec purposes) 74 of the benefit if the amount paid to acquire a share is at least equal
to its FMV at the time the option was granted. Any increase (decrease) in value subsequent to
the date of acquisition will be taxed as a capital gain (loss) in the year of disposal.
(3) Non-Taxable Benefits:
Reasonable automobile allowances are not taxable. An allowance is

considered reasonable if it is computed solely based on the number of kilometres driven in
connection with business. The allowance will be considered reasonable even if certain
expenses75 are reimbursed to the employee if these expenses were not taken into account in
determining the allowance.
The tax authorities tend to consider that the allowance is reasonable if the
rate is not more than $0.54/km for the first 5,000 kilometres and $0.48/km for any additional
kilometres.76 the allowance must take into account the actual kilometres driven to ensure it is
not taxable. It is therefore essential to keep a record of the distance travelled by the employee
to ensure that benefits are not taxable.
If the employee considers that the allowance is not reasonable because it

is insufficient to cover the travelling costs, the employee can include the allowance in income
and deduct the actual eligible amount of the expenses.
50
 Overtime Payment:
Allowances paid or meals provided to employees for overtime worked

will not constitute a taxable benefit to the extent that:
o Overtime of at least two hours is expected to be worked at the request of the

employer;
o Overtime is only put in on an occasional basis;
o The allowance is reasonable.
 Gifts and Awards:
Employers may give their employees tax-free gifts and awards to

mark special occasions or in recognition of certain exceptional accomplishments
provided their total combined value does not exceed $500. In Quebec, there is a
separate $500 limit for gifts and for rewards, which means an employer can give, on a
tax-free basis, a total value of $1,000 per year to each employee. This exemption does
not apply to rewards granted in exchange for work (e.g., for meeting a specific sales
or performance objective).
For federal purposes, in addition to gifts and rewards, a non-cash gift

of a maximum of $500 may also be given to an employee tax-free once every five
years as a reward for years of service or for a birthday.
51
Rules of Tax Planning
Just as rules are important for good living, so also there are some golden rules of tax
planning. The five simple yet effective rules of tax planning are:
 Spread the taxable income among various members in your family;
 Take full advantage of tax exemptions available under the law;
 Take full advantage of permissible tax deductions and rebates available on stipulated
tax-saving investments;
 Make optimum use of tax-exempted incomes; and
 Simple tax planning is smart tax planning.
Spread your income among your family members:
The first step in tax saving is to adopt the concept of divide and rule. The
simple rule is that each family member must have his or her independent source of
income so as to legally become an independent taxpayer under the provisions of the
income tax law.
In case the entire income of a family belongs to just one member, the tax
liability is much higher than when the same income is spread among different
members of the family.
Now, under the income tax law it is not possible to arbitrarily divide one's
income among different members of the family -- and then pay lower tax in the names
of different family members. However, this goal can be achieved by intelligent use of
the facility of gifts and settlements.
(1) Gifts you receive are not your income:
Generally, any gift you receive from various members of your family and
specified relatives is not considered your income but a capital receipt. Thus, no income tax is
payable on gifts received from relatives -- and also gifts received from parties other than
relatives up to a sum of Rs. 50,000 and at the time of marriage up to any amount.
The first rule of tax planning requires that one develops income tax files
for oneself, one's spouse, one's major children, the Hindu Undivided family, and for all other
major relatives in the family, including one's parents. The development of different files of
major family members can be achieved through the process of gifts and settlement.
(2) No income tax on your inheritance:
No income tax is payable on any amount received or inherited by you,

whether in the form of movable assets or immovable assets, consequent to the demise of your
friend or relative. Moreover, there is no upper limit to this exemption.
52
Hence, whenever you receive either bank fixed deposit, shares or
immovable property consequent to the demise of a person, you don't have to pay any income
tax at all on the value of all inherited assets.
Take full advantage of all tax exemptions:
The second step of tax planning lies in claiming all the exemptions and
deductions which are permissible under the income tax law.
A list of most such exemptions and deductions is contained in Section 10

of the Income Tax Act. This list has to be optimised depending on your facts and
circumstances.
If you and your family members are not claiming the optimum benefit of
exemptions and deductions, then it is time to focus on investment planning in the group so
that every family member gets full benefit of all permitted tax exemptions.
Take full advantage of tax deductions:
Then, too, various tax deductions are available under the income tax law.
One should try to avail of the benefit of these deductions for each and every member of the
family.
The various investment options that offer tax rebates should be reviewed
keeping in mind various aspects like the age factor, etc. A check-list should be prepared of
the various deductions permissible under the income tax law.
Check whether each and every tax paying family member is claiming
these. If special care is taken of this aspect, then it is legally possible to save a lot of income
tax.
It is suggested that a chart be prepared of tax, deductions and exemptions

for every family member for purposes of overall tax planning of the family.
It would be worthwhile if a group tax chart is prepared containing details

relating to income tax, tax deductions, net taxable income, tax deducted at source, rebate of
tax, and, finally, the net amount of income tax paid in the case of each family member.
Exempted incomes:
There are innumerable incomes under the income tax law which are
exempted from the purview of tax. These incomes are known as exempted incomes. There
are innumerable incomes under the income tax law which are exempted from the purview of
tax. These incomes are known as exempted incomes.
53
For example, interest income from tax-free bonds as also any income from agriculture are
some items of exempted incomes. There are other exempted incomes also which are
discussed in this book.
Don't overdo it; keep tax planning simple:
The message which we want to bring to you is that you should adopt tax planning but never
overdo it; just remember and follow the golden rules outlined above. These will help you
achieve your tax-saving mission without going overboard.
It is possible to save tax perfectly legally provided you plan your affairs along the rules
described above. This would also help you avoid all worries and tension as all your incomes,
assets and investments would be duly accounted for from the taxation point of view.
54
Limitation
In case of planning leads to rigidity, Planning may not work in dynamic

environment, it reduces creativity, Planning involves huge cost also it is time consuming
process but it’s does not guarantee success It is not true that if a plan has worked successfully
in past, it will bring success in future also as there are so many unknown factors which may
lead to failure of plan in future. Planning only provides a base for analysing future. It is not a
solution for future course of action.
In planning we are always thinking in advance and planning is concerned

with future only and future is always uncertain. In planning many assumptions are made to
decide about future course of action. But these assumptions are not 100% accurate and if
these assumptions do not hold true in present situation or in future condition then whole
planning will fail.
55
BIBLIOGRAPHY
56
Thank You
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WELINGKAR INSTITUDE OF MANAGEMENT &

INCOME TAX PLANNING IN INDIA

Mr. SANDESH CHANDRAKANT YERUNKAR has Satisfactorily Completed her Project

External Examiner Internal Examiner Head of Dept.

This is to certify that Mr. SANDESH CHANDRAKANT YERUNKAR

ii. Date : 16.09.2017

In partial fulfilment of 4th Semester for PGDM (HB) program of WELINGKAR

I Declare that project work, entitled “Income Tax Planning In India”

(B) TAX PLANNING

 Individual Planning………………………………………………………………… …..16

(C) Rules of Tax Planning

 Meaning of Tax Planning :

 Investment in securities provided u/s 10(15) . Interest on such securities is

 Exemptions u/s 10A, 10B, and 10BA

 Residential Status of the person

 Choice of accounting system

Some of these acts are:

A) Income Tax Act:

B) Wealth Tax Act:

C) Gift Tax Act:

D) Expenditure Tax Act:

E) Interest Tax Act:

Examples of Direct Taxes:

New Income Tax Slab Rates for FY 2017-18 (AY 2018-19)

Income Tax Slab Tax Rate

Income up to Rs.2,50,000 No Tax

Income Tax Slab Tax Rate

Income up to Rs.3,00,000 No Tax

Income Tax Slab Tax Rate

Income up to Rs.2,50,000 No Tax

3. Securities Transaction Tax:

There are four different types of corporate tax. They are:

Examples of Indirect Taxes:

An important thing to remember is that since the service at a restaurant is a combination of

a) GST – Goods & Service Tax:

3) Value Added Tax:

4) Custom Duty & Octroi:

Examples of Other taxes:

 Toll Tax & Road Tax:

 Swachh Bharat Cess:

 Krishi Kalyan Cess:

 It encourages savings and investments because if a person invests in certain

(A) INDIVIDUAL PLANNING

(B) CORPORATE PLANNING

1. Save Tax under Section 80C, Section80CCC, Section80CCD

 Investment in ELSS Fund:

ELSS stands for Equity Linked Savings Scheme. These are tax-saving

 PPF (Public Provident Fund):

Deposits made in a PPF account are eligible for tax deductions under

Additionally, an employer’s contribution to the Employee Provident Fund (EPF)

 Investment in Employee Provident Fund:

An employee’s contribution to the Employee Provident Fund (EPF)

 Investment in Tax Saving Fixed Deposit:

 Investment in National Pension System:

The NPS is a pension scheme that has been started by the

 Purchase of National Saving certificates (NSC):

 Investment in Unit Linked Insurance Plan:

ULIPs are a mix of insurance and investment. A part of the