A PROJECT REPORT ON

“A Detail study of Individual Income Tax Planning as per

Income Tax Act 1961"

A project submitted to

University of Mumbai for partial completion of the degree of

Master of Commerce (Advance Accountancy) Semester III
under the faculty of Commerce

By

UPENDRA ANAND NISHAD

Under the Guidance of

MR. RAJIV MISHRA

N.E.S RATNAM COLLEGE OF ARTS, SCIENCE & COMMERCE

NES COMPLEX, NES MARG, BHANDUP (W), MUMBAI-400078

ACADEMIC YEAR 2023-2024

 A PROJECT REPORT ON

“A Detail study of Individual Income Tax Planning as per

Income Tax Act 1961"

A project submitted to

University of Mumbai for partial completion of the degree of

Master of Commerce (Advance Accountancy) Semester III
under the faculty of Commerce

By

UPENDRA ANAND NISHAD

Under the Guidance of

MR. RAJIV MISHRA

N.E.S RATNAM COLLEGE OF ARTS, SCIENCE & COMMERCE

NES COMPLEX, NES MARG, BHANDUP (W), MUMBAI-400078

ACADEMIC YEAR 2023-2024

 Declaration by learner

I the undersigned Mr. Upendra Anand Nishad here by, declare that the
work embodied in this project work titled “A Detail study of Individual
Income Tax Planning as per Income Tax Act 1961", forms my own
contribution to the research work carried out under the guidance of
Mr. Rajiv Mishra is a result of my own research work and has not been
previously submitted to any other University for any other Degree/
Diploma to this or any other University.

Wherever reference has been made to previous works of others, it has been
clearly indicated as such and included in the bibliography.

I, here by further declare that all information of this document has been
obtained and presented in accordance with academic rules and ethical
conduct.

Certified by Mr. Upendra Anand Nishad

Mr. Rajiv Mishra
 NES RATNAM COLLEGE OF ARTS,
SCIENCE & COMMERCE
BHANDUP (W) , MUMBAI – 400078

CERTIFICATE

This is to certify that Mr. Upendra Anand Nishad Of Master of

Commerce (Advance Accountancy) Semester III (2023-24) has
successfully completed the Project on “A Detail study of Individual
Income Tax Planning as per Income Tax Act 1961” under the
guidance of Mr. Rajiv Mishra.

COURSE CORDINATOR / INTERNAL EXAMINER PRINCIPAL

Mr. Rajiv Mishra Dr. (Mrs.) Vinita Dhulia

External examiner Date

 Acknowledgment

To list who all have helped me is difficult because they are so numerous
and the depth is so enormous.

I would like to acknowledge the following as being idealistic channels and

fresh dimensions in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me

chance to do this project.

I would like to thank my Principal, Dr. (Mrs.) Vinita Dhulia for

providing the necessary facilities required for completion of this project.

I take this opportunity to thank our Coordinator Mr. Rajiv Mishra for his
moral support and guidance.

I would also like to express my sincere gratitude towards my project guide

Mr. Rajiv Mishra whose guidance and care made the project successful.

I would like to thank my College Library. For having provided various

reference books and magazines related to my project.

Lastly, I would like to thank each and every person who directly or
indirectly helped me in the completion of the project especially my
Parents and Peers who supported me throughout my project.
 INDEX
Sr. No Chapters Pg No.

1 Introduction 1
- An Extract From Income Tax Act, 1961

- Computation of total income

- Deductions from taxable income

- Computation of tax liability

2 Literature Review 49

- Review of the literature

3 Objectives 50

4 Hypothesis 51

5 Significance 54

6 Limitations 56

7 Research Methodology 57

8 Conclusion 59

9 Suggestion 60

10 Reference 79
 Introduction

Income Tax Act, 1961 governs the taxation of incomes generated within India
and of incomes generated by Indians overseas. This study aims at presenting a
lucid yet simple understanding of taxation structure of an individual’s income in
India for the assessment year 2007-08.

Income Tax Act, 1961 is the guiding baseline for all the content in this report
and the tax saving tips provided herein are a result of analysis of options
available in current market. Every individual should know that tax planning in
order to avail all the incentives provided by the Government of India under
different statures is legal.

This project covers the basics of the Income Tax Act, 1961 as amended by the
Finance Act, 2007 and broadly presents the nuances of prudent tax planning and
tax saving options provided under these laws. Any other hideous means to avoid
or evade tax is a cognizable offence under the Indian constitution and all the
citizens should refrain from such acts.

Tax is the major source of revenue for the government, the development
of any country’s economy largely depends on the tax structure it has adopted.
A Taxation Structure which facilitates easy of doing business and having no
chance for tax evasion brings prosperity to a country’s economy. Therefore as
taxation structure plays an important role in country’s development. India has
a well-developed tax structure. The power to levy taxes and duties is
distributed among the three tiers of Government, in accordance with the
provisions of the Indian Constitution. Indian taxation structure has gone through
many reforms and still it is very far ahead from being a ideal taxation structure.

Income Tax Act, 1961 governs the taxation of incomes generated within India
and of incomes generated by Indians overseas. This study aims at presenting a

1
lucid yet simple understanding of taxation structure of an individual’s income in
India for the assessment year 2017-18.

Income Tax Act, 1961 is the guiding baseline for all the content in this report
and the tax saving tips provided herein are a result of analysis of options
available in current market. Every individual should know that tax planning to
avail all the incentives provided by the Government of India under different
statures is legal.

A Detail study of Individual Income Tax Planning as per Income Tax Act
1961 Project

covers the basics of the Income Tax Act, 1961 as amended by the Finance Act,
2007 and broadly presents the nuances of prudent tax planning and tax saving
options provided under these laws. Any other hideous means to avoid or evade
tax is a cognizable offense under the Indian constitution and all the citizens
should refrain from such acts.

2
Meaning

Income tax is applicable for individuals, businesses, corporate, and all other
establishments that generate income. The Income Tax Act, 1961 regulates the
collection, recovery, and administration of income tax in India. The government
requires the tax amount for various purposes ranging from building the
infrastructure to paying the state and central government's employees. It helps
the government in generating a steady source of income that is used for the
development of the nation.

The income tax is paid every month from the monthly earnings, however, it is
calculated on an annual basis. The amount of income tax an individual has to
pay depends on many factors.

Direct Taxes are those which are paid directly by the individual or
organization to the imposing authority. They are levied on income and profits

Tax Planning can be understood as the activity undertaken by the assessee to

reduce the tax liability by making optimum use of all permissible allowances,
deductions, concessions, exemptions, rebates, exclusions and so forth, available
under the statute. It helps in minimizing Tax Liability in Short-Term and in
Long Term.

3
Tax Management deals with filing of Return in time, getting the accounts
audited, deducting tax at source etc. Tax Management relates
to Past, Present, Future. Past – Assessment Proceedings, Appeals, Revisions etc.
Present – Filing of Return, payment of advance tax etc. Future – To take
corrective action. It helps in avoiding payment of interest, penalty, prosecution
etc.

4
Definition:

A direct tax is paid directly by an individual or organization to the imposing

entity. A taxpayer, for example, pays direct taxes to the government for
different purposes, including real property tax, personal property tax,
income tax or taxes on assets.

Direct Taxes :

a) Corporation tax

b) Taxes on income

c) Estate duty

d) Interest Tax

e) Wealth Tax

f) Gift Tax

g) Land Revenue

h) Agricultural tax

i) Hotel receipts tax

j) Expenditure tax

k) Others

5
 COMPUTATION OF TOTAL INCOME

Profits and Gains of Business or Profession

Income from House

Income from Salaries Property

Income from Other Sources Capital Gains

6
 Income from Salaries

Incomes termed as Salaries:

Existence of ‘master-servant’ or ‘employer-employee’ relationship is absolutely

essential for taxing income under the head “Salaries”. Where such relationship
does not exist income is taxable under some other head as in the case of partner
of a firm, advocates, chartered accountants, LIC agents, small saving agents,
commission agents, etc. Besides, only those payments which have a nexus with
the employment are taxable under the head ‘Salaries’. Salary is chargeable to
income-tax on due or paid basis, whichever is earlier.
Any arrears of salary paid in the previous year, if not taxed in any earlier
previous year, shall be taxable in the year of payment.
Advance Salary:

Advance salary is taxable in the year it is received. It is not included in the

income of recipient again when it becomes due. However, loan taken from the
employer against salary is not taxable.
Arrears of Salary:
Salary arrears are taxable in the year in which
it is received.

Bonus:
Bonus is taxable in the year in which it is
received.

7
Pension:
Pension received by the employee is taxable under ‘Salary’ Benefit of standard
deduction is available to pensioner also. Pension received by a widow after the
death of her husband falls under the head ‘Income from Other Sources.

Profits in lieu of salary:

Any compensation due to or received by an employee from his employer or

former employer at or in connection with the termination of his employment or
modification of the terms and conditions relating there to Any payment due to
or received by an employee from his employer or former employer or from a
provident or other fund to the extent it does not consist of contributions by the
assessee or interest on such contributions or any sum/bonus received under a
Keyman Insurance Policy.
Any amount whether in lump sum or otherwise, due to or received by an
assessee from his employer, either before his joining employment or after
cessation of employment.

Allowances from Salary Incomes

Dearness Allowance/Additional Dearness (DA):

All dearness allowances are fully taxable

City Compensatory Allowance (CCA):

CCA is taxable as it is a personal allowance granted to meet expenses wholly,

necessarily and exclusively incurred in the performance of special duties unless
such allowance is related to the place of his posting or residence.

8
Certain allowances prescribed under Rule 2BB, granted to the employee either
to meet his personal expenses at the place where the duties of his office of
employment are performed by him or at the place where he ordinarily resides,
or to compensate him for increased cost of living are also exempt.

House Rent Allowance (HRA):

HRA received by an employee residing in his own house or in a house for

which no rent is paid by him is taxable. In case of other employees, HRA is
exempt up to a certain limit

Entertainment Allowance:
Entertainment allowance is fully taxable, but a deduction is allowed in certain
cases.

Academic Allowance:

Allowance granted for encouraging academic research and other professional

pursuits, or for the books for the purpose, shall be exempt u/s 10(14). Similarly,
newspaper allowance shall also be exempt.

Conveyance Allowance:

It is exempt to the extent it is paid and utilized for meeting expenditure on travel
for official work.

9
 Income from House Property

Incomes Termed as House Property Income:

The annual value of a house property is taxable as income in the hands of the
owner of the property. House property consists of any building or land, or its
part or attached area, of which the assessee is the owner. The part or attached
area may be in the form of a courtyard or compound forming part of the
building. But such land is to be distinguished from an open plot of land, which
is not charged under this head but under the head ‘Income from Other Sources’
or ‘Business Income’, as the case may be. Besides, house property includes
flats, shops, office space, factory sheds, agricultural land and farm houses.

However, following incomes shall be taxable under the head ‘Income from
House Property'.

1. Income from letting of any farm house agricultural land appurtenant thereto
for any purpose other than agriculture shall not be deemed as agricultural
income, but taxable as income from house property.

2. Any arrears of rent, not taxed u/s 23, received in a subsequent year, shall be
taxable in the year.

Even if the house property is situated outside India it is taxable in India if the
owner-assessee is resident in India.

10
Incomes Excluded from House Property Income:

The following incomes are excluded from the charge of income tax under this
head:
 Annual value of house property used for business purposes
 Income of rent received from vacant land.
 Income from house property in the immediate vicinity of agricultural land
and used as a store house, dwelling house etc. by the cultivators

Annual Value:

Income from house property is taxable on the basis of annual value. Even if the
property is not let-out, notional rent receivable is taxable as its annual value.

The annual value of any property is the sum which the property might
reasonably be expected to fetch if the property is let from year to year.

In determining reasonable rent factors such as actual rent paid by the tenant,
tenant’s obligation undertaken by owner, owners’ obligations undertaken by the
tenant, location of the property, annual rateable value of the property fixed by
municipalities, rents of similar properties in neighbourhood and rent which the
property is likely to fetch having regard to demand and supply are to be
considered.

Annual Value of Let-out Property:

Where the property or any part thereof is let out, the annual value of such
property or part shall be the reasonable rent for that property or part or the
actual rent received or receivable, whichever is higher.

11
Deductions from House Property Income

Deduction of House Tax/Local Taxes paid:

In case of a let-out property, the local taxes such as municipal tax, water and
sewage tax, fire tax, and education cess levied by a local authority are
deductible while computing the annual value of the year in which such taxes are
actually paid by the owner.

Other than self-occupied properties

Repairs and collection charges: Standard deduction of 30% of the net annual
value of the property.

Interest on Borrowed Capital:

Interest payable in India on borrowed capital, where the property has been
acquired constructed, repaired, renovated or reconstructed with such borrowed
capital, is allowable (without any limit) as a deduction (on accrual basis).
Furthermore, interest payable for the period prior to the previous year in which
such property has been acquired or constructed shall be deducted in five equal
annual instalments commencing from the previous year in which the house was
acquired or constructed.

Amounts not deductible from House Property Income:

Any interest chargeable under the Act payable out of India on which tax has not
been paid or deducted at source and in respect of which there is no person who
may be treated as an agent.

12
 Expenditures not specified as specifically
deductible. For instance, no deduction can be
claimed in respect of expenses on electricity,
water supply, salary of liftman, etc.

Self Occupied Properties

No deduction is allowed under section 24(1) by way of repairs, insurance

premium, etc. in respect of self-occupied property whose annual value has been
taken to be nil under section 23(2) (a) or 23(2) (b) of the act. However, a
maximum deduction of Rs. 30,000 by way of interest on borrowed capital for
acquiring, constructing, repairing, renewing or reconstructing the property is
available in respect of such properties.

In case of self-occupied property acquired or constructed with capital borrowed

on or after 1.4.1999 and the acquisition or construction of the house property is
made within 3 years from the end of the financial year in which capital was
borrowed the maximum deduction for interest shall be Rs. 1,50,000. For this
purpose, the assessee shall furnish a certificate from the person extending the
loan that such interest was payable in respect of loan for acquisition or
construction of the house, or as refinance loan for repayment of an earlier loan
for such purpose.

13
The deduction for interest u/s 24(1) is allowable as under:

i. Self-occupied property: deduction is restricted to a maximum of Rs. 1,50,000

for property acquired or constructed with funds furrowed on or after 1.4.1999
within 3 years from the end of the financial year in which the funds are
borrowed. In other cases, the deduction is allowable up to Rs. 30,000.

ii. Let out property or part there of: all eligible interests are allowed.

It is, therefore, suggested that a property for self, residence may be acquired
with borrowed funds, so that the annual interest accrual on borrowings remains
less than Rs. 1,50,000. The net loss on this account can be set off against
income from other properties and even against other incomes.

If buying a property for letting it out on rent, raise borrowings from other family
members or outsiders. The rental income can be safely passed off to the other
family members by way of interest. If the interest claim exceeds the annual
value, loss can be set off against other incomes too.

At the time of purchase of new house property, the same should be acquired in
the name(s) of different family members. Alternatively, each property may be
acquired in joint names. This is particularly advantageous in case of rented
property for division of rental income among various family members.
However, each co-owner must invest out of his own funds (or borrowings) in
the ratio of his ownership in the property.

14
 Capital Gains

Any profits or gains arising from the transfer of capital assets effected during
the previous year is chargeable to income-tax under the head “Capital gains”
and shall be deemed to be the income of that previous year in which the transfer
takes place. Taxation of capital gains, thus, depends on two aspects – ‘capital
assets’ and transfer’.

Capital Asset:

‘Capital Asset’ means property of any kind held by an assessee including

property of his business or profession, but excludes non-capital assets.

Transfers Resulting in Capital Gains

 Sale or exchange of assets;

 Relinquishment of assets;
 Extinguishment of any rights in assets;
 Compulsory acquisition of assets under any law;
 Conversion of assets into stock-in-trade of a business carried on by the
owner of asset;
 Handing over the possession of an immovable property in part performance
of a contract for the transfer of that property;
 Transactions involving transfer of membership of a group housing society,
company, etc.., which have the effect of transferring or enabling enjoyment
of any immovable property or any rights therein ;
 Distribution of assets on the dissolution of a firm, body of individuals or
association of persons;

15
 Transfer of a capital asset by a partner or member to the firm or AOP,
whether by way of capital contribution or otherwise; and
 Transfer under a gift or an irrevocable trust of shares, debentures or warrants
allotted by a company directly or indirectly to its employees under the
Employees’ Stock Option Plan or Scheme of the company as per Central
Govt. guidelines.

Year of Taxability:

Capital gains form part of the taxable income of the previous year in which the
transfer giving rise to the gains takes place. Thus, the capital gain shall be
chargeable in the year in which the sale, exchange, relinquishment, etc. takes
place.

Where the transfer is by way of allowing possession of an immovable property

in part performance of an agreement to sell, capital gain shall be deemed to
have arisen in the year in which such possession is handed over. If the
transferee already holds the possession of the property under sale, before
entering into the agreement to sell, the year of taxability of capital gains is the
year in which the agreement is entered into.

Classification of Capital Gains:

Short Term Capital Gain:

Gains on transfer of capital assets held by the assessee for not more than 36
months (12 months in case of a share held in a company or any other security
listed in a recognized stock exchange in India, or a unit of the UTI or of a
mutual fund specified u/s 10(23D) ) immediately preceding the date of its
transfer.

16
Long Term Capital Gain:

The capital gains on transfer of capital assets held by the assessee for more than
36 months (12 months in case of shares held in a company or any other listed
security or a unit of the UTI or of a specified mutual fund).

Period of Holding a Capital Asset:

Generally speaking, period of holding a capital asset is the duration for the date
of its acquisition to the date of its transfer. However, in respect of following
assets, the period of holding shall exclude or include certain other periods.
Computation of Capital Gains:

1. As certain the full value of consideration received or accruing as a result of

the transfer.
2. Deduct from the full value of consideration-
 Transfer expenditure like brokerage, legal expenses, etc.,
 Cost of acquisition of the capital asset/indexed cost of acquisition in case of
long-term capital asset and Cost of improvement to the capital asset/indexed
cost of improvement in case of long term capital asset. The balance left-over
is the gross capital gain/loss.
 Deduct the amount of permissible exemptions u/s 54, 54B, 54D, 54EC,
54ED, 54F, 54G and 54H.

Full Value of Consideration:

This is the amount for which a capital asset is transferred. It may be in money or
money’s worth or combination of both. For instance, in case of a sale, the full

17
value of consideration is the full sale price actually paid by the transferee to the
transferor. Where the transfer is by way of exchange of one asset for another or
when the consideration for the transfer is partly in cash and partly in kind, the
fair market value of the asset received as consideration and cash consideration,
if any, together constitute full value of consideration.

In case of damage or destruction of an asset in fire flood, riot etc., the amount of
money or the fair market value of the asset received by way of insurance claim,
shall be deemed as full value of consideration.

1. Fair value of consideration in case land and/ or building; and

2. Transfer Expenses.

Cost of Acquisition:

Cost of acquisition is the amount for which the capital asset was originally
purchased by the assessee.

Cost of acquisition of an asset is the sum total of amount spent for acquiring the
asset. Where the asset is purchased, the cost of acquisition is the price paid.
Where the asset is acquired by way of exchange for another asset, the cost of
acquisition is the fair market value of that other asset as on the date of
exchange.

Any expenditure incurred in connection with such purchase, exchange or other

transaction e.g. brokerage paid, registration charges and legal expenses, is added
to price or value of consideration for the acquisition of the asset. Interest paid
on moneys borrowed for purchasing the asset is also part of its cost of
acquisition.

18
Where capital asset became the property of the assessee before 1.4.1981, he has
an option to adopt the fair market value of the asset as on 1.4.1981, as its cost of
acquisition.

Cost of Improvement:

Cost of improvement means all capital expenditure incurred in making additions

or alterations to the capital assets, by the assessee. Betterment charges levied by
municipal authorities also constitute cost of improvement. However, only the
capital expenditure incurred on or after 1.4.1981, is to be considered and that
incurred before 1.4.1981 is to be ignored.

Indexed cost of Acquisition/Improvement:

For computing long-term capital gains, ‘Indexed cost of acquisition and

‘Indexed cost of Improvement’ are required to deducted from the full value of
consideration of a capital asset. Both these costs are thus required to be indexed
with respect to the cost inflation index pertaining to the year of transfer.

19
Rates of Tax on Capital Gains:

Short-term Capital Gains

Short-term Capital Gains are included in the gross total income of the assessee
and after allowing permissible deductions under Chapter VI-A. Rebate under
Sections 88, 88B and 88C is also available against the tax payable on short-term
capital gains.

Long-term Capital Gains

Long-term Capital Gains are subject to a flat rate of tax @ 20% However, in
respect of long term capital gains arising from transfer of listed securities or
units of mutual fund/UTI, tax shall be payable @ 20% of the capital gain
computed after allowing indexation benefit or @ 10% of the capital gain
computed without giving the benefit of indexation, whichever is less.

Capital Loss:

The amount, by which the value of consideration for transfer of an asset falls
short of its cost of acquisition and improvement /indexed cost of acquisition and
improvement, and the expenditure on transfer, represents the capital loss.
Capital Loss’ may be short-term or long-term, as in case of capital gains,
depending upon the period of holding of the asset.
Set Off and Carry Forward of Capital Loss

 Any short-term capital loss can be set off against any capital gain (both long-
term and short term) and against no other income.

20
 Any long-term capital loss can be set off only against long-term capital gain
and against no other income.
 Any short-term capital loss can be carried forward to the next eight
assessment years and set off against ‘capital gains’ in those years.
 Any long-term capital loss can be carried forward to the next eight
assessment year and set off only against long-term capital gain in those
years.

Capital Gains Exempt from Tax:

Capital Gains from Transfer of a Residential House

Any long-term capital gains arising on the transfer of a residential house, to an

individual or HUF, will be exempt from tax if the assessee has within a period
of one year before or two years after the date of such transfer purchased, or
within a period of three years constructed, a residential house.

Capital Gains from Transfer of Agricultural Land

Any capital gain arising from transfer of agricultural land, shall be exempt from
tax, if the assessee purchases within 2 years from the date of such transfer, any
other agricultural land. Otherwise, the amount can be deposited under Capital
Gains Accounts Scheme, 1988 before the due date for furnishing the return.

Capital Gains from Compulsory Acquisition of Industrial Undertaking

Any capital gain arising from the transfer by way of compulsory acquisition of
land or building of an industrial undertaking, shall be exempt, if the assessee
purchases/constructs within three years from the date of compulsory acquisition,

21
any building or land, forming part of industrial undertaking. Otherwise, the
amount can be deposited under the ‘Capital Gains Accounts Scheme, 1988’
before the due date for furnishing the return.

Capital Gains from an Asset other than Residential House

Any long-term capital gain arising to an individual or an HUF, from the transfer
of any asset, other than a residential house, shall be exempt if the whole of the
net consideration is utilized within a period of one

year before or two years after the date of transfer for purchase, or within 3 years
in construction, of a residential house.

Tax Planning for Capital Gains

 An assessee should plan transfer of his capital assets at such a time that
capital gains arise in the year in which his other recurring incomes are below
taxable limits.

 Assessees having income below Rs. 60,000 should go for short-term capital
gain instead of long-term capital gain, since income up to Rs. 60,000 is
taxable @ 10% whereas long-term capital gains are taxable at a flat rate of
20%. Those having income above Rs. 1,50,000 should plan their capital
gains vice versa.

 Since long-term capital gains enjoy a concessional treatment, the assessee

should so arrange the transfers of capital assets that they fall in the category
of long-term capital assets.

22
 An assessee may go for a short-term capital gain, in the year when there is
already a short-term capital loss or loss under any other head that can be set
off against such income.

 The assessee should take the maximum benefit of exemptions available u/s
54, 54B, 54D, 54ED, 54EC, 54F, 54G and 54H.

 Avoid claiming short-term capital loss against long-term capital gains.

Instead claim it against short-term capital gain and if possible, either create
some short-term capital gain in that year or, defer long-term capital gains to
next year.

 Since the income of the minor children is to be clubbed in the hands of the
parent, it would be better if the minor children have no or lesser recurring
income but have income from capital gain because the capital gain will be
taxed at the flat rate of 20% and thus the clubbing would not increase the tax
incidence for the parent.

23
 Profits and Gains of Business or Profession

Income from Business or Profession:

The following incomes shall be chargeable under this head

 Profit and gains of any business or profession carried on by the assessee at
any time during previous year.
 Any compensation or other payment due to or received by any person, in
connection with the termination of a contract of managing agency or for
vesting in the Government management of any property or business.
 Income derived by a trade, professional or similar association from specific
services performed for its members.
 Profits on sale of REP licence/Exim scrip, cash assistance received or
receivable against exports, and duty drawback of customs or excise received
or receivable against exports.
 The value of any benefit or perquisite, whether convertible into money or
not, arising from business or in exercise of a profession.
 Any interest, salary, bonus, commission or remuneration due to or received
by a partner of a firm from the firm to the extent it is allowed to be deducted
from the firm’s income. Any interest salary etc. which is not allowed to be
deducted u/s 40(b), the income of the partners shall be adjusted to the extent
of the amount so disallowed.
 Any sum received or receivable in cash or in kind under an agreement for
not carrying out activity in relation to any business, or not to share any
know-how, patent, copyright, trade-mark, licence, franchise or any other
business or commercial right of, similar nature of information or technique
likely to assist in the manufacture or processing of goods or provision for
services except when such sum is taxable under the head ‘capital gains’ or is

24
 received as compensation from the multilateral fund of the Montreal
Protocol on Substances that Deplete the Ozone Layer.
 Any sum received under a Keyman Insurance Policy referred to u/s 10(10D).
 Any allowance or deduction allowed in an earlier year in respect of loss,
expenditure or trading liability incurred by the assessee and subsequently
received by him in cash or by way of remission or cessation of the liability
during the previous year.
 Profit made on sale of a capital asset for scientific research in respect of
which a deduction had been allowed u/s 35 in an earlier year.
 Amount recovered on account of bad debts allowed u/s 36(1) (vii) in an
earlier year.
 Any amount withdrawn from the special
reserves created and maintained u/s 36 (1)
(viii) shall be chargeable as income in the
previous year in which the amount is
withdrawn.

Expenses Deductible from Business or Profession:

Following expenses incurred in furtherance of trade or profession are admissible

as deductions.
 Rent, rates, taxes, repairs and insurance of buildings.
 Repairs and insurance of machinery, plat and furniture.
 Depreciation is allowed on:
Building, machinery, plant or furniture, being tangible assets,
Know how, patents, copyrights, trademarks, licences, franchises or any other
business or commercial rights of similar nature, being intangible assets,
acquired on or after 1.4.1998.

25
 Development rebate.
 Development allowance for Tea Bushes planted before 1.4.1990.
 Amount deposited in Tea Development Account or 40% profits and gains
from business of growing and manufacturing tea in India,
 Amount deposited in Site Restoration Fund or 20% of profit, whichever is
less, in case of an assessee carrying on business of prospecting for, or
extraction or production of, petroleum or natural gas or both in India. The
assessee shall get his accounts audited from a chartered accountant and
furnish an audit report in Form 3 AD.
 Reserves for shipping business.
 Scientific Research
Expenditure on scientific research related to the business of assessee, is
deductible in that previous year.
One and one-fourth times any sum paid to a scientific research association or
an approved university, college or other institution for the purpose of
scientific research, or for research in social science or statistical research.
One and one-fourth times the sum paid to a National Laboratory or a
University or an Indian Institute of Technology or a specified person with a
specific direction that the said sum shall be used for scientific research under
a programme approved in this behalf by the prescribed authority.
One and one half times, the expenditure incurred up to 31.3.2005 on
scientific research on in-house research and development facility, by a
company engaged in the business of bio-technology or in the manufacture of
any drugs, pharmaceuticals, electronic equipments, computers
telecommunication equipments, chemicals or other notified articles.
 Expenditure incurred before 1.4.1998 on acquisition of patent rights or
copyrights, used for the business, allowed in 14 equal instalments starting
from the year in which it was incurred.

26
 Expenditure incurred before 1.4.1998 on acquiring know-how for the
business, allowed in 6 equal instalments. Where the know-how is developed
in a laboratory, University or institution, deduction is allowed in 3 equal
instalments.
 Any capital expenditure incurred and actually paid by an assessee on the
acquisition of any right to operate telecommunication services by obtaining
licence will be allowed as a deduction in equal instalments over the period
starting from the year in which payment of licence fee is made or the year in
which business commences where licence fee has been paid before
commencement and ending with the year in which the licence comes to an
end.
 Expenditure by way of payment to a public sector company, local authority
or an approved association or institution, for carrying out a specified project
or scheme for promoting the social and economic welfare or upliftment of
the public. The specified projects include drinking water projects in rural
areas and urban slums, construction of dwelling units or schools for the
economically weaker sections, projects of non-conventional and renewable
source of energy systems, bridges, public highways, roads promotion of
sports, pollution control, etc.
 Expenditure by way of payment to association and institution for carrying
out rural development programmes or to a notified rural development fund,
or the National Urban Poverty Eradication Fund.
 Expenditure incurred on or before 31.3.2002 by way of payment to
associations and institutions for carrying out programme of conservation of
natural resources or afforestation or to an approved fund for afforestation.
 Amortisation of certain preliminary expenses, such as expenditure for
preparation of project report, feasibility report, feasibility report, market
survey, etc., legal charges for drafting and printing charges of Memorandum
and Articles, registration expenses, public issue expenses, etc. Expenditure

27
 incurred after 31.3.1988, shall be deductible up to a maximum of 5% of the
cost of project or the capital exployed, in 5 equal instalments over five
successive years.
 One-fifth of expenditure incurred on amalgamation or demerger, by an
Indian company shall be deductible in each of five successive years
beginning with the year in which amalgamation or demerger takes place.
 One-fifth of the amount paid to an employee on his voluntary retirement
under a scheme of voluntary retirement, shall be deductible in each of five
successive years beginning with the year in which the amount is paid.
 Deduction for expenditure on prospecting, etc. for certain minerals.
 Insurance premium for stocks or stores.
 Insurance premium paid by a federal milk co-operative society for cattle
owned by a member.
 Insurance premium paid for the health of employees by cheque under the
scheme framed by G.I.C. and approved by the Central Government.
 Payment of bonus or commission to employees, irrespective of the limit
under the Payment of Bonus Act.
 Interest on borrowed capital.
 Provident and superannuation fund contribution.
 Approved gratuity fund contributions.
 Any sum received from the employees and credited to the employees
account in the relevant fund before due date.
 Loss on death or becoming permanently useless of animals in connection
with the business or profession.
 Amount of bad debt actually written off as irrecoverable in the accounts not
including provision for bad and doubtful debts.
 Provision for bad and doubtful debts made by special reserve created and
maintained by a financial corporation engaged in providing long-term
finance for industrial or agricultural development or infrastructure

28
 development in India or by a public company carrying on the business of
providing housing finance.
 Family planning expenditure by company.
 Contributions towards Exchange Risk Administration Fund.
 Expenditure, not being in nature of capital expenditure or personal
expenditure of the assessee, incurred in furtherance of trade. However, any
expenditure incurred for a purpose which is an offence or is prohibited by
law, shall not be deductible.
 Entertainment expenditure can be claimed u/s 37(1), in full, without any
limit/restriction, provided the expenditure is not of capital or personal nature.
 Payment of salary, etc. and interest on capital to partners
 Expenses deductible on actual payment only.
 Any provision made for payment of contribution to an approved gratuity
fund, or for payment of gratuity that has become payable during the year.
 Special provisions for computing profits and gains of civil contractors.
 Special provision for computing income of truck owners.
 Special provisions for computing profits and gains of retail business.
 Special provisions for computing profits and gains of shipping business in
the case of non-residents.
 Special provisions for computing profits or gains in connection with the
business of exploration etc. of mineral oils.
 Special provisions for computing profits and gains of the business of
operation of aircraft in the case of non-residents.
 Special provisions for computing profits and gains of foreign companies
engaged in the business of civil construction, etc. in certain turnkey projects.
 Deduction of head office expenditure in the case of non-residents.
 Special provisions for computing income by way of royalties etc. in the case
of foreign companies

29
Expenses deductible for authors receiving income from royalties
 In case of Indian authors/writers where the amount of royalties receivable
during a previous year are less than Rs. 25,000 and where detailed accounts
regarding expenses incurred are not maintained, deduction for expenses may
be allowed up to 25% of such amount or Rs. 5,000, whichever is less. The
above deduction will be allowed without calling for any evidence in support
of expenses.
 If the amount of royalty receivable exceeds Rs.25,000 only the actual
expenses incurred shall be allowed.

Set Off and Carry Forward of Business Loss:

If there is a loss in any business, it can be set off against profits of any other
business in the same year. The loss, if any, still remaining can be set off against
income under any other head.

However, loss in a speculation business can be adjusted only against profits of

another speculation business. Losses not adjusted in the same year can be
carried forward to subsequent years.

30
 Income from Other Sources

Other Sources

This is the last and residual head of charge of income. Income of every kind
which is not to be excluded from the total income under the Income Tax Act
shall be charge to tax under the head Income From Other Sources, if it is not
chargeable under any of the other four heads-Income from Salaries, Income
From House Property, Profits and Gains from Business and Profession and
Capital Gains. In other words, it can be said that the residuary head of income
can be resorted to only if none of the specific heads is applicable to the income
in question and that it comes into operation only if the preceding heads are
excluded.

Illustrative List

Following is the illustrative list of incomes chargeable to tax under the head
Income from Other Sources:

(i) Dividends

Any dividend declared, distributed or paid by the company to its shareholders is

chargeable to tax under the head ‘Income from Other Sources”, irrespective of
the fact whether shares are held by the assessee as investment or stock in trade.
Dividend is deemed to be the income of the previous year in which it is
declared, distributed or paid. However interim dividend is deemed to be the
income of the year in which the amount of such dividends unconditionally made
available by the company to its shareholders.

31
However, any income by way of dividends is exempt from tax u/s10(34) and
no tax is required to be deducted in respect of such dividends.

(ii) Income from machinery, plant or furniture belonging to the assessee and let
on hire, if the income is not chargeable to tax under the head Profits and gains
of business or profession.

(iii) Where an assessee lets on hire machinery, plant or furniture belonging to

him and also buildings, and the letting of the buildings is inseparable from the
letting of the said machinery, plant or furniture, the income from such letting, if
it is not chargeable to tax under the head Profits and gains of business or
profession.

(iv) Any sum received under a Keyman insurance policy including the sum
allocated by way of bonus on such policy if such income is not chargeable to
tax under the head Profits and gains of business or profession or under the head
Salaries.

32
(v) Where any sum of money exceeding twenty-five thousand rupees is
received without consideration by an individual or a Hindu undivided family
from any person on or after the 1st day of September, 2004, the whole of such
sum, provided that this clause shall not apply to any sum of money received
(a) From any relative; or
(b) On the occasion of the marriage of the individual; or
(c) Under a will or by way of inheritance; or
(d) In contemplation of death of the payer.

(vi) Any sum received by the assessee from his employees as contributions to
any provident fund or superannuation fund or any fund set up under the
provisions of the Employees’ State Insurance Act. If such income is not
chargeable to tax under the head Profits and gains of business or profession
(vii) Income by way of interest on securities, if the income is not chargeable to
tax under the head Profits and gains of business or profession. If books of
account in respect of such income are maintained on cash basis then interest is
taxable on receipt basis. If however, books of account are maintained on
mercantile system of accounting then interest on securities is taxable on accrual
basis.

(viii) Other receipts falling under the head “Income from Other Sources’:
 Director’s fees from a company, director’s commission for standing as a
guarantor to bankers for allowing overdraft to the company and director’s
commission for underwriting shares of a new company.
 Income from ground rents.
 Income from royalties in general.

33
Deductions from Income from Other Sources:

The income chargeable to tax under this head is computed after making the
following deductions:

1. In the case of dividend income and interest on securities: any reasonable sum
paid by way of remuneration or commission for the purpose of realizing
dividend or interest.

2. In case of income in the nature of family pension: Rs.15, 000or 33.5% of

such income, whichever is low.
3. In the case of income from machinery, plant or furniture let on hire:

(a) Repairs to building

(b) Current repairs to machinery, plant or furniture
(c) Depreciation on building, machinery, plant or furniture
(d) Unabsorbed Depreciation.

4. Any other expenditure (not being a capital expenditure) expended wholly and
exclusively for the purpose of earning of such income.

34
 DEDUCTIONS FROM TAXABLE INCOME

 Deduction under section 80C

 Deduction under section 80CCC

 Deduction under section 80D

 Deduction under section 80DD

 Deduction under section 80DDB

 Deduction under section 80E

 Deduction under section 80G

 Deduction under section 80GG

 Deduction under section 80GGA

 Deduction under section 80CCE

35
 Deduction under section 80C

This new section has been introduced from the Financial Year 2005-06. Under
this section, a deduction of up to Rs. 1,00,000 is allowed from Taxable Income
in respect of investments made in some specified schemes. The specified
schemes are the same which were there in section 88 but without any sectoral
caps (except in PPF).

80C

This section is applicable from the assessment year 2006-2007.Under this

section 100%deduction would be available from Gross Total Income
subject to maximum ceiling given u/s 80CCE.Following investments are
included in this section:

 Contribution towards premium on life insurance

 Contribution towards Public Provident Fund.(Max.70,000 a year)
 Contribution towards Employee Provident Fund/General Provident Fund
 Unit Linked Insurance Plan (ULIP).
 NSC VIII Issue
 Interest accrued in respect of NSC VIII Issue
 Equity Linked Savings Schemes (ELSS).
 Repayment of housing Loan (Principal).
 Tuition fees for child education.
 Investment in companies engaged in infrastructural facilities.

36
Notes for Section 80C

1. There are no sectoral caps (except in PPF) on investment in the new

section and the assessee is free to invest Rs. 1,00,000 in any one or
more of the specified instruments.
2. Amount invested in these instruments would be allowed as deduction
irrespective of the fact whether (or not) such investment is made out of
income chargeable to tax.
3. Section 80C deduction is allowed irrespective of assessee's income
level. Even persons with taxable income above Rs. 10,00,000 can avail
benefit of section 80C.
4. As the deduction is allowed from taxable income, the exact savings in
tax will depend upon the tax slab of the individual. Thus, a person in
30% tax stab can save income tax up to Rs. 30,600 (or Rs. 33,660 if
annual income exceeds Rs. 10,00,000) by investing Rs. 1,00,000 in the
specified schemes u/s 80C.

Deduction under section 80CCC

Deduction in respect of contribution to certain Pension Funds: Deduction is

allowed for the amount paid or deposited by the assessee during the previous
year out of his taxable income to the annuity plan (Jeevan Suraksha) of Life
Insurance Corporation of India or annuity plan of other insurance companies for
receiving pension from the fund referred to in section 10(23AAB)
Amount of Deduction: Maximum Rs. 10,000/-

Deduction under section 80D

Deduction in respect of Medical Insurance Premium

Deduction is allowed for any medical insurance premium under an approved

37
scheme of General Insurance Corporation of India popularly known as
MEDICLAIM) or of any other insurance company, paid by cheque, out of
assessee’s taxable income during the previous year, in respect of the following
In case of an individual – insurance on the health of the assessee, or wife or
husband, or dependent parents or dependent children.
In case of an HUF – insurance on the health of any member of the family
Amount of deduction: Maximum Rs. 10,000, in case the person insured is a
senior citizen (exceeding 65 years of age) the maximum deduction allowable
shall be Rs. 15,000/-.

Deduction under section 80DD

Deduction in respect of maintenance including medical treatment of

handicapped dependent:

Deduction is allowed in respect of – any expenditure incurred by an assessee,

during the previous year, for the medical treatment training and rehabilitation of
one or more dependent persons with disability; and amount deposited, under an
approved scheme of the Life Insurance Corporation or other insurance company
or the Unit Trust of India, for the benefit of a dependent person with disability.
Amount of deduction: the deduction allowable is Rs. 50,000 (Rs. 40,000 for
A.Y. 2003-2004) in aggregate for any of or both the purposes specified above,
irrespective of the actual amount of expenditure incurred. Thus, if the total of
expenditure incurred and the deposit made in approved scheme is Rs. 45,000,
the deduction allowable for A.Y. 2004-2005, is Rs. 50,000

Deduction under section 80DDB

Deduction in respect of medical treatment

A resident individual or Hindu Undivided family deduction is allowed in

respect of during a year for the medical treatment of specified disease or ailment

38
for himself or a dependent or a member of a Hindu Undivided Family.
Amount of Deduction Amount actually paid or Rs. 40,000 whichever is less (for
A.Y. 2003-2004, a deduction of Rs. 40,000 is allowable In case of amount is
paid in respect of the assessee, or a person dependent on him, who is a senior
citizen the deduction allowable shall be Rs. 60,000.

Deduction under section 80E

Deduction in respect of Repayment of Loan taken for Higher Education An

individual assessee who has taken a loan from any financial institution or any
approved charitable institution for the purpose of pursuing his higher education
i.e. full time studies for any graduate or post graduate course in engineering
medicine, management or for post graduate course in applied sciences or pure
sciences including mathematics and statistics.
Amount of Deduction: Any amount paid by the assessee in the previous year,
out of his taxable income, by way of repayment of loan or interest thereon,
subject to a maximum of Rs. 40,000

Deduction under section 80G

Donations: 100 % deduction is allowed in respect of donations to: National

Defence Fund, Prime Minister’s National Relief Fund, Armenia Earthquake
Relief Fund, Africa Fund, National Foundation of Communal Harmony, an
approved University or educational institution of national eminence, Chief
Minister’s earthquake Relief Fund etc.
In all other cases donations made qualifies for the 50% of the donated amount
for deductions.

39
 Deduction under section 80GG

Deduction in respect of Rent Paid:

Any assessee including an employee who is not in receipt of H.R.A. u/s
10(13A)
Amount of Deduction: Least of the following amounts are allowable:

 Rent paid minus 10% of assessee’s total income

 Rs. 2,000 p.m.

 25% of total income

Deduction under section 80GGA

Donations for Scientific Research or Rural Development:

In respect of institution or fund referred to in clause (e) or (f) donations made up
to 31.3.2002 shall only be deductible.
This deduction is not applicable where the gross total income of the assessee
includes the income chargeable under the head Profits and gains of business or
profession. In those cases, the deduction is allowable under the respective
sections specified above.

Deduction under section 80CCE

A new Section 80CCE has been inserted from FY2005-06. As per this section,
the maximum amount of deduction that an assessee can claim under Sections
80C, 80CCC and 80CCD will be limited to Rs 100,000.

40
 COMPUTATION OF TAX LIABILITY

 Tax Rates for A.Y. 2022-23

 Sample Tax Liability Calculations

 Filing of Income Tax Return

41
Tax Rates for A.Y. 2022-23

Following rates are applicable for computing tax liability for the current
Financial Year ending on March 31 2021-22, (Assessment Year 2022-23).
The normal tax rates applicable to a resident individual will depend on the age
of the individual. However, in case of a non-resident individual the tax rates
will be same irrespective of his age.
For the purpose of ascertainment of the applicable tax slab, an individual can be
classified as follows:
 Resident individual below the age of 60 years. i.e. born on or after 01-04-
1962
 Resident individual of the age of 60 years or above at any time during the
year but below the age of 80 years. (i.e. born during 01-04- 1942 to 31-
03-1962)
 Resident individual of the age of 80 years or above at any time during the
year. i.e. born before 01.04.1942
 Non-resident individual irrespective of the age.

A new tax regime has been established by the insertion of section 115 BAC
in the Income Tax Act, 1961 vide the Finance Act, 2020. Individuals and
HUFs can choose between the new or old tax regime and pay applicable
income tax as per slabs and rates for FY 2021-22 (AY 2022-23). This option
to Individuals and HUF for payment of taxes at the reduced rates from
Assessment Year 2021-22 and onwards are under the conditions that they
don't claim the normal concessions available.

1. In case of an Individual (resident or non-resident) or HUF or

Association of Person or Body of Individual or any other
artificial juridical person

42
 Old Tax Regime Slab Rate FY 2021-22 New Tax Regime Slab Rate FY 2021-
22

Net Taxable Income Tax Rate Net Taxable Income Tax Rate

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

Rs. 2,50,001 to Rs 5,00,000 5% Rs. 2,50,001 to Rs 5,00,000 5%

Rs. 5,00,001 to Rs. 7,50,000 10%

Rs. 7,50,001 to Rs. 15%

10,00,000

Rs. 5,00,001 to Rs. 20% Rs. 10,00,001 to Rs. 20%

10,00,000 12,50,000

Rs. 12,50,001 to Rs. 25%

15,00,000

Above Rs. 10,00,000 30% Above Rs. 15,00,000 30%

2. In case of a resident senior citizen (who is 60 years or more at any

time during the previous year but less than 80 years on the last day of
the previous year)

Old Tax Regime Slab Rate FY 2021-22 New Tax Regime Slab Rate FY 2021-22

Net Taxable Income Tax Rate Net Taxable Income Tax Rate

43
Up to Rs. 3,00,000 Nil Up to Rs. 2,50,000 Nil

Rs. 3,00,001 to Rs 5,00,000 5% Rs. 2,50,001 to Rs 5,00,000 5%

Rs. 5,00,001 to Rs. 7,50,000 10%

Rs. 7,50,001 to Rs. 10,00,000 15%

Rs. 5,00,001 to Rs. 10,00,000 20% Rs. 10,00,001 to Rs. 20%

12,50,000

Rs. 12,50,001 to Rs. 25%

15,00,000

Above Rs. 10,00,000 30% Above Rs. 15,00,000 30%

Less: Rebate under Section 87A [see Note]

Add: Surcharge and Health & Education Cess [see Note]

3. In case of a resident super senior citizen (who is 80 years or above at

any time during the previous year)

Old Tax Regime Slab Rate FY 2021-22 New Tax Regime Slab Rate FY 2021-22

Net Taxable Income Tax Rate Taxable Income Tax Rate

Up to Rs. 5,00,000 Nil Up to Rs. 2,50,000 Nil

44
 Rs. 2,50,001 to Rs 5,00,000 5%

Rs. 5,00,001 to Rs. 7,50,000 10%

Rs. 7,50,001 to Rs. 10,00,000 15%

Rs. 5,00,001 to Rs. 10,00,000 20% Rs. 10,00,001 to Rs. 20%

12,50,000
Rs. 12,50,001 to Rs. 25%
15,00,000
Above Rs. 10,00,000 30% Above Rs. 15,00,000 30%

45
Sample Tax Liability
Calculations

Table 4: For Resident Male Individuals below 65 years of age

Annual Taxable Income Tax Surcharge Education Total
Income Cess
110000 0 0 0 0
145000 3500 0 105 3605
150000 4000 0 120 4120
195000 13000 0 390 13390
200000 14000 0 420 14420
250000 24000 0 720 24720
300000 39000 0 1170 40170
400000 69000 0 2070 71070
500000 99000 0 2970 101970
1000000 249000 0 7470 256470
1100000 279000 27900 9207 316107

Table 5: For Resident Female Individuals below 65 years of age

Annual Taxable Income Income Tax Surcharge Education Cess Total
110000 0 0 0 0
145000 0 0 0 0
150000 500 0 15 515
195000 9500 0 285 9785
200000 10500 0 315 10815
250000 20500 0 615 21115
300000 35500 0 1065 36565
400000 65500 0 1965 67465
500000 95500 0 2865 98365
1000000 245500 0 7365 252865
1100000 275500 27550 9092 312142

46
Table 6: For Resident Senior Citizens (over 65 years age at any time during F.Y.
2007-08)
Annual Taxable Income Tax Surcharge Education Total
Income Cess
110000 0 0 0 0
145000 0 0 0 0
150000 0 0 0 0
195000 0 0 0 0
200000 1000 0 30 1030
250000 11000 0 330 11330
300000 26000 0 780 26780
400000 56000 0 1680 57680
500000 86000 0 2580 88580
1000000 236000 0 7080 243080
1100000 266000 26600 8778 301378

47
 Filing of Income Tax Return

1. Filing of income tax return is compulsory for all individuals whose gross annual
income exceeds the maximum amount which is not chargeable to income tax
i.e. Rs. 1,45,000 for Resident Women, Rs. 1,95,000 for Senior Citizens and Rs.
1,10,000 for other individuals and HUFs.

2. The last date of filing income tax return is July 31, in case of individuals who
are not covered in point 3 below.

3. If the income includes business or professional income requiring tax audit

(turnover Rs. 40 lakhs), the last date for filing the return is October 31.

4. The penalty for non-filing of income tax return is Rs. 5000. Long term capital
gain on sale of shares and equity mutual funds if the security transaction tax is
paid/imposed on such transactions

48
 Literature review

Tax planning is the analysis of one’s financial situation from a tax efficiency
point of view so as to plan one’s finances in the most optimized manner. Tax
planning allows a taxpayer to make the best use of the various tax exemptions,
deductions and benefits to minimize their tax liability over a financial year. Tax
planning is a legal way of reducing income tax liabilities, however caution has
to be maintained to ensure that the taxpayer isn’t knowingly indulging in tax
evasion or tax avoidance.

Taxes are calculated on the annual income of a person, and an annual cycle
(year) in the eyes of the Income Tax law starts on the 1st of April and ends on
the 31st of March of the next calendar year. The law recognizes and classifies
the year as “Previous Year” and “Assessment Year”.

The year in which income is earned is called the previous year and the year in
which it is charged to tax is called the assessment year.

Literature review is simply an abstract of ideas and thoughts based on another

reference material. It is a body of text that aims to review the critical points of
current knowledge on a particular topic. It is an extremely important part of
dissertation and it proves that the researcher has learned and understood the
matter published on a particular topic.

Literature review is not a mere summary of publications by other authors. It

actually demonstrates researcher understanding of different arguments,
advancements and theories. Literature review represents how widely the
researcher has read and how thorough his research is. It is an in-depth account
of previous research done by students in his area of study. Writing a literature
review is an extremely important part of thesis writing process. Researcher must
not only make sure how it is written, he needs to also know how to organize it
and where he can find relevant information

49
 Objectives

 To study taxation provisions of The Income Tax Act, 1961 as

amended by Finance Act, 2007.
 To explore and simplify the tax planning procedure from
a layman’s perspective.
 To present the tax saving avenues under prevailing statures.

 To know the tax planning and tax management tools.

50
 Hypothesis

"The implementation of effective income tax planning strategies in India can

significantly reduce the tax burden on individual assesses and enhance their
financial well-being."

This hypothesis suggests that by studying and implementing appropriate income

tax planning techniques in India, individual assesses can potentially experience
a notable reduction in their tax liabilities. The hypothesis assumes that
employing suitable tax planning strategies will lead to favorable outcomes for
individual taxpayers, resulting in improved financial conditions. This hypothesis
can be further explored and tested through research and analysis of income tax
laws, regulations, and case studies in India.

Introduction to Income Tax Planning in India:

Briefly explain the concept of income tax planning and its significance for
individual taxpayers in India.

Highlight the importance of understanding income tax laws and regulations to

optimize financial outcomes.

Mention the objectives of income tax planning, such as minimizing tax liability,
maximizing deductions, and ensuring compliance with legal requirements.

Overview of Income Tax Laws in India:

Provide a brief overview of the income tax structure in India, including tax
slabs, rates, and exemptions.

Explain the different types of income that are taxable, such as salary, business
income, capital gains, and more.

Discuss the various sections of the Income Tax Act that offer deductions and
exemptions for individual assesses, such as Section 80C, 80D, 80G, etc.

51
Emphasize the importance of understanding these provisions to effectively plan
and manage one’s tax liabilities.

Assesses:

Explain the potential advantages of income tax planning, such as reducing tax
liabilities, optimizing tax-saving investments, and enhancing financial stability.

Discuss how effective tax planning can help individuals achieve their financial
goals, such as saving for retirement, education, or purchasing a home.

Highlight the role of tax-saving instruments like Employee Provident Fund

(EPF), Public Provident Fund (PPF), National Pension Scheme (NPS), and tax-
saving mutual funds in minimizing tax burdens..

Strategies for Effective Income Tax Planning:

Discuss various strategies that individuals can employ to optimize their income
tax planning in India.

Explain the importance of maintaining proper documentation, record-keeping,

and timely filing of tax returns.

Discuss the benefits of tax diversification, such as investing in multiple tax-

saving instruments to maximize deductions and exemptions.

Explore the concept of tax-efficient investments, such as long-term capital

gains, indexation benefits, and tax-free bonds.

Challenges and Considerations in Income Tax Planning:

Highlight potential challenges and complexities individuals may face while

planning their income taxes in India.

52
Discuss factors to consider, such as changes in tax laws, exemptions, and
deductions, which may impact tax planning strategies.

Emphasize the importance of staying updated with the latest amendments and
seeking professional advice when necessary.

Conclusion:

Summarize the key points discussed in the paper, emphasizing the significance
of income tax planning for individual assesses in India.

Highlight the potential benefits and outcomes that can be achieved through
effective tax planning.

Encourage individuals to take proactive steps in understanding and

implementing income tax planning strategies to optimize their financial well-
being.

53
 Significance
Income tax planning is an integral part of financial management in India,
offering numerous benefits to individuals and businesses. It involves
strategically structuring one's income and expenses to minimize tax liability
while adhering to legal requirements. Effective tax planning can significantly
enhance financial well-being and contribute to long-term wealth accumulation.

Key Advantages of Income Tax Planning in India:

Minimize Tax Liability: Tax planning aims to reduce the overall tax burden by
utilizing tax deductions, exemptions, and benefits offered by the Income Tax
Act, 1961. This allows individuals and businesses to retain more of their hard-
earned income.

Enhance Cash Flow: By optimizing tax payments, tax planning ensures a

smoother flow of funds throughout the year. This helps businesses manage their
finances effectively, avoiding potential cash flow disruptions and fostering
financial stability.

Maximize Savings and Investments: Reduced tax liability translates into

increased disposable income, enabling individuals to save and invest more for
their future goals. This contributes to wealth creation and financial security.

Informed Financial Decisions: Tax planning encourages individuals and

businesses to analyze their financial situation and make informed decisions
regarding income generation, investments, and tax-saving options. This
promotes financial literacy and responsible financial management.

Peace of Mind and Compliance: Proper tax planning ensures compliance with
tax regulations and avoids potential tax penalties or legal issues. This provides

54
peace of mind and allows individuals and businesses to focus on their core
activities.

Effective Income Tax Planning Strategies in India:

Understand Tax Deductions and Exemptions: Familiarize yourself with the

various tax deductions and exemptions available under the Income Tax Act.
Utilize these provisions to reduce your taxable income.

Maximize Deductions from Salary Income: Take advantage of deductions for

salary-related expenses, such as rent allowance, professional tax, and medical
insurance premiums.

Invest in Tax-Saving Schemes: Invest in tax-saving instruments like Public

Provident Fund (PPF), Employee Provident Fund (EPF), and National Pension
Scheme (NPS) to lower your taxable income and create a retirement corpus.

Claim Deductions for Home Loan and Interest: If you have a home loan, claim
deductions for interest paid and principal repayment.

Seek Professional Guidance: Consider consulting a tax advisor for personalized

tax planning advice and assistance in navigating complex tax laws and
regulations.

Income tax planning is an ongoing process that requires regular review and
adjustments based on changes in income, expenses, and tax laws. By adopting
proactive tax planning strategies, individuals and businesses in India can
effectively manage their tax liabilities, enhance their financial well-being, and
achieve their long-term financial goals.

55
 Limitations

1. This project studies the tax planning for individuals assessed to Income Tax.

2. The study relates to non-specific and generalized tax planning, eliminating

the need of sample/population analysis.

3. Basic methodology implemented in this study is subjected to various pros &

cons, and diverse insurance plans at different income levels of individual
assessees.

4. This study may include comparative and analytical study of more than one
tax saving plans and instruments.

5. This study covers individual income tax assessees only and does not hold
good for corporate taxpayers.

56
 6. The tax rates, insurance plans, and premium are all subject to FY 2007-08
only.

Research methodology

The present study has covered various facets of tax awareness, tax planning and
its significant relationship on wealth creation. Yet there is a scope for further
study in some aspects which are not covered in present study.

1. Every year, assessees are paying tax to the government; it means every year
assessees are planning their tax. This leads to every year savings which in turn
wealth creation in the hands of assessees. Therefore, a further research on
comparison of yearly savings or investments of assessees can be done.

2. Present study has taken into consideration only five occupations wise
individual assessees. Research on many more occupation wise and investments
of Male and Female comparison also can be done.

Methodology Adopted:

 For the study purpose the required secondary data is collected by using various
published sources.
 For the presentation and study purpose, the collected data is edited, classified,
and tabulated by using usual statistical techniques. The graphical representation
of the data is also given wherever necessary. In this project used useful related
picture for purpose of easy understand.

Main Body Of Project

 Tax Planning is an activity conducted by the tax payer to reduce the tax liable
upon him/her by making maximum use of all available deductions, allowances,
exclusions, etc .

57
 In other words, it is the analysis of a financial situation from the taxation point
of view. The objective behind tax planning is insurance of tax efficiency.
 Indian law offers a variety of tax saving options for the taxpayers, allowing for a
large range of options for exemptions and deductions through which you could
limit your overall tax output.
 First, you must calculate the tax liability that is associated with you, to find the
amount of income tax that you will get back as income tax refund.
If the amount that you have paid in the form of taxes is more than the tax
liability, then the extra amount will be refunded to your account

58
 Conclusion
At the end of this study, The current income tax slabs 2022-23 are for anyone
filing their Income Tax Return in 2018 i.e. for F.Y.2021-22 (A.Y 2022-23).
After reading this article, you must have understood that your ITR slab AY
2017-18 doesn’t just depend on your income.

It also depends on your age , status and what all deductions and exemptions
you have taken. Deductions and exemptions can knock you into a lower tax
slab, reducing your tax liability (or increasing the size of your tax refund) in
the process.
That’s why it’s in your interest to make sure that you’re taking advantage of all
the income tax provisions for which you’re eligible, whether you use tax
preparation software, seek help from a CA or go the DIY route on Income Tax
portal.

59
 Suggestions
TAX PLANNING - RECOMMENDATIONS AND USEFUL TIPS

 Tax Planning

 Tax Planning Tools

o Strategic Tax Planning

o Insurance

o Public Provident Fund

o Pension Policies

o Five year Fixed Deposits (FDs), National Savings Scheme

(NSC), other bonds

o Equity Linked Savings Scheme (ELSS)

 Income Head-wise Tax Planning Tips

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Tax Planning

Proper tax planning is a basic duty of every person which should be carried out
religiously. Basically, there are three steps in tax planning exercise.

These three steps in tax planning are:

Calculate your taxable income under all heads i.e., Income from Salary, House
Property, Business & Profession, Capital Gains and Income from Other
Sources.
Calculate tax payable on gross taxable income for whole financial year (i.e.,
from 1st April to 31st March) using a simple tax rate table, given on next page.
After you have calculated the amount of your tax liability. You have two
options to choose from:

1.Pay your tax (No tax planning required)

2.Minimise your tax through prudent tax planning.

Most people rightly choose Option 'B'. Here you have to compare the
advantages of several tax-saving schemes and depending upon your age, social
liabilities, tax slabs and personal preferences, decide upon a right mix of
investments, which shall reduce your tax liability to zero or the minimum
possible.

Every citizen has a fundamental right to avail all the tax incentives provided by
the Government. Therefore, through prudent tax planning not only income-tax
liability is reduced but also a better future is ensured due to compulsory savings
in highly safe Government schemes. We should plan our investments in such a
way, that the post-tax yield is the highest possible keeping in view the basic
parameters of safety and liquidity.

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For most individuals, financial planning and tax planning are two mutually
exclusive exercises. While planning our investments we spend considerable
amount of time evaluating various options and determining which suits us best.
But when it comes to planning our investments from a tax-saving perspective,
more often than not, we simply go the traditional way and do the exact same
thing that we did in the earlier years. Well, in case you were not aware the
guidelines governing such investments are a lot different this year. And lethargy
on your part to rework your investment plan could cost you dear.

Why are the stakes higher this year? Until the previous year, tax benefit was
provided as a rebate on the investment amount, which could not exceed Rs
100,000; of this Rs 30,000 was exclusively reserved for Infrastructure Bonds.
Also, the rebate reduced with every rise in the income slab; individuals earning
over Rs 500,000 per year were not eligible to claim any rebate. For the current
financial year, the Rs 100,000 limit has been retained; however internal caps
have been done away with. Individuals have a much greater degree of flexibility
in deciding how much to invest in the eligible instruments. The other significant
changes are:
The rebate has been replaced by a deduction from gross total income,
effectively. The higher your income slab, the greater is the tax benefit.
All individuals irrespective of the income bracket are eligible for this
investment. These developments will result in higher tax-savings.

We should use this Rs 100,000 contribution as an integral part of your overall

financial planning and not just for the purpose of saving tax. We should
understand which instruments and in what proportion suit the requirement best.
In this note we recommend a broad asset allocation for tax saving instruments
for different investor profiles.

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For persons below 30 years of age:

In this age bracket, you probably have a high appetite for risk. Your disposable
surplus maybe small (as you could be paying your home loan installments), but
the savings that you have can be set aside for a long period of time. Your
children, if any, still have many years before they go to college; or retirement is
still further away. You therefore should invest a large chunk of your surplus in
tax-saving funds (equity funds). The employee provident fund deduction
happens from your salary and therefore you have little control over it.
Regarding life insurance, go in for pure term insurance to start with. Such
policies are very affordable and can extend for up to 30 years. The rest of your
funds (net of the home loan principal repayment) can be parked in NSC/PPF.

For persons between 30 - 45 years of age:

Your appetite for risk will gradually decline over this age bracket as a result of
which your exposure to the stock markets will need to be adjusted accordingly.
As your compensation increases, so will your contribution to the EPF. The life
insurance component can be maintained at the same level; assuming that you
would have already taken adequate life insurance and there is no need to add to
it. In keeping with your reducing risk appetite, your contribution to PPF/NSC
increases. One benefit of the higher contribution to PPF will be that your
account will be maturing (you probably opened an account when you started to
earn) and will yield you tax free income (this can help you fund your children's
college education).

63
Table 6: Tax Planning Tools Mix by Age Group

Age Life insurance premium EPF PPF / NSC ELSS Total

< 30 10,000 20,000 20,000 50,000 100,000
30 - 45 10,000 30,000 25,000 35,000 100,000
45 - 55 10,000 35,000 30,000 25,000 100,000
> 55 10,000 - 65,000 25,000 100,000

For persons between 45 - 55 years of age:

You are now nearing retirement. To that extent it is critical that you fill in any
shortfall that may exist in your retirement nest egg. You also do not want to
jeopardize your pool of savings by taking any extraordinary risk. The allocation
will therefore continue to move away from risky assets like stocks, to safer ones
line the NSC. However, it is important that you continue to allocate some
money to stocks. The reason being that even at age 55, you probably have 15 -
20 years of retired life; therefore having some portion of your money invested
for longer durations, in the high risk - high return category, will help in building
your nest egg for the latter part of your retired life.

For persons over 55 years of age:

You are to retire in a few years; then you will have to depend on your
investments for meeting your expenses. Therefore the money that you have to
invest under Section 80C must be allocated in a manner that serves both near
term income requirements as well as long-term growth needs. Most of the funds
are therefore allocated to NSC. Your PPF account probably will mature early
into your retirement (if you started another account at about age 40 years). You

64
continue to allocate some money to equity to provide for the latter part of your
retired life. Once you are retired however, since you will not have income there
is no need to worry about Section 80C. You should consider investing in the
Senior Citizens Savings Scheme, which offers an assured return of 9% pa;
interest is payable quarterly. Another investment you should consider is Post
Office Monthly Income Scheme.

Investing the Rs 100,000 in a manner that saves both taxes as well as helps you
achieve your long-term financial objectives is not a difficult exercise. All it
requires is for you to give it some thought, draw up a plan that suits you best
and then be disciplined in executing the same.

Tax Planning Tools

Following are the five tax planning tools that simultaneously help the assessees
maximize their wealth too.

Most of what we do with respect to tax saving, planning, investment whichever

way you call it is going to be of little or no use in years to come.

The returns from such investments are likely to be minuscule and or they may
not serve any worthwhile use of your money. Tax planning is very strategic in
nature and not like the last minute fire fighting most do each year.

For most people, tax planning is akin to some kind of a burden that they want
off their shoulders as soon as possible. As a result, the attitude is whatever
seems ok and will help save tax – ‘let’s go for it’ - the basic mantra. What is
really foolhardy is that saving tax is a larger prerogative than that of utilisation
of your hard earned money and the future of such monies in years to come.

65
Like each year we may continue to do what we do or give ourselves a choice
this year round. Let’s think before we put down our investment declarations this
time around. Like each year product manufacturers will be on a high note
enticing you to buy their products and save tax. As usual the market will be
flooded by agents and brokers having solutions for you. Here are some
guidelines to help you wade through the various options and ensure the
following:

1. Tax is saved and that you claim the full benefit of your section 80C
benefits
2. Product are chosen based on their long term merit and not like fire
fighting options undertaken just to reach that Rs 1 lakh investment mark
3. Products are chosen in such a manner that multiple life goals can be
fulfilled and that they are in line with your future goals and expectations
4. Products that you choose help you optimise returns while you save tax in
the immediate future.

Strategic Tax Planning

So far with whatever you have done in the past, it is important to understand the
future implications of your tax saving strategy. You cannot do much about the
statutory commitments and contribution like provident fund (PF) but all the rest
is in your control.

1. Insurance

If you have a traditional money back policy or an endowment type of policy

understand that you will be earning about 4% to 6% returns on such policies. In

66
years to come, this will be lower or just equal to inflation and hence you are not
creating any wealth, infact you are destroying the value of your wealth rapidly.

Such policies should ideally be restructured and making them paid up is a good
option. You can buy term assurance plan which will serve your need to
obtaining life cover and all the same release unproductive cash flow to be
deployed into more productive and wealth generating asset classes. Be careful
of ULIPS; invest if you are under 35 years of age, else as and when the stock
markets are down or enter into a downward phase. Your ULIP will turn out to
be very expensive as your age increases. Again I am sure you did not know this.

2. Public Provident Fund (PPF)

This has been a long time favourite of most people. It is a no-brainer and hence
most people prefer this but note this. The current returns are 8% and quite likely
that sooner or later with the implementation of the exempt tax (EET) regime of
taxation investments in PPF may become redundant, as returns will fall
significantly.

How this will be implemented is not clear hence the best option is to go easy on
this one. Simply place a nominal sum to keep your account active before there
is clarity on this front. EET may apply to insurance policies as well.
3. Pension Policies

This is the greatest mistake that many people make. There is no pension policy
today, which will really help you in retirement. That is the cold fact. Tulip
pension policies may help you to some extent but I would give it a rating of four
out of ten. It is quite likely that you will make a sizeable sum by the time you
retire but that is where the problem begins.

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The problem with pension policies is that you will get a measly 2% or 4%
annuity when you actually retire. To make matters worse this will be taxed at
full marginal rate of income tax as well. Liquidity and flexibility will just not be
there. No insurance company or agent will agree to this but this is a cold fact.

Steer clear of such policies. Either make them paid up or stop paying Tulip
premiums, if you can. Divest the money to more productive assets based on
your overall risk profile and general preferences. Bite this – Rs 100 today will
be worth only Rs 32 say in 20 years time considering 5% inflation.

4. Five year fixed deposits (FDs), National Savings Scheme (NSC), other
bonds
These products are fair if your risk appetite is really low and if you are not too
keen to build wealth. Generally speaking, in all that we do wealth creation
should be the underlying motive.

5. Equity Linked Savings Scheme (ELSS)

This is a good option. You save tax and returns are tax-free completely. You get
to build a lot of wealth. However, note that this is fraught with risk. Though it is
said that this investment into an ELSS scheme is locked-in for three years you
should be mentally prepared to hold it for five to 10 years as well.

It is an equity investment and when your three years are over, you may not have
made great returns or the stock markets may be down at that point. If that be the
case, you will have to hold much longer. Hence if you wish to use such funds in
three-four years time the calculations can go wrong.

68
Nevertheless, strange as it may seem, the high-risk investment has the least tax
liability, infact it is nil as per the current tax laws. If you are prepared to hold
for long really long like five-ten years, surely you will make super normal
returns.

That said ideally you must have your financial goal in mind first and then see
how you can meet your goals and in the process take advantage of tax savings
strategies.

There is so much to be done while you plan your tax. Look at 80C benefits as a
composite tool. Look at this as a tax management tool for the family and not
just yourself. You have section 80C benefit for yourself, your spouse, your
HUF, your parents, your father’s HUF. There are so many Rs 1 lakh to be
planned and hence so much to benefit from good tax planning.

Traditionally, buying life insurance has always formed an integral part of an

individual's annual tax planning exercise. While it is important for individuals to
have life cover, it is equally important that they buy insurance keeping both
their long-term financial goals and their tax planning in mind. This note
explains the role of life insurance in an individual's tax planning exercise while
also evaluating the various options available at one's disposal.

Term plans

A term plan is the most basic type of life insurance plan. In this plan, only the
mortality charges and the sales and administration expenses are covered. There
is no savings element; hence the individual does not receive any maturity
benefits. A term plan should form a part of every individual's portfolio. An
illustration will help in understanding term plans better.

69
Cover yourself with a term plan
Table 7: Term Plan Returns Comparison
Tenure (Years)

HDFC ICICI LIC (Anmol SBI Life Kotak

Standard Prudential Jeevan I) (Shield) Mahindra
Life (Term (Life Guard) Old Mutual
Assurance) (Preferred
Term plan)
Tenu 20 25 30 20 25 30 20 25 30 20 25 30 20 25 30
re
Age 2,72 2,77 2,82 2,97 2,97 3,15 2,54 2,86 N 1,95 2,18 N 2,42 2,53 2,75
25 0 0 0 7 7 0 4 1 A 4 0 A 4 5 5
Age 3,58 4,12 4,75 4,07 4,90 NA 4,61 5,53 N 3,54 4,37 N 3,74 4,18 4,73
35 0 0 0 8 0 3 4 A 2 5 A 7 8 9
Age 7,62 NA NA NA NA NA NA NA N 8,35 NA N 7,79 8,97 NA
45 0 A 4 A 7 0
 The premiums given in the table are for a sum assured of Rs 1,000,000
for a healthy, non-smoking male.
 Taxes as applicable may be levied on some premium quotes given above.
 The premium quotes are as shown on websites of the respective
insurance companies. Individuals are advised to contact the insurance
companies for further details.

Let us suppose an individual aged 25 years, wants to buy a term plan for tenure
of 20 years and a sum assured of Rs 1,000,000. As the table shows, a term plan
is offered by insurance companies at a very affordable rate. In case of an
eventuality during the policy tenure, the individual's nominees stand to receive
the sum assured of Rs 1,000,000.

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Individuals should also note that the term plan offering differs across life
insurance companies. It becomes important therefore to evaluate all the options
at their disposal before finalizing a plan from any one company. For example,
some insurance companies offer a term plan with a maximum tenure of 25 years
while other companies do so for 30 years. A certain insurance company also has
an upper limit of Rs 1,000,000 for its sum assured.

Unit linked insurance plans (ULIPs)

Unit linked plans have been a rage of late. With the advent of the private
insurance companies and increased competition, a lot has happened in terms of
product innovation and aggressive marketing of the same. ULIPs basically work
like a mutual fund with a life cover thrown in. They invest the premium in
market-linked instruments like stocks, corporate bonds and government
securities (Gsecs).

The basic difference between ULIPs and traditional insurance plans is that
while traditional plans invest mostly in bonds and Gsecs, ULIPs' mandate is to
invest a major portion of their corpus in stocks. Individuals need to understand
and digest this fact well before they decide to buy a ULIP.

Having said that, we believe that equities are best equipped to give better
returns from a long term perspective as compared to other investment avenues
like gold, property or bonds. This holds true especially in light of the fact that
assured return life insurance schemes have now become a thing of the past.
Today, policy returns really depend on how well the company is able to manage
its finances.

However, investments in ULIPs should be in tune with the individual's risk

appetite. Individuals who have a propensity to take risks could consider buying
ULIPs with a higher equity component. Also, ULIP investments should fit into
an individual's financial portfolio. If for example, the individual has already

71
invested in tax saving funds while conducting his tax planning exercise, and his
financial portfolio or his risk appetite doesn't 'permit' him to invest in ULIPs,
then what he may need is a term plan and not unit linked insurance.

Pension/retirement plans

Planning for retirement is an important exercise for any individual. A retirement

plan from a life insurance company helps an individual insure his life for a
specific sum assured. At the same time, it helps him in accumulating a corpus,
which he receives at the time of retirement.

Premiums paid for pension plans from life insurance companies enjoy tax
benefits up to Rs 10,000 under Section 80CCC. Individuals while conducting
their tax planning exercise could consider investing a portion of their insurance
money in such plans.

Unit linked pension plans are also available with most insurance companies. As
already mentioned earlier, such investments should be in tune with their risk
appetites. However, individuals could contemplate investing in pension ULIPs
since retirement planning is a long term activity.

Traditional endowment/endowment type plans

Individuals with a low risk appetite, who want an insurance cover, which will
also give them returns on maturity could consider buying traditional endowment
plans. Such plans invest most of their monies in corporate bonds, Gsecs and the
money market. The return that an individual can expect on such plans should be
in the 4%-7% range as given in the illustration below.

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Table 8: Traditional Endowment Plan Returns
Age Sum Premium Tenure Maturity Actual rate
(Yrs) Assured (Rs) (Yrs) Amount of return
(Rs) (Rs)* (%)
Company 30 1,000,000 65,070 15 1,684,000 6.55
A
Company 30 1,000,000 65202 15 1,766,559 7.09
B
 The maturity amounts shown above are at the rate of 10% as per
company illustrations. Returns calculated by the company are on the
premium amount net of expenses.
 Taxes as applicable may be levied on some premium quotes given above.
 Individuals are advised to contact the insurance companies for further
details.

A variant of endowment plans are child plans and money back plans. While
they may be presented differently, they still remain endowment plans in
essence. Such plans purport to give the individual either a certain sum at regular
intervals (in case of money back plans) or as a lump sum on maturity. They fit
into an individual's tax planning exercise provided that there exists a need for
such plans.

Tax benefits*

Premiums paid on life insurance plans enjoy tax benefits under Section 80C
subject to an upper limit of Rs 100,000. The tax benefit on pension plans is
subject to an upper limit of Rs 10,000 as per Section 80CCC (this falls within
the overall Rs 100,000 Section 80C limit). The maturity amount is currently
treated as tax free in the hands of the individual on maturity under Section 10
(10D).

73
Income Head-wise Tax Planning Tips

Salaries Head: Following propositions should be borne in mind:

1.It should be ensured that, under the terms of employment, dearness allowance
and dearness pay form part of basic salary. This will minimize the tax incidence
on house rent allowance, gratuity and commuted pension. Likewise, incidence
of tax on employer’s contribution to recognized provident fund will be lesser if
dearness allowance forms a part of basic salary.

2.The Supreme Court has held in Gestetner Duplicators (p) Ltd. Vs CIT that
commission payable as per the terms of contract of employment at a fixed
percentage of turnover achieved by an employee, falls within the expression
“salary” as defined in rule 2(h) of part A of the fourth schedule. Consequently,
tax incidence on house rent allowance, entertainment allowance, gratuity and
commuted pension will be lesser if commission is paid at a fixed percentage of
turnover achieved by the employee.

3.An uncommuted pension is always taxable; employees should get their

pension commuted. Commuted pension is fully exempt from tax in the case of
Government employees and partly exempt from tax in the case of government
employees and partly exempt from tax in the case of non government
employees who can claim relief under section 89.

4.An employee being the member of recognized provident fund, who resigns
before 5 years of continuous service, should ensure that he joins the firm which
maintains a recognized fund for the simple reason that the accumulated balance
of the provident fund with the former employer will be exempt from tax,

74
provided the same is transferred to the new employer who also maintains a
recognized provident fund.

5.Since employers’ contribution towards recognized provident fund is exempt

from tax up to 12 percent of salary, employer may give extra benefit to their
employees by raising their contribution to 12 percent of salary without
increasing any tax liability.

6.While medical allowance payable in cash is taxable, provision of ordinary

medical facilities is no taxable if some conditions are satisfied. Therefore,
employees should go in for free medical facilities instead of fixed medical
allowance.

7.Since the incidence of tax on retirement benefits like gratuity, commuted

pension, accumulated unrecognized provident fund is lower if they are paid in
the beginning of the financial year, employer and employees should mutually
plan their affairs in such a way that retirement, termination or resignation, as the
case may be, takes place in the beginning of the financial year.

8.An employee should take the benefit of relief available section 89 wherever
possible. Relief can be claimed even in the case of a sum received from URPF
so far as it is attributable to employer’s contribution and interest thereon.
Although gratuity received during the employment is not exempt u/s 10(10),
relief u/s 89 can be claimed. It should, however, be ensured that the relief is
claimed only when it is beneficial.

9.Pension received in India by a non resident assessee from abroad is taxable in

India. If however, such pension is received by or on behalf of the employee in a
foreign country and later on remitted to India, it will be exempt from tax.

75
10.As the perquisite in respect of leave travel concession is not taxable in the
hands of the employees if certain conditions are satisfied, it should be ensured
that the travel concession should be claimed to the maximum possible extent
without attracting any incidence of tax.

11.As the perquisites in respect of free residential telephone, providing use of

computer/laptop, gift of movable assets(other than computer, electronic items,
car) by employer after using for 10 years or more are not taxable, employees
can claim these benefits without adding to their tax bill.

12.Since the term “salary” includes basic salary, bonus, commission, fees and
all other taxable allowances for the purpose of valuation of perquisite in respect
of rent free house, it would be advantageous if an employee goes in for
perquisites rather than for taxable allowances. This will reduce valuation of rent
free house, on one hand, and, on the other hand, the employee may not fall in
the category of specified employee. The effect of this ingenuity will be that all
the perquisites specified u/s 17(2)(iii) will not be taxable.

House Property Head: The following propositions should be borne in mind:

1.If a person has occupied more than one house for his own residence, only one
house of his own choice is treated as self-occupied and all the other houses are
deemed to be let out. The tax exemption applies only in the case of on self-
occupied house and not in the case of deemed to be let out properties. Care
should, therefore, be taken while selecting the house( One which is having
higher GAV normally after looking into further details ) to be treated as self-
occupied in order to minimize the tax liability.

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2.As interest payable out of India is not deductible if tax is not deducted at
source (and in respect of which there is no person who may be treated as an
agent u/s 163), care should be taken to deduct tax at source in order to avail
exemption u/s 24(b).

3.As amount of municipal tax is deductible on “payment” basis and not on

“due” or “accrual” basis, it should be ensured that municipal tax is actually paid
during the previous year if the assessee wants to claim the deduction.
4.As a member of co-operative society to whom a building or part thereof is
allotted or leased under a house building scheme is deemed owner of the
property, it should be ensured that interest payable (even it is not paid) by the
assessee, on outstanding installments of the cost of the building, is claimed as
deduction u/s 24.

5.If an individual makes cash a cash gift to his wife who purchases a house
property with the gifted money, the individual will not be deemed as fictional
owner of the property under section 27(i) – K.D.Thakar vs. CIT. Taxable
income of the wife from the property is, however, includible in the income of
individual in terms of section 64(1)(iv), such income is computed u/s 23(2), if
she uses house property for her residential purposes. It can, therefore, be
advised that if an individual transfers an asset, other than house property, even
without adequate consideration, he can escape the deeming provision of section
27(i) and the consequent hardship.

6.Under section 27(i), if a person transfers a house property without

consideration to his/her spouse(not being a transfer in connection with an
agreement to live apart), or to his minor child(not being a married daughter), the
transferor is deemed to be the owner of the house property. This deeming
provision was found necessary in order to bring this situation in line with the

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provision of section 64. But when the scope of section 64 was extended to cover
transfer of assets without adequate consideration to son’s wife or minor
grandchild by the taxation laws(Amendment) Act 1975, w.e.f. A.Y. 1975-76
onwards the scope of section 27(i) was not similarly extended. Consequently, if
a person transfers house property to his son’s wife without adequate
consideration, he will not be deemed to be the owner of the property u/s 27(i),
but income earned from the property by the transferee will be included in the
income of the transferor u/s 64. For the purpose of sections 22 to 27, the
transferee will, thus, be treated as an owner of the house property and income
computed in his/her hands is included in the income of the transferor u/s 64.
Such income is to be computed under section 23(2), if the transferee uses that
property for self-occupation. Therefore, in some cases, it is beneficial to transfer
the house property without adequate consideration to son’s wife or son’s minor
child.

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 References
Books:

 T. N. Manoharan (2007), Direct Tax Laws (7th edition), Snowwhite Publications

P.Ltd., New Delhi.

 Dr. Vinod K. Singhania (2007), Students Guide to Income Tax, Taxman Publications,

New Delhi

 Income Tax Ready Reckoner – A.Y. 2007-08, TaxMann Publications, New Delhi

Websites:

 http://in.taxes.yahoo.com/taxcentre/ninstax.html

 http://in.biz.yahoo.com/taxcentre/section80.html

 http://www.bajajcapital.com/financial-planning/tax-planning

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