A Dissertation: Submitted in Partial Fulfilment of The Requirements For The Degree of

A STUDY ON INCOME TAX PLANNING IN INDIA WITH RESPECT TO
INDIVIDUAL ASSESSEE
A Dissertation
Submitted in partial fulfilment
of the requirements for
the Degree of
Masters in Business Administration in Financial Management
Under the Guidance of: Submitted By:
CA Madhusudan Agrawal Sandeep Barik
Dept. of MBA(FM) S17MBF102,MBA(FM)
DEPARTMENT OF ECONIMICS
SAMBALPUR UNIVERSITY
JYOTI VIHAR, BURLA-768019, ODISHA.
PHONE: 0663-2422137, EMAIL:HTTP://WWW.SUNIV.AC.IN

DECLARATION
I hereby declare that this project report titled, Income Tax Planning in India with
respect to Individual Assessee submitted by me to the Department of MBA(FM) at
Sambalpur University, is a bonafide work undertaken by me and it is not submitted to any
other University or Institute for the Award of any degree diploma/certificate or published
any time before.
Date: (Sandeep Barik)

ACKNOWLEDGEMENT
A work well begun is half done. These encouraging words from my project supervisor
and guide led me to churn out this concise yet comprehensive study.
I sincerely thank Shri CA Madhusudan Agrawal, Faculty, Department of MBA(FM) at

Sambalpur University, for his support and guidance all through this study and for his
unbiased feedback on my presentations all through the MBA course.
I extend my sincere gratitude to all the members of Department of Business Management

for extending their co-operation for successful completion of my project.
This project would not have been possible without the regular reading of Tax Columns
from the business related newspapers; hence, I am thankful to all the authors who
contributed such informative articles which helped me accomplish my this assignment.
Heartfelt thanks to my parents and all my well wishers who made this project possible.
Your contributions have been immensely helpful.
Date: (Sandeep Barik)

INDEX
TABLE OF CONTENTS
1. List of Tables.............................................................................................................i
2. Introduction..............................................................................................................2
3. An Extract from Income Tax Act, 1961...................................................................4
4. Computation of Total Income..................................................................................8
5. Deductions from Taxable Income..........................................................................27
6. Computation of Tax Liability.................................................................................31
7. Tax Planning - Recommendations and Useful Tips...............................................35
8. Conclusion……………………………………………………………………….52
9. Bibliography..........................................................................................................53
List of Tables
 Table 1: Tax Rates for A.Y. 2019-20 - For Resident Male and Female Individuals
(below 60 years of age at any time during the F.Y. 2018-19)…………………..31
 Table 2: Tax Rates for A.Y. 2019-20 - For Resident Senior Citizens (who are above 60
years but less than 80years at any time during the F.Y.2018-19).................................32
 Table 3:Tax Rates for A.Y.2019-20- For Resident Senior Citizens(above 80years of
age at any time during the F.Y.2018-19)…………………………………………32
 Table 4: Sample Tax Liability Calculations - For Resident Male and Female
Individuals (below 60 years of age).............................................................................33
 Table 5: Sample Tax Liability Calculations - For Resident Senior Citizens (above
60years but below 80 years age at any time during F.Y. 2018-19)..............................33
 Table 6 : Sample Tax Liability Calculations - For Resident Senior Citizens (above
80)years age at any time during F.Y. 2018-19)............................................................34
 Table 7: Tax Planning Tools Mix by age group...........................................................37
 Table 8: Term Plan Returns Comparison.....................................................................41
 Table 9: Traditional Endowment Plan Returns............................................................43
CHAPTER 1
INTRODUCTION
 Abstract
 Need for Study
 Objectives
 Scope & Limitations
Abstract
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 2019-20.
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, 2018 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.
Need for Study

In last some years of my career and education, I have seen my colleagues and faculties
grappling with the taxation issue and complaining against the tax deducted by their
employers from monthly remuneration. Not equipped with proper knowledge of taxation
and tax saving avenues available to them, they were at mercy of the HR/Admin
departments which never bothered to do even as little as take advise from some good tax
consultant.
This prodded me to study this aspect leading to this project during my MBA course with
the university, hoping this concise yet comprehensive write up will help this salaried
individual assessee class to save whatever extra rupee they can from their hard-earned
monies.
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Objectives
 To study taxation provisions of The Income Tax Act, 1961 as amended by Finance
Act, 2018.
 To explore and simplify the tax planning procedure from a layman’s perspective.
 To present the tax saving avenues under prevailing statures.
Scope & Limitations

 This project studies the tax planning for individuals assessed to Income Tax.
 The study relates to non-specific and generalized tax planning, eliminating the need
of sample/population analysis.
 Basic methodology implemented in this study is subjected to various pros & cons,
and diverse insurance plans at different income levels of individual assessees.
 This study may include comparative and analytical study of more than one tax saving
plans and instruments.
 This study covers individual income tax assessees only and does not hold good for
corporate taxpayers.
 The tax rates, insurance plans, and premium are all subject to FY 2018-19 only.
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CHAPTER 2
AN EXTRACT FROM INCOME TAX ACT, 1961
 Tax Regime in India
 Chargeability of Income Tax
 Scope of Total Income
 Total Income
 Concepts used in Tax Planning
o Tax Evasion
o Tax Avoidance
o Tax Planning
o Tax Management
 The Income Tax Equation
Tax Regime in India
The tax regime in India is currently governed under The Income Tax, 1961 as amended
by The Finance Act, 2018 notwithstanding any amendments made thereof by recently
announced Union Budget for assessment year 2019-20.
Chargeability of Income Tax
As per Income Tax Act, 1961, income tax is charged for any assessment year at
prevailing rates in respect of the total income of the previous year of every person.
Previous year means the financial year immediately preceding the assessment year.
Scope of Total Income
Under the Income Tax Act, 1961, total income of any previous year of a person who is a
resident includes all income from whatever source derived which:
 is received or is deemed to be received in India in such year by or on behalf of such
person; or
 accrues or arises or is deemed to accrue or arise to him in India during such year; or
 accrues or arises to him outside India during such year:
Provided that, in the case of a person not ordinarily resident in India, the income which
accrues or arises to him outside India shall not be included unless it is derived from a
business controlled in or a profession set up in India.
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Total Income
For the purposes of chargeability of income-tax and computation of total income, The
Income Tax Act, 1961 classifies the earning under the following heads of income:
 Salaries
 Income from house property
 Capital gains
 Profits and gains of business or profession
 Income from other sources
Concepts used in Tax Planning
Tax Evasion
Tax Evasion means not paying taxes as per the provisions of the law or minimizing tax by
illegitimate and hence illegal means. Tax Evasion can be achieved by concealment of
income or inflation of expenses or falsification of accounts or by conscious deliberate
violation of law.
Tax Evasion is an act executed knowingly willfully, with the intent to deceive so that the
tax reported by the taxpayer is less than the tax payable under the law.
Example: Mr. A, having rendered service to another person Mr. B, is entitled to receive a
sum of say Rs. 50,000/- from Mr. B. A tells B to pay him Rs. 50,000/- in cash and thus
does not account for it as his income. Mr. A has resorted to Tax Evasion.
Tax Avoidance
Tax Avoidance is the art of dodging tax without breaking the law. While remaining well
within the four corners of the law, a citizen so arranges his affairs that he walks out of the
clutches of the law and pays no tax or pays minimum tax. Tax avoidance is therefore
legal and frequently resorted to. In any tax avoidance exercise, the attempt is always to
exploit a loophole in the law. A transaction is artificially made to appear as falling
squarely in the loophole and thereby minimize the tax. In India, loopholes in the law,
when detected by the tax authorities, tend to be plugged by an amendment in the law, too
often retrospectively. Hence tax avoidance though legal, is not long lasting. It lasts till the
law is amended.
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Example: Mr. A, having rendered service to another person Mr. B, is entitled to receive a
sum of say Rs. 50,000/- from Mr. B. Mr. A’s other income is Rs. 200,000/-. Mr. A tells
Mr. B to pay cheque of Rs. 50,000/- in the name of Mr. C instead of in the name of Mr. A.
Mr. C deposits the cheque in his bank account and account for it as his income. But Mr. C
has no other income and therefore pays no tax on that income of Rs. 50,000/-. By
diverting the income to Mr. C, Mr. A has resorted to Tax Avoidance.
Tax Planning
Tax Planning has been described as a refined form of ‘tax avoidance’ and implies
arrangement of a person’s financial affairs in such a way that it reduces the tax liability.
This is achieved by taking full advantage of all the tax exemptions, deductions,
concessions, rebates, reliefs, allowances and other benefits granted by the tax laws so that
the incidence of tax is reduced. Exercise in tax planning is based on the law itself and is
therefore legal and permanent.
Example: Mr. A having other income of Rs. 200,000/- receives income of Rs. 50,000/-
from Mr. B. Mr. A to save tax deposits Rs. 60,000/- in his PPF account and saves the tax
of Rs. 12,000/- and thereby pays no tax on income of Rs. 50,000.
Tax Management
Tax Management is an expression which implies actual implementation of tax planning

ideas. While that tax planning is only an idea, a plan, a scheme, an arrangement, tax
management is the actual action, implementation, the reality, the final result.
Example: Action of Mr. A depositing Rs. 60,000 in his PPF account and saving tax of
Rs. 12,000/- is Tax Management. Actual action on Tax Planning provision is Tax
Management.
To sum up all these four expressions, we may say that:

 Tax Evasion is fraudulent and hence illegal. It violates the spirit and the letter of the
law.
 Tax Avoidance, being based on a loophole in the law is legal since it violates only the
spirit of the law but not the letter of the law.
 Tax Planning does not violate the spirit nor the letter of the law since it is entirely
based on the specific provision of the law itself.
 Tax Management is actual implementation of a tax planning provision. The net result
of tax reduction by taking action of fulfilling the conditions of law is tax
management.
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The Income Tax Equation:
For the understanding of any layman, the process of computation of income and tax
liability can be outlined in following five steps. This project is also designed to follow the
same.
 Calculate the Gross total income deriving from all resources.

 Subtract all the deduction & exemption available.
 Applying the tax rates on the taxable income.
 Ascertain the tax liability.
 Minimize the tax liability through a perfect planning using tax saving schemes.
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CHAPTER 3
COMPUTATION OF TOTAL INCOME
 Income from Salaries
 Income from House Property
 Capital Gains
 Profits and Gains of Business or Profession
 Income from Other Sources
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.
8
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 thereto;
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.
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:
9
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.
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.
Incomes Excluded from House Property Income:
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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.
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:
11
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.
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 5
years from the end of the financial year in which capital was borrowed the maximum
deduction for interest shall be Rs. 2,00,000. 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.
The deduction for interest u/s 24(1) is allowable as under:
i. Self-occupied property: deduction is restricted to a maximum of Rs. 2,00,000 for

property acquired or constructed with funds furrowed on or after 1.4.1999 within 5 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.
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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.
2,00,000. 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.
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;
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 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;
 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.
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:
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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 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.
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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.
Where capital asset became the property of the assessee before 1.4.2001, he has an option
to adopt the fair market value of the asset as on 1.4.2001, 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 1.4.2001, is to be considered and that incurred before 1.4.2001 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.
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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.
 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
17
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, 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.
18
 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.
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
19
the head ‘capital gains’ or is received as compensation from the multilateral fund of
the Montreal Protocol on Substances that Deplete the Ozone Layer.
 Any sum received under a Keyman Insurance Policy referred to u/s 10(10D).
 Any allowance or deduction allowed in an earlier year in respect of loss, expenditure
or trading liability incurred by the assessee and subsequently received by him in cash
or by way of remission or cessation of the liability during the previous year.
 Profit made on sale of a capital asset for scientific research in respect of which a
deduction had been allowed u/s 35 in an earlier year.
 Amount recovered on account of bad debts allowed u/s 36(1) (vii) in an earlier year.
 Any amount withdrawn from the special reserves created and maintained u/s 36 (1)
(viii) shall be chargeable as income in the previous year in which the amount is
withdrawn.
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.
 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
20
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.
 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 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.
21
 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 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.
22
 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
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.
23
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.
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;
24
(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.
(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.
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.
25
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.
26
CHAPTER 4
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
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. 1,50,000 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.
Notes for Section 80C
27
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. 1,00,000/-
Deduction under section 80D

Deduction in respect of Medical Insurance Premium
Deduction is allowed for any medical insurance premium under an approved 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
Deduction= Rs 15000 maximum(for senior citizens additional Rs 5000).
In case of an HUF – insurance on the health of any member of the family
Amount of deduction: Rs. 15000( in case senior citizen additional Rs 5000).
Deduction under section 80DD

Deduction in respect of maintenance including medical treatment of handicapped
dependent:
28
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 (in case of disability >40%)
and Rs 1,00,000( disability>80%) 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. 4,000, the
deduction allowable for A.Y. 2019-20, 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 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.
2019-20, 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: No limit on deduction and Deduction shall be allowed for 8
consecutive years starting from the year in which interest was first paid.
Deduction under section 80G
29
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.
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 1,50,000 in A.Y. 2019-20.
30
CHAPTER 5
COMPUTATION OF TAX LIABILITY
 Tax Rates for A.Y. 2019-20

 Sample Tax Liability Calculations
 Filing of Income Tax Return
Tax Rates for A.Y. 2019-20

Following rates are applicable for computing tax liability for the current Financial Year ending
on March 31 2018, (Assessment Year 2019-20).
Table 1: For Resident Male & Female Individuals (below 60 years of age)
Income Tax Slab Tax Rate Plus Surcharge Plus Education Cess
Up to Rs. 2,50,000 Nil Nil Nil
Rs. 2,50,001 to
5% Nil 4% of Income Tax
Rs. 5,00,000
Rs. 5,00,001 to 12,500+20% of TI >
Nil 4% of Income Tax
Rs. 10,00,000 5,00,000
1,12,500 +30% of TI 10%( if 50 lacs to 1cr) 4% of Income Tax and

Above Rs. 10,00,000
>10,00,000 15%(if above 1 cr) surcharge
31
Table 2: For Resident Senior Citizens 60-80 years of age
Rs. 3,00,,001 to
Rs. 5,00,000
Rs. 5,00,001 to 10,000+20% of TI >
Nil 4% of Income Tax
Rs. 10,00,000 5,00,000

Above Rs. 10,00,000
Table 3: For Resident Senior Citizens (who are 80 years or more at any time during the
Financial Year 2018-19)
Rs. 5,00,001 to
Rs. 10,00,000

Above Rs. 10,00,000
.
32
Sample Tax Liability Calculations
Table 4: For Resident Individuals below 60 years of age
Annual Taxable Income Income Tax Surcharge Education Cess Total
110000 0 0 0 0
250000 0 0 0 0
300000 0 0 0 0
400000 0 0 0 0
500000 0 0 0 0
1000000 112500 0 4500 117000
60,00,000 1612500 161250 70950 1844700
Table 5: For Resident Senior Citizen (60-80) years of age

110000 0 0 0 0
250000 0 0 0 0
300000 0 0 0 0
600000 30000 0 1200 31200
800000 70000 0 2800 72800
1000000 110000 0 4400 114400
60,00,000 1610000 161000 70840 1841840
33
Table 6: For Resident Senior Citizens (over 80 years age at any time during F.Y. 2018-19)
110000 0 0 0 0
250000 0 0 0 0
500000 0 0 0 0
600000 20000 0 800 20800
800000 60000 0 2400 62400
1000000 100000 0 4000 104000
60,00,000 1600000 160000 70400 1830400
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. 2,00,000 for
Resident Individual, Rs. 3,00,000 for Senior Citizens(60-80years) and Rs. 5,00,000 for
senior citizen(above 80years).
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
34
CHAPTER 6
TAX PLANNING - RECOMMENDATIONS AND USEFUL TIPS
 Tax Planning
 Tax Planning Tools
 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
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.
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
35
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.
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
36
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).
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 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
37
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.
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.
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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 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.
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.
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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.
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.
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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.
Cover yourself with a term plan

Table 7: Term Plan Returns Comparison
Tenure (Years)
HDFC Standard Life ICICI Prudential LIC (Anmol SBI Life Kotak Mahindra Old
(Term Assurance) (Life Guard) Jeevan I) (Shield) Mutual (Preferred
Term plan)
Tenure 20 25 30 20 25 30 20 25 30 20 25 30 20 25 30
Age 25 2,720 2,770 2,820 2,977 2,977 3,150 2,544 2,861 NA 1,954 2,180 NA 2,424 2,535 2,755
Age 35 3,580 4,120 4,750 4,078 4,900 NA 4,613 5,534 NA 3,542 4,375 NA 3,747 4,188 4,739
Age 45 7,620 NA NA NA NA NA NA NA NA 8,354 NA NA 7,797 8,970 NA
 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.
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).
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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 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.
Table 8: Traditional Endowment Plan Returns

Age Sum Assured Premium (Rs) Tenure Maturity Amount Actual rate of
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(Yrs) (Rs) (Yrs) (Rs)* return (%)
Company A 30 1,000,000 65,070 15 1,684,000 6.55
Company B 30 1,000,000 65202 15 1,766,559 7.09
 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).
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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, 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.
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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.
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.
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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.
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 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
46
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.
Capital Gains Head: The following propositions should be borne in mind
1. Since long-term capital gains bear lower tax, taxpayers should so plan as to transfer their
capital assets normally only 36 months after acquisition. It is pertinent to note that if capital asset
is one which became the property of the taxpayer in any manner specified in section 49(1), the
period for which it was held by the previous owner is also to be counted in computing 36
months.
2. The assessee should take advantage of exemption u/s 54 by investing the capital gain
arising from the sale of residential property in the purchase of another house (even out of India)
within specified period.
3. In order to claim advantage of exemption under sections 54B and 54D it should be
ensured that the investment in new asset is made only after effecting transfer of capital assets.
4. In order to claim advantage of exemption under sections 54, 54B, 54D, 54EC, 54ED,
54EF, 54G and 54GA the tax payer should ensure that the newly acquired asset is not transferred
within 3 years from the date of acquisition. In this context, it is interesting to note that the
transfer (one year in the case of section 54EC) of a newly acquired asset according to the modes
mentioned in section 47 is not regarded as “transfer” even for this purpose. Consequently, newly
acquired assets may be transferred even within 3 years of their acquisition according to the
modes mentioned in section 47 without attracting the capital tax liability. Alternatively, it will be
advisable that instead of selling or converting assets acquired under sections 54, 54B, 54D, 54F,
54G and 54GA into money, the taxpayer should obtain loan against the security of such asset
(even by pledge) to meet the exigency.
5. In 2 cases, surplus arising on sale or transfer of capital assets is chargeable to tax as short-
term capital gain by virtue of section 50. These cases are: (i) when WDV of a block of assets is
reduced to nil, though all the assets falling in that block are not transferred, (ii) when a block of
assets ceases to exist.
Tax on short-term capital gain can be avoided if –

Another capital asset, falling in that block of assets is acquired at any time during the previous
year; or
Benefit of section 54G is availed
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Tax payers desiring to avoid tax on short-term capital gains under section 50 on sale or transfer
of capital asset, can acquire another capital asset, falling in that block of assets, at any time
during the previous year.
6. If securities transaction tax is applicable, long term capital gain tax is exempt from tax by
virtue of section 10(38). Conversely, if the taxpayer has generated long-term capital loss, it is
taken as equal to zero. In other words, if the shares are transferred, in national stock exchange,
securities transaction tax is applicable and as a consequence, the long-term capital loss is
ignored. In such a case, tax liability can be reduced, if shares are transferred to a friend or a
relative outside the stock exchange at the market price (securities transaction tax is not applicable
in the case of transactions not recorded in stack exchange, long term loss can be set-off and the
tax liability will be reduced). Later on, the friend or relative, who has purchased shares, may
transfer shares in a stock exchange.
Clubbed Incomes Head: The following propositions should be borne in mind

1. Under section 64(1) (ii), salary earned by the spouse of an individual from a concern in
which such individual has a substantial interest, either individually or jointly with his relatives, is
taxable in the hands of the individual. To avoid this clubbing, as far as possible spouse should be
employed in which employee does not have any interest. In such a case this section will not be
attracted, even if a close relative of the individual has substantial interest in the concern.
Alternatively, the spouse may be employed in a concern which is inter related with the concern
in which the individual has substantial interest.
2. Income from property transferred to spouse is clubbed in the hands of transferor.

However, it has been held that income from savings out of pin money (i.e., an allowance given to
wife by husband for her dress and usual house hold expenditure) is not included in the taxable
income of husband. Likewise, a pre-nuptial transfer (i.e., transfer of property before marriage) is
outside the mischief of section 64(1) (iv) even if the property is transferred subject to subsequent
condition of marriage or in consideration of promise to marry. Consequently income from
property transferred without consideration before marriage is not clubbed in the income of the
transferor even after marriage. Income from property transferred to spouse in accordance with an
agreement to live apart, is not clubbed in the hands of transferor. It may be noted that the
expression “ to live apart” is of wider connotation and covers even voluntary agreement to live
apart.
3. Exchange of asset between one spouse and another is outside the clubbing provisions if
such exchange of assets is for adequate consideration. The spouse within higher marginal tax rate
can transfer income yielding asset to other spouse in exchange of an equal value of asset which
does not yield any income. For instance, X (whose marginal rate of tax is 33.66%) can transfer
fixed deposit in a company of Rs.100,000 bearing 9% interest, to Mrs. X (whose marginal tax is
nil) in exchange of gold of Rs.100,000; he can reduce his tax bill by Rs. 3029(i.e., 0.3366 x 0.09
x Rs 100000) without attracting provisions of section 64.
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4. Provisions of section 64 (1) (vi) are not attracted if property is transferred by an
individual to his son in law or daughter in law of his brother.
5. If trust is created for the benefit of minor child and income during minority of the child is
being accumulated and added to corpus and income such increased corpus is given to the child
after his attaining majority, the provisions of section 64 (IA) are not applicable.
6. Explanation 3 to section 64 (1) lays down the method for computing income to be
clubbed on the basis of value of assets transferred to the spouse as on the first day of the previous
year. This offers attractive approach for minimizing income to be clubbed by transfers for
temporary periods during the course of the previous year.
7. If a trust is created by a male member to settle his separate property thereon for the
benefit of HUF, with a stipulation that income shall accrue for a specified period and the corpus
going to the trust afterwards, provisions of section 64 are not attracted.
8. If gifts are made by HUF to the wife, minor child, or daughter in law of any of its male or
female members (including karta), provisions of section 64 are not attracted.
9. If an individual transfers property without adequate consideration to son’s wife, income

from the property is always clubbed in the hands of the transferor. If, however, an individual
transfer’s property without consideration to his HUF and the transferred property is subsequently
partitioned amongst the members of the family, income derived from the transferred property, as
is received by son’s wife, is not clubbed in the hands of the transferor. It may be noted that
unequal partition of property amongst family members is not rare under the Hindu law and it
does not amount to transfer as generally understood under law, and, consequently, if, at the time
of partition, greater share is given out of the transferred property to son’s wife or son’s minor
child, the transaction would be outside the scope of section 64 (1) (vi) and 64 (2)(c).
10. In cases covered in section 64, income arising to the transferee, from property transferred
without adequate consideration, is taxable in the hands of transferor. However, income arising
from the accretion of such transferred assets or from the accumulated income cannot be clubbed
in the hands of the transferor.
11. A loan is not a “transfer” for the purpose of section 64.
12. Where the assessee withdrew funds lying in capital account of firm in which he was a
partner and advanced the same to his HUF which deposited the said funds back into firm, the
said loan by the assessee to his HUF could not be treated as a transfer for the purpose of section
64 and income arising from such deposits was not assessable in the hands of the assessee.
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Business and Profession head: The following propositions should be borne in mind to save tax.
1. The Company is defined under section 2(17) as to mean the following:
 any Indian Company ; or

 any body corporate incorporated under the laws of a foreign country ; or
 any institution, association or a body which is assessed or was assessable/ assessed as a
company for any assessment year commencing on or before April 1, 1970; or
 any institution, association or a body, whether incorporated or not and whether
Indian or non Indian, which is declared by general or special order of the CBDT to be a
company.
2. An Indian Company means a company formed and registered under the companies’ act
1956.
3. Domestic Company means an Indian company or any other company which, in respect
Of its income liable to tax under the Act, has made prescribed arrangements for the
declaration and payment of dividends within India in accordance with section194.
4. Arrangement for declaration and payment of dividend: Three requirements are to be satisfied
cumulatively by a company before it can be said to be a company which has made the necessary
arrangements for the declaration and payment of dividends in India within the meaning of
section 194:
a. The share register of the company for all share holders should be regularly maintained
at its principal place of business in India, in respect of any assessment year, at least from
April 1 of the relevant assessment year.
b. The general meeting for passing of accounts of the relevant previous year and the
declaring dividends in respect therefore should be held only at a place within India.
c. The dividends declared, if any, should be payable only at a place within India to all
share holders
5. A Foreign company means a company which is not a domestic company.
6. Industrial company is a company which is mainly engaged in the business of generation or

distribution of electricity or any other form of power or in the construction of ships or in the
manufacture or processing of goods or in mining.
50
CONCLUSION
At the end of this study, we can say that given the rising standards of Indian individuals and
upward economy of the country, prudent tax planning before-hand is must for all the citizens to
make the most of their incomes. However, the mix of tax saving instruments, planning horizon
would depend on an individual’s total taxable income and age in the particular financial year.
51
BIBLIOGRAPHY
Books:
 CA Pankaj Saraogi (2015), Direct Tax Laws (Third Edition), KGC Proeducation Pvt.
Ltd.,Delhi.
 V.P. Gaur(2016), Students Guide to Income Tax, Kalyani Publications, Ludhiana
Websites:
i. http://www.bajajcapital.com/financial-planning/tax-planning
ii. http://taxguru.in
iii. http://cleartax.in
iv. www.incometaxmanagement.com
52

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A STUDY ON INCOME TAX PLANNING IN INDIA WITH RESPECT TO

Under the Guidance of: Submitted By:

CA Madhusudan Agrawal Sandeep Barik

Dept. of MBA(FM) S17MBF102,MBA(FM)

JYOTI VIHAR, BURLA-768019, ODISHA.

PHONE: 0663-2422137, EMAIL:HTTP://WWW.SUNIV.AC.IN

Date: (Sandeep Barik)

I sincerely thank Shri CA Madhusudan Agrawal, Faculty, Department of MBA(FM) at

I extend my sincere gratitude to all the members of Department of Business Management

Date: (Sandeep Barik)

Need for Study

Scope & Limitations

Tax Regime in India

Chargeability of Income Tax

Concepts used in Tax Planning

Tax Management is an expression which implies actual implementation of tax planning

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

 Calculate the Gross total income deriving from all resources.

Income from Salaries

Incomes termed as Salaries:

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

Salary is chargeable to income-tax on due or paid basis, whichever is earlier.

Salary arrears are taxable in the year in which it is received.

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

Profits in lieu of salary:

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

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

House Rent Allowance (HRA):

Income from House Property

Incomes Termed as House Property Income:

Incomes Excluded from House Property Income:

Annual Value of Let-out Property:

Deductions from House Property Income:

Deduction of House Tax/Local Taxes paid:

Other than self-occupied properties

Interest on Borrowed Capital:

Amounts not deductible from House Property Income:

Expenditures not specified as specifically deductible. For instance, no deduction can be

Self Occupied Properties

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

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

i. Self-occupied property: deduction is restricted to a maximum of Rs. 2,00,000 for

Transfers Resulting in Capital Gains

 Sale or exchange of assets;

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

Classification of Capital Gains:

Short Term Capital Gain:

Long Term Capital Gain:

Period of Holding a Capital Asset:

Computation of Capital Gains:

Full Value of Consideration:

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

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

Cost of improvement means all capital expenditure incurred in making additions or

Indexed cost of Acquisition/Improvement: