Tax Planning for Year 2010

Following are some of the best tax saving investment options for the current assessment
year [AY 2010-2011]

It is generally observed that during the last few months of a financial year people make last
moment impulsive decisions to invest in tax saving instruments. In the process they may end up
buying products that are actually not right for them. Tax planning is something that needs to be
done a few months in advance so that one has ample time to understand & evaluate different
options available to suit his/her financial situation. You can begin yourtax planning now for the
Assessment Year 2010-11.

Following are a few simple tips for planning your taxes for this financial year:

I. Utilize the Income Tax exemptions

Section 80C
Under this section one can claim up to Rs. 1 lakh in deductions. The options in this section
include

 Employee Provident Fund (EPF),

 Public Provident Fund (PPF) - up to Rs.70, 000 per annum,
 National Savings Certificate (NSC),
 5-year bank fixed deposits,
 Life insurance policies,
 Equity-Linked Savings Schemes (ELSS),
 Unit Linked Insurance Plans (ULIPs),
 School fees, and
 Home loan principal repayment.

In order to make investments in this section one needs to decide on the ideal debt vs. equity mix
which is right based on factors like age, risk-return profile & goals.

Section 80D
One can claim deductions up to Rs 15,000 incase you have taken a medical insurance plan for
yourself or your spouse or dependant parents or children (and an additional Rs.15, 000 for your
parents' medical insurance) under Section 80D for premiums paid. This limit has now been
enhanced to Rs 20,000 for senior citizens on the condition that the premiums are paid via cheque.

Section 80DD
Under Section 80DD, expenses related to the medical treatment of a dependent having disability
qualifies for tax benefits. This section allows deductions up to Rs. 50,000 or 75, 000 to be
claimed depending on the severity.

II. Interest on home loan

Interest component of a home loan is allowed as a deduction under the head ‘income from house
property' U/s 24(b) up to a limit of Rs 1.5 lakhs a year for a self-occupied house. The claim can
also be made on loans taken for repair, renewal or reconstruction of an existing property.

III. Shuffle and switch strategy

Shuffling is a popular strategy that is used by ELSS [Equity Linked Savings Scheme] investors.
They have a mandatory lock-in period of 3 years. Incase you have been investing an amount Rs
50,000 for last few years but don't have cash to invest this year, then you can easily redeem the
investments made 3 years ago and re-invest that amount this year so as to claim the benefits. You
need not pay any long term capital gains as you will be redeeming after more than one year.
Hence you will be enjoying tax benefits without making any fresh investments. The only risk
here is the NAV that can go up or down in the shuffle process which may lead to a small profit
or loss.

Some fund houses also allow switch option for tax benefits. Suppose an investor with previous
ELSS investments doesn't have the money to make further investment in current financial year.
In such a case, he can consider switching it to a liquid fund and then back into the ELSS fund
within a short period of time like 10-15 days to avail the tax benefits.

IV. Tax smart charitable donations

You can get a tax relief if you donate to institutions that are approved U/s 80G of the Income
Tax Act. The rate of deduction is either 50 or 100 %, depending upon the type of the charity
fund. There is no upper limit on the amount given to a charity. However, donations should be
made only to the specified trusts and only donations of up to 10 per cent of the total income
qualify for such deduction. Please note that tax exemption is only an added advantage of charity
and this should not be the primary reason for doing so.

V. Divide your income

Generally, if you invest either in your wife's or child's name, then the income generated from
these investments will be clubbed with your income & taxed accordingly. But, if you transfer
money by way of a deed to a child who is a major i.e. over 18 years of age and invest in his
name, then the income generated from this investment will not be clubbed with your income.
Instead, it will be clubbed with the income of your child/wife and will be taxed accordingly.
Cash gifts that are received from specified relatives are tax exempt and there is no upper limit.
Also, cash gifts of any amount from anyone received during child birth, marriage or any other
specified event are totally tax-exempt. But, any cash that is received from a non-relative where
the value of gift is in excess of Rs 50,000 in a particular year will be considered as income and
taxed accordingly.

In a nutshell remember the following:

 Combine Tax Planning with your Financial Plan for the year so that the products which
you invest in will match your risk profile as well as your future goals
 There's no need to consider a home loan as a bad debt. Consider getting a loan for buying
a home.
 Charity is good for both – the receiver as well as the giver. Do check on the validity and
the receipts before claiming deduction u/s 80G
  Take advantage of the tax benefits under sections 80C, 80D and 80DD
 Insurance policies provide tax benefits on the premiums paid as well as on the returns
received.
 By way of medical insurance, you not only take care of your family against medical
expenses, but also receive a tax deduction u/s 80D
 Remember to file taxes on time

SUMMARY OF IMPORTANT INCOME TAX PROVISIONS 2010-2011

Finance Minister Pranab Mukherjee took the first step towards implementation of the Direct
Taxes Code (DTC) on Friday. While retaining the basic exemption limits for all income levels
(as in the DTC), he increased the other slabs. For instance, while the basic exemption limit for
individuals has been retained at Rs 1.6 lakh, the 10 per cent rate will now be applicable for the
Rs 1.6 lakh-Rs 5 lakh bracket. Earlier, the 10 per cent rate was applicable for income of Rs 1.6-
Rs 3 lakh. The hike in the slab means that the taxpayer is going to save Rs 20,600 for incomes up
to Rs 5 lakh.

Further, he has also increased the limit for the next income slab — that is, the 20 per cent tax rate
will be applicable for incomes of Rs 5 lakh-Rs 8 lakh instead of Rs 3 lakh-Rs 5 lakh. And the
highest rate of 30 per cent will be applicable on incomes of over Rs 8 lakh (earlier Rs 5 lakh).

The maximum benefit that will come because of the increase in slabs would be Rs 51,500. “With
the consumer inflation index rising at 14.97 per cent (December-end), this move will help reduce
some of the burden by leaving more cash at the individual’s hands,” said a financial planner.

New tax rate for individuals

In addition, the finance minister has also increased the limit of investments under Section 80C by
Rs 20,000 — from Rs 1 lakh to Rs 1.2 lakh.

MORE DOUGH TO BLOW Figures in Rs

Particulars Men Women Senior Citizens
Threshold 160,000 190,000 240,000
exemption
Tax slabs 10% 160,001 to 190,001 to 240,001 to 500,000
500,000 500,000
20% 500,001 to 500,001 to 500,001 to 800,000
800,000 800,000
30% Above 800,000 Above 800,000 Above 800,000

However, the benefits will only be given to people who invest in infrastructure bonds. A separate
Section 80CCF has been introduced under which this benefit will come to the investor.
For the taxpayer in the higher income tax bracket, if one adds the tax benefit of Rs 51,500 with
the 80CCF benefit (Rs 6,180), the total reduction in the tax burden would be Rs 57,680.

On a total income of Rs 10 lakh there will be effective tax saving of Rs 57,680 to an individual.

Tax rates

Corporate, partnership firms continue to be taxed at 30%.

Surcharge on domestic companies proposed to be reduced from 10% to 7.5%.

Minimum Alternate Tax (MAT) rate proposed to be increased to 18% of book profits from 15%.

Charitable purpose liberalised

Carrying on of trade, commerce or business or rendering of service in relation thereto for

advancement of any other object of general public utility was hitherto not considered as
charitable purpose.

It is now proposed that receipts from such activities will be considered as charitable purpose so
long if total receipts from activity in the nature of / rendering of any service in relation to any
trade, commerce or business do not exceed Rs 10 lakh in the previous year.

[Effective Assessment Year 2009-2010 Onwards]

Taxation of fees for technical services in hands of NRIs

Amendment to replace explanation to section 9(1) that sought to overrule the interpretation laid
down by Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. Vs DIT
(2007) [288 ITR 408] which laid impetus on the place of rendition of services by non-residents
for being taxed in India.

The explanation is proposed to be amended to specifically provide that income shall be deemed
to accrue or arise in India to non-resident, irrespective of the place of rendering such services.

[Retrospective Effective From June 1, 1976 Onwards]

Tax holiday for SEZ units

Anomaly in method of computation of eligible profits as a proportion of export turnover to the

total turnover of the Special Economic Zone undertaking has been rectified retrospectively
effective from Assessment Year 2006-07.

Deduction in respect of long term infrastructure bonds

Deduction of Rs. 20,000 for subscription to investment in long term infrastructure bonds which
will be notified by Central Government.

This deduction will be over and above existing limit of Rs. 100,000 under section 80C, 80CCC
and 80CCD.

[Effective Assessment Year 2011-2012 Onwards]

Deduction for contribution to Central Government Health Scheme (CGHS)

Contribution made to CGHS for serving and retired Government servants allowed as deduction
under section 80D within the present limits of Rs. 15,000 and Rs. 20,000 for senior citizens.

[Effective Assessment Year 2011-2012 Onwards]

Enhancement of weighted deduction for in-house scientific research and development for
corporate covered under section 35(2AB)

The quantum of claiming a weighted deduction on the expenditure incurred on in-house

scientific research and development by corporate has been raised from 150% to 200% of such
expenditure.

[Effective Assessment Year 2011-12 Onwards]

Enhancement and extension of weighted deduction for payment made for scientific or
social or statistical research

The quantum of claiming a weighted deduction on the payment made to an approved research
association or college or university or institutions engaged in scientific research or research in
social science or statistical research has been raised from 125% to 175% times of such payment.

[Effective Assessment Year 2010-11 Onwards]

Exemption of income of approved association engaged in research of social or scientific

research

The income of association engaged in engaged in research of social or statistical research are
proposed to be made fully exempt from tax. Presently, only a scientific research association
enjoys exemption.

[Effective Assessment Year 2010-11 Onwards]

Investment linked tax incentive scheme to hotel industry

A deduction of 100% of capital expenditure (excluding land, goodwill, and financial instrument)
has been proposed to incentivise hotel industry for building and operating a new hotel of two star
or above category anywhere in India, which starts functioning after April1, 2010.

[Effective Assessment Year 2011-12 Onwards]

No disallowance if TDS deposited before filing of return of income

It is proposed that no disallowance of the expenditure which is subject to TDS provision will be
made, if after deduction of tax during the previous year, tax has been paid on or before the due
date of filing of return of income.

[Effective Assessment Year 2010-11 Onwards]

Increase in rate of interest for late deposit of TDS

The rate of interest on late deposit of tax deducted has been increased from 12% p.a. to 18% p.a.
with effect from July 1, 2010.

Clarification on fee for technical services in relation to exploration industry

It has been proposed to clarify where provision of technical services to a person in exploration
industry shall not be covered by presumptive tax provisions of section 44BB and will be taxed on
net or gross basis under section 44DA or 115A.

Other services in respect of exploration activities will be only covered by presumptive tax
provision.

[Effective Assessment Year 2011-12 Onwards]

Increase in limit of turnover/gross receipt for audit of account and presumptive taxation

Threshold limits for mandatory audit of accounts (See table):

BIGGER BITE FOR BUSINESSES

Particulars Existing pre-Budget Proposed post-Budget
Business turnover Rs 40 lakh Rs 60 lakh
Professional receipts Rs 10 lakh Rs 15 lakh
Penalty for failure to furnish Rs 1 lakh Rs 1.50 lakh
audit report if turnover beyond
the above threshold

Tax neutral conversion of a private company /unlisted companies into a Limited Liability
Partnership (‘LLP’)
Conversion of a private company /unlisted company with turnover not exceeding Rs 60 lakh into
a LLP is proposed to be tax neutral. Certain other conditions also to be satisfied. Provisions with
respect to losses, WDV, Cost of Acquisition introduced for successor LLP. MAT credit not
available to successor LLP. Breach of conditions results into deemed taxation in the hands of
successor LLP.

[Effective form ay 20011-12 onwards]

Anti-abuse provisions to provide share transfer without consideration or inadequate

consideration considered as income

Currently, gifts received by a firm/privately-held company are not taxable. Anti-abuse provisions
now provide taxation of receipt of shares held in privately held company by any firm/privately
held company from any person without consideration or for inadequate consideration.

Any receipt in the course of amalgamation, demerger or certain business reorganisation, is

excluded from the purview of such taxation.

This amendment is effective from June 1, 2010. It is further proposed that in case immovable
property is transferred for consideration irrespective of its adequacy, it shall not be taxable.

However, transfer of immovable property without consideration shall continue to be taxable.

Taxation of property for no/insufficient consideration to cover only capital assets. Therefore,
transfer of stock in trade, raw material and consumable stores not to be taxable in the hand of
Individual/HUF.

The tax officer would be able to refer to the valuation officer for determination of value of the
property transferred without consideration or for inadequate consideration.

Above amendments are effective from October 1, 2009.

Relief to housing projects pending for completion and to new housing projects

100% deduction on profits from a housing project is available if the project is completed within 4
years from the end of the financial year in which approval from local authority is obtained.

This period is proposed to be increased to 5 years.

Further, the current norm for maximum build area for each unit is enhanced from 5% of total
build up area or 2,000 sq ft to 3% of total built-up area or 5,000 sq ft, whichever is higher.

[Effective From Ay 2010-11 Onwards]

Relief to Hotel/convention centre pending for completion in National Capital Territory

Deduction to a Hotel/convention centre in National Capital Territory is available if it starts
functioning on or before March 31, 2010. In light of the fact that the Commonwealth Games
shall be held in October 2010, it is proposed that the deduction shall be available even if the
hotel/ convention centre starts functioning before July 31, 2010.

[Effective July 1, 2011 Onwards]

Rationalisation of provisions relating to tax deduction at source (‘TDS’)

Threshold for the purpose of deducting TDS has been increased with effect from July 1, 2010 in
view of rising inflation and reducing compliance burdens (See table 3).

LESS TDS Figures in Rs

Section Particulars of payment Existing threshold Proposed threshold
reference
194B Winnings for lottery or 5,000 10,000
crossword puzzle
194BB Winnings from horse race 2,500 5,000
194C Payment to contractor 20,000 (single) 30,000 (single)

50,000 (aggregate) 75,000 (aggregate)

194D Insurance commission 5,000 20,000
194H Commission or brokerage 2,500 5,000
194I Rent 1,20,000 1,80,000
194J Fees for professional or 20,000 30,000
technical services

Deductor and collector will continue to issue TDS/TCS certificate even after April 1, 2010.

HOW TO SAVE INCOME TAX THROUGH PLANNING

Taxpayers can lower the incidence of income tax by means of legal transfer of their sources of
income among family members, so that each unit of the family enjoys the basic personal income
tax exemption limit, which the Finance Bill 2008 has revised for financial year 2008-09 to Rs
150,000 for male individuals and HUFs; Rs 180,000 for resident women tax payers and Rs
225,000 for resident senior citizens.

The first step in tax saving through family tax planning is to adopt the concept of divide and rule.
The simple rule is that each family member must have his or her independent source of income
so as to legally become an independent tax payer under the provisions of the income tax law.
In case the entire income of a family belongs to just one member, the tax liability is much higher
than when the same income is spread among different members of the family.

Now, under the income tax law it is not possible to arbitrarily divide one's income amongst
different members of the family - and then pay lower tax in the names of different family
members. However, this goal can be achieved by intelligent use of the facility of gifts and
settlements.

Thus, for example, even if a taxpayer's parents are not paying income tax today but if they
receive some gift from friends or relatives or from anyone else in the world, the income so
generated would belong to them.

In this manner, independent income tax files can be started for different family members by
developing independent funds for each person through gifts thereby resulting in separate
independent sources of income which would then be taxed separately to income tax.

Once the income is spread among more people, chances are some of them would attract lower
rates of tax. Also, each one would then be entitled to independently claim exemptions,
deductions, rebates, etc.

Generally, any gift you receive from various members of your family and specified relatives is
not considered your income but a capital receipt. Thus, no income tax is payable on gifts
received from relatives - and also gifts received from parties other than relatives upto a sum of
Rs. 50,000 and at the time of marriage up to any amount.

Care should, however, be taken to ensure that any gift which is received should be a genuine one.
The person making the gift, called the donor, should have proof of his or her having the source
for making the gift.

The other important point to keep in mind in the case of gifts is that the provisions of Section 64
of Income Tax Act prohibit any direct or indirect transfer of funds between an assessee and
his/her spouse.

Thus, a husband should not make any gift to his wife; likewise, the wife should not make a gift
to her husband. If the gift is made between spouses, it would attract the provision of Section 64
and lead to clubbing of the incomes of the spouses.

To achieve the best results of gift, and to avoid clubbing of income, you may receive gift from
any relative other than your spouse, and, in the case of a daughter-in-law from her father-in-law.

A trust for minor children eliminates clubbing of income

The gifts made to a minor child would similarly result in clubbing of income. Hence, from the
point of view of tax planning a trust could be created for the welfare of the minor child with a
specific condition that no part of income should be spent on the minor child during the period of
minority.
If this simple technique is adopted then there will be no clubbing of income of the minor child
with the income of the parents. The clubbing provisions do not apply when you make gifts to
your major children.

Your major children are your great tax savers

All your major children can help you save your income tax. You can freely gift money to your
major children without attracting the payment of gift tax. This amendment makes it a good idea
to make liberal gifts to your major children so that the income, if any, arising from these
investments in years to come can be taxed in the hands of your major children.

For example, if you have fixed deposits let us say of Rs 20 lakh (Rs 2 million) and you have a
major son as well as a major daughter then it makes sense to gift away Rs 500,000 to each of
them.

After receiving the gift amount the children also make investment in bank fixed deposit and each
of them receives yearly interest of say, Rs. 45,000. On this amount the son as well as the
daughter will not pay income tax because the amount is below the exemption limits of Rs
150,000 and Rs. 180,000, respectively.

Thus your major children can now be great source of tax saving and you can enjoy the benefit of
lower income tax incidence in the family as a whole. If, however, due to some reasons you do
not feel inclined to make huge gifts to your major children, then you may give interest-free loans
to your major children so as to legally reduce your taxable income. It is lawful to grant interest-
free loans to your major children from your own funds.

Your parents and in-laws can save you taxes

Might sound incredible to most readers but the fact is that your own parents as well as your own
in-laws can become legal tools of tax planning for you and your family. If you want to achieve
this dictum then all you are requested to do is just to give away a portion of your funds either as
a gift or a loan to your parents as well as your in-laws so that in years to follow your income tax
burden become light as the income on funds transferred by you to them which would bring in
income would be taxed in their hands.

With the increase in the limit of exempted income for individuals, women tax payers and senior
citizens, it is now a great time for having income tax files for all.

Separate income tax file for a daughter-in-law

Under Section 64 (1) (a) of the IT Act, if the father-in-law or mother-in-law makes any gift to his
or her daughter-in-law, i.e., their son's wife, on or after 1 June 1973, the income arising to the
daughter-in-law in respect of the gifts so made would be liable to be included in the total income
of the father-in-law or the mother-in-law making the gift.
However, where such a daughter-in-law receives a gift not from her father-in-law or mother-in-
law or her husband but from her father or mother or uncle or aunt or uncle-in-law, etc. then the
income arising to such daughter-in-law in respect of such a gift would be liable to be assessed as
the income of the daughter-in-law separately.

Such income would not be included in the total income of the father-in-law or the mother-in-law
or the husband of such a lady.

Besides, if the daughter-in-law makes an investment of such gifted amount, the income arising to
her out of such investment would also be liable to be assessed separately.

Similarly, if she were to join a partnership firm as a partner with the help of such gifted money,
the interest arising to her would be assessable to tax in her separate assessment.

Such interest or salary as a working partner would not be liable to be included in the income of
her husband or father-in-law or mother-in-law or any other relative. If she is a partner of any firm
carrying on any business, her husband could also be a partner in the same firm.

Now, from assessment year 1993-94 her share income

Example from the firm would not be clubbed with the income of
Mr. A has a major son named Mr. B, the husband. This is illustrated in the following example.
who gets married on 18.1.2008. Mrs.
B receives a sum of Rs 4,00,000 as Tax planning for a nuclear family
gifts from her father, mother and
other relatives, on the occasion of her
The concept of joint family is cracking down. Nuclear
marriage. family concept is on a rise. Under the present scenario for
a nuclear family there is imperative need of tax planning
Mrs. B joins a partnership firm along so as to cut down taxes.
with C, D and E who are outsiders.
Her interest from the said firm in The simple methodology of tax planning for a nuclear
respect of the accounting year ended family is to have separate income tax file for self, spouse
on 31.3.2008 relevant to the and all children as well as the Hindu Undivided Family.
assessment year 2008-2009 is Rs
44,000. For major children the tax planning is easy and simple,
namely to resort to the concept of gifts and loans. As far
The income of Mr. A from his as the minor child is concerned the best answer could be
separate business is Rs 43,000 while achieved by having a separate income tax file of the
the income of Mr. B from his own minor child through his 100 per cent specific beneficiary
separate business is, Rs 72,000. trust as mentioned in the preceding paragraph.

In this case Mrs. B would be liable to The Hindu Undivided Family file can also be opened. In
be assessed separately on interest case the nuclear family adopts tax planning by having
from the partnership firm amounting income tax files for different family members and
to Rs 44,000 and tax payable would thereafter takes liberal advantage of the provisions
be nil. relating to tax deduction, then it would be possible to
achieve best tax planning for a nuclear family.
This sum of Rs 44,000 arising to Mrs.
B would not be liable to be included
along with the sum of Rs 43,000
being the income of her father-in-law
Mr. A or with Rs 72,000 the income
of her husband, Mr. B.
Tax planning by DINKs

Working couples who have no children are known as DINKs (Double Income No Kids).
Substantial tax planning is needed for them even in the initial years of their married life. The best
tax planning which DINKs should adopt is that each one of them should take full advantage of
income tax exemptions and deductions.

The present exemption limit for the financial year 2008-09 is Rs 150,000 for every individual
male tax payer. In addition, for a woman tax payer the exemption limit would be Rs 180,000.
Thus, for the financial year 2008-09, DINKS would be able to enjoy a combined exemption limit
of Rs. 330,000.

Never in the past the tax exemption slabs were so very attractive. They should also make
investments in a residential house by taking a loan and thus save income tax up to the maximum
extent (each of them). They should also plan a separate income tax file of HUF.

What is Tax Planning ?

Tax planning is an essential part of your financial planning. Efficient tax planning enables you to
reduce your tax liability to the minimum. This is done by legitimately taking advantage of all tax
exemptions, deductions rebates and allowances while ensuring that your investments are in line
with your long term goals.

What tax planning is not...

 Tax Planning is NOT tax evasion. It involves sensible planning of your income sources
and investments. It is not tax evasion which is illegal under Indian laws.
 Tax Planning is NOT just putting your money blindly into any 80C investments.
 Tax Planning is NOT difficult. Tax Planning is easy. It can be practiced by everyone and
with a very little time commitment as long as one is organized with their finances.

Planning taxes this year

a. You will have certain needs and goals to meet. Understand what those are and then figure out
how to maximize tax efficiency in your effort to meet them. Tax planning should be a part of the
overall financial planning that you must do.

For instance, you might be getting married and need to buy a house. In this situation you need to
get insurance to protect you spouse if they are financially dependant upon you, as well as you
need to get a home loan. What should you prioritize and what do you have the capacity to
afford? If you blindly put money into an insurance policy, it might not even be sufficient to give
you adequate insurance cover. However, if you choose to pay off the principal on your home
loan, that could be a better option in this situation.

b. Do not blindly invest money with the the first agent that you might come across. You might
end up making mistakes. A lot of people end up buying insurance policies with minimal
insurance coverage or putting money in instruments where they cannot access the money when
they need it.

c. Do not make last minute decisions just because your payroll department has reminded you that
the internal deadline for submitting proofs is approaching. Tax planning involves planning in
advance to avoid the last minute scramble.

Selecting tax saving investments

You should think about the following criteria, before selecting your tax saving investments for
the year:

 Liquidity: How quickly will you need the money? Will you need to access the money
within the next year or two years or over what duration ?
None of the above instruments let you withdraw your money quickly, in fact there is a
minimum three year lock in for all tax saving investments.
 Risk and Return: How much risk do you want to take. There is a trade off between the
two, some instruments are very low risk, but as a result they give low returns which are
capped.
 Inflation protection: The instruments that give you a low return typically are the worst
type of investments regarding inflation. This is important because many of the
instruments give you a fixed rate of interest, and lock in your money for a long period.
This is not a good protection against inflation.
 Tax Exemption: All tax saving investments under Section 80C are alike in one respect
that they are tax exempt when they are invested. But they differ with respect to the tax on
the income you earn from such an investment as well as the tax on the maturity of the
investment

Income Tax Planning

There are numerous opportunities for minimizing the amount of income tax you pay.

In order to achieve that, you need intelligent income tax planning.

Income tax planning must be a continuous exercise because many tax saving opportunities can
only be made use of by carefully planning in advance.
There are many informative books by intelligent writers to provide expert guidance on income
tax planning.

They have discussed the different practical and tested methods of income tax saving that can be
adopted to have maximum benefit.

It applies to all kind of income like salary income or income from house property, capital gains
or interest. Some Important rules forincome tax planning:

Disperse the Taxable Income

 One should try dividing the total income to the possible members of the family.
 To do that the members should show their independent sources of income and is an
independent income tax payer under the provisions of the Income Tax Law.
 By doing this the tax liability is lowered and money can be saved as the same income is
spread among different members of the family.

Gifts are Not Taxable

 The primary rule of income tax planning implies the maintenance of income tax files for
oneself, spouse, children, and for all other close relatives in the family, including the
parents.
 Benefits of tax can be achieved through the process of gifts and settlement.
 In case, any gift is received from the members of the family and relatives is not
considered income. Thus, no income tax is payable on gifts received from relatives.
 Gifts received from other parties who are not relatives, up to a sum of Rs. 50,000 is not
taxable.
 Any gift at the time of marriage up to any amount is also not taxable.
 So, you can plan your tax depending on these strategies.

Income tax is Not Applicable on Inheritance

 No income tax is payable on the inherited money and assets.

 The fundamental rule implies that the asset received by inheritance is not your income
but it is a capital receipt.
 So, incase, you inherit either fixed deposits, shares or any kind of movable or immovable
property owing to the demise of a person, you are not liable to pay anyincome tax at all
on the value of all inherited assets

Complete Information of Tax Exemption

 You should always try to take the maximum benefit of the exemptions and deductions.
 Tax should be planned in such a manner that you are able to claim all possible
exemptions and deductions which are permissible under the Income Tax Planning.
Maximum Benefit of Tax Deduction

 Income tax planning will be appropriate if you know the various tax deductions
available under the income tax law.
 Benefits of deductions can be availed for all the family members as per the act.
 There are various income tax rebates which can be availed by selecting the right kind of
investments.
 Age factor should be considered while claiming to get the permissible rebate.

Exempted Income

 The kind of income which is exempted from the purview of tax is called exempted
income.
 For example, there are some bonds which are known as tax-free bonds, the interest
earned on these is exempted income.
 Any income from agriculture also comes under the exempted income.

Tips

Some other tips to save tax:

 Salary Packages should be designed in the income tax benefiting Regime

 Loan should be taken to Invest in Residential Property.
 Investment should be done on Minor Children
 Real Estate Investments can give you the benefit of income tax rebate
 Life Insurance should be planned for financial Security and reasonable returns
 Investors should be aware of bigger expenditures.
 Mutual Fund Investment can avail you the benefits of tax
 Tax savey Investment Planning by Senior Citizens
 Always maintain a Record of Your Investments
 A Financial Planner for You income and family members.
 You should intelligently tap your Invisible Funds.
 Joint Bank Accounts should be done with tax planning
 Investment should be within the limit of Allowances

Most of us lack behind in the Tax planning. We always do it at the end of Feb or Mar, because of
which we end up into wrong decisions. Here we will help you to identify Tax saving investments
as per your requirement. In India we can save Tax under sec 80cc up to Rs.1, 00,000 and apart
from that we can also claim income tax exemption for interest on housing loan up to Rs.1, 50,
000, Mediclaim up to Rs.20, 000 for dependent senior citizen parents. In India we have many
instruments to invest fortax saving so therefore we should not invest in which comes first to us.
One should always do a proper and careful Tax planning. One should also look Tax planning as
protection planning (Life insurance, mediclaim) or as wealth creation (ELSS, FD). First of all
you need to find out how much Provident Fund is deducted from your salary. Because that
amount will be considered under your One Lakh rupees limit. For ex.: if Rs.25,000 yearly has
been deducted from your salary then you have to think about only remaining Rs.75, 000.

ELSS Fund or Tax saving Fund = this means the Equity Linked saving scheme. This helps you
to indirectly invest in the equity market. But it has three year lock in period. So you should invest
amount which you will need after three years only. ELSS provides you the benefit of Tax saving
as well as Wealth creation. Some Tax funds also provide you the medical benefits. Ask your
agent about all the features of your Tax saving fund. If you feel your agent is only interested in
selling products then you can always contact us for your queries.

Life Insurance Plan = It is always said that one should not look at the Life insurance plan as tax
saving. We also suggest you the same thing.All life insurance plans gives you the tax benefit so
you should always go for plan which is suitable to your life and your financial planning.You
need not buy every year new policy. If you think that you have already invested enough in life
insurance plan but want to invest again then you should go for ULIP plans. Payout from life
insurance policy is tax free.

Fixed Deposit = Mostly people who don't want to take risk invest in Fixed deposit. Currently
there is 5 year fixed deposit which provides you the tax benefit. Currently the maturity amount is
tax free. This instrument provides you the benefit of tax saving and guaranteed return.FD is not
preferable by financial planner due to less return compare to ELSS and long maturity term. But if
still one wants to invest in FD then he should invest spare amount which will not require in near
future.

Loans = Currently in India there are two loans Home loans and Education loan have Tax
exemption. Many people invest in house so that they can claim exemption. One should
understand that under section 80cc only principle repayment can be exempt. Tax deduction on
the interest component comes under section 24 and will depend upon whether home is rented or
self occupied. You should keep in mind that over a period of time the principle payment increase
and the interest payment decrease. We should also analyze whether interest payment is not more
than the benefit of tax exemption.Under education loans, the interest that you pay will be tax
deductable.

PPF and NSC= People who don't want to take risk they can invest their small savings in PPF. It
gives you guaranteed return but it has lock in period of 15 years. You can withdraw some part
after 6 years. One can look at this option as their Pension planning. PPF normally gives you the
7.5% to 8% (subject to change) return but don't forget that it gives you the benefit of
compounding rate. If you have withdrawn your Provident fund while changing a job then you
can invest that amount in PPF. It will be saved as Provident fund and you will get the benefit of
tax also.NSC stands for National Saving certificate. This one also assures you the guaranteed
return. You can also invest into post office.Most of us are not aware of the Volunteer Providend
fund. Normally 12.5%of your basic salary is invested into your PF and same contribution is done
by the employer. As a concept of VPF you can invest up to 100% of your basic salary in your PF
but your employee contribution will remain the same. You just need to inform your employer to
invest as a VPF from your salary. You will get the exemption up to 100% of your basic salary if
invested in PF or VPF. This is suitable for those who are risk averse and who don't want to get
into the planning.

Mediclaim = Mediclaim policies taken for yourself or your parents will allow you to get a tax
exemption under section 80 D up to a Rs.20,000limit for your parents and Rs.15,000 for
yourself.

The importance of tax-planning

For most individuals tax is a four-letter word. How many individuals willingly part with their
hard-earned money for taxes? Not many! Mention paying taxes and all those age-old arguments
about - "what do we get that we should pay taxes?" surface. While that is a topic which can be
debated for eons, few would dispute the utility that tax-planning can offer.

What is tax-planning?

Tax-planning amounts to making investments or contributions in line with prescribed guidelines

that lead to reduction in tax liability. Simply put, the tax liability is computed as a percentage of
the income. As per prevailing tax laws, certain investments and contributions have been
earmarked for claiming tax benefits. When these investments and/or contributions are made, the
same are reduced from the income while computing the tax liability. As a result, the tax liability
is reduced. No marks for guessing that lower taxes are a welcome break.

Section 80C

Now that we have discussed what tax-planning is, the next step is to discuss how the same
should be conducted. Before that, an introduction to Section 80C is necessary. While there are a
number of sections in the Income Tax Act that offer opportunities for tax-planning, the most
popular and pervasive one is Section 80C. You can claim deductions under Section 80C for a
variety of investments - for example investments in tax-saving funds (ELSS), Public Provident
Fund (PPF), National Savings Certificate (NSC), infrastructure bonds and tax-saving fixed
deposits. Similarly, contributions towards provident fund, life insurance premium, repayment of
the principal amount on a home loan, payment of tuition fees are also eligible for Section 80C
deductions.

How tax-planning can lead to wealth creation

The Section 80C limit has been set at Rs 100,000 in a financial year. This means you can invest
upto Rs 100,000 every year in the stipulated investment avenues or utilise the sum for paying life
insurance premium, repaying a home loan and claim tax benefits. Now the same has a two-
pronged effect. First, you save tax at present, and second, by investing the monies, you are
creating an asset/income for the future. For example, investments in tax-saving funds, PPF and
NSC will yield returns in the future. Life insurance premium repayment will mean that your
dependents will be provided for in your absence. Finally, home loan repayment will lead to
creation of an asset (a housing property).

Let's not forget that we are talking about investing Rs 100,000 (which is a significant sum) every
year. Simple maths tell us that Rs 100,000 invested every year at 8.0% per annum (pa) over a 15-
Yr period will amount to a substantial Rs 2,715,200.

How to create wealth

Now that we have discussed tax-planning, its benefits and how it can help create wealth, let's
come to the interesting part - how to create wealth. We discuss some of the major investment
avenues that offer Section 80C benefits and should form a part of your tax-planning portfolio.

1. Tax-saving mutual funds

Tax-saving mutual funds (also called equity linked savings schemes - ELSS) are equity funds
that offer tax benefits under Section 80C. Essentially, like equity funds, these funds also invest
their corpus in equities. However, the differentiating factor is the 3-Yr lock-in and the tax
benefits. While in a regular equity fund, the investor is free to sell his investment whenever he
wishes to, in a tax-saving fund, the investor must stay invested at least for a 3-Yr period. Also,
investments in a regular equity fund aren't eligible for any tax benefits, but investments in tax-
saving funds are eligible for Section 80C tax benefits.

For a young investor like you who has time on his side, tax-saving funds should be the preferred
tax-planning destination. They will aptly match your risk appetite.

2. Public Provident Fund

Public Provident Fund (PPF) is an assured return scheme (i.e. it offers guaranteed returns) that
runs over a 15-Yr period. The scheme requires recurring investments i.e. annual investments are
necessary to keep the PPF account active. The minimum and maximum investment amounts are
Rs 500 and Rs 70,000 respectively pa. Investments in PPF are eligible for Section 80C
deductions. Also the interest income from PPF is tax-free.

At present investments in PPF offer a return of 8.0% pa, compounded annually. However, this
rate is subject to revision; hence, investments in PPF may yield a higher or lower return going
forward, depending on how rates are revised.

You can make smaller contributions to the PPF account. The same will help you build a risk-free
corpus for the future.

3. National Savings Certificate

National Savings Certificate (NSC) is another assured return scheme. However unlike PPF, it
isn't recurring in nature. Hence, an investor is required to make a lumpsum investment that
matures after 6 years. The minimum investment amount is Rs 100, while there is no upper limit
for investing in NSC. Interest income from NSC is paid on maturity; the same is also taxable.
Interest accrued on NSC is considered to be reinvested; hence, it is eligible for reinvestment
under Section 80C.

Investments in NSC offer a return of 8.0% pa, compounded half-yearly. This rate is locked-in at
the time of making the investment. Hence investment is insulated from any subsequent rate
change.

You can make investments in NSC for a 6-Yr period to gainfully invest one-time surpluses and
to provide for needs that will arise over a corresponding time frame.

4. Tax-saving fixed deposits

You must be aware of fixed deposits offered by banks. Tax-saving fixed deposits aren't very
different. These are fixed deposits, wherein investments upto Rs 100,000 are eligible for
deduction under Section 80C. Generally, Rs 100 is the minimum investment amount. Tax-saving
fixed deposits have a 5-Yr investment tenure and no premature withdrawals are permitted.

At present, most banks offer a rate of return in the range of 8.0%-8.5% pa. A higher rate of
return (additional 0.5%) is offered on investments made by senior citizens. Also the interest
income from tax-saving fixed deposits is chargeable to tax and subject to TDS (tax deduction at
source).

Tax-saving fixed deposits can be utilised like NSC, to meet future needs that will arise over a
predictable period.

5. Unit linked insurance plans

Unit linked insurance plans (ULIPs) are the most "happening" offerings from the life insurance
segment. Simply put, ULIPs are market-linked avenues that combine insurance and investment.
Premiums paid on ULIPs are eligible for deduction under Section 80C. ULIPs have been dealt
with in detail in another article in this guide.

In conclusion, remember that tax-planning is not just another dreary chore that has to be
conducted annually. On the contrary, it's an opportunity for wealth creation. Give the tax-
planning exercise its fair attention and time.

The term Tax Planning refers to the use of the saving instruments (deductions & exemptions)
given by the government so as to decrease the tax liability, but sometimes the word tax
planning is misunderstood and the people choose the ways of tax evasion and tax avoidance.
The tax planning is completely legal and is done keeping in mind all the rules and regulations. 
For example; If Mr. X as an individual has an income of 5, 50,000 for the assessment year then
the tax that he needs to pay is 70,000. Solution: according to the tax rates of assessment year
2009-2010 the calculation is as follows;
 
                               =50,000 x 30% = 15000 (Above 500000 30% Tax)
                               =200000 x 20% = 40000 (Between 300000-500000 20% Tax)
                               =140000 x 10% = 14000 (Between 1, 60,000 – 300000 10 %)
                     =3% education Cess on 69,000 (15000+40000+14000) = Rs. 2070
             
             Tax Payable = 15000 + 40000 + 14000 + 2070 = 71,070
 
If Mr. X decides to deposit Rs. 70,000 to the Public Provident fund then the tax liability will
change because his taxable income comes down to 4,80,000 and his tax liability will come down
to 51, 500 this is called the Tax planning.
 
Tax avoidance is within the legal constrains
and is done using the loopholes of the system.
For example a company is thinking of starting
a manufacturing unit and it has lot of land in
the present city where its head office is
located but it sets up the manufacturing unit in
some of the northern states or backward states
as there is 100% deduction.
 
Tax evasion is completely illegal. Here the
person tries to show false figures or cook up
the books so as to completely reduce the tax
liability. For example the person may have
purchased a car for personal use and while
giving the details he puts it as used for renting
and when he does it the depreciation amount
that he will get increases and hence the total
income decreases or in another case a company may just set up a dummy manufacturing unit in a
backward state and prepare those parts in some of its own manufacturing units. The company
gets tax deduction but it is illegal and if found guilty then it may be punished. 
 

Tax planning Vs Tax Management

There is always some confusion created by these words and most often the person who is doing a
tax planning thinks that he is managing the tax and vice versa in some cases. We will have a look
at some of the points which clearly indicate that these are two different words all together.
 
The tax planning is a wide term and the tax management comes under it. Tax planning is done in
order to reduce the tax liability whereas the tax management is paying the taxes in compliance
with the set rules. The tax planning is done for the future whereas the tax management relates to
the past, present and future.    
 
Tax planning is not at all a complex process provided the assessee knows the tax code. The
complete knowledge is not necessary all he needs to know is the correct tax slabs and the various
deductions allowed. Today as we are living in a very busy world we tend to overlook at the tax
planning and hurry things when the due date is fast approaching where as if there is a proper tax
plan then we will be reducing the tax liability. Having said this now let us have a look at some of
the deductions.
(Note: we will be mainly focusing on the deductions that are allowed for the individuals)
 
Deductions Under Income tax
Below given are the major deductions avaulable under the income tax act.
 
Section 80C
It gives deduction upto Rs. 1, 00,000 for the investment done by an assessee in Public Provident
Fund, National Saving Certificate, Accrued interest on National Saving Certificate, Life
Insurance Premium, Equity Linked Savings Schemes (ELSS), 5-Year fixed deposits with banks
and Post Office etc.
 
Section 80D
Section 80D gives the assessee 100% tax deduction for the medical insurance premium
paid by him for his or spouse’s or the children’s medical insurance. An additional tax deduction
of 15000 is given if he has paid the medical insurance of his parents and it will be increased to
20,000 if they are senior citizens. Point to be noted here is that the payment should be made by
any means except by cash.
 
80GGA
If the payment is made to the scientific research
association or to a university or to a college for
scientific research or for the statistical research
then under the section 80GGA then 100% of the
amount is taken as deduction.
 
80G
The donations given to some of the approved
funds or institutions are given an exemption of
50% and 100% in certain cases under 80G.
 
80E
Under the section 80E the interest on the loan that
is taken for the higher education is eligible for
deduction.
 
80GG
Under the section 80GG the house rent in excess of 10% of taxable income, paid by a salaried or
self employed person who is not getting the HRA( House Rent Allowance) then 25% of the total
income or Rs. 2,000 per month (whichever is less) is given as deduction. 
 
Everyone has a fair knowledge about the insurance policies available, medical insurances, post
office savings account, house rent allowance, donations for research so we will discuss
about some of the deductions in the 80C.
 

 
Provident Fund
The provident fund is defined as a retirement benefit in which the employee and employer both
part with certain amount of salary which is invested with the provident fund authorities or in the
self maintained provident fund. The interest earned is credited to the provident account of the
employee on a regular basis. There are four types of provident funds
 
 Statutory Provident Fund
 Recognized Provident Fund
 Un-Recognized Provident Fund
 Public Provident Fund 
Of the above the in first three types both the employer and employee needs to pay part of their
salary whereas in the fourth one only employee pays and maintains the provident fund and this
one is completely exempted. The maximum amount a person can deposit annually in the Public
Provident Fund is 70,000 and the whole amount is taken as exemption. The rate of interest is
8% and is not liable for any tax. The important point to be noted here is that the provident fund is
a long term investment i.e for 15 years. The PPF account can be opened by a salaried
person in state bank of India or other associated banks such as state bank of mysore, state bank
of rajasthan etc. The minimum amount that one needs to deposit to his PPF account is 500 and
maximum limit is 70,000. The advantages of PPF may be that it is completely tax exempted, one
of the safest investment, the investment can be taken as an exemption etc. the dis-advantages
may be like the capital is held for a long time, the interest rates are lower compared to the FD
rates etc.
 
Equity Linked Saving Scheme (ELSS)
ELSS is one of the investment options. The maximum
amount that is exempted is 1, 00,000. The difference
between ELSS, National Saving Certificate (NSC) &
PPF is that the lock in periods is 3, 6 & 15 years
respectively. The best way to invest in the ELSS is by
Systematic Investment Plan (SIP). According to SIP
every month the investor invests a fixed amount of
money in the market. It is done to take advantage of
the market fluctuations for example in one month if
the rate of a unit is 40 rupees and the investor is
investing 2000 rupees then in that particular month he will be buying 50 units and in the next
month if the unit price is 20 rupees then he will end up by buying 100 units. The advantages of
ELSS are that the money is locked in for short period of time; the dividend can opt for payment
etc. The dis-advantage is that returns are directly depending on the variations of the markets.
 
Tuition fees
The tuition fees are rising and reaching the sky every year thus there is a deduction of 1, 00,000
in under section 80C upto two children. If both the parents are working then only one of them
can claim the deduction. This deduction is applicable for recognized educational institutions and
only the tuition fee is exempted. Transportation fees, admission fees do not come under this.  
 
Note
The deductions for insurance, PPF, tuition fees, ELSS is given totally as 1,00,000
 
The assessee must know utilize the deductions so as to reduce the tax liability but must take care
that he doesn’t invest his money in only one avenue. The safest would be to invest in many
avenues taking into account constant returns, safety and tax exemption.
 
Let us have a look at an example under 80C   
PPF/ ELSS ELSS=20,000 ELSS=40,00 ELSS=50,000
0
PPF=20,000 40,000 60,000 70,000
PPF=40,000 60,000 80,000 90,000
PPF=50,000 70,000 90,000 1,00,000
PPF=70,000 90,000 1,00,000 1,00,000
PPF=90,000 90,000 1,00,000 1,00,000
PPF=1,10,00
0 90,000 1,00,000 1,00,000
In the above example a person has invested in PPF and ELSS and different combinations are
given. The maximum limit for PPF exemption is 70,000 that’s why even though the PPF has
risen to 90,000 and 1, 10,000 and ELSS=20,000 (in both cases) the total amount exempted is
90,000. It is the same in case of total exemption for example PPF=70,000 & ELSS=40,000 the
total would be 1,10,000 but the exemption given will be 1,00,000 because that’s the maximum
limit.
 
Importance of tax planning is
Mr. X is earning 4,00,000 per annum he has not done any investment and his children tuition
fees is 50,000 but they are learning in unrecognized education institutions so it is not exempted.
Mr. Y earns the same amount per annum and out of his earnings he has deposited 10000 to his
PPF account, paid insurance premium of 4000, ELSS=15000, and paid children tuition fees
which amounts to 50,000. Mr. Z is also earning 4,00,000 and out of that he has deposited 20,000
in his PPF account, paid insurance premium of 10000, ELSS=50,000
  Mr. X Mr. Y Mr. Z
Total income 4,00,000 4,00,000 4,00,000
(-) Deductions  
 PPF Nil 10,000 20,000
Insurance Nil 4,000 10,000
ELSS Nil 15,000 20,000
Children tuition
fees Nil 50,000 50,000
Total deduction Nil 79,000 1,00,000
Taxable income 4,00,000 3,21,000 3,00,000
Tax 34,000 18,200 14,000
3% education Cess 1020 546 420
Total Tax liability 35,020 18,746 14,420