Personal Tax Planning

Tax Planning

• 'Tax Planning' Logical analysis of a financial

situation or plan from a tax perspective, to
align financial goals with tax efficiency
planning.

• The purpose of tax planning is to discover

how to accomplish all of the other elements of
a financial plan in the most tax-efficient
manner possible.
 Tax Avoidance vs. Tax Evasion
• Tax Avoidance
– Reducing tax liability in permissible ways as per the law
– Takes into account of loop-holes of law
– Legitimate and legal
– Intentional tax planning before the actual liability arises

• Tax Evasion
– Intent to defraud
– Illegal, uses unfair means
– “Unrelated to a professional practice”
– Intentional attempt to avoid payment of tax after liability has arisen
Assessment Year & Financial Year
 Assessment Year & Financial Year
• It is the year in which you have earned the
income. Simply put, if you are filing a return
this year, the financial year will be 2015-16.

• For example, if you have had an income between

1 April 2015 and 31 March 2016, then 2014-15
will be referred to as FY.

• AY is the year in which you file returns. (2016-

17)
Tax Exemption, Deduction & Rebate
 Tax Exemption
• Exemption means, your income is actually taxable
but as per the present scenario, government has given
a potion of it as exemption i.e. not subject to tax. If
such exemption benefit has been withdrawn by
government then the entire income will be taxable in
India.

• Exemption can be provided as a special benefit

• For example; an individual getting his salary from

employer is eligible for house rent allowance
exemption, LTA,
 Tax Deduction
• Like in the case of exemption, deduction also reduces your
taxable income. But it’s not specific to any income in particular.
It is based on certain criteria that the person has to fulfill to get
it.

• The best example of Income Tax deduction is section 80C

where you claim deduction for your investment in LIC, PPF, FD
and Mutual Fund etc. To get this deduction you have to
specifically fulfill the criteria that are in section 80C
irrespective of your type of income. (Also 80E, 80TTA,

• Another major difference between exemption and deduction is,

while exemptions are deducted from their respective source as
mentioned in Income Tax Act 1961, deductions are deducted
from GTI i.e. after taking all taxable incomes together.
 Tax Rebate
• After finding out total tax liability, you can claim rebate out
of it.

• Rebate is a specific amount as specified in the act which

will be provided by deducting it out of your net tax liability.

• For this assessment year 2014-2015 (Financial year 2013-

2014) IT act specified Rs. 2000 as rebate if your income is
less than Rs.5, 00,000.

• To claim this rebate you have to first calculate your net tax
liability and then deduct Rs.2, 000 out of it to find out your
tax liability that needs to be paid to government.
What are Tax Slabs in FY 2017-18 ?
 Tax Slabs

Income Slab Tax Rate

Income up to Rs 2,50,000* No tax

Income from Rs 2,50,000 – Rs 5%

5,00,000

Income from Rs 5,00,000 – 20%

10,00,000

Income more than Rs 30%

10,00,000
Residential Status and Tax Incidence
 Residential Status and Tax Incidence
• Tax incidence on an assessee depends on his residential
status.

• For instance, whether an income, accrued to an individual

outside India, is taxable in India depends upon the
residential status of the individual in India.

• Similarly, whether an income earned by a foreign national

in India (or outside India) is taxable in India, depends on the
residential status of the individual, rather than on his
citizenship.

• Therefore, the determination of the residential status of a

person is very significant in order to find out his tax liability
STEP First find out whether such individual is
1 “Resident (R)” in India or “Non-resident
(NR)” in India

STEP •If such individual is “Resident” in India,

2 then find out whether he is “ordinarily
resident” or “not ordinarily resident” in
India

•However, if such individual is a “Non-

resident” in India, then no further
investigation is necessary.
 Step 1: Determining whether
Resident (R) or Non-Resident (NR)
Under the Income-tax Law, an individual will be treated as a resident in
India for a year if he satisfies any of the following conditions (i.e. may
satisfy any one or may satisfy both the conditions):

(1) He is in India for a period of 182 days or more in that year;

or

(2) He is in India for a period of 60 days or more in the year and

for a period of 365 days or more in 4 years immediately preceding
the relevant year.

• If an individual does not satisfy any of the above conditions he will be

treated as non-resident in India.
Step 2: Determining whether resident and ordinarily
resident (ROR) or resident but not ordinarily resident
(RNOR)
• A resident individual will be treated as resident and ordinarily resident
in India during the year if he satisfies following conditions:

(1) He is resident in India for at least 2 years out of 10 years

immediately preceding the relevant year.

(2) His stay in India is for 730 days or more during 7 years
immediately preceding the relevant year.

• A resident individual who does not satisfy any of the aforesaid

conditions or satisfies only one of the aforesaid conditions will be
treated as resident but not ordinarily resident.
Incidence Of Tax For Different Tax Payers
 Resident Resident Non-
Particulars and but not Resident
Ordinarily and in India
a resident in Ordinarily
India a resident
in India

Taxable in Taxable in Taxable in

Indian Income India India India
 Resident and Resident but Non-
Particulars Ordinarily a not and Resident in
resident in Ordinarily a India
India resident in
India

Foreign Income
-If it is business income and business is
controlled wholly or partly from India Taxable in India Taxable in India Not Taxable in
India
- If it is income from profession which
is set up in India Taxable in India Taxable in India Not Taxable in
India
- If it is business income and business is Not Taxable in
controlled outside India Taxable in India India Not Taxable in
India
- If it is income from profession Not Taxable in
which is set up outside India Taxable in India India Not Taxable in
India
- Any other Foreign Income (like Not Taxable in
salary, rent, interest, etc.) Taxable in India India Not Taxable in
India
What is Income ?
 Definition of Income

• Income is defined to “include” several items

• It is not an exhaustive definition

• Any income which is not specifically exempt is taxable

21
 Examples of Exempt Income
• Agricultural income
• Receipts by a member from a HUF
• Gratuity received on retirement, termination or death
• Commuted Pension
• Exemption of amount received by way of encashment of
unutilized earned leave on retirement.
• Dividend Income
• Any allowance to the extent not taxable
• Amount received from insurance policies on maturity of LIC
policies (subject to conditions prescribed)
• Income from provident funds
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 Examples of Exempt Income
• Voluntary Retirement Receipts to the Maximum limit of
Rs. 5,00,000 (subject to conditions)
• Payments from Superannuation Fund
• House Rent Allowance (subject to conditions)
• Educational Scholarships
• Exemption in respect of clubbed income of minor
• Long Term Capital Gains on Transfer of listed Equity
Shares and Units of Equity Oriented Mutual Funds

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 Heads of Income
• Five main Heads of Income:
– Salaries
– Income from House Property
– Profits and Gains of Business or Profession
– Capital Gains
– Income from Other Sources

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24
 Salaries (basis of charge)
Income is taxable under head “Salaries”, only if there exists
Employer - Employee Relationship between the payer and the
payee. The following incomes shall be chargeable to income-tax
under the head “Salaries”:-
1.Salary Due
2.Advance Salary [u/s 17(1)(v)]
3.Arrears of Salary

Note:
(i)Salary is chargeable on due basis or receipt basis, whichever is
earlier.
(ii)Advance salary and Arrears of salary are chargeable to tax on
receipt basis only.
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Income from house property

Properties can be broadly classified into:

• Let out property

• Self occupied property
• Deemed to be let out

26
 Income from house property
Determination of Annual Value

This involves three steps:

Step 1 – Determination of Gross Annual Value (GAV)

Step 2 – GAV minus municipal tax paid by the owner
during the previous year
Step 3 – Balance = Net Annual Value (NAV)
Step 4 – Reduce 30% of NAV as an ad-hoc Standard
Deduction
Step 5 – Reduce Interest, if any, paid on a loan taken to
buy/construct the property
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Profit and Gains from Business & Profession
Business :
“Business” simply means any economic activity carried on for
earning profits. Sec. 2(3) has defined the term as “ any trade,
commerce, manufacturing activity or any adventure or concern
in the nature of trade, commerce and manufacture”.

Profession :
“Profession” may be defined as a vocation, or a job
requiring some thought, skill and special knowledge like that
of C.A., Lawyer, Doctor, Engineer, Architect etc. So profession
refers to those activities where the livelihood is earned by the
persons through their intellectual or manual skill.

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 Capital gains
Capital Gain’s tax liability arises only when the
following conditions are satisfied:

 There should be a capital asset.

 The capital asset is transferred by the assessee
 Such transfer takes place during the previous year.
 Any profit or gains arises as a result of transfer.

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 Income From Other Sources
(Residuary head of Income)
Income of every kind, which is not to be excluded from the
total income and not chargeable to tax under any other head,
shall be chargeable under the head “Income from Other
Sources”.

List of items chargeable under this head:-

 Dividends from Co-op. Banks/Foreign companies

 Winning from lotteries, crossword puzzles, races,
gambling, betting of any form
 Interest on securities
 Income from plant, machinery or furniture on hire
30
 Contd.
• Any sum received under a Keyman insurance policy
• Any gift exceeding Rs. 50,000 received from non
relatives
• Interest on foreign government securities
• Agriculture income received outside India
• Director’s Sitting Fees

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 Common Salary Heads
• Basic Salary
• Dearness Allowance
• HRA
• Conveyance Allowance
• Medical Allowance
• Entertainment Allowance
• Education Allowance
• Special Allowance
• LTA
HRA, Entertainment & Special Allowances
 Allowances

• Allowance is defined as a fixed quantity of

money or other substance given regularly in
addition to salary for meeting specific
requirements of the employees.
 Type of Allowances
• House Rent Allowance
• Entertainment Allowance
• Special Allowances
• Education Allowance
• Transport Allowance
• Medical Allowance
 House Rent Allowance

• House rent allowance received by an employee

is taxable under the head Salaries up to the
extent it is not exempt u/s 10(13A) of the
Income Tax Act.

• House rent allowance is exempt to the extent

of minimum of the following three amounts.

• The balance shall be taxable and thus included

in the gross salary of the employee.
 Continued ………..
• Actual House Rent Allowance received by the employee in
respect of the period during which the rented accommodation
is occupied by the employee during the previous year

• Excess of rent paid (for the accommodation) over 10% of the

salary for the relevant period

• 50% of the salary where the residential house is situated at

Mumbai, Calcutta, Delhi or Chennai and 40% of the salary
where the house is situated at any other place, for the relevant
period.

NOTE: Salary here means Basic Salary + DA, if dearness

allowance is provided by the terms of employment.
 Example

• X, who resides in Kanpur, receives Rs780000 as basic pay during

the previous year 2017-18.He stays in his father’s house up to

Aug.31,2017 for which he does not pay any rent and thereafter in

an accommodation taken on monthly rent of Rs-15000. The

employer ,however pays Rs7000/m as house rent allowance

throughout the previous year. He claims that entire HRA is exempt

from tax. Is he legally correct?

 Solution
• As the sum of HRA paid is the least of the
three sums, his claim is valid.
A) Rs-312000 i.e.,40% of salary
B) Rs-84000 i.e., HRA
C) Rs-102000 i.e., excess of rent paid over 10%
of salary.
 Special Allowances

• Certain allowances are specifically granted to meet

expenses incurred wholly and necessarily in the
performance of duties of office or to compensate the
employee for increased cost of living and these are
exempt from tax to the extent of actual amount
received or the amounts spent for the specified
purpose for which these were received.

• If the amount of allowance received is more than the

amount spent for the specified purpose the balance is
again taxable. Few of such allowances are Traveling
Allowance, Daily Allowance, Conveyance Allowance
etc.
 Education Allowances
• Children education allowance: Exempt up to actual
amount received per child or Rs.100 p.m. per child up to a
maximum of 2 children, whichever is less.

• Hostel expenditure allowance: Exempt up to actual

amount received per child or Rs.300 p.m. per child up to a
maximum of two children, whichever is less.
 Transport Allowances
• No Exemption Now
 Medical Allowance
• No Exemption now
 Leave Travel Allowance
• Use your Leave Travel Allowance for your
holidays, which is available twice in a block of
four years.

• In case you have been unable to claim the benefit

in a particular four- year block, you could now
carry forward one journey to the succeeding block
and claim it in the first calendar year of that
block. Thus, you may be eligible for three
exemptions in that block.
 Tax on Bonus
• A bonus from your employer is fully taxable in
the year in which you receive it. However
request your employer for the following:
– If you anticipate tax rates to be reduced or slabs to
be modified in the subsequent year, see if you
could push the bonus payment to the subsequent
year
– Produce your tax investment details well before, to
prevent your employer from deducting tax on
bonus before handing it over
 Standard Deduction
• INR 40,000
 Allowances which are exempt in case of
certain persons:

• Allowances paid to a citizen of India and who is a

government employee for rendering services outside
India.
• Allowances paid to High Court Judges are exempt from
tax.
• Sumptuary Allowance given to High Court and Supreme
Court Judges.
• Allowances received by an employee of UNO from his
employer.
How to Save Income Tax-Salaried
 How to Save Income Tax-Salaried
• https://cleartax.in/s/80c-80-
deductions#Section%2080GG
 Tax Saving from Home Loans
• Use your home loan efficiently to save more
tax. The principal component of your loan, is
included under Section 80C, offering a
deduction up to Rs. 1,50,000.

• The interest portion offers a deduction up

to Rs. 2,00,000 separately under Section 24.
 Utilizing Section 80C
Section 80C offers a maximum deduction of up
to Rs. 1,50,000. Utilize this section to the fullest
by investing in any of the available investment
options. A few of the options are as follows:

• Public Provident Fund

• Life Insurance Premium
• National Savings Certificate
• Equity Linked Savings Scheme (3 years lock in)
• 5 year fixed deposits with banks and post office
• Tuition fees paid for children's education, up to a
maximum of 2 children
• Principal paid of housing loan
 Section 80CCC
• This section provides a deduction to an individual
for any amount paid or deposited in any annuity
plan of LIC or any other insurer.

• The plan must be for receiving a pension from a

fund referred to in Section 10(23AAB).

• Pension received from the annuity or amount

received upon surrender of the annuity, including
interest or bonus accrued on the annuity, is
taxable in the year of receipt.
 Section 80CCD
• Deduction for self-contribution to NPS –
section 80CCD (1B) A new section 80CCD (1B)
has been introduced for an additional
deduction of up to Rs 50,000 for the amount
deposited by a taxpayer to their NPS account.
 Section 80GG
Deduction for House Rent Paid Where HRA is not
Received
a. This deduction is available for rent paid when HRA is not
received. The taxpayer, spouse or minor child should not own
residential accommodation at the place of employment
b. The taxpayer should not have self-occupied residential
property in any other place
c. The taxpayer must be living on rent and paying rent
d. The deduction is available to all individuals

Deduction available is the least of the following:

• a. Rent paid minus 10% of adjusted total income
• b. Rs 5,000/- per month
• c. 25% of adjusted total income*
 80 D
• Section 80D - Deduction of Rs. 25,000 for
medical insurance of self, spouse and
dependent children, self plus parents 50,000
and Rs. 50,000 for medical insurance for self
(Senior citizen) and parents above 65 years
 80DD
• According to the Income Tax Act, if you are paying a premium
to LIC or any other insurance company (approved by the
Income Tax board) for the medical treatment of a dependent
physically disabled person, you can avail exemption under the
section 80DD.

• Here, the dependent should be none other than your spouse,

children, parents or sibling.

• If the person is suffering from 40 per cent of any disability, a

fixed sum of Rs. 75,000 can be claimed in a year. Similarly, if
the disability is 80 per cent, the fixed sum goes up
to Rs. 1,25,000 per year.

• For initiating the process of deduction you need to submit the

medical certificate issued by a medical authority along with the
return of income.
 80DDB
• If you have incurred expenses for the medical
treatment of self or your dependents, you can
claim a deduction of up to Rs. 40,000 or the
actual amount paid, whichever is less, under the
section 80DDB.

• For a senior citizen, the maximum exempted

amount is Rs. 100,000, or the amount actually
paid for medical expenses. To claim a deduction
under this section, you need to submit a medical
certificate from a doctor working in a government
hospital.
 80E
• The interest paid on loan taken for pursuing higher education of
self or any dependent is exempted from tax under section 80E. An
education loan can be taken for wife, children and minors for
whom you are the legal guardian.

• This deduction is applicable for a period of eight years or till the

interest is paid, whichever is earlier. The deduction is only
approved for higher studies, which means full-time graduate or
postgraduate courses in engineering, management or applied
sciences, pure sciences including mathematics or statistics.

• However, from 2011 onwards, the scope of this exemption has

been extended to cover all fields of studies including vocational
studies pursued after completing the senior secondary examination
or equivalent. No exemption is applicable for part-time courses.
 Section 80EE
Deductions on Home Loan Interest for First Time Home Owners

• FY 2017-18 and FY 2016-17 This deduction is available in FY

2017-18 if the loan has been taken in FY 2016-17.

• The deduction under this section is available only to an individual

who is a first time home-owner.

• The value of the property purchased must be less than Rs 50 lakh

and the home loan must be less than Rs 35 lakh.

• The loan must be taken from a financial institution and must have
been sanctioned between 01 April 2016 to 31 March 2017. Through
this section, an additional deduction of Rs 50,000 can be claimed on
home loan interest.
 Section 80CCG
Rajiv Gandhi Equity Saving Scheme (RGESS)

• The deduction under this section is available to a resident individual.

Investors whose gross total income is less than Rs. 12 lakhs. To avail the
benefits under this section the following conditions should be met:a. The
assessee should be a new retail investor as per the requirement specified
under the notified scheme.

• The investment should be made in such listed investor as per the

requirement specified under the notified scheme.

• The minimum lock in period in respect of such investment is three years

from the date of acquisition in accordance with the notified scheme.

• Upon fulfillment of the above conditions, a deduction, which is lower of

the following is allowed 50% of the amount invested in equity shares; or
Rs 25,000 for three consecutive Assessment Years.
 80GGC
• Any monetary contribution to any political
party or electoral trust is eligible for tax
exemption.

• Thus, your contribution, as a matter of

appreciation for their work, will serve both the
purposes.
 80U
• A resident of India suffering from any kind of
specified disability is eligible to claim tax deduction
under this section.

• In order to enjoy this opportunity, one should be

suffering from not less than 40 per cent of the following
diseases: blindness, low vision, mental illness, mental
retardation, hearing impairment.

• The deduction provided is flat Rs. 75,000, irrespective

of the expense incurred. If the disability is severe, the
deduction can be up to Rs. 1.25 lakh. One needs to
provide a copy of all the certificates issued by a
medical authority in order to avail this benefit.
 80CCG
• The Finance Act 2012 introduced a new Section
80CCG (Rajiv Gandhi Equity Saving Scheme) to offer
50 per cent tax break to new investors who invest up
to Rs. 50,000 and whose GTI is less than or equal
to Rs. 10 lakh. It has been introduced for budding
investors entering the equity markets for the first time
and is a once-in-a-lifetime benefit

• Hence, there are several sections apart from 80C that

can help an individual benefit from tax exemptions. It is
time to start looking beyond 80C for tax savings.
 Section 80G
Deduction for donations towards Social Causes
• The various donations specified in u/s 80G are
eligible for deduction up to either 100% or 50%
with or without restriction as provided in section
80G.

• From FY 2017-18 any donations made in cash

exceeding Rs 2,000 will not be allowed as
deduction.

• The donations above Rs 2000 should be made in

any mode other than cash to qualify as deduction
u/s 80G.
Income tax returns: 7 incomes you
shouldn't forget to declare
 Interest Earned from Bank
1. Interest earned from savings bank account: This interest is tax
free up to Rs. 10,000. Any interest earned above that is taxable and
should be declared (Sec 80 TTA)

2. Interest earned from fixed deposits: This is taxable as per one's

income tax slab. Most of the time banks deduct 10 per cent TDS
when the interest accrued is more than Rs. 10,000 (unless one
submits Form 15 G/H). However, the actual tax liability will be
more or less, depending upon the tax bracket one falls under after all
incomes and deductions are claimed

3. Interest earned from recurring deposits: This interest is taxable as

per one's income tax slab. Banks do not cut any TDS on interest
earned on recurring deposits and, hence, it becomes even more
important to declare this source of income.
4. Cash gifts: Cash gifts of over Rs. 50,000 should be declared as
they are taxable (unless for specific occasions like marriage)

5. Capital gains/losses: Any capital gains/losses made from trading

equities, selling mutual funds, gold, etc. should be declared.
Similarly, any losses should be declared as these help in offsetting
gains for subsequent years

6. Exempt income: Exempt income (e.g. interest earned on

PPF/EPF accounts) should be declared for auditing purposes only.
This is a tax-free income

7. Dividend income: Dividend income is tax free in the hands of the

investor. However, this should be declared while filing income tax
returns.
 Is interest income from fixed deposits with Bank
up to Rs 10000 is tax free??

• It's not tax free. Bank will not deduct tax till it
reaches Rs. 10000. After that whole interest
amount will be subject to TDS.

• So if total interest is Rs. 11000, then TDS will

be Rs. 1100 (assumed 10% Tax generally).
And there will be Education Cess applied on
the calculated tax.
Exercise: Personal Tax Planning
 Exercise 1
• Mr. Sharma was born in 1978 in Pune. Later
on he migrated to Australia in December 2013
and took the citizenship of that country with
effect from Jan 1, 2014.

• Mr. Sharma came to India on Feb 15, 2015 for

a visit of 190 days. Find out his residential
status for assessment year 2015-16 on the
assumption that before 2013 he was present in
India at least 275 days every year.
 Answer 1
• He is PIO as he had Indian passport earlier
• He was only for 45 days in India in financial
year 2014-15. For tax purpose his residential
status is NR
 Exercise 2
• Mr. Singh was born in Karachi on Jan 2, 1947.
He has been staying in USA since 1986. He
comes to India on a visit of 200 days on
October 10, 2014. Determine his residential
status for assessment year 2015-16
 Answer 2
• Mr. Singh is PIO
• His total stay in India during previous year was
173 days.
• His residential status is NR
 Exercise 3
• Sumit (40 years), an Indian citizen, leaves India for the
first time on October 10, 2010 for employment outside
India. Before October 10, 2010, he was never out of
India since his birth.

• During the previous year 2014-15 he came to India for

195 days (on July 10, 2014), respectively. Find out his
residential status for the assessment year 2015-16.

• Does it make any difference if X comes to India on

October 10, 2014 instead of July 10, 2014.
 Answer 3
• Sumit is an Indian Citizen

• He was in India for 195 days in previous year. So he is

resident in India

• He was also in India for more than 730 days during the
preceding 7 years and he was also resident in India for
more than 2 years out of preceding 10 years. Therefore
his residential status is ROR

• If he would come on October 10, 2014 for a visit of 195

days than his total stay in India in that financial year is
173 days. Therefore his residential status would have
been NR
 Exercise 4
• Basic Salary Rs. 900,000 p.a.
• DA 100% of Basic salary
• HRA 30% of Basic + DA
• Transport Allowance Rs. 2,000 per month
• Medical Allowance Rs. 3,000 per month
• LTA Rs. 130,000
• Children Education Allowance Rs. 1000 p.m. (1Child)
• Bonus Rs. 50,000
• Provident fund contributed by employer Rs. 108000 p.a. (same deducted)
• FD Interest received Rs. 10,000
• Dividend received Rs. 15,000
• Interest on provident fund Rs. 65,000
• Actual Rent paid per month Rs. 30,000 (Delhi)
• Life insurance premium paid Rs. 24,000
• Medical insurance paid for self Rs. 12000
• Medical insurance paid for parents Rs. 18,000
• Electricity and gas bill paid by employer Rs. 5000 p.m.
• Salary of servant paid by employer Rs. 6000 p.m.
 A Final Word
• Keep in mind the below points, to avoid the
hassles of last minute tax planning.
• Give your employer details of loans and tax
saving investments beforehand, to prevent any
excess deduction
• Check the Form 16 received at the end of each
year from your employer thoroughly
• It is important to start your tax planning well
before 31st March, and to file your returns
before the 31st of July each year