Oriental Institute of Management, Vashi, Navi Mumbai
In partial fulfillment of the requirements for the award of the degree of MASTERS IN FINANCIAL MANAGEMENT
Under the guidance of Prof Ankita Srivastava
Oriental Institute of Management, Vashi, Navi Mumbai 2012-2015
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DECLARATION
I, RATHNAVATHY RAMACHANDRAN, ROLL NO-1206 student of MFM 3 rd
Year declare that this report titled TAXATION PLANNING FOR INDIVIDUAL WITH RESPECT TO ASSESSEE is a record of independent work carried out by me under the guidance and supervision of Prof Ankita Srivastava towards the partial fulfillment of requirements for the M.FM. degree course UNIVERSITY OF MUMBAI
I further declare that this project report is the result of my own efforts and that it has not been submitted to any other university or institute for the award of a degree or diploma or any other similar title of recognition.
RATHNAVATHY RAMACHANDRAN 3
CERTIFICATE
This is to certify that RATHNAVATHY RAMACHANDRAN, ROLL NO- 1206, is a bonafide student of Masters in Financial Management course of the Institute (2012-2015), affiliated to University of Mumbai. Project report on TAXATION PLANNING FOR INDIVIDUAL WITH RESPECT TO ASSESSEE is prepared by his under the guidance of Prof Ankita Srivastava in partial fulfillment of the requirements for the award of the degree of Masters in Financial Management of University of Mumbai.
Prof. Ankita Srivastava Prof. Sahar Kapdi (Internal Guide) In Charge Director
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ACKNOWLEDGEMENT
The final project of MFM course was undoubtedly a great learning experience for me and has helped me learn immensely. I feel great pleasure in expressing my regards and profound sense of gratitude to my guide Prof .Ankita Srivastava for her inspiration, guidance and support in the completion of this project report.
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.
I express my sincere thanks to my college at Oriental Institute of Management (OIM), who provided adequate support and facilities to accomplish my work of data collection and completion of project report on time.
Last but not the least; I am highly thankful to my friends who were always there whenever their support was needed.
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INDEX TABLE OF CONTENTS 1. List of Tables ........................................................................................................... i 2. Introduction ..............................................................................................................9 3. An Extract from Income Tax Act, 1961 ................................................................13 4. Computation of Total Income ................................................................................25 5. Deductions from Taxable Income ..........................................................................53 6. Computation of Tax Liability ................................................................................61 7. Tax Planning - Recommendations and Useful Tips ..............................................65 8. Conclusion.76 9. Bibliography ..........................................................................................................77
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List of Tables Table 1: Tax Rates for A.Y. 2014-15 - For Individuals (Other than Specified Individuals )And Hindu Undivided Families Only ......................................................62 Table 2: Tax Rates for A.Y. 2014-15 - For Individual, Being Resident in India, Who is of the Age of 60Years or More But less than 80 Years ) ................................63 Table 3: Tax Rates for A.Y. 2014-15 - For Individual, Being Resident in India, Who is of the Age of 80 Years or More) .....................................................................63
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CHAPTER 1 INTRODUCTION Need for Study Objectives Scope & Limitations
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INTRODUCTION
Income Tax Act, 1961 governs the taxation of incomes generated within India and of incomes generated by Indians overseas. This study aims at presenting a lucid yet simple understanding of taxation structure of an individuals income in India for the assessment year 2014-15.
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, 2013 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.
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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, 2013. To explore and simplify the tax planning procedure from a laymans perspective. To present the tax saving avenues under prevailing statures.
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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 2014-15 only.
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CHAPTER 2 AN EXTRACT FROM INCOME TAX ACT, 1961 Tax Regime in India Basic Knowledge of Income Tax Chargeability of Income Tax Income 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
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Tax Regime in India The tax regime in India is currently governed under The Income Tax, 1961 as amended by The Finance Act, 2013 notwithstanding any amendments made thereof by recently announced Union Budget for assessment year 2014-15.
Basic Knowledge of Income Tax According to Income Tax Act 1961, every person, who is an assessee and whose total income exceeds the maximum exemption limit, shall be chargeable to the income tax at the rate or rates prescribed in the Finance Act. Such income shall be paid on the total income of the previous year in the relevant assessment year. Assessee means a person by whom (any tax) or any other sum of money is payable under the Income Tax Act, and includes
(a) Every person in respect of whom any proceeding under the Income Tax Act has been taken for the assessment of his income or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person; (b) Every person who is deemed to be an assessee under any provisions of the Income Tax Act. (c) Every person who is deemed to be an assessee in default under any provision of the Income Tax Act.
Where a person includes:- o Individual o Hindu Undivided Family (HUF) o Association of persons (AOP) o Body of Individual (BOI) o Company o Firm 15
o A local authority and o Every artificial judicial person not falling within any of the preceding categories. Income tax is an annual tax imposed separately for each assessment year (also called the tax year). Assessment year commence from 1 st April and ends on the next 31 st March.
The total income of an individual is determined on the basis of his residential status in India. For tax purposes, an individual may be resident, nonresident or not ordinarily resident.
Types of Residents
Resident [S 6(1)] An individual is treated as resident in a year if present in India: 1. For 182 days during the year or 2. For 60 days during the year and 365 days during the preceding four years. Individuals fulfilling neither of these conditions are nonresidents. (The All Assessees Resident Only Individual & HUF Resident & Ordinary Resident Resident But Not Ordinary Resident Non Resident 16
rules are slightly more liberal for Indian citizens residing abroad or leaving in India for employment abroad)
Non-Resident Individual [S.2(30)] According to Section 2(30) of the Act a non-resident means a person who is not a resident. Basically, a non-resident is a person who is not a resident. Thus, an individual who does not satisfy the test mentioned above in Section 6(1), is to be called a non- resident.
Resident & Ordinarily Resident Individual [S. 6(6)] A resident individual may be either an ordinary resident or a not-ordinary resident. Every individual who has stayed be in India for the specified number of days in a particular year is a resident in India for that previous year. But, a resident individual would also be an ordinary resident in India if he has been a resident in India for a large number of years in the past. An individual who is a resident in India is treated as an ordinary resident if (a) he has been a resident in India for at least 2 out of the 10 years immediately preceding the previous year, (b) he has been in India for a period of 730 days or more during the 7 years immediately preceding the previous year.
Not Ordinary Resident An individual who is a resident, according to the tests laid down in S 6(1), but who fails to satisfy the additional tests laid down in S 6(6) is called a resident but not ordinary resident [RNOR]. A person would be not ordinarily resident in Indian in any previous year if such person is an individual who has been a non-resident in India (a) 9 out of 10 previous years preceding that year, or (b) has during 7 previous years preceding that year been in India for a period of 729 days of less.
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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.
Income [S.2(24)] (What is charged to tax)
DEFINITION As per Section 2(24) of the Act the term Income includes (1) profits and gains (2) dividends (3) voluntary contributions received by a. a charitable or religious trust b. a specified institution (4) perquisites taxable under the head Salaries under S. 17(2) or profits in lieu of salary taxable as salaries under S.17(3) (5) special allowance or benefit specifically granted to an employee to meet expenses for the performance of his duties. (6) Allowance to an employee to meet his personal expenses at office, or to compensate him for the increased cost of living (e.g. Dearness Allowance) (7) benefit or perquisite obtained from a Company by a director or a person having substantial interest. (8) Profits on sale of an import licence, taxable u/s. 28(iiia) (9) Capital gains chargeable under S.45 of the Act. (10) Profits of any business of insurance carried on by a mutual insurance company or a co-operative society, taxable u/s. 44 or the First Schedule to the Act. (11) the profits and gains of any business of banking (including providing credit facilities) carried on by a Co-operative society with its members.
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(12) Winnings from lotteries, prizes by draw of lots or by chance, crossword puzzles, races including horse races, card games, game show, entertainment programme on television in which people compete to win prizes, gambling or betting. (13) Contribution from employees to Provident Fund, or Superannuation Fund, or Employees Insurance Fund etc. deducted by the employer from the salaries of the employees. (14) any sum received under a Keyman Insurance Policy (i.e policy taken on the owner/Director etc.), including bonus on such policy. (15) any sum exceeding Rs. 50,000 received without consideration (i.e. a gift)by an individual or an HUF, is taxable.
Scope of Total Income The following points should be noted in regard to scope of income
Resident & Ordinary Resident A Resident and Ordinary Resident is taxable in respect of any 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 the previous year
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Resident But Not Ordinary Resident A person not ordinarily resident in India, is taxable in respect of any income, from whatever source derived, which is received or deemed to be received in India, in the previous year, by or on behalf of such person; or accrues or arises or is deemed to accrue or arise to him, in India during the previous year; or accrues or arises to him outside India, from a business controlled from or a profession set up in India.
Non-Resident A person who is a non-resident, is taxable in respect of any income, from whatever source derived, which is received in India, or is deemed to be received in India, in the previous year, by or on behalf of such person; or accrues or arises or is deemed to accrue or arise to him, in India during the previous year.
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Residential Status And Taxability of Income Nature of Income Resident & Ordinary Resident Resident But Not Ordinary Resident Non Resident Income received in India Taxable Taxable Taxable Income which accrues or arises in India Taxable Taxable Taxable Income deemed to be received in India Taxable Taxable Taxable Income deemed to accrue in India Taxable Taxable Taxable Income which accrues and arises outside India from a business controlled from India/ profession set up in India Taxable Taxable Not Taxable Any other Income which accrues or arises outside India Taxable Not Taxable Not Taxable
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
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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.
The devices adopted in Tax Evasion are unethical and have to be condemned. Evasion once proved not only attracts heavy penalties but also could lead to prosecution.
Example: Mr. A, was invited at a religious function and the host of which was Mr. B (Businessman). Mr. A observed that people were calling him Sethji (Mr. B) and he was informed that Mr. B had donated Rs.2,00,000 in the temple along with 500 blankets to the poor people. He has also arranged for feast for 1000 people.
Mr.A asked him How did you donate money in the temple, by cheque or by draft?
Mr. B replied If I had donated through cheque or draft, my white money would have got affected. I therefore had to pay by cash.
This means that the money he evaded from tax and gave in the temple was called Donation and the same person is treated with respect in spite of the fact that he has robbed nations wealth by doing so. He is a traitor but surprisingly our society calls him Sethji instead.
Tax Avoidance Tax Avoidance is minimizing the incidence of tax by adjusting the financial affairs in such a manner that although it is within the four corners of taxation laws, but the advantage is taken by finding out loopholes in laws. 22
The shortest definition of tax avoidance is the art of dodging tax without breaking the law.
In tax avoidance, the tax payer apparently circumvents the law without giving rise to the criminal offence by use of a scheme, arrangement or device normally of a complex nature, where the main purpose is to defer, reduce, completely avoid the tax payable under 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. Mr. As 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 is the arrangement of financial activities in such a way that maximum tax benefits are enjoyed by making use of all beneficial provisions in the tax laws. It entitles assess to avail certain exemptions, deductions, rebates and relief so as to minimize his tax liability. All these are permitted by law and not frowned upon.
Tax planning may be legitimate provided it is within the framework of law. It is the obligation of every citizen to pay taxes honestly without restoring to subterfuges
Example: Saving Tax through your Family! Surprised! Yes we can save tax through our family members i.e Parents, Through Parents:- Assuming that both the parents are senior citizens. Heres how you go about it. Income tax deductions allow senior citizens a tax free income of Rs. 2.5 lacs . To exhaust this limit, say you gift Rs. 28 lacs to each parent in cash. Of this, both can individually put Rs.15 lacs in a senior citizens savings scheme that earns a return of 9% and pays interest 23
every quarter. Each will get yearly interest of nearly Rs.1.4 Lacs. If they invest the remaining Rs.13 lacs each in the State Bank of Indias (SBI) fixed deposit of eight years (at an interest of 7.5%) that pays interest each quarter, it will fetch them an income of nearly Rs. 1 lac (approx). That means both parents have earned Rs.2.8 lacs from the senior citizen saving scheme the tax-free limit (Rs.2.4 lacs) that each parent enjoys. So they dont even need to file tax returns.
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.
It includes maintenance of accounts, filing of return, payment of taxes, deduction of tax at source, timely payment of advance tax etc. Poor tax management is likely to result in levy of interest, penalty and prosecution, etc.
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. 25
CHAPTER 3 COMPUTATION OF TOTAL INCOME Income from Salaries Income from House Property Profits and Gains of Business or Profession Capital Gains Income from Other Sources
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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.
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.
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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 Allowance is defined as a fixed amount of money given periodically in addition to the salary for the purpose of meeting some specific requirements connected with the service rendered by the employee or by way of compensation for some unusual conditions of employment. It is taxable on due/accrued whether it is paid in addition to the salary or in lieu thereof. 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.
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House Rent Allowance (HRA): HRA received by an employee residing in his own house or in a house for which no rent is paid by him is taxable. In case of other employees, HRA is exempt up to a certain limit
Entertainment Allowance: Entertainment allowance is fully taxable, but a deduction is allowed in certain cases.
Academic Allowance: Allowance granted for encouraging academic research and other professional pursuits, or for the books for the purpose, shall be exempt u/s 10(14).
Conveyance Allowance: It is exempt to the extent it is paid and utilized for meeting expenditure on travel for official work.
Deduction under S.16 Entertainment Allowances: Received by an employee will first be included in employees income under the head Salary and thereafter a deduction there from is permissible subject to the conditions and limits laid down under section 16(ii). From assessment year 2002- 03 and onwards, entertainment allowance received by an employee of non- Government employer, is not eligible for deduction u/s. 16(ii) and hence said allowance will be taxed as income under the head Salaries.
Tax on Employment: Any sum paid by an employee on account of the tax on employment (i.e. Professional Tax) which is levied by a State Government is allowable as deduction from the salary of the employee provided it has been paid by him. 29
INCOME FORM 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.
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Incomes Excluded from House Property Income: The following incomes are excluded from the charge of income tax under this head: Annual value of house property used for business purposes Income of rent received from vacant land. Income from house property in the immediate vicinity of agricultural land and used as a store house, dwelling house etc. by the cultivators
Annual Value: [S.23] Income from house property is taxable on the basis of annual value. It is charged to tax a notional amount called annual value (AV), i.e the estimated value of income expected if the property is rented. AV indicates the capacity of the property to produce income.
Annual Value is RLV or Actual Rent AV broadly speaking, may be either of the following tow amounts 1. Reasonable Lettable Value (RLV) :- This is the expected rent i.e the sum for which the property might reasonably be expected to let from year to year. (i) RLV is to be computed whether the property is actually let or not (ii) RLV is a notional figure. But it is not a fictitious figure. It must be computed on a long term basis since it indicates the expected rent from year to year. (iii) RLV may be estimated on the basis of a. Fair Rent:- rent fetched by a similar house in the same locality b. Municipal Rent:- Gross Rateable Value fixed by the Municipality for levy of the property taxes. c. Standard Rent:- is fixed under the Rent Control Act, if any, applicable to the area in which the property is situated. It is not mentioned in the Income Tax Act.
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(iv) RLV is computed as follows:- Reasonable Lettable Value Rs A. Fair Rent XX B. Municipal Value XX C. Higher of [A] and [B] XX D. Standard Rent, if any XX E. Lower of [C] and [D] = [RLV] XX Notes: (I) If Standard Rent is not applicable, RLV is equal to Higher of Fair Rent and Municipal Value (II) While RLV cannot exceed standard rent, RLV, may, however, be lower that the standard rent
2. Actual Rent (AR):- This is the actual rent received or receivable by the owner in respect of a property which is actually let. (i) Actual Rent is applicable only if the property is actually let. It is irrelevant in case the property is not rented but is self-occupied or is un-occupied or is deemed to be let. (ii) Amount of Actual Rent would not include the amount of rent which the owner cannot realise to the extent allowable under the Income-tax Rules (iii) Actual Rent is computed as below:- Actual Rent Rs. Rent Received/Receivable XX Less:- Allowable Unrealised Rent XX = (AR) XX
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Annual Value depends on use of Property: Whether is property is let out entirely, or let out but remains vacant partly, or self- occupied or un-occupied or is deemed to be let.
Deductions from House Property Income:
Standard Deduction: A lumpsum amount equal to 30% of the Net Annual Value (NAV), can be deducted on account of all expenses on property (repairs, collection charges, ground rent, insurance, and so on except interest explained below). Such deduction is allowed on notional basis irrespective of who (owner or tenant) bears the expenses or the amount of actual expenses incurred.
Interest on Borrowed Capital:
Interest on Borrowed Capital is allowable as deduction on accrual basis. The capital must be borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the house property.
The deduction is allowed only in case of house property which is owned and is in the occupation of the employee for his own residence. However, if it is not actually occupied by the Assessee in view of his place of the employment being at other place, his residence in that other place should not be in a building.
Following points should be kept in view: As deduction is available on accrual basis, it should be claimed on yearly basis even if the interest is not actually paid during the year. Deduction is available even if neither the principal nor the interest is a charge on property. Interest on unpaid interest is deductible. No deduction is allowed for any brokerage or commission for arranging loan. Interest on fresh loan taken to repay original loan is also allowable as deduction. 33
The quantum of deduction allowed as per table below: Sr.No Purpose of Borrowing Capital Date of Borrowing Capital Maximum Deduction allowable 1 Repair or renewal or reconstruction of the house Any time Rs.30,000/- 2 Acquisition or Construction of the house Before 01.04.1991 Rs.30,000/-
3 Acquisition or Construction of the house On or After 01.04.1991 Rs. 1,50,000/-
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 in India who may be treated as an agent, shall not be deducted in computing Income from House Property.
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.
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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 firms income. Any interest salary etc. which is not allowed to be deducted u/s 40(b), the income of the partners shall be adjusted to the extent of the amount so disallowed. Any sum received or receivable in cash or in kind under an agreement for not carrying out activity in relation to any business, or not to share any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of, similar nature of information or technique likely to assist in the manufacture or processing of goods or provision for services except when such sum is taxable under the head capital gains or is 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). 35
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. Unabsorbed Depreciation:- Means the excess of the depreciation over the profits for the year. In such a case, the depreciation amount is more than the profits of the relevant business. 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 36
accounts audited from a chartered accountant and furnish an audit report in Form 3 AD. Reserves for shipping business. Scientific Research Expenditure on scientific research related to the business of assessee, is deductible in that previous year. One and one-fourth times any sum paid to a scientific research association or an approved university, college or other institution for the purpose of scientific research, or for research in social science or statistical research. One and one-fourth times the sum paid to a National Laboratory or a University or an Indian Institute of Technology or a specified person with a specific direction that the said sum shall be used for scientific research under a programme approved in this behalf by the prescribed authority. One and one half times, the expenditure incurred up to 31.3.2005 on scientific research on in-house research and development facility, by a company engaged in the business of bio-technology or in the manufacture of any drugs, pharmaceuticals, electronic equipments, computers telecommunication equipments, chemicals or other notified articles. Expenditure incurred before 1.4.1998 on acquisition of patent rights or copyrights, used for the business, allowed in 14 equal instalments starting from the year in which it was incurred. 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. 37
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 a forestation or to an approved fund for a forestation. 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. 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. 38
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. 39
Special provisions for computing profits and gains of shipping business in the case of non-residents. Special provisions for computing profits or gains in connection with the business of exploration etc. of mineral oils. Special provisions for computing profits and gains of the business of operation of aircraft in the case of non-residents. Special provisions for computing profits and gains of foreign companies engaged in the business of civil construction, etc. in certain turnkey projects. Deduction of head office expenditure in the case of non-residents. Special provisions for computing income by way of royalties etc. in the case of foreign companies 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.
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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 following aspects Capital assets Transfer Previous Year Profits and gains
Capital Asset:
Capital Asset means property of any kind held by an assessee, whether or not connected with his business or profession. Property may be tangible or intangible. Examples of Capital Assets are Land, Building, Vehicles, Tenancy rights, Licences, Patents, Trademark etc.
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; 41
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.
In case of destruction or damage of a capital asset in fire, flood, riot, etc, and receipt of any money or asset as insurance claim, the capital gain shall be chargeable to tax in the year such money or asset is received.
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Classification of Capital Gains:
Short Term Capital Gain
A 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 is called as short term capital asset and capital gain arising on its transfer is called short term capital gain.
Long Term Capital Gain:
A capital asset 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) is called long-term capital asset and capital gain arising on its transfer is called long-term capital gain
Period of Holding a Capital Asset:
Generally speaking, period of holding a capital asset is the duration for the date of its acquisition to the date of its transfer. However, in respect of following assets, the period of holding shall exclude or include certain other periods.
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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. 3. The balance left-over is the gross capital gain/loss. 4. Deduct the amount of permissible exemptions u/s 54, 54B, 54D, 54EC, 54ED, 54F, 54G and 54H. 5. The balance is the net capital gain/loss, chargeable to tax.
Full Value of Consideration:
This is the amount for which a capital asset is transferred. It may be in money or moneys 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.
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Transfer Expenses: Transfer expenses include brokerage paid for arranging the deal, legal expenses incurred for preparing conveyance deed and other documents, cost of inserting advertisement in newspaper for sale of the asset and commission paid to auctioneer.
Cost of Acquisition:
Cost of acquisition is the amount for which the capital asset was originally purchased by the assessee.
Cost of acquisition of an asset is the sum total of amount spent for acquiring the asset. Where the asset is purchased, the cost of acquisition is the price paid. Where the asset is acquired by way of exchange for another asset, the cost of acquisition is the fair market value of that other asset as on the date of exchange.
Any expenditure incurred in connection with such purchase, exchange or other transaction e.g. brokerage paid, registration charges and legal expenses, is added to price or value of consideration for the acquisition of the asset. Interest paid on moneys borrowed for purchasing the asset is also part of its cost of acquisition.
Where capital asset became the property of the assessee before 1.4.1981, he has an option to adopt the fair market value of the asset as on 1.4.1981, as its cost of acquisition.
Cost of Acquisition of Property received by way of Gift:
Where any property received by an individual or HUF, on or after 01.10.2009 [or any share received by a firm/private company/ closely held public company on or after 01.06.2010], without consideration or for inadequate consideration, is taxed as income of the recipient u/s. 56 (2) (vii), the cost of acquisition of such property shall be the amount subjected to tax under said section. 45
Cost of Improvement:
Cost of improvement means all capital expenditure incurred in making additions or alterations to the capital assets, by the assessee. Betterment charges levied by municipal authorities also constitute cost of improvement. However, only the capital expenditure incurred on or after 1.4.1981, is to be considered and that incurred before 1.4.1981 is to be ignored.
In case of intangible assets like goodwill, right to manufacture, etc. cost of improvement shall be nil.
Indexed cost of Acquisition/Improvement:
For computing long-term capital gains, Indexed cost of acquisition and Indexed cost of Improvement are required to be 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.
Accordingly, Indexed Cost of Acquisition and Indexed Cost of Improvement shall be computed as under:
Indexed Cost of = Cost of Acquisition X Cost of Inflation Index Acquisition for the year of transfer Cost Inflation Index for the year of acquisition Or 1981-82, whichever is later
Indexed Cost of = Cost of Improvement X Cost Inflation Index Improvement for the year of transfer Cost Inflation Index for the year of Improvement 46
It may further be noted that where additions/alterations to a capital asset had taken place over a number of years, then indexed cost of improvement, for each year in which there was an additional/alteration, shall be worked out separately and then aggregated to arrive at the Total Indexed Cost of Improvement, in respect of that asset.
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.
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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 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.
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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.
If however, only a part of net consideration is so utilised, the amount of exemption shall be equal to:
Capital Gains X Cost of New Residential House Amount of Net Consideration
Further, if the amount cannot be so utilised before filing the return, then in order to avail of the exemption, it may be deposited under the Capital Gains Accounts Scheme 1988 before the due date for filing the return.
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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. 5,00,000 should go for short-term capital gain instead of long-term capital gain, since income up to Rs. 5,00,000 is taxable @ 10% whereas long-term capital gains are taxable at a flat rate of 20%. Those having income above Rs. 8,00,000 should plan their capital gains vice versa.
Since long-term capital gains enjoy a concessional treatment, when total income is above Rs. 8,00,000 the assessee should so arrange the transfers of capital assets that they fall in the category of long-term capital assets.
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 higher slab rate shall not be attracted in case of parent, as a result of clubbing.
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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/s 10(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; 51
(iii) Where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to tax under the head Profits and gains of business or profession;
(iv) Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy if such income is not chargeable to tax under the head Profits and gains of business or profession or under the head Salaries.
(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.
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(viii) Other receipts falling under the head Income from Other Sources: Directors fees from a company, directors commission for standing as a guarantor to bankers for allowing overdraft to the company and directors commission for underwriting shares of a new company. Income from ground rents. Income from royalties in general. Agricultural income from a place outside India Insurance commission Income from undisclosed sources
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, 000 or 33.5% of such income, whichever is low.
3. In the case of income from machinery, plant or furniture let on hire: (a) Repairs to building (b) Current repairs to machinery, plant or furniture (c) Depreciation on building, machinery, plant or furniture (d) Unabsorbed Depreciation.
4. Any other expenditure (not being a capital expenditure) expended wholly and exclusively for the purpose of earning of such income.
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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 80EE Deduction under section 80G Deduction under section 80GG Deduction under section 80GGA Deduction under section 80U
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Deduction and Net Income A number of deductions under Chapter VI-A i.e. Sections 80C to 80U are allowed from the gross total income. These deductions are allowed to certain specified tax-payers, in relation to certain specified incomes or expenditure or investments or donation. These deductions have to be made from the gross total income, in order to arrive at net income/taxable income.
80C Deduction is allowed for the amount paid or deposited by the assessee during the previous year in specified schemes (given below), subject to a maximum of Rs. 1,00,000/- Following investments are included in this section: 1. Life Insurance premium for policy : a. In case of individual, on life of assessee, assessees spouse and any child of assessee b. In case of HUF, on life of any member of the HUF 2. Sum deducted from salary payable to Government servant for securing deferred annuity or making provision for his wife/children [qualifying amount limited to 20% of salary] 3. Contribution by an individual, made under Employees Provident Fund Scheme. 4. Contribution to Public Provident Fund Account in the name of: (i) In case of individual, such individual or his spouse or any child of such individual (ii) In case of HUF, any member thereof.
5. Contribution by an employee to a recognized provident fund 6. Contribution by an employee to an approved superannuation fund. 7. Tuition fees (excluding development fees, donations, etc.) paid by an individual to any university, college, school or other educational institution situated in India for full time education of any 2 of his/her children. 8. Certain payments for purchase/construction of residential house property. 55
9. Sum paid towards notified annuity plan of LIC or other insurer 10. 5 year term deposit in an account under the Post Office Time Deposit Rules, 1981
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 assessees taxable income during the previous year, in respect of the following In case of an individual insurance on the health of the assessee, or wife or husband, or dependent parents or dependent children. In case of an HUF insurance on the health of any member of the family
Amount of deduction: (I) In case of Individual assessee: For insurance on health of self, spouse and dependent children Maximum Rs.15,000 (Rs. 20,000 in case any person insured is a senior citizen)
For insurance on health of any parent or parents Maximum Rs.15,000 (Rs.20,000 in case any person insured is a senior citizen) 56
(II) In case of an HUF the maximum deduction is Rs.15,000 (Rs.20,000 in case any person insured is a senior citizen).
Deduction under section 80DD Deduction in respect of maintenance including medical treatment of handicapped dependent:
Deduction is allowed in respect of any expenditure incurred by an assessee, during the previous year, for the medical treatment training and rehabilitation of one or more dependent persons with disability; and
Amount deposited, under an approved scheme of the Life Insurance Corporation or other insurance company or the Unit Trust of India, for the benefit of a dependent person with disability.
Amount of deduction: The deduction allowable is Rs. 50,000 (Rs. 1,00,000 in case of severe disability) in aggregate for any of or both the purposes specified above, irrespective of the actual amount of expenditure incurred.
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 : (a) Does not exceed Rs. 40,000 (the whole of such amount) (b) Exceeds Rs. 40,000 57
Where the amount actually paid is in respect of the assessee or his dependent or any member of a HUF of the assessee and who is a senior citizen, the ceiling limit of deduction is Rs.60,000, instead of Rs.40,000
Deduction under section 80E Deduction in respect of Repayment of Loan taken for Higher Education An individual assessee who has taken a loan from any financial institution or any approved charitable institution for the purpose of pursuing his higher education i.e. full time studies for any graduate or post graduate course in engineering medicine, management or for post graduate course in applied sciences or pure sciences including mathematics and statistics.
Amount of Deduction: Any amount paid by the assessee in the previous year, out of his taxable income, by way of repayment of loan or interest on such loan, without any limit.
Deduction under section 80EE [Only during A.Y.2014-15 & 2015-16] Deduction in respect of Acquisition of Residential House Individual can claim benefit under this section only when all the following conditions are satisfied, these are Purchase should be first time buyer i.e has never purchased any house and now he is going to purchase a houe. Value of the house should not be more than 40 lacs. Loan taken by individual for the purpose of buying a house should not be more than 25 lacs. On the date of sanction of loan individual does not have any own residential house property. Loan for this purpose taken by individual should be from the Financial Institution or Housing Finance Company. For this purpose, loan should be sanctioned between 01.04.2013 to 31.03.2014 58
Amount of Deduction: Asseessee can take deduction u/s. 80EE on interest payable on home loan upto 1 lac in A.Y. 2014-15. It can claim deduction in two assessments year. Means if whole amount of interest payable upto 1 lac is not claimed as deduction in A.Y. 2014-15 then remaining balance amount upto 1 lac can claim as deduction in A.Y. 2015-16. Total deduction under this section shall not be more than 1 lakh.
Example:- Assessee has taken a loan for the purpose of residential house property & interest payable on loan Rs.90,000/- for the A.Y. 2014-15. In this case assessee can claim deduction Rs.90,000/- in A.Y. 2014-15 and other remaining balance i.e. Rs. 10,000/-, can claim in A.Y. 2015-16.
Deduction under section 80G
Donations: Not Limited to 10% of GTI ; @ 100% of Donation Made Prime Ministers National Relief Fund, Armenia Earthquake Relief Fund, Africa Fund, National Foundation of Communal Harmony, Chief Ministers earthquake Relief Fund , Any University or any educational institution of national eminence approved by the prescribed authority, National Sports Fund, National Cultural Fund etc.
Not Limited To 10% of GTI ; @ 50% of Donation Made Jawaharlal Nehru Memorial Fund, Prime Ministers Drought Relief Fund, National Childrens Fund, Indira Gandhi Memorial Trust etc.
Limited to 10% of Adj. GTI ; @ 100% of Donation Made Government or any local authority or an approved institution or association By a company to the Indian Olympic Association or to an institution notified U/s. 10(23) for the development of infrastructure for sports and games in India.
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Limited to 10% of Adj. GTI ; @ 50% of Donation Made Government or Local Authority to be utilised for any charitable purposes other than the purpose of family planning. Any notified temple, mosque, gurudwara, church or other place of historic or a place of public worship of renown throughout any state for its renovation or repair.
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 assessees total income Rs. 2,000 p.m. 25% of total income Total Income = Gross total income minus Capital gains, short term capital gains under section 111A , deductions under section 80C to 80U (other than 80GG) and income under section 115A .
Deduction under section 80GGA Deduction in respect of certain donations for scientific, social or statistical research or rural development programme or for carrying out an eligible project or National Urban Poverty Eradication Fund shall be allowed
Deduction Amount: 100% of Donations or contributions made
No deduction shall be allowed if contribution is paid in cash in excess of Rs.10,000
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Deduction under section 80U A resident individual who, at any time during the previous year, is certified by the medical authority to be a person with disability [as defined under Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act 1995]. Deduction Amount: Rs.50,000 (Rs.1,00,000 in case of severe disability)
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CHAPTER 5 COMPUTATION OF TAX LIABILITY Tax Rates for A.Y. 2014-15 Filing of Income Tax Return
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Tax Rates for A.Y. 2014-15 Following rates are applicable for computing tax liability for the current Financial Year ending on March 31 2014, (Assessment Year 2014-15). Table 1: Income Tax Slab for Individuals who are below than 60 years of age Net Income Range Income Tax Plus Surcharge Plus Education Cess Income Up to Rs. 2,00,000 Nil Nil Nil Income from Rs. 2,00,000 to Rs. 5,00,000 10% of Income above Rs. 2,00,000 Less: Tax Credit - 10% of taxable income up to Rs.2000/- maximum Nil 3% of Income Tax Income from Rs. 5,00,001 to Rs. 10,00,000 Rs. 30,000 + 20% of Income above Rs. 5,00,000 Nil 3% of Income Tax Income above Rs. 10,00,000 Rs. 1,00,000 + 30% of Income above Rs. 10,00,000 Nil 3% of Income Tax
Note:- Surcharge will be applicable @10% when total taxable income in over 1 crore.
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Table 2: Income Tax Slab for Individuals who are 60 years or over 60 years but below 80 years of age Net Income Range Income Tax Plus Surcharge Plus Education Cess Income Up to Rs. 2,50,000 Nil Nil Nil Income from Rs. 2,50,000 to Rs. 5,00,000 10% of Income above Rs. 2,50,000 Nil 3% of Income Tax Income from Rs. 5,00,000 to Rs. 10,00,000 Rs. 25,000 + 20% of Income above Rs. 5,00,000 Nil 3% of Income Tax Income above Rs. 10,00,000 Rs. 1,00,000 + 30% of Income above Rs. 10,00,000 Nil 3% of Income Tax
Note:- Surcharge will be applicable @10% when total taxable income in over 1 crore.
Table 3: Income Tax slab for Individuals who are over 80 years of age Net Income Range Income Tax Plus Surcharge Plus Education Cess Income Up to Rs. 5,00,000 Nil Nil Nil Income from Rs. 5,00,000 to Rs. 10,00,000 20% of Income above Rs. 5,00,000 Nil 3% of Income Tax Above Rs. 10,00,000 Rs. 1,00,000 + 30% of Income above Rs. 10,00,000 Nil 3% of Income Tax
Note:- Surcharge will be applicable @10% when total taxable income in over 1 crore. 64
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 Individuals (Other than specified individuals) and Hindu Undivided Families for Senior Citizens who is of the age of 60 years but below 80 years Rs. 2,50,000 and for Individual, being Resident in India who is of the age of 80 years or more.
2. The last date of filing income tax return in case of individuals is July 31 st every year as per Section 139 (1) on or before due date.
3. If the income includes Business or Professional income requiring tax audit (for Business limit increased to Rs.1 Crore and for Professional it is Rs.25 lacs), the last date for filing the return is 30 th September.
4. What is the Penalty if some one failed to filed his return by due date ? [Section 139(1)] In fact there is no penalty as such for this fault, absolutely no penalty. Specific penalty for late filing of return is prescribed u/s. 271F which is briefed here under. Say For example for previous year 2013-14, assessment year is 2014-15 and it will ends on 31.03.2015, means there is no penalty for late filing of income tax return up to 31.03.2015 and after that Assessing Officer (AO) can impose a penalty of Rs.5,000 and that is also his (AO) which he may or may not exercise after giving due hearing to the assessee.
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CHAPTER 6 TAX PLANNING - RECOMMENDATIONS AND USEFUL TIPS Tax Planning Income Tax and Investment Tips for 2013 o Income Tax file for one and all o Plan for your minor children o Real Estate Strategy o Salaries and Perquisites o Tax Planning relating to Capital Gain o Keep your eyes and ears open for DTC o Time to vigorously think of investments in NPS o New Life Insurance Policies for your family o Rajiv Gandhi Equity Savings Scheme o Your 360 Degree Watch
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Tax Planning
Tax planning is one of the most important aspects of personal finance. People often fail to look at tax planning objectively and straight away start making investments related to tax saving. Also they often tend to mix tax planning and investment planning, which are totally different and are made with varying objective. Insurance for long has been the front-runner whenever investments regarding tax savings are considered. Life insurance is not an investment option but a financial tool, which protects from any unforeseen eventualities. Buying excessive insurance however leads to holding unnecessary products. Savings under section 80C can be broadly classified as investment based and non- investment based. Provident Fund (PF), Public Provident Fund (PPF), Employees' Provident Fund (EPF), National Savings Certificates (NSC), National Pension System (NPS), Fixed deposit (FD) and Equity Linked Savings Scheme (ELSS)come are investment based savings; while principal repayment of home loan, tuition fee are non-investment based. Before making investments related to tax saving it is always important that the individuals must analyse their risk appetite, and determine the percentage of debt and equity exposure they are comfortable with. Then they can match these percentages of debt and equity while investing in the available tax saving investments. Since the risk appetite, liquidity needs and current portfolio of every individual are different, making investments based on just returns is not advisable.
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TAX PLANNING AGE-WISE 23-30 This is generally starting phase of the career for most of the professionals, and therefore is the right time to start saving for the future. The investments made during this phase should have a long-term investment horizon. Starting to save and investing for retirement will give an edge if started at early age because of power of compounding. Investing in a mix of ELSS and pension-related schemes like EPF, NPS or EPF is a good option for professionals of this age group. By doing so, they ensure that they plan for their retirement from an early age. It also provides the advantage of providing equity exposure to their retirement fund. It is also advisable for the professionals of this age group to get required life insurance cover and health insurance cover. They can take the advantage of low premium rates if they start during this age. Avoid falling in the trap of endowment plans and unit linked insurance plans. 31-36 During this phase, most of the professionals can generally take advantage of avenues of tax savings other than investments. Contribution to provident fund by self and employer, required life insurance cover for self and family form the major portion of 80C. Tuition fee of the children can also be claimed under the same section. The average age of an Indian home buyer is 30. Most of the professionals in this age group can take advantage of tax savings related to a home loan. They can claim the principal repayment under section 80C and interest repayment under section 24B. For couples who are both liable to pay tax, it is advisable to take the home loan on a joint account. It is also advisable to take required health insurance cover for self and family which would account for section 80D. 68
For professionals who can still make investments under 80C, they should chalk out the goals they want to achieve and their respective timelines, before making any tax related investments. Then based on their risk appetite and time horizon, they can invest in relevant tax saving investments. Avoid over doing tax-saving investments. 36-45 Non-investment related tax savings will play a major role in tax planning even during this phase. Principal repayment on existing home loan, employer and self-contribution for PF, tuition fee of children and life insurance cover for self and family, account for more than 1 lakh under section 80C. So professionals in this age group need not make any investments for tax saving. In case they have an option to invest in 80C they can opt for investments pertaining to retirement. They can even claim the interest repayment of home loan under section 24B and health insurance premium being paid for self and family under section 80D. This is also time for the professionals to undo the past mistakes they had made regarding tax savings. They should assess all their existing tax saving investments and assess the pros and cons of holding them. It is also important that they avoid over doing tax saving investments. They should assess all their expenditures and identify the expenses which are eligible for tax savings. This gives them a fair bit of idea whether they have to make investments or not. 46-60 This is generally the peak earnings phase of the professionals. Most of them try to pay off their existing debts and channelize their income towards savings for retirement. The same factors of home loan, tuition fee and PF account for majority of the tax savings. Most of the professionals do not opt for health insurance other than the one provided by their organisations. But getting a health insurance at age 60, or after retirement, is an uphill task. Most of the service providers have a cut-off age of 60. So if have not got a health insurance by now, get one. This can be claimed under section 80D. 69
The cut-off age for opening a PPF account is also 60. If they do not have a PPF account by now, it is advisable to start one, as 60 years is the cut-off for opening a PPF account. In case, they have to make investments, they can choose any of the debt products related to retirement. Avoid buying excessive insurance or tax-saving investments. 60 Years Capital protection should be the motto of the investments being made after retirement. All investments should be in debt. Retired employees looking for timely pay outs (monthly or quarterly) can consider investing in senior citizen saving schemes (SCSS). Since SCSS is backed by government, it provides high security for your capital which is essential for post-retirement investments.
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INCOME TAX AND INVESTMENT TIPS FOR 2013 Let us all welcome the year 2013 with varied ideas to bring home tax planning for you and your family and also take you through Investment Strategies for investing your money. The following are important Tax and Investment Tips for the year 2013 will surely help you to achieve your desired results : 1) Income-tax file for one and all It is time now for every tax payer of the country to make a resolution to have a separate independent Income-tax File for every member in the family. The objective of this is to achieve tax planning and cut down on your income-tax payments. Firstly think of your wife and if she does not have till now a separate independent Income- tax File, then start of having such independent Income-tax File for your wife. The concept of gift and loans in the name of your wife will help you to achieve this. However, do remember that your wife can receive gift from any relative other than her husband, her father in law and her mother in law. However, wife is free to take loan with reasonable interest from anyone including the husband. Similarly adopt the concept of gifting your major children and start having separate independent Income- tax File for your major children.
2) Plan for your minor children If you are having a minor child or a grand child, plan right now the different strategies for the safety and security of your minor child in particular. If you want to have lots of income and wealth in the name of the minor child and would still like no clubbing of the income of the minor child, then it is time now to think of creating a separate independent hundred per cent Specific Beneficiary Trust in the name of the minor child based on the principles enunciated by the various courts of India including the Supreme Court of India so that the income of the minor child with special terms and conditions mentioned in the Trust Deed is not clubbed with the income of the parents. It is also possible for you to think of starting a PPF account in the name of the minor child for his or her safety and also do not forget to take out 71
Life Insurance Policies specially in the name of your minor child which will help the process of investment strategy in the years to come for the safety, security of your loving children.
3) Real Estate Strategy In the year 2013 in case you are thinking of buying your sweet home, then at that point of time do consider various vistas of tax and investment planning and then only take a decision to buy the property in the name of a particular member of the family. Generally speaking, it will be worthwhile to buy the property in joint names so as to reap the full fruits of tax and investment planning. Please do note that every co- owner of the property will enjoy a separate deduction of interest on housing loan up to Rs. 1,50,000 per annum and would also enjoy deduction in respect of repayment of the housing loan and plan now for your Real Estate to grow. Simultaneously, do not forget to keep in mind the provisions of the Wealth Tax Law so as to take care of wealth tax liability in respect of Real Estate or plan your wealth tax matter in such a manner that keeping in view the provisions contained in the Wealth-tax Law wealth- tax is not attracted on your Real Estate investment. It would also be a good idea to think of Rental Real Estate investment with the basic aim of getting a fixed secured rental income and lower tax incidence which is made possible through the special tax deduction at the rate of 30 per cent available for repairs etc.
4) Salaries and Perquisites We pray to the Almighty God to give you a good rise in your salary package in the year 2013. It may also be possible that you might be thinking of changing your job. In all situations namely when you get a good rise in salary or when you shift your service, then in both these situations do take care with regard to income-tax provisions contained in the Income-tax Law to save tax on your salary and perquisites. Study in greater detail the provisions contained specially in Income-tax Rules to get hold various of tax free allowances and perquisites for you during the year 2013. It is time now for you to even design your salary package and finally keep a strict watch on the comparatively recent new circular of the Central Board of Direct 72
Taxes dealing with various aspects connected with taxation of salary income which will help you to save your taxes. Likewise, while you make contribution in the year 2013 to Provident Fund, please keep a strict watch during the year because the definition of salary for the purposes of Provident Fund is expected to be amended. Hence, your contribution as well as the contribution of your employer during the year 2013 has to be definitely in tune with the new provisions based on the change of the definition of salary. 5) Tax Planning relating to Capital Gain If in the year 2013 you are going to receive certain amount by way of Capital Gain, then before making your decision to sell your assets, find out in the first place whether the gain arising to you is a Short-term Capital Gain or is it a Long-term Capital Gain because generally speaking, if you hold the asset for more than thirty six months, only then the gain becomes Long-term Capital Gain and is eligible to various concessions and deductions. Reversely, if the gain happens to be a Short- term Capital Gain, then there is no advantage at all in most cases. However, the shares and mutual funds if sold after holding it for more than twelve months, becomes a Long-term Capital Gain and less than that is a Short-term Capital Gain. Therefore, during the year 2013 at any point of time whenever you are contemplating to sell a particular asset, firstly sit down and calculate the period of holding. It is even possible that just postponing your sale to couple of months later or in some cases couple of days later may enable you to get full advantage of Long-term Capital Gain. Hence, do not sell the asset till you calculate the tax impact thereon. Also take care to save your Long-term Capital Gains either by investing in Capital Gain Bonds or in a residential property or finally investing in shares of certain new companies which are micro and small enterprises so that your tax liability with reference to Long-term Capital Gain becomes a big zero.
6) Keep your eyes and ears open for DTC All tax payers should keep a watch over the changes which are going to be proposed through the Direct Taxes Code. We are not sure whether the Direct Taxes Code or DTC will be presented in the year 2013 but going by the common expectations one 73
can reasonably come to a conclusion that during the year 2013 Direct Taxes Code may be introduced in the Parliament which will completely result into makeover of the Income-tax Act, 1961. Hence, we should carefully peep into all the intricate provisions contained in the Direct Tax Code so that we can plan our tax and investment strategy for the years to come keeping in view the proposed amendments introduced in the tax laws of the country through the Direct Taxes Code. The investment strategy for you and your family will have to be geared up with new dimension specially after the coming into operation of the Direct Taxes Code. As soon as the Direct Taxes Code is presented it would be a good idea to forget all about the Income-tax Act and to concentrate on the deep study of the new Direct Taxes Code. As soon as the new Code is presented, all the tax payers of India must carefully screen the new provisions and should plan their strategy and tax planning in the years to come. 7) Time to vigorously think on investments in NPS Please focus your investment strategy for the year 2013 on investment vistas connected with New Pension Scheme. Although by now the New Pension Scheme popularly known as NPS is into operation for the last couple of years. However, still now NPS investment has not become the darling of tax payers of India. However, it is time now to show your love and affection to the investment in new Pension Scheme. It is time now for you to study the new provisions in greater detail and try to open separate NPS account for different members in your family. For those tax payers who are having high income and wealth, it is recommended that two tier account in NPS should also be obtained. Finally if you are going to complete sixty years of age during the year 2013, then you should be more careful to immediately open NPS account in your name. This is mainly because of the fact that once you have completed sixty years of age, you cannot open a new NPS Account. Please note that after sixty years of age one cannot go in for opening an NPS account. But if you have already opened NPS account, then you can continue contributing in the said account. Hence, in the year 2013 you should aim at bringing NPS as a preferred tool of investment in your family. 74
8) New Life Insurance Policies for your family Are you adequately insured ? Let this question be asked by every adult income-tax payer in his family. I would like every tax payer to take care of securing his family during the year against calamity. One of the best way to protect the family is to adequately insure all the family members. It is time now for you not just to count your Life Insurance Policies for different members in the family but to sit down and ponder whether all the family members are adequately insured. In most cases I am sure the answer that will come in conclusion would be that most of the family members are not adequately insured. Hence, during the year 2013 please take a call to answer the question whether you and your family members are adequately insured. Do not forget to take an insurance policy for your dear loving daughter too.
9) Rajiv Gandhi Equity Savings Scheme For all those tax payers who have never had any exposure in the stock market let the year 2013 be their first year for investing in the stock market. Firstly the action plan to enter into the stock market would be to open a Demat Account in your name. To inspire all those who have never had any exposure in the stock market tax incentive is being made available in the Income-tax Law in terms of the provision contained in section 80CCG whereby first time investors in the stock market can go in for making investment up to Rs. 50,000 and enjoy a tax deduction equal to 50 per cent of such investment. Thus, tax saving can be made by taking an exposure to Rajiv Gandhi Equity Investment Scheme and thereby cutting down your tax payment by Rs. 2,500 to Rs. 5,000.
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10) Your 360 Degree Watch All those who are big spenders should be very careful in the year 2013 because Government is going to keep a strict 360 Degree watch on such spenders because the Income-tax Department has been collecting data in respect of its 360 Degree High Profile Spenders. It may be noted that there is no problem in your spending the money for the purpose which you like. But what is relevant is that you should have adequate sources and resources to prove the spending by you. Hence, in the year 2013 do keep records and details of high spending by you in different vistas so that if the tax radar comes to you, you can adequately answer about the spending by you either on holidays or on big purchase of assets etc.
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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 individuals total taxable income and age in the particular financial year.
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BIBLIOGRAPHY
Books: Dr. Vinod K. Singhania (2013), Students Guide to Income Tax, Taxman Publications, New Delhi Income Tax Ready Reckoner A.Y. 2014-15, TaxMann Publications, New Delhi Ainapure & Ainapure Direct & Indirect Taxes A.Y. 2014-15, Manan Prakashan Nabis Income Tax Guidelines & Mini Ready Reckoner A.Y. 2013-14 & 2014-15 , A Nabhi Publication
Invested: How I Learned to Master My Mind, My Fears, and My Money to Achieve Financial Freedom and Live a More Authentic Life (with a Little Help from Warren Buffett, Charlie Munger, and My Dad)
Owner Operator Trucking Business Startup: How to Start Your Own Commercial Freight Carrier Trucking Business With Little Money. Bonus: Licenses and Permits Checklist
Taxes for Small Businesses 2023: Beginners Guide to Understanding LLC, Sole Proprietorship and Startup Taxes. Cutting Edge Strategies Explained to Lower Your Taxes Legally for Business, Investing
Tax Accounting: A Guide for Small Business Owners Wanting to Understand Tax Deductions, and Taxes Related to Payroll, LLCs, Self-Employment, S Corps, and C Corporations
How To Get IRS Tax Relief: The Complete Tax Resolution Guide for IRS: Back Tax Problems & Settlements, Offer in Compromise, Payment Plans, Federal Tax Liens & Levies, Penalty Abatement, and Much More