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How to make a proper tax planning
FAS
Proper tax planning is the basic duty of every person, which should be carried out religiously.
Basically, there are three steps in the tax planning exercise. You need not consult an Income Tax
Practitioner or a Chartered Accountant for this matter.

In fact, you can do it yourself. These three steps of tax planning are:

1. Calculate your Taxable Income for the Financial Year (from April 1 to March 31) from all
sources such as salary /pension, interest etc.
2. Calculate tax payable on Annual Taxable Income using a simple tax rate table, given on
the next page.
3. After you have calculated the amount of your tax liability, you have two options to
choose from:

a . Pay your tax (no tax planning is required b. Minimize your tax through

Prudent Tax Planning. Most people should and do choose Option ‘b’. Here, you have to
compare the advantages of several tax saving schemes and depending upon your age, social
liabilities, tax slab and personal preferences, decide on the right mix of investments/insurance
plans, which shall reduce your tax liability to Zero or to the “Minimum” extent possible. You
may also consult your Financial Planner for distributing your savings in various tax saving
schemes.

1. Filing of income tax return is compulsory for all individuals whose gross annual income
exceeds the maximum amount which is not chargeable to income tax i.e. Rs. 1,90,000 for
Resident Women, Rs. 2,40,000 for Senior Citizens and Rs. 1,60,000 for other individuals and
HUFs.

2. The last date of filing income tax return for individuals is July 31, with one exception
covered in point 3 below.

3. If the income includes business or professional income requiring tax audit (annual turnover
Rs. 40 lakhs), the last date for filing the return is PRUDENT TAX PLANNING IS THE BASIC DUTY
OF EVERY TAX PAYER. CITIZENS MUST
AVAIL ALL THE BENEFITS PROVIDED TO THEM UNDER THE CURRENT TAX LAWS.

ONE SHOULD NOT BE PROCRASTINATING TAX PLANNING DECISIONS TILL THE END OF THE
FINANCIAL YEAR AS EARLIER YOU START, EARLIER WILL YOUR INVESTMENTS MATURE IN THE
FUTURE. PAYING YOUR LEGITIMATE TAX DUES FILLS YOU WITH A SENSE OF RESPONSIBILITY
TOWARDS OUR COUNTRY’S FISCAL OBJECTIVES AND SAVING TAXES GIVES YOU EXTRA
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SATISFACTION AND MENTAL PEACE AS EVERY RUPEE OF TAX SAVED IS A RUPEE EXTRA
EARNED.

4. The penalty for non-filing of income tax return is Rs. 5000.

1. Interest on PPF/GPF/EPF.

2. Interest on GOI tax free bonds.

3. Dividends on Shares and on Mutual Funds.

4. Any capital receipt from life insurance policies i.e., sums received either on death of the
insured or on maturity of life insurance plans. However, in case of life insurance policies issued
after March 31, 2004, exemption on maturity payment u/s 10(10D) is available only if the
premium paid in any year does not exceed 20% of the sum assured.

5. Interest on savings bank account in a post office.

6. Long term capital gain on sale of shares and equity mutual funds if the security transaction
tax is paid/ imposed on such transactions.

Dividend income from companies /equity-oriented Mutual Funds is completely exempt in the
hands of investors. Dividend is also tax-free in the hands of investors in case of debtoriented
Mutual Fund schemes.

Gift tax was abolished with effect from October 1, 1998. The gifts were no longer taxable in
the hands of donor or donee. However, with effect from September 1, 2004, any gift received
by an individual or HUF will be included in taxable income, provided the amount of gift exceeds
Rs. 50,000.

1.Spouse 2.Brother or sister 3. Brother or sister of the spouse 4. Brother or sister of either of
the parents of the individual 5. Any lineal ascendant or descendant of the individual 6. Any
lineal ascendant or descendant of the spouse of the individual 7. Spouse of the person referred
to in (2) or (6) Also, gifts received on the occasion of marriage or under a will by way of
inheritance are also tax free As per Income Tax , Income of a Person is Computed under the
following 5

Heads :
1. Income from Salaries 2. Income from House Properties 3. Profit & Gains of Business &
Profession
4. Capital Gains 5. Income from Other Sources Now we will discuss in detail about the
taxability of these sources of income. Salaried employees are issued a certificate of tax
deducted at source from salary income by their employers in Form No. 16. It also gives the
Net Taxable Salary
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If the property is self occupied then the Income from House Property is treated as NIL. If any
loan is taken for the purchase of the property then the amount paid towards interest upto a
maximum of Rs.1,50,000/- is deducted from taxable income. In case property is given on rent,
then we have to find out the Annual Rental Income.
deduct 30% towards repairs & maintenaince deduct the amount of interest paid on loan taken
for the purchase of the property.

Income as arrived on the basis of Profit & Loss A/c Interest Income from company deposits,
debentures/bonds, savings bank account/ fixed deposits with banks, post office savings
schemes like MIS, NSC, KVP, private loans given to relatives, friends or any other entity as well
as from government securities is required to be included in the Gross Taxable Income
Deduction u/s 80 L has been omitted now and accordingly, interest income from the above
sources is fully taxable now.

Interest payments by companies on Income tax is deducted @10.3% in case the interest
exceeds Rs 5,000 in a financial year. Income Tax is deducted @10.3% in case the interest
amount exceeds Rs. 10,000 in a financial year.

Income tax is deducted @10.3% in case the interest exceeds Rs. 5,000 in a financial year .

Deduction of income tax at source can be avoided by filing Form 15G in duplicate (15 H for
senior citizens). However, such forms can be submitted only by individuals whose total income
in the financial year is expected to be below the maximum amount not chargeable to tax.

Capital gain arises when certain assets like property (plot or a built up commercial residential
unit) or shares/mutual fund units/bonds etc are sold for a profit. The treatment of capital gains
is slightly different from other sources of income as listed above. It mainly depends upon
whether the capital gain (profit on sale) is short term or long term.

Capital gain is considered to be short term if immovable property is sold /transferred within
three years of acquisition. Similarly, if shares or other financial securities such as mutual fund
units are sold within one year of purchase, the profit earned is treated as short term capital
gain. Short term capital gain is included in the gross taxable income like other sources of
income and normal rates of tax apply, which depend on the gross taxable income from all
sources including short term capital gains.

With effect from October 1, 2004, the only exception is short term capital gains from sale of
equity shares or units of equity oriented mutual fund schemes. In this case, short term capital
gains are taxed at a flat rate of 15% plus education cess, irrespective of the tax slab on other
sources of income, provided securities transaction tax is paid on such sale.

If immovable property is sold after three years of purchase, or financial securities such as
shares, deep discount bonds,
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units of open - ended or close – ended schemes of mutual funds are disposed of
(sold/redeemed/transferred) after holding the same for more than twelve months, then the
gain is considered to be long term capital gain.

With effect from October 1, 2004, long term capital gain on transfer of listed shares/units of
equity oriented mutual funds schemes has been exempted from tax, provided securities
transaction tax has been paid on such sale. For assets other than listed shares/units of equity
oriented mutual fund schemes, tax is payable in respect of long term capital gains at a flat rate
of 20% and the amount of gain has to be adjusted for inflation. This inflation adjustment is
known as indexation benefit. Every year the Government of India announces inflation
adjustment rate for the purpose of long term capital gain. Long-Term Capital Gains arising from
sale/ transfer of bonds and debt securities (including units of debtoriented mutual fund
schemes) Long-Term Capital Gains tax in respect of bonds and debt securities is payable
at a flat rate of 10% plus education cess of the capital gains amount. But it should be noted that
this lower rate of tax @ 10% plus cducation cess will be applicable in respect of such bonds and
debt securities, which are listed on any recognized stock exchange and also for units of debt-
oriented mutual fund schemes. However, there is an option to avail the indexation benefits, but
in that case tax will have to be paid at the normal Long-Term Capital Gain tax rate of 20% plus
education cess.

In order to save capital gain tax, the total amount of Long -Term Capital Gain (after availing
indexation benefit) has to
be invested in any of the following two schemes specified under section 54EC (upto Rs.50 lakhs
only):

1. Bonds issued by Rural Electrification Board (REC)

2. Bonds Issued by NHAI (National Highways Authority of India)
These bonds have a minimum lock-in period of three years. If 100% capital gain amount is
invested in the above-mentioned bonds, 100% tax is saved. Similarly, if 60% of capital gain
amount is invested, in that case only 60 % of capital gain tax will be saved and on the balance
40% tax has to be paid.

In case of sale/ transfer of residential house, the same must have been held for at least three
years. Only in that case, the gain (profit on sale) shall be considered as Long-Term Capital Gain.
Tax on Long Term Capital Gain can also be saved by buying another house within a period of
two years from the date of sale or by constructing a new residential house within three years of
sale.

1. Short Term Capital Loss can be set off against any capital gain, whether Short Term or Long
Term.
2. However, Long Term Capital Loss can only be set off against Longterm Capital Gain.
3. Unabsorbed Short-Term Capital Loss can be carried forward for eight years.
4. Similarly, unabsorbed Long Term Capital Loss can also be carried forward for eight years and
can be
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set off only against Long Term Capital Gain.

This new section was introduced from the Financial Year 2005-06.
Under this section, a deduction of up to Rs. 1,00,000 is allowed from Taxable Income in respect
of investments made
in some specified schemes.

Specified Investment Schemes u/s 80C and u/s 80CCC (1)-

1. Life Insurance Premiums

2. Employee’s Contributions to Employees Provident Fund/GPF
3. Public Provident Fund (maximum Rs 70,000 in a year)
4. NSC (National Savings Certificates)
5. Unit Linked Insurance Plan (ULIP)
6. Repayment of Housing Loan (Principal)
7. Equity Linked Savings Scheme (ELSS) of Mutual Funds
8. Tuition Fees including admission fees or college fees paid for fulltime
education of any two children of the assessee (Any development fees or donation or payment
of a similar nature shall not be eligible for deduction).
9. Interest accrued in respect
of NSC VIII issue.
10. Pension scheme of LIC of India or any other insurancecompany.
11. Fixed Deposit with Banks having a lock-in period of 5 Years
12. Amount deposited under Post Office Senior Citizens Scheme. (Current Rate of interest is 9%
P.A.)
13. Amount deposited in Five Year Time Deposit Scheme in Post Office
14. Amount deposited in theNABARD Rural Development Bonds of NABARD

Notes:

1. There are no sectoral caps (except in PPF) on investment in the new section and the assessee
is free to invest Rs 1,00,000 in any one or more of the specified instruments.
2. Amount invested in these instruments would be allowed as deduction irrespective of the fact
whether (or not) such investment is made out of income chargeable to tax.
3. Section 80C deduction is allowed irrespective of the assessee’s income level. Even persons
with taxable income above Rs. 10,00,000 can avail the benefit of section 80C.
Please note that because the deduction is allowed from taxable income, the exact savings in tax
will depend upon the tax
slab of the individual. Thus, a person in the 30% tax slab can save income tax up to Rs. 30,900 (
Tax plus education cess ) by investing Rs. 1,00,000 in the specified schemes u/s 80C. Deduction
under section 80CCF - Deduction up to Rs.20000/- in respect of subscription to long – term
Infrastructure Bonds With effect from current financial year a new section has been introduced
to enable taxpayers to save additional tax over and above Section 80C. Under this section, a
deduction of up to Rs. 20,000 is allowed (over and above Rs. 100000 U/S 80 C ) from Taxable
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Income in respect of investments made in long – term Infrastructure Bonds . So far IFCI, LIC ,
IDFC, and L&T infrastructure Finance Co have received permission to launch these long term
infrastructure bonds.

A person who falls in the 30% tax bracket can save income tax up to 6180/-( Tax plus
education cess) by investing Rs.20000/- in Long Term Infrastructure Bonds. Deduction under
section 80D Under this section, deduction of up to Rs 40,000 can be claimed in respect of
premium paid by any mode other than cash towards health insurance policy of various
General Insurance companies like Apollo Munich’s easy health IFFCO Tokio’s Individual
Medishield Policy,ICICI Lombard Health Advantage,Star Health’s Senior Citizen-Red Carpet etc..
Such premium can be paid towards health insurance of spouse, parents as well as dependent
children.

Under this section, interest on borrowed capital for the purpose of house purchase or
construction is deductible from taxable income up to Rs.1,50,000 with some conditions to be
fulfilled. Prudent Tax Planning is the basic duty of every tax payer. Citizens must avail all the
benefits provided to them under the current tax laws. One should not be procrastinating tax
planning decisions till the end of the financial year as earlier you start, earlier will your
investmentsmature in the future. Paying your legitimate tax dues fills you with a sense of
responsibility towards our country’sfiscal objectives and saving taxes gives you extra
satisfaction and mental peace as every rupee of tax saved is a rupee extra earned.

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Regards,

Kirang Gandhi
Corporate Financial Planner
www.kgandhi.anindia.com
M-9271267305