CHAPTER 1

INTRODUCTION

1.1 INTRODUCTION
Tax planning is the analysis of a financial situation or plan from a tax perspective.
The purpose of tax planning is to ensure tax efficiency. Through tax planning, all
elements of the financial plan work together in the most tax-efficient manner possible.
Tax planning is an essential part of a financial plan. Reduction of tax liability and
maximizing the ability to contribute to retirement plans are crucial for success. As
responsible citizens of the country, paying Income Tax on time, on your income is
mandatory for the country to grow.
Income Tax Act, 1961 governs the taxation of incomes generated within India and of
incomes generated by Indians overseas. This study aims at presenting a lucid yet
simple understanding of taxation structure of an individual’s income in India.

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
2019, and broadly presents the nuances of prudent tax planning and tax saving options

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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.

1.2 INCOME TAX

An income tax is a tax that governments impose on income generated by businesses
and individuals within their jurisdiction. By law, taxpayers must file an income tax
return annually to determine their tax obligations. Income taxes are a source of
revenue for governments. They are used to fund public services, pay government
obligations, and provide goods for citizens. Certain investments, like housing
authority bonds, tend to be exempt from income taxes.

1.2.1 INCOME TAX ACT 1961

The Income Tax Act was passed in the year 1961. This act was come in to force on
the 1st April, 1962 to the whole India and is the statute under which everything related
to taxation is listed. This includes levy, collection, administration and recovery of
income tax. The act basically aims to consolidate and amend the rules related to
taxation in the country.
An Income Tax Act contains 298 sections and 14 schedules with numerous
subsections. It laid out a system by which taxes are to be assessed and collected and
specifies a procedure by which disputes with tax authorities are to be addressed. The
important provisions provided in the Income Tax Act were enlisted below.
Under the Income Tax Act, every person, who is an assessee and whose income
exceeds the maximum exemption limit, shall be chargeable to the 68 income tax at the
rate or rates prescribed in the Finance Act, such income tax will be paid on the total
income of the previous year in the relevant assessment year. Assessment year is a
period of 12 months starting from 1st day of April every year and ending on 31st day
of March of the next year and previous year/financial year is the 12 months period
before the assessment year.
The year in which income is earned is called previous year and the one in which it is
charged to tax is called assessment year.

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Taxes are collected by the government in three ways:

1) Voluntary payment by taxpayers to designated banks, like advance tax and self-

assessment tax.

2) TDS or Taxes Deducted at Source is the ones which are deducted from your
monthly income, before you receive it.

3) TCS or Taxes Collected at Source.

1.2.2 TYPES OF INCOME TAX

Taxes in India can be categorized as direct and indirect taxes. Direct tax is a tax you
pay on your income directly to the government. Indirect tax is a tax that somebody
else collects on your behalf and pays to the government e.g. restaurants, theatres and
e-commerce websites recover taxes from you on goods you purchase or a service you
avail. This tax is, in turn, passed down to the government.

Direct Taxes are broadly classified as:

1. Income Tax –
This is taxes an individual or a Hindu Undivided Family or any taxpayer other than
companies, pay on the income received. The law prescribes the rate at which such
income should be taxed

2. Corporate Tax –
This is the tax that companies pay on the profits they make from their businesses.
Here again, a specific rate of tax for corporates has been prescribed by the income tax
laws of India.

Indirect taxes take many forms:

Service tax on restaurant bills and movie tickets, value-added tax or VAT on goods
such as clothes and electronics. Goods and services tax, which has recently been
introduced, is a unified tax that has replaced all the indirect taxes that business owners
have to deal with.

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1.2.3 WHO PAYS INCOME TAX AND WHY IS IT NEEDED?
Income tax is applicable to be paid by individuals, corporates, businesses, and all
other establishments that generate income. The collection, recovery, and
administration of income tax in India is regulated by Income Tax Act, 1961. The
government deploys this tax amount for a number of reasons ranging from building
the infrastructure to paying the state and central government employees their salaries.
Income tax helps the government generate a steady source of income which is
eventually used for the development of the nation. Even though income tax is paid
every month from the monthly earnings, it is calculated on an annual basis. The
amount of income tax an individual has to pay depends on a number of factors.

1.3 INCOME TAX ASSESSEE:

An Assessee is any individual who is liable to pay taxes to the government against
any kind of income earned or any losses incurred by him for a particular assessment
year. Each and every person who has been taxed in the previous years for income
earned by him is treated as an Assessee under the Income Tax Act, 1961.An Assessee
may be any individual liable to pay taxes for himself or to pay tax on behalf of else.
The Income Tax Act, 1961 has classified Assessee in different categories. An
Assessee may either be a normal Assessee, a Representative Assessee, a Deemed
Assessee or an Assessee in Default.

The various categories of Assesses as laid down in the Act are and who all belong
to the respective categories of being an Assessee:

1. Normal Assessee:
A normal Assessee is an individual who is liable to pay taxes for the income earned
by him for a particular financial year. Each and every Individual who has paid taxes in
preceding years against the income earned or losses incurred by him is liable to make
payments to the government in the form of tax. Any individual who is supposed to
make payments to the government in the form of interest or penalty or anybody who
is entitled to tax refund under the IT Act is an Assessee. All such individuals are
grouped under the category of Normal Assessee.

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 2. Representative Assessee:
Many times, it so happens that an individual is liable to pay taxes for income or losses
incurred not only by him, but also for income or losses incurred by a third party. Such
an individual is known as Representative Assessee. Basically, he acts as a
representative for people who themselves are not in a position to file and pay their
taxes themselves. Generally, the people who need representatives are no, minors or
lunatics. And the people representing them are either their agents or guardians. Such
people are deemed to be Representative Assesses

3. Deemed Assessee:
i. Deemed Assessee is an individual who is put in a position to pay taxes for some
other person by the legal authorities. Generally, the individuals who are treated as
Deemed Assesses are:
ii. The executors or the legal heir of the property of a deceased person, who in
written has passed on his property to the executor, is treated as a Deemed
Assessee.
iii. The eldest son or any other legal heir of a deceased individual (who has expired
without writing his will) is treated as a Deemed Assessee.
iv. The guardian of a minor, a lunatic or an idiot is treated as a Deemed Assessee.
v. The agent of a Non-Resident Indian (having Income Sources in India) is treated as
a deemed Assessee.

PERSONS:
A person in India, for the purpose of income tax includes:
1. Individual
2. Hindu Undivided Family (HUF)
3. Association of persons (AOP)
4. Body of Individual (BOI)
5. Company
6. Firm
7. A local authority and
8. Every artificial judicial person not falling within any of the preceding categories

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Each of these taxpayers is taxed differently under the Indian income tax laws. While
firms and Indian companies have a fixed rate of tax of 30% of profits, the individual,
HUF, AOP and BOI taxpayers are taxed based on the income slab they fall under.
People’s incomes are grouped into blocks called tax brackets or tax slabs. And each
tax slab has a different tax rate.

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, non-resident or not ordinarily
resident.

1.4 SCOPE OF TOTAL INCOME:

Under the Income Tax Act, 1961, total income of any previous year of a person who
is a resident includes all income from whatever source derived which: is received or is
deemed to be received in India in such year by or on behalf of such person; accrues or
arises or is deemed to accrue or arise to him in India during such year; or accrues or
arises to him outside India during such year:
Provided that, in the case of a person not ordinarily resident in India, the income
which accrues or arises to him outside India shall not be included unless it is derived
from a business controlled in or a profession set up in India.
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.

1.5 HEADS OF INCOME:

From the following heads of income the total income is to be
calculated:
1.5.1 Income From Salaries
1.5.2 Income from house property
1.5.3 Income From Capital gains
1.5.4 Income From business or profession
1.5.5 Income from other sources

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1.5.1. INCOME FROM SALARIES:
Existence of ‘master-servant’ or ‘employer-employee’ relationship is absolutely
essential for taxing income under the head “Salaries”. When a person receives a pay
for his job from a company it is called as salary. There must be a contract existing as
per the rule of law, which can established that the payer is the employer and the
receiver is the employee. 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.  Salary also should include the
basic wages or salary, advance salary, pension, commission, gratuity, perquisites as
well as the annual bonus.

1.5.2. INCOME FROM HOUSE PROPERTY:

Rental Income from properties owned by a person other than those which are
occupied by him is charged as income from house property. 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.

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Even if the house property is situated outside India it is taxable in India if the owner-
assessee is resident in India. Incomes Excluded from House Property Income: 

The following incomes are excluded from the charge of income tax under this head:

1. The Annual value of house property used for business purposes

2. Income of rent received from vacant land.
3. Income from house property in the immediate vicinity of agricultural land and
used as a store house, dwelling house etc. by the cultivators.

1.5.3. INCOME FROM CAPITAL GAIN:

Any profits or gains arising from the transfer of capital assets affected during the
previous year is chargeable to income-tax under the head “Capital gains” and shall be
deemed to be the income of that previous year in which the transfer takes place.
Taxation of capital gains, thus, depends on two aspects – ‘capital assets’ and transfer’.
Capital gains’ means any profit or gains arising from transfer of a capital asset. If any
Capital Asset is sold or transferred, the profits arising out of such sale are taxable as
capital gains in the year in which the transfer takes place. A capital gain is the
difference between the price at which the capital asset was acquired and the price at
which the same asset was sold. In technical terms, capital gain is the difference
between the cost of acquisition and the fair market value on the date of sale or transfer
of asset.

Capital Asset:
‘Capital Asset’ means property of any kind held by an assessee including property of
his business or profession, but excludes non-capital assets. It includes all kinds of
property, movable or immovable, tangible or intangible, fixed or circulating. Thus
land and building, plant and machinery, goodwill, trademark, mutual fund etc. are
capital assets.

Capital assets are of two types: 

1. Short term capital assets
2. Long term capital assets

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1. Short-term capital asset:
This is an asset that is held for not more than 36 months immediately preceding the
date of its transfer. This period of 36 months is substituted to 12 months in case of
certain assets like equity or preference shares held in a company, any other security
listed on a recognised stock exchange of India, Units of specific equity mutual funds
and Zero coupon bonds.

2. Long term capital asset:

This is an asset that is held for more than 36 months or 12 months as the case may be.
Transfer is defined as the sale of the asset, giving up of rights on the asset, forceful
takeover by law or maturity of the asset. Many transactions are not considered as
transfer, for example, transfer of a capital asset under a will. Stocks and units of
equity diversified mutual funds qualify for long term capital gains if held for more
than a year. In case of real estate, it qualifies for long term capital gains if it is held for
more than two years. Earlier to the Finance Act 2017, real estate was considered as a
long term capital asset only if it was held for more than three years.

1.5.4. INCOME FROM BUSINESS AND PROFESSION:

Income from Business/Profession:

Income from Business/Profession means any income which is shown in profit and
loss account after considering all allowed expenditures.

Income chargeable under business/profession:

The following are few examples of incomes which are chargeable under this head:-
1. Normal Profit from general activities as per profit and loss account of business
entity.
2. Profit from speculation business should be kept separate from business income
and shown separately.
3. Any profit other than regular activities of a business should be shown as casual
income and will be shown under “income from other sources” head.
4. Profit earned on sale of REP License/Exim scrip, cash assistance against export or
duty drawback of custom or excise.

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5. The value of any benefits whether convertible into money or no from
business/profession activities.
6.  Any interest, salary, commission etc. received by the partner of a firm will be
treated as business/professional income in hand of partner. However, the share of
profit from partnership firm is exempt in hand of partner.
7. Amount recovered on account of bad debts which were already adjusted in profit
in earlier years etc.

1.5.5. INCOME FROM OTHER SOURCES:

Sections 56 to 59 deal with the provisions for computation of income under the head
‘income from other sources’. This is a residuary head covering all incomes which do
not specifically fall under any of the heads mentioned earlier.
Income from other sources consists of two main categories and they are recurring
income and non-recurring income.

1) Recurring income:
Any income received at regularly at equal intervals. This generally includes interest
income from the savings bank, post office savings, fixed deposits, recurring deposits
etc.
2) Non-recurring income: 
Any income received only once. This generally includes Income from the
lottery, gambling, horse racing etc.

Next, let us see the items which come under this type of income.

List of items under Income from Other Sources

1. Dividend: Dividend is chargeable at a rate of 10% if the aggregate amount of

dividend during that year exceeds Rs. 10,00,000. This is applicable to
individuals/HUFs. If you receive a dividend from a domestic company and it is
chargeable under dividend distribution tax, then you will get an exemption.
2. One-time income: Income from lotteries, crossword puzzles, horse races, games,
gambling or betting.
3. Interest on securities if it is not taxable under “Profits and Gains of Business or
Profession”.

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4. Income from machinery, plant or furniture belonging to taxpayer and let on hire.
This is applicable if income is not chargeable to tax under the head ‘Profits and
Gains of Business or Profession’.
5. Composite rental income from letting of plant, machinery or furniture with
buildings, where such letting is inseparable. Again, this is applicable if this
income is not taxable under the head ‘Profits and Gains of Business or
Profession’.
6. If an employee receives any compensation due to the termination of his
employment or modification of terms and conditions relating to the job, then that
amount will be taxable.
7. Any sum of money received as an advance or otherwise in the course of
negotiations for the transfer of a capital asset shall be charged to tax under this
head, if:

a) The sum is forfeited; and

b) The negotiations do not result in the transfer of such capital asset.

1.6 INCOME TAX CALCULATION:

Every income that you are received should form part of your income tax return. Of
course, the law does provide for exemption of certain incomes e.g. dividend income
from an Indian company, LTCG on listed equity shares unto Rs 1 lakh in any
financial year etc.
Therefore, here is a quick guideline you can probably follow to compute taxes due on
your income:
1. List down all your income – be it salary, rental income, capital gains, interest
income or profits from your business or profession.
2. Remove incomes that are exempt under law
3. Claim all applicable deductions available under every source of income. E.g.
claim standard deduction of Rs 40,000 from salary income, claim municipal taxes
from rental income, claim business related expenses from your business turnover
etc.

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4. Claim all applicable exemptions under every head of income e.g. amount
reinvested in another house property can be claimed as exemption from capital
gains income etc.
5. Claim applicable deductions from your total income e.g. the 80 deductions
like 80C, 80D, 80TTA, 80TTB etc.

1.7 INTRODUCTION TO TAX PLANNING:

In an organized society, tax is unavoidable because it is the price paid for

administrative and political stability by the public to the Government. It is the duty of
each citizen to pay due taxes in time and not to resort to any device to evade the
payment of taxes. An effective tax strategy is vital for successful financial planning
since payment of taxes reduces the disposable income of the tax payers. To solve the
problem of tax burden, the concept of tax planning has been introduced in the Income
Tax Act. Tax planning may be defined as an arrangement of one’s financial affairs in
such a way that without violating in any way the legal provisions, full advantage is
taken of all tax exemptions, rebates, allowances and other reliefs or benefits permitted
under the Act. This will reduce the burden of taxation on the assessees as far as
possible.
Tax planning may be regarded as a method of intelligent application of expert
knowledge of planning one’s economic affairs with a view to securing the consciously
provided tax benefits on the basis of national priorities in keeping with the legislative
and judicial opinion. But it does not imply taking undue advantage of loopholes in tax
laws or evading tax liability. Hence tax planning is defined as the methods used by a
tax payer to reduce his burden of Contents. Tax planning may be legitimate provided
it is within the frame work of tax laws. Hence tax evasion and tax avoidance must be
understood as distinct from tax planning.
The present chapter discusses the concepts of tax planning and explains the
deductions and relief available to individual income tax assessees under the
provisions of the Income Tax Act for the period under study. The chapter is organized
in to two parts. While the first part explains the concepts of tax planning, second part
discusses tax planning of employees under the provisions of Income Tax Act, 1961.

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1.7.1 FEATURES OF TAX PLANNING:

1. Reduction in Tax Liability:

The first and foremost characteristic of tax planning is that it results in the reduction
in tax liability of an individual which ensure that an individual has more disposable
income which can be used by an individual for consumption for making investments
which can come in handy in future. Hence for example, if an individual is able to save
money due to tax planning and invest it wisely .Which can be of great help when an
individual take retirement.

2. Advance Planning Is Needed:

Another feature of taxation planning is that one needs to plan in advance regarding
how to make sure that tax liability is reduced to maximum possible extent by
investing in tax saving instruments right from start of the financial year because if you
are thinking that you can reduce your tax liability by doing taxation planning night
before the last date for filing income tax returns than you will be in for
disappointment.

3. Investment in Tax Saving Instruments:

Tax planning can be done only by investing in tax saving instruments which can be
through bonds or mutual funds or fixed deposits of banks. In simple words, one
cannot claim tax relief by making an investment in any asset rather one has to make
an investment in instruments for investments available in the market if one wants to
claim tax relief from tax authorities.

4. Made Every Year:

Taxation planning is one thing which has to be made every year and unlike other
investments like real estate or stocks where one has to review the investment after 2
or 3 years. In simple words just like you get increment in your job every year in the
same way taxation planning has to be done every year unless you stop earning enough
money to be tax liable.

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5. Dynamic in Nature:
Tax planning is dynamic in nature because every year assessee have to modify tax
plan according to rules framed by the government as the government keeps changing
tax laws which in turn keep the tax planner on toes as he or she has to change his or
her investment in tax saving instruments accordingly.
As one can see from the above features of tax planning that it is of great help not only
in saving money for the current period but also make sure that on your retirement you
receive a good amount of money out of saving generated due to taxation planning.

1.7.2 OBJECTIVES OF TAX PLANNING

1. Reduction of tax liability:

An assessee can save the maximum amount of tax, by properly arranging his/her
operations as per the requirements of the law, within the framework of the statute. It is
helps to reduce tax liability with the use of deductions and exemptions gives by
income tax law.

2. Minimization of litigation:
There is a war-like situation between the taxpayers and tax collectors as the former
wants the tax liability to be minimum while the latter attempts to extract the
maximum. So, proper tax planning aims at conforming to the provisions of the tax
law, in such a way that incidence of litigation is minimized.

3. Productive investment:
One of the major objectives of tax planning is the channelization of taxable income to
different investment plans. It aims at the optimum utilization of resources for
productive causes and relieving the assessee from tax liability.

4. Healthy growth of economy:

The growth and development of the economy greatly depend on the growth of its
citizens. Tax planning measures involve generating white money that flows freely and
results in the sound progress of the economy.

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5. Economic stability:
Proper tax planning brings economic stability by various techniques such as
mobilizing resources for national projects or availing ways for investments which are
productive in nature. Tax Planning follows an honest approach, to achieve maximum
benefits of tax laws, by applying the script and moral of law. Therefore the objectives
do not in any way contradict the concept of tax laws.

1.7.3 TYPES OF TAX PLANNING

Here are the three types of tax planning:
1. Purposive tax planning
2. Permissive tax planning
3. Long range and Short range tax planning

1. Purposive tax planning: 

Purposive tax planning means applying tax provisions in an intellectual manner so to
avail the tax benefits based on national priorities. It includes tax planning with a
purpose of getting the maximum benefit by making suitable program for replacement
of assets, correct selection of investment, varying the residential status and
diversifying business activities and income. Also, Under Income Tax Act, Section 60
to Section 65 is related to the income of other persons included in the income of
assessee. Here, assessee can plan in a way that the provisions do not get attracted so
as to increase the disposable resources. This is known as purposive tax planning.

2. Permissive tax planning: 

Permissive tax planning refers to the plans which are permissible under various
provisions of the law, for example planning of earning income covered by Section 10,
Section 10(1), planning of taking advantage of various deductions, incentives for
getting benefit of different tax concessions etc. In other words, it means planning
made as per provision of the taxation laws.

3. Long range and Short range tax planning: 

Short-range planning means planning made annually to fulfil the limited or specific
objectives. It is executed at the end of the year to reduce taxable income legally. Also,

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in short-range tax planning there is no permanent commitment. An individual may
invest in NSCs (National savings certificate) or PPF (Public Provident Fund) within
the prescribed limit when income is increased. It is not advisable to take
LIC/ULIP/Pension Plan etc. Long range tax planning refers to the practices
undertaken by the assessee. Long term planning is done at the beginning or the
income year to be followed around the year.  Long term planning does not help
immediately, for example transfer of assets without consideration to minor child. In
this case, the income will be combined to transferor up to the child in minor but once
the child turns 18, this will be the child’s income

1.7.4 CONCEPT USED IN TAX PLANNING:

1. Tax Evasion
Tax Evasion means not paying taxes as per the provisions of the law or minimizing
tax by illegitimate and hence illegal means. Tax Evasion can be achieved by
concealment of income or inflation of expenses or falsification of accounts or by
conscious deliberate violation of law. Tax Evasion is an act executed knowingly
wilfully, with the intent to deceive so that the tax reported by the taxpayer is less than
the tax payable under the law.

2. Tax Avoidance
Tax Avoidance is the art of dodging tax without breaking the law. While remaining
well within the four corners of the law, a citizen so arranges his affairs that he walks
out of the clutches of the law and pays no tax or pays minimum tax. Tax avoidance is
therefore legal and frequently resorted to. In any tax avoidance exercise, the attempt is
always to exploit a loophole in the law. A transaction is artificially made to appear as
falling squarely in the loophole and thereby minimize the tax. In India, loopholes in
the law, when detected by the tax authorities, tend to be plugged by an amendment in
the law, too often retrospectively. Hence tax avoidance though legal, is not long
lasting. It lasts till the law is amended.

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3. Tax Planning
Tax Planning has been described as a refined form of ‘tax avoidance’ and implies
arrangement of a person’s financial affairs in such a way that it reduces the tax
liability. This is achieved by taking full advantage of all the tax exemptions,
deductions, concessions, rebates, reliefs, allowances and other benefits granted by the
tax laws so that the incidence of tax is reduced. Exercise in tax planning is based on
the law itself and is therefore legal and permanent.

4. 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.
To sum up all these four expressions, we may say that:
1. Tax Evasion is fraudulent and hence illegal. It violates the spirit and the letter of
the law.
2. 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.
3. 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.
4. 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.

.
1.8 TAX PLANNING FOR SALARIED ASSESSEES:
Tax planning means an arrangement of one’s financial activities in such a way to get
maximum tax benefit. At the very outset, it is necessary to clear the misconception
about the tax planning that prevails among the salaried assessees. They seem to
misunderstand that tax planning means paying no tax. This may not be possible in all
cases. Tax liability cannot be totally avoided, once the income crosses a particular
limit. This is because of the fact that the avenues for tax savings are quite limited and
even the available avenues have their own in-built ceiling limit. Hence, tax planning

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means reducing tax liability to the absolute minimum by adopting proper tax planning
measures.
For a salaried assessee, the approach for tax planning must be three fold:
First is investing in savings schemes out of the current year income, so as to reduce
the tax liability to the absolute minimum.
Next is effecting proper investment of the surplus, if any, after meeting expenses
(including taxes) so as to reap (i) the maximum tax benefit on the income from such
investments and (ii) to obtain maximum returns on the investments.
Finally, planning some special measures in the pre-retirement stage as well as
effecting investment of retirement benefits in appropriate areas so as to ensure regular
and adequate flow of income after retirement.
As a prelude to the above approach, it is essential and necessary for the assessees to
arm themselves with information on the following aspects:
a. The various tax saving schemes available under the Act.
b. The identification of the proper avenues, which suit their requirements.
c. The effecting of the savings in a planned manner well in time.
Tax planning is a sensible decision taken by the income tax assessees to reduce their
tax liability while investing their hard earned money in various investment and tax
saving schemes. Before making an investment one has to plan where, when and how
to invest his/her money. The investment option that suits one may not suit others. One
has to choose an investment option that is highly suitable to him. To select a suitable
investment option the assessees should know the various tax planning measures
available. Hence, in this chapter various tax-planning options available for the
salaried assessees.
Such as:

1.8.1 INCOME TAX SLABS OF SALARIED EMPLOYEES

1.8.2 ALLOWANCES FOR SALARIED ASSESSEE
1.8.3 EXEMTIONS FOR SALARIED ASSESSEE
1.8.4 DEDUCTIONS FROM GROSS TOTAL INCOME

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1.8.1 INCOME TAX SLABS OF SALARIED EMPLOYEES
Individuals have been categorized into three categories of taxpayers:

Table 1.1: Income Tax Slab for Individuals Who Are Below Age of 60 Years

Income Tax Slabs (Rs.) Tax Rate for Individual Below the Age Of 60 Years

0 to 2,50,000* Nil

2,50,001 to 5,00,000 5% of total income exceeding 2,50,000

Tax Amount of 12,500 for the income up to 5,00,000

5,00,001 to 10,00,000
+20% of total income exceeding 5,00,000

Tax Amount of 1,12,500 for the income up to 10,00,000

Above 10,00,000
+30% of total income exceeding 10,00,000

Table 1.2: Income Tax Slabs for Senior Citizens Who Are Between 60 Years and
80 Years Old.

Income Tax Slab (Rs) Tax Rate for Individual above the Age Of 60 Years

0 to 2,50,000* Nil

2,5 0,001 to 5,00,000 5% of total income exceeding 2,50,000

Tax Amount of 12,500 for the income up to 5,00,000 +

5,00,001 to 10,00,000
+20% of total income exceeding 5,00,000

Tax Amount of 1,12,500 for the income up to 10,00,000 +

Above 10,00,000
+30% of total income exceeding 10,00,000

Table 1.3: Income Tax Slabs for Super Senior Citizens Who Are Above 80 Years
Old.

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Income Tax Slab (Rs.) Super Senior Citizens of and above 80 years of age

Up to 5,00,000 Nil

 5,00,001 to 10,00,000 20% of income exceeding 5,00,000

Tax Amount of 1,00,000for the income up to

Above 10,00,000
10,00,000 + 30% of total income exceeding 10,00,000

SOME IMPORTANT POINTS:

The income tax rates are applied to the annual income calculated. Thereafter
Surcharge and Cess is added to the tax payable.

A surcharge is also applicable slab wise. The surcharge is calculated on the Tax
amount. If the income is:

1. Above Rs.50,00,000 and up to Rs.1 crore – then 10% surcharge is applicable

2. Above Rs.1 crore and up to Rs.2 crore – then 15% surcharge is applicable.

In the Union Budget 2019-20, a new surcharge on income tax for super-rich
individuals has been levied. So, individuals earning:

1. Between Rs.2 crores and up to Rs.5 crore –then 25% surcharge is applicable;
2. For Above Rs. 5 crore – then 37% surcharge is applicable.

An additional Cess of 4% for Health & Education is applicable to the income tax plus
surcharge.

1.8.2 ALLOWANCES FOR SALARIED ASSESSEE

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1. House Rent Allowance
A salaried individual having a rented accommodation can get the benefit of HRA
(House Rent Allowance). This could be totally or partially exempted from income tax.
However, if you aren’t living in any rented accommodation and still continue to
receive HRA, it will be taxable.
If you couldn’t submit rent receipts to your employer as proof to claim HRA, you can
receipts and evidence of any payment made towards rent. You may claim the least of
the following as HRA exemption.
a. Total HRA received from your employer
b. Rent paid less 10% of (Basic salary +DA)
c. 40% of salary (Basic+DA) for non-metros and 50% of salary (Basic+DA) for
metros

2. Standard Deduction
 The Indian Finance Minister, while presenting the Union Budget 2018, announced a
standard deduction amounting to Rs. 40,000 for salaried employees. This was in the
place of the transport allowance (Rs. 19,200) and medical reimbursement (Rs.
15,000). As a result, salaried people could avail an additional income tax exemption
of Rs. 5,800 in FY 2018-19. The limit of Rs. 40,000 has been increased to Rs. 50,000
in the Interim Budget 2019. 

3. Leave Travel Allowance (LTA)

The income tax law also provides for an LTA exemption to salaried employees,
restricted to travel expenses incurred during leaves by them. Please note that the
exemption doesn’t include costs incurred for the entire trip such as shopping, food
expenses, entertainment and leisure among others.
You can claim LTA twice in a block of four years. In case an individual doesn’t use
this exemption within a block, he/she could carry the same to the next block.
Below are the restrictions which are applicable to LTA:
1. LTA only covers domestic travel and not the cost of international travel
2. The mode of such travel must be railway, air travel, or public transport

4. Mobile reimbursement

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A taxpayer may incur expenses on mobile and telephone used at residence. The
income tax law allows an employee to claim a tax free reimbursement of expenses
incurred. An employee can claim reimbursement of the actual bill amount paid or
amount provided in the salary package, whichever is lower.

5. Books and Periodicals

Employees incur expenses on books, newspapers, periodicals, journals and so on. The
income tax law allows an employee to claim a tax free reimbursement of the expenses
incurred. The reimbursement allowed to an employee is the lower of the bill amount
or the amount provided in the salary package.

6. Food coupons
Your employer may provide you with meal coupons such as sodexo. Such food
coupons are taxable as perquisite in the hands of the employee. However, such meal
coupons are tax exempt up to Rs 50 per meal. A calculation based on 22 working days
and 2 meals a day results in a monthly benefit of Rs 2,200. Consequently, the yearly
exemption works up to Rs 26,400.

7. Entertainment Allowance
Entertainment allowance is the amount of money given to an employee to make
payments towards hospitality of their customers for drinks, meals, business outings,
client meetings, hotels and more. The allowance is completely taxable for all private
sector employees. However, government employees can claim exemption on this tax,
as quoted under section 16 (ii) and the amount of exemption is limited to the lowest of
following:
i) 20% of gross salary (excluding all other allowance, perks and benefits),
ii) Actual entertainment allowance and iii) Rs. 5,000.

8. 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

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him or at the place where he ordinarily resides, or to compensate him for increased
cost of living are also exempt.

1.8.3 EXEMPTIONS FOR SALARIED ASSESSEE:

The Income Tax Act allows various Income Tax Exemptions for Salaried
Employees which are very effective in saving taxes. A salaried employee would be
required to intimate his employer that he is claiming these income tax exemptions
available for Salaried Employees and then the Employer would compute the Tax on
the balance income as per the Income Tax Slabs and deduct TDS on Salary
accordingly.
Income Tax Exemptions for Salaried Employees. The various Income Tax
Exemptions for Salaried Employees have been mentioned below. These Income Tax
Exemptions for Salaried Employees are highly advisable to everyone as they help in
saving tax legally thereby reducing the tax burden on the Salaried Employee.

1. HRA Exemption For Salaried Employees :

Many employers give House Rent Allowance (HRA) to their employees for them to
reside at a good place. A portion of the House Rent Allowance given by an employer
to an employee is exempted from the levy of the Income Tax and Income Tax is only
levied on the remaining part. HRA Exemption is one of the most useful income tax
exemptions for Salaried Employees as it can be easily claimed and the amount of
exemption allowed is also large.

 2. Income Tax Exemption On Leave Travel Allowance :

Many employers also give allowances to their employees to go on a vacation with
their respective families. The amount given by the employer to an employee to go on
a vacation is exempted from the levy of tax to a certain extent provided that the
amount given was for a vacation in India only. Leave Travel Allowance is also an
effective income tax exemption for Salaried Employees. However, this amount can
only be claimed if the employee actually goes on a vacation as bills for the same
would be required to be furnished.

3. Exemption On Encashment Of Leaves For Salaried Employees :

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Most employers give all their employees a certain no. of days which can be claimed
as leaves. However, in case a person does not claim these leaves, many employers
also give their employees the option for en-cashing these leaves i.e. the employers
pays extra to the employees for the leaves which were allowed to be taken but were
not taken. This amount received as Leave Encashment is also allowed to be claimed
as an exemption up to a certain extent.

4. Tax Exemption From Pension Income For Salaried Employees :

On retirement of an employee, many employers pay a pension to their employees.
Sometimes, the employer pays pension from his own pocket and in some cases, the
employer purchases an annuity and then the pension is being paid by the organisation
from whom the annuity has been purchased. The Pension can be of 2 types i.e.
Commuted and Uncommuted. In commuted pension, the whole amount of pension is
received in lump-sum whereas in Uncommuted Pension, the amount is paid in
instalments at regular intervals.
Irrespective of the type of Pension, Income Tax Exemption is given in both types of
pensions up to a certain limit.

5. Income Tax Exemption On Gratuity For Salaried Employees

Gratuity is a gift made by the employer to his employee in appreciation of the past
services rendered by the employee. Gratuity can either be received by:-
a) The employee himself at the time of his retirement
b) The legal heir at the time of the death of the employee
For the purpose of computing Income Tax Exemptions for Salaried Employees who
have received gratuity, the employees can be segregated into 3 parts and then the
exemption is allowed depending on the category they are into:-
Govt. Employees and employees of Local Authorities
Employees not covered in any of the 2 above.

6. Income Tax Exemption On VRS Received:

Many employees opt for Voluntary Retirement before the actual age of retirement (i.e.
60 years). In such cases, the employer sometimes gives some money to the employee
on his voluntary retirement. The amount received or receivable by the employee on

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voluntary retirement under the golden handshake scheme is exempted under Section
10(10C).

7. Income Tax Exemption For Perquisites:

Some employers also give their employees various perquisites/facilities like Car,
Mobile phones, Rent Free accommodation.
Such perquisites are not fully tax free. A specific value of such facilities is allowed as
an exemption and value of the balance facilities allowed is allowed as an exemption.

1.8.4 DEDUCTIONS FROM GROSS TOTAL INCOME

1. Section 80C
Deductions on Investments
You can claim a deduction of Rs 1.5 lakh your total income under section 80C. In
simple terms, you can reduce up to Rs 1,50,000 from your total taxable income, and it
is available for individuals and HUFs.

2. Section 80CCC – Insurance Premium

Deduction for Premium Paid for Annuity Plan of LIC or Other Insurer
Section 80CCC provides a deduction to an individual for any amount paid or
deposited in any annuity plan of LIC or any other insurer. The plan must be for
receiving a pension from a fund referred to in Section 10(23AAB). Pension received
from the annuity or amount received upon surrender of the annuity, including interest
or bonus accrued on the annuity, is taxable in the year of receipt. 

3. Section 80CCD – Pension Contribution

Deduction for Contribution to Pension Account
a. Employee’s contribution under Section 80CCD
You can claim this if you deposit in your pension account. Maximum deduction you
can avail is 10% of salary (in case the taxpayer is an employee) or 20% of gross total
income (in case the taxpayer being self-employed) or Rs 1.5 lakh – whichever is less.
Until FY 2016-17, maximum deduction allowed was 10% of gross total income for
self-employed individuals.

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b.Deduction for self-contribution to NPS – section 80CCD
A new section 80CCD (1B) has been introduced for an additional deduction of up to
Rs 50,000 for the amount deposited by a taxpayer to their NPS account. Contributions
to Atal Pension Yojana are also eligible.

c. Employer’s contribution to NPS – Section 80CCD

 Claim additional deduction on your contribution to employee’s pension account for
up to 10% of your salary. There is no monetary ceiling on this deduction.

4. Section 80GG – House Rent Paid

Deduction for House Rent Paid Where HRA is not Received
a. Section 80GG deduction is available for rent paid when HRA is not received. The
taxpayer, spouse or minor child should not own residential accommodation at the
place of employment
b. The taxpayer should not have self-occupied residential property in any other place
c. The taxpayer must be living on rent and paying rent
d. The deduction is available to all individuals.

Deduction available is the least of the following:

a. Rent paid minus 10% of adjusted total income
b. Rs 5,000/- per month
c. 25% of adjusted total income*
*Adjusted Gross Total Income is arrived at after adjusting the Gross Total Income for
certain deductions, exempt income, long-term capital gains and income related to
non-residents and foreign companies.
From FY 2016-17 available deductions have been raised to Rs 5,000 a month from Rs
2,000 per month.

5. Section 80GGA – Scientific Research or Rural Development

Donations for scientific research or rural development

Section 80GGA allows deductions for donations made towards scientific research or
rural development. This deduction is allowed to all assessees except those who have
an income (or loss) from a business and/or a profession.

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Mode of payment: Donations can be made in the form of a cheque or by a draft or in
cash; however cash donations in excess of Rs 10,000 are not allowed as deductions.
100% of the amount that is donated or contributed is considered eligible for
deductions.

6. Section 80E – Interest on Education Loan

Deduction for Interest on Education Loan for Higher Studies
A deduction is allowed to an individual for interest on loans taken for pursuing higher
education. This loan may have been taken for the taxpayer, spouse or children or for a
student for whom the taxpayer is a legal guardian.80E deduction is available for a
maximum of 8 years (beginning the year in which the interest starts getting repaid) or
till the entire interest is repaid, whichever is earlier. There is no restriction on the
amount that can be claimed.  

7. Section 80D – Medical Insurance

Deduction for the premium paid for Medical Insurance
An individual or HUF can claim a deduction of Rs.25,000 under section 80D on
insurance for self, spouse and dependent children. An additional deduction for
insurance of parents is available up to Rs 25,000, if they are less than 60 years of age.
If the parents are aged above 60, the deduction amount is Rs 50,000, which has been
increased in Budget 2018 from Rs 30,000.
In case, both taxpayer and parent(s) are 60 years or above, the maximum deduction
available under this section is up to Rs.1 lakh.

8. Section 80DD – Disabled Dependent

Deduction for Rehabilitation of Handicapped Dependent Relative
Section 80DD deduction is available to a resident individual or a HUF and is available
on:
a. Expenditure incurred on medical treatment (including nursing), training and
rehabilitation of handicapped dependent relative
b. Payment or deposit to specified scheme for maintenance of handicapped dependent
relative.
i. Where disability is 40% or more but less than 80% – fixed deduction of Rs 75,000.

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ii. Where there is severe disability (disability is 80% or more) – fixed deduction of Rs
1,25,000.
To claim this deduction a certificate of disability is required from prescribed medical
authority. From FY 2015-16 – The deduction limit of Rs 50,000 has been raised to Rs
75,000 and Rs 1, 00,000 has been raised to Rs 1, 25,000.  

9. Section 80DDB – Medical Expenditure

Deduction for Medical Expenditure on Self or Dependent Relative
A. For individuals and HUFs below age 60
A deduction up to Rs.40,000 is available to a resident individual or a HUF. It is
available with respect to any expense incurred towards treatment of specified medical
diseases or ailments for himself or any of his dependents. For an HUF, such a
deduction is available with respect to medical expenses incurred towards these
prescribed ailments for any of the HUF members
B. For senior citizens and super senior citizens
In case the individual on behalf of whom such expenses are incurred is a senior
citizen, the individual or HUF taxpayer can claim a deduction up to Rs 1 lakh. Until
FY 2017-18, the deduction that could be claimed for a senior citizen and a super
senior citizen was Rs 60,000 and Rs 80,000 respectively. This has now become a
common deduction available upto Rs 1 lakh for all senior citizens (including super
senior citizens) unlike earlier.
C. For reimbursement claims
Any reimbursement of medical expenses by an insurer or employer shall be reduced
from the quantum of deduction the taxpayer can claim under this section.
Also remember that you need to get a prescription for such medical treatment from
the concerned specialist in order to claim such deduction.
 
10. Section 80U – Physical Disability
Deduction for Person suffering from Physical Disability
A deduction of Rs.75,000 is available to a resident individual who suffers from a
physical disability (including blindness) or mental retardation. In case of severe
disability, one can claim a deduction of Rs 1, 25,000.
From FY 2015-16 – Section 80U deduction limit of Rs 50,000 has been raised to Rs
75,000 and Rs 1, 00,000 has been raised to Rs 1, 25,000.  

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11. Section 80G – Donations
Deduction for donations towards Social Causes
The various donations specified in u/s 80G are eligible for deduction up to either
100% or 50% with or without restriction. From FY 2017-18 any donations made in
cash exceeding Rs 2,000 will not be allowed as deduction. The donations above Rs
2000 should be made in any mode other than cash to qualify for 80G deduction.

a. Donations with 100% deduction without any qualifying limit

1) National Defence Fund set up by the Central Government
2) Prime Minister’s National Relief Fund
3) National Foundation for Communal Harmony
4) An approved university/educational institution of National eminence
5) Fund set up by a State Government for the medical relief to the poor
6) National Illness Assistance Fund
7) National Blood Transfusion Council or to any State Blood Transfusion Council
8) National Sports Fund, National Cultural Fund, National Children’s Fund
9) Fund for Technology Development and Application
10) Swachh Bharat Kosh (applicable from financial year 2014-15)
11) Clean Ganga Fund (applicable from financial year 2014-15)
12) National Fund for Control of Drug Abuse (applicable from financial year 2015-16
etc.

 b. Donations with 50% deduction without any qualifying limit

1) Jawaharlal Nehru Memorial Fund
2) Prime Minister’s Drought Relief Fund
3) Indira Gandhi Memorial Trust
4) The Rajiv Gandhi Foundation

 c. Donations to the following are eligible for 100% deduction subject to 10% of
adjusted gross total income
1) Government or any approved local authority, institution or association to be
utilized for the purpose of promoting family planning.
2) Donation by a Company to the Indian Olympic Association or to any other
notified association or institution established in India for the development of

29
 infrastructure for sports and games in India or the sponsorship of sports and games
in India.

d. Donations to the following are eligible for 50% deduction subject to 10% of
adjusted gross total income
1) Any other fund or any institution which satisfies conditions mentioned in Section
80G(5).
2) Government or any local authority to be utilized for any charitable purpose other
than the purpose of promoting family planning.
3) Any authority constituted in India for the purpose of dealing with and satisfying
the need for housing accommodation or for the purpose of planning, development
or improvement of cities, towns, villages or both.
4) For repairs or renovation of any notified temple, mosque, gurudwara, church or
other places.

12. Section 80GGC – Contribution to Political Parties

Deduction on contributions given by any person to Political Parties
Deduction under section 80GGC is allowed to an individual taxpayer for any amount
contributed to a political party or an electoral trust. It is not available for companies,
local authorities and an artificial juridical person wholly or partly funded by the
government. You can avail this deduction only if you pay by any way other than
cash. 

13. Section 80RRB – Royalty of a Patent

Deduction with respect to any Income by way of Royalty of a Patent
80RRB Deduction for any income by way of royalty for a patent, registered on or
after 1 April 2003 under the Patents Act 1970, shall be available for up to Rs.3 lakh or
the income received, whichever is less. The taxpayer must be an individual patentee
and an Indian resident. The taxpayer must furnish a certificate in the prescribed form
duly signed by the prescribed authority.

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1.9 MISTAKE DONE WHILE DOING TAX PLANNING:

1.9.1 Delaying Tax-Saving Investments And Hurrying To Save Taxes In The

Last Quarter:
They key to building a good investment portfolio, lies in making systematic
investments over the year. People who are unaware of tax deductions tend to hurry
and take a call in making tax-saving investments in the last minute. 
Little do they know that rushed investments can lead to erroneous decisions. Also
making tax-saving investments at the last moment will not allow you to reap its full
benefits. A large one time investment can make your monthly budget go haywire. 
What to Do:
Timing is very important when it comes to tax-saving investments. Start investing in
tax-saving schemes at the beginning of the financial year and create a diversified
investment portfolio. Take the effort to give a deep thought regarding your
investments, in order to make the most of it. 

1.9.2 Ignoring Expenses That Are Tax-Exempt:

Being ignorant is the biggest folly of all. Most of the people are not even aware that
the expenses they make towards health insurance premium, children’s tuition fees,
house loan payment, house rent etc. qualify as valid tax deductions. Hence, they don’t
declare such expenses and end up paying more taxes. 
One of the common unknown allowances is that of the House Rent Allowance
(HRA). Typically most of the employees get HRA from employers and if you fail to
get this allowance, you can claim deduction up to Rs.2000 per month in your income
tax returns. 
Moreover, when it comes to tax-saving investments, people tend to limit their
declarations to Section 80C alone. They are unaware of other tax deductions of
medical expenses, interest on housing and educational loans, expenses toward social
donations and more. 
What to Do:
Be informed about all expenses that qualify as tax deductions. The money that you
have already spent should not go waste by paying more taxes on top of it. Ensure to

31
claim the deductions you can and don’t just focus on Section 80C tax benefits. There
are several other tax-saving avenues. 

1.9.3 Investing in Tax-Inefficient Schemes:

A common tax-saving strategy that is preferred by most is investing in long term fixed
deposits (FD) or acquiring national saving certificates (NSC). You can make a one-
time claim on the investment you make, however the interest you earn on both Fds
and NSCs are taxable. This makes such products tax-inefficient. 
Distinguish tax-saving schemes like PPF and other pension schemes, from usual
investments of fixed deposits or recurring deposits and make the most out of them.
Investments made in PPF (public provident fund) are eligible for tax deduction and at
the same time the interest earned out of them are tax-free. Look for such effective tax-
saving schemes. 
Also, your investment portfolio should have the right mix of equity and debt
investment funds. You can opt for tax-saving mutual funds with exposure to equities
or stock market and also invest in debt funds with endowment plans, PPF, etc.
Allocate funds accordingly and build the right portfolio to save more. 
What to Do:
Allocate part of your portfolio to Equity investment schemes in order to save tax and
earn high returns in the long run. Consider your financial goals, risk appetite and age
and invest in effective tax-saving schemes. 

1.9.4 Investing Too Much in Endowment Insurance Plans:

Endowment insurance plans are life insurance schemes that are good for tax-saving
and essential investment. However, investing a big chunk of your hard-earned money
on Endowment plans alone will not fetch you great returns. 
When you walk into a bank or ask your insurance agent for tax-saving schemes, they
always recommend endowment life insurance plans. Since they earn the highest
commission usually at the rate of 35% of the first-year premium and 5% on
subsequent premiums, they tend to convince and sell it to you. 
These plans are very long term usually in the range of 10-20 years, in which you need
to keep investing. If you redeem in between, then you will not even get your initial
investment back. Many taxpayers make the mistake of investing almost the entire

32
eligible amount of Section 80 C in endowment plans and fail to look at other effective
tax-saving schemes. 
What to Do:
Invest in term plans, which also qualify for tax deduction under Section 80 C as
opposed to endowment insurance plans. Do not invest a major chunk of tax-deduction
money on endowment plans and consider other options as well. 

1.9.5 Not Fulfilling The Section 80C Limit:

Under section 80, an individual taxpayer is eligible for tax deductions up to Rs.
1,50,`000. However, not everyone is aware and able to meet the limit. Often, they end
up shelling out more income taxes that they need to, because they are unable to utilize
the limit of Section 80C. 
Also be aware of the rules well. Tax benefits always come with underlying terms and
conditions that you need to know prior to investing. For example, the entire life
insurance premium is not tax deductible and applies only up to 10% of the sum
assured amount. There is a common misconception among investors, that the entire
premium is eligible for tax deduction. This makes them rush into such products in
order to save taxes. So, always know the rules well and then make correct decisions. 
What to Do:
It is not mandatory to invest the entire Rs. 1.5 Lakhs to save taxes. Invest as much as
you can and plan you tax-saving investments to reap the full benefits of the available
tax deductions under Section 80C. Awareness of the underlying rules will definitely
help you plan your finances better. 

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