TAX PLANNING

• Tax planning involves strategizing and managing your financial affairs to legally minimize your tax liability.
• Tax planning is the process of organizing your financial affairs in a way that minimizes your tax liability while remaining compliant
with the tax laws of your country.
• Effective tax personal planning involves careful consideration of your financial situation.
Objectives of tax planning
• Reducing Tax Liability: The primary objective of tax planning is to minimize the amount of taxes paid, both in the short and long
term. This can be achieved by taking advantage of available deductions, exemptions, credits, and other tax-saving strategies.

• Maximizing Tax Efficiency: Tax planning aims to structure your financial transactions and investments to optimize your tax
efficiency. This involves choosing investment vehicles, retirement accounts, and other financial instruments that provide tax
advantages.

• Maintaining Compliance: While the goal is to reduce taxes, it's essential to do so within the bounds of tax laws and regulations.
Effective tax planning ensures that all strategies employed are legal and compliant with tax codes.
• Managing Cash Flow: By strategically timing income and expenses, tax planning can help individuals and businesses
manage their cash flow more effectively. This can involve deferring income or accelerating expenses to optimize tax
liability in a given year.
• Enhance Financial Well-Being: Lowering taxes means retaining a larger portion of earned income. This extra income
can be used to improve financial stability, meet financial goals, and maintain a higher standard of living.
• Increase Investment Potential: With reduced tax liability, individuals and businesses have more capital to invest. This
can lead to increased investment opportunities, potentially resulting in greater wealth accumulation over time.
• Support Retirement Planning: Effective tax planning can contribute to building a solid retirement nest egg by taking
advantage of retirement accounts and tax-deferred growth
• Achieve Tax Efficiency: Tax-efficient strategies ensure that financial decisions are structured in a way that minimizes
taxes without violating legal or ethical boundaries .
Common tax planning strategies for individuals in India:
Unit Linked Insurance Plan (ULIP): Under section 80C of the Income Tax Act 1961, the premium paid towards the purchase of a life
insurance policy qualifies for deduction up to Rs. 1.5 lakh.
Equity Linked Savings Schemes: in a period of 3 years which is the shortest amongst all the investment products. Investment mutual
fund investment schemes that invest a large percentage of their portfolio in equity. Furthermore, the fund has a mandatory lock-in ELSS
funds qualify for deduction under section 80C of the income tax act up to a maximum of Rs. 1.5 lakh.
Public Provident Fund (PPF): Taxpayers can claim a deduction under section 80C of the Income Tax Act for the amount invested by
them during the financial year. PPF account comes with a lock-in period of 15 years.
Sukanya Samridhi Yojana (SSY): . Investing in Sukanya Samriddhi Yojana also qualifies as an eligible deduction under section 80C of
the Income Tax Act. The scheme comes with a lock-in period of 21 years and will mature after the expiry of 21 years. A minimum
deposit of Rs. 250 is required to be made per year for 15 years.
National Savings Certificate: Investment in NSC qualifies for deduction under section 80C of the income tax act up to Rs. 1.50 lakh.
• Tax-savings fixed deposit: Investment in tax saver fixed deposit eligible for deduction under section 80C while
calculating the taxable income. A minimum lock-in period of 5 years.

• National Pension Scheme (NPS): As per the provision of section 80CCD, an individual can claim a deduction up to
Rs. 1.5 lakh by investing in NPS. Additionally, a new sub-section 1B was also introduced, which offered an additional
deduction of up to Rs. 50,000/-for contributions made by individual taxpayers towards the NPS.

• Health Insurance premium under section 80D:You can claim a tax benefit up to Rs. 25,000

• Repayment of an education loan: The income tax act provides a tax benefit on repayment of the loan as a tax
deduction under section 80E of the act. the interest paid on the education loan qualifies for a tax deduction for a
maximum of 8 years, or the interest is repaid, whichever is earlier.

• Interest paid on home loan : The interest component paid as a part of the loan can be claimed as a deduction
under section 24 up to Rs. 2 lakh
• . HRA (House Rent Allowance): If you are a salaried individual and receive HRA as part of your
salary, you can claim exemptions .
• Donations made to charitable institutions: Depending on the type of organization where a
donation has been made, the tax deduction under section 80G can be either 50% or 100% of the
donation amount.
• Gifts to Family Members: Gifting assets to family members can help in reducing the tax liability
on income generated from those assets, especially if the family members are in lower tax brackets.
 TAX STRUCTURE IN INDIA

• Tax is a compulsory payment by the citizens to the government to meet the public expenditure. It is legally imposed by the government on
the taxpayer and in no case, taxpayers can refuse to pay taxes.
• Example: Income tax, Corporate tax, Sales tax, etc.
• There are three methods of taxation prevalent in economies with their individual merits. These are:
• Regressive taxation
• Proportional taxation
• Progressive taxation
• Progressive Taxation
• A progressive tax is a tax that imposes a lower tax rate on low-income earners compared to those with a higher income, making it based on
the taxpayer's ability to pay. That means it takes a larger percentage from high-income earners than it does from low income individuals.
• Indian income tax is a typical example of Progressive tax. The idea here is less tax on the people who earn less and higher taxes on the people
who earn more.
• Regressive Taxation
• A regressive tax is a tax applied uniformly, taking a larger percentage of income from low-income earners than
from high-income earners. It is in opposition to a progressive tax.
• This method while appreciated for rewarding the higher producers or income earners is criticised for being
more taxing on the poor and low-producers.
• Proportional Taxation
• A proportional tax system, also called a flat tax system, assesses the same tax rate on everyone regardless of
income or wealth.
• The sales tax is one of the best examples of proportional tax because all consumers regardless of income pay
the same fixed rate.
 DEFERRED TAX

• It shall be noted at the outset that as per the accounting standards followed by companies, there are
two different financial reports that an organisation prepares every fiscal year – an income statement
and a tax statement.
• Guidelines behind the preparation of a company’s income statement and tax statement are slightly
different. Hence, sometimes the numbers mentioned in both these reports might vary.
• It is this disparity that creates the scope for deferred tax. The term deferred tax, in essence, refers to
the tax that shall either be paid or has already been settled due to transient inconsistency between an
organisation’s income statement and tax statement.
• As per this definition, there are two types of deferred tax-deferred tax asset and deferred tax liability.
• Deferred tax asset: When an inconsistency between the income statement of an organisation and its
corresponding tax statement provides that the company pays its tax liability for another period in
advance or is able to reduce its tax liability for a subsequent period in a particular, fiscal year, then
that is recorded as deferred tax asset.

• Deferred tax liability: In case the disparity in numbers between an organisation’s income statement
and tax statement provides that tax be accumulated in a particular year, but such company is liable
to settle it in a subsequent fiscal year, then it shall be considered as a deferred tax liability. It is
created when there is a timing difference between when a tax liability accrues and when a company
is liable to pay it. As it is a future financial obligation, an organisation accounts for it in the year it
accrues as per accounting guidelines.
 SCENARIOS IN WHICH DEFERRED TAX IS RECORDED

• Difference in Depreciation Percentage

• If there is a difference in the percentage of depreciation calculated by an organisation on its assets

and considered by the IT department, then a deferred tax can be created.

• For instance, company B has assets worth Rs. 60,000 on which it calculates 10% depreciation
whereas as per the IT department, depreciation shall be calculated at the rate of 15%. As per the
supposition, depreciation recorded in the company’s income statement is Rs. 9,000, while in its tax
statement it is mentioned as Rs. 6,000. This temporary difference of Rs. 3,000 will create a deferred
tax asset as the company is paying an additional tax of Rs. 750 (25% x 3000) in its current fiscal
year.
• Unrealised revenues and expenses
• Suppose, company D has created a provision for bad debts of Rs. 10,000, which brings down its
gross profit to Rs. 1,05,000. However, in its tax statements, it has not mentioned that provision, due
to which their gross profit is Rs. 1,15,000. Therefore, it is creating a deferred tax asset of Rs. (25%
x 10,000) or Rs. 2,500.

• There is no separate deferred tax rate followed in taxation practices in India; therefore, the general
corporate tax rate is applicable in the calculation of deferred tax.
Income shifting
• Income shifting, also known as income splitting, is a tax planning technique that
transfers income from high to low-tax bracket taxpayers. It also reduces the overall tax
burden by moving income from a high to a low tax rate bracket.
• This tax planning technique helps transfer income to lower tax brackets.
TAX FREE INCOME

• Agricultural Income [Section 10(1)]

• Amount received by a member of the HUF from the income of the HUF, or in
case of the impartible estate out of an income of family estate [Section 10(2)]
• Interest on notified savings certificates [Section 10(4B)]
• Gift received from a relative
• Saving bank interest up to 10,000 and 50,000 to a person above 60
• Capital gains are exempted up to 100,000 on equity
• Leave travel concession [Section 10(5)]
• Allowance/perquisites to Government employees outside India [Section 10(7)]
• Death-cum-retirement gratuity received by Government servants [Section 10(10)(i)]
• Gratuity received by a non-government employee covered by the Payment of
Gratuity Act, 1972 [Section 10(10)(ii)]
• Pension [Section 10(10A)]
• Leave salary [Section 10(10AA)]
• Retrenchment compensation [Section 10(10B)]

• Compensation for Bhopal Gas Leak Disaster [Section 10(10BB)]

• Compensation on account of any disaster [Section 10(10BC)]
• Payment at the time of voluntary retirement [Section 10(10C)]
• Tax on perquisites paid by the employer [Section 10(10CC)]
• Amount paid on life insurance policy [Section 10(10D)]
• Prescribed allowances or benefits [Section 10(14)]