tax planning for individuals

1. Topic:
Tax Planning
For Individuals
PRESENTED BY:
HINA VARSHNEY
B.Com (III SEM)

2. Meaning of Tax
The word `tax’ means `a rate or sum of
money levied on persons or property
for the benefit of the State’.
Section 2(43) of the Income Tax
Act, 1961, defines `tax’. Tax means
chargeable under the provisions of
this Act. For direct tax purposes it
means the tax chargeable under the
Income Tax Act, 1961 & the Wealth
Tax Act,1957.

3. Tax planning
Tax planning is arrangement of
financial activities in such a way
that maximum tax benefits, as
provided in the income-tax act are
availed of. It envisages use of
certain exemption, deductions,
rebates and reliefs provided in
the act.

4. Tax avoidance
Tax avoidance is minimizing the incidence of
tax by adjusting the affairs in such a
manner that although it is within the four
corners of the laws, it is done with a
purpose to defraud the revenue. It is the
act of dodging without directly breaking the
law. For e.g.: if A gives gift to his wife,
the income from the asset gifted will be
clubbed in the hand of A. But to avoid this
clubbing provision “A” decides to give gift to
B’s wife and B reciprocates it by giving gift
to A’s wife. This is not tax planning but tax
avoidance.

5. Difference b/w tax planning
& tax avoidance
 In
tax planning the letter & the spirit of
the law are followed while in tax
avoidance the tax is reduced by taking
advantage of the loopholes of the law.
 Tax planning is permanent while tax
avoidance is temporary. However, no
penalty can be imposed either in case of
tax planning or in the case of tax
avoidance.

6. Objectives of tax planning
 Reduction
in tax liability
 Productive
 Reduction
 Healthy
investment
in cost
growth of economy
 Employment
 Minimisation
generation
of litigation

7. Tax planning for individuals
1. Agricultural income:

Persons who are engaged in
agricultural activities should plan
their activities in such a way that the
income from their activities falls
within the definition of the term
‘agricultural income’ because it is
totally exempt.
cont.

8. Tax planning for individuals
1. Agricultural income:
For e.g. A farmer instead of selling his
standing crop to someone else can sell his
produce directly to the consumers through
his own shop & this additional income would
also be agricultural income.
 Where the return from agricultural land is
more or less the same as return from
other investments, it is better to buy
agricultural land & derive agricultural
income which is exempt from tax.

9. Tax planning for individuals
2. Income of minor child:
The income of a minor child is included in the
income of mother or father.
a). Investment of money of minor child: the
money of the minor child should be invested
in such funds, shares etc. the income of
which is exempt or will be received on
attaining majority of child. For e.g. a
residential house can be purchased or
constructed, the income of which will be
exempt u/s 23(2).

10. Tax planning for individuals
b). Income of minor child: Income of minor
child derived by manual worker or an activity
involving application of his specialised
knowledge & experience is not included in
the income of the parent. For e.g. a minor
derives income by acting in a movie. Such
income is not includible in the income of
father or mother but if he deposits that
money in a bank & receives interest of the
deposit, the interest income is includible in
the income of parents.

11. Head wise tax planning
1. Allowances: Certain allowances are
either fully exempt or partly exempt &
partly taxable. Hence, to reduce tax
liability the following allowances may be
taken from the employer:
a). Children education allowances: Such
allowances is exempt upto Rs. 100 p.m. per
child upto a maximum of 2 children.
b). Hostel allowance: Such allowance is
exempt upto Rs. 300 p.m. per child upto a
maximum of 2 children.

12. Head wise tax planning
Cont.…..
c). Transport allowance: To meet the cost
of commuting b/w the place of residence &
place of duty is exempt to Rs. 800 (1600
for disabled person)
d). Uniform allowances: Any allowance
granted to meet the expenditure incurred
on the purchase or maintenance of uniform
of uniform for wear during the
performance of duties of an office or
employment of profit is exempt.

13. Head wise tax planning
3. House rent allowance versus
rent free house: If an employer
provides an option of either rent- free
house or house rent allowance, the
employee should calculate his tax
liability before giving this option. In
some cases house rent allowance is
beneficial & in some cases the rentfree house.

14. Tax Planning In Relation
To Income From House
Property
a). A house property may be purchased or
constructed by taking a loan. The interest on
loan is deductible fully in computing income
from house property.
b). If an assesse has option either to live in
own house or live in rented house & rented his
own house, he should live in his own house
because the annual value of self occupied house
is taken as nil.

15. Tax planning in relation
to profits & gains of
business or profession
1.
Location
of
Business:
The
businessman should select a place of
business carefully. If it is located in Free
Trade Zone or backward district or special
category states, he will be entitled to
exemption or deduction (u/s 10AA/80IB/80-IC). It reduce his tax liability.
cont.

16. Tax planning in relation
to profits & gains of
business or profession
2. Nature of Business: He should
select such a business the income is
either exempt or deduction is allowed
at a prescribed rate from such
income. For e.g. agricultural income
is exempt & in case of hotel business,
he will get deduction from gross total
income.

17. Tax planning in relation
to capital gains
The tax is levied on long- term
capital gains at a lower rate of
interest.
2) If a shareholder has received
bonus shares on his shares & he
wants to sell some shares
immediately,
he
should
sell
original shares so that he may get
the benefit of long term capital
gain tax.
1)

18. Tax planning in relation
to income from other
sources
1)
2)
A person who is having substantial interest
in a closely- held company, he should not
borrow from such company otherwise such
loan to the extent of accumulated profits
will be treated as taxable dividend u/s
2(22)(e).
The dividends on shares of a domestic
company & income from units of mutual fund
are tax free. Hence people may invest in
shares or units to save tax….