Question 1

Capital and revenue receipts

 Posted in: Capital and revenue items (explanations)
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Business receipts are inflow of economic resources mostly in the form of cash and cash
equivalents. In accounting and finance, they can be divided into two types – capital
receipts and revenue receipts. A brief explanation of both the types is given below:

Capital receipts
Capital receipts are business receipts which are not related to the day to day business
activities of a company. They occur occasionally and provide benefit for a long period of
time.

Capital receipts are normally presented in the balance sheet of a company when

realized and generally occur as a result of the following events:

1. Sale of fixed assets

2. Issuance of capital in the form of shares
3. Issuance of debt instruments

Suppose, in annual general meeting of a QRS company, the issue of right shares was
approved at the rate of $8 per share. QRS allocated shares to all the existing members
of the company proportionately and in return received cash. The cash received by QRS
company was a capital receipt. The company debited its bank account and credited its
equity account in the books of accounts.

Other common examples of capital receipts

 Cash received from sale of fixed assets.

 Amount of loan received by the company from a bank.
 Capital invested in the business by a new partner.
 Consideration received by a company through sale of its license to produce a
well marketed drug to another company

Revenue receipts
Revenue receipts are receipts that occur routinely. They are realized from day to day
business activities of a company and are needed by any business to survive and strive.
Revenue receipts are normally received through the sale of stock-in-trade and the
provision of services to customers in the ordinary course of business. The effect of
revenue receipts is normally shown only in the income statement of the company.
Suppose CDE Company is in the business of manufacturing and selling baby diapers
them in bulk to wholesalers and retailers. CDE invoices its customers on receipt of
goods by them and maintains an average collection period of 30 days. CDE records its
sale/revenue on receipt of goods by the customers. The sales revenue received by CDE
company is a revenue receipt.

Common examples of revenue receipts

 Revenue received from sale of goods to customers.

 Revenue received from provision of services to clients
 Income received as interest on a saving account.
 Dividend income received from shares of various companies.
 Rental income received by a company.
 Bad debts recovered by a company
 Cash discount received from vendors.
 Commission income received by a company.

Summary and conclusion

 Capital receipts are inflow of economic resources to the company and are non-
recurring in nature. Their effect is carried only to the balance sheet of company
 Revenue receipts are inflow of economic resources to the company and are
recurring in nature. They are vital to keep the company running. Their effect is
only shown in the income statement of a company.
 Capital receipts and revenue receipts should never be confused with each other
as it can lead to classification errors and an incorrect financial summary report.
Question 2
Deductions on Section 80C, 80CCC,
80CCD & 80D
Section 80 Deductions For financial year 2019-20 (Including Budget 2020 amendments )
Updated on Jan 30, 2021 - 12:45:20 PM
Budget 2021 will be announced on 1st February 2021 addressed by FM Nirmala
Sitharaman
Deductions on Section 80C, 80CCC, 80CCD & 80D : Deductions allowed under the income tax act
help you reduce your taxable income. You can avail the deductions only if you have made tax-saving
investments or incurred eligible expenses. There are a number of deductions available under various
sections that will bring down your taxable income. The most popular one is section 80C of Chapter
VIA. Other preferred dedcutions under chapter VIA are 80D, 80E, 80G, 80DDB and so on. In this
article, let us discuss some of the important deductions under chapter VIA that a taxpayer can claim.  

1. Section 80C
Deductions on Investments
Section 80C : 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.
If you have paid excess taxes, but have invested in LIC, PPF, Mediclaim, paid your children’s tuition
fees etc. and have missed claiming a deduction for the same, you can do so while filing your Income
Tax Return. The Income Tax Department will refund the excess money to your bank account.

Not Enough 80C Deduction in Your Form-16?

If you need help claiming Section 80 deductions like 80C, investments, mediclaim, or
calculating HRA to save on taxes, cleartax’s Tax Expert can help you claim a refund (if applicable)
and e-file in 48 hours.

Get Savings on Income Taxes With a Tax Expert to Help

You File
Sometimes, you may have deductions or investments eligible for 80C, but haven’t submitted
the proofs to your employer. This may cause to additional TDS deductions. You can still
claim these deductions while e-filing, as long as you have the proofs with you.
I WANT AN EXPERT TO HELP ME FILE
 

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 (1)
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.
b.Deduction for self-contribution to NPS – section 80CCD (1B) 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 (2)

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.
Know more about Section 80CCD  

4. Section 80 TTA - Interest on Savings

Account
Deduction from Gross Total Income for Interest on
Savings Bank Account
If you are an individual or an HUF, you may claim a deduction of maximum Rs 10,000
against interest income from your savings account with a bank, co-operative society, or post
office. Do include the interest from savings bank account in other income.
Section 80TTA deduction is not available on interest income from fixed deposits, recurring
deposits, or interest income from corporate bonds.
 

5. 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.
An online e-filing software like that of ClearTax can be extremely easy as the limits are auto-
calculated. So, you do not have to worry about making complex calculations.
From FY 2016-17 available deduction has been raised to Rs 5,000 a month from Rs 2,000 per
month.
 

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.
 

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7. Section 80EE - Interest on Home Loan

Deductions on Home Loan Interest for First Time Home
Owners
FY 2017-18 and FY 2016-17 This deduction is available in FY 2017-18 if the loan has been taken in
FY 2016-17. The deduction under section 80EE is available only to home-owners (individuals)
having only one house property on the date of sanction of the loan. The value of the property must be
less than Rs 50 lakh and the home loan must be less than Rs 35 lakh. The loan taken from a financial
institution must have been sanctioned between 1 April 2016 and 31 March 2017. There is an
additional deduction of Rs 50,000 available on your home loan interest on top of deduction of Rs 2
lakh (on interest component of home loan EMI) allowed under section 24. FY 2013-14 and FY 2014-
15 During these financial years, the deduction available under this section was first-time house worth
Rs 40 lakh or less. You can avail this only when your loan amount during this period is Rs 25 lakh or
less. The loan must be sanctioned between 1 April 2013 and 31 March 2014. The aggregate deduction
allowed under this section cannot exceed Rs 1 lakh and is allowed for FY 2013-14 and FY 2014-15.  

8. Section 80CCG - RGESS

Rajiv Gandhi Equity Saving Scheme (RGESS)
The deduction under this section 80CCG is available to a resident individual, whose gross total
income is less than Rs.12 lakh. To avail the benefits under this section the following conditions
should be met:

a. The assessee should be a new retail investor as per the requirement specified under the
notified scheme.
b. The investment should be made in such listed investor as per the requirement specified
under the notified scheme.
c. The minimum lock in period in respect of such investment is three years from the date of
acquisition in accordance with the notified scheme.
Upon fulfillment of the above conditions, a deduction, which is lower of the following is allowed.

 50% of the amount invested in equity shares; or

 Rs 25,000 for three consecutive Assessment Years.

Rajiv Gandhi Equity Scheme has been discontinued starting from 1 April 2017. Therefore, no

deduction under section 80CCG will be allowed from FY 2017-18. However, if you have invested in
the RGESS scheme in FY 2016-17, then you can claim deduction under Section 80CCG until FY
2018-19.  

9. Section 80D - Medical Insurance

Deduction for the premium paid for Medical Insurance
You (as 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.
Example: Rohan's age is 65 and his father's age is 90. In this case, the maximum deduction Rohan can
claim under section 80D is Rs. 100,000. From FY 2015-16 a cumulative additional deduction of Rs.
5,000 is allowed for preventive health check.  

10. 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.
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.  

11. 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. Read our detailed article on Section 80DDB.
 

12. 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.  

13. 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

 National Defence Fund set up by the Central Government

 Prime Minister's National Relief Fund
 National Foundation for Communal Harmony
  An approved university/educational institution of National eminence
 Zila Saksharta Samiti constituted in any district under the chairmanship of the Collector of
that district
 Fund set up by a State Government for the medical relief to the poor
 National Illness Assistance Fund
 National Blood Transfusion Council or to any State Blood Transfusion Council
 National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and
Multiple Disabilities
 National Sports Fund
 National Cultural Fund
 Fund for Technology Development and Application
 National Children's Fund
 Chief Minister's Relief Fund or Lieutenant Governor's Relief Fund with respect to any State
or Union Territory
 The Army Central Welfare Fund or the Indian Naval Benevolent Fund or the Air Force
Central Welfare Fund, Andhra Pradesh Chief Minister's Cyclone Relief Fund, 1996
 The Maharashtra Chief Minister's Relief Fund during October 1, 1993 and October 6,1993
 Chief Minister's Earthquake Relief Fund, Maharashtra
 Any fund set up by the State Government of Gujarat exclusively for providing relief to the
victims of earthquake in Gujarat
 Any trust, institution or fund to which Section 80G(5C) applies for providing relief to the
victims of earthquake in Gujarat (contribution made during January 26, 2001 and September
30, 2001) or
 Prime Minister's Armenia Earthquake Relief Fund
 Africa (Public Contributions — India) Fund
 Swachh Bharat Kosh (applicable from financial year 2014-15)
 Clean Ganga Fund (applicable from financial year 2014-15)
 National Fund for Control of Drug Abuse (applicable from financial year 2015-16)

b. Donations with 50% deduction without any qualifying limit

 Jawaharlal Nehru Memorial Fund

 Prime Minister's Drought Relief Fund
 Indira Gandhi Memorial Trust
 The Rajiv Gandhi Foundation

c. Donations to the following are eligible for 100% deduction subject to 10% of
adjusted gross total income

 Government or any approved local authority, institution or association to be utilized for the
purpose of promoting family planning
 Donation by a Company to the Indian Olympic Association or to any other notified
association or institution established in India for the development of 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

 Any other fund or any institution which satisfies conditions mentioned in Section 80G(5)
 Government or any local authority to be utilized for any charitable purpose other than the
purpose of promoting family planning
 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
 Any corporation referred in Section 10(26BB) for promoting the interest of minority
community
 For repairs or renovation of any notified temple, mosque, gurudwara, church or other places.

14. Section 80GGB - Company Contribution

Deduction on contributions given by companies to
Political Parties
Section 80GGB deduction is allowed to an Indian company for the amount contributed by it to any
political party or an electoral trust. Deduction is allowed for contribution done by any way other than
cash.  

15. 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.  

16. 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.
 

17. Section 80 TTB - Interest Income

Deduction of Interest on Deposits for Senior Citizens
A new section 80TTB has been inserted vide Budget 2018 in which deductions with respect
to interest income from deposits held by senior citizens will be allowed. The limit for this
deduction is Rs.50,000.
No further deduction under section 80TTA shall be allowed. In addition to section 80 TTB,
section 194A of the Act will also be amended so as to increase the threshold limit for TDS on
interest income payable to senior citizens. The earlier limit was Rs 10,000, which was
increased to Rs 50,000 as per the latest Budget.
 

18. Deductions-Summary
 

Section 80 Deduction Table

Edit

Allowed Limit (maximum)

Section Deduction on FY 2018-19

80C Investment in PPF Rs. 1,50,000

– Employee’s share of PF contribution
– NSCs
– Life Insurance Premium payment
– Children’s Tuition Fee
– Principal Repayment of home loan
– Investment in Sukanya Samridhi Account
– ULIPS
– ELSS
– Sum paid to purchase deferred annuity
– Five year deposit scheme
– Senior Citizens savings scheme
– Subscription to notified securities/notified deposits
Edit

Allowed Limit (maximum)

Section Deduction on FY 2018-19

scheme
– Contribution to notified Pension Fund set up by Mutual
Fund or UTI.
– Subscription to Home Loan Account scheme of the
National Housing Bank
– Subscription to deposit scheme of a public sector or
company engaged in providing housing finance
– Contribution to notified annuity Plan of LIC
– Subscription to equity shares/ debentures of an
approved eligible issue
– Subscription to notified bonds of NABARD

80CCC For amount deposited in annuity plan of LIC or any other -

insurer for a pension from a fund referred to in Section
10(23AAB)

80CCD(1) Employee’s contribution to NPS account (maximum up to -

Rs 1,50,000)

80CCD(2) Employer’s contribution to NPS account Maximum up to 10% of

salary

80CCD(1B Additional contribution to NPS Rs. 50,000

)

80TTA(1) Interest Income from Savings account Maximum up to 10,000

80TTB Exemption of interest from banks, post office, etc. Maximum up to 50,000
Applicable only to senior citizens

80GG For rent paid when HRA is not received from employer Least of :
– Rent paid minus 10% of
total income
– Rs. 5000/- per month
– 25% of total income
Edit

Allowed Limit (maximum)

Section Deduction on FY 2018-19

80E Interest on education loan Interest paid for a period

of 8 years

80EE Interest on home loan for first time home owners Rs 50,000

80CCG Rajiv Gandhi Equity Scheme for investments in Equities Lower of

– 50% of amount invested
in equity shares; or
– Rs 25,000

80D Medical Insurance – Self, spouse, children – Rs. 25,000

Medical Insurance – Parents more than 60 years old or – Rs. 50,000
(from FY 2015-16) uninsured parents more than 80 years
old

80DD Medical treatment for handicapped dependent or payment – Rs. 75,000

to specified scheme for maintenance of handicapped – Rs. 1,25,000
dependent
– Disability is 40% or more but less than 80%
– Disability is 80% or more

80DDB Medical Expenditure on Self or Dependent Relative for – Lower of Rs 40,000 or

diseases specified in Rule 11DD the amount actually paid
– For less than 60 years old – Lower of Rs 1,00,000 or
– For more than 60 years old the amount actually paid

80U Self-suffering from disability : – Rs. 75,000

– An individual suffering from a physical disability – Rs. 1,25,000
(including blindness) or mental retardation.
– An individual suffering from severe disability

80GGB Contribution by companies to political parties Amount contributed (not

allowed if paid in cash)

80GGC Contribution by individuals to political parties Amount contributed (not

Edit

Allowed Limit (maximum)

Section Deduction on FY 2018-19

allowed if paid in cash)

80RRB Deductions on Income by way of Royalty of a Patent Lower of Rs 3,00,000 or

income received
 Question 3
Differences between Tax
evasion, Tax avoidance
and Tax planning
2 Feb 20215 minute read
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 Differences between Tax evasion, Tax avoidance and Tax planning

Tax evasion, Tax avoidance and Tax planning are common terms when it comes to
taxpayers’ manners for tax reduction. In this article, BBCIncorp will clarify meaning,
features as well as differences between tax evasion, tax avoidance and tax planning!

Table of Contents

 1. Tax planning for long-term benefits

 2. Tax avoidance is totally legal
 3. Tax evasion is deemed as tax fraud
 4. Differences between tax evasion, tax avoidance and tax planning
 5. Special considerations for choosing the right tax reduction manner
1. Tax planning for long-term benefits

Tax planning, like tax avoidance, is totally legal.

Tax planning is the process of elaborating the company’s financial related matters to
maximize the tax benefits under eligible provisions of the tax framework. The
planning assists taxpayers to lessen their tax liability through a variety of means,
namely deductions, credits, rebates and exemptions provided under the Income Tax
Act or the corresponding tax laws.
To give an example, one may look for incentives from tax planning by saving via
retirement plans. They can also make investments in fixed deposit, mutual funds,
provident funds or other similar accounts for the reduction of tax liability.

A key feature of tax planning is its relation to the future. An efficient tax planner of
the company with a good tax planning in hand may facilitate the tax minimization in
either short term or long term. To bring the best possible outcome for the tax
perspective, one’s tax planning should bring below some essential elements into
considerations:

 Choice of business entity

 Timing of income
 Size of business
 Planning for expenditures and purchases
 The owner’s residency status
 Capital structure
Among the three methods, tax planning is considered to be the most upright
approach with respect to complying with the provisions of the tax laws. There are
many strategies for a good tax planning of your company, the key of which many
startups and entrepreneurs have opted for incorporating an offshore
company thanks to its great benefits of tax efficiency.
You may want to learn more: Offshore company for Indian citizens: What things to
consider
2. Tax avoidance is totally legal
Some people can be getting in a muddle over the meaning of tax evasion and tax
avoidance. Those two terms sometimes are used interchangeably, but in fact they
are strikingly different. A highlight to note down is that tax avoidance is totally legal,
whilst tax evasion is not.

Tax avoidance is the act of minimizing tax liability within the limits of the law or
without breaking the law. In other words, taxpayers can use legitimate methods to
reduce the amount of tax payable in association with their financial activities. Such
methods to allow taxpayers to avoid paying tax to the government may include the
followings:

 Using tax deductions for decreasing business expenses and business tax bill
 Delaying the payment of tax until a later date with an appropriate tax deferral plan
 Taking advantage of tax credits for legal purposes like business purchases,
benefiting the company’s employees for sick leave and family leave
 Sheltering revenue from tax liability through the establishment of employee
retirement plans.
It should also be noted that seeking reductions of tax obligations by tax avoidance is
100% legal, but it must be within four corners of the tax law framework. Employing
practices of tax avoidance if inappropriate in some cases may lead the taxpayer to
step beyond the line to tax evasion, hence a violation of the jurisdiction regulations.

Thus, it is advisable that both individuals and corporations should gain a good hold
of relevant knowledge before using any tax strategies for minimizing taxes. Also
recommended for companies is that they had better engage financial experts for
legal advice on how tax avoidance can be utilized in the most efficient manner.

You may feel interested: 5 Countries With No Income Tax That You Should Know
3. Tax evasion is deemed as tax fraud
Tax evasion is any illegal method or unlawful attempt to reduce tax liability of
taxpayers. It is highly attached to techniques or illicit practices which results in
showing fewer profits to minimize the individual or company’s tax burden.

Examples of tax evasion usually are the followings:

 Making false statements and information

 Inflating deductions without legal proof
 Hiding related documents to prove the actually earned business profits like records
of transactions or report of cash income
 Concealing or transferring assets illegally
 Magnifying tax credit
 Claiming excessive expenditure

Tax evasion can be deemed as a form of tax fraud which indicates illegitimate and
deliberate actions for not paying tax. Due to the fact that employing such unfair
means is fraudulent, any taxpayers regardless of individual or business committing
tax evasion behaviors would be prosecuted for offence and must be subject to
stringent punishments of a heavy fine or imprisonment.
4. Differences between tax evasion, tax avoidance
and tax planning

Businesses in search of saving tax often come up with those couples of terms. Each
term has been clarified quite obviously in our above-mentioned sections. Below are
key differences between tax evasion, tax avoidance and tax planning to help you get
better understanding:

 Purpose: All serve for tax saving, but tax avoidance aims at minimizing tax, while tax
evasion is deemed a form of not paying tax. Tax planning, on the other hand, helps
businesses to ensure tax efficiency.
 Legality: Both tax planning and tax avoidance are legal. As considered as frauds, tax
evasion is an illegal method to reduce tax.
 Nature: Tax avoidance is performed by availing loopholes in the law, but complying
with law provisions. By contrast, tax evasion is performed by employing illegitimate
means for nonpayment of tax. Tax planning uses existing law provisions to relieve
the burden of tax liability.
 How it is exercised: Tax avoidance is characterized as tax planning, but it is done
before tax liability takes place. This method generally emerges in short-term benefits.
Like tax avoidance, tax planning also should be done before tax liability arises, but it
 associates with the future and often serves for either long-term or short-term
benefits of every assessee. Oppositely, tax evasion is typically done after the tax
liability has arisen.
 Consequences: Tax avoidance is subject to penalty or imprisonment if it violates the
tax regulations. Tax planning is totally legal, meanwhile, tax evasion must be subject
to penalty and other kinds of punishment.
5. Special considerations for choosing the right tax
reduction manner

While the nature of tax planning is quite obvious, there sometimes seems to be
some confusion over the difference between tax evasion and tax avoidance, hence
making wrongful decisions. It is well-advised that any taxpayers, whether individuals
or businesses, should be fully aware of the tax practices being used.

In this regard, two essential tips that taxpayers need to take into account are as
below:

 Acquire knowledge of tax laws and methods for the reduction of tax liability in the
most efficient way. Keep in mind, differentiating such methods on the basis of its
purpose, legality, and features is very crucial as this would help you stay out of
trouble and penalty.
 Seek advice from a professional tax expert or service firm. This is also a good idea as
the person with his/her area of expertise will always know how to apply the tax law to
decrease your tax burden and maximize your benefits. Furthermore, tax regulations
are often subject to changes, whether your tax-saving instrument is correct or not
should be put under specific advice upon circumstances by tax experts as well.

In a nutshell, there are three instruments that taxpayers usually opt for minimizing
their tax liability, including Tax planning, Tax avoidance, and Tax evasion. Each
method is attached to a different manner for tax reduction. Note, however, that tax
avoidance and tax planning are legal practices. By contrast, tax evasion is not and it
is deemed a means of fraud in most cases.

Feel free to contact us if you need more practical advice!

Question 4
Provident Funds – Types & Tax
Implications
Last updated: August 13, 2019 | by Sreekanth Reddy 27 Comments

There are different types of Provident Funds (PFs) which can be used by an

individual for investment and saving purposes. The Balance of Provident Fund
account (PF A/c) consists of amount invested by employee (you), amount invested
by your employer and interest received on the amount invested.

The rules related to subscription, withdrawal, and taxability of Provident

Fund (PF) vary depending on the type of Provident Fund. Taxability of provident
fund is much more complex because of separate conditions of taxability.

In this post, let us understand the types of Provident Funds and their Tax
implications.

Types of Provident Funds : Tax Implications & Key

Points
 Statutory Provident Fund (SPF / GPF)

o These are maintained by Government, Semi Govt bodies, Railways,

Universities, Local Authorities etc.,
o The contributions made by the employer are exempted from income
taxes in the year in which contributions are made.
o The contributions made by the employee can be claimed as tax
deductions under section 80c.
o Interest amount credited during the financial year is not treated as
income and hence it is exempted from income tax.
o The redemption amount at the time of retirement is exempted from
tax.
o If an employee terminates the PF account, the withdrawal amount
too is exempted from taxes.
 Recognized Provident Fund (RPF)
o Any establishment (business entity) which employs 20 or
more employees can join RPF. Most of the individuals (who are
salaried) generally contribute to this type of Provident Fund. This is
 one of the popular types of Employees Provident
Funds (EPF). (Organizations which employ less than 20 employees can
also join RPF if the employer and employees want to do so)
o The business entity can either join the Govt. scheme set up by the PF
Commissioner (or) the employer himself can manage the scheme by
creating a PF Trust. All Recognized Provident Fund Schemes must be
approved by The Commissioner of Income Tax (CIT).
o Employer’s contribution in excess of 12% of salary is treated as
income of the employee and is taxable. In excess of 12%, the
contributions are taxable in the year of contribution.
o Tax Deduction u/s. 80C is available for amount invested by the
employee (up to Rs 1.5 Lakh in a Financial Year).
o Interest amount earned (up to 9.5% interest rate) on PF balance
(employee’s + employer’s contributions) is tax free. In excess of 9.5%,
the interest on contributions is taxable as ‘salary’ in the year in which it
is accrued.
o Accumulated funds redeemed by the employee at the time of
retirement / resignation are exempt from tax if he/she continues the
service for 5 years or more.
 Unrecognized Provident Fund (UPF)
o These are not recognized by Commissioner of Income Tax.
o Employer’s contribution is not treated as income in the year of
investment and hence not taxable in that specific year. So, it is tax free
in the year of contribution.
o Tax deduction under section 80c is not available on Employees
contributions.
o Interest earned is not treated as income in the year it is credited and
hence not taxable in the year of accrual.
o At the time of redemption / retirement, the employer’s
contributions and interest thereon is treated as ‘salary income’ and
chargeable to tax. However, employee’s contribution is not chargeable
to tax. Interest on Employees contribution will be charged under
income from other sources.
 Public Provident Fund (PPF)
o Under PPF any individual from public, whether is in employment or
not may contribute to this fund.
o The minimum contribution is Rs. 500 p.a. & maximum is Rs 1.5 Lakh
Rs. p.a. The amount is repayable after 15 years.
o PPF can serve as an excellent retirement planning / savings tool, for
those who do not come under any pension scheme.
 o The PPF offers tax benefit under section 8OC and the interest earned
is also exempt from tax. All the eligible withdrawals are exempted
from taxes.

Question 5
Incomes which are charged to tax under the head ‘Income from other sources’
‘Income from other sources’ is the residual head of income. Hence, any income
which is not specifically taxed under any other head of income will be taxed under
this head.
Further, there are certain incomes which are always taxed under this head. These
incomes are as follows:
 As per section 56(2)(i), dividends are always taxed under this head. However,
dividends from domestic company other than those covered by section 2(22)(e) are
chargeable to tax in accordance with the provisions of section 115BBDA. As per Section
115BBDA, Dividend received from Domestic Companies upto Rs 10 Lacs will be exempt
from Tax and then any amount received above 10 lacs will be tax at 10%.
 Winnings from lotteries, crossword puzzles, races including horse races, card game
and other game of any sort, gambling or betting of any form whatsoever, are always taxed
under this head.
 Income by way of interest received on compensation or on enhanced compensation
shall be chargeable to tax under the head “Income from other sources”, and such income
shall be deemed to be the income of the year in which it is received, irrespective of the
method of accounting followed by the However, a deduction of a sum equal to 50% of such
income shall be allowed from such income. Apart from this, no other deduction shall be
allowed from such an income.
 Gifts received by an individual or HUF (which are chargeable to tax) are also taxed
under this head.
 In addition to above, following incomes are charged to tax under this head, if not
taxed under the head “Profits and gains of business or profession”.
o Any contribution to a fund for welfare of employees received by the [Section
56(2)(ic)].
o Income by way of interest on securities. [Section 56(2)(id)].
o Income from letting out or hiring of plant, machinery or furniture. [Section
56(2)(ii)].
o Income from letting out of plant, machinery or furniture along with building;
both the lettings are inseparable. [Section 56(2)(iii)].
o Any sum received under a Keyman Insurance Policy including
bonus. [Section 56(2) (iv)].

Relevance of method of accounting

Income chargeable to tax under the head “Income from other sources” is to be
computed in accordance with the method of accounting regularly employed by the
assessee. Hence, if the assessee follows mercantile system, then income will be
computed on accrual basis. If assessee follows cash system, then income will be
computed on cash basis. However, method of accounting does not affect the basis
of charge in case of dividend income and income by way of interest received on
compensation or on enhanced compensation.
Illustration
Ascertain the head of taxability of the incomes given below:

Nature of income Head of taxability

Dividend of Rs. 10,84,000 received by Mr. Dividend is always charged to tax under the
Kapoor from an Indian company. head “Income from other sources”. However,
dividends from domestic company are exempt
from tax upto Rs 10 Lacs only. Any amount
received more than 10 lacs tax at 10%.

Hence Rs 84,000 will be tax at 10%.

Dividend of Rs. 1,84,000 received by Mr. Dividend is always charged to tax under the
Sunil from a foreign company. head “Income from other sources”. Dividends
from foreign company do not qualify for
exemption under section 10(34) and, hence, will
be fully charged to tax.

Rs. 25,200 won by Mr. Soham from a game Income by way of winnings from lotteries, 
show. crossword  puzzles,  races
including horse races, card game and other
game of any sort, gambling or betting of any
form whatsoever, are always charged to tax
under the head “Income from other sources”.
Hence, Rs. 25,200 won from a game show will
be charged to tax under the head “Income from
other sources”.
Rs. 84,000 received by Mr. Kumar Gifts received by an individual or HUF (which
are charged to tax) are taxed under the head
from his friend on his birthday. “Income from other sources”. In this case, gift is
 
received from a friend and it exceeds Rs.
50,000. Hence, entire amount will be charged to
tax under the head “Income from other
sources”.

Rent of a plot of land of Rs. 20,000 received Rent from plot of land will be charged to tax
by Mr. Jagdish. under the head “Income from other sources”.
Rent of plot of land is not charged to tax under
the head “Income from house property”

Rent of a shop amounting to Rs. 1,00,000 Rent of  shop (being building) is charged to tax
per month received by Mr. Sohil. under the head “Income from house property”.

Interest of Rs. 50,000 from bank fixed Interest    on   bank   fixed   deposits   is
deposits received by a salaried employee. charged to tax under the head “Income from
other sources”.

Taxation of Gift under head Income from Other Sources:

Gifts received by Individual & HUF
56(2)(x) is applicable only when gifts are received by Individual and HUF. Donor or
Donee may be Resident or non Resident.

1. Cash:
If aggregate value is less than Rs.50000 than nothing will be taxable. If value
exceeds Rs. 50,000, the whole amount will be taxable.

2. Movable Property as Gift:

a) Without consideration:
Where any person receives, in any previous year, from any person or persons any
property other than immovable property without consideration, the aggregate fair
market value of which exceeds fifty thousand rupees, the whole of the aggregate fair
market value of such property will be taxable in the hands of receiver.
b) For Inadequate Consideration:
Where any person receives, in any previous year, from any person or persons any
property other than immovable property for a consideration which is less than the
aggregate fair market value of the property by an amount exceeding fifty thousand
rupees, the aggregate fair market value of such property as exceeds such
consideration.
 The excess differential amount will be taxable in the hands of receiver.

3. Immovable Property as Gift:

a) Without Consideration:
Where any person receives, in any previous year, from any person or persons any
immovable property without consideration and the stamp duty value of which
exceeds fifty thousand rupees then in such case, the stamp duty value of such
property will be taxable in the hands of receiver.
b) For Inadequate Consideration:
Where any person receives, in any previous year, from any person or persons any
immovable property for a consideration, the stamp duty value of such property as
exceeds such consideration, if the amount of such excess is more than the higher of
the following amounts:
(i) the amount of fifty thousand rupees; and
(ii) the amount equal to five per cent of the consideration
The excess differential amount will be taxable in the hands of receiver.
4. Some Exempt gifts
If any gifts are received in following situations or from below mentioned people then
those gifts will be fully exempt under Income Tax.
Any sum of money or any property received:
 from any relative; or
 on the occasion of the marriage of the individual; or
 under a will or by way of inheritance; or
 in contemplation of death of the payer or donor or
 from any local authority or
 from any fund or foundation or university or other educational institution or hospital or
other medical institution or any trust or institution referred to in clause (23C) of section 10; or
 from or by any trust or institution registered under section 12A or section 12AA; or
 by any fund or trust or institution or any university or other educational institution or
any hospital or other medical institution or
 by way of transaction not regarded as transfer under clause (i) or clause (iv) or
clause (v) or clause (vi) or clause (via) or clause (viaa) or clause (vib) or clause (vic) or
clause (vica) or clause (vicb) or clause (vid) or clause (vii) of section 47; or
 from an individual by a trust created or established solely for the benefit of relative of
the individual.
 any compensation or other payment, due to or received by any person, by whatever
name called, in connection with the termination of his employment or the modification of the
terms and conditions relating thereto
Tax treatment of amount received from life insurance policy
 Any amount received under a life insurance policy, including bonus is exempt from
tax under section 10(10D). However, following points should be noted in this regard:
 Exemption is available only in respect of amount received from life insurance
policy.
 Exemption under section 10(10D) is unconditionally available in respect of
sum received for a policy which is issued on or before March 31 st, 2003, however, in
respect of policies issued on or after April 1 st, 2003, the exemption is available only if
the amount of premium paid on such policy in any financial year does not exceed
20% (10% in respect of policy taken on or after April 1 st, 2012) of the actual capital
sum assured. It should be noted that amount received on death of the person will
continue to be exempt without any
 Value of premium agreed to be returned or of any benefit by way of bonus (or
otherwise), over and above the sum actually assured, which is received under the
policy by any person, shall not be taken into account while calculating the actual
capital sum assured.
Expenses allowed as deductions while computing income chargeable to tax
under the head “Income from other sources
Following major deductions are available from income chargeable to tax under the
head “Income from other sources” :
(a) Commission or remuneration for realising dividends (if not covered under section
115-O which is exempt) or interest on securities [Section 57(i)].
(b) Any sum received by an employer from employees as contribution towards any
welfare fund of such employees is first included as income of the employee, and if
the employer credits such sum to the employee’s account under the relevant fund on
or before the due date (of such fund), then such amount (i.e., employee’s
contribution) is deductible from the income of the employer [Section 57(ia)].
(c) Current (not capital) repairs, insurance premium and depreciation in respect of
plant, machinery, furniture and buildings are deductible from rent income earned by
letting out of plant, machinery, furniture and building, which are chargeable to tax
under section 56(2)(ii)/(iii).
(d) A deduction of lower of Rs. 15,000 or 33 1/3% of such income is available in case
of income in the nature of family pension (i.e., regular monthly amount payable by
the employer to the family members of the deceased employee) [Section 57(iia)].
(e) Under section 57(iii), deduction is available in respect of any other expenditure
(not being in the nature of capital expenditure) laid out or expended wholly and
exclusively for the purpose of making or earning such income during the relevant
previous year.
Expenses not allowed as deductions while computing income chargeable to tax
under the head “Income from other sources”
Under section 58, following expenditures are not deductible while computing income
chargeable to tax under the head “Income from other sources” :
 Personal expenditure [Section 58(1)(a)(i)].
 Any interest chargeable under the Act which is payable outside India on which
tax has not been paid or deducted at source [Section 58(1)(a)(ii)].
 Any amount paid which is taxable under the head “Salaries” and payable
outside India on which tax has not been paid or deducted at source [Section 58(1)
(a) (iii)].
 Sum paid on account of wealth-tax is not deductible under section 58(1A).
 Amount specified under section 40A is not deductible [Section 58(2)].
QUESTION6
The tax levied on the profit or gain earned on selling capital assets is called capital
gains tax. Depending on the holding period, capital gains tax can be Long term Capital
Gains Tax (LTCG) or Short term Capital Gains Tax (STCG). LTCG is 10% for stocks and
equity mutual funds and 20% with indexation for real estate, debt mutual funds and other
assets. LTCG on equities/equity mutual fund does not get the benefit of indexation.
STCG is levied as per your slab rate. The holding period for classifying tax as LTCG or
STCG changes from asset to asset. LTCG applies to real estate for a holding period of
more than 2 years, to debt funds for a holding period more than 3 years and to
stocks/equity mutual funds for holding period of more than 1 year
Capital Asset
Any asset such as immovable property, vehicles, leasehold earning, jewellery,
machinery or intellectual property such as patents and trademarks is termed a capital
asset. Capital assets include any direct rights, which in of Indian companies, includes
the rights of management or ownership control as well as other holding rights.

Capital Gain
Capital gain is the net profit which an investor makes after selling any of his capital
assets at a price that exceeds the original purchase price. The transfer of such capital
asset should have had been done in the previous financial year in order to be eligible for
taxation during the current year. The entire value of this sale is taxable under the income
head termed as ‘Capital Gain’. This whole process is backed by three fundamental
elements:

 A capital asset such as property, gold etc.

 The transfer of such capital asset
 A profit earned as a result of this transfer.

However if  there is any loss at the time of selling the capital assets, in the context of
purchase price can result in capital loss, which would of course be tax exempt. Capital
gains tax does not apply for inherited assets or assets acquired through gift or partition
of HUF property.
Assets exempt from capital gains
 Any stock held in trade (profits on this will be taxed as business income).
 Consumable raw materials which are kept for the specific purpose of any
business or as per profession (taxed under business income).
 Any personal effects which are movable/effects kept for personal use.
 Agricultural land which is not located within an 8 km radius of any municipality,
Municipal Corporation, notified area board, any town committee / cantonment
area board having a minimum residential population of 10,000 people.
 National Defense Gold Bonds 6.5 % Gold Bonds or the Special Bearer/ Gold
Deposit bonds under the Government Gold Deposit Scheme.

Type of Capital Gain

  Long-Term Capital gain (LTCG): Capital gain is long term if the asset is held for
greater than a specified period. This period is
 2 years for real estate
 1 year for stocks/equity mutual funds/listed debentures or govt securities/zero-
coupon bonds/units of UTI and
 3 years for debt funds/any other assets.
 Short-Term Capital gain (STCG): The gain in any asset sold before the expiry of
a defined period is termed short term capital gain. The holding periods for
different assets are given above. Holding these assets for less than the periods
mentioned will bring them under STCG.

Calculation of Capital Gains

For the ease of calculation of capital gain tax it is done as per the nature of capital gain.

1. Taxation on short-term capital gains– STCG is calculated by adding the capital

gain to the total income of the taxpayer. Subsequently, income tax is applied as
per the individual’s tax bracket.

2. Taxation on long-term capital gains – LTCG is levied at

 20% for real estate, debt funds, other assets, after giving taxpayers the benefit of
indexation
 10% for stocks/equity mutual funds/listed bonds/zero coupon bonds/units of UTI

Indexation in Capital Gains

This concept takes into account the effect of inflation to reduce your tax liability. It is
calculated using CII, an index maintained by the Income Tax Department. You can get
the CII details here. Currently the cost inflation index for the running financial year 2018-
19 is 280. For example assume that you buy a debt fund in 2013 for Rs 100 and sell it in
2018 for Rs 150. Since you have sold it after three years, the gain is long term and a tax
of 20% with indexation will apply. The Cost Inflation Index (CII) in FY 13 was 200 and
the CII in FY 18 was 272. As a result your purchase price for tax purposes will rise to
(272/200)*100 = 136 and your taxable gain will be 150 – 136 = 14. The tax payable will
be 20% of 14 = Rs 2.8. Hence even though you have made a gain of Rs 50, your actual
tax is not 20% of Rs 50 or Rs 10 but rather only Rs 2.8 after applying indexation
Methodology for computing Capital Gains
 

1. Short-term capital gain tax = A- (B+C+D)

A= Sale value of the asset

B= cost of acquisition
C= cost of improvement
D= the cost of expenditure incurred totally and solely in the connection with a transfer

2. Long-term capital gain = A-(B+C+D), whereas,

A=Full value of consideration received or accruing
B=indexed cost of acquisition*
C= indexed cost of improvement**
D= cost of expenditure incurred wholly and exclusively in connection with such a transfer
*Indexed cost of acquisition = A X (B / C), wherein
A= Cost of acquisition
B=CII of the year of transfer
C= CII of the year of acquisition
**Indexed cost of improvement = A X (B / C), wherein,
A=cost of improvement
B=CII of the year of transfer
C= CII of year of year of improvement
Cost of transfer is the brokerage paid for managing the deal, cost of advertising plus
legal expenses incurred etc.
Capital Gains Tax Exemptions
These exemptions mentioned below can be claimed either fully or partially. For example
if purchase price is Rs 80 lakh and your sale proceeds are Rs 1 crore (hence gains of Rs
20 lakh) and you deposit Rs 50 lakh as per the below mentioned exemptions, half your
capital gains (Rs 10 lakh) will be exempt. The other half (Rs 10 lakh) will be taxable.

 Section 54: If the sale proceeds of a residential property are further utilized to
buy another residential property, the capital gains on the sale proceeds are
exempt. This is however subject to the following conditions

a)The purchase of property should be done either 1 year prior to selling the property or
within two years of the sale.
b) In case of under construction property, the same should be done within maximum
three years from the transfer date of the earlier property.
c)The newly acquired property cannot be further sold within 3 years of purchase or
construction.
d) The newly acquired property should be located in India.

 Section 54F: If you sell any other asset like agricultural land within 10 km of a
city or valuable paintings, jewellery, debt funds etc, you can take the benefit of
Section 54F. This section grants deduction for purchase of a house property from
the proceeds of the sale of any capital asset. The following additional conditions
apply:

a)The purchase of property should be done either 1 year prior to selling the property or
within two years of the sale.
b) In case of under construction property, the same should be done within maximum 3
years from the transfer date of the earlier property.
c)The newly acquired property cannot be further sold within 3 years of purchase or
construction.
d) The newly acquired property should be located in India.
e) The person should not have more than one residential property on the date of the
transfer.
f) No other property is purchased within 1 year of the transfer or constructed within 3
years of the transfer
The investor can deposit the sale proceeds in a Capital Gains Account Scheme before
the due date for filing returns in order to take the benefit of the above sections even if he
has not bought/constructed another property. However he must buy/construct the new
property within the time limits specified above and can pay for it by using the money
deposited in the Capital Gains Account Scheme.

Section 54EC: Capital Gains Bonds issued by NHAI (National Highways Authority of
India) and REC (Rural Electrification Corporation) are eligible for exemption from capital
gains tax up to Rs 50 lakh. They have a tenure of 5 years and carry a fixed interest rate
(currently 5.25%). The interest on these bonds is taxable. Only capital gains in real
estate are eligible for this deduction. For example, if you buy an asset for Rs 10 lakh and
sell it for Rs 20 lakh investing the entire Rs 20 lakh in NHAI/REC capital gains bonds,
the said transaction would not attract capital gains tax.

QUESTION 7

List of Tax-Free Perquisites –

Income Tax Act
A perquisite refers to any form of non-cash remuneration made available by an employer to an
employee. In other words, any non-cash consideration paid by an employer to the employee is
considered to be a perquisite. Perquisites provided by an employer to an employee are taxable
under the head of income known as Income from Salaries. However, some types of
perquisites are tax-free in the hands of the employee. For effective tax planning and reduction of
tax liability, the employer and employee must be aware of the list of tax-free perquisites which
are provided by the Income Tax Act. In this article, we have provided a list of some of the tax-
free perquisites mentioned under the Income Tax Act.

Medical Facilities & Reimbursements

The value of medical treatment provided to an employee or any member of his/her family in a
hospital, dispensary or a nursing home maintained by the employer will be a tax-free perquisite.
Also, any money paid by the employe for expenditure incurred by the employee on his/her
medical treatment or treatment of any member of his family subject to a maximum of Rs.15,000
in the previous year will be treated as a tax-free perquisite.

Recreational Facilities
Any recreational facility provided to a group of employees by the employer is not taxable. Thus,
health club, sports and similar facilities provided uniformly to all employees by the employer is a
tax-free perquisite.

Traininghttps://www.indiafilings.com/lear
n/tax-free-perquisites/
Any cost incurred by the employer for providing training to the employees or by way of payment
of fees or refresher courses attended by the employees can be treated as tax-free perquisite.

Telephone & Laptops

Expenses incurred by an employer on a telephone, mobile phone or use by the employee or any
member of his household, a laptop or computer belonging to the employer can be treated as a
tax-free perquisite.

Education for Children

Any amount is given by an employer to an employees child as scholarship is a tax-free
perquisite. Also, if an educational facility is maintained and owned by the employer and free
educational facilities are provided to the children of the employee or where such free educational
facilities are provided in any institution by reason of his/her being in employment of that
employer, then the value of benefit provided can be treated as a tax-free perquisite if the amount
does not exceed Rs.1000 per child per month.

Food and Beverage

Free food and non-alcoholic beverages provided by an employer to an employee during working
hours at office premises or through a paid voucher that are not transferable and usable only at
select places is a tax-free prerequisite, provided the value of such a mean is up to Rs.50 per
meal.

Loan to Employees
Any loan of an amount of less than Rs.20,000 provided as a loan to an employee can be treated
as a tax-free perquisite. Also, the loan provided by an employer for medical treatment in respect
of diseases specified in Rule 3A of the Income Tax Rules is tax-free.

Insurance Premium & Pension

Contributions
An insurance premium paid by an employer on an accident policy taken out for the employee is a
tax-free perquisite. Also, employers contribution to the superannuation fund of the employee
provided such contribution does not exceed Rs.1,50,000 per employee per year can be treated
as a tax-free perquisite.

Prerequisites Provided Outside India

Perquisites allowed outside India by the Government to the employees, who are citizens of India
for rendering services outside India which are not taxable.
Rent Free House/ Conveyance Facility
The rent-free accommodation and conveyance facilities are provided to a judge of a supreme
court or high court that is not a taxable perquisite.

Residence to Officials of Parliament

The rent-free furnished residence that includes the maintenance provided to an officer of the
parliament, a union minister or leader opposition in parliament, that is not a taxable perquisite.

Accommodation in a Remote Area

The accommodation provided by the employer would be a tax-free prerequisite if the
accommodation is granted to an employee working at mining site or an onshore oil exploration
site or a dam site or a project execution site, or a power generation site or an offshore site which
is being of a temporary nature and having plinth area which is not exceeding more than 800
square feet, is located not less than 8 kilometres distance away from the local limits of
municipality or a cantonment board (or) is located in a remote area.

Tax by Employer on Non-monetary

Perquisites
A tax that is paid by the employer on non-monetary perquisites of the employee would be exempt
in the hands of the employee. The notified perquisites paid both to serve and retired chairman
and members of union public service commission.

Leave Travel Concession (LTC)

The employee is entitled to the exemption under section 10(5) in respect of the value of the travel
concession or assistance that is received by or due to him from his employer family, in
connection with his proceeding-

 On leave to any destination in India

 To any destination in India after retirement from service or after the termination of his
service.

To know about the concept of a slump sale in Income Tax, click here.

Other Related Guides

Form 34EAForm 34EA - Income Tax Form of application for obtaining an advance ruling
under section 245Q(1) of the Income-tax Act, 1961

Income Tax Settlement CommissionIncome Tax Settlement Commission The

Income Tax Settlement Commission is a premier Alternative Dispute Resolution (ADR) body in
India. The Income Tax...
Form 26Form 26 - Income Tax Annual Return of deduction of tax under section 206 of the
Income-tax Act, 1961 in respect of all payments other than “Salaries”...

Section 80TTBSection 80TTB Deduction The Budget 2018 has introduced a new Section
80 TTB in the Income Tax Act. The new section offers a tax deduction to assessee...

Form 10CForm 10C - Income Tax Audit report under section 80HH of the Income-tax Act,
1961

Allowances available to different categories of Tax Payers [AY 2021-22]

A. Under the head Salaries

S. Section Particulars Limit of exemption Exemption

No. available to

1. 10(7) Any allowance or Entire Amount Individual- Salaried

perquisite paid or Employee (being a
allowed by citizen of India)
Government to its
employees posted
outside India

2. – Allowances to Judges Exempt, subject to Individual – Judges

of High certain conditions. of High
Court/Supreme Court Court/Supreme Court

3. – Compensatory Fully Exempt Individual – Judges

allowance received by
a Judge under article
222(2) of the
Constitution

4. – Salary and allowances Fully Exempt Individual – Teacher

received by a from SAARC
teacher /professor member State
from SAARC member
state (Subject to
certain conditions).

5. 10(45) Following allowances Fully Exempt Individual –

and perquisites given Chairman/Member of
to serving UPSC
Chairman/Member of
UPSC is exempt from
tax:

a) Value of rent free

 official residence
b) Value of
conveyance facilities
including transport
allowance
c) Sumptuary
allowance
d) Leave travel
concession

7. – Allowances paid by Fully Exempt Individual – Individual –

the UNO to its Government employee Employees of UNO
employees

QUESTION 8

Tax-Free Bonds: Meaning, How to Invest

and More
Updated on Jan 23, 2021 - 02:06:07 AM
People are always after that investment options that provide good returns. Zero tax on returns,
among other benefits makes tax-free bonds one of the most sought-after investments in the
market. We have covered the following in this article:

1. What are Tax-Free Bonds?

2. Who should invest in Tax-Free Bonds?
3. What are the features of Tax-Free Bonds?
4. What are the commonly found Tax-Free Bonds?
5. How are Tax-Free Bonds different from Tax-Saving Bonds?
6. How to invest in Tax-Free Bonds?
7. How to redeem your Tax-Free Bonds?

1. What are Tax-Free Bonds?

Tax-free bonds are issued by a government enterprise to raise funds for a particular purpose.
One example of these bonds is the municipal bonds. They offer a fixed interest rate and hence
is a low-risk investment avenue. As the name suggests, its most attractive feature is its
absolute tax exemption as per Section 10 of the Income Tax Act of India, 1961. Tax-free
bonds generally have a long-term maturity of ten years or more. The government invests the
money collected from these bonds in infrastructure and housing.

2. Who should invest in Tax-Free Bonds?

Tax-free bonds are an excellent choice for investors looking for fixed income like senior
citizens. As government enterprises typically issue these bonds for a longer tenure, default
risk is very less in these bonds and you are assured of a fixed income for a more extended
period, typically ten years or more. The government enterprises invest the money collected
through the issuance of these bonds in infrastructure and housing projects.
Tax-free bonds are the right choice for investors falling in the highest tax bracket. Typically
high net-worth (HNI) individuals, HUF members, trusts, co-operative banks, and qualified
institutional investors prefer to invest in these bonds.

3. What are the features of Tax-Free Bonds?

a. Tax-exemption
In the case of tax-free bonds, the interest income is entirely tax-exempt. Also, the tax
deducted at source (TDS) does not apply to these bonds. However, it is advised to declare
your interest income as tax-free bonds do not imply that you can claim the investment
amount for the tax deduction. Tax-free bonds, when compared to bank FDs, offer great
benefits to investors who fall in the highest tax brackets.

b. Risk factors
Chances of defaulting on interest payment are very low as these schemes are from the
government itself. Also, it offers capital protection and a fixed monthly or annual income.
Hence, it can be considered quite safe.

c. Liquidity
You cannot liquidate tax-free bonds as quickly as, say, debt funds. Since government bonds
are long-term investments and have more extended lock-in periods, liquidation of the bonds
may not be that easy.

d. Lock-in tenure
Tax-free bonds have higher lock-in-period that range from 10 years to 20 years. You cannot
withdraw your money before the maturity date. Therefore, please make sure that you will not
need this money shortly after investing.

e. Issuance & transaction

Tax-free bonds are issued through a Demat account or in physical mode. They mainly trade
in stock markets.

f. Returns
The returns you make on these bonds are primarily dependent on the purchase price. This is
because they are traded in low volumes with a limited number of interested buyers or sellers.

g. Interest
The rate of interest offered on tax-free bonds generally ranges between 5.50% to 6.50%,
which is fairly attractive when considering the tax exemption on these bonds. A bondholder
receives the interest annually. However, the rates are subject to fluctuations as they are
related to the current rate of government securities.

4. What are the commonly found Tax-Free

Bonds?
Many public sector undertakings issue tax-free bonds. National Highway Authority of India,
NTPC Limited, Indian Railways, and Rural Electrification Corporation are some of the most
popular ones. Housing and Urban Development Corporation, Indian Renewable Energy
Development Agency, Rural Electrification Limited, and Power Finance Corporation are the
other examples. Therefore, you must always check the authenticity before buying.
 

Tax-free Bonds Tax-saving Bonds

Interest (income) you earn is tax-exempt Just the initial investment is tax-exempt

Section 10 of the Income Tax Act Section 80CCF of the Income Tax Act

Offer higher interest rates than tax-saving Lesser interest rates compared to tax-free bonds
bonds

Can invest up to Rs.5 lakh Tax-exemption is only up to Rs.20,000 investment

Higher lock-in period from 10 years Has a buyback clause – you can withdraw investments after 5 or
7 years

 
6. How to invest in Tax-Free Bonds?
Tax-free bonds have trading options that allow bond trading through a Demat account or in
physical form. Therefore, investing in these bonds is simple and highly rewarding.
Remember, the subscription period for the investment is open only for a specific time. You
will be required to submit your PAN details when buying the physical format.
When the government releases them to the public, the investor can subscribe by applying
online or offline. On the other hand, if an investor requests for the bond post-issuance, he/she
can invest using the trading account. Hence, it is much similar to trading shares in a stock
market.
7. How to redeem your Tax-Free Bonds?
Redeeming tax-free bonds is a fairly easy process, provided you have completed the tenure.
However, you cannot withdraw your bond before 10-20 years, but only trade it on stock
exchanges to another investor. The entity that issued the bond in the first place cannot
repurchase it either. Moreover, the profit you make after the sale is also taxable under Section
112. Hence, the gains you get after selling the bond before one year is taxable as per your
income tax slab. Trading it after one year will attract a long-term capital gains tax at 10%,
and there is no benefit of indexation provided.
To conclude, tax-free bonds offer fixed tax-free income at low risk. They are easily liquid via
trading of these bonds in secondary markets before the maturity period. However, the
government hasn’t notified on the issuance of these bonds since 2016. So, investors need to
be aware of the tenure and interest rate if they are considering those by PSU companies.

Question 9

Tax Planning Under MAT

Updated on Jan 05, 2021 - 02:40:47 PM
MAT stands for Minimum Alternate Tax, and it was launched to reduce (if not to bridge) the
gap between the tax accountability as per income calculation and book profits. In this article,
let us explore how tax planning under MAT works.

1. MAT - A brief Introduction

2. How to calculate MAT?
3. What is MAT Credit?

1. MAT - A Brief Introduction

Minimum Alternative Tax is payable under the Income Tax Act. The concept of MAT was
introduced to target those companies that make huge profits and pay the dividend to their
shareholders but pay no/minimal tax under the normal provisions of the Income Tax Act, by
taking advantage of the various deductions, and exemptions allowed under the Act. But with
the introduction of MAT, the companies have to pay a fixed percentage of their profits as
Minimum Alternate Tax. MAT is applicable to all companies, including foreign companies.
MAT is calculated under Section 115JB of the Income-tax Act. Every company should
pay higherof the tax calculated under the following two provisions:

1. Tax liability as per the Normal provisions of income tax act(tax rate 30% plus 4% Edu
cess plus surcharge (if applicable)
TAX LIABILITY AS PER THE NORMAL PROVISIONS OF THE INCOME TAX ACT
WHOSE TURNOVER OR GROSS RECEIPTS WAS OF Rs. 250Cr DURING THE FY
2016-17.(TAX RATE 25% PLUS 4%EDUCATION CESS PLUS SURCHARGE(IF
APPLICABLE)
2. Tax liability as per the MAT provisions are given in Sec 115JB(18.5 % of Book Profits
Plus 4 % education cess plus a surcharge if applicable). The tax rate is 15% with effect from
AY 2020-21 (FY 2019-20)

2. How to calculate MAT?

MAT is equal to 18.5% (15% from AY 2020-21) of Book profits (Plus Surcharge and cess as
applicable). Book profit means the net profit as shown in the profit & loss account for the
year as increased and decreased by the following items:

Additions to the Net Profit (If debited to the Profit and Loss

Account):
1. Income Tax paid or payable if any calculated as per normal provisions of income tax act.
2. Transfer made to any reserve
3.  Dividend proposed or paid
4. Provision for loss of subsidiary companies
5. Depreciation including depreciation on account of revaluation of assets
6. Amount/provision of deferred tax
7. Provision for unascertained liabilities e.g. provision for bad debts
8. Amount of expense relating to exempt income under sections 10,11,12 (except sec 10AA
and 10(38)  This means income under section 10AA & long term capital gain exempt under
section 10(38) are subject to MAT.Provision made for diminution in the value of any asset

Deletions to the Net Profit (If credited to the Profit and Loss
Account)
1. Amount withdrawn from any reserves or provisions
2. The amount of income to which any of the provisions of section 10, 11 & 12 except 10AA
& 10(38) applies.
3. Amount withdrawn from revaluation reserve and credited to profit & loss account to the
extent of depreciation on account of revaluation of asset.
4. Amount of loss brought forward or unabsorbed depreciation, whichever is less as per the
books of account. However, the loss shall not include the depreciation. (if loss brought
forward or unabsorbed depreciation is nil then nothing shall be deducted.)
5. Amount of Deferred Tax, is any such amount is credited in the profit & loss account
6. Amount of depreciation debited to the Profit and Loss Account (excluding the depreciation
on revaluation of Assets)

3. What is MAT Credit?

When any amount of tax is paid as MAT by the company, then it can claim the credit of such
tax paid in accordance with the provision of section 115JAA.
Allowable Tax Credit: Tax paid as per MAT calculation — Income tax payable under
normal provision of Income-tax Act, 1961.
(However, no interest shall be paid on this Tax credit by the Department.)
For Instance

ABC Ltd has the taxable income as per normal provisions of the income tax Act Rs 40 lakhs and Book profits of
Rs 75 lakhs for the FY 2019-20.

 Tax payable will be higher of the following two:

Rs 40, 00,000 @ 30 % plus 4% = 12,48, 000

 Tax liability as per MAT provisions will be :

Rs 75, 00,000 @ 18.5 % plus 4% = Rs 14,43,000

Hence Tax payable by the company will be Rs 14,43,000.
MAT CREDIT: Rs 14,43,000 – Rs 12, 48,000 = Rs 1,95,000
Such tax credit shall be carried forward for 15 Assessment Years immediately succeeding
the assessment year in which such credit has become allowable. This is with effect from AY
2018-19 prior to which MAT could be carried forward only for a period of 10 AYs. For
instance, if the excess tax is paid is in FY 2016-17, then the credit of such tax can be carried
forward from in FY 2017-18.
MAT credit shall be allowed to be set off in a year when the tax becomes payable on the total
income in accordance with the normal provisions of the Act. Set off shall be allowed to the
extent of difference between the tax on the total income under normal provision and tax
which would have been payable as per MAT under section 115JB.
MAT credit can be better explained with the help of an illustration. So let’s try to understand
it with the help of an example:

 Actual tax payable : Higher of Tax Payable under MAT OR Tax Payable as per normal
provisions.
 MAT credit set off is allowed only if tax payable as per normal provisions is greater than tax
payable as per MAT and also to the extent of the difference between the two.
 MAT Credit Available under section115JAA: Tax Payable under MAT — Tax Payable as per
normal provisions

Question 10