TAX PLANNING

Taxes are the compulsory contributions paid by the citizens of the country for meeting different
government expenditures. There are three stages in the imposition of the tax by the government. They are:

1. What is all the income chargeable to the tax?

2. Assessment and the tax payment by the persons.
3. Method of recovery of the tax if tax was not paid on time.

TAX

DIRECT TAX INDIRECT TAX

GOODS AND
INCOME TAX
SERVICE
TAX
CAPITAL
GAIN TAX

SECURITIES
TRANSACTION TAX

DIVIDEND
DISTRIBUTION
TAX
 Features of Taxes

The features of taxes are as follows:

1. It is compulsory contribution; refusal to pay is a punishable offence.

2. In the payment of a tax, the element of sacrifice is involved because tax payer cannot claim direct
benefit against tax.

3. Taxes are imposed by the Government only.

4. Tax should be paid regularly and periodically.

5. The aim of taxation is the welfare of the community as a whole.

Direct Taxes:

They are imposed on a person‘s income, wealth, expenditure, etc. Direct Taxes charge is on person concern
and burden is borne by person on whom it is imposed. Direct taxes are one type of taxes an individual pays
that are paid straight or directly to the government, such as income tax, poll tax, land tax, and personal
property tax. Such direct taxes are computed based on the ability of the taxpayer to pay, which means that
the higher their capability of paying is, the higher their taxes are.

INCOME TAX:

Income tax is a type of direct tax the central government charges on the income earned during a financial
year by the individuals and businesses. It is calculated based on the tax slabs defined by Income Tax
Department. Most tax rates are progressive, which means that the tax rate increases as the level of income
increases. The reasoning behind this tax structure is that the poor are less able to pay taxes, while the rich
have more excess cash with which to pay taxes.

In India, Income-tax was introduced for the first time in 1860 by Sir James Wilson in order to meet the
losses sustained by the Government during that time. In 1886, a Separate Income Tax Act was passed. This
act was amended from time to time. In 1918, a new Income Tax Act was passed and again it was replaced by
another new Act which was passed 1922 The Income Tax Act 1922 has become very complicated due to
several amendments.

In consultation with Ministry of Law, Income Tax Act 1961 was passed. The Income-tax Act 1961 has been
brought into force with effect from 1st April 1962. It applies to the whole of India. Every year the central
government made various amendments through Union Budget. These amendments pass through the
Parliament and get approval of the President of India.

According to estimates, about 71 per cent of the government’s total revenues are collected through taxes and
duties, while nine per cent come from non-tax revenues and the rest of about 20 per cent are covered through
borrowings and other liabilities. The revenue collected by the government is used in various ways, like
paying states’ share of taxes and duties, interest payments, expenditure on central sector schemes and
centrally sponsored schemes, pension to retired government employees, defense expenditures, subsidies,
expenses through finance commission, transfers, etc.

Types of income tax:

Individual income tax:

Individual income tax is also referred to as personal income tax. This type of income tax is levied on an
individual's wages, salaries, and other types of income. This tax is usually a tax the state imposes. Because
of exemptions, deductions, and credits, most individuals do not pay taxes on all of their income.

Business income tax:

Businesses also pay income taxes on their earnings; they taxes income from corporations, partnerships,
self-employed contractors, and small businesses. Depending on the business structure, the corporation, its
owners, or shareholders report their business income and then deduct their operating and capital
expenses. Generally, the difference between their business income and their operating and capital expenses
is considered their taxable business income.

Income Tax Rebate

When an individual pays more than his/her tax liability she receives a refund on the paid amount which is
known as tax rebate. The excess money is refunded at the end of the fiscal year. For claiming a tax refund
one needs to file an tax return.

Tax Rebate

Tax rebate is a refund on taxes when the tax liability is less than the taxes the individual has paid. Taxpayers
usually get a refund on their income tax if they have paid more than what they owe. The tax refund money is
given back at the end of the financial year.
In India, you can get a refund of the excess tax along with the interest. To claim the income tax refund one
must file the income tax return within a specified period. Most often you get tax refunds as your income falls
within the tax slab that gets modified every year as per the directions of the government.

Working of income tax:

Income tax is imposed depending on the nature of the income. There are different types of income

 Income from salary/pension: This includes basic salary, taxable allowances, perquisites, and
profit in lieu of salary, as well as pension received by the person who himself/herself has
retired from the service. Incomes from salary and pension are included in the computation of
taxable income.
 Income from business/profession: This includes actual and presumptive incomes from
business and professions that individuals do in their personal capacity and is added to taxable
income after adjustment of the deductions allowed.
 Income from house property: An income tax assessee can own one or more house properties.
These house properties can be self-occupied or rented out or even vacant. This head describes
the rules relating to such ownership. The rules under this head describe how rent from one or
more house properties is to be treated for the purpose of calculation of taxable income. It also
describes how interest on home loan is to be accounted for in the case of self-occupied, rented
out and vacant properties. An income tax assessee can claim certain deductions such as
municipal taxes and a standard deduction for house maintenance in certain cases. The final net
income or loss under this head is then added to or deducted from the income from the other
heads.
 Income from other sources: This includes incomes like interest from a savings account, fixed
deposits (FDs), family pension etc, which are included in the taxable income.
 Income from Lottery, Betting, Race Horse etc: Such incomes are included in the total
income, but excluded from taxable income as different tax rates are applicable on these types of
income.
Income Tax Payment
Tax Deducted at Source (TDS)
For specified payments, tax is deducted at source by the payer when making payment to the recipient
of income. The recipient of income can claim the credit of the TDS amount by adjusting it with the
final tax liability.
Advance Tax
The taxpayer must pay tax in advance when his estimated income tax liability for the year exceeds Rs
10,000. The government has specified due dates for payment of advance tax installments.
Self-Assessment Tax
It is the balance tax that the taxpayer has to pay on the assessed income. The self-assessment tax is
calculated after reducing the advance tax and TDS from the total income tax calculated on the assessed
income.

How income tax is calculated in India:

Income tax in India is calculated on the basis of tax rates determined by the government for an
Assessment Year (AY).
Once the gross total income is calculated by adding all the various sources, whichever applicable,
deductions on account of tax-saving investments, allowed expenses, donations etc are adjusted. After
the entire eligible deduction amount is reduced from the gross income, the figure of taxable income is
arrived at. The income tax amount that is payable is computed on the basis of taxable income.

Income Tax Return forms in India:

Filing of Income Tax Return (ITR) is compulsory for earning individuals or entities, depending on
their earning capacity. The Income Tax Return needs to be filed on prescribed ITR Forms. For AY
2019-20, there are six ITR Forms: ITR-1, ITR-2, ITR-3, ITR-4, ITR-5 and ITR-7.
 ITR-1: This ITR form is also called Saral and is for resident Indians having Income from
Salaries, one House Property, Other Sources (interest, family pension etc.), and
Agricultural Income up to Rs 5,000. This form does not apply to an individual who has
invested in Unlisted Equity Shares or is a Director in a company or has a total income of
over Rs 50 lakh.
 ITR-2: This ITR form is applicable to Individuals and HUFs who don’t have income
from profits and gains of business or profession.
  ITR-3: Individuals and HUFs having income from profits and gains of business or
profession need to use this form.
 ITR-4: This form applies to resident Indian Individuals, HUFs and Firms (other than
LLP) having income from Business and Profession up to Rs 50 lakh, which is computed
under sections 44AD, 44ADA or 44AE. An Individual, who is either a Director in a
company or has invested in Unlisted Equity Shares, can’t use this form.
 ITR-5: This form applies to assessees other than Individual, HUF, Company, and
persons filing the ITR-7 Form.
 ITR-7: This form is applicable for the persons, including companies, who required to
furnish return under sections 139(4A) or 139(4B) or 139(4C) or 139(4D) of the Income
Tax Act.

Process of filing online income tax returns:

An income tax return is a form that enables a taxpayer to declare his income, expenses, tax
deductions, investments, taxes etc. The Income Tax Act, 1961 makes it mandatory under various
scenarios for a taxpayer to file an income tax return.
An income tax return is a form filed to report the annual income of a taxpayer. There may be various
reasons for filing an income tax return even in the absence of income.

A taxpayer may want to file his income tax return for reporting his income for a financial year,
carrying forward losses, claiming an income tax refund, claiming tax deductions, etc.
The Income Tax Department provides the facility for electronic filing (e-filing) of an income tax
return. Before discussing the steps involved in the e filing of income tax return, it is essential for a
taxpayer to keep the documents for calculation and reporting data in ITR.

 Step 1: Calculation of Income and Tax

 Step 2: Tax Deducted at Source (TDS) Certificates and Form 26AS
 Step 3: Choose the right Income Tax Form
 Step 4: Download ITR utility from Income Tax Portal
 Step 5: Fill in your details in the Downloaded File
 Step 6: Validate the Information Entered
  Step 7: Convert the file to XML Format
 Step 8: Upload the XML file on the Income Tax Portal

You have to pay your taxes before filing your tax return. If you are a salaried individual, then most of
your tax liability is deducted from your salary by your employer in the form of TDS and paid to the
government on your behalf. In case you are liable to pay advance tax, then you have to pay 90% of it
before the 31st of March every financial year. You can file your ITR once the financial year ends.

The window to file ITR is generally open till the 31st of July of the relevant assessment year. However,
the due date to file ITR may get extended, and the IT department will notify the same through
notifications. It is always advisable to file your ITR within the due date. It’s worthwhile noting that you
attract a late filing fee of Rs 5,000 on failing to file ITR within the due date of the assessment year.

Capital Gain tax:

A 'capital gain' is made when the price at which you sell an asset is higher than the price at which you had
bought the same asset in the past. An asset can be any property owned by a person like real estate, equity,
bonds or mutual funds.

Any profit or gain that arises from the sale of a ‘capital asset’ comes under the category ‘income’, and
hence you will need to pay tax for that amount in the year in which the transfer of the capital asset takes
place. This is called capital gains tax.

The two types of Capital Gains are

 Short-term capital gains tax (STCG) and

 Long-term capital gains tax (LTCG).

Short- term capital gain:

STCG or Short Term Capital Gains Tax is the tax levied on profits generated from the sale of an asset
which is held for a government-defined short period is called short-term capital gains tax. An asset
held for a period of 36 months or less is a short-term capital asset.

The below-mentioned assets, when held for 12 months or less, are considered short-term capital assets:
  Short Term Capital Gains Tax on shares: Equity and preference shares in a company
which are listed on NSE or BSE or any other recognized stock exchange
 Securities such as debentures, bonds, govt securities, etc. which are listed on the stock
exchange in India
 Units of UTI, even if not quoted.
 Zero-coupon bonds both unquoted and quoted.

Short term capital gains calculation

After taking the full value of the asset into account, deduct the expenditures incurred in connection
with the transfer. Also, deduct the cost of acquisition and improvement costs. The leftover amount is a
short-term capital gain, which will then be taxed under STCG.

Long term capital gain tax:

Long Term Capital Gains Tax or LTCG Tax is the tax levied on the profit generated by an asset such
as real estate and shares, which is held for a long time period. The period of holding to be defined as
“long term” or “short term” varies from asset to asset, as per the government rules. An asset held for
more than 36 months is a long-term capital asset. They will be classified as a long-term capital asset if
held for more than 36 months as earlier.

Long term capital gains tax is not charged on inherited properties as it is a transfer of property rights
and not a sale. However, once sold, the inherited properties also attract capital gains tax. In
determining whether to consider the asset acquired by gift, will, succession, or inheritance as long term
or short term, the period of ownership of the previous owner is also taken into account.

The below-mentioned assets, when held for 12 months or more, are considered long-term capital
assets.

 Equity and preference shares in a company which are listed on a recognized stock
exchange such as NSE or BSE;
 Securities (example – debentures, bonds, govt securities etc.) which are listed on the
stock exchange in India;
 Units of UTI even if not quoted; and
  Zero-coupon bonds both quoted and unquoted.

Securities transaction tax:

STT is a kind of financial transaction tax which is similar to tax collected at source (TCS). STT is a
direct tax levied on every purchase and sale of securities that are listed on the recognized stock
exchanges in India.

STT was introduced in the Budget of 2004 and implemented in Oct 2004. The objective behind the
levy is to mitigate tax evasion as the same is taxed at source. Stocks, futures, option, mutual funds and
exchange traded funds come under the ambit of STT.

The STT applicable in the case of intraday transaction will be different from the one applicable in the
case of delivery transaction. Likewise, the STT applicable in the case of buying a security will be
different from the one applicable in the case of selling the security.

STT will be applicable in the case of transaction that takes place in the exchanges. For availing the
exemption in the case of long-term capital gain, the asset under consideration has to be subjected to
STT.

The term ‘Securities’ is defined in Securities Contracts (Regulation) Act and includes the following:

 Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities
of a like nature in or of any incorporated company or other body corporate.
 Derivatives.
 Units or any other instrument issued by any collective investment scheme to the investors
in such schemes.
 Government securities of equity nature.
 Equity oriented units of mutual fund.
 Rights or interest in securities.
 Securitized debt instruments.
Securities transaction tax with relevance to income tax:

Securities Transaction Tax (STT) is levied on all transactions done on the stock market despite the
nature of the transactions. However, the treatment of STT tax for the purpose of Income tax varies with
the nature of the transaction. There are two types of transactions in trading, one for the purpose of
investment and others for the purpose of business.

If the purpose of trading is for investment, then the profits from this are treated as capital gains. The
taxation for these gains will depend on the holding period of the investment. On the other hand, if the
purpose of equity trading is to earn money for a business, then the income from this trading is treated
separately and is taxed as per individual income tax slabs. The treatment of security transaction tax in
each of the cases varies.

Income from Capital Gains from Investing

If salaried or self-employed individuals are trading in securities for the purpose of short term or long
term investing, then the security transaction tax is levied on the transactions done. The gains arising
out of these investments will be classified as short term and long term based on the holding period of
the investment. Both short term capital gains and long term capital gains are subject to tax as per the
rules.

Income from Trading as a Profession (Business Income)

If an individual or an entity is trading in securities to generate business income, then the gains and
losses will be treated as business income. The security transaction tax is levied on the transitions done.
The income arising from these transactions will be treated as business income and taxable as
per income tax rules. One can claim the STT tax paid on the transactions as a deduction under Section
36 of The Income Tax Act while filing income tax returns. Here, STT tax becomes a business expense.

Dividend distribution tax:

The Dividend Distribution Tax is a tax levied on dividends that a company pays to its shareholders out
of its profits. The Dividend Distribution Tax, or DDT, is taxable at source, and is deducted at the time
of the company distributing dividends. The dividend is the part of profits that the company shares with
its shareholders. The provisions of DDT were introduced by the Finance Act 1997. Only a domestic
company is liable and has to pay the tax even if it is not liable to pay any tax on its income. However,
the income tax laws in India provide for an exemption of the dividend income received from Indian
companies by the investors by levying a tax called the Dividend Distribution Tax (DDT) on the
company paying the dividend. The provisions relating to DDT are governed by Section 115O.

Who are eligible to pay?

Any domestic company which is declaring/distributing dividend is required to pay DDT at the rate of
15% on the gross amount of dividend as mandated under Section 115O. Therefore the effective rate of
DDT is 17.65%* on the amount of dividend.

Dividend Distribution Tax (Sec 115 O) is 15% but in case of dividend referred to in Section 2 (22)(e)
of the Income Tax Act, it has been increased from 15% to 30%.

Deadline of the payment of tax:

DDT is to be paid within 14 days of declaration, distribution or payment of dividend whichever is the
earliest.
In case of non-payment within 14 days, the company would be liable to pay by way of interest at the
rate of 1% of the DDT from the date following the date on which such DDT was payable till the time
such DDT is actually paid to the government. These provisions are contained under Section 115P.

Provisions for DDT:

Special Provisions Related to DDT

a. Income by way of dividend in excess of Rs 10 lakh would be chargeable at the rate of 10% for
individuals, Hindu Undivided Family (HUF) or partnership firms and private trusts.

b. When a holding company receives dividend from its subsidiary company (both being domestic
companies), then when the holding company distributes dividend, the amount of dividend liable for
DDT will be equal to:

 Dividend declared/distributed/paid during the year (less) Dividend received by holding

company during the year (subject to certain conditions)
Goods and service Tax:

GST, or Goods and Services Tax, is a tax that customers have to bear when they buy any goods or
services, such as food, clothes, electronics, items of daily needs, transportation, travel, etc. The concept
of GST is that it is an “Indirect Tax”, i.e., this tax is not directly paid by customers to the government,
but is rather levied on the manufacturer or seller goods and the providers of services. The sellers
usually add the tax expense into their costs, and the price the customers pay is inclusive of GST. Thus,
in most cases, you end up paying a tax even if you are not an income taxpayer.

Benefits:

GST was brought in as a revolutionary change and India’s biggest tax system overhaul since
Independence. GST replaced a plethora of indirect taxes such as states’ sales tax, service tax, excise,
etc., with a single central tax regime applied uniformly on all products and services. However, the
biggest benefit of GST was that it opened up entire India as a single unified market allowing for free
movement of goods across states’ borders, as opposed to the earlier scenario where state borders
became barriers.

Components of GST:

There are two components of GST:

1. Intra state GST

 State GST(SGST)
 Central(CGST)
2. Interstate GST(IGST)

Intrastate:

Intra-State supply of goods or services is when the location of the supplier and the place of supply i.e.,
location of the buyer are in the same state. In Intra-State transactions, a seller has to collect both CGST
and SGST from the buyer. The CGST gets deposited with the Central Government and SGST gets
deposited with the State Government.
SGST is a tax levied on Intra State supplies of both goods and services by the State Government and
will be governed by the SGST Act.

CGST will also be levied on the same Intra State supply but will be governed by the Central
Government.

Ex: Let’s suppose Rajesh is a dealer in Maharashtra who sold goods to Anand in Maharashtra worth
Rs. 10,000. The GST rate is 18% comprising of CGST rate of 9% and SGST rate of 9%.

Inter-State supply of goods or services is when the location of the supplier and the place of supply
are in different states. Also, in cases of export or import of goods or services or when the supply of
goods or services is made to or by a SEZ unit, the transaction is assumed to be Inter-State. In an Inter-
State transaction, a seller has to collect IGST from the buyer.

IGST is a tax levied on all Inter-State supplies of goods and/or services and will be governed by the
IGST Act. IGST will be applicable on any supply of goods and/or services in both cases of import into
India and export from India.

Ex: Consider that a businessman Rajesh from Maharashtra had sold goods to Anand from Gujarat
worth Rs. 1,00,000. The GST rate is 18% referring to 18% IGST. In such a case, the dealer has to
charge Rs. 18,000 as IGST. This IGST will go to the Centre.

Objectives of GST:

To achieve the ideology of ‘One Nation, One Tax’: GST has replaced multiple indirect taxes, which
were existing under the previous tax regime. The advantage of having one single tax means every state
follows the same rate for a particular product or service.

To subsume a majority of the indirect taxes in India: India had several indirect taxes such as
service tax, Value Added Tax (VAT), Central Excise, etc., which used to be levied at multiple supply
chain stages. Some taxes were governed by the states and some by the Centre. There was no unified
and centralized tax on both goods and services. Under GST, all the major indirect taxes were
subsumed into one. It has greatly reduced the compliance burden on taxpayers and eased tax
administration for the government.

To eliminate the cascading effect of taxes: One of the primary objectives of GST was to remove the
cascading effect of taxes (tax on tax).. Under GST, the tax levy is only on the net value added at each
stage of the supply chain. This has helped eliminate the cascading effect of taxes and contributed to the
seamless flow of input tax credits across both goods and services.

To curb tax evasion: GST, taxpayers can claim an input tax credit only on invoices uploaded by their
respective suppliers. This way, the chances of claiming input tax credits on fake invoices are minimal.
The introduction of e-invoicing has further reinforced this objective. Hence, GST has curbed tax
evasion and minimized tax fraud from taking place to a large extent.

Online procedures for ease of doing business: Previously, taxpayers faced a lot of hardships dealing
with different tax authorities under each tax law. Besides, while return filing was online, most of the
assessment and refund procedures took place offline. Now, GST procedures are carried out almost
entirely online. Everything is done with a click of a button, from registration to return filing to refunds
to e-way bill generation. It has contributed to the overall ease of doing business in India and simplified
taxpayer compliance to a massive extent.

An improved logistics and distribution system: A single indirect tax system reduces the need for
multiple documentation in the supply of goods. GST minimizes transportation cycle times, improves
supply chain and turnaround time, and leads to warehouse consolidation, among other benefits.

To promote competitive pricing and increase consumption: Having uniform GST rates have
contributed to overall competitive pricing across India and on the global front. This has hence
increased consumption and led to higher revenues, which has been another important objective
achieved.

Advantages Disadvantages
GST eliminates the cascading effect of tax Increased cost due to software purchase
High threshold of registration GST will mean an increase in operating cost
Composition scheme of small business SME will have high tax burden
Simple and easy online procedure GST came into effect in the middle of the
financial year
The number of compliance is lesser Adapting to a complete online taxation system
Improved efficient of logistics
Unorganized sector is regulated in the GST
Tax planning:

The main goal of every taxpayer is to minimize his Tax Liability. To achieve this objective taxpayer
may resort to following Three Methods:

 Tax Planning
 Tax Avoidance
 Tax Evasion

Tax planning:

Tax Planning involves planning in order to avail all exemptions, deductions and rebates provided in
Act. Tax Planning is resorted to maximize the cash inflow and minimize the cash outflow. Since Tax is
kind of cast, the reduction of cost shall increase the profitability. Every prudence person, to maximize
the Return, shall increase the profits by resorting to a tool known as a Tax Planning.

Tax Planning should be done by keeping in mine following factors:

 The Planning should be done before the accrual of income. Any planning done after the accrual
income is known as Application of Income and it may lead to a conclusion of that there is a
fraud.
 Tax Planning should be resorted at the source of income.
 The choice of an organization, i.e. Taxable Entity. Business may be done through a
Proprietorship concern or Firm or through a Company.
 The choice of location business, undertaking, or division also plays a very important role.
Residential status of a person. Therefore, a person should arrange his stay in India such a way
that he is treated as NR in India.
 Choice to Buy or Lease the Assets. Where the assets are bought, depreciation is allowed and
when asset is leased, lease rental is allowed as deduction.
 Capital Structure decision also plays a major role. Mixture of debt and equity fund should be
balanced, to maximize the return on capital and minimize the tax liability. Interest on debt is
allowed as deduction whereas dividend on equity fund is not allowed as deduction
Types of Tax planning:

Tax Planning may be classified as follows:

 Short term tax planning

 Long term tax planning
 Permissive tax planning
 Purposive tax planning

Short term tax planning:

Short Term Tax Planning: Short range Tax Planning means the planning thought of and executed at the
end of the income year to reduce taxable income in a legal way.

Example: Suppose, at the end of the income year, an assesses finds his taxes have been too high in
comparison with last year and he intends to reduce it. Now, he may do that, to a great extent by making
proper arrangements to get the maximum tax rebate u/s 88. Such plan does not involve any long term
commitment, yet it results in substantial savings in tax.

Long term tax planning:

This plan is chalked out at the beginning of the fiscal and the taxpayer follows this plan throughout the
year. Unlike short-range tax planning, you might not be offered with immediate tax benefits but it can
prove useful in the long run.

Example: If an assesses transferred shares held by him to his minor son or spouse, though the income
from such transferred shares will be clubbed with his income u/s 64, yet is the income is invested by
the son or spouse, then the income from such investment will be treaded as income of the son or
spouse

Permissive tax planning:

This method involves planning under various provisions of the Indian taxation laws. Tax planning in
India offers several provisions such as deductions, exemptions, contributions, and incentives. For
instance, Section 80C of the Income Tax Act, 1961, offers several types of deductions on various tax-
saving instruments.

Purposive tax planning:

Purposive tax planning involves using tax-saver instruments with a specific purpose in mind. This
ensures that you obtain optimal benefits from your investments. This includes accurately selecting the
appropriate investments, creating an apt agenda to replace assets (if required), and diversification of
business and income assets based on your residential status.

Tax Avoidance

It is an act of dodging tax without breaking the Law. It means when a taxpayer arranges his financial
activities in such a manner that although it is within the four corner of tax law but takes advantages of
loopholes which exists in the Tax Law for reduction of tax a liability.

It means that method adopted for reducing tax liability should be within the framework of law. If it is
not within the framework of law, it amounts to tax avoidance and not Tax planning.

Tax Evasion

Any illegal method which leads to reduction of tax liability is known as Tax Evasion. The Tax Evasion
is resorted to by applying following dishonest means:

 Concealing the Income

 Claiming excessive expenditure
 Falsification of accounts.
 Willful violence of Rules

Tax deducted at source (TDS):

TDS is basically a part of Income Tax. It has to be deducted by a person for certain payments made by
them. TDS or Tax Deducted at Source is income tax reduced from the money paid at the time of
making specified payments such as rent, commission, professional fees, salary, interest etc. by the
persons making such payments.
Usually, the person receiving income is liable to pay income tax. But the government with the help of
Tax Deducted at Source provisions makes sure that income tax is deducted in advance from the
payments being made by you.

Assesses will file the TDS return and whatever tax is calculated on his total income will be deducted
and the final amount will either be a refund or a demand.

Different items such as salaries, interest income, commission, lottery winnings, Dividend, etc, all have
different rates of TDS to be deducted on them. We can check the different rates for the different items
in the TDS rate chart.

Items Liable for a TDS Deduction

 TDS on salaries: TDS on salaries is deducted at the rate of the income tax slab for the relevant
year. For the assessment year, 2020-2021 the exemption limit for an individual is Rs 2,50,000.
 TDS on winning from lottery, crossword or any game: A TDS of 30% is deducted from any
amount received by the way of lottery, crosswords or any other game if the amount exceeds Rs.
10,000. For eg- any amount won at a game show will be liable to a deduction at the rate of 30%
TDS.
 TDS on interest on securities: A TDS of 10% is to be deducted for individual and HUF on
interest from securities received if the limit of Rs. 5000 on debentures and 10,000 on others are
crossed.
 TDS on deemed dividend: There is a 10% TDS deduction rate on income from dividend if the
limit of Rs. 5,000 is crossed.
 TDS on withdrawal of National Savings Scheme: There is a 20% TDS deduction on any
withdrawal from the NSS if the limit exceeds RS. 2500.
 TDS on rent: There is a rate of 2% on Plant and Machinery and 10% on Land and Building if
the limit exceeds Rs. 2,40,000 per annum.
Tax deductions:

Tax deductions are the sum of money that can be reduced from the total taxable income. To get the
net income of a taxpayer, the deduction amount is first included in the gross total income and then
subtracted from it. It is kind of concession received by the taxpayers from the income tax department.
The tax deductions also promote investments and savings by a taxpayer.

Areas of tax deductions:

Public Provident Fund (PPF): By contributing to your PPF account, you can get tax deduction under
Section 80C, the Indian Income Tax Act, 1961.

Life Insurance Premiums: You can get income tax deduction for paying premium towards life
insurance policies for self, spouse and child under section 80C of the Indian Income Tax Act, 1961.
The amount received on maturity of the policy is free from tax. However, it is subject to the terms and
conditions mentioned in your policy.

National Saving Certificate (NSC): The amount invested in NSC is eligible for tax deduction under
section 80C of the Indian Income Tax Act, 1961. National Saving Certificates is one of the highly
secured modes of investments in India. But, the interest earned from NSC is taxable. As an NSC is a
cumulative scheme, interest is reinvested and qualifies for tax deduction.

Bank Fixed Deposits (FDs): You can get tax deduction by investing in fixed deposits for a tenure of 5
years, under section 80C of the Indian Income Tax Act, 1961. Many banks in India offer tax saving
fixed deposits. However, the interest accrued on FDs is subject to tax

Senior Citizen Savings Scheme (SCSS): Senior citizens can get tax deduction by investing in Senior
Citizen Savings Scheme offered by banks. These schemes are eligible for tax deduction under Section
80C of the same act. The interest earned from these schemes is entirely taxable.

Post Office Time Deposit (POTD): Investing in a five-year POTD, you can get tax deduction under
Section 80C. However, interest accrued on the same is fully taxable.

Unit-linked Insurance Plans (ULIP): Investing in ULIPs for yourself, spouse and your children, you
can get tax deductions under Section 80C.
Home Loan EMIs: Equated monthly installments paid to repay the principal amount of your home
loan are eligible for income tax deductions under section 80C of the same act.

Mutual Funds & ELSS: Investing in mutual funds and equity-linked savings scheme, you are eligible
for tax deductions under section 80C, the Indian Income Tax Act, 1961.

Stamp Duty and Registration Charges for a Home: Stamp duty and registration fee paid for
transferring property are entitled for income tax deduction under section 80C, the Indian Income Tax
Act, 1961.

Retirement Savings Plan: You can also get income tax deductions by investing in retirement plans
offered by LIC or other insurance providers. Contribution to the National Pension Scheme is also
eligible for tax deduction.

Tuition Fees: Tuition fee paid for your children’s education qualifies for income tax deduction under
section 80C. However, the fee needs to be paid for full-time education in an Indian university, college
and school for any two children. Tuition fee does not include any donations or development fee
towards education institutions.

Medical Insurance Premiums: Health insurance premium paid for self, spouse and children qualifies
for income tax deduction under section 80D of the Indian income Tax Act, 1961. The deduction
allowed under this section is Rs. 25,000 for youngsters and Rs. 30,000 for senior citizens.

Infrastructure Bonds: Investing in infrastructure bonds, you become eligible for income tax
deductions under section 80CCF of the Indian Income Tax Act.

Charitable Contribution: Donating for charitable tasks will help you reduce your taxable income
under section 80G of the Indian Income Tax Act, 1961. However, make sure that you declare the
whole contribution before 31st December each year.

Treatment of Disabled Dependents: Under section 80DD of the Indian Income Tax Act, 1961, you
can get income tax deductions for medical expense incurred in the treatment of any disabled dependent
of yours.
Deduction for Preventive Health Check-ups: An amount of Rs.5000 spent for preventive health
check-ups of an individual or his/her family members qualifies for tax deduction under section 80D of
the Indian Income Tax Act, 1961.

Interest Paid on Education Loan: You can get tax deduction on the interest paid for an educational
loan under section 80E of the Indian Income Tax Act, 1961. The loan can be taken to pursue higher
education by the employee, or for his/her spouse, children or a student to whom the employee is a legal
guardian.

Deduction on House Rent Paid: An employee can get income tax deduction for the house rent paid, if
the employee or his/her spouse does not own residential accommodation at the place of employment.
This deduction is usually applicable for salaried taxpayers under section 80GG of the Indian Income
Tax Act, 1961.

Benefits of tax deduction:

 Tax deductions help you reduce an amount from your taxable income and save tax. When you
claim an income tax deduction, it reduces the amount of your income that is subject to tax.
 Reduced taxable income helps you save and invest money in other areas.
 Tax deduction first reduces the income subject to the highest tax brackets. So, you can claim
deduction for the amounts spent in tuition fees, medical expenses, and charitable contributions.

Tax benefits on educational loan:

An education loan helps you not only finance your foreign studies but it can save you a lot of tax as
well. If you have taken an education loan and are repaying the same, then the interest paid on that
education loan is allowed as a deduction from the total income under Section 80E.

Only an individual can claim this deduction. It is not available to HUF or any other kind of taxpayer.
The loan should be taken for the higher education of self, spouse or children or for a student for whom
the individual is a legal guardian. Parents can easily claim this deduction for the loan taken for the
higher studies of their children.
Deduction amount

The deduction allowed is the total interest part of the EMI paid during the financial year. There is no
limit on the maximum amount that is allowed as deduction.

You, however, need to obtain a certificate from your Bank. Such certificate should segregate the
principal and the interest portion of the education loan paid by you during the financial year.

The total interest paid will be allowed as a deduction. No Tax benefit is allowed for the principal
repayment.

Period of deduction

The deduction for the interest on loan starts from the year in which you start repaying the loan.

It is available only for 8 years starting from the year in which you start repaying the loan or until the
interest is fully repaid whichever is earlier.

This means if the complete repayment of the loan is done in 5 years only, then tax deduction will be
allowed for 5 years and not 8 years.

It should also be noted that if your loan tenure exceeds 8 years, then you cannot claim a deduction for
the interest paid beyond 8 years. So it is always advisable that an education loan is paid within eight
years.

Section 80(E):

The deduction is allowed on the total interest amount of the EMI paid during the financial year. The
loan has to be taken from a bank or financial institution to pursue higher studies. One needs to obtain a
certificate from the bank wherein the principal and interest amounts of the education loan paid during
the financial year should be mentioned separately. It is because no deduction is allowed on the
principal repayment amount.
Tax benefits on home loan:

Buying your own house is a dream comes true for everyone. The Indian government has always shown
a great inclination to encourage citizens to invest in houses. This is why a home loan is eligible for tax
deduction under Section 80C. And when you buy a house on a home loan, it comes with multiple tax
benefits that significantly reduce your tax outgo.

Many schemes like Pradhan Mantri Jan Dhan Yojana are flashing green light on the Indian housing
sector by striving to bring down the issues of affordability and accessibility. In this article, we will all
the home loan tax benefits.

Deduction for interest paid on housing loan

A home loan must be taken for the purchase/construction of a house. If it is taken for construction of
house, then it must be completed within five years from the end of the financial year in which the loan
was taken.

If you are paying EMI for the housing loan, it has two components –

 Interest payment
 Principal repayment

The interest portion of the EMI paid for the year can be claimed as a deduction from your total income
up to a maximum of Rs 2 lakh under Section 24.

From the assessment year 2018-19 onwards, the maximum deduction for interest paid on self-occupied
house property is Rs 2 lakh. For let out property, there is no upper limit for claiming interest.
However, the overall loss one can claim under the head ‘House Property’ is restricted to Rs 2 lakh
only. This deduction can be claimed from the year in which the construction of the house is completed.

Deduction on interest paid towards home loan during the pre-construction period

The Income Tax Act allows claiming a deduction of such interest also, called the pre-construction
interest. A deduction in five equal installments starting from the year the property is acquired or
construction is completed is allowed, over and above the deduction you are otherwise eligible to claim
from your house property income. However, the maximum eligibility remains capped at Rs 2 lakh.
Deduction on principal repayment

The principal portion of the EMI paid for the year is allowed as a deduction under Section 80C. The
maximum amount that can be claimed is up to Rs 1.5 lakh.

But to claim this deduction, the house property should not be sold within five years of possession.
Otherwise, the deduction claimed earlier will be added back to your income in the year of sale.

Deduction for stamp duty and registration charges

Besides claiming the deduction for principal repayment, a deduction for stamp duty and registration
charges can also be claimed under Section 80C but within the overall limit of Rs 1.5 lakh.

However, it can be claimed only in the year these expenses are incurred.

Additional deduction under Section 80EE

Additional deduction under Section 80EE is allowed to the home buyers for a maximum of up to Rs
50,000. To claim this deduction, the following conditions should be met:

 The amount of loan taken should be Rs 35 lakh or less, and the property’s value does not
exceed Rs 50 lakh.

 The loan must have been sanctioned between 1st April 2016 to 31st March 2017.

 And on the date of loan sanction, the individual does not own any other house, i.e. first-
time house owner.

Section 80EE was reintroduced but is valid for loans sanctioned till 31st March 2017 only.

Additional deduction under Section 80EEA

To promote the housing sector, Budget 2019 has introduced an additional deduction under Section
80EEA for homebuyers for a maximum of up to Rs 1,50,000.

To claim this deduction, below mentioned conditions should be met:

 The stamp value of the property does not exceed Rs 45 lakh.

  The loan must have been sanctioned between 1 April 2019 to 31 March 2022 (extended
from 31 March 2021)

 On the date of loan sanction, the individual does not own any other house, i.e. first time
home buyer.

 The individual should not be eligible to claim deduction under Section 80EE if claiming
deduction under this section.

Deduction for a joint home loan

If the loan is taken jointly, each loan holder can claim a deduction for home loan interest up to Rs 2
lakh each and principal repayment under Section 80C up to Rs 1.5 lakh each in their tax returns.

To claim this deduction, they should also be co-owners of the property taken on loan. So, a loan taken
jointly with your family can help you claim a larger tax benefit.

Tax Planning Tax Management

The objective of Tax Management is to
(i) The Objective of Tax Planning is
comply with the provisions of Income Tax
to minimize the tax liability
Law and its allied rules.
Tax Management deals with filing of Return
(ii) Tax Planning also includes Tax
in time, getting the accounts audited,
Management
deducting tax at source etc.
Tax Management relates to Past ,. Present,
Future.
Past – Assessment Proceedings, Appeals,
(iii) Tax Planning relates to future. Revisions etc.
Present – Filing of Return, payment of
advance tax etc.
Future – To take corrective action
(iv) Tax Planning helps in
Tax Management helps in avoiding payment
minimizing Tax Liability in Short-
of interest, penalty, prosecution etc.
Term and in Long Term.
Tax Management is essential for every
(v) Tax Planning is optional.
assessee.