Taxation System in India

India has a well-developed tax structure with clearly demarcated authority between Central
and State Governments and local bodies.
Central Government levies taxes on income (except tax on agricultural income, which the
State Governments can levy), customs duties, central excise and service tax.
Value Added Tax (VAT), stamp duty, state excise, land revenue and profession tax are levied
by the State Governments.
Local bodies are empowered to levy tax on properties, octroi and for utilities like water
supply, drainage etc.
Indian taxation system has undergone tremendous reforms during the last decade. The tax
rates have been rationalized and tax laws have been simplified resulting in better compliance,
ease of tax payment and better enforcement. The process of rationalization of tax
administration is ongoing in India.

Direct Taxes

In case of direct taxes (income tax, wealth tax, etc.), the burden directly falls on the taxpayer.
Income tax
According to Income Tax Act 1961, every person, who are an assesse and whose total income
exceeds the maximum exemption limit, shall be chargeable to the income tax at the rate or
rates prescribed in the Finance Act. Such income tax shall be paid on the total income of the
previous year in the relevant assessment year.
Assesse means a person by whom (any tax) or any other sum of money is payable under the
Income Tax Act, and includes (a) Every person in respect of whom any proceeding under the Income Tax Act has been
taken for the assessment of his income (or assessment of fringe benefits) or of the income of
any other person in respect of which he is assessable, or of the loss sustained by him or by
such other person, or of the amount of refund due to him or to such other person;
(b) Every person who is deemed to be an assesse under any provisions of the Income Tax Act;
(c) Every person who is deemed to be an assesse in default under any provision of the Income
Tax Act.
Where a person includes:
Individual
Hindu Undivided Family (HUF)
Association of persons (AOP)
Body of individuals (BOI)
Company
Firm
A local authority and,
Every artificial judicial person not falling within any of the preceding categories.
Income tax is an annual tax imposed separately for each assessment year (also called the tax
year). Assessment year commences from 1st April and ends on the next 31st March. The total
income of an individual is determined on the basis of his residential status in India. For tax
purposes, an individual may be resident, nonresident or not ordinarily resident.
1. Resident
An individual is treated as resident in a year if present in India:
For 182 days during the year or

For 60 days during the year and 365 days during the preceding four years. Individuals
fulfilling neither of these conditions are nonresidents.
2. Resident but not Ordinarily Resident
A resident who was not present in India for 730 days during the preceding seven years or who
was nonresident in nine out of ten preceding years is treated as not ordinarily resident.
3. Non-Residents
Non-residents are taxed only on income that is received in India or arises or is deemed to
arise in India. A person not ordinarily resident is taxed like a non-resident but is also liable to
tax on income accruing abroad if it is from a business controlled in or a profession set up in
India.
Non-resident Indians (NRIs) are not required to file a tax return if their income consists of
only interest and dividends, provided taxes due on such income are deducted at source. It is
possible for non-resident Indians to avail of these special provisions even after becoming
residents by following certain procedures laid down by the Income Tax act.
Status

Indian Income

Foreign Income

Resident and ordinarily resident

Taxable

Taxable

Resident but not ordinary resident

Taxable

Not taxable

Non-Resident

Taxable

Not taxable

Personal Income Tax

Personal income tax is levied by Central Government and is administered by Central Board
of Direct taxes under Ministry of Finance in accordance with the provisions of the Income
tax act
Corporate tax
Definition of a company
A company has been defined as a juristic person having an independent and separate legal
entity from its shareholders. Income of the company is computed and assessed separately in
the hands of the company. However the income of the company, which is distributed to its
shareholders as dividend, is assessed in their individual hands. Such distribution of income is
not treated as expenditure in the hands of company; the income so distributed is an
appropriation of the profits of the company.
Residence of a company

A company is said to be a resident in India during the relevant previous year if:
o It is an Indian company
o If it is not an Indian company but, the control and the management of its
affairs is situated wholly in India

A company is said to be non-resident in India if it is not an Indian company and some

part of the control and management of its affairs is situated outside India.

Corporate sector tax

The taxability of a company's income depends on its domicile. Indian companies are taxable
in India on their worldwide income. Foreign companies are taxable on income that arises out
of their Indian operations, or, in certain cases, income that is deemed to arise in India.
Royalty, interest, gains from sale of capital assets located in India (including gains from sale
of shares in an Indian company), dividends from Indian companies and fees for technical
services are all treated as income arising in India. Current rates of corporate tax.
Different kinds of taxes relating to a company
Minimum Alternative Tax (MAT)
Normally, a company is liable to pay tax on the income computed in accordance with the
provisions of the income tax Act, but the profit and loss account of the company is prepared
as per provisions of the Companies Act. There were large number of companies who had
book profits as per their profit and loss account but were not paying any tax because income
computed as per provisions of the income tax act was either nil or negative or insignificant.
In such case, although the companies were showing book profits and declaring dividends to
the shareholders, they were not paying any income tax. These companies are popularly
known as Zero Tax companies. In order to bring such companies under the income tax act
net, section 115JA was introduced w.e.f assessment year 1997-98.
A new tax credit scheme is introduced by which MAT paid can be carried forward for set-off
against regular tax payable during the subsequent five year period subject to certain
conditions, as under:

When a company pays tax under MAT, the tax credit earned by it shall be an amount,
which is the difference between the amount payable under MAT and the regular tax.
Regular tax in this case means the tax payable on the basis of normal computation of
total income of the company.

MAT credit will be allowed carry forward facility for a period of five assessment
years immediately succeeding the assessment year in which MAT is paid. Unabsorbed
MAT credit will be allowed to be accumulated subject to the five-year carry forward
limit.

In the assessment year when regular tax becomes payable, the difference between the
regular tax and the tax computed under MAT for that year will be set off against the
MAT credit available.

The credit allowed will not bear any interest

Fringe Benefit Tax (FBT)

The Finance Act, 2005 introduced a new levy, namely Fringe Benefit Tax (FBT) contained in
Chapter XIIH (Sections 115W to 115WL) of the Income Tax Act, 1961.

Fringe Benefit Tax (FBT) is an additional income tax payable by the employers on value of
fringe benefits provided or deemed to have been provided to the employees. The FBT is
payable by an employer who is a company; a firm; an association of persons excluding
trusts/a body of individuals; a local authority; a sole trader, or an artificial juridical person.
This tax is payable even where employer does not otherwise have taxable income. Fringe
Benefits are defined as any privilege, service; facility or amenity directly or indirectly
provided by an employer to his employees (including former employees) by reason of their
employment and includes expenses or payments on certain specified heads.
The benefit does not have to be provided directly in order to attract FBT. It may still be
applied if the benefit is provided by a third party or an associate of employer or by under an
agreement with the employer.
The value of fringe benefits is computed as per provisions under Section 115WC. FBT is
payable at prescribed percentage on the taxable value of fringe benefits. Besides, surcharge in
case of both domestic and foreign companies shall be livable on the amount of FBT. On these
amounts, education cess shall also be payable.
Every company shall file return of fringe benefits to the Assessing Officer in the prescribed
form by 31st October of the assessment year as per provisions of Section 115WD. If the
employer fails to file return within specified time limit specified under the said section, he
will have to bear penalty as per Section 271FB.
The scope of Fringe Benefit Tax is being widened by including the employees stock option
as fringe benefit liable for tax. The fair market value of the share on the date of the vesting of
the option by the employee as reduced by the amount actually paid by him or recovered from
him shall be considered to be the fringe benefit. The fair market value shall be determined in
accordance with the method to be prescribed by the CBDT.
Dividend Distribution Tax (DDT)
Under Section 115-O of the Income Tax Act, any amount declared, distributed or paid by a
domestic company by way of dividend shall be chargeable to dividend tax. Only a domestic
company (not a foreign company) is liable for the tax. Tax on distributed profit is in addition
to income tax chargeable in respect of total income. It is applicable whether the dividend is
interim or otherwise. Also, it is applicable whether such dividend is paid out of current profits
or accumulated profits.
The tax shall be deposited within 14 days from the date of declaration, distribution or
payment of dividend, whichever is earliest. Failing to this deposition will require payment of
stipulated interest for every month of delay under Section115-P of the Act.
Rate of dividend distribution tax to be raised from 12.5 per cent to 15 per cent on dividends
distributed by companies; and to 25 per cent on dividends paid by money market mutual
funds and liquid mutual funds to all investors.
Banking Cash Transaction Tax (BCTT)

The Finance Act 2005 introduced the Banking Cash Transaction Tax (BCTT) w.e.f. June 1,
2005 and applies to the whole of India except in the state of Jammu and Kashmir.BCTT
continues to be an extremely useful tool to track unaccounted monies and trace their source
and destination. It has led the Income Tax Department to many money laundering and hawala
transactions.
BCTT is levied at the rate of 0.1 per cent of the value of following "taxable banking
transactions" entered with any scheduled bank on any single day:

Withdrawal of cash from any bank account other than a saving bank account; and

Receipt of cash on encashment of term deposit(s).

However, Banking Cash Transaction Tax (BCTT) has been withdrawn with effect from April
1, 2009.
Securities Transaction Tax (STT)
Securities Transaction Tax or turnover tax, as is generally known, is a tax that is leviable on
taxable securities transaction. STT is leviable on the taxable securities transactions with effect
from 1st October, 2004 as per the notification issued by the Central Government. The
surcharge is not leviable on the STT.
Tax Rebates for Corporate Tax
The classical system of corporate taxation is followed in India

Domestic companies are permitted to deduct dividends received from other domestic
companies in certain cases.

Inter Company transactions are honored if negotiated at arm's length.

Special provisions apply to venture funds and venture capital companies.

Long-term capital gains have lower tax incidence.

There is no concept of thin capitalization.

Liberal deductions are allowed for exports and the setting up on new industrial
undertakings under certain circumstances.

There are liberal deductions for setting up enterprises engaged in developing,

maintaining and operating new infrastructure facilities and power-generating units.

Business losses can be carried forward for eight years, and unabsorbed depreciation
can be carried indefinitely. No carry back is allowed.

Dividends, interest and long-term capital gain income earned by an infrastructure fund
or company from investments in shares or long-term finance in enterprises carrying

on the business of developing, monitoring and operating specified infrastructure

facilities or in units of mutual funds involved with the infrastructure of power sector
are proposed to be tax exempt.
Capital Gains Tax
A capital gain is income derived from the sale of an investment. A capital investment can be a
home, a farm, a ranch, a family business, work of art etc. In most years slightly less than half
of taxable capital gains are realized on the sale of corporate stock. The capital gain is the
difference between the money received from selling the asset and the price paid for it.
Capital gain also includes gain that arises on "transfer" (includes sale, exchange) of a capital
asset and is categorized into short-term gains and long-term gains.
The capital gains tax is different from almost all other forms of taxation in that it is a
voluntary tax. Since the tax is paid only when an asset is sold, taxpayers can legally avoid
payment by holding on to their assets--a phenomenon known as the "lock-in effect."
The scope of capital asset is being widened by including certain items held as personal effects
such as archaeological collections, drawings, paintings, sculptures or any work of art.
Presently no capital gain tax is payable in respect of transfer of personal effects as it does not
fall in the definition of the capital asset. To restrict the misuse of this provision, the definition
of capital asset is being widened to include those personal effects such as archaeological
collections, drawings, paintings, sculptures or any work of art. Transfer of above items shall
now attract capital gain tax the way jewellery attracts despite being personal effect as on date.
Short Term and Long Term capital Gains
Gains arising on transfer of a capital asset held for not more than 36 months (12 months in
the case of a share held in a company or other security listed on recognized stock exchange in
India or a unit of a mutual fund) prior to its transfer are "short-term". Capital gains arising on
transfer of capital asset held for a period exceeding the aforesaid period are "long-term".
Section 112 of the Income-Tax Act, provides for the tax on long-term capital gains, at 20 per
cent of the gain computed with the benefit of indexation and 10 per cent of the gain computed
(in case of listed securities or units) without the benefit of indexation.
Double Taxation Relief
Double Taxation means taxation of the same income of a person in more than one country.
This results due to countries following different rules for income taxation. There are two
main rules of income taxation i.e. (a) Source of income rule and (b) residence rule.
As per source of income rule, the income may be subject to tax in the country where the
source of such income exists (i.e. where the business establishment is situated or where the
asset / property is located) whether the income earner is a resident in that country or not.

On the other hand, the income earner may be taxed on the basis of the residential status in
that country. For example, if a person is resident of a country, he may have to pay tax on any
income earned outside that country as well.
Further, some countries may follow a mixture of the above two rules. Thus, problem of
double taxation arises if a person is taxed in respect of any income on the basis of source of
income rule in one country and on the basis of residence in another country or on the basis of
mixture of above two rules.
In India, the liability under the Income Tax Act arises on the basis of the residential status of
the assesse during the previous year. In case the assesse is resident in India, he also has to pay
tax on the income, which accrues or arises outside India, and also received outside India. The
position in many other countries being also broadly similar, it frequently happens that a
person may be found to be a resident in more than one country or that the same item of his
income may be treated as accruing, arising or received in more than one country with the
result that the same item becomes liable to tax in more than one country.
Relief against such hardship can be provided mainly in two ways: (a) Bilateral relief, (b)
Unilateral relief.
Bilateral Relief
The Governments of two countries can enter into Double Taxation Avoidance Agreement
(DTAA) to provide relief against such Double Taxation, worked out on the basis of mutual
agreement between the two concerned sovereign states. This may be called a scheme of
'bilateral relief' as both concerned powers agree as to the basis of the relief to be granted by
either of them.
Unilateral relief
The above procedure for granting relief will not be sufficient to meet all cases. No country
will be in a position to arrive at such agreement with all the countries of the world for all
time. The hardship of the taxpayer however is a crippling one in all such cases. Some relief
can be provided even in such cases by home country irrespective of whether the other country
concerned has any agreement with India or has otherwise provided for any relief at all in
respect of such double taxation. This relief is known as unilateral relief.
Double Taxation Avoidance Agreement (DTAA)
List of countries with which India has signed Double Taxation Avoidance Agreement:

DTAA Comprehensive Agreements - (With respect to taxes on income)

DTAA Limited Agreements With respect to income of airlines/ merchant shipping

Limited Multilateral Agreement

DTAA Other Agreements/Double Taxation Relief Rules

Specified Associations Agreement

Tax Information Exchange Agreement (TIEA)

Indirect Taxation
Sales tax
Central Sales Tax (CST)
Central Sales tax is generally payable on the sale of all goods by a dealer in the course of
inter-state trade or commerce or, outside a state or, in the course of import into or, export
from India.
The ceiling rate on central sales tax (CST), a tax on inter-state sale of goods, has been
reduced from 4 per cent to 3 per cent in the current year.
Value Added Tax (VAT)
VAT is a multi-stage tax on goods that is levied across various stages of production and
supply with credit given for tax paid at each stage of Value addition. Introduction of state
level VAT is the most significant tax reform measure at state level. The state level VAT has
replaced the existing State Sales Tax. The decision to implement State level VAT was taken in
the meeting of the Empowered Committee (EC) of State Finance Ministers held on June 18,
2004, where a broad consensus was arrived at to introduce VAT from April 1, 2005.
Accordingly, all states/UTs have implemented VAT.
The Empowered Committee, through its deliberations over the years, finalized a design of
VAT to be adopted by the States, which seeks to retain the essential features of VAT, while at
the same time, providing a measure of flexibility to the States, to enable them to meet their
local requirements. Some salient features of the VAT design finalized by the Empowered
Committee are as follows:

The rates of VAT on various commodities shall be uniform for all the States/UTs.
There are 2 basic rates of 4 per cent and 12.5 per cent, besides an exempt category
and a special rate of 1 per cent for a few selected items. The items of basic necessities
have been put in the zero rate brackets or the exempted schedule. Gold, silver and
precious stones have been put in the 1 per cent schedule. There is also a category with
20 per cent floor rate of tax, but the commodities listed in this schedule are not
eligible for input tax rebate/set off. This category covers items like motor spirit
(petrol), diesel, aviation turbine fuel, and liquor.

There is provision for eliminating the multiplicity of taxes. In fact, all the State taxes
on purchase or sale of goods (excluding Entry Tax in lieu of Octroi) are required to be
subsumed in VAT or made VATable.

Provision has been made for allowing "Input Tax Credit (ITC)", which is the basic
feature of VAT. However, since the VAT being implemented is intra-State VAT only
and does not cover inter-State sale transactions, ITC will not be available on interState purchases.

Exports will be zero-rated, with credit given for all taxes on inputs/ purchases related
to such exports.

There are provisions to make the system more business-friendly. For instance, there is
provision for self-assessment by the dealers. Similarly, there is provision of a
threshold limit for registration of dealers in terms of annual turnover of Rs 5 lakhs.
Dealers with turnover lower than this threshold limit are not required to obtain
registration under VAT and are exempt from payment of VAT. There is also provision
for composition of tax liability up to annual turnover limit of Rs. 50 lakhs.

Regarding the industrial incentives, the States have been allowed to continue with the
existing incentives, without breaking the VAT chain. However, no fresh sales tax/VAT
based incentives are permitted.

Roadmap towards GST

The Empowered Committee of State Finance Ministers has been entrusted with the task of
preparing a roadmap for the introduction of national level goods and services tax with effect
from 01 April 2007.The move is towards the reduction of CST to 2 per cent in 2008, 1 per
cent in 2009 and 0 per cent in 2010 to pave way for the introduction of GST (Goods and
Services Tax).
Excise Duty
Central Excise duty is an indirect tax levied on goods manufactured in India. Excisable goods
have been defined as those, which have been specified in the Central Excise Tariff Act as
being subjected to the duty of excise.
There are three types of Central Excise duties collected in India namely
Basic Excise Duty
This is the duty charged under section 3 of the Central Excises and Salt Act, 1944 on all
excisable goods other than salt which are produced or manufactured in India at the rates set
forth in the schedule to the Central Excise tariff Act, 1985.
Additional Duty of Excise
Section 3 of the Additional duties of Excise (goods of special importance) Act, 1957
authorizes the levy and collection in respect of the goods described in the Schedule to this
Act. This is levied in lieu of sales Tax and shared between Central and State Governments.
These are levied under different enactments like medicinal and toilet preparations, sugar etc.
and other industries development etc.

Special Excise Duty

As per the Section 37 of the Finance Act, 1978 Special excise Duty was attracted on all
excisable goods on which there is a levy of Basic excise Duty under the Central Excises and
Salt Act, 1944.Since then each year the relevant provisions of the Finance Act specifies that
the Special Excise Duty shall be or shall not be levied and collected during the relevant
financial year.
Customs Duty
Custom or import duties are levied by the Central Government of India on the goods
imported into India. The rate at which customs duty is leviable on the goods depends on the
classification of the goods determined under the Customs Tariff. The Customs Tariff is
generally aligned with the Harmonized System of Nomenclature (HSL).
In line with aligning the customs duty and bringing it at par with the ASEAN level,
government has reduced the peak customs duty from 12.5 per cent to 10 per cent for all goods
other than agriculture products. However, the Central Government has the power to generally
exempt goods of any specified description from the whole or any part of duties of customs
leviable thereon. In addition, preferential/concessional rates of duty are also available under
the various Trade Agreements.
Service Tax
Service tax was introduced in India way back in 1994 and started with mere 3 basic services
viz. general insurance, stock broking and telephone. Today the counter services subject to tax
have reached over 100. There has been a steady increase in the rate of service tax. From a
mere 5 per cent, service tax is now levied on specified taxable services at the rate of 12 per
cent of the gross value of taxable services. However, on account of the imposition of
education cess of 3 per cent, the effective rate of service tax is at 12.36 per cent.

Need of taxation in developing country like India

In developing countries the government has to play an active role in promoting economic
growth & development because private initiative & capital are limited.

Fiscal policy or budget has become important instrument in promoting growth and
development in such economies.
Taxation is an important part of fiscal policy which can be used effectively by governments
of developing economies.
Role of Direct and Indirect Taxes
The role of taxation in developing economies is stated as follows:
1. Resource Mobilization
Taxation enables the government to mobilize a substantial amount of revenue. The tax
revenue is generated by imposing: Direct Taxes such as personal income tax, corporate tax,
etc., Indirect Taxes such as customs duty, excise duty, etc.
In 2006-07, it is estimated that the tax revenue of the central government (India) was 81% of
the total revenue receipts, whereas, non tax revenue was only 19%.
2. Reduction in Inequalities of Income
Taxation follows the principle of equity. The direct taxes are progressive in nature. Also
certain indirect taxes, such as taxes on luxury goods are also progressive in nature. This
means the rich class has to bear the higher incidence of taxes, whereas, the lower income

group is either exempted from tax (direct taxes) or has to pay lower rate of duty (indirect
taxes) on goods consumed by the masses. Thus, taxation helps to reduce inequalities of
income and wealth.
3. Social Welfare
Taxation generates social welfare. The social welfare is generated due to certain undesirable
products like alcoholic products, tobacco products and such other products are heavily taxed,
which restricts their consumption, which in turn facilitates social welfare.
A part of the tax revenue is utilized for social development activities, such as health,
education and family welfare, which also improve social welfare as well as social order in the
society.
4. Foreign exchange
Taxation encourages exports and restricts imports. Generally, developing countries and even
the developed countries do not impose taxes on export items. For instance, in India, exports
are exempted from excise duty, VAT, customs duty and other duties.
However, there is customs duty on imported goods. Therefore, taxation helps to: Earn foreign
exchange through the promotion of exports.
5. Regional Development
Taxation plays an important role in regional development; Tax incentives such as tax holiday
for setting up industries in backward regions, which induces business firms to set up
industries in such regions, Tax revenue collected by government is also utilized for
development of infrastructure in backward regions.
6. Control of Inflation
Taxation can be used as a tool of controlling inflation. Through taxation, the Government can
control inflation as follows:1. If inflation is due to high rise in prices of essential items, then the Government may
reduce the rate of indirect taxes.
2. If inflation is due to increase in demand, the Government may try to cut down the
effective demand by increasing the tax rate. Increase in tax rate may restrict
consumption, which may reduce demand, and subsequently inflation may be
controlled.

Why Indirect Taxes are more suitable in Developing Countries?

Indirect taxes have become an important source of development funds in developing
countries. Many developing economies that have adopted economic planning use indirect
taxes as important source of funds.
These taxes are found to be better suited in developing countries because they have much
wider coverage as compared to direct taxes. Both rich and poor pay indirect taxes in form of
commodity price.
High rate of taxes on luxury goods will take away resources from the rich and such resources
re-distributed among the poor in the form of subsidies besides taxes on product like alcohol,
cigarettes can have beneficial effect on consumption pattern.
Indirect taxes are used to divert resources from less desired use to more desired one in
developing countries. Taxes on goods considered to be luxuries will make them more
expensive, lower their demand and profitability. This will divert their resources from the
production of these goods to more essential ones.
Taxes on imported goods have been used by developing countries for reducing imports and
promoting domestic industries.
On other hand in developing economies collection of direct taxes is not very significant. Only
a small proportion of population pays such taxes. Direct taxes are primary used in such
economies to reduce inequalities of income distribution. High degree of progression is used
in case of direct taxes in developing countries. This discourages savings done by high income
group and adversely effects investment and capital formation. Highly progressive taxation
leads to tax evasion and black money.
Thus direct taxes have a limited role to play in developing countries and indirect taxes have
become an important source of development funds in developing countries.
In this way we can say both direct and indirect taxes are essential to bring adequate revenue
to the state for meeting the increasing public expenditure. Both taxes are essential to promote
economic growth, fill employment and economic stability. Direct and indirect taxes should
side by side & balance each other. However in developing countries, direct taxation has
limited scope and hence indirect taxation plays a more significant role. A well oriented
system of taxation requires combination of direct & indirect taxes in different proportions.

Introduction to Income Tax in India

The Central Government has been empowered by Entry 82 of the Union List of Schedule VII
of the Constitution of India to levy tax on all income other than agricultural income. The
Income Tax Law comprises The Income Tax Act 1961, Income Tax Rules 1962, Notifications
and Circulars issued by Central Board of Direct Taxes, Annual Finance Acts and Judicial
pronouncements by Supreme Court and High Courts.
The government of on taxable income of all persons including individuals, Hindu Undivided
Families, companies, firms, association of persons, body of individuals, local authority and
any other artificial judicial person. Levy of tax is separate on each of the persons. The levy is
governed by the Indian Income Tax Act, 1961. The Indian Income Tax Department is
governed by CBDT and is part of the Department of Revenue under the Ministry of Finance,
Govt. of India. Income tax is a key source of funds that the government uses to fund its
activities and serve the public.
INTRODUCTION
Income tax is an annual tax on income. The Indian Income Tax Act (Section 4) provides that
in respect of the total income of the previous year of every person, income tax shall be
charged for the corresponding assessment year at the rates laid down by the Finance Act for
that assessment year. Section 14 of the Income tax Act further provides that for the purpose of
charge of income tax and computation of total income all income shall be classified
Under the following heads of income:
A. Salaries
B. Income from house property
C. Profits and gains of business or profession.
D. Capital gains
E. Income from other sources.
The total income from all the above heads of income is calculated in accordance with the
provisions of the Act as they stand on the first day of April of any assessment year. In this
booklet an attempt is being made to discuss the various provisions relevant to the salaried
class of taxpayers as well as pensioners and senior citizen

Salaries
WHAT IS SALARY
Salary is the remuneration received by or accruing to an individual, periodically, for service
rendered as a result of an express or implied contract. The actual receipt of salary in the
previous year is not material as far as its taxability is concerned. The existence of employer-

employee relationship is the sine-qua-non-for taxing a particular receipt under the head
salaries. For instance, the salary received by a partner from his partnership firm carrying on
a business is not chargeable as Salaries but as Profits & Gains from Business or
Profession. Similarly, salary received by a person as MP or MLA is taxable as Income from
other sources, but if a person received salary as Minister of State/Central Government, the
same shall be charged to tax under the head Salaries. Pension received by an assesse from
his former employer is taxable as Salaries whereas pension received on his death by
members of his family (Family Pension) is taxed as Income from other sources.
WHAT DOES SALARY INCLUDE
Section 17(1) of the Income tax Act gives an inclusive and not exhaustive definition of
Salaries including therein
1.
2.
3.
4.
5.
6.

Wages
Annuity or pension
Gratuity
Fees, Commission, perquisites or profits in lieu of salary
Advance of Salary
Amount transferred from unrecognized provident fund to recognized provident fund
Contribution of employer to recognised Provident Fund in excess of the prescribed
limit
7. Leave Encashment
8. Compensation as a result of variation in-service contract etc. (x) Contribution made
by the Central
DEDUCTION FROM SALARY INCOME
The following deductions from salary income are admissible as per Section 16 of the Incometax Act.
(a) Professional/Employment tax levied by the State Govt.
(b) Entertainment Allowance- Deduction in respect of this is available to a government
employee to the extent of Rs.5000/- or 20% of his salary or actual amount received,
whichever is less.
PERQUISITES
Perquisite may be defined as any casual emolument or benefit attached to an office or
position in addition to salary or wages.
Perquisite is defined in the section17 (2) of the Income tax Act as including:
1. Value of rent-free/concessional rent accommodation provided by the employer.
2. Any sum paid by employer in respect of an obligation which was actually payable by the
assesse.
3. Value of any benefit/amenity granted free or at concessional rate to specified employees
etc.

4. The value of any specified security or sweat equity shares allotted or transferred, directly
or indirectly, by the employer, or former employer, free of cost or at concessional rate to
the assesse.
5. The amount of any contribution to an approved superannuation fund by the employer in
respect of the assesse, to the extent it exceeds one lakhs rupees.
6. The value of any other fringe benefit or amenity as may be prescribed.
VALUATION OF PERQUISITES
As a general rule, the taxable value of perquisites in the hands of the employees is its cost to
the employer. However, specific rules for valuation of certain perquisites have been laid
down in Rule 3 of the I.T. Rules. These are briefly given below.
Valuation of residential accommodation provided by the employer:(A) Union or State Government Employees- The value of perquisite is the license fee as
determined by the Govt. as reduced by the rent actually paid by the employee.
(b) Non-Govt. Employees- The value of perquisites an amount equal to 15% of the salary in
cities having population more than 25 lakhs, (10% of salary in cities where population as per
2001 censuses exceeding 10 lakhs but not exceeding 25 lakhs and 7.5% of salary in areas
where population as per 2001 census is 10 lakhs or below). In case the accommodation
provided is not owned by the employer, but is taken on lease or rent, then the value of the
perquisite would be the actual amount of lease rent paid/payable by the employer or15% of
salary, whichever is lower. In both of above cases, the value of the perquisite would be
reduced by the rent, if any, actually paid by the employee.
Value of Furnished Accommodation- The value would be the value of unfurnished
accommodations computed above, increased by 10% per annum of the cost of furniture
(including TV/radio/refrigerator/AC/other gadgets). In case such furniture is hired from a
third party, the value of unfurnished accommodation would be increased by the hire charges
paid/payable by the employer.
However, any payment recovered from the employee towards the above would be reduced
from this amount.
Value of hotel accommodation provided by the employer- The value of perquisite arising
out of the above would be 24% of salary or the actual charges paid or payable to the hotel,
whichever is lower. The above would be reduced by any rent actually paid or payable by the
employee. It may be noted that no perquisite would arise, if the employee is provided such
accommodation on transfer from one place to another for a period of15 days or less.

Perquisite of motor car provided by the employer- if an employer providing such facility
to his employee is not liable to pay fringe benefit tax, the value of such perquisite shall be:

a) Nil, if the motor car is used by the employee wholly and exclusively in the performance of
his official duties.
b) Actual expenditure incurred by the employer on the running and maintenance of motor car,
including remuneration to chauffeur as increased by the amount representing and tear of the
motor car and as reduced by any amount charged from the employee for such use (in case the
motor car is exclusively for private or personal purposes of the employee or any member of
his household).
c) Rs. 1800- (plus Rs. 900-, if chauffeur is also provided) per month (in case the motor car
issued partly in performance of duties and partly for private or personal purposes of the
employee or any member of his household if the expenses on maintenance and running of
motor car are met or reimbursed by the employer). However, the value of perquisite will be
Rs. 2400- (plus Rs. 900-, if chauffeurs also provided) per month if the cubic capacity of
engine of the motor car exceeds1.6 litres.
d) Rs. 600- per month (in case the motor car issued partly in performance of duties and
partly for private or personal purposes of the employee or any member of his household if the
expenses on maintenance and running of motor car for such private or personal use are fully
met by the employee). However, the value of perquisite will be Rs. 900permonth if the cubic
capacity of engine of the motor car exceeds 1.6 litres.
If the motor car or any other automotive conveyance is owned by the employee but the actual
running and maintenance charges are met or reimbursed by the employer, the method of
valuation of perquisite value is different.
Perquisite arising out of supply of gas, electric energy or water: This shall be determined as
the amount paid by the employer to the agency supplying the same. If the supply is from the
employers own resources, the value of the perquisite would be the manufacturing cost per
unit incurred by the employer. However, any payment received from the employee towards
the above would be reduced from the amount.
Free/Concessional Educational Facility: Value of the perquisite would be the expenditure
incurred by the employer. If the education institution is maintained & owned by the
employer, the value would be nil if the value of the benefit per child is below Rs. 1000/- P.M.
or else the reasonable cost of such education in a similar institution in or near the locality.
Free/Concessional journeys provided by an undertaking engaged in carriage of passengers or
goods: Value of perquisite would be the value at which such amenity is offered to general
public as reduced by any amount, if recovered from the employee. However, these provisions
are not applicable to the employees of an airline or the railways.
Provision for sweeper, gardener, watchman or personal attendant: The value of benefit
resulting from provision of any of these shall be the actual cost borne by the employer in this
respect as reduced by any amount paid by the employee for such services. (Cost to the
employer in respect to the above will be salary paid/payable).

Value of certain other fringe benefits:

(a) Interest free/concessional loans- The value of the perquisite shall be the excess of interest
payable at the prescribed interest rate over, interest, if any, actually paid by the employee or
any member of his household. The prescribed interest rate would be the rate charged by State
Bank of India as on the 1st Day of the relevant Previous Year in respect of loans of the same
type and for same purpose advanced by it to general public. Perquisite to be calculated on the
basis of the maximum outstanding monthly balance method. However, loans up to Rs.
20,000/-, loans for medical treatment specified in Rule 3A are exempt provided the same are
not reimbursed under medical insurance.
(b)Value of free meals- The perquisite value in respect of free food and non-alcoholic
beverages provided by the employer, not liable to pay fringe benefit tax, to an employee shall
be the expenditure incurred by the employer as reduced by the amount paid or recovered
from the employee for such benefit or amenity. However, no perquisite value will be taken if
food and non-alcoholic beverages are provided during working hours and certain conditions
specified under are satisfied.
(c) Value of gift or voucher or token- The perquisite value in respect of any gift, or voucher,
or taken in lieu of which such gift may be received by the employee or member of his
household from the employer, not liable to pay fringe benefit tax, shall be the sum equal to
the amount of such gift, voucher or token. However, no perquisite value will be taken if the
value of such gift voucher or taken is below Rs. 5000/- in the aggregate during the previous
years.
(d)Credit card provided by the employer- The perquisite value in respect of expenses incurred
by the employee or any of his household members, which are charged to a credit card
provided by the employer, not liable to pay fringe benefit tax, which are paid or reimbursed
by such employer to an employee shall be taken to be such amount paid or reimbursed by the
employer. However, no perquisite value will be taken if the expenses are incurred wholly and
exclusively for official purposes and certain conditions mentioned in are satisfied.
(e) Club membership provided by the employer- The perquisite value in respect of amount
paid or reimbursed to an employee by an employer, not liable to pay fringe benefit tax,
against the expenses incurred in a club by such employee or any of his household members
shall be taken to be such amount incurred or reimbursed by the employer as reduced by any
amount paid or recovered from the employee on such account. However, no perquisite value
will be taken if the expenditure is incurred wholly any exclusively for business purposes and
certain conditions mentioned in are satisfied.
The value of any other benefit or amenity provided by the employer shall be determined on
the basis of cost to the employer under an arms length transaction as reduced by the
employees contribution.

The fair market value of any specified security or sweat equity share, being an equity share in
a company, on the date on which the option is exercised by the employee, shall be determined
as follows:(a) In a case where, on the date of exercising of the option, the share in the company is listed
on a recognized stock exchange, the fair market value shall be the average of the opening
price and closing price of the share on the date on the said stock exchange.
(b) In a case where, on the date of exercising of the option, the share in the company is not
listed on a recognized stock exchange, the fair market value shall be such value of the share
in the company as determined by a merchant banker on the specified date.
(c) The fair market value of any specified security, not being an equity share in a company, on
the date on which the option is exercised by the employee, shall be such value as determined
by a merchant banker on the specified date.
PERQUISITES EXEMPT FROM INCOME TAX
Some instances of perquisites exempt from tax are given below:
Provision of medical facilities:Value of medical treatment in any hospital maintained by the Government or any local
authority or approved by the Chief Commissioner of Income-tax. Besides, any sum paid by
the employer towards medical reimbursement other than as discussed above is exempt up to
Rs.15,000/-.
Perquisites allowed outside India by the Government to a citizen of India for rendering
services outside India.
Rent free official residence provided to a Judge of High Court or Supreme Court or an
Official of Parliament, Union Minister or Leader of Opposition in Parliament.
No perquisite shall arise if interest free/concessional loans are made available for medical
treatment of specified diseases in Rule 3A or where the loan is petty not exceeding in the
aggregate Rs.20, 000/No perquisite shall arise in relation to expenses on telephones including a mobile phone
incurred on behalf of the employee by the employer.

ALLOWANCES
Allowance is defined as a fixed quantity of money or other substance given regularly in
addition to salary for meeting specific requirements of the employees. As a general rule, all
allowances are to be included in the total income unless specifically exempted. Exemption in
respect of following allowances is allowable to the exempt mentioned against each:-

House Rent Allowance: - Provided that expenditure on rent is actually incurred, exemption
available shall be the least of the following:

HRA received.
Rent paid less 10% of salary.
40% of Salary (50% in case of Mumbai, Chennai, Kolkata, and Delhi) Salary here
means Basic + Dearness Allowance, if dearness allowance is provided by the terms of
employment.

Leave Travel Allowance: The amount actually incurred on performance of travel on leave to
any place in India by the shortest route to that place is exempt. This is subject to a maximum
of the air economy fare or AC 1st Class fare (if journey is performed by mode other than air)
by such route, provided that the exemption shall be available only in respect of two journeys
performed in a block of 4 calendar years.
Certain allowances given by the employer to the employee are exempt u/s 10(14). All these
exempt allowance are detailed in Rule 2BB of Income-tax Rules and are briefly given below:
For the purpose of this, following allowances are exempt, subject to actual expenses incurred:

Allowance granted to meet cost of travel on tour or on transfer.

Allowance granted on tour or journey in connection with transfer to meet the daily
charges incurred by the employee.
Allowance granted to meet conveyance expenses incurred in performance of duty,
provided no free conveyance is provided.
Allowance granted to meet expenses incurred on a helper engaged for performance of
official duty.
Academic, research or training allowance granted in educational or research
institutions.
Allowance granted to meet expenditure on purchase/ maintenance of uniform for
performance of official duty.

The following allowances have been prescribed as exempt, according to the act:-

Type of Allowance
(i)

Special Compensatory
Allowance for hilly
areas or high altitude
allowance or climate
Allowance.

Amount exempt
Rs.800 common for various
areas of North East, Hilly areas
of U.P., H.P. & J&K and Rs.
7000 per month for Siachen area
of J&K and Rs.300 common
for all places at a height of 1000
mts or more other than the
Above places.

(ii)

Border area allowance

or remote area
allowance or a difficult
area allowance or
disturbed area

Various amounts ranging from

Rs.200 per month to Rs.1,300
per month are exempt for
various areas specified in
Rule 2BB.

Allowance.
(iii)

Tribal area/Schedule
area/Agency area
allowance available in
M.P., Assam, U.P.,
Karnataka, West
Bengal, Bihar, Orissa,

Rs.200 per month.

Tamilnadu, Tripura
(iv)

Any allowance granted

to an employee working
in any transport system
to meet his personal
expenditure during duty
performed in the course
of running of such
transport from one

70% of such allowance upto a

maximum of Rs. 10,000 per
Month.

Place to another place.

Type of Allowance

Amount exempt

(i)

Special Compensatory

Rs.800 common for various

Allowance for hilly

areas of North East, Hilly areas

areas or high altitude

of U.P., H.P. & J&K and Rs.

allowance or climate

7000 per month for Siachen area

Allowance.

of J&K and Rs.300 common

for all places at a height of 1000
mts or more other than the
Above places.

(ii)

Border area allowance

Various amounts ranging from

or remote area

Rs.200 per month to Rs.1,300

allowance or a difficult

per month are exempt for

area allowance or

various areas specified in

disturbed area

Rule 2BB.

Allowance.
(iii)

Tribal area/Schedule

Rs.200 per month.

area/Agency area
allowance available in
M.P., Assam, U.P.,
Karnataka, West
Bengal, Bihar, Orissa,
Tamilnadu, Tripura
(iv)

Any allowance granted

70% of such allowance upto a

to an employee working

maximum of Rs. 10,000 per

in any transport system

Month.

to meet his personal

expenditure during duty
performed in the course
of running of such
transport from one
Place to another place.

(v)

Children education

Rs.100 per month per child upto

Allowance.

A maximum 2 children.

(vi)

Allowance granted to
meet hostel expenditure
On employees child.

Rs.300 per month per child upto

A maximum two children.

(vii)

Compensatory field
area allowance
available in various
areas of Arunachal
Pradesh, Manipur
Sikkim, Nagaland,
H.P., U.P. & J&K.

Rs.2600 per month.

(viii)

Compensatory modified
field area allowance
available in specified
areas of Punjab,
Rajasthan, Haryana,
U.P., J&K, H.P., West
Bengal & North East.

Rs.1,000 per month

(ix)

Counter insurgency
allowance to members
Of Armed Forces.

Rs.3,900 Per month

(x)

Transport Allowance
granted to an employee
to meet his expenditure
for the purpose of
commuting between the
place of residence &
Duty.

Rs.800 per month.

(xi)

Transport allowance
granted to physically
disabled employee for

Rs.1600 per month.

the purpose of commuting

between place of duty
and residence

Types of allowance
(xii) Underground allowance

Amount exempt
Rs.800 per month.

granted to an employee
working in under ground
Mines.
(xiii) Special allowance in the

Rs.1,060 p.m. (for altitude of

nature of high altitude

9000-15000 ft.) Rs.1,600 p.m.

allowance granted to

(For altitude above 15000 ft.)

members of the armed

Forces.
(xiv) Any special allowance

Rs. 4,200/- p.m.

granted to the members

of the armed forces in
the nature of special
compensatory highly
active field area
Allowance
(xv) Special allowance

Rs. 3,250/- p.m.

granted to members of
armed forces in the
nature of island duty
Allowance.
(in Andaman & Nicobar
& Lakshadweep Group
of Islands)

OVERVIEW OF INCOME FROM HOUSE PROPERTY

Under the Income Tax Act what is taxed under the head Income from House Property is the
inherent capacity of the property to earn income called the Annual Value of the property. The
above is taxed in the hands of the owner of the property.
COMPUTATION OF ANNUAL VALUE
(i) GROSS ANNUAL VALUE(G.A.V.) is the highest of
(a) Rent received or receivable
(b) Fair Market Value.
(c) Municipal valuation.
(If however, the Rent Control Act is applicable, the G.A.V. is the standard rent or rent
received, whichever is higher).
It may be noted that if the let out property was vacant for whole or any part of the previous
year and owing to such vacancy the actual rent received or receivable is less than the sum
referred to in clause (a) above, then the amount actually received/receivable shall be taken
into account while computing the G.A.V. If any portion of the rent is unrealizable, (condition
of unreliability of rent is laid down in Rule 4 of I.T. Rules) then the same shall not be
included in the actual rent received/receivable while computing the G.A.V.
(ii) NET VALUE (N.A.V.) is the GAV less the municipal taxes paid by the owner. Provided
that the taxes were paid during the year.
(iii) ANNUAL VALUE is the N.A.V. less the deductions available u/s 24.

DEDUCTIONS U/S 24:- Are exhaustive and no other deductions are available:(i) A sum equal to 30% of the annual value as computed above.
(ii) Interest on money borrowed for acquisition/construction/ repair/renovation of property is

deductible on accrual basis. Interest paid during the pre construction/acquisition period
will be allowed in five successive financial years starting with the financial year in which
construction/acquisition is completed. This deduction is also available in respect of a self
occupied property and can be claimed up to maximum of Rs.30000/-. The Finance Act,
2001 had provided that w.e.f. A.Y. 2002-03 the amount of deduction available under this
clause would be available up to Rs.1,50,000/- in case the property is acquired or
constructed with capital borrowed on or after 1.4.99 and such acquisition or construction
is completed before 1.4.2003. The Finance Act 2002 has further removed the requirement
of acquisition/ construction being completed before 1.4.2003 and has simply provided
that the acquisition/construction of the property must be completed within three years from the
end of the financial year in which the capital was borrowed.
SOME NOTABLE POINTS

In case of oneself occupied property, the annual value is taken as nil. Deduction u/s 24 for
interest paid may still be claimed there from. The resulting loss may be set off against income
under other heads but cannot be carried forward.
If more than one property is owned and all are used for self occupation purposes only, then
any one can be opted as self occupied, the others are deemed to be let out.
Annual value of one house away from workplace which is not let out can be taken as NIL
provided that it is the only house owned and it is not let out.
If a let out property is partly self occupied or is self occupied for a part of the year, then the
value in proportion to the portion of self occupied property or period of self occupation, as
the case may be is to be excluded from the annual value.
From Assessment year 1999-2000 onwards, an assesse who apart from his salary income has
loss under the head Income from house property, may furnish the particulars of the same in
the prescribed form to his Drawing and Disbursing Officer who shall then take the above loss
also into account for the purpose of TDS from salary.
A new section 25B has been inserted with effect from assessment year 2001-2002 which
provides that where the assesse, being the owner of any property consisting of any buildings
or lands there to which may have been let to a tenant, receives any arrears of rent not charged
to income tax for any previous year, then such arrears shall be taxed as the income of the
previous year in which the same is received after deducting there from a sum equal to 30% of
the amount of arrears in respect of repairs/collection charges. It may be noted that the above
provision shall apply whether or not the assesse remains the owner of the property in the year
of receipt of such arrears.
PROPERTY INCOME EXEMPT FROM TAX
Annual value of any one palace of an ex-ruler Property income of a local authority university/
educational institution approved scientific research association political party Property used
for own business or profession. One self occupied property House property held for
charitable purposes
OVERVIEW OF CAPITAL GAINS
CAPITAL GAINS
Profits or gains arising from the transfer of a capital asset during the previous year are
taxable as Capital Gains of the Income Tax Act. The taxability of capital gains is in the year
of transfer of the capital asset.
CAPITAL ASSET: - As defined in section 2(14) of the Income Tax Act, it means property of
any kind held by the assesse except:
(a) Stock in trade, consumable stores or raw materials held for the purpose of business or
profession.
(b) Personal effects, being moveable property (excluding Jewellery, archaeological
collections, drawings, paintings, sculptures or any other work of art) held for personal

use.
(c) Agricultural land, except land situated within or in area upto 8 kms, from a municipality,
Municipal Corporation, notified area committee, town committee or a cantonment board
with population of at least 10,000.
(d) Six and half percent Gold Bonds, National Defense Gold Bonds and Special Bearer
Bonds.
TYPES OF CAPITAL GAINS
When a capital asset is transferred by an assesse after having held it for at least 36
months, the Capital Gains arising from this transfer are known as Long Term Capital Gains.
In case of shares of a company or units of UTI or units of a Mutual Fund, the minimum
period of holding for long term capital gains to arise is 12 months. If the period of holding is
less than above, the capital gains arising there from are known as Short Term Capital Gains.
COMPUTATION OF CAPITAL GAINS
Capital gain is computed by deducting from the full value of consideration, for the transfer of
a capital asset, the following:(a) Cost of acquisition of the asset(COA):- In case of Long Term Capital Gains, the cost of
acquisition is indexed by a factor which is equal to the ratio of the cost inflation index of
the year of transfer to the cost inflation index of the year of acquisition of the asset.
Normally, the cost of acquisition is the cost that a person has incurred to acquire the
capital asset. However, in certain cases, it is taken as following:
(i) When the capital asset becomes a property of an assesse under a gift or will or by
succession or inheritance or on partition of Hindu Undivided Family or on
distribution of assets, or dissolution of a firm, or liquidation of a company, the COA
shall be the cost for which the previous owner acquired it, as increased by the cost of
improvement till the date of acquisition of the asset by the assesse.
(ii) When shares in an amalgamated Indian company had become the property of the
assesse in a scheme of amalgamation, the COA shall be the cost of acquisition of
shares in the amalgamating company.
(iii)

Where the capital asset is goodwill of a business, tenancy right, stage carriage
permits or loom hours the COA is the purchase price paid, if any or else nil.

(iv)The COA of rights shares is the amount which is paid by the subscriber to get them.
In case of bonus shares, the COA is nil.
(b) Cost of improvement, if any such cost was incurred. In case of long term capital assets,
the indexed cost of improvement will be taken.
(c) Expenses connected exclusively with the transfer such as brokerage etc.

DEDUCTIONS UNDER INCOME TAX

The Income Tax Act provides that on determination of the gross total income of an assesse
after considering income from all the heads, certain deductions there from may be allowed.
These deductions detailed in chapter VIA of the Income Tax Act must be distinguished from
the exemptions provides in Section 10 of the Act. While the former are to be reduced from
the gross total income, the latter do not form part of the income at all.
The chart given below describes the deductions allowable under chapter VIA of the I.T. Act
from the gross total income of the assesses having income from salaries.
The Income Tax Act allows various Income Tax Exemptions for Salaried Employees which
are very effective in saving taxes. A salaried employee would be required to intimate his
employer that he is claiming these income tax exemptions available for Salaried Employees
and then the Employer would compute the Tax on the balance income as per the Income Tax
Slabs and deduct TDS on Salary accordingly
The TDS deducted from Salary Income is reflected in the Form 16 which is required to be
given by the employer to all his employees for deduction of TDS during the financial year.
The TDS so deducted is also reflected in the Form 26AS which can be downloaded online by
the employees themselves:1. HRA Exemption for Salaried Employees
Many employers give House Rent Allowance (HRA) to their employees for them to reside at
a good place. A portion of the House Rent Allowance given by an employer to an employee is
exempted from the levy of the Income Tax and Income Tax is only levied on the remaining
part.
HRA Exemption is one of the most useful income tax exemptions for Salaried Employees as
it can be easily claimed and the amount of exemption allowed is also large.
2. Income Tax Exemption on Leave Travel Allowance
Many employers also give allowances to their employees to go on a vacation with their
respective families. The amount given by the employer to an employee to go on a vacation is
exempted from the levy of tax to a certain extent provided that the amount given was for a
vacation in India only.
Leave Travel Allowance is also an effective income tax exemption for Salaried Employees.
However, this amount can only be claimed if the employee actually goes on a vacation as
bills for the same would be required to be furnished.
3. Exemption on Encashment of Leaves for Salaried Employees
Most employers give all their employees a certain no. of days which can be claimed as
leaves. However, in case a person does not claim these leaves, many employers also give
their employees the option for en-cashing these leaves i.e. the employers pays extra to the
employees for the leaves which were allowed to be taken but were not taken.
This amount received as Leave Encashment is also allowed to be claimed as an exemption up
to a certain extent.
4. Tax Exemption from Pension Income for Salaried Employees
On retirement of an employee, many employers pay a pension to their employees.
Sometimes, the employer pays pension from his own pocket and in some cases, the employer
purchases an annuity and then the pension is being paid by the organization from whom the
annuity has been purchased.

The Pension can be of 2 types i.e. Commuted and Uncommuted. In commuted pension, the
whole amount of pension is received in lump-sum whereas in Uncommuted Pension, the
amount is paid in installments at regular intervals.
Irrespective of the type of Pension, Income Tax Exemption is given in both types of pensions
up to a certain limit.
5. Income Tax Exemption on Gratuity for Salaried Employees
Gratuity is a gift made by the employer to his employee in appreciation of the past services
rendered by the employee. Gratuity can either be received by:1. The employee himself at the time of his retirement
2. The legal heir at the time of the death of the employee
For the purpose of computing Income Tax Exemptions for Salaried Employees who have
received gratuity, the employees can be segregated into 3 parts and then the exemption is
allowed depending on the category they are into:1. Govt. Employees and employees of Local Authorities
2. Employees covered under the Payment of Gratuity Act, 1972
3. Employees not covered in any of the 2 above.
6. Income Tax Exemption on VRS Received
Many employees opt for Voluntary Retirement before the actual age of retirement (i.e. 60
years). In such cases, the employer sometimes gives some money to the employee on his
voluntary retirement.
The amount received or receivable by the employee on voluntary retirement under the golden
handshake scheme is exempted under Section 10(10C)
7. Income Tax Exemption for Perquisites
Some employers also give their employees various perquisites/facilities like Car, Mobile
phones, Rent Free accommodation.
Such perquisites are not fully tax free. A specific value of such facilities is allowed as an
exemption and value of the balance facilities allowed is allowed as an exemption.
8. Exemption of Various Allowances
Various other allowances like Transport Allowance, Children Education Allowance are also
allowed as Income Tax Exemptions to Salaried Employees but only up to a certain limit.
RELIEF UNDER SECTION 89:-It is available to an employee when he receives salary in
advance or in arrear or when in one financial year, he receives salary of more than 12 months
or receives profits in lieu of salary. W.e.f. 1.6.89, relief u/s 89(1) can be granted at the time
of TDS from employees of all companies, co-operative societies, universities or institutions
as well as govt./public sector undertakings, the relief should be claimed by the employee in
Form No. 10E and should be worked out as explained in Rule 21A of the Income Tax Rules.

Thefollowinginvestments/paymentsareinteraliaeligiblefordeductionu/s80C:

NATURE OF

REMARKS

INVESTMENT
Life Insurance Premium

For individual, policy must be in

the name of self or spouse or
Any childs name.

Sum paid under contract for

For individual, on life of self,

deferred annuity

spouse or any child of such

Individual.

Sum deducted from salary

Payment limited to 20% of

payable to Govt. Servant for

Salary.

securing deferred annuity for

self, spouse or child
Contribution made under

Employees Provident Fund

Scheme
Contribution to PPF

For individual, can be in the

name of self/spouse, any child

Contribution by employee to a

Recognized Provident Fund.

Subscription to any notified

securities/notified deposits
Scheme.

Subscription to any notified

E.g. NSC VIII issue.

Savings certificates.
Contribution to Unit Linked
Insurance Plan of LIC Mutual
Fund

e.g. Dhanrakhsa 1989

Tuition fees paid at the time of

Contribution to notified deposit
scheme/Pension
fund settoup
by
admission
or otherwise
any
The National Housing Bank.

Available in respect of any two

school, college, university or

Certain payment made by way
of installment
or part
payment
other
educational
institution
of loan taken for purchase/
construction
residential
situated
withinofIndia
for the
House property.
Purpose of full time education.

Any term deposit for a fixed

Children.
Condition has been laid that in
case the property is transferred
before the expiry of 5 years
from the end of the financial
year in which possession of
such property is obtained by him,
the aggregate amount of
deduction of income so allowed
years shall
This for
has various
been included
in be liable
To tax in that year.

period of not less than five years

Subscription to units of a
Mutual Fund notified u/s
With the scheduled bank.
10(23D)

Section 80C by the Finance Act,

Subscription to deposit scheme

Subscription to notified bonds
of a public sector company
engaged
providing housing
issued
by in
NABARD
Finance.

This has been included in

Subscription to equity shares/

debentures forming part of any
approved eligible issue of
capital made by a public
company or public financial
Payment made into an account
Institutions.

2006.

Section 80C by the Finance Act,

2007 and has come into effect

From 1.4.2008.

This has been introduced by

under the Senior Citizens

Finance Act, 2008 and shall

Savings Scheme Rules, 2004

Come into effect from 1.4.2009.

Payment made as five year

This has been introduced by

time deposit in an account under

Finance Act, 2008 and shall

the Post Office Time Deposit

Come into effect from 1.4.2009.

Rules, 1981

PERMANENT ACCOUNT NUMBER

WHAT IS P.A.N.?
P.A.N. or Permanent Account Number is a number allotted to a person by the Assessing
Officer for the purpose of identification. P.A.N. of the new series has 10 alphanumeric
characters and is issued in the form of laminated card.
WHO SHALL APPLY FOR P.A.N.?
Section 139A of the Income Tax Act provides that every person whose total income exceeds
the maximum amount not chargeable to tax or every person who carries on any business or
profession whose total turnover or gross receipts exceed Rs.5 Lakhs in any previous year or
any person required to file a return of income u/s 139(4A) shall apply for PAN. Besides, any
person not fulfilling the above conditions may also apply for allotment of PAN. With effect
from 01.06.2000, the Central Government may by notification specify any class/classes of
person including importers and exporters, whether or not any tax is payable by them, and
such persons shall also then apply to the Assessing Officer for allotment of PAN.
W.e.f. 01.04.2006 a person liable to furnish a return of fringe benefits under the newly
introduced section 115WD of the I.T. Act is also required to apply for allotment of PAN. Of
course, if such a person already has been allotted a PAN he shall not be required to obtain
another PAN.
The Finance Act, 2006 has provided that for the purpose of collecting any information, the
Central Govt. may by way of notification specify any class or classes of persons for allotment
of PAN and such persons shall apply to the Assessing Officer within the prescribed time.
Provision for allotment of PAN has also been introduced w.e.f.1.6.2006 as per which the
assessing officer may allot a Permanent Account No. to any person whether or not any tax is
payable by him having regard to the nature of transactions.
TRANSACTIONS IN WHICH QUOTING OF PAN IS MANDATORY
Purchase and sale of immovable property. Purchase and sale of motor vehicles. Transaction in
shares exceeding Rs.50000. Opening of new bank accounts. Fixed deposits of more than
Rs.50000.
Application for allotment of telephone connections. Payment to hotels exceeding Rs.25000.
Provided that till such time PAN is allotted to a person, he may quote his General Index
register Number.
HOW TO APPLY FOR PAN
Application for allotment of PAN is to be made in Form 49A. Following points must be noted
while filling the above form:i) Application Form must be typewritten or handwritten in black ink in BLOCK
LETTERS.
ii) Two black & white photographs are to be annexed.

iii) While selecting the Address for Communication, due care should be exercised as all
communications thereafter would be sent at indicated address.
iv) In the space given for Fathers Name, only the fathers name should be given.
Married ladies may note that husbands name is not required and should not be given.
v) Due care should be exercised to fill the correct date of birth.
vi) The form should be signed in English or any of the Indian Languages in the 2
specified places. In case of thumb impressions attestation by a Gazetted Officer is
necessary.

TAXABILITY OF RETIREMENT BENEFITS

INTRODUCTION
On retirement, an employee normally receives certain retirement benefits. Such benefits are
taxable under the head Salaries as profits in lieu of Salaries as provided in Section 17(3).
However, in respect of some of them, exemption from taxation is granted u/s 10 of the
Income Tax Act, either wholly or partly. These exemptions are described below:GRATUITY (Sec. 10(10)):
(i) Any death cum retirement gratuity received by Central and State Govt. employees,
Defense employees and employees in Local authority shall be exempt.
(ii) Any gratuity received by persons covered under the Payment of Gratuity Act, 1972 shall
be exempt subject to following limits:(a) For every completed year of service or part thereof, gratuity shall be exempt to the
extent of fifteen days Salary based on the rate of Salary last drawn by the concerned
employee.
(b) The amount of gratuity as
50,000(w.e.f.24.9.97).

calculated

above

shall

not

exceed

Rs.3,

(iii) In case of any other employee, gratuity received shall be exempt subject to the following
limits:(a) Exemption shall be limited to half month salary (based on last 10 months average)
for each completed year of service.
(b) Rs.3.5 Lakhs whichever is less.
Where the gratuity was received in any one or more earlier previous years also and any
exemption was allowed for the same, then the exemption to be allowed during the year gets
reduced to the extent of exemption already allowed, the overall limit being Rs. 3.5 Lakhs.
Gratuity payment to a widow or other legal heirs of any employee who dies in active service
shall be exempt from income tax. Payment of Gratuity (Amendment) Bill, 2010 has proposed
to increase the limit to Rs. 10, 00,000.
COMMUTATION OF PENSION (SECTION 10(10A)):
(i) In case of employees of Central & State Govt. Local Authority, Defense Services and
Corporation established under Central or State Acts, the entire commuted value of
pension is exempt.
(ii) In case of any other employee, if the employee receives gratuity, the commuted value of
1/3 of the pension is exempt, otherwise, the commuted value of of the pension is
exempt.

Judges of S.C. & H.C. shall be entitled to exemption of commuted value upto of the
pension (Circular No. 623 dated 6.1.1992).
LEAVE ENCASHMENT (Section 10(10AA)):
(i) Leave Encashment during service is fully taxable in all cases; relief u/s 89(1) if applicable
may be claimed for the same.
(ii) Any payment by way of leave encashment received by Central & State Govt. employees
at the time of retirement in respect of the period of earned leave at credit is fully exempt.
(iii) In case of other employees, the exemption is to be limited to the least of following:
(a) Cash equivalent of unutilized earned leave (earned leave entitlement cannot exceed
30 days for every year of actual service)
(b) 10 months average salary.
(c) Leave encashment actually received. This is further subject to a limit of Rs.3,
00,000 for retirements after 02.04.1998.
(iv)Leave salary paid to legal heirs of a deceased employee in respect of privilege leave
standing to the credit of such employee at the time of death is not taxable.
RETRENCHMENT COMPENSATION:Retrenchment compensation received by a workman under the Industrial Disputes Act, 1947
or any other Act or Rules is exempt subject to following limits:(i) Compensation calculated @ fifteen days average pay for every completed year of
continuous service or part thereof in excess of 6 months.
(ii) The above is further subject to an overall limit of Rs.5, 00,000 for retrenchment on or
after 1.1.1997 (Notification No. 10969 dated 25.6.99).
COMPENSATION ON VOLUNTARY RETIREMENTOR GOLDEN HANDSHAKE
(Sec. 10(10C)):
(i) Payment received by an employee of the following at the time of voluntary retirement,
or termination of service is exempt to the extent of Rs. 5 Lakhs
(a) Public Sector Company.
(b) Any other company.
(c) Authority established under State, Central or Provincial Act.
(d) Local Authority.
(e) Co-operative Societies, Universities, IITs and Notified Institutes of Management.
(f) Any State Government or the Central Government.

(ii) The voluntary retirement Scheme under which the payment is being made must be
framed in accordance with the guidelines prescribed in Rule 2BA of Income Tax
Rules. In case of a company other than a public sector company and a co-operative
society, such scheme must be approved by the Chief Commissioner/Director General
of Income-tax. However, such approval is not necessary from A.Y. 2001-2002
onwards.
(iii)

Where exemption has been allowed under above section for any Assessment
year, no exemption shall be allowed in relation to any other Assessment year. Further,
where any relief u/s 89 for any Assessment year in respect of any amount received or
receivable or voluntary retirement or termination of service has been allowed, no
exemption under this clause shall be allowed for any Assessment year.

PAYMENT FROM PROVIDENT FUND

Any payment received from a Provident Fund, (i.e. to which the Provident Fund Act, 1925
applies) is exempt. Any payment from any other provident fund notified by the Central Govt.
is also exempt. The Public Provident Fund (PPF) established under the PPF Scheme, 1968
has been notified for this purpose. Besides the above, the accumulated balance due and
becoming payable to an employee participating in a Recognized Provident Fund is also
exempt to the extent provided in Rule 8 of Part A of the Fourth Schedule of the Income Tax
Act.
PAYMENT FROM APPROVED SUPERANNUATIONFUND:-Payment from an
Approved Superannuation Fund will be exempt provided the payment is made in the
circumstances specified in the section viz. death, retirement and incapacitation.
EXPATRIATES WORKING IN INDIA
In case of foreign expatriate working in India, the remuneration received by him,
assessable under the head Salaries, is deemed to be earned in India if it is payable to him for
service rendered in India as provided in of the Income Tax Act. The explanation to the
aforesaid law clarifies that income in the nature of salaries payable for services rendered in
India shall be regarded as income earned in India. Further, from assessment year 2000-2001
onwards income payable for the leave period which is preceded and succeeded by services
rendered in India and forms part of the service contract shall also be regarded as income
earned in India. Thus, irrespective of the residential status of the expatriate employee, the
amount received by him as salary for services rendered in India shall be liable to tax in India
being income accruing or arising in India, regardless of the place where the salary is actually
received. However, there are certain exceptions to the rule which are briefly discussed
below:Remuneration of an employee of a foreign enterprise is exempt from tax if his stay in India is
less than 90 days in aggregate during the financial year. This is subject to further relaxation
under the provisions of Double Taxation Avoidance Agreement entered into by India with the
respective country.
Remuneration received by a foreign expatriate as an official of an embassy or high
commission or consulate or trade representative of a foreign state is exempt on reciprocal
basisRemuneration from employment on a foreign ship provided the stay of the employee

does not exceed 90 days in the financial year Training stipends received from foreign
government.
DOUBLE TAXATION AVOIDANCE AGREEMENT
The Central Government acting under the authority of Law has entered into DTAAs with
more than 85 countries. Such treaties serve the purpose of providing protection to the tax
payers from double taxation. As per section 90in relation to an assesse to whom any DTAA
applies, the provisions of the Act shall apply only to the extent they are more beneficial to the
assesse. The provisions of these DTAAs thus prevail over the statutory provisions.
INDIAN RESIDENTS POSTED ABROAD
Indian residents who have taken up employment in countries with which India has got DTAA
are entitled to the benefit of the DTAA entered into by India with the country of employment.
Accordingly, their tax liability is decided.
Indian expatriates working abroad have been granted several special tax concessions under
the Act. Professors, teachers and research workers working abroad in any university or any
educational institutions are entitled to deduction of 75% of their foreign remuneration
provided the same is brought into India in convertible foreign exchange within a period of 6
months from the end of the previous year or such extended time as may be allowed(Sec. 80R). Similarly, in case of an Indian Citizen having received remuneration for services rendered
outside India, 75% of his foreign remuneration is deductible from his taxable income
provided such remuneration is brought to India in convertible foreign exchange within the
time specified above.
From assessment year 2001-2002 onwards, there has been a change in the amount of
deduction available under sections 80R/ 80RRA. For details, reference may be made to the
sections concerned of the Income Tax Act. No deduction u/s 80R/80RRA shall be allowed in
respect of A.Y. 2005-06 onwards.
It may also be mentioned here that as per section income chargeable under the head Salary
payable by the Government to a citizen of India for services rendered outside India is deemed
to accrue or arise in India. However, allowances or perquisites paid or allowed outside India
by the Govt. to a citizen of India for rendering services abroad is exempt from taxation u/s.
INCOME TAX CLEARANCE CERTIFICATE
An expatriate before leaving the territory of India is required to obtain a tax clearance
certificate from a competent authority stating that he does not have any outstanding tax
liability. Such a certificate is necessary in case the continuous presence in India exceeds 120
days. An application is to be made in a prescribed form to the Income Tax Authority having
jurisdiction for assessment of the expatriate to grant a tax clearance certificate. This is to be
exchanged for final tax clearance certificate from the foreign section of the Income Tax
Department. Tax Clearance certificate is valid for a period of 1 month from the date of issue
and is necessary to get a confirmed booking from an airline or travel agency and may be
required to be produced before the customs authorities at the airport.

INCOME TAX ON FRINGE BENEFITS

INTRODUCTION:
The Finance Act, 2005 has introduced a new tax called Income-tax on fringe benefits w.e.f.
01.04.2006. This shall be in the form of additional income tax levied on fringe benefits provided or
deemed to have been provided by an employer to his employees during the previous year.
RATEOFTAX:
The tax on fringe benefits shall be levied at the rate of 30% on the value of fringe benefits provided.
LIABILITYTOPAY:
The liability to pay this tax is to be borne by the employer including:i) A company
ii) A firm
iii) An association of persons or body of individuals excluding any fund or trust or institution
eligible for exemption u/s 10(23C) or 12AA.
iv) a local authority
v) an artificial juridical person

WHAT IS INCLUDED IN FRINGE BENEFITS:Fringe benefits have been defined as including any consideration for employment provided
by way of
1. Any privilege, service, facility or amenity provided by an employer directly or
indirectly including reimbursement
2. Any free or concessional ticket provided by the employer for private journeys of his
employees or their family members.
3. Any contribution by the employer to an approved superannuation fund for employees.
4. Any specified security or sweat equity shares allotted/ transferred, directly or
indirectly by the employers free of cost or at concessional rate to his employees. The
detailed provisions in respect of this are included in Chapter XII H of the I.T. Act.
Further, fringe benefits shall be deemed to have been provided if the employer has incurred
any expenses or made any payments for various purposes namely, entertainment, provision of
hospitality, conference, sales promotion including publicity, employees Further, fringe
benefits shall be deemed to have been provided if the employer has incurred any expenses or
made any payments for various purposes namely, entertainment, provision of hospitality,
conference, sales promotion including publicity, employees welfare, conveyance, tour &
travel, use of hotel, boarding & lodging etc.
Various provisions relating to income tax on fringe benefits have been modified by the
Finance Act, 2006. Exceptions in respect of certain expenditures have been introduced
including expenditure incurred on distribution of free/concessional samples and payments to
any person of repute for promoting the sale of goods or services of the business of the
employer. Similarly, it has been proposed that expenditure incurred on providing free or
subsidized transport or any such allowance provided by the employer to his employees for

journeys from residence to the place of work shall not be part of fringe benefits. Another
significant amendment is regarding the contribution by an employer to an approved
superannuation fund to the extent of Rs.1 lakhs per employee which shall not be liable to
fringe benefit tax. Further, in the case of some other expenses incurred such as expenses
incurred on tour and travel, lower rates for valuation of fringe benefits @ 5% have been
provided for. The Finance Act, 2008 has introduced further exemption in respect of certain
expenditures from the purview of Fringe Benefit Tax. These include payments through nontransferable electronic meal cards, provision of crche facility, organizing sports events
orsponsoring a sportsman being an employee. These provisions shall come into effect from
A.Y. 2009-10 onwards.
The Finance act, 2009 has withdrawn the Fringe Benefit Tax. Thus, the FBT stands abolished
w.e.f. A.Y. 2010-11 and now such perquisites are taxable in hands of employees.

Tax Planning
Proper tax planning is a basic duty of every person which should be carried out religiously.
Basically, there are three steps in tax planning exercise.
These three steps in tax planning are:
Calculate your taxable income under all heads i.e., Income from Salary, House Property,
Business & Profession, Capital Gains and Income from Other Sources.
Calculate tax payable on gross taxable income for whole financial year (i.e., from 1st April to
31st March) using a simple tax rate table, given on next page.
After you have calculated the amount of your tax liability. You have two options to choose
from:
1.

Pay your tax (No tax planning required)

2.

Minimise your tax through prudent tax planning.

Most people rightly choose Option 'B'. Here you have to compare the advantages of several
tax-saving schemes and depending upon your age, social liabilities, tax slabs and personal
preferences, decide upon a right mix of investments, which shall reduce your tax liability to
zero or the minimum possible.
Every citizen has a fundamental right to avail all the tax incentives provided by the
Government. Therefore, through prudent tax planning not only income-tax liability is reduced
but also a better future is ensured due to compulsory savings in highly safe Government
schemes. We should plan our investments in such a way, that the post-tax yield is the highest
possible keeping in view the basic parameters of safety and liquidity.
For most individuals, financial planning and tax planning are two mutually exclusive
exercises. While planning our investments we spend considerable amount of time evaluating
various options and determining which suits us best. But when it comes to planning our
Investments from a tax-saving perspective, more often than not, we simply go the traditional
way and do the exact same thing that we did in the earlier years. Well, in case you were not
aware the guidelines governing such investments are a lot different this year. And lethargy on
your part to rework your investment plan could cost you dear.
Why are the stakes higher this year? Until the previous year, tax benefit was provided as a
rebate on the investment amount, which could not exceed Rs 100,000; of this Rs 30,000 was
exclusively reserved for Infrastructure Bonds. Also, the rebate reduced with every rise in the
income slab; individuals earning over Rs 500,000 per year were not eligible to claim any
rebate. For the current financial year, the Rs 100,000 limit has been retained; however
internal caps have been done away with. Individuals have a much greater degree of flexibility
in deciding how much to invest in the eligible instruments. The other significant changes are:
The rebate has been replaced by a deduction from gross total income, effectively. The higher
your income slab, the greater is the tax benefit.

All individuals irrespective of the income bracket are eligible for this investment. These
developments will result in higher tax-savings.
We should use this Rs 100,000 contribution as an integral part of your overall financial
planning and not just for the purpose of saving tax. We should understand which instruments
and in what proportion suit the requirement best. In this note we recommend a broad asset
allocation for tax saving instruments for different investor profiles.
For persons below 30 years of age:
In this age bracket, you probably have a high appetite for
risk. Your disposable surplus maybe small (as you could be paying your home loan
instalments), but the savings that you have can be set aside for a long period of time. Your
children, if any, still have many years before they go to college; or retirement is still further
away. You therefore should invest a large chunk of your surplus in tax-saving funds (equity
funds). The employee provident fund deduction happens from your salary and therefore you
have little control over it. Regarding life
Insurance, go in for pure term insurance to start with. Such policies are very affordable and
can extend for up to 30 years. The rest of your funds (net of the home loan principal
repayment) can be parked in NSC/PPF.
For persons between 30 - 45 years of age:
Your appetite for risk will gradually decline over
this age bracket as a result of which your exposure to the stock markets will need to be
adjusted accordingly. As your compensation increases, so will your contribution to the EPF.
The life insurance component can be maintained at the same level; assuming that you would
have already taken adequate life insurance and there is no need to add to it. In keeping with
your reducing risk appetite, your contribution to PPF/NSC increases. One benefit of the
higher contribution to PPF will be that your account will be maturing (you probably opened
an account when you started to earn) and will yield you tax free income.
For persons between 45 - 55 years of age:
You are now nearing retirement. To that extent it is
critical that you fill in any shortfall that may exist in your retirement nest egg. You also do not
want to jeopardize your pool of savings by taking any extraordinary risk. The allocation will
therefore continue to move away from risky assets like stocks, to safer ones line the NSC.
However, it is important that you continue to allocate some money to stocks. The reason
being that even at age 55, you probably have 15-20 years of retired life; therefore having
some portion of your money invested for longer durations, in the high risk - high return
category, will help in building your nest egg for the latter part of your retired life.
For persons over 55 years of age:
You are to retire in a few years; then you will have to
depend on your investments for meeting your expenses. Therefore the money that you have to
invest under Section 80C must be allocated in a manner that serves both near term income
requirements as well as long-term growth needs. Most of the funds are therefore allocated to
NSC. Your PPF account probably will mature early into your retirement. You continue to
allocate some money to equity to provide for the latter part of your retired life. Once you are
retired however, since you will not have income there is no need to worry about Section 80C.

You should consider investing in the Senior Citizens Savings Scheme, which offers an
assured return of 9% pa; interest is payable quarterly. Another investment you should
consider is Post Office Monthly Income Scheme.
Investing the Rs 100,000 in a manner that saves both taxes as well as helps you achieve your
long-term financial objectives is not a difficult exercise. All it requires is for you to give it
some thought, draw up a plan that suits you best and then be disciplined in executing the
same.
Tax Planning Tools
Following are the five tax planning tools that simultaneously help the assesses maximize their
wealth too.
Most of what we do with respect to tax saving, planning, investment whichever way you call
it is going to be of little or no use in years to come.
The returns from such investments are likely to be minuscule and or they may not serve any
worthwhile use of your money. Tax planning is very strategic in nature and not like the last
minute fire fighting most do each year.
For most people, tax planning is akin to some kind of a burden that they want off their
shoulders as soon as possible. As a result, the attitude is whatever seems ok and will help
save tax lets the go basic for mantra. What its really foolhardy is that saving tax is a
larger prerogative than that of utilisation of your hard earned money and the future of such
monies in years to come. Like each year we may continue to do what we do or give ourselves
a choice this year round.
Product manufacturers will be on a high note enticing you to buy their products and save tax.
As usual the market will be flooded by agents and brokers having solutions for you. Here are
some guidelines to help you wade through the various options and ensure the following:
1. Tax is saved and that you claim the full benefit of your section 80C benefits
2. Product are chosen based on their long term merit and not like fire fighting options
undertaken just to reach that Rs 1 lakhs investment mark
3. Products are chosen in such a manner that multiple life goals can be fulfilled and that they
are in line with your future goals and expectations
4. Products that you choose help you optimise returns while you save tax in the immediate
future.
Strategic Tax Planning
So far with whatever you have done in the past, it is important to understand the future
implications of your tax saving strategy. You cannot do much about the statutory
commitments and contribution like provident fund (PF) but all the rest is in your control.
1. Insurance

If you have a traditional money back policy or an endowment type of policy understand that
you will be earning about 4% to 6% returns on such policies. In years to come, this will be
lower or just equal to inflation and hence you are not creating any wealth, infact you are
destroying the value of your wealth rapidly.
Such policies should ideally be restructured and making them paid up is a good option. You
can buy term assurance plan which will serve your need to obtaining life cover and all the
same release unproductive cash flow to be deployed into more productive and wealth
generating asset classes. Be careful of ULIPS; invest if you are under 35 years of age, else as
and when the stock markets are down or enter into a downward phase. Your ULIP will turn
out to be very expensive as your age increases. Again I am sure you did not know this.
2. Public Provident Fund (PPF)
This has been a long time favourite of most people. It is a no-brainer and hence most people
prefer this but note this. The current returns are 8% and quite likely that sooner or later with
the implementation of the exempt tax (EET) regime of taxation investments in PPF may
become redundant, as returns will fall significantly.
How this will be implemented is not clear hence the best option is to go easy on this one.
Simply place a nominal sum to keep your account active before there is clarity on this front.
EET may apply to insurance policies as well.
3. Pension Policies
This is the greatest mistake that many people make. There is no pension policy today, which
will really help you in retirement. That is the cold fact. Tulip pension policies may help you
to some extent but I would give it a rating of four out of ten. It is quite likely that you will
make a sizeable sum by the time you retire but that is where the problem begins.
The problem with pension policies is that you will get a measly 2% or 4% annuity when you
actually retire. To make matters worse this will be taxed at full marginal rate of income tax as
well. Liquidity and flexibility will just not be there. No insurance company or agent will
agree to this but this is a cold fact.
Steer clear of such policies. Either make them paid up or stop paying Tulip premiums, if you
can. Divest the money to more productive assets based on your overall risk profile and
general preferences. Bite this Rs 100 today will be worth only Rs 32 say in 20 years time
considering 5% inflation.
4. Five year fixed deposits (FDs), National Savings Scheme (NSC), other bonds
These products are fair if your risk appetite is really low and if you are not too keen to build
wealth. Generally speaking, in all that we do wealth creation should be the underlying
motive.

5. Equity Linked Savings Scheme (ELSS)

This is a good option. You save tax and returns are tax-free completely. You get to build a lot
of wealth. However, note that this is fraught with risk. Though it is said that this investment
into an ELSS scheme is locked-in for three years you should be mentally prepared to hold it
for five to 10 years as well.
It is an equity investment and when your three years are over, you may not have made great
returns or the stock markets may be down at that point. If that be the case, you will have to
hold much longer. Hence if you wish to use such funds in three-four years time the
calculations can go wrong.
Nevertheless, strange as it may seem, the high-risk investment has the least tax liability,
infact it is nil as per the current tax laws. If you are prepared to hold for long really long like
five-ten years, surely you will make super normal returns.
That said ideally you must have your financial goal in mind first and then see how you can
meet your goals and in the process take advantage of tax savings strategies.
There is so much to be done while you plan your tax. Look at 80C benefits as a composite
tool. Look at this as a tax management tool for the family and not just yourself. You have
Section
80C benefit for yourself
There are so many Rs 1 lakhs to be planned and hence so much to benefit from good tax
planning.
Traditionally, buying life insurance has always formed an integral part of an individual's
annual tax planning exercise. While it is important for individuals to have life cover, it is
equally important that they buy insurance keeping both their long-term financial goals and
their tax planning in mind. This note explains the role of life insurance in an individual's tax
planning exercise while also evaluating the various options available at one's disposal.
6. Unit linked insurance plans (ULIPs)
Unit linked plans have been a rage of late. With the
advent of the private insurance companies and increased competition, a lot has happened in
terms of product innovation and aggressive marketing of the same. ULIPs basically work like
a mutual fund with a life cover thrown in. They invest the premium in market-linked
instruments like stocks, corporate bonds and government securities.
The basic difference between ULIPs and traditional insurance plans is that while traditional
plans invest mostly in bonds ULIPs' mandate is to invest a major portion of their corpus in
stocks. Individuals need to understand and digest this fact well before they decide to buy a
ULIP.
Having said that, we believe that equities are best equipped to give better returns from a long
term perspective as compared to other investment avenues like gold, property or bonds. This
holds true especially in light of the fact that assured return life insurance schemes have now
become a thing of the past. Today, policy returns really depend on how well the company is
able to manage its finances.

However, investments in ULIPs should be in tune with the individual's risk appetite.
Individuals who have a propensity to take risks could consider buying ULIPs with a higher
equity component. Also, ULIP investments should fit into an individual's financial portfolio.
If for example, the individual has already invested in tax saving funds while conducting his
tax planning exercise, and his financial portfolio or his risk appetite doesn't 'permit' him to
invest in ULIPs, then what he may need is a term plan and not unit linked insurance.
7. Pension/retirement plans
Planning for retirement is an important exercise for any
individual. A retirement plan from a life insurance company helps an individual insure his life
for a specific sum assured. At the same time, it helps him in accumulating a corpus, which he
receives at the time of retirement.
Premiums paid for pension plans from life insurance companies enjoy tax benefits up to Rs
10,000 under Section 80CCC. Individuals while conducting their tax planning exercise could
consider investing a portion of their insurance money in such plans.
Unit linked pension plans are also available with most insurance companies. As already
mentioned earlier, such investments should be in tune with their risk appetites. However,
individuals could contemplate investing in pension ULIPs since retirement planning is a long
term activity.
8. Traditional endowment/endowment type plans
Individuals with a low risk appetite, who want
an insurance cover, which will also give them returns on maturity could consider buying
traditional endowment plans. Such plans invest most of their monies in corporate bonds,
money market. A variant of endowment plans are child plans and money back plans. While
they may be presented differently, they still remain endowment plans in essence. Such plans
purport to give the individual either a certain sum at regular intervals (in case of money back
plans) or as a lump sum on maturity. They fit into an individual's tax planning exercise
provided that there exists a need for such plans.
4. Tax benefits
Premiums paid on life insurance plans enjoy tax benefits under Section 80C subject to an
upper limit of Rs 100,000. The tax benefit on pension plans is subject to an upper limit of Rs
10,000 as per Section 80CCC (this falls within the overall Rs 100,000 Section 80C limit).
The maturity amount is currently treated as tax free in the hands of the individual on maturity
under Section 10 (10D)
Income Head-wise Tax Planning Tips
Salaries Head: Following propositions should be borne in mind:
1. It should be ensured that, under the terms of employment, dearness allowance and
dearness pay form part of basic salary. This will minimize the tax incidence on house rent
allowance, gratuity and commuted pension.
.

2. An uncommented pension is always taxable; employees should get their pension

commuted. Commuted pension is fully exempt from tax in the case of Government
employees and partly exempt from tax in the case of government employees and partly
exempt from tax in the case of non government employees who can claim relief under
section 89.
3. An employee being the member of recognized provident fund, who resigns before 5 years
of continuous service, should ensure that he joins the firm which maintains a recognized
fund for the simple reason that the accumulated balance of the provident fund with the
former employer will be exempt from tax, provided the same is transferred to the new
employer who also maintains a recognized provident fund.
4. Since employers contribution toward from tax up to 12 percent of salary, employer may
give extra benefit to their employees by raising their contribution to 12 percent of salary
without increasing any tax liability.
5. While medical allowance payable in cash is taxable, provision of ordinary medical
facilities is no taxable if some conditions are satisfied. Therefore, employees should go in
for free medical facilities instead of fixed medical allowance.
6. Since the incidence of tax on retirement benefits like gratuity, commuted pension,
accumulated unrecognized provident fund is lower if they are paid in the beginning of the
financial year, employer and employees should mutually plan their affairs in such a way
that retirement, termination or resignation, as the case may be, takes place in the
beginning of the financial year.
7. Pension received in India by a non resident assesse from abroad is taxable in India. If
however, such pension is received by or on behalf of the employee in a foreign country
and later on remitted to India, it will be exempt from tax.
8. As the perquisite in respect of leave travel concession is not taxable in the hands of the
employees if certain conditions are satisfied, it should be ensured that the travel
concession should be claimed to the maximum possible extent without attracting any
incidence of tax.
9. As the perquisites in respect of free residential telephone, providing use of
computer/laptop, gift of movable assets(other than computer, electronic items, car) by
employer after using for 10 years or more are not taxable, employees can claim these
benefits without adding to their tax bill.
10. Since the term salary includes ba other taxable allowances for the purpose of valuation
of perquisite in respect of rent free house, it would be advantageous if an employee goes
in for perquisites rather than for taxable allowances. This will reduce valuation of rent
free house, on one hand, and, on the other hand, the employee may not fall in the category
of specified employee.

House Property Head: The following propositions should be borne in mind:

1. If a person has occupied more than one house for his own residence, only one house of
his own choice is treated as self-occupied and all the other houses are deemed to be let
out. The tax exemption applies only in the case of on self-occupied house and not in the
case of deemed to be let out properties. Care should, therefore, be taken while selecting
the house) to be treated as self-occupied in order to minimize the tax liability.
2. As interest payable out of India is not deductible if tax is not deducted at source (and in
respect of which there is no person who may be treated as an agent u/s 163), care should
be taken to deduct tax at source in order to avail exemption u/s 24(b).
3. As amount of municipal tax is deducting accrual basis, it should paid be during ensure
the previous year if the assesse wants to claim the deduction.
4. As a member of co-operative society to whom a building or part thereof is allotted or
leased under a house building scheme is deemed owner of the property, it should be
ensured that interest payable (even it is not paid) by the assesse, on outstanding
instalments of the cost of the building, is claimed as deduction u/s 24.
5. If an individual makes cash a cash gift to his wife who purchases a house property with
the gifted money, the individual will not be deemed as fictional owner of the property.
Taxable income of the wife from the property is, however, includible in the income of
individual in terms of section 64(1)(iv), such income is computed u/s 23(2), if she uses
house property for her residential purposes. It can, therefore, be advised that if an
individual transfers an asset, other than house property, even without adequate
consideration, he can escape the deeming provision of section 27(i) and the consequent
hardship.
6. Under section 27(i), if a person transfers a house property without consideration to his/her
spouse (not being a transfer in connection with an agreement to live apart), or to his
minor child (not being a married daughter), the transferor is deemed to be the owner of
the house property. This deeming provision was found necessary in order to bring this
situation in line with the provision of section 64. But when the scope of section 64 was
extended to cover transfer of assets without adequate consideration to sons wif laws
(Amendment) Act 1975, w.e.f. A.Y. 1975-76 onwards the scope of section 27(i) was not
similarly extended. Consequently, if a person transfers house property to his sons wife
without adequate co to be the owner of the property u/s 27(i), but income earned from the
property by the transferee will be included in the income of the transferor u/s 64. For the
purpose of sections 22 to 27, the transferee will, thus, be treated as an owner of the house
property and income computed in his/her hands is included in the income of the transferor
u/s 64. Such income is to be computed under section 23(2), if the transferee uses that
property for self-occupation. Therefore, in some cases, it is beneficial to transfer the
house property without adequate consideration to sons wife or sons.

Capital Gains Head: The following propositions should be borne in mind

1. Since long-term capital gains bear lower tax, taxpayers should so plan as to transfer their
capital assets normally only 36 months after acquisition. It is pertinent to note that if
capital asset is one which became the property of the taxpayer in any manner specified in
section 49(1), the period for which it was held by the previous owner is also to be counted
in computing 36 months.
2. The assesse should take advantage of exemption u/s 54 by investing the capital gain
arising from the sale of residential property in the purchase of another house (even out of
India) within specified period.
3. In order to claim advantage of exemption under sections 54B and 54D it should be
ensured that the investment in new asset is made only after effecting transfer of capital
assets.
4. In order to claim advantage of exemption under sections 54, 54B, 54D, 54EC, 54ED,
54EF, 54G and 54GA the tax payer should ensure that the newly acquired asset is not
transferred within 3 years from the date of acquisition. In this context, it is interesting to
note that the transfer (one year in the case of section 54EC) of a newly acquired asset
according to the modes mentioned in section 47 is not regarded as transfer even for this
may be transferred even within 3 years of their acquisition according to the modes
mentioned in section 47 without attracting the capital tax liability. Alternatively, it will be
advisable that instead of selling or converting assets acquired under sections 54, 54B,
54D, 54F, 54G and 54GA into money, the taxpayer should obtain loan against the security
of such asset (even by pledge) to meet the exigency.
5. In 2 cases, surplus arising on sale or transfer of capital assets is chargeable to tax as shortterm capital gain by virtue of section 50. These cases are: (i) when WDV of a block of
assets is reduced to nil, though all the assets falling in that block are not transferred, (ii)
when a block of assets ceases to exist.
Tax on short-term capital gain can be avoided if
1. Another capital asset, falling in that block of assets is acquired at any time during the
previous year; or Benefit of section 54G is availed Tax payers desiring to avoid tax on
short-term capital gains under section 50 on sale or transfer of capital asset, can acquire
another capital asset, falling in that block of assets, at any time during the previous year.
2. If securities transaction tax is applicable, long term capital gain tax is exempt from tax by
virtue of section 10(38). Conversely, if the taxpayer has generated long-term capital loss,
it is taken as equal to zero. In other words, if the shares are transferred, in national stock
exchange, securities transaction tax is applicable and as a consequence, the long-term
capital loss is ignored. In such a case, tax liability can be reduced, if shares are transferred
to a friend or a relative outside the stock exchange at the market price (securities
transaction tax is not applicable in the case of transactions not recorded in stack
exchange, long term loss can be set-off and the tax liability will be reduced). Later on, the
friend or relative, who has purchased shares, may transfer shares in a stock exchange.
Clubbed Incomes Head: The following propositions should be borne in mind

1. Under section 64(1) (ii), salary earned by the spouse of an individual from a concern in
which such individual has a substantial interest, either individually or jointly with his
relatives, is taxable in the hands of the individual. To avoid this clubbing, as far as
possible spouse should be employed in which employee does not have any interest. In
such a case this section will not be attracted, even if a close relative of the individual has
substantial interest in the concern. Alternatively, the spouse may be employed in a
concern which is inter related with the concern in which the individual has substantial
interest.
2. Income from property transferred to spouse is clubbed in the hands of transferor.
However, it has been held that income from savings out of pin money (i.e., an allowance
given to wife by husband for her dress and usual house hold expenditure) is not included
in the taxable income of husband. Likewise, a pre-nuptial transfer (i.e., transfer of
property before marriage) is outside the mischief of section 64(1) (iv) even if the property
is transferred subject to subsequent condition of marriage or in consideration of promise
to marry. Consequently income from property transferred without consideration before
marriage is not clubbed in the income of the transferor even after marriage. Income from
property transferred to spouse in accordance with an agreement to live apart, is not
clubbed in the hands of transfer live apart is of wider connotation apart.
3. Exchange of asset between one spouse and another is outside the clubbing provisions if
such exchange of assets is for adequate consideration. The spouse within higher marginal
tax rate can transfer income yielding asset to other spouse in exchange of an equal value
of asset which does not yield any income. For instance, X (whose marginal rate of tax is
33.66%) can transfer fixed deposit in a company of Rs.100,000 bearing 9% interest, to
Mrs. X (whose marginal tax is nil) in exchange of gold of Rs.100,000; he can reduce his
tax bill by Rs. 3029(i.e., 0.3366 x 0.09 x Rs 100000) without attracting provisions of
section 64.
4. Provisions of section 64 are not attracted if property is transferred by an individual to his
son in law or daughter in law of his brother.
5. If trust is created for the benefit of minor child and income during minority of the child is
being accumulated and added to corpus and income such increased corpus is given to the
child after his attaining majority, the provisions of section 64 (IA) are not applicable.
6. Explanation 3 to section 64 (1) lays down the method for computing income to be
clubbed on the basis of value of assets transferred to the spouse as on the first day of the
previous year. This offers attractive approach for minimizing income to be clubbed by
transfers for temporary periods during the course of the previous year.
7. If a trust is created by a male member to settle his separate property thereon for the
benefit of HUF, with a stipulation that income shall accrue for a specified period and the
corpus going to the trust afterwards, provisions of section 64 are not attracted.
8. If gifts are made by HUF to the wife, minor child, or daughter in law of any of its male or
female members (including karta), provisions of section 64 are not attracted.
9. In cases covered in section 64, income arising to the transferee, from property transferred
without adequate consideration, is taxable in the hands of transferor. However, income

arising from the accretion of such transferred assets or from the accumulated income
cannot be clubbed in the hands of the transferor.
10. Where the assesse withdrew funds lying in capital account of firm in which he was a
partner and advanced the same to his HUF which deposited the said funds back into firm,
the said loan by the assesse to his HUF could not be treated as a transfer for the purpose
of section 64 and income arising from such deposits was not assessable in the hands of
the assesse.
Business and Profession head:
The following propositions should be borne in mind to save tax.
1. The Company is defined under section 2(17) as to mean the following:
a. Any Indian Company ; or
b. Anybody corporate incorporated under the laws of a foreign country ; or
c. Any institution, association or a body which is assessed or was assessable/ assessed as a
company for any assessment year commencing on or before April 1, 1970; or
d. Any institution, association or a body, whether incorporated or not and whether Indian or
non Indian, which is declared by general or special order of the CBDT to be a company.
2. An Indian Company means a company formed and registered under companies Act1956.
3. Domestic Company means an Indian company or any other company which, in respect Of
its income liable to tax under the Act, has made prescribed arrangements for the
declaration and payment of dividends within India in accordance with section194.
4. Arrangement for declaration and payment of dividend: Three requirements are to be
satisfied cumulatively by a company before it can be said to be a company which has
made the necessary arrangements for the declaration and payment of dividends in India
within the meaning of section 194:

The share register of the company for all share holders should be regularly
maintained at its principal place of business in India, in respect of any assessment
year, at least from April 1 of the relevant assessment year.

The general meeting for passing of accounts of the relevant previous year and the
declaring dividends in respect therefore should be held only at a place within India.

The dividends declared, if any, should be payable only at a place within India to all
share holders

5. A Foreign company means a company which is not a domestic company.

6. Industrial company is a company which is mainly engaged in the business of generation

or distribution of electricity or any other form of power or in the construction of ships or

in the manufacture or processing of goods or in mining.