Tax Planning assumes a significant importance in the modern day. Since the ancient days in India, the concept of taxation has been prevalent. In the Arthashastra, the system of taxation assumed a major significance in the economic development of a nation.

A tax is basically a contribution, in most cases, involuntary, on various incomes and services that people utilize. For E.g Wealth Tax, Income Tax, Service Tax, Water Tax, etc. The amount collected from these taxes is utilized by the government for the social security schemes and various projects such as public infrastructure and the like.

In India, taxation goes back to the ancient times where there was a taxation system wherein the various businesses were taxed. The British Empire had imposed a tax on something as Salt also!!

One famous personality quoted that there are only two things that are permanent in the world for human beings, death and taxes!!

In India, the basic law governing the taxation is the Income Tax Act 1961. The various incomes are clubbed under this Act and the rates for the taxes are mentioned. Individuals have a different tax structure, HUF, and Corporates have a different tax structure.

The current tax slabs for Financial Year 2015-16 are as follows:

Individual resident aged below 60 years (i.e. born on or after 1st April 1955) or any NRI/ HUF/ AOP/ BOI/ AJP*

Income Slabs

Tax Rates

i.

Where the taxable income does not exceed Rs. 2,50,000/-.

NIL

ii.

Where the taxable income exceeds Rs. 2,50,000/- but does not exceed Rs. 5,00,000/-.

10% of amount by which the taxable income exceeds Rs. 2,50,000/-.
Less ( in case of Resident Individuals only ) : Tax Credit u/s 87A - 10% of taxable income upto a maximum of Rs. 2000/-.

iii.

Where the taxable income exceeds Rs. 5,00,000/- but does not exceed Rs. 10,00,000/-.

Rs. 25,000/- + 20% of the amount by which the taxable income exceeds Rs. 5,00,000/-.

iv.

Where the taxable income exceeds Rs. 10,00,000/-.

Rs. 125,000/- + 30% of the amount by which the taxable income exceeds Rs. 10,00,000/-.

Surcharge : 10% of the Income Tax, where taxable income is more than Rs. 1 crore.

Education Cess : 3% of the total of Income Tax and Surcharge.

Super Senior Citizen (Individual resident who is of the age of 80 years or more at any time during the previous year i.e. born before 1st April 1934)

 

Income Slabs

Tax Rates

i.

Where the taxable income does not exceed Rs. 5,00,000/-.

NIL

ii.

Where the taxable income exceeds Rs. 5,00,000/- but does not exceed Rs. 10,00,000/-

20% of the amount by which the taxable income exceeds Rs. 5,00,000/-.

iii.

Where the taxable income exceeds Rs. 10,00,000/-

Rs. 100,000/- + 30% of the amount by which the taxable income exceeds Rs. 10,00,000/-.

Surcharge : 10% of the Income Tax, where taxable income is more than Rs. 1 crore.

Education Cess : 3% of the total of Income Tax and Surcharge.

Co-operative Society

Income Slabs

Tax Rates

i.

Where the taxable income does not exceed Rs. 10,000/-.

10% of the income.

ii.

Where the taxable income exceeds Rs. 10,000/- but does not exceed Rs. 20,000/-.

Rs. 1,000/- + 20% of income in excess of Rs. 10,000/-.

iii.

Where the taxable income exceeds Rs. 20,000/-

Rs. 3.000/- + 30% of the amount by which the taxable income exceeds Rs. 20,000/-.

Surcharge : 10% of the Income Tax, where taxable income is more than Rs. 1 crore.

Education Cess : 3% of the total of Income Tax and Surcharge.

Firm / Association of Persons

Income Tax : 30% of taxable income.

Surcharge : 10% of the Income Tax, where taxable income is more than Rs. 1 crore.

Education Cess : 3% of the total of Income Tax and Surcharge.

Local Authority

Income Tax : 30% of taxable income.

Surcharge : 10% of the Income Tax, where taxable income is more than Rs. 1 crore.

Education Cess : 3% of the total of Income Tax and Surcharge.

Domestic Company

Income Tax : 30% of taxable income.

Surcharge : The amount of income tax as computed in accordance with above rates, and after being reduced by the amount of tax rebate shall be increased by a surcharge

  • At the rate of 5% of such income tax, provided that the taxable income exceeds Rs. 1 crore.
  • At the rate of 10% of such income tax, provided that the taxable income exceeds Rs. 10 crores.

Education Cess : 3% of the total of Income Tax and Surcharge.

Company other than a Domestic Company

  • @ 50% of on so much of the taxable income as consist of (a) royalties received from Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern after the 31st day of March, 1961 but before the 1st day of April, 1976; or (b) fees for rendering technical services received from Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern after the 29th day of February, 1964 but before the 1st day of April, 1976, and where such agreement has, in either case, been approved by the Central Government.
  • @ 40% of the balance

Surcharge :

The amount of income tax as computed in accordance with above rates, and after being reduced by the amount of tax rebate shall be increased by a surcharge as under

  • At the rate of 2% of such income tax, provided that the taxable income exceeds Rs. 1 crore.
  • At the rate of 5% of such income tax, provided that the taxable income exceeds Rs. 10 crores.

Scope of Taxation Individuals & HUF.

In the case of Individuals and HUF’s there are five heads of Income that are taxed:

  1. Income from Salary
  2. Income from House Property
  3. Income from Business or Profession
  4. Income from Other Sources
  5. Income from Capital Gains

As there are sources of Income, there are also various deductions that are available for the tax payers, which are classified under Section 80 of the Income Tax Act:

Section 80C: In order to encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act. Investments made under such schemes are referred to as 80C investments. Under this section, you can invest a maximum of Rs l.50 lakh combined for all the options and if you are in the highest tax bracket of 30%, you save a tax of Rs 33,600. The various investment options under this section include:

  1. Provident Fund & Voluntary Provident Fund
  2. Public Provident Fund
  3. National Savings Certificate
  4. Equity-Linked Savings Scheme
  5. Life Insurance Premiums
  6. Home Loan Principal Repayment
  7. Stamp Duty and Registration Charges For Home
  8. Bank fixed deposits
  9. Children’s Education Expenses

 

80CCG:The Finance Act 2012 introduced a new Section 80CCG to offer 50 per cent tax break to new investors who invest up to Rs 50,000 and whose GTI is less than or equal to Rs 10 lakh. It has been introduced for budding investors entering the equity markets for the first time and is a once-in-a-lifetime benefit.

Section 80D: Healthcare costs are increasing by the day and therefore the amount of premium contributed to any Health Insurance Plan for self and family members including parents (whether dependent or not) qualifies for deduction under 80D The maximum amount allowed for exemption annually for self, spouse and dependent parents/children is Rs 25,000. In case of a senior citizen, the maximum amount extends up to Rs 30,000. If you are paying the premium for your parents (whether dependent or not), you can claim an additional maximum deduction of Rs 30,000 over and above the amount of Rs 25,000 for self.

80DD: If you contribute a premium to LIC or any other insurance company (approved by the Income Tax board) for the medical treatment of a dependent spouse, children, parents or sibling who is physically disabled, you can avail exemption under the section 80DD for a maximum amount of upto Rs Rs 1,00,000 per year depending upon the nature of the disability. For initiating the process of deduction you need to submit the medical certificate issued by a medical authority along with the return of income.

80DDB: If you have made a contribution for the medical treatment of a dependent spouse, children, parents or sibling for the treatment of specific diseases, you can avail exemption under this section for a maximum amount of upto Rs Rs 1,00,000 subject to conditions.

80E: Higher Education is getting expensive by the day. In case of a loan availed for the higher education of self, spouse, children and minors for whom you are the legal guardian, then the interest on the loan, irrespective of the amount, can be claimed as a deduction under Section 80E. This deduction is applicable for a period of eight years or till the interest is paid, whichever is earlier. This deduction can be claimed over and above the educational expenses under Section 80C.

80G: Donations for Philanthropic purposes can earn a deduction under Section 80G over and above the amount of deduction under Section 80C. The minimum and maximum amounts are:

 

80GG: A salaried or self-employed individual staying in a rented house can claim a deduction under this section subject to a maximum of 25% of the total income, or Rs 2000 per month, or excess of rent paid over 10 per cent of total income.

80GGC: Any monetary contribution to any political party or electoral trust is eligible for tax exemption. Thus, your contribution, as a matter of appreciation for their work, will serve both the purposes.

80U: A resident of India suffering from any kind of specified disability is eligible to claim tax deduction under this section upto a maximum amount of Rs 1 lakh subject to the conditions being fulfilled.

Exemptions Under Section 10:

There are various allowances which form a part of the salary of an individual in modern corporate India and since they form a part of the salary, it is a general rule that all the allowances ought to be a part of the total income of the Individual if not particularly exempted.

As per Income Tax Act, there are numerous allowances exempt under section 10 for an individual. The Income Tax Act provides manifold exemptions of tax to each and every individual. Some important exemptions under section 10 of Income Tax Act are mentioned below:

LTA or Leave Travel Allowance: LTA is exempted to an extent intended for just domestic travel under section 10(5) of the Income Tax Act. Moreover, this exemption is just subject to LTA limit specific in the salary of an individual.

Life Insurance: The compensation earnings of life insurance plan or policy is exempt under Section 10(10D). This section incorporates the maturity amount and death claims as well.

Agricultural Income: Agricultural income is completely exempt from tax provided it is the one and only source of earning during the financial year. On the other hand, if it is escorted with income from other resources, it is taxable.

Provident Fund: If any payments are received from PF, then section 10 exemptions are applicable. PF when withdrawn is assessable / taxable for not more than five years of service. Besides this, balance of Employee’s Provident Fund can also be withdrawn and that too because of few certain conditions.

HRA or House Rent Allowance: For an employee, HRA is subject to exemption to the least amount mentioned below:

  • HRA actually received
  • Rent compensated, i.e. 10% of the salary
  • For metro cities ( Mumbai, Kolkata, Chennai, Delhi): 50% of the salary and 40% for rest cities

Education as well as hostel allowances: This education allowance is exempt to Rs. 100 monthly for one child and that also for maximum of just two children in a family. In the same way, hostel allowance is also exempt up to Rs. 300 monthly for one child and that too for maximum of just two children per family.

Gratuity: the amount of gratuity acquired by the Government employee is completely covered under exemptions under Section 10. Moreover, for others which are included under the payment of Gratuity Act, the least of the following is exempted:

  • Salary of 15 days which is on the basis of the very last drawn salary for every year of service
  • The amount of Rs. 10,00,000
  • The definite sum of gratuity received

In case the employee is not covered under the Payment of Gratuity Act, then, the least of the following are exempted:

  • Salary of 15 days for every year of service
  • The amount of Rs. 10, 00, 000
  • The definite sum of gratuity received

Dividends Received: The amount of dividend declared by the company for mutual fund or stock is exempt from tax when it is for an individual.

Interest on Securities: Proceeds from the securities by way of interest or premium from mutual bonds, certificates, or any kind of deposits is completely exempt from tax.

Compensation for voluntary retirement: The maximum amount for voluntary retirement which is exempted from tax is Rs. 5, 00, 000 according to Rule 2BA of IT Act.

Superannuation fund: If any such amount is received / acquired from an official superannuation fund, then it is subject to section 10 exemptions for an individual.

Transport allowance: Another Allowance exempt under section 10 includes transport allowance up to the amount of Rs. 800 which meansRs. 9,600 annually. Transport allowance means the expense which is incurred for the purpose of travel from the place of dwelling to the place of work.

Leave Encashment: A Government employee at the time of retirement receives leave encashment which comes under section 10 exemptions. On the other hand, a non-government employee is subject to the least amount for exemption:

  • No of months x Average Monthly Salary
  • 10 x Average Monthly Salary
  • The actual amount of leave encashment received

Commuted pension: For Government employees, commuted pension is completely exempt. Apart from this for others or non-government employees, this is exempt to smallest amount of the following:

  • If the amount of gratuity is received, i.e. up to 1/3rd of the pension acquired
  • If the amount of gratuity is not received, then half of the pension is acquired