TAX PLANNING

Introduction

Tax Planning involves planning in order to avail all exemptions, deductions and rebates provided
in Act. The Income Tax law itself provides for various methods for Tax Planning, Generally it is
provided under exemptions u/s 10, deductions u/s 80C to 80U and rebates and relief’s. Some of
the provisions are enumerated below :

 Investment in securities provided u/s 10(15) . Interest on such securities is fully exempt
from tax.
 Exemptions u/s 10A, 10B, and 10BA
 Residential Status of the person
 Choice of accounting system
 Choice of organization.

For availing benefits, one should resort to bonafide means by complying with the provisions of
law in letter and in spirit.

Where a person buys a machinery instead of hiring it, he is availing the benefit of depreciation. If
is his exclusive right either to buy or lease it . In the same manner to choice the form of
organization, capital structure, buy or make products are the assesse’s exclusive right. One may
look for various tax incentives in the above said transactions provided in this Act, for reduction
of tax liability. All this transaction involves tax planning.

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

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

Objectives of Tax Planning

 Reduction of Tax Liability: An assessee can save the maximum amount of tax, by properly
arranging his/her operations as per the requirements of the law, within the framework of the
statute.
 Minimization of Litigation: There is a war-like situation between the taxpayers and tax
collectors as the former wants the tax liability to be minimum while the latter attempts to extract
the maximum. So, a proper tax planning aims at conforming to the provisions of the tax law, in
such a way that incidence of litigation is minimized.
 Productive Investment: One of the major objective of tax planning is channelisation of taxable
income to different investment plans. It aims at the optimum utilization of resources for
productive causes and relieving the assessee from tax liability.
 Healthy Growth of Economy: The growth and development of the economy greatly depend on
the growth of its citizens. Tax planning measures involve generating white money that flows
freely and results in the sound progress of the economy.
 Economic Stability: Proper tax planning brings economic stability by various techniques such as
mobilizing resources for national projects or availing ways for investments which are productive
in nature.

Tax Planning follows an honest approach, to achieve maximum benefits of tax laws, by applying
the script and moral of law. Therefore the objectives do not in any way contradict the concept of
tax laws.

Types of Tax Planning

1. Short-range and long-range Tax Planning: The tax planning which is made every year to
arrive at specific or limited objectives, is called short-range tax planning. Conversely, long-range
tax planning alludes to such practices undertaken by the assessee which are not paid off
immediately.
2. Permissive Tax Planning: Tax planning, wherein the planning is made as per expressed
provision of the taxation laws is termed as permissive tax planning.
3. Purposive Tax Planning: Purposive tax planning refers to the tax planning method which
misleads the law. Under this type, there is no expressed provision of the statute.
Tax planning means intelligently applying tax provisions to manage an individual’s affairs, in
order to avail the tax benefits based on the national priorities, in accordance with the interest of
general public and government.

INCOME TAX POLICY

 The Government has tried to achieve social objective of education to masses through
various tax provisions. However, exemption limit for children education allowance is
very meager and has not been revised since A.Y. 1997-98. Further, principal amount of
education loan under Sec. 80E has been disallowed since A.Y. 2006-07. Moreover, only
tuition fee is deductible under Sec. 80C which forms a small portion of total charges by
educational institutions.

 There has been no maximum limit for interest on borrowed capital in case of let out
house property during the study period and deduction limit in case of self-occupied house
property has been Rs. 150000 since A.Y. 2002-03.

 Monetary limit in relation to medical relief under Sections 80D, 80DD, 80DDB and 80U
has been increased from time to time. However, it seems to be very low as compared to
ever increasing actual cost of medical treatment.


 Tax incentives are allowed to individuals and HUFs in respect of specified savings to
channelise them into targeted sectors having a definite impact on growth of the economy.
The Government raised the net qualifying amount to Rs. 100000 under Sec. 88 in A.Y.
2001-02 and replaced tax rebate with deduction under Sec. 80C with effect from A.Y.
2006-07. Scope of Sec. 80C has been widened by adding more modes of savings in it. An
additional saving of Rs. 20000 under Sec. 80CCF has been introduced with effect from
A.Y. 2010-11.

 Government has amended Sec. 80G from time to time during the study period.
  Monetary limit of tax relief to senior citizens and women assesses has been increased
gradually in the form of tax rebate till A.Y. 2005-06 and then in the form of higher tax
exemption limit. It is an appreciable approach for social welfare.

 Agricultural sector, where nearly 70 per cent of country‟s population is engaged is

outside the income tax net under Sec. 10(1). However, agricultural income is taken into
account to determine tax rate on non-agricultural income.

 In order to encourage the employers to generate more employment opportunities, a new

Sec. 80JJAA has been introduced with effect from A.Y. 1999-2000. According to which,
Indian manufacturing company is allowed a special deduction of 30 per cent of
„additional wages‟ paid to „new regular workmen‟ employed during the relevant
previous year.

GROWTH OF INCOME TAX REVENUE IN INDIA

 There is a structural shift in the composition of tax revenue of Central Government in

favour of direct taxes from indirect taxes. The share of total direct taxes increased from
34.68 per cent in 1997-98 to 53.02 per cent in 2007-08, whereas the share of indirect
taxes decreased from 65.32 per cent in 1997-98 to 46.98 per cent in 2007-08.

 Total number of personal income tax assessees increased from 128.57 lakh in 1997-98 to
331.65 lakh in 2007-08 at an EGR of 8.36 per cent. However, assessees having income
„above Rs.10 lakh‟ increased from 0.39 lakh to 2.17 lakh at an EGR of 1.28 per cent
during the corresponding period.

 The percentage share of personal income tax assessees belonging to taxable income
„below Rs. 2 lakh‟ decreased from 95.59 per cent of total assessees in 1997-98 to 86.81
per cent in 2007-08 and share of assessees belonging to taxable income „Rs. 2 lakh -10
lakh‟ increased from 3.96 per cent to 12.5 per cent during the corresponding period.
However, share of assessees having income „above Rs.10 lakh‟ showed a negligible
increase i.e. from 0.30 per cent in 1997-98 to 0.66 in 2007-08.

 Total number of corporate assessees increased from 2.75 lakh in 1997-98 to 4.98 lakh in
2007-08 at an EGR of 4.85 per cent. However, assessees belonging to taxable income
„above Rs.10 lakh‟ increased at a higher rate i.e. from 0.25 lakh in 1997-98 to 0.59 lakh
in 2007-08 by registering EGR of 10.06 per cent.
  Percentage share of corporate assessees belonging to taxable income „below Rs. 50000‟
and „above Rs.10 lakh‟ increased from 58.55 per cent and 9.09 per cent of total assessees
in 1997-98 to 63.45 per cent and 11.85 per cent in 2007-08 respectively, whereas share of
assessees belonging to taxable income „Rs. 50000 -10 lakh‟ decreased from 31.64 per
cent in 1997-98 to 24.30 per cent in 2007-08.

CONCLUSION

A Structured Questionnaire was given to 300 respondents of Surat, Ahmedabad, and Vadodara cities
to know their perceptions regarding Mutual Fund Investment. The following broad conclusions were
drawn: People save in Mutual Funds for different purposes i.e. children education, children
marriage, house construction, retirement planning and tax planning. It was found that main purpose
of savings in Mutual Fund by the respondents was for children education (56.33%) followed by
Retirement Planning (48.33%).Tax planning was given the third priority by the respondents. People
engaged in Business gave the first preference to children education (68.7%) followed by
professionals (58.8%) and then salaried class (53.7%). Professionals gave the first preference to
children marriage (50%), followed by salaried class (41.3%) and retired people (45.5%). Salaried
class gave the first preference to house construction (44.6%) followed by Business people (36.1%)
and professional (29.4%). Retired people gave the first preference to tax planning (47.1%)
followed by salaried (43.8%) and Business people (42.2%). The relationship between
educational qualifications and purpose of savings revealed that the respondents gave priority to
children’s education (56.3%), retirement planning (48.3%) followed by tax planning (40%).
In case of the relationship between monthly income and purpose of savings, a unique trend has
emerged. As the income increases, priority is given to tax planning. Majority of the respondents
gave the first preference to children education followed by retirement planning. If we look at the
relationship between age and purpose of savings, it can be seen that those belonging to the age
group below 40 gave the first priority to children’s education while both the age group 40 to 60
and above 60 gave priority to retirement planning for investment in Mutual Funds.

Savings A/c, Mutual Funds and Insurance are the popular tools of investment by the respondents
of Surat, Ahmedabad and Vadodara cities of Gujarat state. Out of total respondents 71%
respondents gave preference to invest in Mutual Funds, 69% respondents gave preference to
invest in saving A/c, and 65.3% respondents gave the preference to Insurance. In Surat city, the
most popular sources of investment for the respondents are Saving A/c, Insurance, Mutual
Funds, bank/Recurring deposit and PPF and GPF A/c. In Ahmedabad, the most popular sources
of investment for the respondents are saving A/c, Mutual Funds, Insurance, Bank/Recurring
deposit and share market. In Vadodara, the most popular sources of investment for the
respondent are Insurance, Saving A/c, Gold and Silver, Mutual Funds and PPF and GPF A/c.
Respondents do not prefer to invest in Real estate, Post office scheme, Government securities,
Company deposits, debentures, bonds. The factors influencing the selection of Mutual Fund
scheme in Surat are Net Asset Value, High Returns, Repurchase Facility, Reputation of Mutual
Fund, and Market Trends in their order of priority. The influencing factors for selection of
Mutual Fund scheme in Ahmedabad are High Returns, Net Asset Value, Market Trends, Tax
Policy, and Reputation of Mutual Fund in their order of priority.

The influencing factors for selection of Mutual Fund scheme in Vadodara are High Returns, Tax
Policy, Net Asset Value, Repurchase Facility, and Easy Transfer in their order of priority. The
popular sources through which respondents get information about mutual fund are friends,
Brokers, Professional Advisors, Media and Newspaper in Surat and Ahmedabad city. In
Vadodara the first five preferred sources of information are friends, media, newspaper,
colleagues, internet and Brokers. People of Surat and Ahmedabad get the information regarding
Mutual Fund from professionals advisors also while people of Vadodara get the information
from colleagues and internet.

Preference for Mutual Funds schemes based on structure given by respondents of Surat,
Ahmedabad and Vadodara shows that most of respondents (76%) prefer to invest their money in
open ended schemes of Mutual Funds. Preference for Mutual Funds schemes based on objective
by respondents of Surat, Ahmedabad and Vadodara reveals that most of respondent of selected
cities of Gujarat prefer to invest in Growth schemes followed by Income schemes and then Tax
Savings Schemes. Preference for Mutual Funds schemes by the occupation of respondents of
selected cities of Gujarat reveals that Business class, salaried and professionals prefer to invest
their money in Growth fund (65.1%) and followed by Tax saving fund (42.2%) while
housewives prefer to invest their savings in Growth fund followed by income funds. Out of 300
respondents, 97% respondents are interested in SIP. Out of these 97%, 63.7% respondents
already have invested in SIP while 36.3% respondents are eager to invest in SIP .SIP is popular
scheme among mutual funds respondents.

It is seen through X2 test that there is no association between SIP investment and occupation of
the respondents and between SIP investment and income of respondents. But, there exist an
association between SIP investment and education i.e. educated people prefer to invest in SIP
Plan.

According to Garret’s rank technique the main five reasons for investment in mutual funds are
high returns, safety, tax exemption, liquidity and diversification of risk in selected cities of
Gujarat. Fear of frauds, poor timing of investment, portfolio manipulation, lack of investor’s
education and lack of transparency are the main common factors discouraging investment in
Mutual Funds in selected cities in Gujarat. In Surat city, high loading charges and lack of
adequate research infrastructure are the additional factors that discourage investment in mutual
funds, while in Ahmedabad, lack of professional management of funds and reckless