Main Project Last

1
A STUDY ON INVESTMENT AND TAX PLANNING 0F SALARIED

PERSON
A Project Submitted to
University of Mumbai for partial completion of the degree of
Bachelor in commerce (Accounting and Finance)
By
Miss. RUGVEDA HONALKAR
Under the Guidance of
Mrs. Dipali Mehta
Bhartiya Vidya Bhavan’s Hazarimal Somani College of Arts and Science and
Jayaramdas Patel College of Commerce and Management Studies
Chowpatty, Gamdevi.
Mumbai 400007
MARCH,2019
A STUDY ON INVESTMENT AND TAX PLANNING 0F SALARIED PERSON |

2
ABSTRACT
Planning assumed a dominating role towards the close of the twentieth century and
continues with ever expanding horizon in the twenty-first century also. For the economic
development of any country, planning has to be resorted to in order to distribute the economic
resources evenly or on priority basis to better the economic position of the weaker sections of
the society. For the proper implementation of the development programmes, a sound base of
public finance has also to be built up which requires huge revenue and a major part of which
is achieved through the collection of taxes. Raising public revenue through taxation is a
popular policy of an economy and it does not entail any extra burden on the government as in
the case of borrowings. Thus, taxation is considered to be the most effective source of raising
public revenue. The practical concept of taxation law is to realize the maximum revenue, of
course, with in the frame work of law. On the other hand, payment of taxes reduces the
disposable income of the tax payers and imposes a burden on them.
Since tax by definition is a payment without direct quid pro quo, every tax payer wants
to pay the minimum in the form of taxes. Therefore, the modern tax payer is ‘in between the
lines’: whether he has to remain content after what is left by the taxing authorities or whether
there is any scope for him to reduce the incidence of tax to the minimum possible extent. It is
here that tax planning has assumed far - reaching importance in the confounding complexities
of the taxation laws. The planning has proved a saviour of the economic life of the tax payer
who can reduce the incidence of tax to the minimum if he is able to plan his tax affairs
diligently and intelligently.
Tax planning may be defined as an arrangement of one’s financial affairs in such a way
that without violating in any way the legal provisions, full advantage is taken of all
exemptions, deductions, concessions, rebates, allowances and other reliefs or benefits
permitted under the Act so that the burden of taxation, as far as possible, is the least. Tax
planning may, therefore, be regarded as a method of intelligent application of expert
knowledge while planning one’s affairs with a view to securing the consciously provided tax
benefits on the basis of national priorities in keeping with the legislative and judicial opinion.
Tax planning is neither tax evasion nor tax avoidance. It is the scientific planning of one’s
financial affairs in such a way as to attract minimum liability to tax or postponement of the

3
tax liability for the subsequent period by availing of various incentives, concessions,
allowances, rebates and reliefs provided for, in the context of existing tax laws.
The exemptions, deductions, rebates and relief have been provided by the legislature
to achieve certain social and economic goals and to encourage savings and investments for
the economic development of the country. Tax planning is an act with in the four corners of
the Act and it is not a colourable device to avoid the tax. Thus, if a person takes the advantage
of the deductions and rebates, he not only reduces his tax liability, but also helps in achieving
the objectives of the legislature, which is lawful, social and ethical.
Tax planning involves in every case a thorough and up-to-date knowledge of tax laws.
Not only is an up - to - date knowledge of the statute law necessary, but one must also be
aware of the judge-made laws in the form of various decisions of the Courts. One of the best
methods to study tax planning is through the case law. The judgments of the Supreme Courts
and various High Courts reveal instances of successful and unsuccessful tax planning. The
judgments touch up on various provisions of tax laws and their application to different
situations. The question of interpretation of law can also have a bearing on the success or
failure of tax planning. The circulars issued by the Central Board of Direct Taxes from time
to time will be of much use to the tax payers. Moreover, a sound method of tax planning
should be carefully chartered after considering that whatever is done is not only strictly within
the frame work of law but is also in consonance with the legislative intentions and should
sound sensible to any reasonable person.

4
INDEX
Chapter No.1 Introduction.
1) 1.1 Introduction to tax

1.2 Introduction to Tax payer
1.3 Introduction to Tax saving

1.4 Introduction to Tax Planning
1.5 Introduction to Tax Management

1.6 Tax Evasion and Tax Avoidance
1.7 ORIGIN OF – INCOME TAX LAW
1.8 Introduction to Investment

2) Necessity of Tax planning. 16
3) Four Most Common Mistakes Which Tax

Payers Commit: 18
4) Major Deductions in Tax Under Section 80c,
80ccc, 80ccd & 80u of the Income Tax Act. 21
5) 13 Important Changes in Tax Rules from
FY 2018-19 38
6) View on Best Tax Saving Options 46
Chapter No.2 Research Methodology
2.1: Objectives of the Study. 52
2.2: Statement of the problem 53
2.3: Scope of study. 54
2.5 Research Methodology 55

5
Chapter No. 3 Literature Review

Case Study No: 1
Personal Tax Planning 55
Case Study No: 2 68

Tax Planning and Compliance
Case Study No: 2 69

Case study no: 4 70
Willingness to pay tax
Case study no: 4 71
Income Tax Assessment Procedures and Their
Practical Implementations
Chapter No.4 Data Analysis, Interpretation and 72
Presentation.
Chapter No.5 Conclusion and Suggestions 80
Bibliography 91
Annexure

6
Certificate
This is to certify that Ms. Rugveda Uttam Honalkar has worked

and duly completed her/his Project Work for the degree of Bachelor in Commerce
(Accounting & Finance) under the Faculty of Commerce in the subject of
A STUDY ON INVESTMENT AND TAX PLANNING 0F SALARIED PERSON
and her/his project is entitled, “Ms. Dipali Mehta” under my supervision.

I further certify that the entire work has been done by the learner under my guidance
and that no part of it has been submitted previously for any Degree or Diploma of any
University.
It is her/ his own work and facts reported by her/his personal findings and
investigations.
Mrs. Dipali Mehta

7
DECLARATION BY LEARNER
I the undersigned Miss. Rugveda Uttam Honalkar here by, declare that the work embodied
in this project work titled A STUDY ON INVESTMENT AND TAX PLANNING
0F SALARIED PERSON” forms my own contribution to the research work carried out
under the guidance of Ms. Dipali Mehta is a result of my own research work and has not
been previously submitted to any other University for any other Degree/ Diploma to this or
any other University.
Wherever reference has been made to previous works of others, it has been clearly indicated as
such and included in the bibliography.
I, here by further declare that all information of this document has been obtained and presented in
accordance with academic rules and ethical conduct.
Name & signature of the learner
Miss. Rugveda Uttam Honalkar
Certified by,
Mrs. Dipali Mehta

8
ACKNOWLEDGEMENT
To list who all have helped me is difficult because they are so numerous and the depth is so enormous.
I would like to acknowledge the following as being idealistic channels and fresh dimensions in the
completion of this project.
I take this opportunity to think the University of Mumbai for giving me chance to do this project.
I would like to thank my Principal Dr. S. V. Rathod for providing the necessary facilities required for
completion of this project.
I take this opportunity to thank our Co-ordinator Mrs. P. A. Merchant, for her moral support and guidance.
I would also like to express my sincere gratitude towards my project guide Mrs. Deepali Mehta whose
guidance and care made the project successful.
I would like to thank my College Library, for having provided various reference books and magazines
related to my project.
Lastly, I would like to thank each and every person who directly or indirectly helped me in the completion
of the project especially my Parents and Peers who has supported me throughout my project.

9
Chapter No.1: Introduction.
1.1: Introduction to ‘Tax’.
The word tax is derived from the Latin word called ‘Taxo’ means to estimate, appreciate
or value. A tax is a mandatory financial charge or some other type of levy imposed upon a
taxpayer by a government organisation in order to fund various public expenditures. A failure
to pay, along with evasion of or resistance to taxation, is punishable by law. Taxes consist of
direct taxes and indirect taxes and may be paid in money or as its labour equivalent.
Personal income tax is often collected on a pay as you earn basis, with small corrections
made soon after the end of the tax year. These corrections take one or two forms: payments
to the government, for taxpayers who have not paid enough during the tax year; and tax
refunds from the government to those who have overpaid. Income-tax systems will often have
deductions available that lessen the total tax liability by reducing total taxable income. They
may allow losses from one type of income to count against taxes paid on wages. Other tax
systems may isolate the loss, such that business losses can only be deducted against business
tax by carrying forward the loss to later tax payers.
1.1.1: Types of taxes
➢ Taxes on income
The government levy income taxes on personal and business revenue and interest
income. In addition to income taxes, the government can also mandate that employers
subtract payroll taxes from their workers’ pay checks each pay period, and then match the
sums deducted. Capital gain taxes are those paid on any profits made from the sale of an asset
and are usually applied to stock and bond transactions. Estate taxes are imposed on the transfer
of property upon the death of the owner.
➢ Taxes on property
Property tax, sometimes known as an ad valorem tax, is imposed on the value of real
estate or other personal property. Property taxes are usually imposed by local governments
and charged on a recurring basis. Real estate taxes are often subject to fluctuation based upon
a jurisdiction’s assessment of the worth of a property based on its condition, location and
market value, and/or changes to the amounts apportioned to various recipients of the tax.

10
➢ Taxes on goods and services
The sales tax is most often used as a method for states and local governments to raise
revenue. Purchases made at the retail level are assessed a percentage of the sales price of a
particular item. Rates vary between jurisdictions and the type of item bought. Excise taxes are
based on the quantity of an item and not on its value. User fees are taxes that are assessed on
a wide variety of services, including airline tickets, rental cars, toll roads, utilities, hotel
rooms, licenses, financial transactions and many others. So-called sin taxes are imposed on
items like cigarettes and alcohol. Luxury taxes are imposed on certain items, such as
expensive cars or jewellery.
1.2: Introduction: Tax Payer.
A taxpayer is a person or organization (such as a company) subject to pay a tax.

Taxpayers have an Identification Number, a reference number issued by a government to its
citizens.
The term taxpayer generally describes one who pays taxes. A taxpayer is an individual
or entity that is obligated to make payments to municipal or government taxation
agencies. Taxes can exist in the form of income taxes and property taxes imposed on owners
of real property (such as homes and vehicles), along with many other forms. Most adults are
taxpayers. Virtually every human being is a taxpayer at some point. People pay taxes when
they pay for goods and services, which are taxed. The term taxpayer often refers to the
workforce of a country who pays for government projects through taxation. The taxpayers'
money is part of the public funds, which are all money spent or invested by government to
satisfy individual or collective needs or to create future benefits. For tax purposes, business
entities are also taxpayers, which means their revenues and expenditures are subject to
taxation.
1.2.1: Types of Tax Payers
Taxpayers can be classified into two major categories – individual and corporation. A
corporation is a legal entity that is separate from the owners for tax purposes. These major
categories can be further divided in different subcategories.

11
Individual taxpayers can be classified as either a citizen or an alien (an alien is a person
who resides within the borders of a country and is not a national of that country). A citizen
can further be classified as either a resident citizen or a non-resident citizen.
Corporations can be classified into domestic, foreign and partnership. A foreign

corporation is either resident foreign or non-resident foreign corporation. A resident foreign
corporation is a foreign corporation engaged in trade or business in the country. A non-
resident foreign corporation is a foreign corporation not engaged in trade or business within
the country but deriving income from sources in the country. A partnership is a business
structure where ownership and management responsibility of a company is split between two
or more individuals. A partnership is not a legal entity that is separate from the owners and
therefore the partnership itself does not pay taxes.
1.3: Tax Saving
Tax savings means that you pay a reduced amount of taxes, either because a particular
type of investment income is taxed at a low rate or not at all, or because only a portion of the
investment income is taxable. Most municipal bonds produce tax savings for their owners
because their interest is not subject to federal income tax and may also be exempt from state
and local taxes. Likewise, real estate investments can produce substantial tax-deductible
expenses (such as mortgage interest, depreciation, and maintenance) that offset income and
ultimately result in tax savings. Many other investments offer the opportunity to earn capital
gains which can be subject to special low tax rates.
The Income-tax Act, 1961 has various sections taxpayers can use to reduce their tax
outgo every year. And the most common sections in the Act that people use to save on tax
are 80C, 80D, 80CCD (1B), and 24 (b). However, each of these sections come with a
maximum investment amount set by the government. Therefore, based on the tax rate of the
individual - 5 percent, 20 percent and 30 percent (excluding cess of 4 percent) - the
maximum tax saved will be limited.
1.4: Tax planning for an individual.
In other words, all arrangements by which the tax is saved by ways and means, which
comply with the legal obligation and requirements and are not the sprite behind these, would
constitute tax planning. Tax planning should not be done with an assesses could be legally
correct, yet on the whole these transactions may be devised to defraud the revenue. All such

12
devices where status is followed in strict words but actually spirit behind the statue is married
would be termed as colourable devices and they do not form part of the tax planning. All
according with the true spirit of statue and should be correct in form and substance.
The form and substance of a transaction is real test of any tax-planning device. The
form of transaction, as it appears superficially and the real intention behind such transaction
may remain concealed. Substance of a transaction refers to intention of parties behind the
transaction.
Tax planning is the arrangement of one’s affairs in such a manner that the tax planner
may either reduce the incident of tax wholly or reduce it to maximum possible extent as may
be permissible within the framework of the taxation land. It does not amount to evasion of
tax. It is an act of prudence and farsightedness on the part of the taxpayer who is entitle to
reduce the burden of his tax liability to the maximum possible extent under the existing law.
Tax planning ensures not only accruals of tax benefit with in the four corners of law, but it
also ensures that the tax obligations are properly discharged to avoid penal provision.
In India, there are a number of tax saving options for all taxpayers. These options allow
for a wide range of exemptions and deductions that help in limiting the overall tax liability.
The deductions are available from sections 80C through section 80U and can be claimed by
eligible taxpayers. These deductions are made against the quantum of tax liabilities. There are
various other sections under the Income Tax Act, 1961 that can reduce your tax liabilities such
as exemptions and tax credits. When tax planning is done inside the frameworks defined by
the respective authorities, it is fully legal and in fact a smart decision. However, using shady
techniques to avoid tax payments is illegal and you may get into trouble for doing so. Tax
saving practices include tax avoidance, tax evasion and tax planning. Out of these tax planning
is the only legal manner of reducing your tax liabilities. The government offers the different
opportunities to save on taxes with the intention of reducing tax burden on a taxpayer through
legal income tax planning methods.
1.4.1: Types of Tax Planning:
• Purposive tax planning: Planning taxes with a particular objective in mind
• Permissive tax planning: Tax planning that is under the framework of law

13
• Long range and Short-range tax planning: Planning done at the start and end of a fiscal year
respectively.
1.4.2: Planning Tool for Salaried Person.
1. Salary Restructuring
Restructuring your salary may not always be possible. But if your company permits, or if you
are on good terms with your HR department, restructuring a few components could reduce
your tax liability.
2.Utilizing Section 80C

Section 80C offers a maximum deduction of up to Rs. 1,00,000. Utilize this section to the
fullest by investing in any of the available investment options. A few of the options are as
follows:
· Public Provident Fund
· Life Insurance Premium
· National Savings Certificate
· Equity Linked Savings Scheme
· 5-year fixed deposits with banks and post office
3. Options beyond 80C

If you have exhausted your limit of Rs. 1,00,000 under section 80C, here are a few more
options:
· Section 80D - Deduction of Rs. 25,000 for medical insurance of self, spouse and dependent
children and Rs.50,000 for medical insurance of parents above 60 years
· Section 80G- Donations to specified funds or charitable institutions.
4. House Rent Allowance
Well, this will only work if you are salaried. The amount of deduction under this head will
depend of factors like Rent paid and your HRA component in salary.
You have to actually pay rent to claim this deduction.

14
You cannot own a house and claim this deduction unless the house and your place of
employment is in different cities.
5. Tax Saving from Home Loans
Use your home loan efficiently to save more tax. The principal component of your loan, is
included under Section 80C, offering a deduction up to Rs. 1,00,000. The interest portion
offers a deduction up to Rs. 1,50,000 separately under Section 24.
6. Leave Travel Allowance

Use your Leave Travel Allowance for your holidays, which is available twice in a block of
four years. In case you have been unable to claim the benefit in a particular four- year block,
you could now carry forward one journey to the succeeding block and claim it in the first
calendar year of that block. Thus, you may be eligible for three exemptions in that block.
7. Tax on Bonus
A bonus from your employer is fully taxable in the year in which you receive it. However,
request your employer for the following:
· If you anticipate tax rates to be reduced or slabs to be modified in the subsequent year, see
if you could push the bonus payment to the subsequent year
· Produce your tax investment details well before, to prevent your employer from deducting
tax on bonus before handing it over
8. HUF Creation:
HUF is considered as a separate entity which has its own PAN No and is therefore taxed
separately. This helps to separate tax obligations of an individual from that of his family. Tax
slabs of HUF are same as that of an individual, and qualify for all the tax benefits under
Section 80C, 80D, 80G, 80L and so on. It also enjoys exemptions under Section 54 and 54F
with respect to capital gains. The HUF is also entitled to claim deduction for interest on self-
occupied house property of Rs. 2, 00,000 in a year as per section 24 of the Income-tax Act.
9. Buy House with Parent or Siblings as joint-owners: -
You can have your spouse/parent/siblings as co-owner and all the co-owners can claims the
tax deductions of 1 lac for principal and 2 lacs for interest part. So, if you take a housing loan

15
with your siblings as co-owner of property and co-Borrower of loan, the loan amount interest
and principle paid will be available for tax exemption in ratio of your loan amount.
1.5: Introduction to Tax Management:
Tax management is an internal part of the tax planning. It takes necessary precautions
to comply with the legal formalities to avail the tax exemption/ deductions, rebates or relief
as are contempt’s in the scheme of tax planning. Tax management plays a vital role in calming
allowance, deductions and tax exemptions by complying with the required conditions. For
example, where an assesses follows mercantile system of accounting, the claim of expenses
should be made, subject to the provisions of section 43B, on accrual bases, if the assesses fails
to make such a claim, such expenses cannot be deducted in subsequent years. Similarly, the
specified deductions under section 80IA, section 80JJA, etc., cannot be allowed by the
assessing officer. Tax management also protects an assesses against penalty and prosecution
by discharging tax obligations in time. Thus, the study of tax planning is incomplete without
tax management. Tax planning without the study of tax management is like knowing the
medicine without knowing how to administer it.
Tax management means, the management of finances, for the purpose of paying tax.
✓ The objective of Tax Management is to comply with the provisions of Income Tax Law and
its allied rules
✓ Tax Management deals with filing of Return in time, getting the accounts audited, deducting
tax at source etc.
✓ Tax Management relates to Past, Present, Future.
Past – Assessment Proceedings, Appeals, Revisions etc.
Present – Filing of Return, payment of advance tax etc.
Future – To take corrective action
✓ Tax Management helps in avoiding payment of interest, penalty, prosecution.
✓ Tax Management is essential for every assesses.

16
1.6: Tax evasion and tax avoidance:
Tax is a source of revenue for a government of a country, through which it endeavours

to provide better infrastructure, standard of living and security to its inhabitants. However,
these taxes can at times come in the way of subjective development of individuals or a
company and further push these individuals and large business houses to contemplate a way
to avoid the same by using loopholes in the laws and guidelines that govern the taxes.
Indian government has always been proactive in closing and fixing loopholes in the tax laws
and its structure through budget, amendments, guidelines and treaties with various countries.
However, government in this regard is always two steps behind the large business houses in
India, which are well equipped with up to date intellectuals, who know how to manipulate tax
rates, loopholes in laws, deductions and sometimes trade relations with other countries, in
order to decrease the burden of tax that is levied on their company without breaking any law.
These large business houses are able to structure the most complex and elaborate tax
avoidance strategies, thereby causing great deal of loss to government revenue worldwide.
According to a paper by Alex Cobham & Petr Janský, (Cobham, 2018) each year globally,
around INR 50,000 crores worth of government revenue is lost due to tax avoidance by big
business houses. Reliance India Limited, Tata Industries, Vodafone, Google, etc. are some of
the examples of large business houses that function in India and who have successfully
mastered the art of tax avoidance.
1.6.1: Tax Evasion.
It refers to a situation where a person tries to reduce his tax liability by deliberately
suppressing the income or by inflating the expenditure showing the income lower than the
actual income and resorting to various types of deliberate manipulations. An assesses guilty
of tax evasion is punishable under the relevant law. Tax evasion may involve stating an untrue
statement knowingly, submitting misleading documents, suppression of facts, not maintaining
proper accounts of income earned (if required under the law) omission of material facts in
assessments. An assesses, who dishonestly claims the benefit under the statute by making
false statements, would be guilty of tax evasion.

17
1.6.2: Tax avoidance.
The line of demarcation between tax planning and tax avoidance is very thin and
blurred. There could be element of mollified motive involved in the tax avoidance also. Any
planning which, through done strictly according to legal requirements defeats the basic
intention of the legislature behind the statute could be termed as instance of tax avoidance. It
is usually done by adjusting the affair in such a manner the there is no infringement of taxation
laws and b taking full advantage of the loopholes there in so as to attract the least incidence
of tax.
1.6.3: How tax avoidance is different from tax planning and tax evasion?
There is a thin line of distinction between tax avoidance and tax planning, both of them
are completely legal in the eyes of law. Tax planning is something which is expected from a
taxpayer and tax avoidance is something which is beyond the expectation of the government
(Batra, 2014). For example, there are certain provisions of Income Tax Act 1961, which a
taxpayer can optimally utilize and reduce his/her tax liability through deductions under
Section 10, Section 80C, and Section 80U, Section 37 etc., in order to effectively conduct tax
planning. On the other hand, a company shifting its Intellectual property to a country with
reduced tax rates than India is one of the examples of effective tax avoidance. (Chawla, 2017).
On the other hand, tax evasion is completely illegal and is not at all encouraged by any
government, unlike tax planning and avoidance. Tax evasion is outright stealing and involves
breaking of law. The common example of tax evasion is undisclosed income in cash which
was found stashed in many houses in India during the demonetization drive in November,
2016. Cash that was rendered not legal and was undisclosed wealth which was accumulated
by individuals by evading taxes.
1.6.4: How is it done?
Big business houses in India utilize many strategies in order to avoid tax. There is a
huge role of tax havens and subsidiaries in these strategies.
The term ‘tax haven’ is a country that offers foreign individuals and businesses a
minimal tax liability in a politically and economically stable environment, with little or no
financial information shared with foreign tax authorities.

18
The term ‘subsidiary’ is a company with stock that is more than 50% controlled by
another company, which is usually referred to as the parent company or the holding company.
Movement of assets, shares, deals and money from India to these tax havens through
subsidiaries is the most favoured and advantageous strategy amongst big business houses in
India. Since 2005, many Indian and foreign companies that are set up in India have been using
tax havens and subsidiaries in order to avoid tax. We will discuss the strategies used by these
large corporations in order to avoid tax, in depth below.
1.7: ORIGIN OF – INCOME TAX LAW
The term Income tax was first introduced in India on 31st July 1860 by the British
Government for five years to overcome the financial difficulties experienced by the
Government. The act imposing the tax was modelled on the English Act. This act was revived
in 1867 in the form of “License Tax” that tax is imposed on trades and profession based on
annual income. This license tax was replaced by “Certificate Tax” in the year 1868. In the
year 1886 a new Act was passed whose basic scheme has been preserved in all subsequent
enactments. This act on Income Tax imposed tax on income at flat rate and the Agriculture
income was excluded. During the First World War the expenditure of the Government has
increased and hence graduated scale of Income Tax was introduced in 1916.In 1918, a new
Income Tax Act was passed repeating all previous acts. It brought about drastic changes in
the manner of computation of income and levy of tax. Income from all sources was to be
aggregated and the tax was levied on the aggregate income in the year itself. This act remained
in force up to the year of 1922. Many defects were noticed in the practice of this act. So, it
was felt necessary to amend the act. Government of India appointed All India Tax Enquiry
Committee (AITEC) to suggest suitable remedies for improving and effective implementation
of the act. His on the recommendations of the committee, the act of 1918 was replaced by the
Income Tax Act 1922 which remained in force for forty years. Under this act administration
of Income Tax was vested in the hands of Central Government. This act was modelled on the
lines of the British Income Tax act. It introduced changes in the method of assessment and
collection of taxes. It is provided that the assessment of tax would be determined by the
Finance Act, which would be passed by the parliament before 31st March every year instead
of being fixed by the Income Tax Act. Apart from that, as a result of this Act the Central

19
Board of Revenue [CBR] was established in 1924. The Income Tax Act 1922 was materially
revived by the Income Tax (Amendment) Act, 1939. This act was passed based on the
recommendations of the Income Tax committee. The classification of residential status into
resident, Not -ordinarily resident, non-resident was introduced only by this Amendment Act.
The scheme of “Advance payment of Tax” was introduced by the Income Tax (Amendment)
Act, 1944. In 1948 the scheme of provisional assessment was introduced. To simplify the Act
of 1922 which become complicated as a result of too many amendments between 1939 and
1956, the law commission was appointed in 1956. Apart from that, Government of India
invited Professor Nicholas Koldor, a distinguished professor of Economics of Cambridge
University to review the existing Indian Income Tax system. After reviving the structure, a
report called “The Indian Tax Reforms” in the 1957.His report paved the way for introduction
of an annual wealth act, capital gain tax etc, to minimize the inconveniences caused by the
assesses the Direct Taxes Administrative Enquiry Committee was set up 1958 under the
chairmanship of Mahabir Tyagi. The present law of income tax is contained in the income tax
year 1961 as amended up to date almost every year. This act contains nearly sections. The
provisions regarding computation of total income, procedure for assessment, appeal,
penalties, prosecution, refund powers of Income Tax authorities etc. are governed by this Act.
Every year the parliament passes a finance act. This finance act introduces amendment of
direct tax laws. The rates of income tax for a current assessment year, rates for reduction of
tax at source and advance payment tax for the said financial year are fixed by this Finance
Act.
According to the current Income Tax Act -2017
Taxes levied by the Government are of two types- Direct taxes and Indirect taxes.
Indirect taxes are those that are levied on services and goods. Direct taxes, on the other hand,
are levied on profits and income. For example, service tax that you pay in a restaurant is an
indirect tax whereas Income Tax that is deducted from your salary every month in the form
of TDS is an example of direct tax.
Income Tax refers to a percentage of your income that you are liable to pay directly to
the government. The money collected by this direct tax route is used by the Government for
infrastructural developments and also to pay the employees of central and state government
bodies.

20
Income Tax Act of India, passed in 1961, governs the provisions for income tax as
well as the various deductions that are applicable to it. However, since 1961, the law has been
amended several times to take care of inflation and other socio-economic situations.
If you fall in any of the following criteria, then you are required to file income tax return:
• If you are less than 60 years of age and your total annual gross income exceeds Rs. 2,50,000.
• If you are a senior citizen i.e. 60 years or above and below 80 years of age, and your total annual
gross income exceeds Rs3,00,000.
• If you are a super senior citizen i.e. 80 years or above and your total annual gross income
exceeds Rs5,00,000.
• If you are a company or a firm, then irrespective of whether you have profit or loss, filing ITR
for the financial year is a must.
• If you are looking forward to claiming a tax refund for the financial year.
• If you are an Indian resident and act as a signing authority for any foreign account.
• If you are an Indian resident and possess an asset or financial interest located outside India.
• If you have sold equity shares in a company or unit of equity oriented mutual funds or unit of
business trust for more than Rs.2,50,000 and have gained tax-exempt long-term capital gains
from the same.
• If you receive any income derived from the sale of a property which had been held under a
charitable trust, religious trust, political party, educational institution, any authority, body or
trust.
• If you are a foreign company which has been taking any treaty benefit on any transaction made
in India.
• If you are an NRI (Non-Resident Indian) but if your total annual gross income earned or accrued
in India exceeds Rs2,50,000.
• Even if you do not fall into any of the above criteria but are looking forward to avail any kind
of loan, then you should file ITR. ITR filings are taken as valid income proofs and are often
asked while opting for any kind of loan.

21
• If you do not file an ITR even after falling into any of the above criteria, you are subjected to
respective penalties for the default
Income Tax Rates for taxpayers under 60 years of age in FY 2018-2019 and FY 2017-2018
Income Slab Tax Rate
Up to Rs.2,50,000 No Tax
Rs.2,50,000 - Rs.5,00,000 5%
Rs.5,00,000 - Rs.10,00,000 20%
Rs.10,00,000 and beyond 30%
1.8 Introduction to Investment
To invest is to allocate money in the expectation of some benefit in the future.
In finance, the benefit from investment is called a return. The return may consist of a profit
from the sale of property or an investment, or investment income
including dividends, interest, rental income etc., or a combination of the two. The projected
economic return is the appropriately discounted value of the future returns.
Investors generally expect higher returns from riskier investments. When we make a low risk
investment, the return is also generally low.
Investors, particularly novices, are often advised to adopt a particular investment

strategy and diversify their portfolio. Diversification has the statistical effect of reducing
overall risk.
1.8.1 Investment strategies
A value investor buys assets that they believe to be undervalued (and sells overvalued ones).
To identify undervalued securities, a value investor uses analysis of the financial reports of
the issuer to evaluate the security. Value investors employ accounting ratios, such as earnings
per share and sales growth, to identify securities trading at prices below their worth.

22
Warren Buffett and Benjamin Graham are notable examples of value investors. Graham
and Dodd's seminal work, Security Analysis, was written in the wake of the Wall Street Crash
of 1929.[2]
The price to earnings ratio (P/E), or earnings multiple, is a particularly significant and
recognized fundamental ratio, with a function of dividing the share price of stock, by
its earnings per share. This will provide the value representing the sum investors are prepared
to expend for each dollar of company earnings. This ratio is an important aspect, due to its
capacity as measurement for the comparison of valuations of various companies. A stock with
a lower P/E ratio will cost less per share than one with a higher P/E, taking into account the
same level of financial performance; therefore, it essentially means a low P/E is the preferred
option.[3]
An instance in which the price to earnings ratio has a lesser significance is when companies
in different industries are compared. For example, although it is reasonable for a
telecommunications stock to show a P/E in the low teens, in the case of hi-tech stock, a P/E
in the 40s range is not unusual. When making comparisons, the P/E ratio can give you a
refined view of a particular stock valuation.
For investors paying for each dollar of a company's earnings, the P/E ratio is a significant
indicator, but the price-to-book ratio (P/B) is also a reliable indication of how much investors
are willing to spend on each dollar of company assets. In the process of the P/B ratio, the share
price of a stock is divided by its net assets; any intangibles, such as goodwill, are not taken
into account. It is a crucial factor of the price-to-book ratio, due to it indicating the actual
payment for tangible assets and not the more difficult valuation of intangibles. Accordingly,
the P/B could be considered a comparatively conservative metric.
1.8.2 Famous investors
Investors famous for their success include Warren Buffett. In the March 2013 edition
of Forbes magazine, Warren Buffett ranked number 2 in their Forbes 400 list.[4] Buffett has
advised in numerous articles and interviews that a good investment strategy is long-term
and due diligence is the key to investing in the right assets.
Edward O. Thorp was a highly successful hedge fund manager in the 1970s and 1980s who
spoke of a similar approach.

23
The investment principles of both of these investors have points in common with the Kelly
criterion for money management. Numerous interactive calculators which use the Kelly
criterion can be found online.
Introduction Part 2:
Necessity of Tax planning.

Whether your investment objective is to preserve your wealth, provide an income or generate
capital growth, for the most effective results you need to protect your capital and income from
being eroded by taxation. Many investors pay more tax than strictly necessary because they
have not structured their investable assets in the most tax efficient way.
While the tax tail should not necessarily wag the investment dog, you should always talk to a
wealth manager like Blevins Franks to establish what your options are so you can make the
most informed decision. It does not make sense to buy investments one way and pay a high
tax on them if you could h\old them another way with a lower tax liability.
We believe that tax planning is a fundamental part of investment planning and your general
wealth management. At the end of the day what matters is after tax returns. You should not
tackle investment planning without tax planning or tax planning without investment planning.
The two are inextricably linked and your adviser should provide both investment and tax
expertise.
There are various benefits to strategic tax planning.
It can reduce income and capital gains tax on your savings, investments and pensions. Many
people pay more tax than necessary, such as income tax on bank interest they are not even
withdrawing and capital gains tax when switching between investments.
The less tax you pay, the more you have to spend or save for your future or to leave to your
heirs.
You may be able to lower the inheritance tax liability for your heirs.
Tax planning may also make life easier for your heirs. Many of the investment arrangements
we recommend to our clients allow you to fill in a beneficiary nomination form so your assets
should pass directly to your chosen beneficiaries without the need to go through probate.

24
Advance tax planning is important if you are a British expatriate moving back to the UK.
There may be steps you can take now to make your investments tax efficient when you return.
It is fairly easy to get DIY tax planning wrong, especially with the goalposts changing all the
time, and you (or your heirs) may end up with an unexpected tax bill, or worse, facing a tax
investigation. Taking professional advice will give you peace of mind that your tax planning
is correct and legitimate and that you are not leaving your family any tax headaches.
Wealth management advice is more important than ever before if you want to protect and
grow your wealth; legitimately mitigate the amount of tax you pay; control when and where
you pay tax and ensure your wealth is distributed on your death according to your wishes and
as tax efficiently as possible.
You have worked hard to build up your current wealth, much of it accumulated out of post-
tax income. Now do not risk losing any more to tax than you have to. At Blevins Franks we
combine effective tax planning strategies with investment advice to maximise your wealth
preservation opportunities.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based
upon our understanding of current taxation laws and practices which are subject to change.
Tax information has been summarised; an individual must take personalised advice.

25
Four Most Common Mistakes Which Tax Payers Commit:
A: Procrastination
The root of all mistakes in tax planning — procrastination, which eventually leads to merely
tax saving, rather than optimally planning for your taxes. Your haste often gets you to forget
or ignore the other facets of financial planning such as your age, income, ability to take risks
and prioritising financial goals.
Reasons for Procrastination:
While it’s possible to file your taxes months in advance, it’s commonplace to procrastinate
and not get to the task until the last minute—increasing the chances of making mistakes and
overpaying while you’re at it. According to surveys, tax procrastinators have been known to
overpay by hundreds due to mistakes that came as a result of rushing the process and making
last minute changes, and they fork over roughly double the amount that early filers pay just
to get their taxes done. Understandably, procrastinators are also much less comfortable with
their often-frantic filing methods they’re forced to employ as the clock is ticking.
There are many benefits to filing early, starting with that it would shorten our misery and just
get the whole thing over with. Also, many people expect to get a refund, and whether it’s $5
or $5,000, that’s money you’d have sooner in your pocket rather than in the government’s
coffers.
To get to the heart of why people put off completing their taxes, we need to understand what
causes the more generic, run-of-the-mill procrastination. There are five basic reasons why we
procrastinate. Perhaps there are more, but we'll get to that some other time.
1. No obvious penalties. Many people procrastinate for the simple reason that they’ve gotten
away with it in the past. The government doesn’t care whether you file early or not, so if you
get your return in just before the deadline there’s no harm, no foul. Not officially anyway. But
doing your taxes at the last minute is likely to lead to mistakes, and mistakes can lead to an
ugly audit, which includes the possibility of very real penalties.
2. Excuses, excuses, excuses. You can always justify procrastination by blaming the
circumstances. Excuses tend to be of the self-serving variety, and if other people engaged in

26
the same procrastination as you, you’d be sceptical if not downright convinced that they were
fudging the truth. Things are different when it’s you who is making the excuses. Self-serving
biases fall into the general category that psychologists call the “fundamental attribution error.”
Through this process we’re blinded to our own flaws and forgive ourselves for all sorts of
mistakes and imperfections, including tardiness, with any number of excuses conveniently
helping the cause.
3. Perfectionism. Though seeking perfection may seem like a desirable quality, it can actually
leave people incapable of moving forward on high-stakes tasks, such as doing their taxes. For
perfectionists, the fear of making a huge goof—paying too much, or screwing up so badly
you’ll wind up in serious legal trouble—can be paralyzing. People with a strong need to have
everything just so may have all the work on their taxes done months ahead of the deadline,
but put off filing because they want to make sure they haven’t made any errors. They may
also wait in hopes that they’ll find a new angle that will save them money. In the meantime,
the tax process is torturing them, and the government is holding onto a refund that could
already be in the perfectionist’s bank account.
4. Waiting = excitement. Originally developed by DePaul psychologist Joseph Ferrari, the

concept of “arousal procrastination” was originally met with scepticism. However, a 2011
study of college students (procrastinators par excellence) revealed that for certain individuals,
procrastination produces the “kickstart” needed to put them in high gear. Researchers found
that undergraduates high on the quality of extraversion (outgoingness) were more likely to fit
into this pattern of procrastination. Extroverts, by definition, seek stimulation from outside of
themselves. Waiting until the last possible moment to tend to an important task can actually
give these people a powerful emotional high.
5. Grace under pressure? Hardly. Plenty of people operate under the misconception left
over from their school days: a totally irrational and unfounded theory that they do their very
best work when a deadline is rapidly approaching. The majority of people are actually less
effective and more prone to making mistakes if they wait until the last minute, but myths
learned in the past are hard to correct. Our faulty memories of the past lead us to remember
the times we came through in glory racing through the finish line. We tend to gloss over the
times when we embarrassingly tripped or failed to finish the race, though.

27
B: Buying unnecessary insurance products for tax saving
If you do a dipstick survey, nearly 100% of taxpayers would have bought life insurance. The
irony is that nine out of 10 of these buyers would have bought insurance for the wrong
reason: to save tax. Despite efforts by financial experts and the media to spread awareness
about the importance of insurance as a protection tool, insurance continues to be seen as a
tax-saving device. Indeed, the January-March quarter is the busiest for insurance distributors
because 70% of their business gets transacted during that period. But this is also the period
when taxpayers make the mistake of buying insurance for tax savings. In the process, they
end up with high-cost policies they don’t need. Here are three reasons why insurance is a
bad choice as a tax saving instrument:
Requires multi-year commitment

Tax saving investments under Section 80C are no different from regular investments so one
should apply the same parameters to assess them. Insurance is a long-term contract that
requires a multi-year financial commitment. An individual’s priorities change over time.
Suppose a taxpayer takes a home loan to buy a house 2-3 years later. A large chunk of his
Section 80C limit will be taken care of by the home loan principal repayment. But the
insurance premium will force him to continue putting money in the policy even though he
doesn’t need to make tax saving investments.
Higher costs, lower returns

Many other investment options under Section 80C offer better returns than insurance at a
lower cost. The PPF and Sukanya Samriddhi Yojana have no costs at all, while ELSS
mutual funds charge only 2-2.5% and offer far better returns than insurance policies that
yield barely 5-6%. The low yield from insurance is largely due to the higher costs that go
into paying commissions to brokers. More importantly, options such as ELSS, Sukanya and
PPF offer flexibility of investment wherein the buyer can in can invest at any time of the
year and any amount that suits his pocket.

28
Tax deduction is not core

The tax deduction offered on life insurance is not the core objective of the policy. A term
plan of Rs 1 crore can help safeguard the financial future of the family if something
untoward happens to the breadwinner. For a 35-year-old man, the premium for such a plan
is only Rs 10,000-12,000 a year. On this the tax savings in the highest tax bracket work out
to only Rs to only Rs 3,000-3,600. Buyers should not even take this insignificant amount
into consideration when they buy protection for themselves.
C: Power of compounding through tax saving mutual funds
The key aspect of compounding is that it generates earnings on the previous earnings along
with the base capital. The point is to build a large base which keeps on adding to the previous
earnings. If you have INR 1 lakh invested as an initial investment which is compounded at 10
percent per annum for the following 15 years, you will have a base of INR 4,17,725. This is
how compounding creates a cycle of earnings that keep growing. As an investor, keep in mind
that the pivotal point of compounding is that the earnings generated by the investment should
be reinvested. One must not at any point withdraw or take the returns. This withdrawing of
earnings will not let the base of the investment to grow.
How does Compounding occur in Mutual Funds?
Mutual funds are designed in such a manner that they harness the power of compounding. As
an investor, you will make gains when the value of each unit of investment goes up. When
you make investments over a long period of time, the benefit of compounding helps you grow
your investment. This is particularly the case in mutual funds because the money that is
generated in the form of capital gains is reinvested to create additional returns.
You may choose to invest INR 1000 every month in a mutual fund for the next 10 years and
at a rate of 8 percent per annum. So, you will notice that your investment of INR 1,20,000 in
10 years’ time gave you a return of INR 1,82,946. Now if you choose to invest it further for
say another 10 years, the money now reinvested will grow even faster and give you INR
3,94,967. This is the special thing about compounding where the existing investment, along
with the returns on this investment and the new investment each month, all contribute towards
further gains.

29
If there was no compound interest, your total investment of ₹5 lakh would have earned you
₹50,000 at 10% interest. The difference made by compounding is worth ₹1,71,561 in the
above example. That’s almost 3.43 times more than you have earned.
What are the Key rules of Investment that enable Compounding?
a. Make an early start
Nothing like starting early to make the most of compounding. If you start investing from the
time you start earning, it will make for a solid base that will enable your funds to grow further
over the course of time.
b. Discipline
If you wish to create a healthy portfolio, it is imperative that you define your priorities and be
regular in your investments. Regardless of how less you earn, knowing what your priority is
and understanding how being disciplined now would pay off later, will help you develop the
habit to keep funds aside for investing.
c. Be patient
A lot of us wish for quick returns not realizing that it is the long-term investments that really
powerfully reap from the concept of compounding. You will have to allow your investment
to grow at its own pace without meddling with it. Years of dedicated investment on your part
will render a strong and healthy lump sum amount for you at the end.
d. Check your spending
Saving is a habit that all of us must inculcate but more important than that is knowing where
to spend your money. It is not a difficult chore to develop a plan and then focus on it.
Budgeting is important to ensure that you are never caught off guard and that you have the
means to fend for yourself. If you spend wisely, you will reap well.
How much should I Invest to achieve financial goals?
There are calculators available online where you can easily evaluate how much money you
would require saving if you wish to reach a certain target. The tools available online give you

30
the specific figures based on how much time you want to compound for, the rate of interest
offered, etc.
To know more about where you can invest to meet your financial goals, visit Clear Tax and
choose from our select offerings of funds.
D: Failing to optimise all available options for tax saving
For many, tax planning starts as well as ends with Section 80C of Income-tax Act, 1961-
which enunciates investment instruments for tax saving. But investing only in these
investment instruments would not lead to optimal reduction of your tax liability.
Therefore, look beyond Section 80C and avail for most of the tax saving investment
opportunities possible.
NPS
The Government of India (GOI) launched the National Pension System for individuals in May
of 2009. Under the NPS, each Subscriber will open an account with Central Recordkeeping
Agency (CRA) which will be identified through unique Permanent Retirement Account
Number (PRAN).
The NPS offers you additional tax deduction for the investment up to Rs. 50,000 in under
subsection 80CCD (1B). This is over and above the deduction of Rs. 1.5 lakh available under
sec 80C of Income Tax Act. 1961. Returns would depend on the asset class that you choose.
For example, you could select equity, which is a high-risk instrument or corporate debt or
government debt.
Rajiv Gandhi Equity Savings Scheme (Section 80CG)
Under this scheme individuals can invest up to Rs 50,000 in approved stocks. The tax benefits
are available under Sec 80CG. However, only first-time investors are allowed to invest in this
scheme to claim tax benefits.
This scheme has not taken off, since being introduced during the UPA regime. There were
reports that there might be an overhaul of the scheme, but nothing has come through. A
scheme that has risks associated with stock market investment. The scheme since being

31
launched has never taken off and one is not sure on the reasons for the same. It has also not
been promoted aggressively and not many investors know of this as a tax saving scheme.
In any case the amount of Rs 50,000 is too small.
Interest on education loan (Section 80E)
The deduction is allowed only on the interest repayment part, not on the principal amount of
education loan. Means that only interest repayment is available for tax deduction while filing
income tax return.
This deduction is over and above the 80C limit and there is no maximum limit on claiming
deduction under 80E. Not many are aware of the scheme, and one needs to educate people
more on this section and its benefits.
It is better parents take the loan on behalf of the children, in case the child is not taxable. This
way they can save on taxes.
House rent allowance (Section 80GG)
If you are staying in a rented apartment or house and paying rent, you can claim tax deduction
under Sec 80GG of the Income Tax Act.
The amount of deduction is based on the city that you are residing. Again, some cities need
to be revamped to factor in an increased rental in this city, but that has not happened so far.
More details and exact break-up cannot be sought from your company, so it is best talking to
the HR department on the exact tax benefits that you would get. Home Loans In the Union
Budget last year, Finance Minister Arun Jaitley increased the limit on deduction on home loan
interest under Section 24 to Rs 2 lakhs from Rs 1.5 lakhs earlier. An additional deduction of
Rs 50,000 on home loan interest can be claimed starting financial year 2016-17 under Sec
80EE of the Income Tax Act. However, to be able to claim this deduction, you must meet
certain conditions. The principal amount continues to be a part of the overall benefits under
Sec 80C. The principal amount also was hiked to Rs 1.5 lakh from the earlier limit of Rs 1
lakh.
Health Insurance (Section 80D)
Individuals should take a health insurance policy, which would enable them save tax up to
Rs 25,000 in case of ordinary citizens and Rs 30,000 in case of senior citizens. So, one can go

32
ahead and take a good health insurance policy. This is again a tax option that you have apart
from the usual 80C benefits. The Sec 80D benefits also include the benefits on expenses
incurred towards preventive health check-ups. Apart from the tax benefit, it is important to
remember that a health insurance coverage is a must for individuals.
Donations (Section 80G)
Section 80G of income tax law provides tax benefits on amount donated to NGO's. So, it may
be time to be a little more generous than before. However, the deduction can be made only if
you are donating by cash or draft. The deduction can be either 50 per cent or 100 per cent.
You have to claim this deduction when filing you tax returns and quoting of PAN number to
the institution where you donated is a must. There is an entire list of institutions and
establishments where you can donate.
Medical treatment under Sec 80DDB
For certain specific diseases, Income Tax Act offers tax benefits to an individual under section
80DDB on the basis of expenses incurred by him for the treatment of such diseases or ailment.
This is not only for the person filing the tax returns, but, also for individuals’ dependents of
such an individual. However, this tax benefit is not available for Non-Resident Indians. In
case it is a Hindu Undivided Family one can claim it for members of such a HUF.

33
Major Deductions in Tax Under Section 80c, 80ccc, 80ccd & 80u of the
Income Tax Act.
A: SECTION 80C – QUALIFIED SAVINGS
DEDUCTION IN RESPECT OF LIFE INSURANCE PREMIA, ETC. (SEC. 80C)
Conditions
(i) Assesses must be an individual or HUF.
Amount of Deduction: Amount of deduction is the least of the following: The gross qualifying
amount; or
(ii) Notified amount i.e. Rs1.5 lac.
Gross qualifying amount: it is aggregate of the following:
(a) Life insurance premium paid by Government employee to Central Government Employees
Insurance, Scheme and payment made by a person under children deferred endowment
assurance policy.
Important points
• Total annual premium should not exceed
o 20% of total sum assured if policy is issued before 01.04.2012
o 10% total sum assured if policy is issued on or after 01.04.2012' However, where the policy,
issued on or after the 1st day of April 2013, is for insurance on life of any person, who is:
o a person with disability or a person with severe disability as referred to in section 80U, or
o suffering from disease or ailment as specified in the rules made under section 80DDB,
Then annual premium should not exceed "fifteen per cent".
• Where assesses is an individual, policy can be taken on his own life, life of
spouse or any child. Such child may be dependent or independent, male or
female, minor or major and married or unmarried.

34
• Where assesses is Hindu Undivided Family, policy may be taken on life of
any member of the family.
Minimum period of holding should be 2 years.
(b) Payment in respect of non-commutable deferred annuity.
Important Point
• Such plan may be taken in the name of individual or spouse or any child of
such individual.
(c) Any sum deducted from salary payable by Government employee for the
purpose of deferred annuity.
Important Point
• Such plan may be for the benefit of individual or his spouse or children.
(d) Contribution towards statutory or general provident fund (SPF/GPF) and recognized
provident fund (RPF).
(e) Contribution towards 15 years Public Provident Fund, (PPF).
Important Points
• According to Public Provident Fund (PPF) scheme and Income tax Act, 1961 assesses may
open PPF account in his own name or in the name of spouse or child.
• Minimum amount should not be less than 2500 and maximum amount 1,00,000 per annum.
(f) Contribution towards approved superannuation fund.
(g) Subscription to National Saving Certificate (NSC).
Important Point
• Accrued interest is deemed to be reinvested and is also qualified for deduction for first five
years.
(h) Contribution for participation in Unit Linked Insurance Plan (ULIP) of Unit Trust of India.

35
Important Points
• If assesses is an individual, ULIP can be in the name of assesses or his spouse or any child.
Such child may be dependent or independent, male or female, minor or major and married or
unmarried.
• Where assesses is Hindu Undivided Family, ULIP in the name of assesses or his life of any
member of the family.
• Minimum period of holding should be 5 years.
(1) Contribution for participation in Unit Linked Insurance Plan (ULIP) of LIC Mutual Fund
(earlier known as Dharamshala plan of LIC Mutual Fund). Important Points
• If assesses is an individual, ULIP can be taken on his own life, life of spouse or any child.
Such child may be dependent or independent, male or female, minor or major and married or
unmarried.
• Where assesses is Hindu Undivided Family, ULIP may be taken on life of any member of the
family.
• Minimum period of holding should be 5 years.
(j) Payment for notified Annuity Plan of LIC (commonly known as New Jeevan Dhara, New
Jeevan Akshay, New Jeevan Akshay I, New Jeevan Akshay New Jeevan Akshay III) or any
other insurer.
(k) Subscription towards notified units of Mutual Fund or Unit Trust of India.
(l) contribution to notified pension fund set up Mutual Fund or Unit Trust of India (that is
retirement benefit pension fund of UTI).
(m) Any sum paid as subscription to Home Loan Account Scheme of National Housing bank
or contribution towards any notified pension fund set up by the National Housing bank.
However, the sum also includes the accrued interest.
(n) any sum paid as subscription to any scheme of:
• public sector company engaged in providing long-term finance for purchase or construction
of residential houses in India (that is Public Deposit Scheme of HUDCO).

36
• Housing board constituted in India for the purpose of planning, development for
improvement of cities or towns.
(o) any sum paid as tuition fees weather at the time of admission or later on to any university
or college or educational institution in India for full time education of any two children of the
assesses.
• it does not include any payment to words development fee, donation or payment of some other
major.
• fee must be paid for full time education in India.
• full time education includes any educational course offered by any university, college, school
or other educational institution to a student who is enrolled full time for the said course. It
also includes play school activities, prenursery and nursery classes.
• the amount allowable as tuition fee shall include any payment coffee to any university College
school or any other educational institution in India except the amount representing payment
in the nature of development fees for donation or capitation fees for payment of similar nature.
(p) any payment towards cost of purchase or construction of a residential property. It also
includes repayment of loan taken from Government, Bank, cooperative Bank, LIC, National
Housing Bank, assesses employer which can be public company, public sector company,
University and Cooperative Society.
Such payment may be made towards:
• any instalment or part payment of the amount due under any self-financing or other scheme
of any development authority, housing board or other authority engaged in the construction
and sale of house property on ownership basis; or
• any instalment or part payment of the amount due to any company or Co-operative society of
which the assesses is a shareholder or member towards the cost of house property allotted to
him; or
• Repayment of the amount borrowed by the assesses from:
- The Central Government or any State Government, or
- Any •hank, including a Co-operative bank, or

37
- The Life Insurance Corporation, or
- The National Housing Bank, or
• Any public company formed and registered in India with the main object of carrying on the
business of providing long-term finance for construction or purchase of houses in India for
residential purposes which is eligible for deduction under clause (viii) of subsection (1) of
section 36, or
• Any company in which the public is substantially interested or any cooperative Society,
which such company or cooperative Society is engaged in business of financing the
construction of houses, or
• the assesses employer where such employer is a public company or a public sector company
or a university established by law or a college affiliated to start university or a local authority
or a cooperative society;
• the assesses employer we are searching ploy is an authority or a board or a corporation or any
other body established or constituted under a Central or state act.
• Stamp duty, registration fee and other expenses for the purpose of transfer of such house
property to the assesses.
• Minimum period of holding should be five years.
(q) amount invested in approved debentures of, and equity shares in a public sector company
engaged in infrastructure including power sector units of the mutual fund, proceeds of which
are utilised for developing, maintaining, etc, off a new infrastructure facility.
(r) amount deposited as term deposit for a period of five years or more in accordance with
government scheme.
(s) subscription to any notified bonds of National Bank for Agriculture and Rural
Development (NABARD).
(t) amount deposited under Senior Citizens Saving Scheme.
(u) amount deposited in Five-Year Time Deposit Scheme in the post office.

38
(v) any sum paid or deposited in Sukanya Samridhi Account Scheme in the case of an
individual, in the name of that individual for any girl child of that individual, or any girl child
for home search person is the legal guardian.
B: SECTION 80CCC- DEDUCTION IN RESPECT OF PENSION FUND
Background for deduction under Section 80C of the Income Tax Act (India) / What are
eligible investments for Section 80C:
Section 80C replaces the Section 88 with more or less same investment mix available in
Section 88. The new section 80C has become effective w.e.f. 1st April, 2006. Even the
section 80CCC on pension scheme contributions was merged with the above Section
80C. However, this new section has allowed a major change in the method of providing the
tax benefit. Section 80C of the Income Tax Act allows certain investments and expenditure
to be tax-exempt. One must plan investments well and spread it out across the various
instruments specified under this section to avail maximum tax benefit. Unlike Section 88,
there are no sub-limits and is irrespective of how much you earn and under which tax bracket
you fall.
The Maximum limit of deduction under section 80C is Rs 1.50 lakh from Financial year 2014-
15 / Assessment Year 2015-16. Before FY 2014-15 the limit was Rs. 1 Lakh. Under this
heading many small savings schemes like NSC, PPF and other pension plans. Payment of life
insurance premiums and investment in specified government infrastructure bonds are also
eligible for deduction under Section 80C.
Most of the Income Tax payee try to save tax by saving under Section 80C of the Income Tax
Act. However, it is important to know the Section in toto so that one can make best use of the
options available for exemption under income tax Act. One important point to note here is
that one can not only save tax by undertaking the specified investments, but some expenditure
which you normally incur can also give you the tax exemptions.
Besides these investments, the payments towards the principal amount of your home loan are
also eligible for an income deduction. Education expense of children is increasing by the day.
Under this section, there is provision that makes payments towards the education fees for
children eligible for an income deduction

39
Section 80C of the Income Tax Act is the section that deals with these tax breaks. It states that
qualifying investments, up to a maximum of Rs. 1.50 Lakh, are deductible from your income.
This means that your income gets reduced by this investment amount (up to Rs. 1.50 Lakh),
and you end up paying no tax on it at all!
This benefit is available to everyone, irrespective of their income levels. Thus, if you are in
the highest tax bracket of 30%, and you invest the full Rs. 1.50 Lakh, you save tax of Rs.
45,000. Isn’t this great? So, let’s understand the qualifying investments first.
Investments Qualifying for deduction under section 80C
Provident Fund (PF) & Voluntary Provident Fund (VPF):
PF is automatically deducted from your salary. Both you and your employer contribute to it.
While employer’s contribution is exempt from tax, your contribution (i.e., employee’s
contribution) is counted towards section 80C investments. You also have the option to
contribute additional amounts through voluntary contributions (VPF). Interest is tax-free.
Public Provident Fund (PPF):
Among all the assured returns small saving schemes, Public Provident Fund (PPF) is one of
the best. Interest is Compounded Yearly and the normal maturity period is 15 years. Minimum
amount of contribution is Rs 500 and maximum is Rs 1,50,000. A point worth noting is that
interest rate is assured but not fixed. Read more-
Life Insurance Premiums:
Any amount that you pay towards life insurance premium for yourself, your spouse or your
children can also be included in Section 80C deduction. Please note that life insurance
premium paid by you for your parents (father / mother / both) or your in-laws is not eligible
for deduction under section 80C. If you are paying premium for more than one insurance
policy, all the premiums can be included. It is not necessary to have the insurance policy from
Life Insurance Corporation (LIC) – even insurance bought from private players can be
considered here.

40
Equity Linked Savings Scheme (ELSS):
There are some mutual fund (MF) schemes specially created for offering you tax savings, and
these are called Equity Linked Savings Scheme, or ELSS. The investments that you make in
ELSS are eligible for deduction under Sec 80C. Read
Home Loan Principal Repayment:
The Equated Monthly Instalments (EMI) that you pay every month to repay your home loan
consists of two components – Principal and Interest. The principal component of the EMI
qualifies for deduction under Sec 80C. Even the interest component can save you significant
income tax – but that would be under Section 24 of the Income Tax Act.
Stamp Duty and Registration Charges for a home:
The amount you pay as stamp duty when you buy a house, and the amount you pay for the
registration of the documents of the house can be claimed as deduction under section 80C in
the year of purchase of the house.
Sukanya Samriddhi Account: Sukanya Samridhi Account’ can be opened at any time from
the birth of a girl child till she attains the age of 10 years, with a minimum deposit of Rs 1000.
A maximum of Rs 1.5 lakh can be deposited during the financial year. Interest on this account
is fully exempt from tax in the year of accrual as well as in the year of receipt. Sukanya
Samriddhi Account meaning Girl Child Prosperity Scheme is a special deposit scheme
launched by Prime Minister Narendra Modi on 22 January 2015 for girl child. The scheme of
Sukanya Samriddhi Account came into effect via notification of Ministry of Finance. The
notification details are Notification No. G.S.R.863(E) Dated 02.12.2014. Scheme will be
governed by ‘Sukanya Samriddhi Account Rules, 2014’.
Per girl child only single account is allowed. Parents can open this account for maximum two
girl child. In case of twins this facility will be extended to third child
Minimum deposit amount for this account is ₹ 1,000/- and maximum is ₹ 1,50,000/- per year
Money to be deposited for 14 years in this account.
Interest is calculated on yearly basis, Yearly compounded.
Passbook facility is available with Sukanya Samriddhi account.

41
National Savings Certificate (NSC) (VIII Issue):
NSC is a time-tested tax saving instrument with a maturity period of Five and Ten
Years. Interest is Compounded Half Yearly. While the minimum investment amount is Rs
100, there is no maximum amount. Premature withdrawals are permitted only in specific
circumstances such as death of the holder. Investments in NSC are eligible for a deduction of
up to Rs 150,000 p.a. under Section 80C. Furthermore, the accrued interest which is deemed
to be reinvested qualifies for deduction under Section 80C. However, the interest income is
chargeable to tax in the year in which it accrues.
Infrastructure Bonds: These are also popularly called Infra Bonds. These are issued by
infrastructure companies, and not the government. The amount that you invest in these bonds
can also be included in Sec 80C deductions.
Pension Funds – Section 80CCC: This section – Sec 80CCC – stipulates that an investment
in pension funds is eligible for deduction from your income. Section 80CCC investment limit
is clubbed with the limit of Section 80C – it means that the total deduction available for
80CCC and 80C is Rs. 1.50 Lakh. This also means that your investment in pension funds up
to Rs. 1.50 Lakh can be claimed as deduction u/s 80CCC. However, as mentioned earlier, the
total deduction u/s 80C and 80CCC cannot exceed Rs. 1.50 Lakh.
5-Yr bank fixed deposits (FDs):
Tax-saving fixed deposits (FDs) of scheduled banks with tenure of 5 years are also entitled
for section 80C deduction.
Senior Citizen Savings Scheme 2004 (SCSS): A recent addition to section 80C list, Senior
Citizen Savings Scheme (SCSS) is the most lucrative scheme among all the small savings
schemes but is meant only for senior citizens. Interest Senior Citizen Savings Scheme 2004 is
payable quarterly instead of compounded quarterly. Thus, unclaimed interest on these
deposits won’t earn any further interest. Interest income is chargeable to tax.
The account may be opened by an individual,
Who has attained age of 60 years or above on the date of opening of the account?

42
Who has attained the age 55 years or more but less than 60 years and has retired under a
Voluntary Retirement Scheme or a Special Voluntary Retirement Scheme on the date of
opening of the account within three months from the date of retirement?
No age limit for the retired personnel of Defence services provided they fulfil other specified
conditions.
5-Yr post office time deposit (POTD) scheme:
POTDs are similar to bank fixed deposits. Although available for varying time duration like
one year, two-year, three year and five year, only 5-Yr post-office time deposit (POTD)
qualifies for tax saving under section 80C. Interest is compounded quarterly but paid annually.
The Interest is entirely taxable.
NABARD rural bonds:
There are two types of Bonds issued by NABARD (National Bank for Agriculture and Rural
Development): NABARD Rural Bonds and Bhavishya Nirman Bonds (BNB). Out of these
two, only NABARD Rural Bonds qualify under section 80C.
Unit linked Insurance Plan:
ULIP stands for Unit linked Saving Schemes. ULIPs cover Life insurance with benefits of
equity investments. They have attracted the attention of investors and tax-savers not only
because they help us save tax but they also perform well to give decent returns in the long-
term.
Others: Apart from the major avenues listed above, there are some other things, like
children’s education expense (for which you need receipts), that can be claimed as deductions
under Section 80C.
So, where should you invest?
Like most other things in personal finance, the answer varies from person to person. But the
following can be the broad principles:
Provident Fund: This is deducted compulsorily, and there is no running away from it! So, this
has to be the first. Also, apart from saving tax now, it builds a long term, tax-free retirement
corpus for you.

43
Home Loan Principal:
If you are paying the EMI for a home loan, this one is automatic too! So, it comes as a close
second.
Life Insurance Premiums:
Every earning person having dependents should have adequate life insurance coverage. (For
more on this, please read “Life after life – Why you should buy Life Insurance”) Therefore,
life insurance premium payments are the next.
Voluntary Provident Fund (VPF) / Public Provident Fund (PPF):
If you think that the PF being deducted from your salary is not enough, you should invest
some more in VPF, or in PPF.
Equity Linked Savings Scheme (ELSS):
After the above, if you have not reached the limit of Rs. 1,50,000, then you should invest the
remaining amount in Equity Linked Savings Scheme (ELSS).
Equities provide the best, inflation-beating return in the long term, and should be a part of
everyone’s portfolio. After all, what can be better than something that gives great return and
helps save tax at the same time?
When to Invest for 80C deduction?
Many of us start looking for investment avenues only in February or March, just before the
Financial Year is getting over. This is a big mistake! One, you would end up investing your
money without putting proper thought to it. And secondly, you would end up losing the
interest / appreciation for the whole year. Instead, decide where you want to make the
investments, and start investing right from the beginning of the financial year – from April.
This way, you would not only make informed decisions, but would also earn the interest for
the full year from April to March.

44
13 Important Changes in Tax Rules from FY 2018-19
Every budget makes some changes to tax laws every year and Budget 2018 was no different.
We must be aware of these changes and plan our taxes and investments accordingly. Below
are the 13 changes that Budget 2018 made and all of these would be applicable from April 1,
2018:
1. Reintroduction of Standard Deduction
Budget 2018 has introduced standard deduction of Rs 40,000 for salaried tax payers. The good
thing is this would be applicable for pensioners too. This deduction can be availed without
submission of any proofs.
2. Transport Allowance & Medical Reimbursement no more Tax free
With introduction of standard deduction, the Transport Allowance & Medical Reimbursement
would no longer be tax free. Currently the transport allowance was tax free up to Rs 19,200
and medical reimbursement up to Rs 15,000. Net of these allowances and introduction of
standard deduction salaried tax payers have additional tax exemption of only Rs 5,800.
3. Cess on Taxes hiked to 4% (Health and Education Cess)
There has been NO change in the income tax slabs in Budget 2018. However, from FY 2018-
19 the existing cess of 3% (Education, Secondary and Higher Education Cess) has been
increased to 4% and named as Health and Education Cess.
4. Reintroduction of Long-term capital gains tax on stocks and equity based mutual
funds
Budget 2018 has reintroduced long term capital gains tax of 10%+cess (i.e. 10.4%) on gains
made of sale of equity or equity oriented mutual funds. To qualify for long term capital gains
the stocks/mutual fund should have been held for at least 1 year. The good news is capital
gains up to Rs 1 lakh is tax free.

45
5. Dividend distribution tax on Equity mutual funds
Starting FY 2018-19 the dividends from equity mutual funds would attract dividend
distribution tax of 10%. However, the dividend received would be tax free in hands of
investor. This is mainly to equate dividend and growth plans of equity mutual funds.
6. Increased tax exemption on interest income for senior citizens (80TTB)
Budget 2018 has introduced a new section 80TTB according to which senior citizens would
be able to claim interest income up to Rs 50,000 as tax exempted income. However, if you
take benefit u/s 80TTB then you cannot claim tax benefit on interest received on savings bank
account u/s 80TTA.
7. TDS limit on interest income increased for senior citizens u/s 194A
There is TDS (tax deduction at source) for almost all kind of income. However, as a relief to
senior citizens Budget 2018 has raised the limit for TDS on interest income from Rs 10,000
to Rs 50,000. So, TDS would only be applicable for senior citizens if the annual interest
income from a bank/post office is more than Rs 50,000.
8. Tax deduction for Single Premium Health Insurance Premium
In case assesses buy single premium health/medical insurance policy covering multiple years,
the tax exemption u/s 80D would be available proportionately for all the years. For e.g. if you
pay Rs 1,00,000 premium for a health policy covering for 5 years, you can claim Rs 20,000
tax exemption every year for 5 years subject to limits.
9. Increased deduction for medical insurance premium u/s 80D for senior citizens
The Medical Insurance premium and the preventive health check-up limit for senior citizens
under section 80D has been increased from Rs 30,000 to Rs 50,000. This is good news in
keeping with the ever-increasing health care and related insurance costs.
10. Increased deduction for medical treatment u/s 80DDB for senior citizens

46
The deduction for medical treatment of specified critical illnesses have been increased to Rs
1 Lakh. Earlier the limit was Rs 60,000 for senior citizens and Rs 80,000 for very senior
citizens. Following illness are covered under section 80DDB:
• Neurological Diseases
• Parkinson’s Disease
• Malignant Cancers
• AIDS
• Chronic Renal failure
• Haemophilia
• Thalassaemia
11. Long Term Capital Gains Bond only eligible for capital gains from property
From FY 2018-19, the long-term capital gains tax exemption by investing in long term
capital gains bond from specified companies (NHAI, REC or PFC) u/s 54EC would only be
available for capital gains from sale of property including land, residential or commercial
building. Until this year these bonds could be used for capital gains arising from sale of any
asset.
12. Long Term Capital Gains Bond maturity increased to 5 Years
The maturity period for Long Term Capital Gains Bond has been increased from 3 years to
5 years. This would make these bonds less attractive. Remember the interest rate is just
5.75% and the interest received is fully taxable.
13. Extension of Partial Tax-exemption on NPS withdrawal to self-employed
Until now 40% of NPS corpus on withdrawal was tax exempted for employees. However,
from FY 2018-19 this benefit has been extended to all NPS accounts.
The above changes would be applicable for the FY 2018-19. So, make a note of the above
and plan your investments and taxes accordingly.

47
View on Best Tax Saving Options
At the end of this study, we can say that given the rising standards of Indian individuals and
upward economy of the country, prudent tax planning beforehand is must for all the citizens
to make the most of their incomes. However, the mix of tax saving instruments, planning
horizon would depend on an individual’s total taxable income and age in the particular
financial year. Further concluding with the view on best tax saving options for salaried
persons:
1) EPF/VPF (Employee Provident Fund)

➢ EPF is mandatory for salaried employees working for companies with more than 20
employees
➢ Under EPF rules, you need to contribute 12% of your Basic pay + DA to EPF
➢ The employer matches this EPF contribution
➢ You have option to put up to 100% of Basic pay + DA to EPF. This is known as
Voluntary Provident Fund (VPF)
➢ The employer is NOT required to match your VPF contribution.
Merits:
• The interest earned on EPF/VPF is Tax Free
• Can take loan against EPF and also do partial withdrawal under certain conditions
• Convenient to invest as the amount is directly deducted from salary.
Demerits:
• Money is locked till your retirement
• The EPF interest rates are market linked and set by EPFO every year
• This option is only for salaried employees
• The withdrawal of EPF takes time
2) PPF (Public Provident Fund)

➢ PPF can be opened at Post Offices, 24 Nationalized Banks and ICICI Bank Has
mandatory locking of 15 Years and can be extended further 5 years at a time
➢ Maximum Investment Allowed: Rs 1.5 Lakh per Year (Budget 2014 increased this
limit)

48
➢ Minimum Investment of Rs 500 required every year to keep the account active
➢ Interest Rates paid on PPF are market linked onward hence would vary every quarter.
Merits
• The interest earned on PPF is Tax Free
• After opening the PPF account, investment can be done online every Year (for some banks)
• Can take loan against PPF and also do partial withdrawal
• It cannot be attached by court orders
• Highest Safety – backed by Govt. of India
Demerits
• Longer Locking period
• The PPF interest rates are market linked and hence would change every quarter
• HUFs and NRIs cannot open PPF Account
3) Sukanya Samridhi Account (SSA)

➢ Sukanya Samridhi Account is a new scheme by Government to promote all round
development of Girl Child
➢ Can only be opened for Girl child below 10 years of age (max for 2 girl children by a
parent)
➢ Deposit to the account to be made for 14 years and account matures at 21 years from
date of opening
➢ Maximum Investment Allowed: Rs 1.5 Lakh per Year per account
➢ Minimum Investment of Rs 1,000 required every year to keep the account active
➢ Interest Rates paid are market linked & is reset every quarter.
Merits
• The interest earned on SSA is Tax Free
• 50% withdrawal allowed when girl turns 18 for marriage/higher education
• Investment can be done online
Demerits
• Longer Locking period
• The SSA interest rates are market linked and hence would change every quarter
• HUFs and NRIs cannot open SSA Account

49
4) NSC (National Saving Certificate)

• NSC is Tax saving Fixed Deposit Scheme from India Post
• It is available for 5 years (NSC VIII) – 10 Year NSC has been discontinued from 2016
• The interest is market linked and changes every quarter.
• There is no maximum limit for investment in NSC but the ded1uction is only till
maximum of Rs 1.5 Lakh u/s 80C
• You can buy NSC in denominations of Rs 100, 500, 1000, 5000 and 10000
Merits
• NSCs can be kept as collateral security to get loan from banks
• No Tax deduction at source
• The interest accrued for NSC qualifies for Sec 80C deduction in subsequent years
Demerits
• The interest earned is taxable
• You need to go to post office to invest and redeem. There is no online investment/
redemption facility
• Trust and HUF cannot invest
5) Tax Saving FD from Banks/ Post Offices

• These are like normal Fixed Deposit with banks but is labelled as “Tax Saving FD”
while making the deposit
• Has minimum tenure of 5 Years. Some banks offer special schemes for longer tenures
with higher interest rates
• Some banks offer 0.25% to 0.50% additional interest for Senior Citizens and their
employees
• As of today, banks are offering 6.5% -7.5% for general public and additional 0.25% -
0.5% for Senior Citizens
Merits
• Convenient to invest. Many banks offer online facility for Tax Saving FD
• Redemption on maturity comes directly to your bank account
• High Safety - FD up to Rs1 Lakh is insured by RBI

50
Demerits
• The interest earned is taxable
• Cannot be withdrawn prematurely
• Cannot be pledged to secure loan or as security
6) Senior Citizens Savings Scheme (SCSS)

• As the name suggests, SCSS is for senior citizens who are 60 years or above on the date
of opening of the account. Also, people with 55 years of age who have retired by VRS can
open SCSS after 3 months of retirement
• Minimum Investment: Rs 1,000 while Maximum Investment: Rs 15 Lakhs ❖ The joint
account can be opened only with your spouse. There is no age limit applicable for the joint
account holder
• The interest is paid out quarterly.
• No partial withdrawal is permitted before 5 years. The account may be extended for a
further period of 3 Years
Merits
• The interest is paid quarterly to the saving account, hence can serve as regular income for
retired
• Redemption on maturity comes directly to your bank account or through post-dated
cheques
• The SCSS carries a sovereign guarantee for principal and interest payments. So, it’s the
safest investment
Demerits
• The interest from SCSS is taxable
• Bank would deduct TDS if the total interest in a year is over Rs 10,000
• NRIs and HUF are not eligible to open an account
7) Life Insurance
• The only product you should consider from Life Insurance companies is – Term Plan
• The sum assured on death should be at least 10 times the annual premium
• This limit is altered only in special cases of disability (the premium should be 15% or
less of sum assured)

51
• Buy insurance only if you have dependents.! Do not buy insurance to save tax! There
are plenty of better ways to save taxes
8) National Pension Scheme (NPS)

• NPS was introduced in April 2009 and has two types of Accounts –Tier 1 and Tier 2
• Tier 2 account is optional and only contribution to Tier 1 account is eligible for Tax
Deduction u/s 80CCD
• Tier- 1 account requires a minimum investment of Rs 1,000 annually and Rs 500 per
transaction
• Salaried employees can claim deduction up to 10% of your salary, which comprises
basic + DA, while for self-employed its capped capped at 20% of gross total income.
Merits
• This is lowest cost Pension plan in the country
• You can choose your investment profile based on your risk. NPS can invest maximum of
50% in selected stocks.
• On death the entire amount is paid to the nominee.
Demerits
• NPS is partially taxable at withdrawal
• The locking is till you are 60 years of age
• You can withdraw max of 60% at maturity and have to compulsorily buy annuity for min
40% corpus
9) Equity Linked Saving Scheme
• ELSS is popularly known as Tax Saving Mutual Fund
• The minimum investment is Rs 500
• There is no limit for maximum investment but the maximum deduction you get 1.5
Lakhs every year
Merits
• Only investment option which can beat inflation
• Has the shortest locking period of 3 years
• ELSS can be bought and redeemed online
Demerits

52
• The returns are dependent on stock market. So, its high-risk investment. You might lose
money at the end of 3 years
Chapter no.2: Research Methodology.
2.1: Objectives of the Study.
The study was conducted with the following objectives:
1. To review the tax reforms being introduced by the Government in respect of Income Tax
Laws and ascertain its impact on the salaried class.
2. To assess the efficiency of the administrative machinery for collection of income tax and
management of taxation matters as per the Income Tax Act.
3. To understand and evaluate the tax planning measures being adopted by the salaried class
of the State.
4. To assess whether there is significant differences in the tax planning measures adopted by
different segments of the salaried class of the State, based on level of income and type of
organisation.
5. To ascertain the level of awareness of the salaried class on various tax planning measures
available under the Income Tax Act.
6. To analyse the impact of tax planning on savings habits and investment pattern of the
assesses belonging to the salaried class.

53
2.2: Statement of the problem.

The salaried employees constitute a sizable class of taxpayers who contribute to the
total revenue collection by way of income tax. Their income is assessed under the head
“Salaries”. Tax planning has assumed special importance for the salaried class of tax payers
in view of the mounting pressures of inflation, price hike and their strict obligations to tax
compliance. It is, therefore, essential for this class of tax payers to know their tax obligations
in the right perspective and the measures of tax planning available to them so that they can
make the best use of their earnings by reducing the incidence of tax. Thorough and up-to-date
knowledge of the tax laws is necessary to avail the benefits provided under the provisions of
the Act and thereby ensuring that the ‘take home pay’ is kept at the maximum possible
monetary level. However, efforts from the part of the assesses to plan his savings and
investments so as to minimise the tax incidence is not up to the mark. There are numerous
reasons for this ranging from lack of awareness of taxation laws to complexities in the
compliance formalities. The administrative machinery for collection and enforcement of taxes
is often complex in terms of maintenance and operations. Tax planning is possible through
appropriate savings and wise investment decisions. Tax payers normally turn away of their
tax liability only towards the end of the financial year. This leaves them with little option to
invest or save with the available income. The real issue would relate to having awareness on
the numerous provisions that would help in reducing the tax liability. The key issue is
awareness about the income tax provisions as well as awareness about investment
opportunities. Investment comes in the form of physical assets and financial assets with
varying yields. The complete understanding on the opportunities available and managing
one’s finance considering tax liability and post-tax cost are crucial as far as personal finance
is concerned. Planning for the future so as to enhance returns and minimise tax commitments
would form part of financial decision making. These issues are more complex when it comes
to the salaried class with a stabilized income inflow. The current study is an effort to evaluate
the tax planning measures adopted by the salaried income tax assesses of the State in the light
of tax administration measures being implemented by the Government.

54
All the relevant information for the study has been obtained from the representative
samples of the salaried section and without referring to any records. As the study is for current
and also short period, those data seen to reliable.
2.3: Scope of study.
Taxation is considered as a complex matter affecting financial planning of each

individual income tax assesses. The scope of the present study is limited to the tax planning
measures adopted by the salaried income tax assesses. The study also evaluates the extent of
awareness of employees on tax laws and tax planning measures. The savings habits,
investment pattern, repayment of liabilities, tax planning measures adopted for the period
under study and the level of awareness of employees on tax laws and tax planning measures
were studied and evaluated.

55
2.5: Research methodology.
It deals with the definition of Research Problem, Research Design, Methods of Data
collection, Sampling Design and Interpretation of Data.
In pursuance of the objectives identified and hypotheses formulated, the following

methodology was adopted to conduct the study.
2.4.1 Phase 1: Search for Available Literature
There had been numerous studies on the direct tax system in India in the back drop of
taxation reforms and administrative issues. Various studies have been conducted on taxation
and its various aspects by the individual scholars, research organizations, State Governments
and Government of India spanning over a period of nearly six decades. These studies
discussed the defects in the existing tax system and outlined the need for further reforms in
Indian tax structure. However, studies relating to personal income tax in terms of tax planning
measures related to income are few. Every effort was made to gather all available literature
relating to personal income tax planning, personal income tax reforms and direct tax
administration from different sources: - journals, books, web sites, theses etc.
2.4.2 Phase 2: Collection of Secondary Data
The study is analytical as well as descriptive in nature. It makes use of both primary
data and secondary data. Secondary data for the study was collected from the circulars and
notifications of Central Board of Direct Taxes and Reserve Bank India Bulletin. Books,
journals, online websites and news paper reports also form part of the secondary data.
2.4.3 Phase 3: Collection of Primary Data
Primary data was collected through a structured questionnaire to collect information

relating to savings behaviour, investment pattern and tax planning measures adopted by the
salaried class income tax assesses. A pilot study was conducted on fifty respondents test the
original questionnaire and based on their responses final questionnaire was framed.

56
2.4.4 Phase 4: Sampling Design
Salaried class income tax assesses working in the city of Mumbai constituted the
population for the study. Purposive sampling method was adopted to select the sample size.
Fifty respondents each from the service, employee and professional constituted the total
sample size. Out of the fifty sample respondents selected from the Mumbai city, twenty-eight
respondents working as employee, sixteen respondents working in service sector and five
respondents working as professional.
SERVICE EMPLOYEE PROFFESIONAL

16 28 5

57
Chapter No.3: Literature Review
Case Study No: 1
Personal Tax Planning – Report Submitted to Prof. Vinay Kumar Dutta
What is Tax?
A tax is a financial charge or other levy imposed upon a taxpayer (an individual or legal
entity) by a state or the functional equivalent of a state to fund various public expenditures. A
failure to pay, or evasion of or resistance to taxation, is usually punishable by law. Taxes are
also imposed by many administrative divisions. Taxes consist of direct or indirect taxes and
may be paid in money or as its labor equivalent.
Different Types of Taxes
Prevalence of various kinds of taxes is found in India. Taxes in India can be either direct or
indirect. However, the types of taxes even depend on whether a particular tax is being levied
by the central or the state government or any other municipalities. Following are some of the
major Indian taxes:
Direct Taxes
It is names so because it is directly paid to the Union Government of India. To name a few of
the direct taxes, which are imposed by the Indian Government are:
• Banking Cash Transaction Tax

• Corporate Tax
• Capital Gains Tax
• Double Tax Avoidance Treaty
• Fringe Benefit Tax
• Securities Transaction Tax
• Personal Income Tax
• Tax Incentives

58
Indirect Taxes
As opposed to the direct taxes, such a tax in the nation is generally levied on some specified
services or some particular goods. An indirect tax is not levied on any particular organization
or an individual. Almost all the activities, which fall within the periphery of the indirect
taxation, are included in the range starting from manufacturing goods and delivery of services
to those that are meant for consumption. Apart from these, the varied activities and services,
which are related to import, trading etc. are even included within this range. This wide range
results in the involvement as well as implementation of some or other indirect tax in all lines
of business.
Usually, the indirect taxation in the Indian Republic is a complex procedure that involves laws
and regulations, which are interconnected to each other. The regime of indirect taxation
encompasses different kinds of taxes. The organizations offer services in all or most of the
related fields, some of which are as follows:
• Anti-Dumping Duty
• Custom Duty
• Excise Duty
• Sales Tax
• Service Tax
• Value Added Tax or V. A. T.
Tax Planning
INTRODUCTION
Tax planning is a way by which you arrange your financial affairs in such a way that without breaking
up any law you take full advantage of all Exemptions, Deductions, Rebate and Reliefs allowed by law
so that your tax liability will be reduced.
Actually, Government provide deductions, exemptions, reliefs or rebate for the benefits of economy
and society. Like if you made donation to scientific research [u/s 8GGA] then it’s good for Society
and economy too.

59
Objective of Tax planning: -
• Claim Deductions under sections 80C to 80U,

• It will reduce your tax liability and you have to pay less tax,
• Minimize the war between Tax Payer and Tax Administrator, Tax payer wants to pay less tax and Tax
Administrator wants to extract most of the tax, by using Tax Planning this war is minimized as tax
payer is using all legal ways to reduce tax liability,
• Makes Investment: - By tax planning, a Tax payer will invest his money in some good funds which
will result in productive returns for tax payer and transfer money to government for investment too.
• Helps in growth of economy,
• Makes society grow,
• Money saved by you will result in investment which will result in employment generation.
The avid goal of every taxpayer is to minimize his Tax Liability. To achieve this objective taxpayer
may resort to following three methods:
• Tax Planning
• Tax Avoidance
• Tax Evasion
MEANINNG OF TAX PLANNING

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 reliefs. Some of the provisions
are enumerated below:
• Investment in securities
• Exemptions
• Residential Status of the person
• Choice of accounting system
• Choice of organization

60
Why Every Person Needs Tax Planning?

Tax Planning is resorted to maximize the cash inflow and minimize the cash outflow. Since Tax is
kind of cast, the reduction of cost shall increase the profitability. Every prudence person, to maximize
the Return, shall increase the profits by resorting to a tool known as a Tax Planning.
Importance of Tax planning: -
For Tax payer: -
Tax payer has to pay less tax by using tax planning because he is using all available exemptions,
deductions, reliefs, and rebates. All is done within the boundaries of Law.
For Government: -
To use deduction or exemptions you have to invest money in some scheme which results that your
money is transferred back to government and then they can use it to develop the country.
For Society: -
If government invest or start any new project or even tax payer invest his saved money so he will
generate employment, Government can invest in better projects which develops society.
Benefits of tax planning

Making Good Decisions
Tax preparation and filing decisions can have a significant impact on your finances; planning ahead
can help you make better choices. For example, it can be difficult to remember all the expenses you
have during the year that qualify for tax deductions and credits. Early planning can give you time to
think about and document such expenses, making it easier for you to save as much as possible when
you file your return.
Avoiding Mistakes
Errors on a tax return can result in mistakenly paying less or more than you owe. Mistakes are much
easier to make when you are rushed by a deadline and have inadequate planning time. Gathering all
the information you need to file your tax return ahead of time helps you avoid mistakes like failing to
report income. When you fill out your tax return early, you have time to set it aside and come back to
it later to catch errors that you may have missed the first time around or make changes.
Tax Refunds
Most workers have income withheld from paychecks by an employer for income tax purposes. If your
employer withholds too much for taxes and you qualify for tax deductions or credits, the government

61
might owe you a tax refund. When you plan and file your tax return early, the IRS starts processing
tax returns before the tax deadline so you get your tax refund sooner.
Beating the Deadline

Failing to plan ahead can put you in danger of missing the tax-filing deadline, especially if you have
a complicated tax return. Missing the tax deadline can result in a late-payment penalty, a late-filing
penalty and an interest penalty on the amount of unpaid tax that you owe. Even if you can't pay your
total tax debt by the due date, it is important to file a tax return on time to avoid the late-filing penalty.
Considerations
Even when you plan ahead, it is possible to make a mistake or oversight that you need to change. The
IRS lets taxpayer make changes to returns filed within the past three years through amended tax
returns. An amended return can let you correct mistakes, report unreported income sources, change
your filing status and take deductions that you missed.
Sources of personal income
• Salary (Wages, annuity, pension, gratuity, commission, perquisites, bonus and any other
payment received by an employee from the employer)
• Rental Income
• Profit and Gains of Business or Profession (PGBP)
• Capital Gain (Short and Long Term)
• Other Sources
Income from Property
• Rental income from letting out residential or commercial property
• Factors for net annual value:
• a. Rent payable by the tenant.

b. Municipal valuation of the property.
c. Fair rental value (market value of a similar property in the same area) of the property.
d. Standard rent payable under the Rent Control Act.
• Deduction available is:

62
• 30% net of rental income, house tax and interest paid on loan for buying the property
• Interest payable on loan for construction is tax deductible
Capital gains
• Short Term
• For gains accruing on selling short term assets
• Subject to asset class and holding period.
• Added to the Income from salary
• Long Term
• 20 % taxable on gains accruing from selling long term assets
• Subject to asset class and holding period (1 to 3 years depending on asset class)
Which capital gains are taxable:

• Long-term capital gains on stocks and equity mutual funds are not taxed. But short-term gains
are taxed at 15%.
• In case of debt mutual funds, both short-term and long-term capital gains are taxed. Short-term
capital gains are added to the income and taxed as per the individual's income tax slab. Long-
term capital gains from debt mutual funds are taxed at 20% with indexation and 10% without
indexation. Indexation is adjusting the purchase price for inflation. This increases the purchase
cost and, thus, lowers the gain.
Particulars Rs.
Full value of consideration (i.e., Sales XXXXX
consideration of asset)
Less: Expenditure incurred wholly and (XXXXX)
exclusively in connection with transfer of
capital asset (E.g., brokerage,

63
commission, advertisement expenses,

etc.)
Net sale consideration XXXXX
Less: Indexed cost of acquisition (*) (XXXXX)
Less: Indexed cost of improvement, if any (XXXXX)
(*)
Long-Term Capital Gain XXXXX
(*) Cost of acquisition is the purchase price of the capital asset and cost of improvement is
the cost incurred on post purchase capital expenses incurred on additions/improvement to the
capital asset. Indexation is a process by which the cost of acquisition/improvement is adjusted
against inflationary rise in the value of asset. For this purpose, Central Government has
notified cost inflation index for different years. The benefit of indexation is available only to
long-term capital assets. For computation of indexed cost of acquisition/indexed cost of
improvement, following factors are to be considered:
• Year of acquisition/improvement
• Year of transfer
• Cost inflation index of the year of acquisition/improvement
• Cost inflation index of the year of transfer
Indexed cost of acquisition is computed with the help of following formula:
Cost of acquisition × Cost inflation index of the year of transfer of capital asset ÷ Cost
inflation index of the year of acquisition
Indexed cost of improvement is computed with the help of following formula:
Cost of improvement × Cost inflation index of the year of transfer of capital asset ÷ Cost
inflation index of the year of improvement

64
Profit & Gains from business and possession
Profit from any business or income from a professional service provided is subject to tax under
the rules of Income Tax Act.
The income chargeable to tax is the difference between the credits received on running the
business and expenses incurred.
The deductions allowed are:
Depreciation of assets used for business
• Rent for premises
• Insurance and repairs for machinery and furniture
• Advertisements
• Traveling etc.
Income from other sources
• Income in the form of Dividends, Interest, Gift, Windfall gains is subject to 30% tax
• Income such as dividend from Indian companies, interest from PPF among others are exempted
from tax
Tax Slab Rates 2015-16(AY)
The Income Tax slab rates are different for different categories of taxpayers and can be
divided into the following for individuals:
1. For male individuals before 60 years of age

2. For female individuals before 60 years of age
3. For all Senior citizens above 60 years of age
4. For all Super Senior citizens above 80 years of age
Tax Rate as per new slab for individuals below 60 years
2.5: Hypothesis

65
Based on the problems identified and the objectives set, the following hypothesis were
formulated.
1) There is no significant difference between employees from the various fields with regard to
their pattern of savings that lead to tax planning.
their level of awareness on taxation laws and tax planning measures under Income Tax Act.
tax planning measures adopted for the PY 2018 – 19.
All the above hypotheses were formulated and the same were tested for employees in either
sector with regard to different groups. The income wise classification of employees was based
on the tax rate schedule applicable to individual income tax assesses for the PY 2018 -19.
Tax Rate as per new slab for individuals over 80 years
Tax Rates
Where the total income does not NIL

exceed Rs. 5,00,000/-.
Where the total income exceeds Rs. 20% of the amount by which the
5,00,000/- but does not exceed Rs. total income exceeds Rs. 5,00,000/-
10,00,000/- .
Where the total income exceeds Rs. Rs. 100,000/- + 30% of the amount
10,00,000/- by which the total income exceeds
Rs. 10,00,000/-.
Budget also includes Section 87A since 2013 which provides Income Tax Rebate of Rs. 2000
for all individuals earning income less than Rs. 5 lakhs in a year.
a. Cannot invest more than 1 lakh in a year

66
b. Maturity period shall be 5 years

c. No premature payment before 5 years
d. The deposit cannot be pledged to secure any loan.
e. Fixed deposit made upto 1 lakh for 5 years are exempted from income tax
2. EMPLOYEE PROVIDENT FUND

a. Mandatory for every employee drawing a basic salary of Rs 6500
b. Tax-free interest
c. Can take loan against EPF
d. EPF withdrawal is not possible if one is still working
e. Interest rate is market linked
3. PUBLIC PROVIDENT FUND

a. Money will be locked in for 15 years.
b. Interest earned is tax free
c. Cannot invest more than 1 lakh in a year
d. Interest rale is market linked.
e. Lowest risk-government backed.
4. INSURANCE SCHEMES
a. Tax free returns
b. Beneficial when one has dependents.
c. Low cost schemes (Term policy)
5. NATIONAL PENSION SCHEMES

a. Low cost schemes
b. Returns are risk-free but low
c. Entire amount is paid to nominee in case of death of policy holder
d. Returns are taxable at the time of withdrawal
Fixed Income Instruments
6. FIXED DEPOSITS

67
a. Longer lock - in period

7. PENSION PLAN UNDER INSURANCE COMPANIES
a. Few options
b. Low rate of returns
c. Pre maturity withdrawal leads to considerable loss of amount.
Other instruments:
LEAVE TRAVEL ALLOWANCE

Leave Travel Allowance (LTA) is the most common element of compensation adopted by
employers to remunerate employees due to the tax benefits attached to it.
• An LTA is the remuneration paid by an employer for Employee’s travel in the country, when
he is on leave with the family or alone. LTA amount is tax-free
• LTA exemption can be claimed where the employer provides LTA to employee for leave to
any place in India taken by the employee and their family.
• Overseas destinations are not allowed.
• LTA can be claimed only twice in a block of four years.
Sec 80 CCG: Rajiv Gandhi Equity Savings Schemes
• Rajiv Gandhi Equity Savings Scheme or RGESS is a new equity tax advantage savings scheme
for equity investors in India
• This Scheme would give tax benefits to new investors who invest up to Rs. 50,000 and whose
annual income is below Rs. 10 lakhs
• It provides additional tax benefits over and above the present tax savings schemes under the
Income Tax
• Gains, arising of investments in RGESS, can be realized after a year. This is in contrast to all
other tax saving instruments. Act.
• Investments are allowed to be made in installments in the year in which the tax claims are filed
• Dividend payments are tax free
Section 80DDB: Deductions of expenses of medical treatment of specified disease for self
and dependent

68
• Specified disease can include cancer, AIDS, thalassemia, chronic kidney failure etc.
• The actual expense or Rs 40,000, whichever is lesser can be claimed for income tax deduction
under section 80DDB. If the person undergoing treatment is a senior citizen the exemption
limit is Rs 60,000
Donations: Sec 80G, Sec 80GGA and Sec 80 GGC

The deduction available under Section 80G is over and above the deduction of Rs. 1,50,000
allowed under Section 80C.
• Deduction under Section 80G: Contributions to certain charitable funds and organizations
established by the government.
• Donations made in kind are not eligible.
• Maximum deduction limit is classified into 4 depending on the type of charitable

organization or fund as follows:
i) 100% deduction on donation
ii) 50% deduction on donation
iii) 100% deduction subject to qualifying limit of 10% of adjusted gross total income
iv) 50% deduction subject to qualifying limit
• Deduction under Section 80GGA: Donations made for Scientific Research or Rural
Development. The whole amount given as donation to the institutions specified under Section
80GGA is allowed as a deduction.
• Deduction under Section 80GGC: Donations made to political parties can be claimed for tax
deduction under section 80GGC. 80GGC is meant for non-corporate taxpayers.
Interest Paid on Loans

Section 80E: Interest payable on Education loan
• The entire interest amount is eligible, but subject to following conditions:
• Education loan should have been taken from a bank or other financial institution or govt.
recognized charitable organization for full time higher education

69
• Should be paying interest out of your income for education loan for yourself, spouse, children
or anyone whose legal guardian you are
• It can be claimed for tax exemption for a maximum of eight years of loan repayment
Section 24B: Interest payable on Housing Loan & Home Improvement Loan
Maximum deduction limit under 24b
- For borrowing on house property bought, constructed, renewed, repaired or reconstructed

before 1st April 1999: Rs 30,000
- For loan on house property bought or constructed within 3 years of borrowing provided it
was borrowed after 1st April 1999: Rs 1.5 lakhs
- For renewing, repairing or reconstructing house on borrowing after 1st April 1999: Rs 30,00
Case Study No: 2
Some business owners neglect to plan for their taxes and end up rushing to file their tax-return
in time and over-paying their taxes. By having a thorough and tailored tax strategy and a
commitment to implementation, you will notice a reduction in the tax you pay each year. The
taxation system may appear complex, but it can be legally navigated and you should never
pay more tax than necessary. There are various ways to legally minimize your tax liability
and to pay the right amount of tax due.
Although tax laws are complex and constantly changing, there are always opportunities for
you to increase your tax refund and legally minimize your tax liability. Even there are many
tax incentives, reliefs and exemptions under the Internal Revenue Act and the Ghana Revenue
Act. Tax planning is a widely used practice in the commercial world but there are still many
businesses and individuals who fail to fully recognize their potential tax savings.
As an Accounting Professional, I have come across many clients who have been paying more
tax than necessary over the years. With the right knowledge and a good plan, you will avoid
overpaying the Tax Office. It is also important that you receive advice from a qualified
professional before preparing and implementing a taxation strategy. These strategies will keep

70
you on the right side of the law. Tax planning is a strategic and a continuing process and an
expert is needed.
Taxes represent the greatest expense for a large number of businesses and individuals. The
courts have held that no one is legally bound to pay more taxes than what is required under
the law. I believe careful tax planning is most effective and valuable when performed in
anticipation of transactions or potential problems and that filing a tax return is the final step
in a continuing process of developing and executing tax strategies.
I approach tax planning by first understanding your business or personal goals and objectives
and then by considering the tax implications of every business transaction undertaken. I will
work with you to develop practical solutions to complex tax laws encountered when pursuing
your goals and objectives.
I keep you updated about relevant tax law changes that affect you throughout the year. I
constantly review and keeps abreast with Ghana Income Tax Law in order to help my clients
take advantage of strategic tax planning opportunities. I work with you throughout the year to
offer advice that allows you to operate your business in a way which gives you the biggest
advantages.
Case Study No: 2
The essence of tax planning is to enable you to reduce the amount of tax you pay to avoid
financial dilemmas. Whether you like it or not, the tax is an integral part of your life. Some
always come to your mind even when you try to skip it from your mind. However, there are
ways you can handle it, and it will not bother you; any time it comes to your mind, you will
remember that you have already taken care of it. These tax strategies will help you stay on top
of your financial affairs. Each year, when IRS announces deadlines for filing of returns almost
everyone without having proper knowledge and information about this subject feels great
panic and anxiety.

71
On the other hand, those taxpayers who give this matter due to regard throughout the year and
invest time and money for tax planning remains cool and calm. Thus, we are very confident
to state,
• Planning taxes is the best option available to keep all affairs, associated with the tax,
controllable and manageable
• Those who did not plan their taxes and fails to manage the things in a proper way always
find it hard to mitigate with the issues that they confront during the filing of their returns
• In case, if you don’t have complete knowledge and information about this subject that you
can easily hire someone against a nominal fee for complete assistance and support necessary
to have the job done
• Remember, it is an ongoing practice, and you need to take care of between current year's
filling to the next years filling Why Tax Planning is Beneficial Planning your taxes and
keeping everything up to the mark is the advice that we hear from the experts. In fact, there
are plenty of benefits in doing so and to name a few please go through the following list,
• You can maximize the deductions by maintaining all the necessary records
• It will keep you and your business in the good book of the IRS, which means that you will
never face difficulties in expansion activities
• Maintaining taxes with the help of proper planning adds value in your business Tax Planning
& Revolving Credit It is very important and wise always to use your credit cards to pay any
deductible expenses before the year runs out
If you can keep to this strategy, you will be able to increase your tax deduction rate for the
next year. If you are not able to pay your credit card bills until the end of the year, it will not
affect you. What matters is that you will eventually pay it, and you have planned you tax
ahead of time. Taking a rollover distribution is another possible strategy you can apply when
planning your tax. It means your income tax will be withheld from the distribution, and it will
be applied to any previous tax owed. You can then be able to roll over the gross amount of
tax distribution to a traditional internal retirement account. The withheld tax will be applied
to the full tax year to help reduce underpayment of estimated tax. Tax Planning for Deductions
If you reduce the rate at which you spend on miscellaneous, you may be able to save taxes for

72
next year. Check out for certain things that not important and cut the expenses so that you will
be able to save more money to do other important things. This is a wise move because
sometimes we are comfortable with the present financial status, and the bonuses are not
needed. If you are in this category, you can arrange with your employer to defer your bonuses
since you do not need it for now. When tax issues come in the future, those bonuses
accumulated will come in handy, and you will be glad you made the initial move Convinced?
Contact the GLG Accounting now and hear what they have to say.
Case study no: 4
Willingness to pay tax
According to Laffer, economic activities are a decreasing function of the taxation rate. As a
consequence, total tax revenue increases with the taxation rate at its lower levels and decreases
against it at its higher levels. The result is the Laffer curve. According to him, the reason for
this decrease lies in decreasing economic activities. Although this may be true for activities
in the official (white) sector, in the unofficial (black) sector they can increase under the
influence of an increasing taxation rate. Part of the Laffer effect may be nothing more than an
activity switch away from the white towards the (hidden) black sector. This paper takes both
effects into account: decreasing activities in the white sector combined with increasing
activities in the black sector. It examines the computation of the maximum tax revenue
generating taxation rate for a number of OECD countries. It concludes that, with the exception
of Sweden, the marginal taxation rate in these countries is below its optimum. © 2005 Elsevier
Inc. All rights reserved.
Unemployment and labour productivity are important variables in the calculation of potential
income Y. In countries with high unemployment and a high labour productivity, potential
income differs more from the actual income than in countries with low unemployment and
low labour productivity (Table 1). As can be seen in Table 1, there is strong variation in
unemployment and labour productivity. Unemployment ranges from 21.6% in Ireland to 3.5%
in Japan in the year 1996. Germany has a labour productivity of 32.78 ECU per person per
hour and the UK 16.48 ECU. The relative difference between potential income and GDP
differs strongly across the countries, 12.6% in Japan and 31.4% in Ireland. Table 2 contains

73
the marginal tax rates for the 12 countries either in 1995 or in 1996. In Japan and the UK they
were the lowest, 24 and 26%, respectively, and in Sweden the highest, 65%. As can be seen
from this table, the marginal tax rates in Austria, Belgium, Germany, Italy and the Netherlands
are close to each other. The values range from 53% in Ireland (1995) to 60% in Austria and
the Netherlands (1996). Compared to the marginal tax rate, the difference across the countries
with respect to optimum tax rates are smaller. In Sweden, the optimum tax rate is lower than
the actual marginal tax rate. In all other countries the optimum tax rate is higher than the actual
one. It is remarkable that both in Japan and the UK, the optimum tax rate is twice the actual
marginal rate.
Laffer and others concluded that a disproportionate high taxation leads to a high wedge
between gross and net pay, low production, low income and consequently, to low tax revenue.
He did not take into account the activities in the hidden (black) sector. When that is taken into
account, it is possible to distinguish between potential income, which is not affected by the
tax rate, non-registered income, and non-realised income. In our model, the ratio between
non-registered and non-realised income on the one hand, and the potential income on the other
is influenced by the tax rate and willingness to pay tax. The model allows us to estimate the
willingness to pay tax in most countries and to compare their actual tax rates with the tax
revenue maximising rates. The tax rate includes all taxes and not only income tax. The
marginal tax rates differ widely in 12 OECD countries. In Sweden, the revenue maximising
rate is lower than the actual marginal tax rate. In all other countries, the optimum tax rate is
higher than the actual one. In 11 of the 12 OECD countries there is no evidence found for the
proposition that optimum marginal tax rates are lower than actual marginal tax rates. Another
interesting result is that even with a very low willingness to pay tax, the optimum marginal
tax rate is never lower than 36%. What we have done in this paper, to develop a theoretical
model, and consequently to test it, is not common in the field of Laffer curve studies. Many
recent studies in this field are purely theoretical or theoretical-mathematical. The micro-
foundations of the theory are few compared to the kind of macro data that are used for the
empirical testing. As far as we know, no one else has yet estimated marginal tax rates for 12
countries at a time. However, because we used a rather simple model, the interpretation of the
results should be regarded with some caution. The size of the marginal tax rates is not
remarkably high, as might be expected. When we take a look at other empirical work in the
field of tax rates, we see similar results. Stuart (1981) showed that for Sweden in the 1970s,

74
revenue was maximised when the average marginal tax rate was at 70%, the actual tax rate
being 80%. van Ravestein and Vijlbrief (1988) found that for the Netherlands, the revenue
maximising tax rate was 70% in 1985, and that the actual tax rate was 67% in 1985. Hsing
(1996) used annual data during 1959–1991 to estimate the Bell-formed Laffer curve for the
USA. In doing so, he applied four functional forms. The federal government is expected to
maximise its tax revenues when average tax rates lie in the range of 33.7–35.2%. Note that
US citizens also pay state tax (sales tax) and county taxes (property tax). The latter can be a
considerable part of the household budget. This implies that actual tax rates are at least higher
than 0.34. Sutter and Weck-Hanneman 16 It appears that α is a very good estimator of the
value of τ*. Not surprisingly both variables are strongly positively correlated (R2 = 0.993).
722 W.J.M. Heijman, J.A.C. van Ophem / The Journal of Socio-Economics 34 (2005) 714–
723 (2003) in addressing the role of the veil of ignorance on work incentives and tax rates in
a two-person real effort experiment, found that tax rates peak at 50–65%. This supports the
existence of a Laffer curve in taxation. In the empirical part of our paper lack of data means
that we have assumed that the black sector is a fixed proportion of the white one in all the
countries considered. Of course, black money practices probably vary from country to
country. However, this assumption proved to have little influence in the cases where a
sensitivity analysis could be applied. However, this needs further research. In doing so we
still prefer the discrepancy method, since it best corresponds to the model used, which is based
on macro data. The estimated revenue maximising tax rates often differ sharply from the
actual ones. An explanation for this discrepancy lies outside the scope of this paper. Finally,
we have avoided in the pitfall mentioned by Ziliak and McCloskey (2004), in which a
statistically significant finding is mistakenly seen as an economically significant finding. We
looked at both the sign and size of the estimated coefficients and tried to give an economic
interpretation of the results.

75
Case study no: 5
INCOME TAX ASSESSMENT PROCEDURES AND THEIR PRACTICAL

IMPLEMENTATIONS UNDER AMHARA: PROBLEMS AND POSSIBLE SOLUTIONS
A tax is a compulsory contribution from individuals falling under the tax net to the
government to defray expenses incurred in the common interest of all (economic, social and
politicalwell- being of the majority) without reference to special benefit conferred (without a
quid pro quo).Taxes are important sources of public revenue and public goods and services
are normally subjected to collective consumption, which requires that we should put some of
what we earn into the hands of the government. The rationale for paying taxes in general is to
fund the ever-increasing government public expenditure provisions. The huge involvement of
government indifferent activities cannot be provided by the market forces that is the supply
and demand. These involvements cannot be done continuously without the revenue side of
the government which most of it is generated from tax revenues. As long as the government
expends to provide public goods and services provisions, there should be a mechanism in
which the sources of revenue can be obtained. One among the sources of revenue, may be the
major, is the tax revenue other than on-tax revenues, like gift, debt and donation etcetera.
However, to levy and charge a tax revenue is a herculean task to both the tax authorities and
taxpayers. The government needs to administer and enforce tax revenue very cautiously in
order not to incur costs of tax assessment, collection, payment and compliance. Furthermore,
it is not advantageous for the tax authorities to impose tax revenue without a due consideration
for the administration costs because it would be meaningless to impose tax revenue which its

76
administration costs excel the paid tax liabilities. As a result, much focus should be given to
tax administration than imposing and levying tax revenues. Tax enforcement is an interplay
between tax authorities and their officials vis-à-vis the taxpayers for their taxable income
under the legislations. And in the course of interaction, many hurdles exist which can
potentially and actually threat the tax revenue of the government and thereby hamper the
public goods and services putting it beyond the reach of the poor.
7Hence, the researchers will heavily deal, at far-length, with the aspects of income tax
assessment procedures and their practical implementations which are central to tax
administration and which can affect the tax revenue of the government which in turn upset
the provision of public goods and services. Ultimately these, if not taken seriously, will
adversely affect development of the country in all aspects, particularly, the provisions of
public goods and services (like the construction of roads and dams, telecommunication and
electricity and education, health and water supply respectively). These are because of the
bottlenecks of tax assessment procedures and collection systems in the practical aspects which
many times lead to tax collusions of tax officers and taxpayers (which is sometimes called tax
corruptions) and tax evasion or avoidance thereby influencing the tax revenue of the
government. Furthermore, non-compliance and compliance costs affect the last outcome of
income tax revenue of the government and thereby again influence the provisions of public
goods and services. As a result, the very purpose of tax revenue and its counterpart, tax
expenditure, will remain a dream.

77
Chapter No. 4: Data Analysis, Interpretation and Presentation.
4.2: Data Analysis
4.2.1: Questionnaire
Questionnaire on Tax Planning and Investment of salaried person.
SERVICE EMPLOYEE PROFFESIONAL

16 28 5
On the basis of above-mentioned three occupations selected from the main heads. The total
sample size of respondents is 50, which constitutes 16 people respondents in service sector,
28 people working as employees in corporate sector, 5 people working in professional sector.
Following is the data analysis presented on the above research through applied
methodology:
1) Gender…
• Female
• Male

78
In the given figure orange part represents the Male respondents while blue part represents the
Female respondents. The total fifty respondents, twenty-four are males (24) and twenty-seven
(27) are females.
2) Area of operation….
• Service
• Employee
• Profession

79
In the given figure above represent the category of different field of occupations. In the pie
diagram the blue colour represents service sector, blue colour represents professional sector
and yellow colour represents employees working in corporate sector. The total respondents
are further divided in to three classes, which include 29 (58%) of employee sector, 5 (10%)
from professional sector and 16 (32%) of service sector.
3) Scale of income
• Below 15000
• 15001 - 30000
• 30001 – 50000
• Above 50000
In the given figure represents the different income groups of the respondents. The groups are
classified as below fifteen thousand, above fifteen thousand and up to thirty thousand, above
thirty thousand to forty thousand and above forty thousand up to fifty thousand. The analysis

80
of study says that of fifty respondents 70.6% (36) respondents earn below fifteen thousand,
21.6 % (11) respondents earn between fifteen thousand and thirty thousand, 5.9% (3)
respondents earn between thirty thousand and fifty thousand and 2% (1) respondent earn
above fifty thousand.
4) You have....
• Bank Account
• Public Provident Fund (PPF) Account
• Post Office Account
• None

81
In the above figure states the various accounts respondents prefer to have for investments. The
blue colour represents bank account, red colour represents public provident fund account,
yellow colour represents post office account and green represent to have none if the account.
According to the analysis 82.4% (42) respondents prefer to have bank account, 9.8% (5)
respondents prefer to have public provident fund account for their investment and 5.9% (3)
respondents prefer to have post office account and only 2% (1) respondent prefer to have none
of the account.
5) How much do you save from your net income?
• 5% to 10%
• 11% to 20%
• 21% to 30%
• 31% to 40%
• 41% to 50%
The given figure above describes how much the respondents save from their net income. The
blue colour shows the respondents save five to ten percent of their net income, red colour
shows the respondents save from eleven to twenty percent of their income, whereas yellow

82
colour states the respondents save from twenty-one to thirty percent of the net income, green
colour states the respondents save thirty-one to forty percent of the net income and purple
colour shows the respondents save forty-one to fifty percent of their net income. According
to the analysis 56% (28) respondents save five to ten percent, 20% (10) respondents save
eleven to twenty percent, 10% (5) respondents save twenty-one to thirty percent and 14% (7)
respondents save forty-one to fifty percent
6) Are you aware about Tax Planning?
▪ Yes
▪ No
▪ Maybe
The above figure states about the awareness about tax planning among the respondents. The
blue colour states that they are aware about tax planning and red shows that they are not aware
about tax planning, yellow shows they are not sure about it. From the total fifty respondents

83
38% (19) are not aware about tax planning and 48% (24) respondents are aware about tax
planning, 14% (7) respondents are confused about it.
7) Yours’s preference towards investment....

• Short term Investment
• Long term Investment
• Liquid Funds
The above figure shows about the preference of the respondents towards various terms of
investment. From the total respondents 64 % (32) respondents prefers long term and 32% (

84
16) respondents prefers to have short term investment, 2% (1) respondent prefer to invest in
liquid assets.
8) Do you think about Tax Planning while investing…?
• Fixed Deposit / Recurring Deposit

• Gold
• Public Provident Fund
The above figure states about the preference about tax planning while investing among the
respondents. The blue colour states that respondents think about tax planning while investing
and red shows that they do not think about tax planning while investing. From the total fifty

85
respondents 75% (36) think about tax planning while investing and 25% (14) respondents do
not think about tax planning while investing.
9) Which investment avenues do you prefer?

• Fixed deposit/Recurring deposit
• Gold
• Mutual funds
• Public provident fund/ Post office.
The above fig shows preferences of respondents towards various investment avenues. In the
above figure blue colour shows fixed deposit or recurring deposit, red shows investment in

86
gold, yellow shows investment in mutual funds and green shows to invest in public provident
fund or post office account. From the total respondents 38% (16) respondents prefer to have
Mutual funds, 12% (6) respondents prefer to invest in gold, 44% (22) respondents prefer to
have investment in fixed deposit and 6% (3) respondents prefer to have investment in public
provident fund or post office.
10) Are you aware about tax deductions in Income Tax…?

Yes
No
Maybe

87
The above figure states about the awareness about tax deductions among the respondents. The
blue colour states that they are aware about tax deductions and red shows that they are not
aware about tax deductions, yellow shows they are not sure about it. From the total fifty
respondents 68% (34) are not aware about tax planning and 16% (8) respondents are aware
about tax planning, 16% (8) respondents are confused about it.
11)Which deduction you avail the most while tax saving?
• Life Insurance Premium

• Fixed Deposit for 5 years
• Mutual Funds Investment

88
The above fig shows more availed deductions by respondents towards. In the above figure
blue colour shows life insurance premium, red shows fixed deposit of 5 years, yellow shows
investment in mutual funds. From the total respondents 40% (20) respondents avail life
insurance, 22% (11) respondents avail fixed deposit of 5 years, 38% (19) respondents avail
investment in mutual funds.
Chapter no.5: Conclusion and Solution
5.1 Suggestion:
Saving taxes can be a complicated process, if not planned well in advance. To understand
the gross tax you are supposed to pay each year, let’s take a closer look at your salary slip.
You may have noticed that your salary slip consists of different components. The biggest
clue to saving taxes more efficiently lies in your salary slip. It contains the following major
components:
• Earnings
• Allowances
• Deductions
Your earnings are reflected as your basic pay. With regard to contributions, you may receive
dearness allowance, House Rent Allowance (HRA), conveyance allowance and a Leave
Travel Allowance (LTA). The section may also include deductions like Income Tax,
Professional Tax and Provident Fund.
Here are a few tips you may want to consider when you go about planning your taxes.

89
• Look at your salary slip closely
You need to pay an Income Tax on your basic pay. Your HRA is exempt from taxes.
However, HRA exemption is only applicable if you are living in a rented house and paying a
monthly rent. A fixed amount of conveyance allowance also falls under the tax exemption
scheme.
For some employees, income tax is deducted at source. Tax benefits for this can be claimed
by providing supporting documents related to tax saving investments. These documents can
save your income from excess tax deductions, towards the end of the financial year. Plan your
investments in advance to save taxes more effectively.
• Take a good look at the Section 80C mandate
Having a more in-depth look at Section 80C can help you maximise your take-home salary.
You are allowed to invest INR 1.5 lakh in various tax-saving instruments. Equity Linked
Savings Scheme (ELSS), National Savings Certificate (NSC), Public Provident Fund (PPF)
and 5-year Bank Fixed Deposit (FD) are some of the available instruments you can employ to
make tax saving investments. HDFC Bank offers a variety of tax saving products
• Avoid last-minute tax planning
Planning your taxes at the last moment leaves little time for you to study different investment
options. It may also become a burden to invest a lump sum amount just to save tax. You can
invest small amounts regularly through Mutual Funds and SIPs all through the year, thereby
not eating into a chunk of your savings at the last moment.
• Invest to meet your financial goals
Investing, not just to save taxes but also to fulfil your goals, can prove beneficial in tax
planning. You can convert your tax-saving investments into high return ones. For example,
let’s say you intend to buy a new car in three years. You can invest small and regular amounts
in an ELSS. After three years, when the ELSS lock-in period ends, you withdraw and reinvest

90
to meet your goal. Thus, your tax-saving investments can also help you reach your financial
goals.
• Have a look at other sections as well
Apart from Section 80C, there are several other sections that can help you save taxes. Here is
a list of sections that you may consider to avail tax benefits. These details can also be found
in the investment declaration form, given by your employer.
-You can claim tax benefit on LTA, once every two years. However, you will need to submit
a proof of travel for this.
-Avail tax benefits on the premium paid for any health insurance policy (Section 80D).
-Interest paid on an education loan also comes under tax exemption (Section 80E).
5.2 Conclusion
Under current economic conditions applying of tax expenses is complicated by the fact
that the legislation does not fix the notion, essence, and methodology of taxation planning,
there is no accurate division of legal (legitimate) taxation planning and purposeful illegal taxes
evasion. Planning of tax expenses provides the required conditions not for obtaining one-time
profits, but for stable development of the economic subject, increase in its financial strength,
stability and further stable economic growth within the whole state.
Planning of tax expenses has considerable impact on management decisions taken by

owners and management, as well as the growth of the efficiency of financial and economic
activity of the economic entity becoming a way to optimize its taxation profile. Saving on tax
expenses increases the economic entity’s own financial resources. Thus, the main final goal
of planning tax expenses is not only the optimization of tax obligations but also the growth of
financial strength.
As a result of the conducted researches, there are grounds to state that the goal of
planning tax expenses has transformed from minimization to taxation optimization. It enables
the economic entity to plan future tax payments taking into account the current taxation
legislation, as well as strategies and tactics of the business development

91

92
BIBLIOGRAPHY
• www.taxmann.com
• www.indbazzar.com
• Income Tax Planning: A Study of Tax Saving Instruments Preprint · May 2013
• Tax Planning Among College Teachers.
• Income Tax Law and Practice 2011-2012
• VINOTH. K. SINGHANIA Tax Mann’s Direct Taxes Law and Practice 2011-2012.
• V.P. GAUR and D.B. NARANG, Income Tax Law and Practice
• Dr. H.C. METHOTORA and S.P. GOYAL, Income Tax Law and Practice with Tax
Planning.
• Incorporates changes made in Income Tax laws in Budget presented on
February 1, 2018

93
Annexure
1)Gender…
• Female
• Male
2) Area of operation….
• Service
• Employee
• Profession
3)Scale of income
• Below 15000
• 15001 - 30000
• 30001 – 50000
• Above 50000
4)You have....
• Bank Account
• Public Provident Fund (PPF) Account
• Post Office Account
• None
5) How much do you save from your net income?
• 5% to 10%
• 11% to 20%
• 21% to 30%
• 31% to 40%
• 41% to 50%

94
6) Are you aware about Tax Planning?
▪ Yes
▪ No
▪ Maybe
7) Yours’s preference towards investment....

• Short term Investment
• Long term Investment
• Liquid Funds
8) Do you think about Tax Planning while investing…?
• Fixed Deposit / Recurring Deposit
• Gold
• Public Provident Fund
9) Which investment avenues do you prefer?

• Fixed deposit/Recurring deposit
• Gold
• Mutual funds
• Public provident fund/ Post office.
10) Are you aware about tax deductions in Income Tax…?
Yes
No
Maybe
11) Which deduction you avail the most while tax saving?
• Life Insurance Premium
• Fixed Deposit for 5 years
• Mutual Funds Investment

Main Project Last

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Main Project Last

Uploaded by

Copyright:

Available Formats

1

A STUDY ON INVESTMENT AND TAX PLANNING 0F SALARIED

University of Mumbai for partial completion of the degree of

Bachelor in commerce (Accounting and Finance)

Miss. RUGVEDA HONALKAR

Under the Guidance of

Mrs. Dipali Mehta

A STUDY ON INVESTMENT AND TAX PLANNING 0F SALARIED PERSON |

A STUDY ON INVESTMENT AND TAX PLANNING 0F SALARIED PERSON |

A STUDY ON INVESTMENT AND TAX PLANNING 0F SALARIED PERSON |

Chapter No.1 Introduction.

1) 1.1 Introduction to tax

1.3 Introduction to Tax saving

1.5 Introduction to Tax Management

1.7 ORIGIN OF – INCOME TAX LAW

1.8 Introduction to Investment

3) Four Most Common Mistakes Which Tax

A STUDY ON INVESTMENT AND TAX PLANNING 0F SALARIED PERSON |

Chapter No. 3 Literature Review

Case Study No: 2 68

Case Study No: 2 69

A STUDY ON INVESTMENT AND TAX PLANNING 0F SALARIED PERSON |

This is to certify that Ms. Rugveda Uttam Honalkar has worked

and her/his project is entitled, “Ms. Dipali Mehta” under my supervision.

Mrs. Dipali Mehta

A STUDY ON INVESTMENT AND TAX PLANNING 0F SALARIED PERSON |

Name & signature of the learner

Miss. Rugveda Uttam Honalkar

Mrs. Dipali Mehta

A STUDY ON INVESTMENT AND TAX PLANNING 0F SALARIED PERSON |

A STUDY ON INVESTMENT AND TAX PLANNING 0F SALARIED PERSON |

Chapter No.1: Introduction.

1.1: Introduction to ‘Tax’.

1.1.1: Types of taxes

A STUDY ON INVESTMENT AND TAX PLANNING 0F SALARIED PERSON |

➢ Taxes on goods and services

1.2: Introduction: Tax Payer.

A taxpayer is a person or organization (such as a company) subject to pay a tax.

1.2.1: Types of Tax Payers

A STUDY ON INVESTMENT AND TAX PLANNING 0F SALARIED PERSON |

Corporations can be classified into domestic, foreign and partnership. A foreign

1.3: Tax Saving

1.4: Tax planning for an individual.

A STUDY ON INVESTMENT AND TAX PLANNING 0F SALARIED PERSON |

1.4.1: Types of Tax Planning:

• Purposive tax planning: Planning taxes with a particular objective in mind

A STUDY ON INVESTMENT AND TAX PLANNING 0F SALARIED PERSON |

1.4.2: Planning Tool for Salaried Person.

2.Utilizing Section 80C

· Public Provident Fund

· Life Insurance Premium

· National Savings Certificate

· Equity Linked Savings Scheme

· 5-year fixed deposits with banks and post office

3. Options beyond 80C

· Section 80G- Donations to specified funds or charitable institutions.

4. House Rent Allowance

A STUDY ON INVESTMENT AND TAX PLANNING 0F SALARIED PERSON |

5. Tax Saving from Home Loans

6. Leave Travel Allowance

9. Buy House with Parent or Siblings as joint-owners: -

A STUDY ON INVESTMENT AND TAX PLANNING 0F SALARIED PERSON |

1.5: Introduction to Tax Management: