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Income Tax Planning: A Study of Tax Saving Instruments

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DOI: 10.13140/RG.2.2.25046.55360

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International Journal of Management and Social Sciences Research (IJMSSR)
Volume 2, No. 5, May 2013
Income Tax Planning: A Study of Tax Saving Instruments
Savita, Lecturer in Pt. Nakiram Sharma Government College, M. D. University, Rohtak
Lokesh Gautam, Senior Manager, legal and Secretarial, Realtech Group, New Delhi
ABSTRACT
Tax planning is an essential part of our financial
planning. Efficient tax planning enables us to reduce our
tax liability to the minimum. This is done by legitimately
taking advantage of all tax exemptions, deductions rebates
and allowances while ensuring that your investments are
in line with their long-term goals. The purpose of the study
is to find out the most suitable and popular tax saving
instrument used to save tax and also to examine the
amount saved by using that instrument. Over all findings
reveals that the most adopted tax saving instrument is Life
Insurance policy, which got the first rank in this study and
the second most adopted tax saving instrument is
Provident Fund.
Keywords
Tax, Tax saving Instruments, Tax Planning, Tax
Management, Tax Evasion and Tax Avoidance
TAX PLANNING: AN INTRODUCTION
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 colorable devices
or tactics to meet the letters of law but not the sprite
behind these, would constitute tax planning. Tax planning
should not be done with an intent to defraud the revenue,
All transactions entered into by an assessee could be
legally correct, yet on the whole these transactions may be
devised to defraud the revenue. All such devices where
status is followed in strict words but actually spirit behind
the statute is marred would be termed as colorable devices
and they do not form part of the tax planning. All
transactions in respects of tax planning must be in
according with the true spirit of statute 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
lifting the veil of legal documents and ascertaining the
intention of parties behind the transaction.
Tax  planning  is  the  arrangement  of  one’s  affairs  in  such  a   with their finances.
manner that the tax planner may either reduce the incident
of tax wholly or reduce it to maximum possible extent as
may be permissible with in the framework of the taxation
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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.
A. Tax Evasion And Tax Avoidance
Tax Evasion: It refers to a situation where a person try 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 assessee
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 assessee, who dishonestly claims the
benefit under the statute by making false statements,
would be guilty of tax evasion.
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.
B. Tax Planning Excludes
Tax Planning is not tax evasion. It involves sensible
planning of your income sources and investments. It
is not tax evasion, which is illegal under Indian
laws.
Tax Planning is not just putting your money blindly
into any 80C investments.
Tax Planning is not difficult. Tax Planning is easy.
It can be practiced by everyone and with a very
little time commitment as long as one is organized
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International Journal of Management and Social Sciences Research (IJMSSR)
Volume 2, No. 5, May 2013
C. Types of Tax Planning
The tax planning exercise ranges from devising a model
for specific transaction as well as for systematic corporate
planning. These are;
Short and long range tax planning:
Short range planning refers to year-to-year
planning to achieve some specific or limited objective. For
example, an individual assessee whose income is like to
register unusual growth in a particular year as compared to
the preceding year, may plan to subscribe to the
PPF/NSC’s  with  in  the  prescribed  limits  in  order  to  enjoy   private insurers).
substantive tax relief. By investing in such a way, he is not
making permanent commitment but is substantially saving
in the tax
Long range planning on the other hand involves
entering in to activates, which may not pay off
immediately, For example, when an assessee transfers his
equity shares to his minor son he knows that the income
from the shares will be clubbed with his own income, but
clubbing would also cease after minor attains majority.
Permissive tax planning:
Permissive tax planning is tax planning under the
express provisions of tax laws. Tax laws of our country
offer many exemptions and incentives.
Purposive Tax planning:
Purposive tax planning is based on the measures,
which circumvent the law. The permissive tax planning
has the express sanction of the statute while the purposive
tax planning does not carry such sanctions, For example,
under section 60 to 65 of the income tax.1961 the income
of the other persons is clubbed in the income of the
assessee. If the assessee is in a position to plan in such a
way that these provisions do not get attracted, such a plan
would work in favor of the tax payer because it would
increase his disposable resources. Such a tax plan could be
termed  as  “Purposive  Tax  Planning”.
D. 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 assessee
follows mercantile system of accounting, the claim of
expenses should be made, subject to the provisions of
section 43B, on accrual bases, if the assessee fails to make
such a claim, such expenses can not be deducted in
subsequent years. Similarly, the specified deductions
under section 80IA, section 80JJA, etc., cannot be allowed
by the assessing officer suo motu. Tax management also
protects an assessee against penalty and prosecution by
discharging tax obligations in time.
Thus, the study of tax planning is incomplete without tax
management. Tax planning with out the study of tax
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management is like knowing the medicine with out
knowing how to administer it.
2. THE POPULAR INVESTMENT
OPTIONS
PPF (with post offices/banks), statutory provident
fund (deducted and paid by the employees).
Life insurance premium (with the LIC or other
Unit-linked insurance (UTI & mutual funds).
Equity-linked saving schemes.
National Saving Certificates.
Infrastructure bonds.
Home loans.
3. TAX SAVING INSTRUMENTS
Deduction under section 80C is allowed only to individual
or HUF, up to a maximum limit of 1,00,000 Rs. and the
deduction is allowed only when the amount has actually
been paid by the assesseee.
Following amount paid or deposited are allowed as
deduction u/s 80C:
Contribution / subscription to PPF, NSC, NSS,
ULIP, ELSS
Fixed Deposit with any schedule bank for at least
5 years
Any  sum  deposited  as  five  years’  time  deposit  in  
an account under the Post Office Time Deposit
A. Equity Linked Saving Schemes
ELSS is an instrument sold by mutual funds for the
specific purpose of enabling taxpayers to save their taxes.
The proceeds from ELSS are mostly invested in the stock
market so that the investors get the benefit of appreciation
in stock prices, thereby making the stock market work for
investors. The tax deduction for ELSS is available under
section 80C of the Income Tax Act 1961.
B. Life and Medical Insurance Plans
Life Insurance Policies have long been the most popular
tax saving instruments among taxpayers. Insurance
policies offer twin advantage for tax deductions on
premium paid and insurance cover for the insurer and his
family in the event of a financially debilitating event such
as accident, death, etc. The premium paid on life insurance
policies qualify for tax deductions under section 80C,
subject to a maximum of Rs.1 lakh per annum. Most
companies offering Life Insurance also offer medical
insurance policies as well as pension plans which offer tax
deduction under section 80D.
Deduction is allowed to an individual/HUF for payment
towards Medical Insurance Premium or to any
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International Journal of Management and Social Sciences Research (IJMSSR)
Volume 2, No. 5, May 2013
contribution made to the central Government health
Scheme by any mode other than cash.
Maximum 15,000 (For insurance of individual,
spouse, dependent children) or 20,000 in case of senior
citizen, and
Maximum 15,000 (For insurance of parents) or
20,000 if parents are senior citizen.
C. Housing Loan
Repayment of principal amount of loan taken for
purchase/construction of residential house property from
central/state Government, Bank, LIC, National Housing
Bank or from employer (where employer is statutory
corporation, public company, university, college, or local
authority or co-operative society) under section 80C.
Public Provident Fund:
The contributions made to the Employees provident fund
(EPF) and Public Provident Fund (PPF) are also eligible
for tax deductions under section 80C.While the
contribution paid to EPF and PPF by the employees are
subject to the overall ceiling of Rs.1 Lakh under section
80C.
D. National Savings Certificate:
It can be bought at any post offices in the country. While
there is no upper limit for investment, the tax deduction on
NSC is available subject to overall limit of Rs.1 lakh under
section 80C.
E. Term Deposits and Bonds:
Many of the commercial banks have fixed deposit
schemes, which qualify for tax deductions. These deposits
have a lock-in-period of five years. Investments in these
deposits are subject to the overall ceiling limit of Rs.1 lakh
per annum under section 80C.
There are other specified expenses such as registration
charges and stamp duty paid on house property, tuition
fees  for  children’s  education,  among  others,  which  qualify   that this sample represents the whole of universe.
for deductions under section 80C. Under other sections,
Table 1- Sample Unit
Heads Occupation
Salary Teachers
Railway Employees
Business & Shopkeepers
Profession
Advocates
Others Commission Agents
Total
Source – based on primary data
On the basis of above-mentioned five occupations selected
from three main heads. The total sample size of
respondents is 70, which constitutes 15 teachers, 15
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expenses like conveyance allowance; food coupons etc.
also qualify for deductions. There are also special
deductions/concessions for senior and disabled tax payers.
4. RESEARCH METHODOLOGY
Research methodology is a way to systematically solve the
problem. The study of the research design is descriptive in
nature because it throws light on relationship between age
group and income level on tax saving amount. Research
methodology for the present study is as follows:
A. Objectives Of The Study
The purpose of the study is to find out the most suitable
tax saving instrument used to save tax and also to examine
the amount saved by using that instrument.
B. Sample Design
The present study is based on convenience-cum-stratified
sampling. Three heads of occupation have been taken as a
sample and two sub-occupations have been identified from
heads shown in table N0. 1.
C. Sample Unit
The scope of the tax includes the following areas,
(a). Business class
(b). Service class
(c). Others, like commission agents
The persons includes in this study are of different age
groups and various income groups. The area of the study
covers Haryana and Delhi/NCR, but for the purpose of
collecting primary information form respondents the study
has been limited to three heads of income tax. From 2
heads, 2 sub occupations have been selected. While
selecting three heads enough care has been taken to see
Sample
15
15
10
10
20
70
railway employees, 10 shopkeepers, 10 Advocates and 20
commission Agents.
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International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 86
Volume 2, No. 5, May 2013

D. Analysis of the study

General information:

SEX

60
53
No.of respondents 50

40

30 Series1

20 17

10

0
male female

Figure 1. Gender

In the given figure X-axis represent Gender of respondents 53 male & 17 female respondents. The percentage of
while Y-axis represents the total number of respondents. male & female respondents is 75.8 % & 24.2 %
The total numbers of respondents are 70 in which there are respectively.

location

location

40 35 35
no.of respondents

35
30
25
20
15
10
5
0
haryana delhi/ncr
categories

Figure 2. Geographical distribution

In the given figure X-axis represent the Geographical respondents are, 35 from Haryana & 35 from Delhi/NCR
distribution of study respondents while Y-axis represents having an equal percentage of 50% each.
the total number of respondents. The locations of the

Occupations

25
20
No.of respondent

20
15 15
15
10 10
10

0
Teachers Railway shopkeepers Advocates Commission
employees Agents
sample category

Figure 3. Occupation

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International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 87
Volume 2, No. 5, May 2013

In the given table X-axis represent the category of (21.4%), 15 railway employees (21.4%), 10 shopkeepers
occupations respondents while Y-axis represents the total (14.2%), 10 Advocates (14.2%), 20 Commission agents
number of respondents. The total respondents are further (28.4%).
divided in to six classes, which includes 15 teachers

25
21

20 18
17
20-30
15
No. of 11 30-40
respondent 40-50
10
50-60
5 3 60-70

0
1
Age

Figure 4. Age Group

In the given figure No. 4 X-axis represent the age groups
of respondents while Y-axis represents the total Number
of respondents. The age of the respondents are classified
in to five groups, In which 17 respondents (24.2%) are
from the age group of 20-30, 21 respondents (30%) are
from the age group of 30-40, 11 respondents (15.71%) are
from the age group of 40-50, 18 respondents (25.7%) are
from the age group of 50-60, 3 respondents (4.2%) are
from the age group of 60-70.
Income Group
Data was collected from various professionals, which
belongs with different Income group. Following figure
shows Income wise description of respondents-

Income group

30 30
30

25

20 <2 lakhs
no.of
15 2-5 lakhs
respondent
10 7 5-10 lakhs
3 <10 lakhs
5

0
1
income

Figure 5. Income Group

In the given figure No. 5 X-axis represent the income are 30 (42.8%), between the incomes of 5 to 10 lakh are 7
groups of respondents while Y-axis represents the total (10%) and the income more then 10 lakh are 3 (4.28%).
number of respondents. The respondents below the income
2 lakh are 30 (42.8%), between the incomes of 2 to 5 lakh

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International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 88
Volume 2, No. 5, May 2013

Investment in Tax Saving Instruments

Tax saving investment

25 23
20

no. of respondents
20 18
<10,000
15 10,000-30,000
30,000-50,000
10 50,000-70,000
6
70,000-90,000
5 3

0
1
Tax saving amount in Rs.

Figure 6. Amount invest in Tax saving Investment

In the given figure No. 6 X-axis represent the tax saving
amount of respondents while Y-axis represents the total
number of respondent. There are 23 respondents (32.8%),
who save less then Rs. 10,000, 18 respondents (25.7%),
who save between Rs. 10,000 to 30,000, 3 respondents
(4.2%), who save between Rs. 30,000 to 50,000, 6
respondents (8.57%), who save between Rs. 50,000 to
70,000, and 20 respondents (28.57%), who save between
Rs. 70,000 to 90,000.
Long term Investment In tax Saving Instrument
In the given figure No. 7 X-axis represent the investment
in a long-term tax saving instruments while Y-axis
represents the total number of respondent. There are 44
respondents (62.8%), who ensures that their investment in
tax saving instruments are aligned to their long term
financial goals, 8 respondents (11.4%) are saying no and
18  respondents  (25.8%)  don’t  know  about  this.

50
44
45
40
no.of respondents

35
30
25
20 18

15
10 8

5
0
yes no don't know
investment in a long term tax saving instruments

Figure 7. Long term Investment In TSI

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International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 89
Volume 2, No. 5, May 2013

Preferred Tax Saving Instruments

Table 2. Preferred Tax saving Instruments

Source- based on primary data

According to these responses, rank is given to various tax
saving instruments. The respondents preferred life
insurance as the best tax saving instrument and ranked as
One. Provident fund is the IInd highest ranked tax saving
instrument while respondents ranked Fixed Deposits as
IIIrd. Home Loan and Education Loan are the IVth highest
preferred tax saving instruments. National Saving
Certificates ranked as Vth . Respondents preferred Unit
Linked Plans as the VIth and Health Insurance as VIIth .
Equity Linked Saving Scheme and Infra Bonds are ranked
as VIIIth and IXth respectively.

Cross tabulation analysis between Age group/ Income group and Tax Saving Instruments

Table 3-Analysis of tax saving amount with various age groups

Tax
Saving <10 10-30 30-50 50-70 70-90
amount (in
Thousands)
Age
(In years)
20-30 11* 4 1 0 1

30-40 4 7* 0 4 6

40-50 3 3 1 0 4*

50-60 3 4 1 2 8*

60-70 2* 0 0 0 1

Source-based on primary data

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International Journal of Management and Social Sciences Research (IJMSSR)
Volume 2, No. 5, May 2013
* Mode
The rows in table 3 represent age groups while the
columns represent tax saving amount. There are 11
respondents in the 20 to 30 age group, who saves less then
Rs. 10,000 and so on. There are 4 respondents in the 30 to
40 age group, who saves between Rs. 10,000 to 30,000
Table 4- Analysis of tax saving amount with various Income groups
Tax
Saving <10 10-30
amount
(in
thousands)
Income
(in
lakhs)
<2 18* 11
2-5 5 7
5-10 0 0
> 10 0 0
Source-based on primary data
* Mode
The rows represent income groups while the columns
represent tax saving amount. There are 18 respondents in
the income group of less then Rs. 2 lakhs, who saves less
then Rs. 10,000 and so on. There are 5 respondents in the
income group of Rs. 2 lakh to 5 lakhs, who saves between
Rs. 10,000 to 30,000 and so on. There are 0 respondent in
the income group of Rs. 5 to 10 lakh, who saves between
Rs. 30,000 to 50,000 and so on. There are 0 respondent in
the income group of more than Rs. 10 lakhs, who saves
between Rs. 50,000 to 70,000 and so on.
5. FINDING AND SUGGESTIONS
(a). On the bases of this study, the respondents rank
various tax saving instruments according to their priority
of saving tax. The most adopted tax saving instrument is
Life Insurance policy, which got the first rank in this
study. The second most adopted tax saving instrument is
Provident Fund. Further, the third choice is Tax Saving
Fixed Deposits. After that Home/Education Loans,
National Saving certificates, Unit Linked Insurance Plans,
Health Insurance Plans and Equity Linked Saving
Schemes respectively. The instrument, which is least
adopted, as tax saving instrument is Infrastructure Bonds,
which got the ninth rank in this study.
(b). On an analysis of tax saving amount with various
age groups, it is found that, between the age group of 20 to
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and so on. There are 3 respondents in the 40 to 50 age
group, who saves between Rs. 30,000 to 50,000 and so on.
There are 3 respondents in the 50 to 60 age group, who
saves between Rs. 50,000 to 70,000 and so on. There are 2
respondents in the 60 to 70 age group, who saves between
Rs. 70,000 to 90,000 and so on.
30-50 50-70 70-90
0 0 1
2 5 11*
1 1 5*
0 0 3*
30 and 60 to 70, the tax saving amount is less then Rs.
10,000, which shows that saving is very low in young age
and old age. Where as, between the age group of 30 to 40,
the tax saving amount increases between Rs. 10,000 to
30,000. Further, the tax saving amount is between Rs.
70,000 to 90,000 of the age groups between 40 to50 and
50 to 60, which shows the highest income saved of this
study.
(c). On an analysis of tax saving amount with various
income groups, it is found that with the income of less
then Rs. 2 lakhs, the tax saving amount is less then Rs.
10,000. Further, with the increase in income such as
between Rs. 2 to 5 lakhs, 5 to 10 lakhs and more than ten
lakhs, the tax saving amount is between Rs. 70,000 to
90,000. Which means that higher the income, higher the
savings.
6. BIBLIOGRAPHY
[1.] Banks, J., Andrew Dilnot and Sarah Tanner (1997):
“Taxing  Household  Saving:  What  Role  for  the  New  
Individual   Savings   Account?”   Commentary   No.   66,  
London: The Institute for Fiscal Studies.
[2.] Capital   Tax   Group   (1989):   “Neutrality in the
Taxation   of   Savings:   An   Extended   Role   for   PEPs”,  
Commentary No. 17, London: Institute for Fiscal
Studies.
[3.] Chelliah,   Raja   J.   (1996):   “An   Agenda   for  
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 International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 91
Volume 2, No. 5, May 2013

Comprehensive   Tax   Reform”   Towards sustainable

Growth- Essays in Fiscal and Financial Sector
Reforms In India, Oxford University Press, New
Delhi.
[4.] Chelliah, Raja J. and R. Kavita Rao (2001):
“Rational   Ways   of   Increasing   Tax   Revenues   in  
India”   presented   in   World   Bank   Conference   Fiscal
Policies to Accelerate Economic Growth, New
Delhi, May 21-22.
[5.] Dr. Ahuja, Girish and Dr. Gupta, Ravi. (2007):
“Systematic   approach   to   Income   Tax   and   Central  
Sales   Tax”   Book,   Bharat   Law   House   Pvt.   Ltd.  
Publication, New Delhi.
[6.] Lal,   B.B   and   Vashisht,   N.   (2008):   “Direct   Taxes,  
Income   Tax,   Wealth   Tax   and   Tax   planning”   Book,  
Pearson Education, New Delhi.
[7.] Planning Commission, Government of India (2001):
“Report   of   the   Advisory   Group   on   Tax Policy and
Tax Administration for the Tenth Plan”,  New  Delhi.
[8.] Dornbusch, R., Fischer, S., Startz R. (2004).
Macroeconomics 9th Ed. New York: McGraw-Hill.
[9.] Romer, D. (2001). Advanced macroeconomics (2nd
Ed). New York: McGraw-Hill.
[10.] Warner, KE. (1999). The psychology of saving.
Cheltenham: Edward Elgar Publishing Limited.

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