Tax Planning

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Income Tax – Basics


​In this module, we are going to learn how tax planning is an integral part of financial planning. We will start with the basics of tax and gradually move towards the understanding of how different types of incomes are taxed. For example, income from salary is taxed differently than income from business and profession. So, let's start: 

What do you understand by Taxes?

Tax is the amount payable on an income, activity or a product to the Government.

Explain the Indian Tax structure

The Indian tax structure comprises of the following:

 What is tax planning?

Tax planning is a method of arriving at tax liability based on income in such a way so as to take the maximum benefit of the deductions and exemptions available under the provisions of the Act.

A person who is being assessed to determine how much tax they must pay is known as an assessee.

The income of an assessee for a financial year is fixed. Now, the assessee can allocate a part of the income to various savings and investments under the category of deductions and exemptions, this will allow an assessee to reduce the tax liability.

For example, your income is ₹5,00,000 wherein you get an exemption of ₹2, 50,000. Here, you can invest in life insurance policies or fixed deposits of a term of 5 years or any other investment for which deduction is available u/s 80C.

Hence, getting a total exemption of ₹ 2,50,000 + ₹1,50,000 = ₹4,00,000. Hence, tax shall be payable on ₹1,00,000 only. Such planning in which we reduce the amount on which tax is payable is known as Tax Planning. 

What are the basic criteria for being charged Income-tax?

The basic criteria  is to earn income. Once an assessee starts earning, he/she is required to file income-tax subject to the provisions of the Act. The taxability depends on the income tax slab and the status of the assessee under the Act. 

Who is a Person, defined under the Income Tax Act?

As per the provisions of section 2 of subsection 31 of the Act, a person includes:

  • an individual,
  • a Hindu undivided family,
  • a company,
  • a firm,
  • an association of persons or a body of individuals, whether incorporated or not,
  • a local authority, and
  • every artificial juridical person, not falling within any of the preceding sub-clauses.

​What is a Previous Year defined under the Income Tax Act?

As per the provisions of section 3 of the Act, previous year refers to the financial year immediately preceding the assessment year.
For example: If the assessment year is 2021-22, then the financial year will be 2020-21.

What is an Assessment year defined under the Income Tax Act?

As per the provisions of section 2(9) of the Act, the year following the financial year (FY) is the assessment year (AY) starting from the First day of April every year.
So the assessment year for the year 2020-21 shall be April 1st, 2020 – March 31st, 2021.

How does Financial Year (FY) differ from Calendar Year (CY)?
 
The financial statements are prepared for a period of one year and this period differs from country to country. In India, the financial year starts from the 1st day of April and ends at the last day of March.
 
Calendar year is the general timeline of 1 year period starting from January and ending in December. So for the current year, the calendar year is Jan 2020 – Dec 2020.
 
What is the meaning of the Basic amount not chargeable to the income tax?
 
The basic amount not chargeable to tax refers to the maximum amount up to which no tax shall be chargeable to the assessee.
For example: In the case of an individual, the maximum amount not chargeable to tax which is the basic exemption limit amounting to ₹2,50,000.
 
Who is an Assessee defined under the Income Tax Act?
 
As per the provisions of section 2(7) of the Act,  an assessee means a person by whom any tax or any other sum of money is payable under this Act, and includes—
 
(a)  every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or assessment of fringe benefits or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person ;
 
(b)  every person who is deemed to be an assessee under any provision of this Act;

(c)  every person who is deemed to be an assessee in default under any provision of   this Act;

What is ‘Exempt Income’ and discuss its coverage?

Exempt income refers to those items or income which does not form part of the computation of income. These incomes are explicitly mentioned under each of the heads of income and are categorised as below:

How Interest Income earned from savings bank accounts are treated?

According to the provisions under section 80TTA, interest income earned by an assessee (other than a senior citizen, they have a separate section for deduction) from the bank deposits in a savings account are exempted from taxation subject to the following:

The interest income shall be from the deposits made in:

  • A banking company
  • A co-operative society engaged in banking business
  • Post office

The amount allowed shall be the lower of:

  • Total Interest Income Earned
  • Rs. 10,000/-

What does 'Set Off & Carry Forward of Losses' mean?

In income-tax provisions, a loss incurred can be set off against the income earned and the balance of loss that remains unsettled can be carried forward to next year subject to the related provisions.

Set off can be done from the income of the same source or it can be done from a different source of income.

However, do note that certain losses can be set off only against the same sources of income. 

For example:  losses from house property can be adjusted against income from house property.

State the Personal Income Tax Rates / Slabs

From the Financial year 2020-2021, a new tax regime was introduced by our Finance Minister along with the Old/Existing Tax regime. So an assessee can file income tax under any one tax regime. The tax slabs are also different. They are mentioned below. 

Existing Regime Slab Rates for FY 20-21 (AY 21-22) are mentioned below :

For a resident individual ( <60 years)

Note: This will be subject to Health & Education cess of 4 % 

For a resident individual (60 < 80 years)

Note: This will be subject to Health & Education cess of 4 % 

For a resident individual (80 years and above)

Note: This will be subject to Health & Education cess of 4 % 

New Regime Slab Rates for FY 20-21 (AY 21-22) are mentioned below : 

Note: If a taxpayer's total taxable income for a given financial year does not exceed the ₹5,00,000 threshold, they are eligible for a rebate under Section 87A.

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