Financial Planning

Financial Planning is the process of estimating the capital required and determining
it’s competition. It is the process of framing financial policies in relation to procurement,
investment and administration of funds of an enterprise.

Financial planning, also called budgeting, is the process of setting performance goals
and organizing systems to achieve these goals in the future. In other words, planning
is the process of developing business strategies and visions for the future. It’s big
picture stuff.

Financial planning is the task of determining how a business will afford to achieve its
strategic goals and objectives. Usually, a company creates a Financial Plan
immediately after the vision and objectives have been set. The Financial Plan
describes each of the activities, resources, equipment and materials that are needed
to achieve these objectives, as well as the timeframes involved.

Importance of Financial Planning

Financial Planning is process of framing objectives, policies, procedures, programmes

and budgets regarding the financial activities of a concern. This ensures effective and
adequate financial and investment policies.

Importance

• Financial Planning helps in ensuring a reasonable balance between

outflow and inflow of funds so that stability is maintained.
• Adequate funds have to be ensured.
• Financial Planning ensures that the suppliers of funds are easily
investing in companies which exercise financial planning.
• Financial Planning reduces uncertainties with regards to changing
market trends which can be faced easily through enough funds.
• Financial Planning helps in making growth and expansion
programmes which helps in long-run survival of the company.
• Financial Planning helps in reducing the uncertainties which can be a
hindrance to growth of the company. This helps in ensuring stability
and profitability in concern.

The Financial Planning activity following tasks:

• Confirm the business vision and objectives.

• Assess the business environment.
• Identify the types of resources needed to achieve these objectives.
• Calculate the total cost of each type of resource.
• Quantify the amount of resource (labor, equipment, materials).
 • Identify any risks and issues with the budget set.
• Summarize the costs to create a budget.

The role of financial planning includes three categories:

• Objectives of financial management

• Strategic role of financial management
• The planning cycle.

Objectives of Financial Planning

• Determining capital structure: The capital structure is the

composition of capital, i.e., the relative kind and proportion of capital
required in the business. This includes decisions of debt- equity ratio-
both short-term and long- term.
• Determining capital requirements: This will depend upon factors like
cost of current and fixed assets, promotional expenses and long-
range planning. Capital requirements have to be looked with both
aspects: short- term and long- term requirements.
• A finance manager ensures that the scarce financial resources are
maximally utilized in the best possible manner at least cost in order to
get maximum returns on investment.
• Framing financial policies with regards to cash control, lending,
borrowings, etc.

Advantages

It will set out clearly the money that you need to put together to start the business and
then to run it for a period. It will help you to obtain funding if you need it. It will help
prevent you from going into a business that will not be successful. Highlight periods
where your business may need extra financial help. Inspire confidence in lenders and
banks that you may have to approach for finance. It will help you to spot problems
early so you can make plans for the necessary solution. For example, it will highlight
whether you are holding too much stock or whether your collection is less than it should
be or that you will be short of cash at a particular time.

Limitations of Financial Planning:

Rapid Changes:

The growing mechanization of the industry is bringing rapid changes in the industrial
process. The methods of production, marketing devices, consumer preferences create
new demands every time. The incorporation of new changes requires a change in
financial plan every time.

A Problem of Coordination:
The financial function is the most important of all the functions. Other functions
influence a decision about the financial plan. While estimating financial needs,
production policy, personnel requirements, marketing possibilities are all taken into
account.

Changes:

Once a financial plan is prepared then it becomes difficult to change it. A changed
situation may demand a change in financial plan but managerial personnel may not
like it. Even otherwise, assets might have been purchased and raw material and labor
costs might have been incurred. It becomes very difficult to change a financial plan
under such situations.

Forecasting:

Financial plans are prepared by taking into account the expected situations in the
future. Since the future is always uncertain and things may not happen as these are
expected, so the utility of financial planning is limited. The reliability of financial
planning is uncertain and very much doubted.

Need of financial Planning and Process of

Financial Planning
Need of financial Planning

Efficiently Managing Debt

Taking a loan does offer instant gratification. However, when the liabilities turn in to a
debt trap, it’s time you put your personal finances in order with a financial plan. Many
often land up increasing our loans and borrowings through credit cards, overdraft
facilities or personal loans. In most cases, these easy finance options result in
damaging their financial health, leading them into a financial mess. A financial plan will
not only help you to come out of this mess, but will also enable you to manage your
cash flows better in order to achieve your other financial goals.

Invest In the Right Financial Products

Many people invest in the equity asset class through shares or mutual funds. However
more often than not, as mentioned earlier, such investments are done on
recommendations from friends and relatives and without taking into consideration
one’s financial goals and risk appetite. In most of the cases these unplanned and non-
researched investments result in loss of the investors’ money. Hence, it is extremely
important that you invest only after considerable research has been undertaken on
any investment proposition. Constructing a financial plan will enable you or your
financial planner to review your portfolio (both equity and debt) and strike the right
asset allocation to provide you with the best possible outcomes.

Weeding Out inefficient Financial Products

Sometimes people land up taking multiple insurance policies such as Endowment,

Money Back, ULIPs, Pension Plans etc. due to the incomplete knowledge or mis-
selling of products through agents. Many a times, these policies do not solve the
purpose of the insured and only result in filling the pockets of the agent who sold you
that policy. Some policies which promise you a life cover plus returns (market linked)
may fail to do both. More often than not, these policies provide a very low cover and
also low returns due to the number of charges involved. A financial planner can help
you understand which insurance policy suits you the best and which ones are best
avoided.

Set SMART Financial Goals

If you want to plan for financial goals such as buying your dream home, a car, a
vacation abroad, child’s education and their marriage needs and your retirement
amongst host of others; prudent financial planning can come to your recourse.
Through experience we can say that many vie for all the aforementioned goals, but
lack of prudent financial planning and / or procrastination on executing the financial
plan drawn, which in turn hinders accomplishment of financial goals set. So, it is
imperative that a prudent financial plan is made, and is vigilantly and religiously
followed so as to make your dreams come true.

A Blueprint of long-term Goals

If you don’t have road map of how to achieve your dreams, a prudently drawn financial
plan can be your blue print to meet all your financial goals while empowering you to
deal with contingencies as well. Hence financial planning is for those who have unclear
ideas or plans of how they would achieve their dreams and wishes in life.

Managing Cash Flows or Budgeting

If you don’t realise where and how your income is spent every month, then you
definitely need to plan your finances better. Many people fail to understand how their
monthly salaries get extinguished, leaving them with very little or absolutely nothing to
save. Impulsive buying and lack of budgeting for expenses leads to many problems in
the long run. Thus, maintaining a budget is crucial to stay on track towards your long-
term financial goals, while you may achieve all the fancies of life in the short run.

Streamlining Investments

If your investments are scattered and you are yourself unsure about where you have
invested, then it’s high time for you to put your portfolio in order. Many often indulge in
investing in a haphazard manner without conducting a proper need-based analysis or
undertaking sufficient research on financial products. In most of the cases, tips from
friends and families go about forming a portfolio, which may eventually leave an
unsuitable portfolio for you. Also investing in an ad-hoc manner results in scattered
investments which get difficult to manage / track. The investment portfolios of such
investors are extremely strewn with duplicating schemes and investments that do not
provide any advantage of diversification. Such investment portfolios need to be
consolidated and re-aligned so as to meet your financial needs.

Set The Right Asset Allocation

Most people consider equity as the best investment option especially during a stock
market rally. However, it is never wise to put all eggs in the same basket. It is vital for
you to understand that not all assets move in the same direction at the same time. If
equities are witnessing a bear market, it is unlikely that other asset classes such as
gold, debt instruments and real estate will also be witnessing a down-turn at the same
time or vice-versa. Hence, it is best to invest in more than one type of instrument to
improve your chances of achieving your long-term goals with minimal turbulence.
Hence, a suitable asset allocation for you can be devised through a financial plan that
acts as a shield to protect your wealth during uncertain economic conditions and
market volatility.

Calculating The Right Insurance Cover

In case of unfortunate circumstances, the right amount of insurance can be a financial

boon to you or your family members. While life insurance will ensure that your family
members are able to maintain the same standard of living even in your absence, the
right amount of health insurance cover can avoid burning a huge hole in your savings
that mishaps or unforeseen tragic events could have created. However, many people
do not understand how much life and medical cover they should take. A holistic
financial plan will take into account your income, expenses and goals amongst host of
other aspects to determine the optimal amount of cover both your life and health
insurance needs.

Inculcating A Regular Savings Habit

To create wealth in the long-term, investing with discipline and determination is the
key. Even a child needs discipline and regular monitoring to achieve his goal of being
a good student. Hence, you too, need to invest regularly and wisely to meet your
financial goals. Investing small amounts regularly will also prove to be light on your
wallet and reduce the burden of defraying a huge amount from your bank account.
With a financial plan in place, you can determine the amount that you would need to
invest regularly to meet all your goals. You can establish the requisite corpus for
meeting your financial goals through planned investments in the right investment
avenues.

Process of Financial Planning

Step 1: Defining and agreeing your financial objectives and goals

The goals and objectives will be the guide to the financial plan and should provide a
roadmap for your financial future. They should contain the following features:

• Clear and have a defined timeframe

• Quantifiable and achievable
• Separate your needs from your wants

They should be agreed and documented with your financial adviser to assist you
measure progress. They should also be reviewed periodically to capture changing
circumstances and to ensure they remain relevant.

Step 2: Gathering your financial and personal information

The financial planning process and its success will depend on the quality and clarity
of the information communicated to your adviser. Your adviser will complete a detailed
financial fact-find to capture all relevant information in relation to your finances. This
will include:

• Assets and liabilities

• Income and expenditure
• Risk attitude, tolerance and capacity

Step 3: Analysing your financial and personal information

Your financial adviser reviews the information provided in step 2 and uses it to produce
a report that reflects your current financial profile. The following ratios are produced to
improve your understanding of your financial circumstances and to pinpoint areas of
strength or weakness:

• Savings Ratio
• Solvency Ratio
• Debt Service Ratio
• Liquidity Ratio

Your attitude, tolerance and capacity for risk are assessed using a psychometrically
designed risk tolerance questionnaire in relation to investment assets. This is also
analysed to assess your asset allocation for investment or pension goals.

Step 4: Development and presentation of the financial plan

The financial plan is developed based on the information received in step 2 and
analysis completed in step 3. Each of the goals and objectives in step 1 should be
addressed and a recommendation for each identified. It will include:

• Annual consolidated tax calculation

• Net worth statement (a balance sheet)
 • Annual cash flow report (displaying surplus or deficit)

The report is presented, explained, discussed and then signed by both client and
adviser.

Step 5: Implementation and review of the financial plan

Once the analysis and development of the plan is complete, the adviser will outline the
recommended courses of action. This can involve implementing:

• Changing debt provider

• A new pension or investment strategy
• Income and expenditure adjustments.
• Additional life or serious illness insurance

The Adviser may carry out the recommendations or serve as your coach, coordinating
the process with you and other professionals such as, accountants or investment
managers. They may also handle the interaction with financial product providers.

Role of Financial Planner

A financial planner is a qualified investment professional who helps individuals and
corporations meet their long-term financial objectives. Financial planners do their work
by consulting with clients to analyze their goals, risk tolerance, and life or corporate
stages, then identify a suitable class of investments for them. From there they may set
up a program to help the client meet those goals by distributing their available savings
into a diversified collection of investments designed to grow or provide income, as
desired.

A financial planner’s primary role is to assist clients with creating personal budgets;
establishing objectives for saving; minimizing, controlling, and/or managing expenses;
and implementing the necessary steps for creating and accumulating wealth. Financial
planners work with investment managers, mutual funds, and/or financial advisers to
meet their respective clients’ investment needs.

A financial planner’s occupation requires that they remain up-to-date with current tax
legislation and financial product developments and the necessary personal financial
management strategies on retirement and estate planning. Hence, they should also
have good sales skills. They will need to obtain new clients (when necessary) and be
innovative in crafting solutions to improve their clients’ financial situation and ensure
that goals are met.

The duties of a financial planner typically include providing investments and insurance
services to clients, ensuring sound client record-keeping, establishing and maintaining
relationships with clients by remaining up-to-date with the clients’ successes, and
regularly communicating relevant changes that may impact the financial position of the
clients.
They also serve as a middleman for clients and other financial professionals, who offer
guidance on legal, estate management, and personal tax planning.

Types of financial advisors

• Investment representatives

Investment representatives are popularly known as stockbrokers. They help investors

in buying and selling different investments. For example, stock, mutual funds, bonds,
etc. Investment representatives are part of brokerage firms and are registered
investment dealers. They earn a percentage commission on every buy and sell
transaction.

• Investment advisors

An investment advisor is a person who is capable of managing all your investments.

He can also provide investment suggestions on any financial instrument. Investment
advisors are part of registered Portfolio Management companies. Also, investment
advisors either charge a flat fee for their service. Or an annual fee depending on the
size of the portfolio.

• Mutual fund advisor

Mutual fund representatives are certified agents that help you in buying and selling
mutual fund units. The dealers earn a commission from the asset management
company for every sale.

• Personal banker

Personal bankers are agents that are employed by trusts and banks. These bankers
help you in buying and selling savings schemes such as bonds and some government
offerings. Some personal bankers sell mutual funds too.

• Financial planner

A financial planner works closely with you to identify your financial goals and help you
realize them over the long term. The financial planners also help you in financial
planning, investment planning, retirement planning, tax planning, risk management
and many more. They try to strike the right asset allocation to help you reach your
goals

• Insurance advisor

Insurance advisors are licensed representatives that advise on insurance products.

They specialise in selling certain insurance products like life or property insurance. Or
sell a range of all insurance products.
 • Customer Service representative

Customer Service Representatives often offer one-time service. They help you in
opening a bank account or choosing a loan or credit card. They also help in comparing
various mortgage and loan options. Additionally, they may advise on saving bonds
and some government offerings.

Myths about Financial Planning

Financial planning is all about retirement planning

Planning for the future doesn’t mean that it is only for the retirement. But it also means
planning for the unforeseen events of our lives. It is a common misconception that
having a financial plan and savings means making huge sacrifices now and putting
your immediate life goals on hold. This is wrong. With the constant rise in inflation
rates, financial planning is necessary for each one of us so that we are not dependent
on other people to support us for our requirements.

A financial advisor will talk in terms beyond my understanding

Sure, the average person won’t always know all the financial jargon or industry
terminology that financial advisors speak every day. However, the best financial
advisor will embody the heart of a teacher and won’t begin giving you advice until he
or she truly listens and understands you and your financial goals. Ultimately, financial
advisors realize that their success comes from helping you achieve yours.

Too young for financial planning

No one is too young or too old for financial planning. Our circumstances change at
various stages of life so it’s never too early to start financial planning for better financial
future.

At young age, you can create a smart budget and save for big events in your life like
your marriage or buying a house. There are many advantages of starting an early plan
because the interest that you earn on the invested income increases by compounding
and that in turn increases the investment corpus by a phenomenal amount. Thus,
starting early will help you increase your retirement corpus by an unimagined amount!
Planning at the younger age is the ideal thing.

Financial Planning is only for rich

Many people think that financial planning is only for the rich and the elite people. But
this is not true. The fact is that everybody needs money to meet our present and future
financial needs. Hence financial planning is necessary for each one of us. However, it
depends on individuals some may afford to go to a financial planner due to lack of time
or other constraints. While a few people can also try to manage their finance by
seeking good financial education.
I Will Lose Control of My Finances

In the end, a financial advisor doesn’t make the final call for you. They advise you, and
you call the shots. The best financial advisors will give you recommendations based
on investment knowledge, research, and economic trends, but it’s ultimately in your
court to decide whether to proceed with the recommended advice.

Doesn’t need a financial plan

Many of us think that we don’t need a financial plan. Some think that there is a lot of
time to save money. According to me, a financial plan is necessary to meet our future
goals such as money needed for our retirement, buying a house, our children’s
education, their marriage, etc.

Very Busy, no time for this

Yes, all of us are busy. We are busy at work, home, shopping, etc. We constantly
delay our decision to check our portfolio as a result we never understand why financial
planning is necessary. However, it is high time and we need to think serious about our
savings and investments. Since, it is our hard money, and we need to educate
ourselves where to invest and why to invest.

Financial planning is same as investing

The most common misunderstanding among people is that financial planning is all
about investing money in some financial instruments like buying insurance, investing
in FD, recurring deposits, etc.

Investing is one aspect of our financial planning process. Investing money is

necessary but it cannot help us to achieve our financial goals. To meet our financial
goals we need financial planning which is a systematic and long-term process and
cannot be done in a single day.

Financial planning is a one-time exercise

As said earlier, financial planning is a strategic and systematic exercise to achieve

one’s financial goals. Many times people feel that financial planning is a one-time
process and there is no need to review their financial plan regularly. Everyone should
keep in mind that our goals may remain same, but the economic environment,
government policies, taxation norms change so we need to adopt review our plan
accordingly to achieve our financial goals.

Financial planning is free

A lot of people believe that financial planning is free and they don’t need to pay for it.
Remember, there is no free lunch. Some insurance agents or distributors who give
you advice may mis-sell you a financial product which you don’t need completely.
Some of these agents push products because they get good commission on them.
Hence, it is better to educate yourself about financial products. You may also seek a
financial expert’s advice to guide you for products for which he may charge you a
nominal fee.

Factors that influence the personal financial

planning
Solvency and Liquidity

Only invest in those ventures or focus on financial goals that are more likely to yield
sufficient return on investment. Concentrating on anything else defeats the purpose of
financial planning. This means you must be very flexible in shifting toward goals or
ventures that are more appealing at any given point.

Economy

How the economy is performing should always be your concern as it can affect you
positively or negatively. For example, when the economy is expanding, you may be in
a position to boost your savings and focus on more financial goals. On the other hand,
when the economy is contracting, you may find it appealing to focus on the most crucial
goals as a way to cushion yourself from tough times ahead. For example, if you are
an employer, you may want to scale down your employment rate.

Age

Your current age has a huge impact on where you will be financially in the coming
days. While still young (in your 20s and 30s), you are in a position to take a
considerable amount of risk. So, the earlier you start implementing your goals, the
better. Equally, your age determines how much time you have to accomplish your
financial goals. This again emphasizes the importance of focusing while still young.

Responsibilities

How many people financially directly depend on you? If they are people who rely on
you, for example, your parents, children, make sure to factor them in your financial
plan. Otherwise, as much as you try to save, it will not be possible to save for your
short- and long-term goals.

Provision for emergencies

Your financial plan is not complete if you have not included a section for emergencies.
It is wrong to focus on investments and forget that emergencies can hit at any time.
The best way to manage emergencies is by having a good insurance cover. That way,
you can be sure that any time uncertainties arrive, your savings will remain intact.

Financial Potential

How far and fast you can go financially primarily depend on your current savings,
current investment, and ability to save for the future. If you want to go far and fast, you
must, therefore, pay keen attention to current financial prowess.

Changing Culture

Modern culture is ever-changing, and while you can ignore some things, you have to
welcome some. Are you ready financially to accommodate what is inevitable? For
example, are you prepared to finance significant events like graduation and wedding
for your children? To avoid relying on your savings when such events arrive, make
sure to have a provision in your business plan that addresses them. A customizable
financial plan can help you tackle new life demands without hurting your savings.

Financial Goals

How many financial goals do you have? Are they achievable? It is wise to have
achievable goals. Equally, it is crucial to prioritize them. Just having goals and not
knowing which ones are weightier is something you may want to avoid if serious about
financial planning.

Simply align your financial goals with your financial plan. Once you do that, it will be
easier to transform what looks good on the paper to something that is appealing in
real life.

Financial Planner or Advisor

Financial professionals are there to give a hand any time we need financial support.
Talking to a certified financial expert can change your standpoint on financial planning.
One grave mistake most people make when planning (which you must avoid) is
consulting their friends, family members, or other unqualified individuals on financial
matters. While you may pick a few worth pieces from them, only certified financial
planners or advisors can point you in the right direction.

Savings and Investments

How you choose to invest it very crucial. You make a slight mistake, and you could be
in for a rough experience for the rest of your life. When it comes to savings, for
example, when planning for retirement, make sure to settle for the best retirement
plan. The same applies when choosing an investment vehicle for retirement. Choose
the best, don’t settle for less. You may want to consult financial professionals if you
find it challenging to decide.
Spending Behavior

Your financial life is linked directly to your spending. How you spend today determines
whether you will achieve your future financial goals or not. Living within your means is
very key to a bright future.

One downside of overspending is that you lose your credibility among lenders. Other
serious consequences pop up if you don’t control your spending behavior. In a
nutshell, you must be watchful of your expenses to live comfortably in the coming days.

Investor’s life cycle

The investor life cycle refers to the different stages of investment ownership, from the
initial purchase, to the sale of the investment. The most commonly used investor life
cycle includes the accumulation phase, the consolidation phase and the spending and
gifting phases. The asset allocation decisions are usually different at the various
stages of the investor life cycle. We have all heard that we should invest in more
equities at an early age. But while age is important for asset allocation, its importance
is relevant only because our conditions and resources change over time. Individuals
at different stages of the investor life cycle can be of the same age, but would still need
to have different asset allocation strategies.

Accumulation Phase

Investor early or middle to their career tries to accumulate fund so that individual can
have money to spend in the later phase of their life. Some people accumulate the fund
to buy house, car or other important assets and some people accumulate for their
children’s education cost, life peaceful life after retirement.

Funds invested in the early phase of life gives an investor a huge amount of fund which
is compounding over the years

Consolidation Phase

Consolidation phase is the midpoint of their career, in this phase, they earn more,
spends more and pay off all their debts. In this phase moderately high risk taken by
the investor but for capital reservation some investor prefer lower risk investor.
Individual invest in the capital market and investment securities.

Spending Phase

This phase starts when an individual retires from the job. Their overall portfolio is to
be less risky than the consolidation phase; they prefer low risky investment or risk-free
investment. People prefer fixed income securities like a bond, debenture, treasury bills
etc. In this phase, they need some risky investor if they have extra money so that
future inflation can be adjusted.

Gifting Phase

If individuals believe that they have enough extra funds to meet their current and future
expenses then they go for gifting money to their friends, family members or establish
charitable trusts. These can reduce their income taxes and they also keep some fun
for future uncertainties.

Over the different phase, investor behaves differently and invest in their preferred
sector according to their risk-taking behavior.

Financial goals of investors

Investment funds has a set of goals that meet the requirements of investors and
commensurate with the acceptable risk levels. The fund’s manager follows a specific
policy and investment strategy to achieve these goals. That is why the securities that
form the assets of these funds vary according to its goals and objectives. For example:
when the achievement of a steady income is the goal of the fund’s investment, the
fund’s manager sets the policies and investment strategies that will determine the
securities to form the fund’s assets to achieve these goals.

Our relationship with money starts at an early age when we notice family members
exchanging coins or bills for all sorts of stuff we like. Money’s power and authority
grow when we get our first allowance or paid chore. These early experiences foster
habits and beliefs that last throughout your life. Its challenges multiply as we approach
adulthood and are encouraged to take loans to pay for college or buy a car.
Parental figures set the tone for investment goals early in life, teaching us to delay
gratification until we can break the piggy bank, allowing those coins to buy video
games, clothes or equipment. The intimate connection between investment and
lifestyle grows more sophisticated as the years pass. The culmination of your working
life is either a comfortable retirement or a struggle to make ends meet.

Consider stocks as tools for living, just like any other investment no more, no less.
Stocks are among the many tools you use to accomplish something to achieve a goal.
Yes, successfully investing in stocks is the goal that you’re probably shooting for.

You must consider stock investing as a means to an end. When people buy a
computer, they don’t (or shouldn’t) think of buying a computer just to have a computer.
People buy a computer because doing so helps them achieve a particular result, such
as being more efficient in business, playing fun games, or having a nifty paperweight
(tsk, tsk).

Know the difference between long-term, intermediate-term, and short-term goals, and
then set some of each.

• Long-term goals refer to projects or financial goals that need funding

five or more years from now.
• Intermediate-term goals refer to financial goals that need funding two
to five years from now.
• Short-term goals need funding less than two years from now.

Stocks, in general, are best suited for long-term goals such as these:

• Achieving financial independence (think retirement funding)

• Paying for future college costs
• Paying for any long-term expenditure or project

Some categories of stock (such as conservative or large cap) may be suitable for
intermediate-term financial goals. If, for example, you’ll retire four years from now,
conservative stocks can be appropriate.

If you’re optimistic (or bullish) about the stock market and confident that stock prices
will rise, go ahead and invest. However, if you’re negative about the market (you’re
bearish, or you believe that stock prices will decline), you may want to wait until the
economy starts to forge a clear path.

Some information to help you distinguish among these three actions:

Saving is the safe accumulation of funds for a future use. Savings don’t fluctuate and
are generally free of financial risk. The emphasis is on safety and liquidity.
Investing is the act of putting your current funds into securities or tangible assets for
the purpose of gaining future appreciation, income, or both. You need time,
knowledge, and discipline to invest. The investment can fluctuate in price, but it has
been chosen for long-term potential.

Speculating is the financial world’s equivalent of gambling. An investor who speculates

is seeking quick profits gained from short-term price movements in a particular asset
or investment. (In recent years, many folks have been trading stocks [buying and
selling in the short term with frequency], which is in the realm of short-term
speculating.)

Objectives of investment funds can be generally classified as the following:

• Invest to achieve income.

• Invest to maintain capital.
• Invest to achieve income and growth.
• Invest to achieve high growth.
• Invest to achieve growth.

Investment goals become moving targets for many individuals, with carefully laid-out
plans running into roadblocks in the form of layoffs, unplanned pregnancies, health
issues and the need to care for aging parents. Those unexpected challenges demand
a dose of realism when choosing 401(k) allocations or deciding how to spend a year-
end bonus, with the old axiom “saving for a rainy day” ignored by many folks until it’s
too late.

Fortunately, it’s never too late to become an investor. You may be in your 40s before
realizing that life is moving more quickly than expected, requiring contemplation about
retirement. Fear can dominate your thinking if you wait this long to set investment
goals, but that‘s OK if it adds a sense of urgency to wealth management. All
investments start with the first dollar set aside for that purpose, whatever your age,
income, or outlook. Of course, those investing for decades hold a major advantage,
while their growing wealth allows them to enjoy the fruits of their saving habits.

Set Up an Investment Goals Workflow

Investment goals address three major themes regarding money and money
management. First, they intersect with a life plan that engages our thought processes
in unexpected ways. Second, they generate accountability, forcing us to review
progress on a periodic basis, invoking discipline when needed to stay on track. Third,
they generate motivation that impacts our non-financial selves in positive ways that
can improve health and mental outlook.

Once established, the investment plan forces you to think about sacrifices that need
to be made and budgets that need to be balanced, understanding that delay or failure
will have a direct and immediate impact on your wealth and lifestyle. This process
induces long-range thinking and planning, allowing you to abandon a hand-to-mouth
approach and set a priority list for the things in life you truly value.

Use monthly or quarterly statements to review progress and recommit to your chosen
life plan, making small adjustments rather than big changes when money flow
improves or deteriorates. Review your annual returns periodically, and enjoy seeing
your wealth grow without direct intervention or a holiday check from a relative. Learn
to deal with losing periods in a mature manner, using the red ink to build patience while
reexamining how your decision-making may have impacted those negative returns.

Risk Appetite, Risk Profiling

Risk Appetite

Risk appetite is the level of risk that an organization is prepared to accept in pursuit of
its objectives, before action is deemed necessary to reduce the risk. It represents a
balance between the potential benefits of innovation and the threats, that change
inevitably brings. The ISO 31000 risk management standard refers to risk appetite as
the “Amount and type of risk that an organization is prepared to pursue, retain or take”.
This concept helps guide an organization’s approach to risk and risk management.

Types:

Averse: Avoidance of risk and uncertainty is a key organization objective.

Minimal: Preference for ultra-safe options that are low risk and only have a potential
for limited reward.

Cautious: Preference for safe options that have a low degree of risk and may only
have limited potential for reward.

Open: Willing to consider all potential options and choose the one most likely to result
in successful delivery, while also providing an acceptable level of reward and value for
money.

Hungry: Eager to be innovative and to choose options offering potentially higher

business rewards, despite greater inherent risk.

Three main attributes determine your risk appetite: your personal attitude to risk, how
much risk you need to take to achieve your investment goals, and your capacity for
loss how much you can afford to lose.

“Understanding what risk to take when investing is a hard thing to do without guidance
because taking on too little or too much risk can be dangerous,” says Charles Calkin,
financial planner at James Hambro & Co.
Taking on too little investment risk means you may not achieve your financial goals,
while taking on too much risk means you might lose money you can’t afford to lose.

Risk Profiling

Risk profiling is important for determining a proper investment and asset allocation for
a portfolio. Every single person has a different risk profile as the risk appetite depends
on psychological factors, loss bearing capacity, investor’s age, income & expenses
and many such other things.

A risk profile is an evaluation of an individual’s willingness and ability to take risks. It

can also refer to the threats to which an organization is exposed. A risk profile is
important for determining a proper investment asset allocation for a portfolio.
Organizations use a risk profile as a way to mitigate potential risks and threats.

Traditional finance uses the concepts of classical decision making, modern portfolio
theory, and the capital asset pricing model (CAPM) to define the risk profile of an
investor. In this model, investors are inherently risk averse and take on additional risk
only if they judge those higher anticipated returns will compensate them for it. One of
the fundamental results of modern portfolio theory is that, under the assumptions of
the CAPM (Sharpe 1964), all investors invest in a combination of the risk-free asset
and the market portfolio. The allocation of funds between the risk-free asset and the
risky market portfolio is determined only by the risk aversion of the investor. Thus, in
the world described by this traditional model, the investor’s risk profile is given by the
risk aversion factor in the utility function of the investor.

Risk capacity applies to the objective ability of an investor to take on financial risk.
Capacity depends on objective economic circumstances, such as the investor’s
investment horizon, liquidity needs, income, and wealth, as well as tax rates and other
factors. The primary distinguishing feature of risk capacity is that it is relatively immune
to psychological distortion or subjective perception. Risk aversion, however, may be
understood as the combination of psychological traits and emotional responses that
determine the investor’s willingness to take on financial risk and the degree of
psychological or emotional pain the investor experiences when faced with financial
loss. These emotional factors are often even more important for practitioners to
understand than the objective economic circumstances of the investor; yet, they are
harder to measure.

Aggressive

Willing to take significant risks to maximise returns over the long term

*Possible Allocation – Equity: 90-100%; Debt and others: 0-10%

Moderately Aggressive

Seeking to maximise returns over medium to long term with high risk
*Possible Allocation – Equity: 70-90%; Debt and others: 10-30%

Moderate

Looking for relatively higher returns over medium to long term with modest risk

*Possible Allocation: Equity: 40-60%; Debt and others: 40-60%

Moderately Conservative

Willing to take small level of risk for potential returns over medium to long term

*Possible Allocation: Equity: 10-30%; Debt and others: 70-90%

Conservative

Seeking safety of capital, minimal risk and minimum or low returns

* Possible Allocation: Equity: 0-10%; Debt and others: 90-100%

Systematic approach to investing: SIP, SWP,

STP
SIP

A systematic investment plan (SIP) is a plan in which investors make regular,

equal payments into a mutual fund, trading account, or retirement account. SIPs
allow investors to save regularly with a smaller amount of money while
benefiting from the long-term advantages of rupee-cost averaging (RCA). By
using a RCA strategy, an investor buys an investment using periodic equal
transfers of funds to build wealth or a portfolio over time slowly.

Benefits

1. Disciplined investment approach

2. Allows you to start small and increase the investment amount
gradually
3. Comes with two beneficial investment strategies:

• Power of compounding- the returns are compounded making the

amount huge
• Rupee cost averaging- balances out the risk and volatility
 4. Easy to use
5. Timing the market is not required

SWP

An SWP allows you to withdraw a specific sum of money from a fund at regular
intervals. Such a system is particularly suited to retirees, who are typically
looking for a fixed flow of income. SWPs provide the investor with a certain level
of protection from market instability and help avoid timing the market.

STP

Generally, one opts for an STP when there is a lump sum to invest. Like a SIP, an
STP helps spread out investments over a period of time to average the purchase
cost and rule out the risk of getting into the market at its peak. However, with an
STP, you invest a lump sum in one scheme (mostly a debt scheme) and transfer a
fixed amount from this scheme regularly to another scheme (mostly an equity
scheme).

The basic idea behind an STP is to earn a little extra on the lump sum while it is
being deployed in equity, since debt funds provide better returns than a normal
savings bank account.

Depending on the lump-sum amount, the investor can decide the period over
which he wants to deploy the money in the market. Typically, the larger the
amount, the longer the time period.

An STP can be done from an equity fund to a debt fund as well. If you are saving
for an important goal like your child’s education, buying a home or retirement
and you are nearing your goal, don’t wait till the target date. Begin moving your
money from equity to debt well before the time when you will need the money.

Following are the benefits of STP

1. Consistent returns
2. Cost averaging
3. Portfolio Re-balancing

Types of STP

1. Fixed STP: A fixed amount is drawn from investment and invested

in another.
 2. Capital appreciation STP: The profit gained from one investment
is drawn out and invested in other.
3. Flexi STP: A flexi-STP allows you to keep one set of funds in one
investment type say debt funds and transfer it to other type say
equity funds depending upon the market condition.

Financial Plan; Goal based Financial Plan

Financial planning is a step-by-step approach to meet one’s life goals. A financial plan
acts as a guide as you go through life’s journey. Essentially, it helps you be in control
of your income, expenses and investments such that you can manage your money
and achieve your goals.

A financial plan is a document containing a person’s current money situation and long-
term monetary goals, as well as strategies to achieve those goals. A financial plan
may be created independently or with the help of a certified financial planner.

Enjoy a better standard of living

Most people assume that they would have to sacrifice their standard of living if their
monthly bills and EMI repayments are to be addressed. On the contrary, with a good
financial plan, you would not need to compromise your lifestyle. It is possible to
achieve your goals while living in relative comfort.

Increase your savings

It may be possible to save money without having a financial plan. But it may not be
the most efficient way to go about it. When you create a financial plan, you get a good
deal of insight into your income and expenses. You can track and cut down your costs
consciously. This automatically increases your savings in the long run.

Attain peace of mind

With adequate funds at hand, you can cover your monthly expenses, invest for your
future goals and splurge a little for yourself and your family, without worry. Financial
planning helps you manage your money efficiently and enjoy peace of mind. Don’t
worry if you have not yet reached this stage. If you are on the path of financial planning,
the destination of financial peace is not very far away.

Be prepared for emergencies

Creating an emergency fund is a critical aspect of financial planning. Here, you need
to ensure that you have a fund that is equal to at least 6 months of your monthly salary.
This way, you don’t have to worry about procuring funds in case of a family emergency
or a job loss. The emergency fund can help you pay for varied expenses on time.
Goal based Financial Plan

Goal based financial planning is a method which can help you achieve multiple goals
across different stages of life. There are some common life-stage goals of most
investors e.g. buying a house, children’s higher education and marriage, retirement
planning and leaving an estate for your loved ones. In addition to these goals, some
clients may have other goals specific to their individual needs and aspirations e.g.
planning for a foreign vacation, buying / building a vacation home, saving a corpus to
start a business, accumulating for early retirement etc. Goal based planning is the
process of defining different goals, quantifying these goals factoring in inflation and
having an investment plan to meet these goals.

Step process:

Setting goals: You should lay-out all your goals in different stages of life. You should
estimate how much money you need for each and always factor in inflation, especially
for your long-term financial goals.

Assessing your risk appetite: This is an important step in financial planning because
you need to take the right amount of risk to achieve your financial goals. If you take
too much risk, you may lose your hard-earned money due to adverse market
movement at the time you need it. If you take too little risk, you may not be able to get
sufficient returns to meet your goals. Your risk appetite depends on your age, stage of
life, goal time-lines and financial situation. You should always invest according to your
risk appetite.

Expense Budgeting: You should assess your post tax income, your expenses
(essential and discretionary), assets (bank deposits, mutual funds etc.), liabilities (car
loans, home loans etc.) and create your budget. Once you have a budget, you know
how much you can save and invest in a systematic way for your financial goals.
Suggested reading: Maximise your SIP returns in volatile markets.

Prepare an investment plan: This is the final step of the financial planning process.
Once you know your goals, risk appetite and asset allocation profile, the rest of the job
is simply to calculate how much you need to save and invest based on goal amount,
goal horizon and expected return on investment based on your asset allocation.
Sometimes in this step, you may realize that you need to save more and cut down
some discretionary expenses. Do not despair, if you are not able to save more. You
should start with what you can save. Over period of time, as your income goes up, you
will be able to save and invest more. You can use facilities like Top-up SIPs, to
increase your investments over time and achieve your goals.

Asset allocation according to goals and risk appetite: Risk and returns are
interrelated higher risk, higher returns in the long term and vice versa. Different asset
classes have different risk profiles, e.g. equity has a higher risk profile compared to
gold or fixed income. Remember that for different financial goals, you should invest in
the right asset class depending on the goal and risk appetite.
Comprehensive Financial Plan, Financial Blood
Test Report
A comprehensive financial plan involves a detailed look at your current financial
situation, a discussion of financial goals and the development of a plan and the
financial products to get from here to there. A small business owner should include
both personal financial assets and the value of the business in the total plan.

Tax Planning

The tax planning part of your financial plan also coordinates with the other sections of
the plan to ensure your financial choices are as tax efficient as possible. You pay
personal and business income taxes and must always be aware of estate taxes. Tax
planning works to avoid paying too much money to the government and keeping as
much of your financial assets for you, your family and your heirs.

Your Assets

The different portions of your financial plan will be integrated with each other and the
different parts will include aspects of other sectors of the plan. On the assets pages of
your plan are your investments and your retirement savings. Investments could include
stocks, bonds, mutual funds and investment real estate. The plan should review
whether your current mix of investments is appropriate to meet your long- and short-
term goals. On the retirement savings side, the plan reviews the types of plans you
have selected, how they are funded and if you have picked the best type of plan for
your business.

Passing Along Wealth

The estate plan portion of your financial plan covers how to ensure everything you
worked for is passed efficiently to your heirs. This portion of the plan includes
information about your investments, life insurance, wills and trusts and the disposition
of your business assets. As you increase your wealth and move through the stages of
life, the estate planning portion of your financial plan tends to become a strong force
in the decision-making process for all parts of the plan.

Your Protection

The protection section of your plan covers the different types of insurance. Property
and casualty products like auto and homeowner’s insurance are straightforward. As a
business owner, liability insurance protects you and your business against legal
actions. Life insurance is important to provide a standard of living to your family, pay
estate tax bills or to cover business obligations.

Reaching Your Goals

The purpose of putting together a comprehensive financial plan is to ensure your
current and future choices in the financial markets are positive steps toward reaching
your financial goals. To coordinate the varied aspects of your financial life, you
probably need one financial adviser with the training to develop a comprehensive
financial plan. This adviser will work and coordinate with the other professionals who
handle parts of your finances such as insurance agents, investment advisers and
lawyers.

A comprehensive financial plan involves:

• A discussion and understanding of your long term, financial goals

• A thorough review of your current financial situation.
• The development of a plan including all financial products needed to
take you from where you are today to where you need to be in the
future.

A solid financial strategy includes, among other topics specific to your life situation and
goals:

• College planning
• Retirement planning
• Tax management
• Risk management
• Debt structure
• Estate management
• Insurance
• Complex life issues. This includes your family structure, such as taking
care of aging parents now, or perhaps sooner than you expected to.

Financial Blood Test Report

In accounting, a financial condition report (FCR) is a report on the solvency condition

of an insurance company that takes into account both the current financial status, as
reflected in the balance sheet, and an assessment of the ability of the company to
survive future risk scenarios. Risk assessment in an FCR involves dynamic solvency
testing, a type of dynamic financial analysis that simulates management response to
risk scenarios, to test whether a company could remain solvent in the face of
deteriorating economic conditions or major disasters. Dynamic solvency testing may
involve both deterministic projections, based on known risks, and stochastic
projections that include random risk events.

The Financial Blood Test framework makes it easier for planners to render the service;
and easier for investors to understand the report and resulting strategy. It can be
offered by any planner in a financially viable format. Employees in banks can offer the
service to a large number of clients. It is also possible for remote branches (which
might suffer from weaker skill sets) to offer financial planning in the hinterland of the
country.
Thus, financial planning can become a mass service so critical, when the population
mass has the money, but lacks the financial literacy.

Independent Financial Advisers often complain that they are not being paid for their
financial planning service. They need to decide

Asset Allocation: Guidelines for asset

Allocation
Asset allocation is the implementation of an investment strategy that attempts to
balance risk versus reward by adjusting the percentage of each asset in an investment
portfolio according to the investor’s risk tolerance, goals and investment time frame.
The focus is on the characteristics of the overall portfolio. Such a strategy contrasts
with an approach that focuses on individual assets.

Many financial experts argue that asset allocation is an important factor in determining
returns for an investment portfolio. Asset allocation is based on the principle that
different assets perform differently in different market and economic conditions.

A fundamental justification for asset allocation is the notion that different asset classes
offer returns that are not perfectly correlated, hence diversification reduces the overall
risk in terms of the variability of returns for a given level of expected return. Asset
diversification has been described as “the only free lunch you will find in the investment
game”. Academic research has painstakingly explained the importance and benefits
of asset allocation and the problems of active management (see academic studies
section below).

Although the risk is reduced as long as correlations are not perfect, it is typically
forecast (wholly or in part) based on statistical relationships (like correlation and
variance) that existed over some past period. Expectations for return are often derived
in the same way. Studies of these forecasting methods constitute an important
direction of academic research.

When such backward-looking approaches are used to forecast future returns or risks
using the traditional mean-variance optimization approach to the asset allocation of
modern portfolio theory (MPT), the strategy is, in fact, predicting future risks and
returns based on history. As there is no guarantee that past relationships will continue
in the future, this is one of the “weak links” in traditional asset allocation strategies as
derived from MPT. Other, more subtle weaknesses include seemingly minor errors in
forecasting leading to recommended allocations that are grossly skewed from
investment mandates and/or impractical often even violating an investment manager’s
“common sense” understanding of a tenable portfolio-allocation strategy.

Allocation strategy
There are several types of asset allocation strategies based on investment goals, risk
tolerance, time frames and diversification. The most common forms of asset allocation
are: strategic, dynamic, tactical, and core-satellite.

Strategic asset allocation

The primary goal of strategic asset allocation is to create an asset mix that seeks to
provide the optimal balance between expected risk and return for a long-term
investment horizon. Generally speaking, strategic asset allocation strategies are
agnostic to economic environments, i.e., they do not change their allocation postures
relative to changing market or economic conditions.

Dynamic asset allocation

Dynamic asset allocation is similar to strategic asset allocation in that portfolios are
built by allocating to an asset mix that seeks to provide the optimal balance between
expected risk and return for a long-term investment horizon. Like strategic allocation
strategies, dynamic strategies largely retain exposure to their original asset classes;
however, unlike strategic strategies, dynamic asset allocation portfolios will adjust their
postures over time relative to changes in the economic environment.

Tactical asset allocation

Tactical asset allocation is a strategy in which an investor takes a more active

approach that tries to position a portfolio into those assets, sectors, or individual stocks
that show the most potential for perceived gains. While an original asset mix is
formulated much like strategic and dynamic portfolio, tactical strategies are often
traded more actively and are free to move entirely in and out of their core asset
classes.

Core-satellite asset allocation

Core-satellite allocation strategies generally contain a ‘core’ strategic element making

up the most significant portion of the portfolio, while applying a dynamic or tactical
‘satellite’ strategy that makes up a smaller part of the portfolio. In this way, core-
satellite allocation strategies are a hybrid of the strategic and dynamic/tactical
allocation strategies mentioned above.

Classification of Assets
Assets

Mostly assets are classified based on 3 broad categories:

Traditional assets
The “traditional” asset classes are stocks, bonds, and cash:

• Stocks: value, dividend, growth, or sector-specific (or a “blend” of any

two or more of the preceding); large-cap versus mid-cap, small-cap or
micro-cap; domestic, foreign (developed), emerging or frontier markets
• Bonds (fixed income securities more generally): investment-grade or
junk (high-yield); government or corporate; short-term, intermediate,
long-term; domestic, foreign, emerging markets
• Cash and cash equivalents (e.g., deposit account, money market fund)

Depending on their extent of convertibility, they are further divid

Convertibility
current assets.

Physical
Comprise assets that are both tangible and intangible.
existence

Depending on their purpose of use, they are categorised as op

Purpose
operating assets.

The following offers a fair idea about the different types of assets in general:

Current assets or short-term assets

These types of assets can be readily converted into cash or its equivalent resources
typically within a year and are known as liquid assets. For example, cash equivalents,
stock, marketable securities and short-term deposits are some of the most common
current assets.

Fixed assets or long-term assets

Also known as hard assets and fixed assets, these resources are not easy to convert
into cash or its equivalent kind. Generally, land, machinery, equipment, building,
patents, trademarks, etc. are considered as fixed assets.

Tangible assets

Similarly, assets with a physical existence are categorised as tangible assets.

Resources like stock, land, building, office supplies, equipment, machinery and
marketable securities, among others are functioning examples of tangible assets.

Intangible assets
On the contrary, assets which do not possess a physical existence come under the
category of intangible assets. The best examples of such assets would be market
goodwill, corporate intellectual property, patents, copyrights, permits, trade secrets,
brand, etc.

Operating assets

Assets like cash, building, machinery, equipment, copyright, goodwill, stock, etc. are
termed as operating assets. Typically, such assets are used to generate revenue and
to maintain daily operation.

Non-operating assets

Though these assets are not used for performing daily operations, they tend to help
generate significant revenue. Some of the best examples of non-operating assets are
short-term investments, vacant land, income generated through fixed deposits, etc.

Alternative assets

Other alternative assets that may be considered include:

• Commodities: precious metals, nonferrous metals, agriculture, energy,

others.
• Commercial or residential real estate (also REITs)
• Collectibles such as art, coins, or stamps
• Insurance products (annuity, life settlements, catastrophe bonds,
personal life insurance products, etc.)
• Derivatives such as options, collateralized debt, and futures
• Foreign currency
• Venture capital
• Private equity
• Distressed securities
• Infrastructure
• Hedge funds

Risk returns characteristics of assets

In asset allocation planning, the decision on the amount of stocks versus bonds in
one’s portfolio is a very important decision. Simply buying stocks without regard of a
possible bear market can result in panic selling later. One’s true risk tolerance can be
hard to gauge until having experienced a real bear market with money invested in the
market. Finding the proper balance is key.

Risk and return are highly correlated. Increased potential returns on investment
usually go hand-in-hand with increased risk. Different types of risks include project-
specific risk, industry-specific risk, competitive risk, international risk, and market risk.
Return refers to either gains and losses made from trading a security.

The return on an investment is expressed as a percentage and considered a random

variable that takes any value within a given range. Several factors influence the type
of returns that investor can expect from trading in the markets.

The risk associated with investments can be thought of as lying along a spectrum. On
the low-risk end, there are short-term government bonds with low yields. The middle
of the spectrum may contain investments such as rental property or high-yield debt.
On the high-risk end of the spectrum are equity investments, futures and commodity
contracts, including options.

Investments with different levels of risk are often placed together in a portfolio to
maximize returns while minimizing the possibility of volatility and loss. Modern portfolio
theory (MPT) uses statistical techniques to determine an efficient frontier that results
in the lowest risk for a given rate of return. Using the concepts of this theory, assets
are combined in a portfolio based on statistical measurements such as standard
deviation and correlation.

Diversification allows investors to reduce the overall risk associated with their portfolio
but may limit potential returns. Making investments in only one market sector may, if
that sector significantly outperforms the overall market, generate superior returns, but
should the sector decline then you may experience lower returns than could have been
achieved with a broadly diversified portfolio.

The correlation between the hazards one runs in investing and the performance of
investments is known as the risk-return tradeoff. The risk-return tradeoff states the
higher the risk, the higher the reward and vice versa. Using this principle, low levels of
uncertainty (risk) are associated with low potential returns and high levels of
uncertainty with high potential returns. According to the risk-return tradeoff, invested
money can render higher profits only if the investor will accept a higher possibility of
losses.

Investors consider the risk-return tradeoff as one of the essential components of

decision-making. They also use it to assess their portfolios as a whole.

Risk Tolerance

An investor needs to understand his individual risk tolerance when constructing a

portfolio of assets. Risk tolerance varies among investors. Factors that impact risk
tolerance may include:

• Future earnings potential.

• The size of the portfolio.
• Ability to replace lost funds.
 • The presence of other types of assets: equity in a home, a pension
plan, an insurance policy.
• The amount of time remaining until retirement.

Problems with asset allocation

• Investors agree to asset allocation, but after some good returns, they
decide that they really wanted more risk.
• Investor behavior is inherently biased. Even though investor chooses
an asset allocation, implementation is a challenge.
• Investors agree to asset allocation, but after some bad returns, they
decide that they really wanted less risk.
• Security selection within asset classes will not necessarily produce a
risk profile equal to the asset class.
• Investors’ risk tolerance is not knowable ahead of time.
• The long-run behavior of asset classes does not guarantee their
shorter-term behavior.

Risk and Return Models

• APM
• Proxy models
• Multifactor model
• Accounting and debt-based models
• The Capital Asset Pricing Model (CAPM)

Managing Risk and Return

Formulas, strategies, and algorithms abound that are dedicated to analyzing and
attempting to quantify the relationship between risk and return.

Roy’s safety-first criterion, also known as the SFRatio, is an approach to investment

decisions that sets a minimum required return for a given level of risk. Its formula
provides a probability of getting a minimum-required return on a portfolio; an investor’s
optimal decision is to choose the portfolio with the highest SFRatio.

Another popular measure is the Sharpe ratio. This calculation compares an asset’s,
fund’s, or portfolio’s return to the performance of a risk-free investment, most
commonly the three-month U.S. Treasury bill. The greater the Sharpe ratio, the better
the risk-adjusted performance.

Factors involved in Asset allocation

Asset allocation refers to an investment strategy in which individuals divide their
investment portfolios between different diverse asset classes to minimize investment
risks. The asset classes fall into three broad categories: equities, fixed-income, and
cash and equivalents. Anything outside these three categories (e.g., real estate,
commodities, art) is often referred to as alternative assets.

Strategies for Asset Allocation

In asset allocation, there is no fixed rule on how an investor may invest and each
financial advisor follows a different approach. The following are the top two strategies
used to influence investment decisions.

Dynamic Asset Allocation

The dynamic asset allocation is the most popular type of investment strategy. It
enables investors to adjust their investment proportion based on the highs and lows
of the market and the gains and losses in the economy.

Age-based Asset Allocation

In age-based asset allocation, the investment decision is based on the age of the
investors. Therefore, most financial advisors advise investors to make the stock
investment decision based on a deduction of their age from a base value of a 100. The
figure depends on the life expectancy of the investor. The higher the life expectancy,
the higher the portion of investments committed to riskier arenas, such as the stock
market.

Insured Asset Allocation

For investors averse to risk, the insured asset allocation is the ideal strategy to adopt.
It involves setting a base asset value from which the portfolio should not drop. If it
drops, the investor takes the necessary action to avert the risk. Otherwise, as far as
they can get a value slightly higher than the base asset value, they can comfortably
buy, hold, or even sell.

Tactical Asset Allocation

The tactical asset allocation strategy addresses the challenges that result from
strategic asset allocation relating to the long-run investment policies. Therefore,
tactical asset allocation aims at maximizing short-term investment strategies. As a
result, it adds more flexibility in coping with the market dynamics so that the investors
invest in higher returning assets.

Factors Affecting Asset Allocation Decision

When making investment decisions, an investors’ portfolio distribution is influenced by

factors such as personal goals, level of risk tolerance, and investment horizon.
Risk tolerance

Risk tolerance refers to how much an individual is willing and able to lose a given
amount of their original investment in anticipation of getting a higher return in the
future. For example, risk-averse investors withhold their portfolio in favor of more
secure assets. In contrast, more aggressive investors risk most of their investments in
anticipation of higher returns. Learn more about risk and return.

Goal factors

Goal factors are individual aspirations to achieve a given level of return or saving for
a particular reason or desire. Therefore, different goals affect how a person invests
and risks.

Time horizon

The time horizon factor depends on the duration an investor is going to invest. Most
of the time, it depends on the goal of the investment. Similarly, different time horizons
entail different risk tolerance.

Liabilities:

If you as an investor have high liabilities, then even though you may be willing to take
high amount of risk, your financial condition would make you a risk-averse investor.
Irrespective of age, willingness to invest, nearness to his goals, risk tolerance or any
other factor, you will be forced to only make safe investments as you cannot afford to
let your investments suffer any setbacks due to market swings. Also, you must avoid
taking loans or increasing liabilities to generate funds to invest in risk assets such as
equities as any losses endured here might worsen your financials.

Risk Appetite:

Your willingness to take risk which is a function of your age, income, expenses,
nearness to goal, will be an important determinant while framing your financial plan.
So, if your willingness to take risk is high (aggressive), you can skew your portfolio
more towards the equity asset class. Similarly, if your willingness to take risk is
relatively low (conservative), your portfolio can be skewed towards fixed income
instruments, and if you are a moderate risk taker you can take a mix of equity and debt
respectively.

Principles of Asset Allocation

Risk is not the same as volatility
The first principle is that ‘volatility’ is not ‘risk’. Volatility is backward looking and
measures an asset’s variability (how much its price moves around). Risk, however, is
the potential to lose money and not recover.

Market Efficiency

Market efficiency is the golden principle of all asset allocation cornerstone principles.
Without some degree of market efficiency, we would not employ asset allocation and
would probably focus instead on security selection. Fortunately, our financial markets
are highly efficient and are becoming even more so as information technology gets
better with time.

Underlying asset allocation are two highly influential and well-known investment
concepts: modern portfolio theory and the efficient market hypothesis.

Identifiable Financial Goals

Asset allocation is the strategy of dividing the assets within a portfolio among the
different asset classes, seeking to achieve the highest expected total rate of return for
the level of risk you are willing and able to accept. As a result, knowing why you are
investing and what you are attempting to accomplish is the vital first step. You cannot
hit a target you are not aiming for.

Expected Total Return

Expected total return is simply your forecast of total return for each asset class and
asset subclass during the future holding period. While past performance does not
guarantee future results, using historical rates of return in lieu of estimating expected
rates is not only quick and easy but also a prudent approach used by many financial
professionals.

Once your risk tolerance has been identified, you then design your portfolio to
maximize your expected total rate of return for the given level of risk you are willing,
able, and need to assume. This task cannot be accomplished without an estimate of
future returns. This is the essence of the risk-and-return trade-off profile. Without a
clear understanding of expected total rates of return for each asset class, there is little
hope of maximizing a portfolio’s potential performance and building your optimal
portfolio.

Correlation

The term correlation refers to how closely the market prices of two investments, or, in
the case of asset allocation, the prices of two asset classes move in relation to each
other. Although not always the case, most securities within an asset class or asset
subclass tend to move together over time. Of course, there are always exceptions.

Optimal Asset Mix.

Asset mix refers to both the asset classes and asset subclasses that a portfolio is
allocated to and their respective weightings within that portfolio. It is essential to
allocate a portfolio’s assets in a deliberate and calculated way in order to develop the
desired risk-and-return trade-off profile. Thus, allocating assets to those asset classes
and asset subclasses to develop the desired risk-and-return trade-off profile defines
the optimal asset mix.

The market cycle leads the economic cycle

The final principle is that history has shown us that weak economic conditions don’t
always lead to weak future share market returns. If you aim to buy assets when the
economic cycle is strong and sell them when it’s weak, you may inevitably miss out on
opportunities and be exposed to risks. It would, however, also be unreasonable to
assume that the macroeconomics and earnings have an insignificant impact on future
market returns. Indeed, a sustained and durable move higher in shares requires strong
support from earnings growth and a healthy macro backdrop.

Reoptimization

Over time, a portfolio’s asset mix, including the resulting risk-and-return trade-off
profile, will change due to price fluctuations, with some fluctuations being quite large.
To address this issue, reoptimization may be appropriate and needed. Reoptimization
is comprised of four different, but somewhat similar, tasks. Think of these tasks as the
Four Rs of Reoptimization: reevaluating, rebalancing, relocating, and reallocating.

• Rebalancing is the task of selling and buying investments in order to

return a portfolio’s current asset class mix to the previously established
optimal asset mix. Tax implications should be considered when
implementing a rebalancing strategy.
• Reevaluating is the task of examining recent changes in your life and
evaluating them within the context of your portfolio.
• Reallocating is the task of adjusting to which investments your
contributions go and in what amount. In this context, reallocating does
not change the mix of your assets, only how contributions will be made
in the future.
• Relocating is the task of exchanging certain assets for other assets
without changing the overall asset mix or risk-and-return trade-off
profile.

Diversification

It is important to apply the principle of diversification in order to minimize risk in a

portfolio. The task of diversifying a portfolio should be addressed after completing the
process of allocating among asset classes and asset subclasses. Diversification is the
process of investing in a significant number of not-too-similar investments within each
asset class in an effort to reduce the risk associated with each individual investment.
By holding a significant number of not-too-similar investments, the impact resulting
from a negative investment-specific event may be minimized. It is important to
understand that the process of diversification entails investing in a significant number
of not-too-similar investments with similar risk-and-return trade-off profiles. In doing
so, your risk-and-return tradeoff profile will remain constant. There is no guarantee
that a diversified portfolio will enhance overall returns or outperform a non-diversified
portfolio. Diversification does not protect against market risk.

Risk-and-Return Trade-off Profile

The trade-off between investment-specific risk and return is central to the application
of asset allocation theory to an investment portfolio. Risk and return are unequivocally
linked, and one simply cannot earn an excessive return while assuming a
corresponding low risk. In basic asset allocation theory, the higher your risk tolerance,
the higher your potential returns. You should not assume higher risk for the same
potential return that a less risky asset may offer. The message here is that you need
to build a portfolio with the maximum expected potential total rate of return given the
level of risk you are willing, able, and need to assume.

Time Horizon

Time horizon plays a significant role in estimating asset class returns, risk levels, and
price correlations. Accurate forecasts are essential to building an optimal portfolio. The
primary use of time horizon is to help determine the portfolio balance between equity
assets and fixed-income assets and cash and equivalents. All else being equal, the
longer your investment time horizon, the more equity investments and less current
income-producing investments you may consider holding. Conversely, the shorter
your investment time horizon, the more current income-producing investments and
less equity investments you may consider.

Investor Risk Profile

Your optimal portfolio is designed based principally on your willingness, ability, and
need to tolerate risk. Consequently, once your risk tolerance is determined, your
optimal asset mix can then be established in order to maximize your portfolio’s return
potential. This concept is expressed as the risk-and-return trade-off profile. Personal
preferences toward risk assumption play a vital role in determining your willingness to
tolerate risk. For example, two different investors with the same level of wealth and
the same specific goals and needs would each have a different preference for
assuming risk.

Retirement planning, Need for retirement

planning
Retirement planning is the process of determining retirement income goals, and the
actions and decisions necessary to achieve those goals. Retirement planning includes
identifying sources of income, sizing up expenses, implementing a savings program,
and managing assets and risk. Future cash flows are estimated to gauge whether the
retirement income goal will be achieved. Some retirement plans change depending on
whether you’re in, say, India, United States or Australia.

Retirement planning is the process of setting retirement income goals and the actions
and decisions necessary to achieve those goals. Retirement planning includes
identifying sources of income, estimating expenses, implementing a savings program,
and managing assets and risk.

Retirement planning is ideally a life-long process. You can start at any time, but it
works best if you factor it into your financial planning from the beginning. That’s the
best way to ensure a safe, secure and fun retirement. The fun part is why it makes
sense to pay attention to the serious and perhaps boring part: planning how you’ll get
there.

Purpose

Money works for you

In the younger days, everyone runs after their 9-5 jobs. Everyone works to earn money
and have a good living. However, retirement days are the days where one cannot work
any longer. Therefore, it is the time when the money one earned should do all the
work.

Stress-free life

This is the most significant outcome of retirement planning. Retirement planning helps
to lead a peaceful and stress-free life. With having investments that earn regular
income during retirement leads to a worry-free life. Retirement is the age where one
has to relax and reap the benefits of all the hard work.

Inflation beating returns

Investing in retirement will help in earning inflation-beating returns. Holding money in

a bank savings account will not generate high returns. In other words, the interest
earned will not be enough to lead an uncompromised retirement. Therefore, proper
investment planning will help one to generate significant returns in the long term. Also,
it is important to start investing early. This helps in averaging out the impact of market
volatility.

Cost-saving

Planning for retirement at a young age will help in reducing the cost. For example, in
an insurance policy the premium amount to be paid will be lesser when the
policyholder is younger. While getting insurance during retirement becomes costly.
Need of Retirement planning

• Best time to fulfil life aspirations.

• One cannot work forever.
• Start planning early and diversify investments.
• The average life expectancy is increasing.
• Relying on one source of income is risky, e.g., pension.
• Do not depend on children.
• Higher complications, e.g., medical emergencies.
• Contribute to the family even during retirement.

Life cycle Planning

Stages of Retirement Planning:

1. Young Adulthood: Those who are entering an adult life may not have
a lot of money to invest, but they can have enough time to let
investments mature. It makes a critical and valuable piece of
retirement saving. Such investments can make up a large piece of
investments with regards to the principle of compound interest.
Compound interest allows interest to be calculated on interest the
more time you have, the more interest you will earn.
2. Early midlife: This age can bring in a lot of financial stress in terms of
mortgages, student loans, and insurance premiums. Therefore, it may
be difficult to save in this period.
3. Later midlife: When time is running out to make up for the difference
in the actual savings and retirement plans, you will have the last
opportunity to fill the gap. Since you will have higher wages and most
of your debts would be fulfilled, you can have a larger sum available
for investment.

The level of emphasis on retirement planning varies throughout different life stages.
During the youth, retirement planning only means setting aside enough funds for
retirement. During the middle of the career, it might change to setting specific
income/asset targets and taking the necessary steps to realise them. Once you reach
retirement, decades of savings will pay out.

Golden Rules of retirement planning

Plan for more than you need

When it comes to retirement planning, you need to evaluate how much income you
will need at the time of retirement. Note that while earmarking your income for
retirement, it always should be more than what you need. To have a great retired life,
you will need 70% to 90% of the current income. For instance, if you’re earning
Rs.70,000 monthly, your monthly earnings at the time of retirement should be nearly
Rs.49,000 to Rs.63,000 per month to lead a financially stress-free life. If you’re
targeting 70% of current income for retirement, savings is not enough. You should
start investing.

The 4 per cent rule

The rule of 4% refers to the withdrawal rate. Regarding this rule, experts further explain
that a retiree who invests 50% in bonds and 50% in equity will not outlive the funds if
he/she withdraws 4% from the account in the first year. After that, the withdrawal
amount is then adjusted as per inflation rate in each year. The rule is based on the
assumption that the portfolio should last for at least 30 years.

Start retirement early

It is crucial that retirement planning is initiated as early as possible because it offers

the benefit of the power of compounding. It also gives the investors a reasonable
amount of time to alter investments if necessary and thus choose the ones that suit
their needs.

Going by the 4% golden rule of retirement planning, if you withdraw Rs. 1 lakh in the
first year of the retirement, you need to build a corpus of Rs.3 crores. To reach a target
such as this, you need to start saving right in your 20s. In fact, you can venture into
investments that would fetch high returns due to the power of compounding. Start
early:

Reverse Mortgage

Many people often invest in a property to secure their future as real estate is known
as the safest and best option for a regular income stream. This is common in India.
You will find that seniors pledge their real estate property to banks or financial
institutions in order to get periodic payments/income, which is also known as a reverse
mortgage. The bank uses this property to disburse a loan amount by assessing factors
like the demand for property, the current price of the asset, and its condition. The
reverse mortgage loan ends when the owner dies or decides to sell the house. If the
owner dies, their children can have a right over the property by repaying the loan, or
the bank takes the possession. Note that such gains are entirely tax-free.

Stick to your investment plan:

More often than not we tend to deviate from our investment plan to fulfill other goals.
Ensure that doesn’t happen when you start financial planning for retirement. Your new
dream car or a bigger house can wait but retirement planning cannot. Invest as much
as you can afford to and invest in flexible plans, which ensure that you can alter your
investment any time during times of dire need. Other than that, the financial goals for
retirement should never be tampered with as they become a habit and in turn disturb
the investment.
The most important part of Retirement planning is ‘Investing’. Investing for retirement
has to be very effective. There are several investment avenues that you can opt for
retirement planning.

You have spent years accumulating your retirement fund. What is the best way to draw
it down. Your retirement fund may consist of a collection of the following:

• Personal Pensions
• Company Pensions
• AVC
• Deferred pensions
• Paid up pensions
• Retirement Bonds

There is no right or wrong solution to retiring your fund. Only your solution. Everyone
is different with a different set of needs, assets and objectives. We provide a bespoke
solution to all of our clients to ensure that you receive the best solution for your specific
situation, be it maximum tax-free lump sum or highest possible life time pension.

Pre

Exchange Traded Funds (ETFs): Exchange traded funds are considered to be one
of the popular securities amongst investors. An Exchange Traded Fund (ETF) is a type
of investment that is bought and sold on stock exchanges. It holds assets like
commodities, bonds, or stocks. An exchange traded fund is like a mutual fund, but
unlike a Mutual Fund, ETFs can be sold at any time during the trading period.
Moreover, ETFs helps you to build a diverse portfolio.

Bonds: Bonds are one of the most popular retirement investment options. A bond is
a debt security where the buyer/holder initially pays the principal amount for buying
the bond from the issuer. The issuer of the bond then pays the holder an interest at
regular intervals and also pays the principal amount at the maturity date. Some of the
bonds provide good 10-20% p.a.-rate of interest. Also, there is no tax applicable on
bonds at the time of investment.

Real Estate: It’s the most preferred retirement investment options amongst investors.
It is an investment made in the real estate, i.e. house/shop/site, etc. It’s considered to
give good stable returns. To make an investment in real estate, one should consider
good location as the key point.

Equity Funds: An equity fund is a type of Mutual Fund that invests mainly in stocks.
Equity represents ownership in firms (publicly or privately traded) and the aim of the
stock ownership is to participate in the growth of the business over a period of time.
The wealth you invest in Equity Funds is regulated by SEBI and they frame policies &
norms to ensure that the investor’s money is safe. As equities are ideal for long-term
investments, it is one of the best retirement investment options.
New Pension Scheme (NPS) New Pension Scheme is gaining popularity in India as
one of the best retirement investment options. NPS is open to all but, is mandatory for
all government employees. An investor can deposit a minimum of INR 500 per month
or INR 6000 yearly, making it as the most convenient for Indian citizens. Investors can
consider NPS as a good idea for their retirement planning because there is no direct
tax exemption during the time of withdrawal as the amount is tax-free as per Tax Act,
1961. This scheme is a risk-free investment as it’s backed by the Government of India.

Post

Bank Fixed Deposits: Most people consider the Fixed Deposit investment as a part
of their retirement investment options because it enables money to be deposited with
banks for a fixed maturity period, ranging from 15 days to five years (& above) and it
allows to earn a higher rate of interest than other conventional Savings Account.
During the time of maturity, the investor receives a return which is equal to the principal
and also the interest earned over the duration of the fixed deposit.

Reverse Mortgage: As a part of the post- retirement investment options, a reverse

mortgage is a good option for senior citizens who need a steady flow of income. In a
reverse mortgage, stable money is generated from the lender in lieu of the mortgage
on their homes. Any house owner who is 60 years of age (and above) is eligible for
this. Retired people can live in their property and receive regular payments, until the
death. The money receivable from the Bank will depend on the valuation of property,
its current price and well as the condition of the property.

Annuity: An annuity is an agreement aimed at generating steady income during

retirement. Where a lump sum payment is made by an investor to obtain a certain
amount instantly or in future. The minimum age entry for any investor in this scheme
is 40 years and the maximum is up to 100 years.

Senior Citizen Saving Schemes (SCSS): As part of the post- retirement investment
options, an SCSS is designed for retired people who are above 60 years old. SCSS is
available through certified banks as well as the network post offices spread across
India. This scheme (or SCSS account) is up to five years, but, upon the maturity, it can
be subsequently extended for an additional three years. With this investment, tax
exemption is eligible under Section 80C.

Retirement planning process

Financial planning is a process of setting objectives vis-à-vis your current income. It
involves assessing your currents savings and assets, estimating future financial
needs, and making plans to achieve monetary goals. Retirement Planning goes
beyond financial planning or providing investment advice and is aimed at achieving
financial security for retirement. It is a holistic solution aimed at enabling people to
achieve their financial dreams both before and after retirement.

Retirement planning is not an art but a definitive science which requires taking a 360-
degree approach to studying one’s current financial health, long-term goals and risk
appetite to design a plan that addresses the retirement and other long-term goals of
an individual.

It involves a step-by-step approach:

Step 1: Identifying your financial and retirement goals

Step 2: Analysing your current financial situation

Step 3: Risk Profiling

Step 4: Asset Allocation

Step 5: Investment Allocation Strategy

Step 6: Periodic Monitoring and Rebalancing

Strategies

• Cut down expenses.

• Seek expert advice / professional help to create a roadmap for you to
maximise your savings without compromising your standard of living.
• Choose investment options that give you higher returns.
• It is good to have a working spouse to generate an additional income
stream.
• Look for additional income through another job / business
simultaneously if possible.
• Start immediately.

Process

Decide Your Retirement Age

The most common retirement age is 60 years, but it may vary from person to
person. Some may wish to work beyond 60 years of age, while a few even wish to
retire at 50 basically it’s a matter of choice. Estimating your retirement age is an
important step, because after this age your regular income stream will stop or at least
reduce considerably (in case you are eligible for pension). You will have to depend on
your savings and investments to take care of your retirement needs.

Start Early to Retire Peacefully

Like any other goal, start planning your retirement as soon as possible. With several
years in hand, you have time and the power of compounding in your favour.
Never delay retirement planning or else you might have to compromise your goal.
Worst case you might have to be financially dependent on your children or family.
Hence, start early, start now.

Most individuals who are in their 20s and having recently started earning might think
that retirement is a distant reality. For them, planning for retirement at this early age
may seem like being overly cautious.

Determine Your Retirement Corpus

Retirement corpus is the amount you require post retirement to meet your expenses
and continue with the same lifestyle and maybe pursue your other personal goals.

For this, first ascertain your annual expenses at present.

For that you need to first write down monthly expenses on various categories such as
household, medical, entertainment, travel, EMI, and children’s school/tuition fees, and
so on.

So, it is important that you make an accurate estimate of how much amount you will
require, to maintain your present lifestyle after you retire.

Pension Schemes
Pension plans are a good way to secure your finances post-retirement. In India, there
are several pensions plans available, and you can choose to invest in the one that you
are most comfortable with.

Pension plans provide financial security and stability during old age when people don’t
have a regular source of income. Retirement plan ensures that people live with pride
and without compromising on their standard of living during advancing years. Pension
scheme gives an opportunity to invest and accumulate savings and get lump sum
amount as regular income through annuity plan on retirement.

According to United Nations Population Division World’s life expectancy is expected

to reach 75 years by 2050 from present level of 65 years. The better health and
sanitation conditions in India have increased the life span. As a result number of post-
retirement years increases. Thus, rising cost of living, inflation and life expectancy
make retirement planning essential part of today’s life. To provide social security to
more citizens the Government of India has started the National Pension System.

There are different kinds of pension plans which you can check below:

• Plans that are sponsored by an insurer where the investment is solely

in debt and are best suited for conservative investors.
• Plans that are unit-linked and invest in both equity and debt.
 • The National Pension Scheme, which invests either 100% in
government securities, 100% in debt securities (other than
government securities), or a maximum of 75% in equity.

Schemes

Life Annuity

These schemes pay an amount called annuity to the retiree for their lifetime. If the
annuitant dies and chooses the option ‘with spouse’, then the spouse receives the
pension amount.

Annuity certain

In this scheme, the annuitant is paid the annuity for a certain number of years. The
annuitant can pick this period, and in case of their death, the beneficiary receives the
annuity.

Pension Plans with and without cover

Pension plans with cover include life cover, which means that if the policyholder dies,
the family members are paid a lump sum. This amount may not be considerable. The
without-cover plan, as the name suggests, does not have life cover. If the policyholder
passes away, then the nominee gets the corpus. At present, the immediate annuity
plans are without protection, while the deferred plans are with cover.

Guaranteed Period Annuity

Regardless of whether the holder survives the duration, this annuity option is given for
periods such as five years, ten, fifteen, and twenty years.

Immediate Annuity

In this type of scheme, the pension begins right away. As soon as you deposit a lump
sum amount, your pension starts. This is based on the amount the policyholder
invests. You can choose from a range of annuity options. Under the Income Tax Act
of 1961, the premiums of the immediate annuity plans are tax exempt. Post the death
of the policyholder, it is the nominee who is entitled to the money.

National Pension Scheme

The Government of India introduced a pension scheme in 2004 for those who wanted
to build up their pension amount. Your savings will be invested in the debt and equity
markets, based on your preference. It allows you to withdraw 60% of the funds at the
time of retirement, and the remaining 40% goes towards purchasing an annuity plan.
Pension Funds

The government body, Pension Fund Regulatory and Development Authority

(PFRDA), has authorised six companies to operate as fund managers. These plans
offer comparatively better returns at the time of maturity and remain in force for a
substantial amount of time.

Deferred Annuity

With a deferred annuity plan, you can accumulate a corpus through a single premium
or regular premiums over the policy term. The pension begins once the policy term
gets over. This deferred annuity plan has tax benefits wherein no tax is charged on
the money invested until you plan to withdraw it. This scheme can be bought by either
making regular contributions or by a one-time payment. This way, it works for you
whether you want to invest the entire amount at one time or want to invest
systematically.

Annuities, Types of Annuities

One of the reasons annuities have so many different features is that they are actually
contracts between an annuity holder also known as an annuitant and an insurance
company. Contracts have different provisions, different costs, different payouts, etc.
The upside is an annuity can be personalized to fit your needs. The downside is the
vast array of options can seem overwhelming to potential annuitants.

Annuities are contracts issued and distributed (or sold) by financial institutions where
the funds are invested with the goal of paying out a fixed income stream later on. They
are mainly used for retirement purposes and help individuals address the risk of
outliving their savings. Upon annuitization, the holding institution will issue a stream of
payments at a later point in time.

Fixed, variable and fixed indexed are the main types of annuities. Knowing what level
of risk you’re comfortable with will help guide you through your annuity choices.

Interest-rate risk is a factor in determining the calculation of your payments. Low risk
yields predictable payment amounts. Higher risk could boost your expectations.

Type Interest Risk

Fixed Preset/guaranteed Low

Variable Tied to investment portfolio Higher

 Fixed Preset minimum. Can change according to index like stock
Medium
Indexed market

Fixed Annuity

This is the option with the least risk and the most predictability. Fixed annuities come
with a guaranteed, set interest rate that doesn’t vary beyond the terms of the contract.
While other investments might soar or dive, the fixed annuity is steady. Sometimes,
however, the interest rate will reset after a predetermined number of years.

Types of fixed annuities

An equity-indexed annuity is a type of fixed annuity, but looks like a hybrid. It credits a
minimum rate of interest, just as a fixed annuity does, but its value is also based on
the performance of a specified stock index usually computed as a fraction of that
index’s total return.

A market-value-adjusted annuity is one that combines two desirable features the ability
to select and fix the time period and interest rate over which your annuity will grow,
and the flexibility to withdraw money from the annuity before the end of the time period
selected. This withdrawal flexibility is achieved by adjusting the annuity’s value, up or
down, to reflect the change in the interest rate “market” (that is, the general level of
interest rates) from the start of the selected time period to the time of withdrawal.

Variable Annuity

A variable annuity comes with more risks and potentially higher rewards. The interest
rate of variable annuities is tied to an investment portfolio. Payments from variable
annuities can increase if the portfolio does well, but they can also decrease if the
investments lose money.

With a variable annuity, the insurer invests in a portfolio of mutual funds chosen by the
buyer. The performance of those funds will determine how the account grows and how
large a payout the buyer will eventually receive. Variable annuity payouts can either
be fixed or vary along with the account’s performance.

People who choose variable annuities are willing to take on some degree of risk in the
hope of generating bigger profits. Variable annuities are generally best for experienced
investors, who are familiar with the different types of mutual funds and the risks they
involve.

Estate planning Definition and Need of Estate

Planning
Estate planning in simple terms refers to the passing assets / investments down from
one generation to another. You decide how much of your estate be it property(s),
car(s), personal accolades, financial investments, etc. you want to pass on to whom
and how, after your demise.

It is a dynamic process that needs to be reviewed at regular intervals to absorb any

changes that might happen in our life or in the laws of the country.

Estate planning is the process of anticipating and arranging, during a person’s life, for
the management and disposal of that person’s estate during the person’s life, in the
event the person becomes incapacitated and after death. The planning includes the
bequest of assets to heirs and may include minimizing gift, estate, generation skipping
transfer, and taxes. Estate planning includes planning for incapacity as well as a
process of reducing or eliminating uncertainties over the administration of a probate
and maximizing the value of the estate by reducing taxes and other expenses. The
ultimate goal of estate planning can only be determined by the specific goals of the
estate owner and may be as simple or complex as the owner’s wishes and needs
directs. Guardians are often designated for minor children and beneficiaries in
incapacity.

Need

Estate planning helps the beneficiary reduce tax outgo on account of

inheritance

For instance, instead of passing on assets after demise, you may gift them to your
loved ones while you are alive; because if left to the prevailing intestacy rules, there is
a chance that a higher amount of tax would be applicable on your property and other
assets.

Helps to prepare for contingencies

With systematic estate planning, you can even determine who will handle all your
financial affairs, in case you were to become incapacitated tomor.

Estate planning can also help pass accolades bestowed on you to a specific
individual

Say, you are defence personnel and wish to give your war medal, which has some
sentimental value to your younger daughter who has interest in war history; this is
possible through prudent estate planning. But in the absence of proper estate
planning, it may or may not be granted to the person of your choice.

Can provide for, or address to a family member or a loved with special needs

Through an estate plan, besides leaving behind a corpus for an individual with special
needs, one can further go on to designate a guardian for them.
Ensures that all assets are passed on to your loved ones

Estate planning ensures that all your assets physical, financial and online are inherited
by the people to whom you want them to be transferred after your demise. The law
might not take into account your personal relationships or preferences while
distributing your assets if you die intestate.

Prevents financial and legal grief to your loved ones

In times when your family may be run down emotionally, financial and legal grief is the
last thing you want them to undergo. With prudent estate planning long-term financial
interest of your loved ones can be ensured, and legal rigmarole can be minimised.

Avoids complications, disagreement, bitterness and drift in the family

Your legal heirs may be inexperienced in managing the bequest. This can complicate
relationships and lead to squabbling and bickering within the family. But drawing an
estate plan prudently can help you manage these atrocities.

Cannons of Taxation Person

Last updated on December 8th, 2019 at 11:14 am

By canons of taxation we simply mean the characteristics or qualities which a

good tax system should possess. In fact, canons of taxation are related to the
administrative part of a tax. Adam Smith first devised the principles or canons of
taxation in 1776.

Even in the 21st century, Smithian canons of taxation are applied by the modern
governments while imposing and collecting taxes.

Types of Canons of Taxation:

In this sense, his canons of taxation are, indeed, ‘classic’. His four canons of
taxation are:

(i) Canon of equality or equity

(ii) Canon of certainty

(iii) Canon of economy

(iv) Canon of convenience.

Modern economists have added more in the list of canons of taxation.

These are:

(v) Canon of productivity

(vi) Canon of elasticity

(vii) Canon of simplicity

(viii) Canon of diversity.

Now we explain all these canons of taxation:

1. Canon of Equality:

Canon of equality states that the burden of taxation must be distributed equally
or equitably among the taxpayers. However, this sort of equality robs of justice
because not all taxpayers have the same ability to pay taxes. Rich people are
capable of paying more taxes than poor people. Thus, justice demands that a
person having greater ability to pay must pay large taxes.

If everyone is asked to pay taxes according to his ability, then sacrifices of all
taxpayers become equal. This is the essence of canon of equality (of sacrifice). To
establish equality in sacrifice, taxes are to be imposed in accordance with the
principle of ability to pay. In view of this, canon of equality and canon of ability
are the two sides of the same coin.

1. Canon of Certainty:

The tax which an individual has to pay should be certain and not arbitrary.
According to A. Smith, the time of payment, the manner of payment, the
quantity to be paid, i.e., tax liability, ought all to be clear and plain to the
contributor and to everyone. Thus, canon of certainty embraces a lot of things. It
must be certain to the taxpayer as well as to the tax-levying authority.

Not only taxpayers should know when, where and how much taxes are to be paid.
In other words, the certainty of liability must be known beforehand. Similarly,
there must also be certainty of revenue that the government intends to collect
over the given time period. Any amount of uncertainty in these respects may
invite a lot of trouble.

3. Canon of Economy:
This canon implies that the cost of collecting a tax should be as minimum as
possible. Any tax that involves high administrative cost and unusual delay in
assessment and high collection of taxes should be avoided altogether.

According to A. Smith: “Every tax ought to be contrived as both to take out

and to keep out of the pockets of the people as little as possible, over and
above what it brings into the public treasury of the State.”

1. Canon of Convenience:

Taxes should be levied and collected in such a manner that it provides the
greatest convenience not only to the taxpayer but also to the government.

Thus, it should be painless and trouble-free as far as practicable. “Every tax”,

stresses A. Smith: “ought to be levied at time or the manner in which it is most
likely to be convenient for the contributor to pay it.” That is why, after the
harvest, agricultural income tax is collected. Salaried people are taxed at source
at the time of receiving salaries.

These canons of taxation are observed, of course, not always faithfully, by

modern governments. Hence these are basic and classic canons of taxation.

Characteristics of Canons of Taxation:

A good (may be a near-ideal) tax system has to fulfil the following

characteristics:

1. The distribution of tax burden should be equitable such that every

person is made to pay his ‘fair share’.

This is known as the ‘fairness’ criterion which focuses on two principles:

Horizontal equity— equals should pay equal taxes; and vertical equity—un-
equals should pay unequal taxes. That is to say, rich people should pay more
taxes.

2. But equity must not hamper productive efficiency such that burdens should be
provided to correct inefficiencies. This ‘efficiency’criterion says that it should
raise revenue with the least costs to the taxpayers so that tax system can allocate
resources without distortion.

3. The two other criteria are: ‘flexibility’ and ‘transparency’.

A good tax system demands changes in tax rates whenever circumstances
change the system. Further, a good tax must be transparent in the sense that
taxpayers should know what they are paying for the services they are getting.

A good tax system is expected to facilitate the use of fiscal policy to achieve the goals of:

(a) Stability

(b) Economic growth.

For the attainment of these goals, there must be built-in-flexibility in the tax
structure.

From the above discussion, it follows that taxation serves the following
purposes:

(i) To raise revenue for the government

(ii) To redistribute income and wealth from the rich to the poor people

(iii) To protect domestic industries from foreign competition

(iv) To promote social welfare.

Assessee
Last updated on December 5th, 2019 at 01:24 pm

Assessee is person who liable to pay Tax, Intrest, or penalty under the Income
Tax Act and includes

1. 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;
2. Every person who is deemed to be an assessee under any provision
of this Act;
3. Every person who is deemed to be an assessee in default under
any provision of this Act.
Ordinary Assessee or Normal Assessee

• Any person against whom some proceeding under this act are
going on. It is immaterial whether any tax or other amount is
payable by him or not.
• Any person who has sustain loss and has filed return loss u/s
139(3)
• Any person by whom some amount of interest tax paid or penalty
is payable under this act
• Any person who entitled to this act

Deemed Assessee or Representative Assessees

A person may not be liable for his own income only for his own income but also
on the income of other person é.g. Guardians of minors or lunatics, agents of the
non residence etc. In such case the person is responsible for the Assessment of
income of such person are called Representative Assessees , such person is
deemed to be assessee .

Assessee in Default

A person is deemed to be an assessee-in-default if he is fails to fulfill his

statutory paying salary or person who is paying Intrest it is their duty to deduct
tax at source and deposit the amount of tax so collected in the treasury. If he fails
to deduct tax at source or deduct tax but does not deposited it in the treasury he
is known as assessee in default.

Definition: Income
Last updated on December 5th, 2019 at 01:24 pm

An assessment levied by a government on the profits of a company. The rate of

corporate income tax paid by a business varies between countries, although
since corporations are legal entities distinct from their owners and operators,
they are typically taxed as if they were people.

Companies, both private and public which are registered in India under the
Companies Act 1956, are liable to pay corporate tax. For the assessment year
2014-15, domestic companies are taxed at the rate of 30%.

In addition to that, surcharge at the rate of 5% is levied if net income is in the

range of Rs 1 crore to Rs 10 crore. If the net income exceeds Rs 10 cr, surcharge at
the rate of 10% is levied. Education cess of 3% is levied on the sum of income tax
and surcharge irrespective of the level of net income.
In the case of foreign companies, royalty or fees received by them in a predefined
time-frame are subject to tax at the rate of 50%. Other income or the balance is
taxed at the rate of 40%. Surcharge at the rate of 2% is levied if the net income
is in the range of Rs 1 cr to Rs 10 cr. If the net income exceeds Rs 10 cr, the
surcharge is increased to 5%.

Education cess of 3% is levied on the sum of income tax and surcharge

irrespective of the level of net income. Marginal relief is given to both domestic
and foreign companies in the case of net income exceeding Rs 1 cr and Rs 10 cr.

Assessment Year, Previous Year

Last updated on November 28th, 2019 at 07:37 pm

Assessment Year [Section 2(9)]: Definition under I.Tax

“Assessment year” means the period of 12 months commencing on the 1 St. day
of April every year.

In India, the Govt. maintains its accounts for a period of 12 months i.e. from 1st
April to 31st March every year. As such it is known as financial year. The income
tax department has also selected same year for its assessment procedure.

The Assessment year is the financial year of the Govt. of India during which
income of a person relating to the relevant previous year is assessed to tax. Every
person who is liable to pay tax under this Act. files return of income by prescribed
dates. These returns are processed by the income tax department officials and
officers. This processing is called assessment. Under this income returned by the
assessee is checked and verified.

Tax is calculated and compared with the amount paid and assessment order is
issued. The year in which whole of this process is undertaken is called
assessment year.

Previous Year [Section 2(34) r.w. Section 3] : Defination under I.Tax

The term previous year is very important because it is the income earned during
previous year which is to be assessed to tax in the assessment year. As the word
‘Previous’ means ‘coming before’, hence it can be simply said that the previous
year is the financial year preceding the assessment year e.g. for assessment year
2014-15 the previous year should be the financial year ending on 31st March
2014.
In simple words, it may be said that the year in which income is earned is called
previous year and the next year in which such income is computed and put to tax
is known as assessment year: For example, income earned by an assessee in the
previous year 2013-14 is taxable in the assessment year relevant to the previous
year 2013-14 and so it is taxable in the assessment year 2014-15. The simple rule
is that the income of a previous year is taxed in its relevant assessment year
subject to certain exceptions.

(a) Previous year in case of a continuing business. It is the financial year

preceding the assessment year. As such for the assessment year 2014-15, the
previous year for a continuing business is 2013-14 i.e. 1-4-2013 to 31-3-2014.

(b) Newly set up business or profession. The assessee is free to set up a new
business or start a new profession on any day and the first previous year in case
of a newly set up business/profession or newly created source of income shall be
on the day it is set up and end on 31st March next following. So the first previous
year may be of 12 months or less than 12 months but all subsequent previous
years shall be of 12 months duration and always be starting on 1st April each year.

(c) In case of a Newly created source of Income.In such case the previous year
shall be the period between the day on which such source comes into existence
and 31st. March next following

Income Tax Important Dates and Forms

Last updated on November 24th, 2019 at 11:22 pm

The due date for filing Income Tax Returns for FY 2018-2019 for Individuals
is 31st July 2019.

Category of Taxpayer Due Date for Tax Filing –

Individual 31st July, 2019

Body of Individuals (BOI) 31st July, 2019
Hindu Undivided Family (HUF) 31st July, 2019
Association of Persons (AOP) 31st July 2019
Businesses (Requiring Audit) 30th September 2019
Businesses (Requiring TP Report) 30th November 2019
(This is income tax return for the financial year 2018-19. Applicable for income
earned from 1 April 2018 to 31 March 2019).

Forms

1. If you get the salary, then you can simply upload your Form-16
finish e-filing quickly
2. If you are a freelancer or run a small business or a home-based
business like a Kirana store or an e-commerce seller (Section
44AD or 44ADA, e-file you’re ITR-4.
3. All ITR forms – ITR-1, ITR-2, ITR-3, ITR-4, ITR-5, ITR-6,
and ITR-7

Residential Status and Income

Last updated on November 28th, 2019 at 07:43 pm

Tax is levied on total income of assessee. Under the provisions of Income-tax

Act, 1961 the total income of each person is based upon his residential status.
Section 6 of the Act divides the assessable persons into three categories

1. Ordinary Resident;
2. Resident but Not Ordinarily Resident; and
3. Non-Resident.

Residential status is a term coined under Income Tax Act and has nothing to do
with nationality or domicile of a person. An Indian, who is a citizen of India can be
non-resident for Income-tax purposes, whereas an American who is a citizen of
America can be resident of India for Income-tax purposes. Residential status of
a person depends upon the territorial connections of the person with this
country, i.e., for how many days he has physically stayed in India.

The residential status of different types of persons is determined differently.

Similarly, the residential status of the assessee is to be determined each year
with reference to the “previous year”. The residential status of the assessee may
change from year to year. What is essential is the status during the previous year
and not in the assessment year.

Important Points:

1.Residential Status in a previous year. Residential status is to be determined

for each previous year.
It implies that—

(a) Residential status of assessment year is not important.

(b) A person may be resident in one previous year and a non-resident in India in
another previous year, e.g., Mr. A is resident in India in the previous year 2018-
19 and in the very next year he becomes a non-resident in India.

2. Duty of Assessee. It is assessee’s duty to place relevant facts, evidence and

material before the Income Tax Authorities supporting the determination of
Residential status.

3. Dual Residential Status is possible. A person may be resident of one or more

countries in a relevant previous year e.g., Mr. X may be resident of India during
previous year 2O17-18 and he may also be resident/non-resident in England in
the same previous year. The emergence of such a situation depends upon the
following

(a) The existence of the Residential status in countries under considerations

(b) The different set of rules having laid down for determination of residential
status.

Determination of Residential status of different ‘Persons’:

As we know that Income tax is charged on every person. The term ‘Person’ has
been defined under section 2(31) includes :

(i) An individual

(ii) Hindu Undivided Family

(iii) Firm

(iv) Company

(v) AOP/BOI

(vi) Local authority

(vii) Every other artificial juridical person not falling in preceding six sub-
classes.
Therefore, it is essential to determine the residential status of above various
types of persons and now we shall learn the calculation of residential status of
each type of person.

Types of Residential Status

Basic rules for determining Residential Status of an Assessee

(I) Residential status is determined for each category of persons separately e.g.
there are separate set of rules for determining the residential status of an
individual and separate rules for companies, etc.

(II) Residential status is always determined for the previous year because we
have to determine the total income of the previous year only.

(III) Residential status of a person is to be determined for every previous year

because it may change from year to year. For example A, who is resident of India
in the previous year 2017- 18, may become a non-resident in previous year
2018-19.

(IV) If a person is resident in India in a previous year relevant to an assessment

year in respect of any source of income, he shall be deemed to be resident in India
in the previous year relevant to the assessment year in respect of each of his
other source of income. [Section 6(5)]

(V) A person may be a resident of more than one country for any previous year. If
Y is a resident in India for previous year 2017-18, it does not mean that he cannot
be a resident of any other country for that previous year.

(VI) Citizenship of a country and residential status of that country are separate
concepts. A person may be an Indian national/citizen, but may not be a resident
in India. On the other hand, a person may be a foreign national/citizen, but may
be a resident in India.
(VII) It is the duty of the assessee to place all material facts before the assessing
officer to enable him to determine his correct residential status.

Income exempted from Tax

Last updated on November 28th, 2019 at 12:38 pm

There are some incomes which do not form part of total income and thus, are also
called as income exempt from tax. Such exempted incomes are given under
section 10 of the Income-tax Act, 1961.

Some of those incomes are explained below:

Agricultural income [Sec. 10(1)]:

Agricultural income in India is totally exempt from tax. However, such income is
to be aggregated in case of certain assessees for the purpose of determining rate
of tax on non-agricultural income.

Receipts by a member from a HUF [Sec. 10(2)]:

Any sum received by an individual as a member of a Hindu Undivided Family

either out of income of the family or out of income of estate belonging to the
family is exempt from tax.

Share of profit received by a partner from a firm [Sec. 10(2A)]:

In case of a person being a partner of a firm which is separately assessed as such,

his/ her share in the total income of the firm is exempt from tax.

Interest on Non-resident (External) Account [Sec. 10(4)]:

In the case of an individual who is not resident in India, any income by way of
interest on money standing to his credit in a Non-resident (External) account in
any bank in India shall be exempt from tax if certain conditions are satisfied.

Remuneration to persons who are not citizens of India [Sec. 10(6)]:

In case of an individual who is not a citizen of India, the following income shall be
exempt from tax:

• Remuneration received by diplomats, etc.

• Remuneration received by a foreign national as an employee of a
foreign enterprise.
 • Non-resident employed on a foreign ship.
• Remuneration of employee of foreign Government during his
training in India.

Allowance or perquisites outside India [Sec. 10(7)]:

Any allowances or perquisites paid or allowed, as such, outside India by the

Government to a citizen of India, for rendering services outside India, are
exempt.

Payments under Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985 [Sec. 10(10BB)]:

Any payments made, under the above Act or any scheme made thereunder, shall
be exempt from tax in the hands of the recipient.

Exemption for compensation received or receivable on account of any disaster [Sec. 10(10BC)]:

Any amount received or receivable from the Central Government or a State

Government or a local authority by an individual or his legal heir by way of
compensation on account of any disaster shall be exempt from tax.

However, the exemption is not allowable in respect of amount received or

receivable to the extent such individual or his legal heir has been allowed a
deduction under the Income-tax Act on account of any loss or damage caused by
such disaster.

Tax on non-monetary perquisites paid by employer [Sec. 10(10CC)]:

The tax actually paid by the employer on a perquisite provided to the employee
[other than the perquisite provided by way of monetary payment within the
meaning of section 17(2)] shall be exempt from tax in the hands of the employee.

Provident Fund [Sec. 10(11)]:

Any payment from a provident fund to which the Provident Fund Act, 1925
applies or from Public Provident Fund set up by the Central Government shall be
exempt from tax.

Educational scholarships [Sec. 10(16)]:

Scholarships granted to meet the cost of education are exempt from tax. In order
to avail the exemption, it is not necessary that scholarship should be financed by
the Government.
Daily allowances of Members of Parliament [Sec. 10(17)]:

The following incomes shall be exempt from tax in the hands of the persons
specified:

• Daily allowance received by any person by reason of his

membership of Parliament or of any State Legislature or of any
Committee thereof;
• Any allowance received by any person by reason of his
membership of Parliament under the Members of Parliament
(Constituency Allowance) Rules, 1986;
• Any constituency allowance received by any person by reason of
his membership of any State Legislature under any Act or Rules
made by that State Legislature.

Pension received by certain awardees/ any member of their family [Sec. 10(18)]:

Any income by way of pension/ family pension received by an individual or any

member of his family shall be exempt from tax if such individual has been in the
service of Central/ State Government and has been awarded Param Vir Chakra or
Maha Vir Chakra or Vir Chakra or such other gallantry award as may be notified.

Exemption of the family pension received by the family members of armed forces (including para-
military forces) personnel killed in action in certain circumstances [Sec. 10(19)]:

Where the death of a member of the armed forces (including para-military

forces) of the Union has occurred in the course of operational duties, in such
circumstances and subject to such conditions as may be prescribed, the family
pension received by the widow or children or nominated heirs, as the case may
be, shall be exempt from tax.

Annual value of one palace of the ex-ruler [Sec. 10(19A)]:

The ‘annual value’ in respect of any one palace which is in occupation of an ex-
ruler is exempt from tax, provided such annual value was exempt before
28.12.1971 by virtue of any law or order then prevailing.

Income of minor clubbed in the hands of a parent [Sec. 10(32)]:

Under section 64(1A), the income of a minor child is includible in the total
income of the parent under the circumstances mentioned therein, section
10(32) provides that such parent in whose income the minor’s income is included
shall be entitled to exemption to the extent such income does not exceed of `
1,500 in respect of each minor child, whose income is so includible. In other
words, the exemption shall be allowed to the extent of the income of each minor
child included or ` 1,500 per child, whichever is less.

Capital gain on transfer of units of US-64 exempt if transfer takes place on or after 1-4-2002 [Sec.
10(33)]:

Any income arising from the transfer of a capital asset, being a unit of the Unit
Scheme, 1964 where the transfer of such asset takes place on or after 1-4-2002,
shall be exempt from tax.

Dividend to be exempt in the hands of the shareholders [Sec. 10(34)]:

Any dividend declared, paid or distributed by a domestic company shall be liable

to dividend distribution tax @ 15% plus surcharge @ 10% plus education cess @
2% plus secondary and higher education cess @ 1% of the amount so declared,
distributed or paid. Hence, such dividend received by the shareholders shall be
exempt from tax in their hands.

Income from units to be exempt in the hands of the unit-holders [Sec. 10(35)]:

Like dividends, income received on units of UTI (now known as specified

undertaking and specified company) and Mutual Funds covered under section
10(23D) shall be exempt from tax in the hands of the unit-holders.

Exemption of long-term capital gain arising from sale of shares and units [Sec. 10(38)]:

Any income arising from the transfer of a long-term capital asset, being an
equity share in a company or a unit of an equity oriented fund shall be exempt
from tax provided:

• Such equity shares are sold through recognized stock exchange,

whereas units of an equity oriented fund may either be sold
through the recognized stock exchange or may be sold to the
mutual fund.
• Such transaction is chargeable to securities transaction tax.

Exemption of amount received by an individual as loan under reverse mortgage scheme [Sec. 10(43)]:

Any amount received by an individual as a loan, either in lump sum or in

instalment, in a transaction of reverse mortgage referred to in section 47(xvi)
shall be exempt from tax.

Income from salaries

Last updated on December 1st, 2019 at 12:36 pm

SECTION I – Understanding Your Payslip

1. Basic Salary

This is a fixed component in your paycheck and forms the basis of other portions
of your salary, hence the name. For instance, HRA is defined as a percentage (as
per the company’s discretion) of this basic salary. Your PF is deducted at 12% of
your basic salary. It is usually a large portion of your total salary.

2. House Rent Allowance

Salaried individuals, who live in a rented house/apartment, can claim house rent
allowance or HRA to lower tax outgo. This can be partially or completely exempt
from taxes. The income tax laws have prescribed a method for computing the
HRA that can be claimed as an exemption.

Also do note that, if you receive HRA and don’t live on rent your HRA shall be fully
taxable.

3. Leave Travel Allowance

Salaried employees can avail exemption for a trip within India under LTA. The
exemption is only for the shortest distance on a trip. This allowance can only be
claimed for a trip taken with your spouse, children, and parents, but not with
other relatives. This particular exemption is up to the actual expenses, therefore
unless you actually take the trip and incur these expenses, you cannot claim it.
Submit the bills to your employer to claim this exemption.

4. Bonus

The bonus is usually paid once or twice a year. Bonus, performance incentive,
whatever may be its name, is 100% taxable. Performance bonus is usually linked
to your appraisal ratings or your performance during a period and is based on the
company policy.

5. Employee Contribution to Provident Fund (PF)

Provident Fund or PF is a social security initiative by the Government of India.

Both employer and employee contribute a 12% equivalent of the employee’s
basic salary every month toward employee’s pension and provident fund. An
interest of about 8.55% from FY 2017-18 (earlier it was 8.65%) gets accrued on
it. This is a retirement benefit that companies with over 20 employees must
provide as per the EPF Act, 1952.
 6. Standard Deduction

Standard Deduction has been reintroduced in the 2018 budget. This deduction
has replaced the conveyance allowance and medical allowance. The employee
can now claim a flat Rs. 50,000 (Prior to Budget 2019, it was Rs. 40,000)
deduction from the total income, thereby reducing the tax outgo.

7. Professional Tax

Professional tax or tax on employment is a tax levied by a state, just like income
tax which is levied by the central government. The maximum amount of
professional tax that can be levied by a state is Rs 2,500. It is usually deducted by
the employer and deposited with the state government. In your income tax
return, professional tax is allowed as a deduction from your salary income.

Broadly your CTC will include:

1. Salary received each month.

2. Retirement benefits such as PF and gratuity.
3. Non-monetary benefits such as an office cab service, medical
insurance paid for by the company, or free meals at the office, a
phone provided to you and bills reimbursed by your company.

Your take-home salary will include:

1. Gross salary received each month.

2. Minus allowable exemptions such as HRA, LTA, etc.
3. Minus income taxes payable (calculated after considering Section
80 deductions).

SECTION III – Retirement Benefits

1. Exemption of Leave Encashment

Check with your employer about their leave encashment policy. Some employers
allow you to carry forward some amount of leave days and allow you to encash
them while others prefer that you finish using them in the same year itself. The
amount received as compensation for leave days accumulated is referred to as
leave encashment and it is taxable as salary.

Exemption of leave encashment from tax:

It is fully exempt for Central and State government employees. For non-
government employees, the least of the following three is exempt.
 1. 10 months average salary preceding retirement or resignation
(where average salary includes basic and DA and excludes
perquisites and allowances)
2. Leave encashment actually received. (this is further subject to a
limit of Rs 3,00,000 for retirements after 02.04.1998)
3. Amount equal to salary for the leave earned (where leave earned
should not exceed 30 days for every year of service)

The amount chargeable to tax shall be the total leave encashment received
minus exemption calculated as above. This is added to your income from salary.

2. Relief Under Section 89(1)

You are allowed tax relief under Section 89(1), when you have received a portion
of your salary in arrears or in advance, or have received a family pension in
arrears. Calculate the Tax Relief Yourself

1. Calculate the tax payable on the total income, including

additional salary in the year it is received.
2. Calculate the tax payable on the total income, excluding
additional salary in the year it is received
3. Calculate the difference between Step 1 and Step 2
4. Calculate the tax payable on the total income of the year to which
the arrears relate, excluding arrears
5. Calculate the tax payable on the total income of the year to which
the arrears relate, including arrears
6. Calculate the difference between Step 4 and Step 5
7. The excess amount at Step 3 over Step 6 is the tax relief that shall
be allowed.

Note that if the amount at Step 6 is more than the amount at Step 3, no relief
shall be allowed.

3. Exemption on Receipts at the Time of Voluntary Retirement

Any compensation received on voluntary retirement or separation is exempt

from tax as per the Section 10(10C). However, the following conditions must be
fulfilled

1. Compensation received is towards voluntary retirement or

separation
2. Maximum compensation received does not exceed Rs 5,00,000.
 3. The recipient is an employee of an authority established under the
Central or State Act, local authority, university, IIT, state
government or central government, notified institute of
management, or notified institute of importance throughout
India or any state, PSU, company or a cooperative society.
4. The receipts are in compliance with Rule 2BA.

No exemption can be claimed under this section for the same AY or any other if
relief under Section 89 has been taken by an employee for compensation of
voluntary retirement or separation or termination of services.
Note: Exemption can only be claimed in the assessment year the compensation
is received.

4. Pension

Pension is taxable under the head salaries in the income tax return. Pension is
paid out periodically on a monthly basis usually. You may also choose to take
pension as a lump sum (also called commuted pension) instead of a periodical
payment. At the time of retirement, you may choose to receive a certain
percentage of your pension in advance.

Commuted and Uncommuted Pension Commuted pension or lump sum received

may be exempt in certain cases. For a government employee, commuted pension
is fully exempt. Uncommuted pension or any periodical payment of pension is
fully taxable as salary.

5. Gratuity

Gratuity is a retirement benefit that employers provide for their employees. The
employee is entitled to receive gratuity when he completes five years of service
at that company. It is, however, only paid on retirement or resignation. Gratuity
received on retirement or death by a central, state or local government employee
is fully exempt from tax for the employee or his family. The tax treatment of your
gratuity is different, depending on whether your employer is covered by the
Payment of Gratuity Act. Check with your company about its status, and then
proceed to calculate.

If your employer is covered by the Payment of Gratuity Act, then the least of the
following three is tax-exempt.

1. 15 days salary based on the salary last drawn for every completed
year of service or part thereof in excess of 6 months.
For simplicity sake, this is calculated as last drawn salary x number of years in
employment x 15/26 (where last drawn salary is Basic salary and DA and number
of years in service is rounded off to the nearest full year)

2. Rs 20,00,000
3. Gratuity actually received

If your employer is not covered under the Payment of Gratuity Act, the least
of the following three is tax-exempt.

1. Half month’s salary for each completed year of service. While

calculating completed years, any fraction of a year shall be
ignored.

SECTION IV – Basics of Income Tax

1. Income Chargeable to Tax

Your income is not equal to your salary. You could earn income from several other
sources other than your salary income. Your total income, according to the
Income Tax Department, could be from house property, profit or loss from
selling stocks or from interest on a savings account or on fixed deposits. All these
numbers get added up to become your gross income.

All the money you receive while rendering

Income from
your job as a result of an employment
Salary
contract

Income from
Income from house property you own;
house
property can be self-occupied or rented out.
property

Income from Income accrued from fixed deposits and

other sources savings account come under this head.

Income from Income earned from the sale of a capital asset

capital gains (mutual funds or house property).
 Income from Income/loss arising as a result of carrying on a
business and business or profession. Freelancers income
profession come under this head.

2. Tax Rates

Add up all your income from the heads listed above. This is your gross total
income. From your gross total income, deductions under Section 80 are allowed
to be claimed. The resulting number is the income on which you have to pay tax.

3. TDS on Salary

TDS is tax deducted at source. Your employer deducts a portion of your salary
every month and pays it to the Income Tax Department on your behalf. Based on
your total salary for the whole year and your investments in tax-saving products,
your employer determines how much TDS has to be deducted from your salary
each month.

For a salaried employee, TDS forms a major portion of an employee’s income tax
payment. Your employer will provide you with a TDS certificate called Form 16
typically around June or July showing you how much tax was deducted each
month.
Your bank may also deduct tax at source when you earn interest from a fixed
deposit. The bank deducts TDS at 10% on FDs usually. A 20% TDS is deducted
when the bank does not have your PAN information.

4. Form 16

Form 16 is a TDS certificate. Income Tax Department mandates all employers to

deduct TDS on salary and deposit it with the government. The Form 16 certificate
contains details about the salary you have earned during the year and the TDS
amount deducted.

It has two parts – Part A with details about the employer and employee name,
address, PAN and TAN details and TDS deductions.

Part B includes details of salary paid, other incomes, deductions allowed, tax
payable.

5. Form 26AS

Form 26AS is a summary of taxes deducted on your behalf and taxes paid by you.
This is provided by the Income Tax Department. It shows details of tax deducted
on your behalf by deductors, details on tax deposited by taxpayers and tax refund
received in the financial year. This form can be accessed from the IT
Department’s website.

6. Deductions

The lower your taxable income, the lower taxes you ought to pay. So be sure to
claim all the tax deductions and benefits that apply to you. Section 80C of the
Income Tax Act can reduce your gross income by Rs 1.5 lakhs. There are a bunch
of other deductions under Section 80 such as 80D, 80E, 80GG, 80U etc. that
reduce your tax liability.

Income from House Property

Last updated on November 28th, 2019 at 07:48 pm

Basics of House Property

A house property could be your home, an office, a shop, a building or some land
attached to the building like a parking lot. The Income Tax Act does not
differentiate between a commercial and a residential property. All types of
properties are taxed under the head ‘income from house property’ in the income
tax return. An owner for the purpose of income tax is its legal owner, someone
who can exercise the rights of the owner in his own right and not on someone
else’s behalf.

When a property is used for the purpose of business or profession or for carrying
out freelancing work – it is taxed under the ‘income from business and
profession’ head. Expenses on its repair and maintenance are allowed as
business expenditure.

1. Self-Occupied House Property

A self-occupied house property is used for one’s own residential purposes. This
may be occupied by the taxpayer’s family – parents and/or spouse and children.
A vacant house property is considered as self-occupied for the purpose of
Income Tax.

Prior to FY 2019-20, if more than one self-occupied house property is owned by

the taxpayer, only one is considered and treated as a self-occupied property and
the remaining are assumed to be let out. The choice of which property to choose
as self-occupied is up to the taxpayer.
For the FY 2019-20 and onwards, the benefit of considering the houses as self-
occupied has been extended to 2 houses. Now, a homeowner can claim his 2
properties as self-occupied and remaining house as let out for Income tax
purposes.

2. Let Out House Property

A house property which is rented for the whole or a part of the year is considered
a let out house property for income tax purposes

3. Inherited Property

An inherited property i.e. one bequeathed from parents, grandparents etc again,
can either be a self occupied one or a let out one based on its usage as discussed
above.

Steps to Calculate Income From House Property

Here is how you compute your income from a house property:

1. Determine Gross Annual Value (GAV) of the property: The gross

annual value of a self-occupied house is zero. For a let out
property, it is the rent collected for a house on rent.
2. Reduce Property Tax: Property tax, when paid, is allowed as a
deduction from GAV of property.
3. Determine Net Annual Value(NAV): Net Annual Value = Gross
Annual Value – Property Tax
4. Reduce 30% of NAV towards standard deduction: 30% on NAV is
allowed as a deduction from the NAV under Section 24 of the
Income Tax Act. No other expenses such as painting and repairs
can be claimed as tax relief beyond the 30% cap under this section.
5. Reduce home loan interest: Deduction under Section 24 is also
available for interest paid during the year on housing loan availed.
6. Determine Income from house property: The resulting value is
your income from house property. This is taxed at the slab rate
applicable to you.
7. Loss from house property: When you own a self occupied house,
since its GAV is Nil, claiming the deduction on home loan interest
will result in a loss from house property. This loss can be adjusted
against income from other heads.
Note: When a property is let out, its gross annual value is the rental value of the
property. The rental value must be higher than or equal to the reasonable rent of
the property determined by the municipality.

Income from profits and gains of business and

profession
Last updated on November 28th, 2019 at 07:50 pm

In view of Section 2(13), business includes any:

(a) Trade

(b) Commerce

(c) Manufacture

(d) Any adventure or concern in the nature of trade, commerce or manufacture.

It covers every facet of an occupation carried on by a person with a view to
earning profit.

• The word “business” is one of large and indefinite import and

connotes something which occupies attention and labour of a
person for the purpose of profit.
• Business arises out of commercial transactions between two or
more persons. One cannot enter into a business transaction with
oneself.

As per section 2(36), profession includes vocation. As profits and gains of a

business, profession or vocation are chargeable to tax under the head “Profits
and gains of business or profession”, distinction between “business”,
“profession” and “vocation” does not have any material significance while
computing taxable income. What does not amount to “profession” may amount
to “business” and what does not amount to “business” may amount to
“vocation”.

1. Business Incomes Taxable under the head of ‘Profit and Gains of Business or
Profession’ (Section 28).

Under section 28, the following income is chargeable to tax under the head
“Profits and gains of business or profession”:
 • Profits and gains of any business or profession;
• Any compensation or other payments due to or received by any
person specified in section 28(ii);
• Income derived by a trade, professional or similar association
from specific services performed for its members;
• The value of any benefit or perquisite, whether convertible into
money or not, arising from business or the exercise of a
profession;
• Any profit on transfer of the Duty Entitlement Pass Book Scheme;
• Any profit on the transfer of the duty free replenishment
certificate;
• Export incentive available to exporters;
• Any interest, salary, bonus, commission or remuneration received
by a partner from firm;
• Any sum received for not carrying out any activity in relation to
any business or profession or not to share any know-how, patent,
copyright, trademark, etc.;
• fair market value of inventory as on the date on which it is
converted into, or treated as, a capital asset determined in the
prescribed manner;
• Any sum received under a Keyman insurance policy including
bonus;
• any sum received (or receivable) in cash or kind, on account of any
capital asset (other than land or goodwill or financial instrument)
being demolished, destroyed, discarded or transferred, if the
whole of the expenditure on such capital asset has been allowed as
a deduction under section 35AD;
• Income from speculative transaction.

2. Business Income Not Taxable under the head ‘Profit and Gains of Business or
Profession’

In the following cases, income from trading or business is not taxable under
section 28, under the head “Profits and gains of business or profession”:

Rental income in the case of Dealer in Property:

Rent of house property is taxable under section 22 under the head “Income from
house property”, even if property constitutes stock-in-trade of recipient of rent
or the recipient of rent is engaged in the business of letting properties on rent.

Dividend on Shares in the case of a Dealer-in-Shares:

Dividends on shares are taxable under section 56(2)(i), under the head “Income
from case of a dealer-in-shares other sources”, even if they are derived from
shares held as stock-in-trade or the recipient of dividends is a dealer-in-shares.
Dividend received from an Indian company is not chargeable to tax in the hands
of shareholders (this rule is subject to a few exceptions).

Winnings from Lotteries, etc.

Winnings from lotteries, races, etc., are taxable under the head “Income from
other sources” etc. (even if derived as a regular business activity).

Interest received on Compensation or Enhanced Compensation:

Such interest is always taxable in the year of receipt under the head “Income
from other sources” (even if it pertains to a regular business activity). A
deduction of 50 % is allowed and effectively only 50 % of such interest is taxable
under the head “Income from other sources”.

Profits derived from the aforesaid business activities are not taxable under
section 28, under the head “Profits and gains of business or profession”. Profits
and gains of any other business are taxable under section 28, unless such profits
are exempt under sections 10 to 13A.

3. Mode of Taxation on Certain Incomes (Section 145B)

Section 145B has been inserted by the Finance Act, 2018. It is applicable from the
assessment year 2017-18 onwards. It provides mode of taxation of the following
incomes:

1. Interest received by an assessee on compensation or on enhanced

compensation, shall be deemed to be the income of the year in
which it is received (however, it is taxable under section 56 under
the head “Income from other sources”).
2. The claim for escalation of price in a contract or export incentives
shall be deemed to be the income of the previous year in which
reasonable certainty of its realization is achieved.
3. Assistance in the form of subsidy (or grant or cash incentive or
duty drawback or waiver or concession or reimbursement) as
referred to in section 2(24)(xviii) shall be deemed to be the
income of the previous year in which it is received, if not charged
to income tax for any earlier previous year.
4. Basic Principles for computing income Taxable under the head ‘Profit and Gains of
Business or Profession’

1. Business or profession carried on by the assessee:

Business or profession should be carried on by the assessee.

2. Business or profession should be carried on during the previous

year:

Income from business or profession is chargeable to tax under this head only if
the business or profession is carried on by the assessee at any time during the
previous year (not necessarily throughout the previous year). There are a few
exceptions to this rule.

3. Income of previous year is taxable during the following

assessment year:

Income of business or profession carried on by the assessee during the previous

year is chargeable to tax in the next following assessment year. There are,
however, certain exceptions to this rule.

4. Tax incidence arises in respect of all businesses or professions:

Profits and gains of different businesses or professions carried on by the

assessee are not separately chargeable to tax. Tax incidence arises on aggregate
income from all businesses or professions carried on by the assessee. If,
therefore, an assessee earns profit in one business and sustains loss in another
business, income chargeable to tax is the net balance after setting off loss
against income. However, profits and losses of a speculative business are kept
separately.

5. Legal ownership vs. beneficial ownership:

Under section 28, it is not only the legal ownership but also the beneficial
ownership that has to be considered. The courts can go into the question of
beneficial ownership and decide who should be held liable for the tax after taking
into account the question as to who is, in fact, in receipt of the income which is
going to be taxed.

6. Real profit vs. anticipated profit:

Anticipated or potential profits or losses, which may occur in future, are not
considered for arriving at taxable income of a previous year. This rule is,
however, subject to one exception: stock-in-trade may be valued on the basis of
cost or market value, whichever is lower.

7. Real profit vs. Notional profit:

The profits which are taxed under section 28 are the real profits and not notional
profits. For instance, no person can make profit by trading with himself in
another capacity.

8. Recovery of sum already allowed as deduction:

Any sum recovered by the assessee during the previous year in respect of an
amount or expenditure which was earlier allowed as deduction, is taxable as
business income of the year in which it is recovered.

9. Mode of book entries not relevant:

The mode or system of book-keeping cannot override the substantial character

of a transaction.

10. illegal business:

The income-tax law is not concerned with the legality or illegality of a business
or profession. It can, therefore, be said that income of illegal business or
profession is not exempt from tax.

Income from Capital Gains

Last updated on November 28th, 2019 at 07:51 pm

Simply put, any profit or gain that arises from the sale of a ‘capital asset’ is a
capital gain. This gain or profit is considered as income and hence charged to tax
in the year in which the transfer of the capital asset takes place. This is called
capital gains tax, which can be short-term or long-term. Capital gains are not
applicable when an asset is inherited because there is no sale, only a transfer.
However, if this asset is sold by the person who inherits it, capital gains tax will
be applicable. The Income Tax Act has specifically exempted assets received as
gifts by way of an inheritance or will.

Here are some examples of capital assets: land, building, house property,
vehicles, patents, trademarks, leasehold rights, machinery, and jewellery. This
includes having rights in or in relation to an Indian company. It also includes
rights of management or control or any other legal right. The following are not
considered capital asset:
 1. Any stock, consumables or raw material, held for the purpose of
business or profession
2. Personal goods such as clothes and furniture held for personal use
3. Agricultural land in rural India
4. 6½% gold bonds (1977) or 7% gold bonds (1980) or national
defence gold bonds (1980) issued by the central government
5. Special bearer bonds (1991)
6. Gold deposit bond issued under the gold deposit scheme (1999) or
deposit certificates issued under the Gold Monetisation Scheme,
2015

Definition of rural area (from AY 2014-15) – Any area which is outside the
jurisdiction of a municipality or cantonment board, having a population of
10,000 or more is considered a rural area. Also, it should not fall within a distance
(to be measured aerially) given below – (population is as per the last census).

Distance Population

2 kms from local limit of municipality or If the population of the municipality/cantonment board is m
cantonment board more than 1 lakh

6 kms from local limit of municipality or If the population of the municipality/cantonment board is m
cantonment board than 10 lakh

8 kms from local limit of municipality or

If the population of the municipality/cantonment board is m
cantonment board

Types of Capital Assets

Short-term capital asset An asset which is held for a period of 36 months or less
is a short-term capital asset. The criteria of 36 months have been reduced to 24
months in the case of immovable property being land, building, and house
property, from FY 2017-18.

For instance, if you sell house property after holding it for a period of 24 months,
any income arising will be treated as long-term capital gain provided that
property is sold after 31st March 2017.

Long-term capital asset An asset that is held for more than 36 months is a long-
term capital asset. The reduced period of the aforementioned 24 months is not
applicable to movable property such as jewellery, debt-oriented mutual funds
etc. They will be classified as a long-term capital asset if held for more than 36
months as earlier.
Some assets are considered short-term capital assets when these are held for 12
months or less. This rule is applicable if the date of transfer is after 10th July 2014
(irrespective of what the date of purchase is). The assets are:

1. Equity or preference shares in a company listed on a recognized

stock exchange in India
2. Securities (like debentures, bonds, govt securities etc.) listed on a
recognized stock exchange in India
3. Units of UTI, whether quoted or not
4. Units of equity oriented mutual fund, whether quoted or not
5. Zero coupon bonds, whether quoted or not

When the above-listed assets are held for a period of more than 12 months, they
are considered as long-term capital asset. In case an asset is acquired by gift,
will, succession or inheritance, the period for which the asset was held by the
previous owner is also included when determining whether it’s a short term or a
long-term capital asset. In the case of bonus shares or rights shares, the period
of holding is counted from the date of allotment of bonus shares or rights shares
respectively.

Tax on Short-Term and Long-Term Capital Gains

Tax on long-term capital gain: The Long-term capital gain is taxable at 20%.

Tax on short-term capital gain when securities transaction tax is not

applicable: If securities transaction tax is not applicable, the short-term capital
gain is added to your income tax return and the taxpayer is taxed according to his
income tax slab.

Tax on short-term capital gain if securities transaction tax is applicable: If

securities transaction tax is applicable, the short-term capital gain is taxable at
the rate of 15%.

Tax on Equity and Debt Mutual Funds

Gains made on the sale of debt funds and equity funds are treated differently.
Funds that invest heavily in equities, usually exceeding 65% of their total
portfolio, is called an equity fund.

Effective 11 July 2014 On or before 10 July 2014

Funds
Short-Term Gains Long-Term Gains Short-Term Gains Long-Term Gain
 At tax slab rates of At tax slab rates of 10% without in
Debt Funds At 20% with indexation
the individual the individual indexation whic

Equity
15% Nil 15% Nil
Funds

Change in Tax Rules for Debt Mutual Funds

Debt mutual funds have to be held for more than 36 months to qualify as a long-
term capital asset. It means that investors would have to remain invested in
these funds for at least three years to take the benefit of long-term capital gains
tax. If redeemed within three years, the capital gains will be added to one’s
income and will be taxed as per one’s income tax slab.

Calculating Capital Gains

Capital gains are calculated differently for assets held for a longer period and for
those held over a shorter period.

Full value consideration The consideration received or to be received by the

seller as a result of transfer of his capital assets. Capital gains are chargeable to
tax in the year of transfer, even if no consideration has been received.

Cost of acquisition The value for which the capital asset was acquired by the
seller.

Cost of improvement Expenses of a capital nature incurred in making any

additions or alterations to the capital asset by the seller. Note that
improvements made before April 1, 2001, is never taken into consideration.

How to Calculate Short-Term Capital Gains?

1. Start with the full value of consideration

2. Deduct the following:
• Expenditure incurred wholly and exclusively in
connection with such transfer
• Cost of acquisition
• Cost of improvement
3. This amount is a short-term capital gain

Short term capital gain = Full value consideration Less expenses incurred
exclusively for such transfer Less cost of acquisition Less cost of improvement.
How to Calculate Long-Term Capital Gains?

1. Start with the full value of consideration

2. Deduct the following:
• Expenditure incurred wholly and exclusively in
connection with such transfer
• Indexed cost of acquisition
• Indexed cost of improvement
3. From this resulting number, deduct exemptions provided under
sections 54, 54EC, 54F, and 54B
4. This amount is a long-term capital gain

Long-term capital gain= Full value consideration

Less : Expenses incurred exclusively for such transfer

Less: Indexed cost of acquisition

Less: Indexed cost of improvement Less:expenses that can be deducted from full
value for consideration*

(*Expenses from sale proceeds from a capital asset, that wholly and directly relate to
the sale or transfer of the capital asset are allowed to be deducted. These are the
expenses which are necessary for the transfer to take place.)

As per Budget 2018, long term capital gains on the sale of equity shares/ units of
equity oriented fund, realised after 31st March 2018, will remain exempt up to
Rs. 1 lakh per annum. Moreover, tax at @ 10% will be levied only on LTCG on
shares/units of equity oriented fund exceeding Rs 1 lakh in one financial
year without the benefit of indexation.

In the case of sale of house property, these expenses are deductible from the
total sale price:

1. Brokerage or commission paid for securing a purchaser

2. Cost of stamp papers
3. Travelling expenses in connection with the transfer – these may
be incurred after the transfer has been affected.
4. Where property has been inherited, expenditure incurred with
respect to procedures associated with the will and inheritance,
obtaining succession certificate, costs of the executor, may also
be allowed in some cases.
In the case of sale of shares, you may be allowed to deduct these expenses:

1. Broker’s commission related to the shares sold

2. STT or securities transaction tax is not allowed as a deductible
expense

Where jewellery is sold, and a broker’s services were involved in securing a

buyer, the cost of these services can be deducted. Note that expenses deducted
from the sale price of assets for calculating capital gains are not allowed as a
deduction under any other head of the income tax return, and these can be
claimed only once.

Income from other sources

Last updated on November 28th, 2019 at 07:51 pm

Income from other sources is a residual category used to classify income that is
not classified taxed under any other head of income. Income from other sources
must be calculated by the taxpayer based on the mercantile system used by the
taxpayer, i.e cash basis or accrual basis. In this article, we look at income from
other sources in detail along with list of allowed deductions.

Items Classified as Income from Other Sources

Apart from income that cannot be classified under any other heads, there are
certain types of incomes which are always taxed under income from other
sources. Such incomes are as under:

• Dividends are always taxed under income from other sources.

However, dividends from domestic company are normally exempt
from tax, as the company declaring dividend pays dividend
distribution tax.
• Winnings from lotteries, crossword puzzles, races including horse
races, card game and other game of any sort, gambling or betting
of any form is classified as income from other sources.
• Interest received on compensation or on enhanced compensation
is taxed under the head “Income from other sources”.
• Gifts received by an individual or HUF (which are chargeable to
tax) are also taxed under this head.

The following types of income can be classified as Income from Other Sources,
if it is not taxed under the head “Profits and gains of business or profession”:
 • Any contribution to a fund for welfare of employees received by
the employer.
• Income received by way of interest on securities.
• Income from letting out or hiring of plant, machinery or furniture.
• Income from letting out of plant, machinery or furniture along
with building; both the lettings are inseparable.
• Money received under a Keyman Insurance Policy including
bonus.

Tax Deduction Allowed for Income from Other Sources

The following deductions can be claimed while computing income from other
sources:

• Commission or remuneration for realizing dividends or interest

on securities.
• Any sum received by an employer from employees as contribution
towards any welfare fund of such employees is first included as
income of the employee, and if the employer credits such sum to
the employee’s account under the relevant fund on or before the
due date (of such fund), then such amount (i.e., employee’s
contribution) is deductible from the income of the employer.
• Current (not capital) repairs, insurance premium and depreciation
in respect of plant, machinery, furniture and buildings are
deductible from rent income earned by letting out of plant,
machinery, furniture and building, which are chargeable to tax.
• A deduction of lower of Rs. 15,000 or 33 1/3% of such income is
available in case of income in the nature of family pension (i.e.,
regular monthly amount payable by the employer to the family
members of the deceased employee).
• Deduction is available in respect of any other expenditure (not
being in the nature of capital expenditure) laid out or expended
wholly and exclusively for the purpose of making or earning such
income during the relevant previous year.

Tax Deduction NOT Allowed

The following deductions cannot be claimed while computing income from

other sources:

• Personal expenditure
 • Interest chargeable and payable outside India on which tax has
not been paid or deducted at source.
• Amount paid which is taxable under the head “Salaries” and
payable outside India on which tax has not been paid or deducted
at source.
• Sum paid on account of wealth-tax that is not deductible.
• Amount specified under section 40A is not deductible.

Clubbing of income
Last updated on November 28th, 2019 at 07:52 pm

‘Its all in the family’. It may seem ordinary to invest money for a non earning
spouse by way of fixed deposits, or other income earning assets or to set up bank
accounts, mutual funds or other investments for children to provide for their
needs in future. Usually, you are only taxed for your own income, but under
certain special circumstances some incomes are ‘clubbed’ along with your
income and you may be liable to pay tax on such clubbed income.

The intention here is to make sure there is no tax that escapes, in case an
individual is moving assets or incomes in the family. In a situation where you
have incurred a loss, such loss (wherever allowed to be adjusted against an
income) is also not allowed to be transferred to anyone and will be ‘clubbed’ to
your income.

Let’s understand in what circumstances you may attract this ‘clubbing’ of

income –

In the case of Assets Transfer to Anyone

Transfer of Income – no transfer of assets: When you retain the ownership of

an asset but decide to transfer its income by doing an agreement or any other
way, the Act will still consider that income as your income and it will be added to
your total income for taxation purposes.

Transfer of Asset – which is revocable: When you transfer the ownership of an

asset and make such transfer revocable, income from such an asset will continue
to be added to your income.

Clubbing of Spouse’s Income

Here are some situations when your spouse’s income will get clubbed to your
income and you’ll have to pay tax on it-
(1) Your spouse receives a salary from a company or a firm in which you have a
substantial interest, then such salary will be clubbed with your income.
Substantial Interest means you alone or with your relatives (husband, wife,
brother, sister or your lineal ascendant or descendant) hold equity or voting
power of a company which is 20% or more. Or in case of a firm you are entitled to
20% or more of the profits. Also, if both of your receive an income from such a
firm or company, it will get taxed in the hands of the person whose taxable
income is higher. There is one exception to this – if your spouse receives the
salary due to his/her application of technical or professional knowledge &
experience then such salary will be taxed in the hands of the person receiving it
and not clubbed.

(2) You transfer an asset to your spouse directly or indirectly without receiving
adequate consideration (does not include where asset is transferred as part of a
divorce settlement) – income from this asset will be clubbed with your income.
For example – where the husband to reduce his tax liability transfers an asset
worth Rs 1,00,000 to his wife for Rs 25,000 .3/4th of the income from this asset
will be taxed in the hands of the husband. If he receives no consideration, in that
case the entire income from this asset will be clubbed with the husband’s
income. Although the clubbing provisions here exclude house property – but in
case you transfer a house property to your wife and do not receive adequate
consideration, as per the Act, you will still be considered the ‘deemed owner’ and
the income from the asset will be clubbed with your income.

(3) You transfer an asset to a person or an association of persons, directly or

indirectly, without adequate consideration, so that the benefit arises to your
spouse either now or on a deferred basis, income from such an asset will be
clubbed with your income.

(4) Assume a situation where you provide money to your spouse (who is non
working) and that money is invested by the spouse and a certain income is
generated (from such money that you gave your spouse).The income that arises
from such investment done by her can be clubbed to your income. However, if
your spouse reinvests the income portion and earns further income then such
income may not be clubbed with your taxable income.

Clubbing of Income of Minor Child (less than 18 years old)

(1) Some families make fixed deposits in the name of a minor child. Income of a
minor is taxable in the hands of the parent whose total income is higher (before
including the minor’s income). If the parents are divorced it is clubbed with the
person who is maintaining the child. There is one exception to this rule – if the
minor has earned an income because of his own manual work, or used his talent
or specialized knowledge & experience OR in case of a minor who is disabled
(based on definition of disability in Section 80U) and earns an income, such
income will not be clubbed.

(2) When your minor child’s income is clubbed to your income – exemption is
available up to Rs 1500 for each such minor child. Which means if clubbed income
is more than Rs 1500, Rs 1500 is the maximum exemption, however if clubbed
income is say Rs 800 (less than Rs 1500) exemption is limited up to such lesser
amount, Rs 800 in this case.

Clubbing of Income of a Major Child (18 or more than 18 years old)

You may be giving over some money to your major child (who may not be
earning), in this case if the major child invests that money – any income from
these investments will not be taxable in your hands but will be taxed in the hands
of the major child. So therefore, there will be no clubbing of income in case of a
major child.

Clubbing of Income of a Son’s Wife

You transfer an asset to your son’s wife directly or indirectly without receiving
adequate consideration – income from this asset will be clubbed with your
income. Or you transfer an asset to a person or AOP, for the immediate or
deferred benefit of your son’s wife, without adequate consideration, directly or
indirectly – income from this asset will be clubbed with your income

Calculation of Taxable income

Last updated on December 8th, 2019 at 11:18 am

Income tax is the tax you pay on your income. Income Tax is levied on a person
who was in India for 182 days during the previous tax year or the person who was
in India for at least 60 days during the previous tax year and for at least 365 days
during the preceding 4 years will be taxed.

A persons total income is divided into 5 heads of income. They are:

• Income from salaries

• Income from house property
• Profit and gains of business or profession
• Capital gains
• Income from other sources
Salary includes wages, pension, gratuity, fees, commission, perquisites,
provident fund contribution, leave encashment, Central Governments
contribution to pension and compensation received for a service.

Calculate Taxable Income on Salary

It is essential to gather all the details required to file your income tax returns
before computing your taxable income on salary. You will then have to calculate
your total taxable income, followed by the calculation of final tax refundable or
payable. To calculate the final tax, you will have to use the applicable tax rates
before subtracting taxes already paid through advance tax or TCS/TDS from the
tax amount due.

The income tax regulations allow individuals to derive income from five sources,
viz. Income from Salary, Income from Business or Property, Income from Capital
Gains, Income from House Property, and Income from Other Sources. Each
income derived by an individual must fall under one of the aforementioned
categories.

Following is the procedure for the calculation of taxable income on salary:

1. Gather your salary slips along with Form 16 for the current fiscal
year and add every emolument such as basic salary, HRA, TA, DA,
DA on TA, and other reimbursements and allowances that are
mentioned in your Form 16 (Part B) and salary slips.
2. The bonus received during the financial year must be added for
the income that is being calculated.
3. The total is your gross salary, from which you will have to deduct
the exempted portion of House Rent Allowance, Transport
Allowance (for which the maximum exemption is Rs.19,200 per
year), Medical reimbursement (for which the maximum
exemption is Rs.15,000), and all other reimbursements provided
the actual bills in respect of the expenses incurred.
4. The result is your net income from salary.

Salary is the remuneration paid by the employer to the employee for the services
rendered for a certain period of time. It is paid in fixed intervals i.e. monthly one-
twelfth of the annual salary. Salary includes:

• Basic Salary or the fixed component of salary as per the terms of

employment.
• Fees, Commission and Bonus that the employee gets from the
employer
 • Allowances that the employer pays the employee to meet his
personal expenses. Allowances are taxed either fully, partially or
are exempt.

Fully taxable allowances are:

Dearness allowance paid to the employees to meet expenses due to inflation.

City Compensatory allowance paid to those who move to big metros like
Mumbai, Delhi, Chennai, where the standard of living is higher.

• Overtime allowance paid to the employee who works over the

prescribed hours.
• Deputation allowance and servant allowance.

Partly taxable allowances are:

• House Rent Allowance:If the employee stays in his own house

then the allowance is fully taxable. The allowance exemption is
the least of
• The actual house rent allowance
• If he pays additional rent above 10% of his salary
• If the rent is equal to 50% of his salary (metros) or 40% (other
areas).
• Entertainment allowance(except for Central and State
Government employees).
• Special allowances like uniform, travel, research allowance etc.
• Special allowance to meet personal expenses like childrens
education allowance, children hostel allowance etc.

Fully exempt allowances are:

• Foreign allowance given to employees posted abroad.

• Allowances of High Court and Supreme Court Judges.
• United Nations Organisation employees allowances.

Perquisites are payments received by employees over their salaries. They are
not reimbursement of expenses. Some perquisites are taxable for all employees,
they are:

• Rent free accommodation

• Concession in accommodation rent
 • Interest free loans
• Movable assets
• Club fee payments
• Educational expenses
• Insurance premium paid on behalf of employees

Some are taxable only to specific employees like directors or those who have
substantial interest in the organisation, they are taxed for:

• Free gas, electricity etc. for domestic purpose

• Concessional educational expenses
• Concessional transport facility
• Payment made to gardener, sweeper and attendant.

Some perquisites are exempt from tax. The fringe benefits that are exempt from
tax are:

• Medical benefits
• Leave travel concession
• Health Insurance Premium
• Car, laptop etc. for personal use.
• Staff Welfare Scheme

Retirement benefits are given to employees during their period of service or

during retirement.

• Pension is given either on a monthly basis or in a lump sum. The

tax is treated depending on the category of the employee.
• Gratuity is given as appreciation of past performance which is
received at the time of retirement and is exempt to a certain limit.
• Leave salaries tax depends on the category of the employee. The
employee may make use of the leave or encash it.
• Provident fund is contributed by both employee and employer on
a monthly basis. At the retirement, employee gets the amount
along with interest. Tax treatment is based on the type of
provident fund maintained by the employer.

Tax calculation including surcharge and

Marginal relief
Last updated on December 8th, 2019 at 11:18 am
Surcharge on Income Tax

Income tax surcharge is an additional charge payable on income tax. It is an

added tax on the taxpayers having a higher income inflow during a particular
financial year.

Surcharge rates for different taxpayers

There are different rates of surcharge applicable to different taxpayers under the
Income Tax Act, 1961.

Taxpayer Income limit

Net income exceeds

Individual/HUF/AOP/BOI/ Artificial Judicial
Rs.50 Lakhs but doesn’t
Person
exceed Rs. 1 Crore

Individual/HUF/AOP/BOI/ Artificial Judicial Net income exceeds

Person Rs.1 Crore

Firm/LLP/Local authorities/Co-operative Net income exceeds Rs.1

Society Crore

Net income exceeds

Domestic Company Rs.1 Crore but doesn’t
exceed Rs.10 Crores

Net income exceeds

Domestic Company
Rs.10 Crores

Net income exceeds

Foreign Company Rs.1 Crore but doesn’t
exceed Rs. 10 Crores
 Net income exceeds
Foreign Company
Rs.10 Crores

Marginal relief for individuals

Case 1: Where the total income* is more than Rs.50 Lakhs but does not exceed
Rs.1 crore, the taxpayers have to pay a surcharge at the rate of 10% on the income
tax computed.

According to the Income-tax provisions, a marginal relief will be provided to

certain taxpayers up to the amount of the difference between the excess tax
payable (including surcharge) on the income above Rs.50 lakhs and the amount
of income that exceeds Rs.50 Lakhs.

Suppose, an individual has a total income of Rs.51 Lakhs in an FY, he will have to
pay taxes inclusive of a surcharge of 10% on the tax computed i.e., total tax
payable will be Rs. 14,76, 750. But, if he would have earned only Rs.50 lakhs, then
the tax liability would have been Rs.13,12,500 only.

Isn’t it unfair for the individual? For earning an extra Rs.1,00,000, he will end up
paying income tax of Rs.1,64,250. The individual’s tax liability should be reduced
to avoid any such excess tax payable.

The individual will get a marginal relief of the difference amount between the
excess tax payable on higher income i.e (Rs.14,76, 750 minus Rs.13,12,500 =
Rs.1,64,250 ) and the amount of income that exceeds Rs. 50 Lakhs i.e.
(Rs.51,00,000 minus Rs.50,00,000 = Rs.1,00,000). The marginal relief will be
Rs.64,250 (Rs.1,64,250 minus Rs.1,00,000).

Case 2: Where the total income is more than Rs.1 crore, a surcharge of 15% will be
levied on the income tax payable.

A marginal relief will be provided to the taxpayer up to the amount of difference

between the excess tax payable (including surcharge) on income above Rs.1
crore and the amount of income that exceeds Rs.1 crore.

Suppose, if the total income of an individual is Rs.1.01 crore in any FY, he will have
to pay tax inclusive of a surcharge of 15% on the tax computed i.e., total tax
payable will be Rs.32,68,875. But, if he would have earned only Rs.1 crore, then
the tax payable would have been Rs.30,93,750 only.
For earning an extra Rs.1,00,000, he will end up paying income tax of
Rs.1,75,125.

Hence, the individual will get a marginal relief of the difference amount between
the excess tax payable on higher income i.e (Rs.1,75,125 ) and the amount of
income that exceeds Rs.1 crore i.e. (Rs. 1,00,000, in this case). The marginal
relief will be Rs.75,125 (Rs.1,75,125 minus Rs.1,00,000).

Marginal relief for firms

Where the total income is more than Rs.1 crore, a surcharge of 12% will be levied
on the income tax payable.

A marginal relief will be provided to such taxpayers having a total income of

more than Rs.1 crore i.e., the income tax payable (including surcharge) on the
higher income should not exceed the income tax payable on Rs.1 Crore by more
than the amount of income that exceeds Rs.1 crore.

To simplify, if the total income of a firm is Rs.1.01 crores, it will have to pay an
income tax inclusive of a surcharge of 12% on the tax computed i.e., total tax
payable will be Rs.32,24,000. But, if the total income would have been only Rs. 1
crore, then the tax payable would have been Rs.31,20,000 only.

For earning an extra Rs.1,00,000, it will end up paying income tax of

Rs.1,04,000.

Hence, the firm will get a marginal relief of the difference amount between the
excess tax payable on higher income i.e (Rs.1,04,000) and the amount of income
that exceeds Rs.1 crore i.e. (Rs.1,00,000, in this case). The marginal relief will be
Rs.4,000 (Rs.1,04,000 minus Rs.1,00,000).

Marginal relief for companies

Case 1: Where the total income of a domestic company is more than Rs.1 crore
but does not exceed Rs.10 crore, a surcharge of 7% will be levied on the income
tax payable.

Similarly, for foreign companies having total income more than Rs.1 crore but
less than Rs. 10 crores, a surcharge of 2% will be levied on the income tax
payable.

Marginal relief will only be provided to such companies having a total income of
more than Rs.1 crore but less than Rs.10 crores i.e., the income tax payable
(including surcharge) on the higher income should not exceed the income tax
payable on Rs.1 Crore by more than the amount of income that exceeds Rs.1
crore.

Case 2: Where the total income of a domestic company is more than Rs.10 crores,
a surcharge of 12% will be levied on the income tax payable.

Similarly, for foreign companies having total income more than Rs.10 crores, a
surcharge of 5% will be levied on the income tax payable.

Marginal relief will only be provided to such domestic companies having a total
income of more than Rs.10 crores i.e., the income tax payable (including
surcharge) on the higher income should not exceed the income tax payable on
Rs.10 crores by more than the amount of income that exceeds Rs.10 crores.

Deduction in Tax
Last updated on November 24th, 2019 at 11:27 pm

1. Section 80C

Deductions on Investments

You can claim a deduction of Rs 1.5 lakh your total income under section 80C. In
simple terms, you can reduce up to Rs 1,50,000 from your total taxable income,
and it is available for individuals and HUFs.

Filing your Income Tax Return. The Income Tax Department will refund the
excess money to your bank account.

2. Section 80CCC – Insurance Premium

Deduction for Premium Paid for Annuity Plan of LIC or Other Insurer

Section 80CCC provides a deduction to an individual for any amount paid or

deposited in any annuity plan of LIC or any other insurer. The plan must be for
receiving a pension from a fund referred to in Section 10(23AAB). Pension
received from the annuity or amount received upon surrender of the annuity,
including interest or bonus accrued on the annuity, is taxable in the year of
receipt.
3. Section 80CCD – Pension Contribution

Deduction for Contribution to Pension Account

1. Employee’s contribution under Section 80CCD (1)

You can claim this if you deposit in your pension account. Maximum deduction
you can avail is 10% of salary (in case the taxpayer is an employee) or 20% of
gross total income (in case the taxpayer being self-employed) or Rs 1.5 lakh –
whichever is less.

Until FY 2016-17, maximum deduction allowed was 10% of gross total income
for self-employed individuals.

1. Deduction for self-contribution to NPS – section 80CCD (1B)A

new section 80CCD (1B) has been introduced for an additional
deduction of up to Rs 50,000 for the amount deposited by a
taxpayer to their NPS account. Contributions to Atal Pension
Yojana are also eligible.
2. Employer’s contribution to NPS – Section 80CCD (2)Claim
additional deduction on your contribution to employee’s pension
account for up to 10% of your salary. There is no monetary ceiling
on this deduction.

4. Section 80 TTA – Interest on Savings Account

Deduction from Gross Total Income for Interest on Savings Bank Account

If you are an individual or an HUF, you may claim a deduction of maximum Rs

10,000 against interest income from your savings account with a bank, co-
operative society, or post office. Do include the interest from savings bank
account in other income.

Section 80TTA deduction is not available on interest income from fixed deposits,
recurring deposits, or interest income from corporate bonds.

5. Section 80GG – House Rent Paid

Deduction for House Rent Paid Where HRA is not Received

1. Section 80GG deduction is available for rent paid when HRA is not
received. The taxpayer, spouse or minor child should not own
residential accommodation at the place of employment
 2. The taxpayer should not have self-occupied residential property
in any other place
3. The taxpayer must be living on rent and paying rent
4. The deduction is available to all individuals

Deduction available is the least of the following:

1. Rent paid minus 10% of adjusted total income

2. Rs 5,000/- per month
3. 25% of adjusted total income*

*Adjusted Gross Total Income is arrived at after adjusting the Gross Total Income
for certain deductions, exempt income, long-term capital gains and income
related to non-residents and foreign companies.

An online e-filing software like that of ClearTax can be extremely easy as the
limits are auto-calculated. So, you do not have to worry about making complex
calculations.

From FY 2016-17 available deduction has been raised to Rs 5,000 a month from
Rs 2,000 per month.

6. Section 80E – Interest on Education Loan

Deduction for Interest on Education Loan for Higher Studies

A deduction is allowed to an individual for interest on loans taken for pursuing

higher education. This loan may have been taken for the taxpayer, spouse or
children or for a student for whom the taxpayer is a legal guardian.

80E deduction is available for a maximum of 8 years (beginning the year in which
the interest starts getting repaid) or till the entire interest is repaid, whichever is
earlier. There is no restriction on the amount that can be claimed.

7. Section 80EE – Interset on Home Loan

Deductions on Home Loan Interest for First Time Home Owners

FY 2017-18 and FY 2016-17 This deduction is available in FY 2017-18 if the loan

has been taken in FY 2016-17. The deduction under section 80EE is available
only to home-owners (individuals) having only one house property on the date
of sanction of the loan. The value of the property must be less than Rs 50 lakh
and the home loan must be less than Rs 35 lakh. The loan taken from a financial
institution must have been sanctioned between 1 April 2016 and 31 March
2017.There is an additional deduction of Rs 50,000 available on your home
loan interest on top of deduction of Rs 2 lakh (on interest component of home
loan EMI) allowed under section 24.

FY 2013-14 and FY 2014-15 During these financial years, the deduction

available under this section was first-time house worth Rs 40 lakh or less. You
can avail this only when your loan amount during this period is Rs 25 lakh or less.
The loan must be sanctioned between 1 April 2013 and 31 March 2014. The
aggregate deduction allowed under this section cannot exceed Rs 1 lakh and is
allowed for FY 2013-14 and FY 2014-15.

8. Section 80CCG – RGESS

Rajiv Gandhi Equity Saving Scheme (RGESS)

The deduction under this section 80CCG is available to a resident individual,

whose gross total income is less than Rs.12 lakh. To avail the benefits under this
section the following conditions should be met:

1. The assessee should be a new retail investor as per the

requirement specified under the notified scheme.
2. The investment should be made in such listed investor as per the
requirement specified under the notified scheme.
3. The minimum lock in period in respect of such investment is three
years from the date of acquisition in accordance with the notified
scheme.

Upon fulfillment of the above conditions, a deduction, which is lower of the

following is allowed.

• 50% of the amount invested in equity shares; or

• Rs 25,000 for three consecutive Assessment Years.

Rajiv Gandhi Equity Scheme has been discontinued starting from 1 April 2017.
Therefore, no deduction under section 80CCG will be allowed from FY 2017-
18. However, if you have invested in the RGESS scheme in FY 2016-17, then you
can claim deduction under Section 80CCG until FY 2018-19.

9. Section 80D – Medical Insurance

Deduction for the premium paid for Medical Insurance

You (as an individual or HUF) can claim a deduction of Rs.25,000 under section
80D on insurance for self, spouse and dependent children. An additional
deduction for insurance of parents is available up to Rs 25,000, if they are less
than 60 years of age. If the parents are aged above 60, the deduction amount is
Rs 50,000, which has been increased in Budget 2018 from Rs 30,000.

In case, both taxpayer and parent(s) are 60 years or above, the maximum
deduction available under this section is up to Rs.1 lakh.

Example: Rohan’s age is 65 and his father’s age is 90. In this case, the maximum
deduction Rohan can claim under section 80D is Rs. 100,000. From FY 2015-16 a
cumulative additional deduction of Rs. 5,000 is allowed for preventive health
check.

10. Section 80DD – Disabled Dependent

Deduction for Rehabilitation of Handicapped Dependent Relative

Section 80DD deduction is available to a resident individual or a HUF and is

available on:

1. Expenditure incurred on medical treatment (including nursing),

training and rehabilitation of handicapped dependent relative
2. Payment or deposit to specified scheme for maintenance of
handicapped dependent relative.
3. Where disability is 40% or more but less than 80% – fixed
deduction of Rs 75,000.
4. Where there is severe disability (disability is 80% or more) – fixed
deduction of Rs 1,25,000.

To claim this deduction a certificate of disability is required from prescribed

medical authority.From FY 2015-16 – The deduction limit of Rs 50,000 has been
raised to Rs 75,000 and Rs 1,00,000 has been raised to Rs 1,25,000.

11. Section 80DDB – Medical Expenditure

Deduction for Medical Expenditure on Self or Dependent Relative

1. For individuals and HUFs below age 60

A deduction up to Rs.40,000 is available to a resident individual or a HUF. It is

available with respect to any expense incurred towards treatment of specified
medical diseases or ailments for himself or any of his dependents. For an HUF,
such a deduction is available with respect to medical expenses incurred towards
these prescribed ailments for any of the HUF members.

1. For senior citizens and super senior citizens

In case the individual on behalf of whom such expenses are incurred is a senior
citizen, the individual or HUF taxpayer can claim a deduction up to Rs 1 lakh. Until
FY 2017-18, the deduction that could be claimed for a senior citizen and a super
senior citizen was Rs 60,000 and Rs 80,000 respectively. This has now become
a common deduction available upto Rs 1 lakh for all senior citizens (including
super senior citizens) unlike earlier.

1. For reimbursement claims

Any reimbursement of medical expenses by an insurer or employer shall be

reduced from the quantum of deduction the taxpayer can claim under this
section.

Also remember that you need to get a prescription for such medical treatment
from the concerned specialist in order to claim such deduction. Read our detailed
article on Section 80DDB.

12. Section 80U – Physical Disability

Deduction for Person suffering from Physical Disability

A deduction of Rs.75,000 is available to a resident individual who suffers from a

physical disability (including blindness) or mental retardation. In case of severe
disability, one can claim a deduction of Rs 1,25,000.

From FY 2015-16 – Section 80U deduction limit of Rs 50,000 has been raised to
Rs 75,000 and Rs 1,00,000 has been raised to Rs 1,25,000.

13. Section 80G – Donations

Deduction for donations towards Social Causes

The various donations specified in u/s 80G are eligible for deduction up to either
100% or 50% with or without restriction. From FY 2017-18 any donations made
in cash exceeding Rs 2,000 will not be allowed as deduction. The donations
above Rs 2000 should be made in any mode other than cash to qualify for 80G
deduction.

a. Donations with 100% deduction without any qualifying limit

• National Defence Fund set up by the Central Government

• Prime Minister’s National Relief Fund
• National Foundation for Communal Harmony
• An approved university/educational institution of National
eminence
• Zila Saksharta Samiti constituted in any district under the
chairmanship of the Collector of that district
• Fund set up by a State Government for the medical relief to the
poor
• National Illness Assistance Fund
• National Blood Transfusion Council or to any State Blood
Transfusion Council
• National Trust for Welfare of Persons with Autism, Cerebral Palsy,
Mental Retardation and Multiple Disabilities
• National Sports Fund
• National Cultural Fund
• Fund for Technology Development and Application
• National Children’s Fund
• Chief Minister’s Relief Fund or Lieutenant Governor’s Relief Fund
with respect to any State or Union Territory
• The Army Central Welfare Fund or the Indian Naval Benevolent
Fund or the Air Force Central Welfare Fund, Andhra Pradesh Chief
Minister’s Cyclone Relief Fund, 1996
• The Maharashtra Chief Minister’s Relief Fund during October 1,
1993 and October 6,1993
• Chief Minister’s Earthquake Relief Fund, Maharashtra
• Any fund set up by the State Government of Gujarat exclusively for
providing relief to the victims of earthquake in Gujarat
• Any trust, institution or fund to which Section 80G(5C) applies for
providing relief to the victims of earthquake in Gujarat
(contribution made during January 26, 2001 and September 30,
2001) or
• Prime Minister’s Armenia Earthquake Relief Fund
• Africa (Public Contributions — India) Fund
• Swachh Bharat Kosh (applicable from financial year 2014-15)
• Clean Ganga Fund (applicable from financial year 2014-15)
• National Fund for Control of Drug Abuse (applicable from financial
year 2015-16)

1. Donations with 50% deduction without any qualifying limit

• Jawaharlal Nehru Memorial Fund

• Prime Minister’s Drought Relief Fund
• Indira Gandhi Memorial Trust
• The Rajiv Gandhi Foundation
c. Donations to the following are eligible for 100% deduction subject to 10% of adjusted gross total
income

• Government or any approved local authority, institution or

association to be utilized for the purpose of promoting family
planning
• Donation by a Company to the Indian Olympic Association or to
any other notified association or institution established in India
for the development of infrastructure for sports and games in
India or the sponsorship of sports and games in India

d. Donations to the following are eligible for 50% deduction subject to 10% of adjusted gross total
income

• Any other fund or any institution which satisfies conditions

mentioned in Section 80G(5)
• Government or any local authority to be utilized for any charitable
purpose other than the purpose of promoting family planning
• Any authority constituted in India for the purpose of dealing with
and satisfying the need for housing accommodation or for the
purpose of planning, development or improvement of cities,
towns, villages or both
• Any corporation referred in Section 10(26BB) for promoting the
interest of minority community
• For repairs or renovation of any notified temple, mosque,
gurudwara, church or other places.

14. Section 80GGB – Company Contribution

Deduction on contributions given by companies to Political Parties

Section 80GGB deduction is allowed to an Indian company for the amount

contributed by it to any political party or an electoral trust. Deduction is allowed
for contribution done by any way other than cash.

15. Section 80GGC – Contribution to Political Parties

Deduction on contributions given by any person to Political Parties

Deduction under section 80GGC is allowed to an individual taxpayer for any

amount contributed to a political party or an electoral trust. It is not available for
companies, local authorities and an artificial juridical person wholly or partly
funded by the government. You can avail this deduction only if you pay by any
way other than cash.
16. Section 80RRB – Royalty of a Patent

Deduction with respect to any Income by way of Royalty of a Patent

80RRB Deduction for any income by way of royalty for a patent, registered on or
after 1 April 2003 under the Patents Act 1970, shall be available for up to Rs.3
lakh or the income received, whichever is less. The taxpayer must be an
individual patentee and an Indian resident. The taxpayer must furnish a
certificate in the prescribed form duly signed by the prescribed authority.

17. Section 80 TTB – Interest Income

Deduction of Interest on Deposits for Senior Citizens

A new section 80TTB has been inserted vide Budget 2018 in which deductions
with respect to interest income from deposits held by senior citizens will be
allowed. The limit for this deduction is Rs.50,000.

No further deduction under section 80TTA shall be allowed. In addition to

section 80 TTB, section 194A of the Act will also be amended so as to increase the
threshold limit for TDS on interest income payable to senior citizens. The earlier
limit was Rs 10,000, which was increased to Rs 50,000 as per the latest Budget.

18. Deductions-Summary

Section 80 Deduction Table

Section Deduction on Allowed Lim

Investment in PPF
– Employee’s share of PF contribution
– NSCs
– Life Insurance Premium payment
– Children’s Tuition Fee
– Principal Repayment of home loan
– Investment in Sukanya Samridhi Account
80C – ULIPS Rs. 1,50,000
– ELSS
– Sum paid to purchase deferred annuity
– Five year deposit scheme
– Senior Citizens savings scheme
– Subscription to notified securities/notified deposits scheme
– Contribution to notified Pension Fund set up by Mutual Fund or UTI.
– Subscription to Home Loan Account scheme of the National Housing
Bank
– Subscription to deposit scheme of a public sector or company engaged in
 providing housing finance
– Contribution to notified annuity Plan of LIC
– Subscription to equity shares/ debentures of an approved eligible issue
– Subscription to notified bonds of NABARD

For amount deposited in annuity plan of LIC or any other insurer for a
80CCC –
pension from a fund referred to in Section 10(23AAB)

80CCD(1) Employee’s contribution to NPS account (maximum up to Rs 1,50,000) –

80CCD(2) Employer’s contribution to NPS account Maximum u

80CCD(1B) Additional contribution to NPS Rs. 50,000

80TTA(1) Interest Income from Savings account Maximum u

Exemption of interest from banks, post office, etc. Applicable only to senior
80TTB Maximum u
citizens

Least of :
– Rent paid
80GG For rent paid when HRA is not received from employer
– Rs. 5000/-
– 25% of tot

80E Interest on education loan Interest paid

80EE Interest on home loan for first time home owners Rs 50,000

Lower of
– 50% of am
80CCG Rajiv Gandhi Equity Scheme for investments in Equities
shares; or
– Rs 25,000

Medical Insurance – Self, spouse, children

– Rs. 25,000
80D Medical Insurance – Parents more than 60 years old or (from FY 2015-16)
– Rs. 50,000
uninsured parents more than 80 years old
 Medical treatment for handicapped dependent or payment to specified
scheme for maintenance of handicapped dependent – Rs. 75,000
80DD
– Disability is 40% or more but less than 80% – Rs. 1,25,0
– Disability is 80% or more

Medical Expenditure on Self or Dependent Relative for diseases specified in – Lower of R

Rule 11DD actually paid
80DDB
– For less than 60 years old – Lower of R
– For more than 60 years old actually paid

Self-suffering from disability :

– An individual suffering from a physical disability (including blindness) or – Rs. 75,000
80U
mental retardation. – Rs. 1,25,0
– An individual suffering from severe disability

Amount con
80GGB Contribution by companies to political parties
in cash)

Amount con
80GGC Contribution by individuals to political parties
in cash)

80RRB Deductions on Income by way of Royalty of a Patent Lower of Rs

Rebate in Tax
Last updated on November 24th, 2019 at 11:28 pm

As we all know, the primary duty of the government is to safeguard its citizens.
There are many helpful provisions in the Indian tax laws to reduce your tax
liability. Section 87A of the Indian Income Tax Act is one such provision. Rebate
under section 87A provides for a marginally lower payment of taxes to
individuals earning an income below the specified limit. It is provided to reduce
the tax burden of the lower income bracket.

Eligibility to Claim Rebate under Section 87A FY 2019-20 (AY 2020-21)

You can claim tax rebate under this provision if you meet the following
conditions:
 1. You must be a RESIDENT INDIVIDUAL; and
2. Your Total Income after Deductions (under Section 80) doesn’t
exceed Rs 5 lakh.
3. The rebate is limited to Rs 12,500. This means that if the total tax
payable is lower than Rs 12,500, then that amount will be the
rebate under section 87A. This rebate is applied to the total tax
before adding the Education Cess (4%).

Following are a few examples of the 87A rebate allowed to Resident Individuals
including Senior Citizens:

Total Income Tax payable before cess Rebate u/s 87A Tax Pay

2,70,000 1,000 1,000 0

3,60,000 3,000 3,000 0

4,90,000 12,000 12,000 0

12,00,000 1,72,500 0 1,79,40

Eligibility to Claim Rebate Under Section 87A FY 2018-19 (AY 2019-20)

You can claim tax rebate under this provision if you meet the following
conditions:

1. You must be a RESIDENT INDIVIDUAL; and

2. Your Total Income after Deductions (under Section 80) doesn’t
exceed Rs 3.5 lakh.
3. The rebate is limited to Rs 2500. This means that if the total tax
payable is lower than Rs 2500, then that amount will be the rebate
under section 87A. This rebate is applied to the total tax before
adding the Education Cess (4%).

Following are a few examples of the 87A rebate allowed to Resident Individuals
including Senior Citizens:
 Total Income Tax payable before cess Rebate u/s 87A Tax Pay

2,65,000 750 750 0

2,70,000 1000 1000 0

3,00,000 2,500 2,500 0

3,50,000 5,000 2,500 2,500+

Eligibility to Claim Rebate Under Section 87A FY 2017-18 (AY 2018-19)

You can claim the rebate if you meet the two conditions listed below:

1. You are a Resident individual; and

2. Your total income after Deductions (under Section 80) is no more
than Rs 3.5 lakh.
3. The rebate is limited to Rs 2500. This means that if the total tax
payable is lower than Rs 2500, then that amount will be your
rebate under section 87A. This rebate is applied to the total tax
before adding the Education Cess (3%).

Following are a few examples of the rebate allowed to Resident Individuals

including Senior Citizens:

Total Income Tax payable before cess Rebate u/s 87A Tax Paya

2,65,000 750 750 0

2,70,000 1000 1000 0

3,00,000 2,500 2,500 0

3,50,000 5,000 2,500 2,500+7

Relief in Tax
Last updated on November 24th, 2019 at 11:29 pm

Tax is calculated on your total income earned or received during the year. If your
total income includes any past dues paid in the current year, you may be worried
about paying a higher tax on such arrears (usually tax rates have gone up over the
years).

To save you from any additional burden of tax due to delay in receiving income,
the tax laws allow a relief under section 89(1).

In simple words, you do not pay more taxes if there was a delay in payment to you
and you were in a lower tax bracket for the year you received the money.

How to calculate tax relief under Section 89(1) on salary arrears

If you have received any portion of your salary in arrears or in advance, or you
have received the family pension in arrears, you are allowed some tax relief
under section 89(1) read along with Rule 21A.

Here’s how you can calculate the tax relief yourself:

Step 1: Calculate tax payable on the total income, including additional salary – in
the year it is received.

Arrears provided for will reflect in Part B of Form 16.

Step 2: Calculate tax payable on the total income, excluding additional salary in
the year it is received. You can get the amount of the additional salary (Arrears)
from the arrear document given by your employer.

Now you have to subtract the arrear from the total salary received (including the
arrears), which can be taken from your Form 16.

After knowing the amount after arrear, you need to calculate the tax over the
same.

Step 3: Calculate the difference between Step 1 and Step 2.

Step 4: Calculate tax payable on the total income of the year to which the arrears
relate, excluding arrears.
Step 5: Calculate tax payable on the total income of the year to which the arrears
relate, including arrears

Step 6: Calculate the difference between Step 4 and Step 5.

Step 7: Excess of amount at Step 3 over Step 6 is the tax relief that shall be
allowed.

If the amount in Step 6 is more than the amount in Step 3 no relief shall be
allowed.

Alternatively, you may follow the steps on the income tax website to calculate
the tax the arrears

Set off and Carry forward of losses

Last updated on November 28th, 2019 at 07:53 pm

Set off of losses means adjusting the losses against the profit/income of that
particular year. Losses that are not set off against income in the same year, can
be carried forward to the subsequent years for set off against income of those
years. A set-off could be:

1. An intra-head set-off
2. An inter-head set-off

a. Intra-head Set Off

The losses from one source of income can be set off against income from another
source under the same head of income.

For eg: Loss from Business A can be set off against profit from Business B where
Business A is one source and Business B is another source and the common head
of income is “Business”.

Exceptions to an intra-head set off:

1. Losses from a Speculative business will only be set off against the
profit of the speculative business. One cannot adjust the losses of
speculative business with the income from any other business or
profession.
 2. Loss from an activity of owning and maintaining race-horses will
be set off only against the profit from an activity of owning and
maintaining race-horses.
3. Long-term capital loss will only be adjusted towards long-term
capital gains. Interestingly, a short-term capital loss can be set off
against long-term capital gain or short-term capital gain.
4. Losses from a specified business will be set off only against profit
of specified businesses. But the losses from any other businesses
or profession can be set off against profits from the specified
businesses.

b. Inter-head Set Off

After the intra-head adjustments, the taxpayers can set off remaining losses
against income from other heads.

Eg. Loss from house property can be set off against salary income

Given below are few more such instances of an inter-head set off of losses:

1. Loss from House property can be set off against income under any
head
2. Business loss other than speculative business can be set off
against any head of income except income from salary.

One needs to also note that the following losses can’t be set off against any other
head of income:

1. Speculative Business loss

2. Specified business loss
3. Capital Losses
4. Losses from an activity of owning and maintaining race-horses

Carry forward of losses

After making the appropriate and permissible intra-head and inter-head

adjustments, there could still be unadjusted losses. These unadjusted losses can
be carried forward to future years for adjustments against income of these years.
The rules as regards carry forward differ slightly for different heads of income.
These have been discussed here:

Losses from House Property:

 • Can be carry forward up to next 8 assessment years from the
assessment year in which the loss was incurred
• Can be adjusted only against Income from house property
• Can be carried forward even if the return of income for the loss
year is belatedly filed.

Losses from Non-speculative Business (regular business) loss:

• Can be carry forward up to next 8 assessment years from the

assessment year in which the loss was incurred
• Can be adjusted only against Income from business or profession
• Not necessary to continue the business at the time of set off in
future years
• Cannot be carried forward if the return is not filed within the
original due date.

Speculative Business Loss:

• Can be carry forward up to next 4 assessment years from the

assessment year in which the loss was incurred
• Can be adjusted only against Income from speculative business
• Cannot be carried forward if the return is not filed within the
original due date.
• Not necessary to continue the business at the time of set off in
future years

Specified Business Loss under 35AD:

• No time limit to carry forward the losses from the specified

business under 35AD
• Not necessary to continue the business at the time of set off in
future years
• Cannot be carried forward if the return is not filed within the
original due date
• Can be adjusted only against Income from specified business
under 35AD

Capital Losses:

• Can be carry forward up to next 8 assessment years from the

assessment year in which the loss was incurred
 • Long-term capital losses can be adjusted only against long-term
capital gains.
• Short-term capital losses can be set off against long-term capital
gains as well as short-term capital gains
• Cannot be carried forward if the return is not filed within the
original due date

Losses from owning and maintaining race-horses:

• Can be carry forward up to next 4 assessment years from the

assessment year in which the loss was incurred
• Cannot be carried forward if the return is not filed within the
original due date
• Can only be set off against income from owning and maintaining
race-horses only

Points to note:

1. A taxpayer incurring a loss from a source, income from which is

otherwise exempt from tax, cannot set off these losses against
profit from any taxable source of Income
2. Losses cannot be set off against casual income i.e. crossword
puzzles, winning from lotteries, races, card games, betting etc.

Inter-Sources & Inter head set off

Last updated on November 24th, 2019 at 11:30 pm

Taxpayers earn income from salary, house property, business or profession,

capital gains and income from other sources. There cannot be a loss from salary
and income from other sources. However, we could suffer losses under other
heads of income such as loss from house property, business loss and capital loss.
Adjusting loss from one head against any gain under the same head is called
‘inter-source’ adjustment. For example: You have two businesses ‘A’ & ‘B’.
Business ‘A’ is making a loss, while business ‘B’ is making profit. Then, the loss
from business ‘A’ can be set-off against profit from business ‘B’. Set-off means
the process of reducing one’s income using losses under other heads or same
head of income.

Similarly, if you have two house properties, one self-occupied and the other on
rent. Loss from the first property can be adjusted against the income from the
second property.
If the losses cannot be set-off fully through inter-source adjustment, they can
next be set-off against other heads of income. This is called “inter-head”
adjustment.

• Inter-source adjustment: Setting-off loss under the same head

of income.
• Inter-head adjustments: If the loss is still existing, loss can be
set-off from other heads of income (subject to certain
restrictions).
• Carry forward of losses: If loss still persists, the same can be
carried forward to the subsequent assessment years.

However this inter-source adjustment is subject to certain exceptions listed

below:

Exception Description

Loss from speculation business cannot be set-off against any incom

1 Loss in a speculation business
income.

2 Long term capital loss Long term capital loss can be set-off against long term capital gains

Loss from the activity of owning & Loss incurred from the activity of owning & maintaining race horse
3
maintaining race horses income from such business & not against any other income.

4 Business loss Business losses cannot be set-off against salary income

Loss cannot be set off against A loss under any head of income cannot be set off against winning
5 winnings from lotteries, crossword puzzles, races (including horse races), card games or any other gam
puzzles etc. gambling or betting of any form or nature.

Except the above five cases, any loss can be set-off against any income from that
source. For instance: Loss from house property can be set off against income
from any other house property.

Loss from a non-speculation business can be set off against income from
speculation or non-speculation business. Short term capital gain can be set off
against any capital gains whether long term or short term.
Income from other sources (except loss from activity of owning & maintaining
race horses) can be set off against any income other than winnings from lotteries
etc. (Mentioned in exception 5 in the table).

Let’s assume: Mr X has the following income from business & profession:
Profit from his professional practice of a lawyer: Rs. 2.5 lakh

Loss from his proprietary business: Rs. 1.75 lakh

Net Income chargeable under Profits & gains from Business & Profession will be
Rs. 75,000 (Rs. 2.5 lakh less Rs. 1.75 lakh)

Mr. Y has incurred a Short term capital loss of Rs. 15 lakh and has made a long
term capital gain of Rs. 32 lakh:

Net Income chargeable under capital gains head is Rs. 17 lakh (Rs. 32 lakh less Rs.
15 lakh).

Carry forward of losses:

If still the losses cannot be set-off fully through inter-head adjustment, they
can be carried forward to the next years. However, the loss so carried forward can
be set-off only against same head of income, i.e. the benefit of “inter-source’
adjustment is lost.

Nature of loss No. of years To be set-off against

Loss from house property 8 Income from house property

Business loss (non-speculative) 8 Business loss (non-speculative

Speculative business loss 4 Income from speculative busin

Loss from activity of owning and 4 Income from the same activity

maintaining of race horses

Short term capital loss 8 Short term or Long term capit

 Long term capital loss 8 Long term capital loss

Concept Relating to Tax Avoidance and Tax

Evasion
Last updated on December 1st, 2019 at 12:32 pm

TAX AVOIDANCE

It is an act of dodging tax without breaking the Law. It means when a taxpayer
arranges his financial activities in such a manner that although it is within the
four corner of tax law but takes advantages of loopholes which exists in the Tax
Law for reduction of tax a liability. In other words though he has complied the
letter of law but not the sprit behind the law.

Following transactions are held as Tax Avoidance which are :

1. Where tax law is complied with by using colorable devices which

means that use o dubious method or a method which is unfair for
reduction of tax liability.
2. Where the fact of the case is presented in a false manner.
3. Where the sprit behind the law is avoided.
4. There is a malafide intention.

It means that method adopted for reducing tax liability should be within the
framework of law. If it is not within the framework of law, it amounts to tax
avoidance and not Tax planning.

TAX EVASION

Any illegal method which leads to reduction of tax liability is known as Tax
Evasion. The Tax Evasion is resorted to by applying following dishonest means :

1. Concealing the Income

2. Claiming excessive expenditure
3. Falsification of accounts.
4. Willful violence of Rules

E.g. Claiming depreciation where no asset exist in the Business or claiming

depreciation on the assets which is used for residential purposes. It Is basically a
fraudulent method of reduction in tax liability.
 TAX AVOIDANCE TAX EVASION

(i) Where the payment of tax is avoided

though by complying with the Where the payment of tax is avoided
provisions of law but defeating the through illegal means or fraud is termed
intension of the law is known as tax as tax evasion.
Avoidance.

(ii) Tax Avoidance is undertaken by Tax evasion is undertaken by employing

taking advantage of loop holes in law unfair means

(iii) Tax Avoidance is done through not

Tax Evasion is an unlawful way of paying
malafied intention but complying the
tax and defaulter may punished.
provision of law.

(iv) Tax Avoidance looks like a tax

Tax evasion is blatant fraud and is done
planning and is done before the tax
after the tax liability has arisen.
liability arises.

Tax Planning
Last updated on December 1st, 2019 at 12:32 pm

The avid goal of every taxpayer is to minimize his Tax Liability. To achieve this
objective taxpayer may resort to following Three Methods :

1. Tax Planning
2. Tax Avoidance
3. Tax Evasion

It is well said that “Taxpayer is not expected to arrange his affairs in a such
manner to pay maximum tax “ . So, the assessee shall arrange the affairs in a
manner to reduce tax. But the question what method he opts for ? Tax Planning,
Tax Avoidance, Tax Evasion !
Let us see its meaning and their difference.
Meaning 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 relief’s. Some of the provisions are enumerated
below :

• Investment in securities provided u/s 10(15) . Interest on such

securities is fully exempt from tax.
• Exemptions u/s 10A, 10B, and 10BA
• Residential Status of the person
• Choice of accounting system
• Choice of organization.

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

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

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.

How is Tool of Tax Planning Exercised ?

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

• The Planning should be done before the accrual of income. Any

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

Methods Of Tax Planning

Various methods of Tax Planning may be classified as follows :

1. Short Term Tax Planning: Short range Tax Planning means the
planning thought of and executed at the end of the income year to
reduce taxable income in a legal way.

Example: Suppose , at the end of the income year, an assessee finds his taxes
have been too high in comparison with last year and he intends to reduce it. Now,
he may do that, to a great extent by making proper arrangements to get the
maximum tax rebate u/s 88. Such plan does not involve any long term
commitment, yet it results in substantial savings in tax.

2. Long Term Tax Planning : Long range tax planning means a plan
chaled out at the beginning or the income year to be followed
around the year. This type of planning does not help immediately
as in the case of short range planning but is likely to help in the
long run ;

e.g. If an assessee transferred shares held by him to his minor son or spouse,
though the income from such transferred shares will be clubbed with his income
u/s 64, yet is the income is invested by the son or spouse, then the income from
such investment will be treaded as income of the son or spouse. Moreover, if the
company issue any bonus shards for the shares transferred, that will also be
treated as income in the hands of the son or spouse.

3. Permissive Tax Planning: Permissive Tax Planning means

making plans which are permissible under different provisions of
 the law, such as planning of earning income covered by Sec.10,
specially by Sec. 10(1) , Planning of taking advantage of different
incentives and deductions, planning for availing different tax
concessions etc.
4. Purposive Tax Planning: It means making plans with specific
purpose to ensure the availability of maximum benefits to the
assessee through correct selection of investment, making
suitable Programme for replacement of assets, varying the
residential status and diversifying business activities and income
etc.

Income Tax Authorities: Their Appointment,

Jurisdiction, Powers and function
Last updated on November 24th, 2019 at 11:36 pm

Commissioner of Income Tax:

He is an important income tax authority which has executive and judicial powers.
The central board of revenue is the appointing authority for commissioner of
income tax. Normally commissioner is appointed as an incharge of a zone. He is
responsible for the administration of the area assigned to him. He is subordinate
regional commissioner income tax.

Appointment of Income-Tax Authorities [Sec. 117]

1. Power of Central Government: The Central Government may

appoint such persons as it thinks fit to be income-tax authorities.
It kept with itself the powers to appoint authorities upto and
above rank of an Assistant Commissioner of Income-Tax [ Sec. 117
(1) ]
2. Power of the Board and Other Higher Authorities: Subject to the
rules and orders of the Central Government regulating the
conditions of service of persons in public services and posts, the
Central Government may authorize the Board, or a Director-
General, a Chief Commissioner or a Director or a Commissioner to
appoint income-tax authorities below the rank of an Assistant
Commissioner or Deputy Commissioner. [ Sec. 117 (2) ]
3. Power to appoint Executive and Ministerial Staff: Subject to the
rules and orders of the Central Government regulating the
conditions of service of persons in public services and posts, an
 income-tax authority authorized in this behalf by the Board may
appoint such executive or ministerial staff as may be necessary to
assist it in the execution of its functions.

(iv) Control of Income-Tax Authorities [ Sec. 118 ]

The Board may, by notification in the Official Gazette, direct that any income-
tax authority or authorities specified in the notification shall be subordinate to
such other income-tax authority or authorities as may be specified in such
notification.

JURISDICTION:

1. In a specific area which is assigned to him, he performs both the

function judicial and executive.
2. If specific area is not assigned then he performs his duties
according the directions of central board of revenue.

FUNCTION AND POWERS OF COMMISSIONER OF INCOME TAX:

The commissioner exercises the power to control the staff of income tax
department working in his jurisdiction. He is also responsible for the efficiency
of work in all respect in his zone.

Following are the important functions and powers of commissioner of income

tax.

1. Determine The Jurisdiction:

He has the power to determine the jurisdiction and assign the work to
subordinate inspecting additional commissioners income tax and deputy
commissioners.

2. Final Authority To Decide The Dispute:

Commissioner income tax is the final authority to decide the disputes if two
subordinate income tax authorities are not in agreement regarding their areas
of juries diction or the assessment of a person.

3. Transfer Of Jurisdiction:

He is empowered to transfer the jurisdiction from one income tax authority to

another.
 4. Revision Of Orders:

He may revise any other passed by his subordinates however these orders should
not be prejudicial to the assessee.

5. Power To With Held The Refund:

The commissioner of income tax is empowered to order that the refund must be
with held if the department wants to appeal against the refund.

6. Refer The Case To High Court:

If he is not satisfied with the decision of appalled tribunal, he can request the
tribunal to refer the case to high court provided that the decision involves the
point of law.

7. Power To Compound Offence:

He may either before or after the institution of proceedings compound such

offence where a person has committed any offence under the income tax law.

8. Order To Person For Payment:

He may order a person who has committed an offence to pay the amount for
which the offence may not compound.

9. Power To Disqualify The Practitioners:

If he finds any practitioners qualify of misconduct, he may disqualify an income

tax practitioner to appear before any income tax authority.

• Power To Amend His Orders:

To rectify any mistake from the record the commissioner income tax may amend
his orders passed by him.

• Power To Receive Evidence:

The commissioner has the power to receive the evidence on affidavit. For the
examination of witness he can issue the orders to commissioners.

12. Power To Demand Documents:

He can compel any person to produce his books of accounts or any other
documents for investigation. He can also enforce any person to attend his office
and he can examine him.

13. Power To Extend The Petition Period:

He can extend the normal period for filling a revision petition, If he is satisfied
about the cause of delay.

14. Power To Decide The Revision Petitions:

Against the decision of his subordinates he entertains, hears and decides the
revision petitions of aggrieved assesses.

15. May Direct For Appeal:

The commissioner of income tax (Head quarter) may direct the deputy
commissioner to appeal to appellate tribunal against the decision made by the
commissioner income tax (appeal).

16. Penalty:

If the notice has been issued to any taxpayer but he has failed to obey the notice.
In this case commissioner income tax may impose penalty on that person.

17. Best Judgement Assessment:

If any person fails to file the return of income tax with in due date then the
commissioner can make the best judgement of assessment.

18. Power Of Recovery Of Tax:

The commissioner income tax can take various steps to recover the amount if
any person fails to pay the due tax.

19. Inventory Of Articles:

If any article is not entered and it is found in the premises the commissioner can
make inventory of that article.

20. Provisional Assessment:

The commissioner income tax has the power to make the provisional
assessment if any person fails to file the return.

21. Notice For Tax:

The commissioner income tax can issue the notice to any person for filling the
return or for the collection of tax from the tax payer.

22. Retain The Documents:

The commissioner income tax is empowered to retain the important documents

of the taxpayers for the purpose of prosecutions.

23. Change The Method Of Accounting:

If any person wants to change his method of accounting, the commissioner

income tax may allow him to change.

Provisions relating to collection and recovery

of Tax
Last updated on July 11th, 2020 at 05:48 pm

A provision for income taxes is the estimated amount that a business or

individual taxpayer expects to pay in income taxes for the current year. The
amount of this provision is derived by adjusting the reported net income of a
business with a variety of permanent differences and temporary differences.
The adjusted net income figure is then multiplied by the applicable income tax
rate to arrive at the provision for income taxes.

This provision can be altered to a considerable extent by the amount of tax

planning that a person or business engages in to defer or eliminate the income
tax liability. Consequently, the proportional size of this provision can vary
significantly from taxpayer to taxpayer, based on their tax planning abilities.

A planned provision for income taxes can also be included in a company’s budget
model. In a well-crafted model, this planned provision would include both
permanent and temporary differences. In a more basic model, the provision is
simply based on the applicable tax rate.

Section 220: When tax payable and when assessee deemed in default
Section 221: Penalty payable when tax in default

Section 222: Certificate to Tax Recovery Officer

Section 223: Tax Recovery Officer by whom recovery is to be effected

Section 224: Validity of certificate and cancellation or amendment thereof

Section 225: Stay of proceedings in pursuance of certificate and amendment or

cancellation thereof

Section 226: Other modes of recovery

Section 227: Recovery through State Government

Section 228: Recovery of Indian tax in Pakistan and Pakistan tax in India
[Omitted]

Section 228A: Recovery of tax in pursuance of agreements with foreign

countries

Section 229: Recovery of penalties, fine, interest and other sums

Section 230: Tax clearance certificate

Section 230A: Restrictions on registration of transfers of immovable property in

certain cases [Omitted]

Section 231: Period for commencing recovery proceedings [Omitted]

Section 232: Recovery by suit or under other law not affected

Features of Provision for Taxation:

Provision for taxation has the following features:

1. Source of Working Capital:

Provision for taxation provides funds for financing working capital.

2. Cost of Financing:
Financing of working capital through provision for taxation does not involve any
cost.

3. Legal Formalities:

Use of provision for taxation as a source of finance does not require any legal
formalities.

4. Floatation Cost:

It does not involve any issue-related cost.

Advantages of Provision for Taxation:

1. Cheap:

It is a cheaper source of finance and does not involve any cost.

2. Obligation:

There is no obligation of payment of any cost of capital.

Disadvantages of Provision for Taxation:

3. Short-term Finance:

Provision for taxation provides funds for a very short period.

2. Inefficient Utilization of Funds:

Sometimes excess provision may be created which might lead to misuse of

funds.

Refund of Tax
Last updated on November 24th, 2019 at 11:34 pm

If, any assessment year an assessee pays the tax which is more than the amount
for which he is actually chargeable and if the assessee proves excess payment
before the Assessing Officer, section 237 empowers the assessee to claim a
refund of the excess. Once the Assessing Officer is satisfied about the excess
payment made by the assessee, he can allow the claim or refund.
Under the following cases a claim to refund may arise :

1. When tax is deducted at source from salary, interest on securities

od debentures, dividend at a rate higher than the rate applicable
to the total income of an assessee.
2. When tax paid in advance exceeds the amount of tax actually
payable as determined at the time of refular assessment.
3. When tax calculated was higher due to some mistake and later on
tax liability is reduced on account of rectification of a mistake.
4. When tax was calculated at the higher rate on the payment given
to non-residents whereas they were actually chargeable at a
lower rate of income tax.
5. When due to double taxation , the assessee is entitled to a double
taxation relief.

Who is allow to Claim Refund of Tax ? Sec. 238(1)

Where the income of one person is included in the total income of any other
person, the latter alone shall be entitled to a refund in case of excess payment of
tax in this case.
In the case of death, incapacity, insolvency, liquidation or other cause, a person
is unable to claim or receive any refund due to him, his legal representative or the
trustee or guardian or receiver, as the case may be, shall be entitled to claim or
receive such refund for the benefit of such person or his estate.
A Claim for Refund must be filed in the prescribed form and verified in the
prescribed manner. Where any part of the total income of a person claiming
refund consists of dividends or any other income from which tax is deducted at
source, the claim for refund shall be accompanied by a certificate which is issued
by the tax-deducting authority. The claim for refund may be presented by the
claimant or through an agent or may be send by post.

Time Limit for Claiming Refund of Tax {Sec. 239(2)}

No such claim shall be allowed, unless it is made within the period specified
hereunder, namely:
(a) where the claim is in respect of income which is assessable for any
assessment year commencing on or before the 1st day of April, 1967, 4 years
from the last day of such assessment year;
(b) where the claim is in respect of income which is assessable for the
assessment year commencing on the first day of April, 1968, 3 years from the last
day of the assessment year;
(c) where the claim is in respect of income which is assessable for any other
assessment year, [one] year from the last day of such assessment year;
(d) where the claim is in respect of fringe benefits which are assessable for any
assessment year commencing on or after the first day of April, 2006, 1 (one) year
from the last day of such assessment year.

C- Refund of Tax on Appeal etc. [Sec. 240]

Where, as a result of any order passed in appeal or other proceeding under this
Act, refund of any amount becomes due to the assessee, the Assessing Officer
shall refund the amount to the assessee without his having to make any claim in
that behalf:
It is further provided that:
(a) an assessment is set aside or cancelled and an order of fresh assessment is
directed to be made, the refund, if any, shall become due only on the making of
such fresh assessment;
(b) the assessment is annulled, the refund shall become due only of the amount,
if any, of the tax paid in excess of the tax chargeable on the total income returned
by the assessee.]

D- Interest On Delayed Refunds of Tax [Sec. 243]

Central Government shall pay the assessee simple interest at 15% p.a. [fifteen
per cent per annum ] on the amount directed to be refunded from the date
immediately following the expiry of the period of 3 months aforesaid to the date
of the order granting the refund.
(2) Where any question arises as to the period to be excluded for the purposes of
calculation of interest under the provisions of this section, such question shall be
determined by the Chief Commissioner or Commissioner whose decision shall be
final.
[(3) The provisions of this section shall not apply in respect of any assessment for
the assessment year commencing on the 1st day of April, 1989 or any subsequent
assessment years.

E- Interest On Refund of Tax Where No Claim Is Needed [ Sec. 244 ]

Where a refund is due to the assessee in pursuance of an order and the Assessing
Officer does not grant the refund within a period of 3 month [three
months] from the end of the month in which such order is passed, the Central
Government shall pay to the assessee simple interest at 15% p.a. [fifteen per
cent per annum ] on the amount of refund due from the date immediately
following the expiry of the period of 3 months [three] months aforesaid to the
date on which the refund is granted.

F- Interest on refunds of Tax [ Sec. 244A ]

Where refund of any amount becomes due to the assessee, he shall be entitled to
receive, in addition to the said amount, simple interest thereon calculated in the
following manner, namely:
(a) where the refund is out of any tax paid or collected at source or paid by way of
advance tax or treated as paid, during the financial year immediately preceding
the assessment year, such interest shall be calculated at the rate of 1½ % [one-
half per cent] for every month or part of a month comprised in the period from
the 1st day of April of the assessment year to the date on which the refund is
granted:
Provided that no interest shall be payable if the amount of refund is less than
10% [ten per cent] of the tax on regular assessment;
(b) in any other case, such interest shall be calculated at the rate of 1½% [one-
half per cent] for every month or part of a month comprised in the period or
periods from the date or, as the case may be, dates of payment of the tax or
penalty to the date on which the refund is granted.

Tax Offences
Last updated on November 24th, 2019 at 11:33 pm

1. Removing, parting or otherwise dealing with seized assets

Section 132 empowers the tax authorities to initiate search proceedings at the
premises of the taxpayer. During the course of search the tax authorities are also
empowered to seize money, bullion, jewellery or other valuable article or thing
found from the taxpayer. Generally, the seized money, bullion etc. is taken by
the tax authorities in their custody (i.e., in the custody of the Government) but if
it is not possible or practicable for the tax authorities to take physical possession
of the same or to remove it to a safe place due to its volume, weight or other
physical characteristics or due to its being of a dangerous nature.

In such a case, second proviso to section 132(1) empowers the tax authorities to
seize the asset by keeping the asset at the place of the taxpayer only. In such
case, the asset will be seized by the tax authorities without physically taking the
assets with them. For this purpose, the authorised officer would serve an order
on the owner or the person who is in immediate possession or control of the asset
that he shall not remove, part with or otherwise deal with the asset, except with
the previous permission of such authorised officer. This action of the authorised
officer shall be deemed to be a seizure of such valuable article or thing under the
Income-tax Act.

Many times, during the course of search it may not be practicable to seize any
books of account, other documents, money, bullion, jewellery or other valuable
article or thing, for reasons other than those mentioned in the second proviso to
section 132(1) (as discussed above). In such cases, as per section 132(3), the tax
authorities may serve an order on the owner or the person who is in immediate
possession or control thereof that he shall not remove, part with or otherwise
deal with it, except with the previous permission of such officer. Such officer may
take such steps as may be necessary for ensuring compliance with the provisions
of section 132(3).

Contravening above discussed provision shall attract prosecution under section

275A.

2. Failure to provide necessary facility to inspect books of account or other documents tax
authorities conducting search

In a case where a search is conducted by the tax authorities, the tax authorities
as per Section 132(1)(iib) may require any person who is found to be in possession
or control of any books of account or other documents maintained in the form of
electronic record as defined in clause (t) of sub-section (1) of section 2 of
the Information Technology Act, 2000 (21 of 2000), to afford the authorised
officer the necessary facility to inspect such books of account or other
documents. Person who fails to provide such facilityshallbe punishable with
rigorous imprisonment and fine under section 275B.

3. Removal, concealment, transfer or delivery of property to prevent tax recovery

If a taxpayer fails to discharge his tax liability, then the tax authority can recover
the tax dues from him by attaching his movable and immovable property. If the
taxpayer fraudulently removes, conceals, transfers or delivers to any person, any
property or any interest therein , intending thereby to prevent that property or
interest therein from being attached for recovery of tax, then prosecution
proceedings shall be initiated under section 276.

4. Failure by the liquidator of a company

As per section 178(1) every person:

(a) who is the liquidator of any company which is being wound up, whether under
the orders of a Court or otherwise; or

(b) who has been appointed the receiver of any assets of a company,

shall, within 30 days after he has become such liquidator give notice of his
appointment to the tax authority who is entitled to assess the income of the
company.

As per section 178(3) the liquidator:-

(a) shall not, without the leave of the Principal Chief Commissioner or Chief
Commissioner orPrincipal Commissioner or Commissioner, part with any of the
assets of the company or the properties in his hands until he has been notified by
the Assessing Officer in this regard; and

(b) on being so notified, shall set aside an amount, equal to the amount notified
and, until he so sets aside such amount, shall not part with any of the assets of
the company or the properties in his hands :

Nothing contained above shall debar the liquidator from parting with such
assets or properties for the purpose of the payment of the tax payable by the
company or for making any payment to secured creditors whose debts are
entitled under law for priority payment over debts due to Government on the
date of liquidation or for meeting such costs and expenses of the winding up of
the company as are in the opinion of the Principal Chief Commissioner or Chief
Commissioner or Principal Commissioner or Commissioner reasonable.

Section 276A provides for prosecution in the case of failure to give notice or
setting aside the sum in compliance with the above provisions of sections
178(1)/178(3) as well as prosecution in case the liquidator parts with any of the
assets of the company or the properties in his hands in contravention of the
provision of section 178(3).

5. Failure to pay TDSor DDT to the credit of the Government

If a person fails to pay to the credit of the Central Government: (i) the tax
deducted by him (i.e., TDS) or (ii) the dividend distribution tax (DDT) as per
section 115-O(2) or (iii) tax in respect of winning from lottery or crossword
puzzle as per section 194B , then such person shall be punishable with rigorous
imprisonment and with fine under section 276B.

6. Failure to pay the tax collected under the provisions of section 206C

Section 206C governs the provisions relating to collection of tax at source. If a

person fails to pay the tax collected by him to the credit of the Government, then
he shall be prosecuted as per section 276BB.

7. Wilful attempt to evade tax, penalty or interest

If a person makes wilful attempt to evade tax, penalty or interest or under-

reports his income, then prosecution proceedings shall be launched against such
person under section 276C.
8. Wilful failure to furnish return of income

If a person makes wilful default in furnishing of return of income under section

139(1) or in response to notice under section 142(1)(i) or section 148 or section
153A then he shall be prosecuted under section 276CC.

However, the taxpayer shall not be prosecuted under this section for failure to
furnish in due time the return of income under section 139(1), if:

(a) the return is furnished by such person before the expiry of the assessment
year; or

(b) the tax payable by such person (not being a company) on the total income
determined on regular assessment, as reduced by advance tax and TDS, if any,
does not exceed Rs. 3,000.

9. Wilful failure to produce accounts and documents under section 142(1) or to comply with
a direction issued under section 142(2A)

Section 142(1) deals with the general provisions relating to an inquiry before
assessment. Under section 142(1), the Assessing Officer can issue notice asking
the taxpayer to file the return of income, if he has not filed the return of income
or to produce or cause to be produced such accounts or documents as he may
require and to furnish in writing and verified in the prescribed manner
information in such form and on such points or matters (including a statement
of all assets and liabilities of the taxpayer, whether included in the accounts or
not) as he may require.

Section 142(2A) deals with special audit. As per section 142(2A) if the conditions
justifying special audit given in section 142(2A) are satisfied, the Assessing
Officer may direct the taxpayer to get his accounts audited or re-audited from a
chartered accountant as nominated by the Principal Chief Commissioner or
Chief Commissioner or Principal Commissioner or Commissioner and to furnish
a report of such audit in the prescribed form.

Section 276D provides for prosecution in the case of wilful failure by the
taxpayer to produce accounts and documents under section 142(1) or to comply
with a direction issued under section 142(2A).

10. Delivery of false statement

If a taxpayer makes statement in any verification under the Act or under any
rules made thereunder, or delivers an account or statement which is false, and
which he either knows or believes to be false, or does not believe it to be true, he
shall be prosecuted under section 277.
11. Enable any other person to evade any tax, penalty or interest

If any person (hereafter referred to as the first person) wilfully and with an intent
to enable any other person (hereafter referred to as the second person) to evade
any tax or interest or penalty chargeable and imposable under the Act, makes or
causes to be made any entry or statement which is false and which the first
person either knows to be false or does not believe it to be true, in any books of
account or other document relevant to or useful in any proceedings against the
first person or the second person under the Act, then the first person shall be
prosecuted under section 277A.

12. Abetment of false return, account, etc.

if a person abets or induces in any manner another person to make and deliver an
account or a statement or declaration relating to any income chargeable to tax
which is false and which he either knows to be false or does not believe it to be
true or to commit an offence under section 276C(1), he shall be prosecuted under
section 278.

13. Disclosure of particulars by public servants

Section 138(1) deals with disclosure of information by the tax authorities to other
officer, authority, etc. Section 138(2) relates to restriction on declaring of
information by the public servant. Section 280 provides for prosecution in the
case of disclosure of information by the public servant in contravention of
section 138(2).

However, no prosecution shall be instituted against a public servant as discussed

above except with the previous sanction of the Central Government.

14. Second and subsequent offences under sections 276B, 276C(1), 276CC, 277 or 278

The provisions of sections 276B, 276C(1), 276CC, 277 or 278 have already been
discussed. Section 278A provides for prosecution in the case of second or
subsequent offence under those sections.

15. Punishment in case of offence by a company

As per section 278B, where an offence under the Income-tax Act has been
committed by a company (*), then every person who, at the time the offence was
committed was in charge of and was responsible to the company for the conduct
of the business of the company as well as the company shall be deemed to be
guilty of the offence and shall be liable to be proceeded against and punished
accordingly.
However if such person proves that the offence was committed without his
knowledge or that he had exercised all due diligence to prevent the commission
of such offence then he shall not be deemed to be guilty of the offence.

Where an offence under the Income-tax Act has been committed by a company
and it is proved that the offence has been committed with the consent or
connivance of, or is attributable to any neglect on the part of, any director,
manager, secretary or other officer of the company, such director, manager,
secretary or other officer shall also be deemed to be guilty of that offence and
shall be liable to be proceeded against and punished accordingly.

Where an offence under the Income-tax Act has been committed by a person,
being a company, such company shall be punished with fine and every person
referred to above or the director, manager, secretary or other officer of the
company referred to above, shall be liable to be proceeded against and punished
in accordance with the provisions of the Act.

(*) For the purposes of this section:

(a) “company” means a body corporate, and includes :-

(i) a firm; and

(ii) an association of persons or a body of individuals whether incorporated or

not; and

(b) “director” in relation to :-

(i) a firm, means a partner in the firm;

(ii) any association of persons or a body of individuals, means any member

controlling the affairs thereof

16. Punishment in case of offence by Hindu Undivided Family

As per section 278C, where an offence under the Income-tax Act has been
committed by a Hindu Undivided Family, the karta shall be deemed to be guilty
of the offence and shall be liable to be proceeded against and punished
accordingly.

However, the karta shall not be liable to any punishment if he proves that the
offence was committed without his knowledge or that he had exercised all due
diligence to prevent the commission of such offence.
Where an offence has been committed by a Hindu Undivided Family and it is
proved that the offence has been committed with the consent or connivance of,
or is attributable to any neglect on the part of any member of the Hindu
Undivided Family, such member shall also be deemed to be guilty of that offence
and shall be liable to be proceeded against and punished accordingly.

Penalties and Prosecutions

Last updated on December 5th, 2019 at 03:04 pm

1. Contravention of order made under section 132(1) (Second Proviso) or under section 132(3)
in case of search and seizure

Section 132 empowers the tax authorities to initiate search proceedings at the
premises of the taxpayer. During the course of search the tax authorities are also
empowered to seize money, bullion, jewellery or other valuable article or thing
found from the taxpayer. Generally, the seized money, bullion etc. is taken by
the tax authorities in their custody(i.e., in the custody of the Government) but if
it is not possible or practicable for the tax authorities to take physical possession
of the same or to remove it to a safe place due to its volume, weight or other
physical characteristics or due to its being of a dangerous nature.

In such a case, second proviso to section 132(1) empowers the tax authorities to
seize the asset by keeping the asset at the place of the taxpayer only. In such
case, the asset will be seized by the tax authorities without physically taking the
assets with them. For this purpose, the authorised officer would serve an order
on the owner or the person who is in immediate possession or control of the asset
that he shall not remove, part with or otherwise deal with the asset, except with
the previous permission of such authorised officer. This action of the authorised
officer shall be deemed to be a seizure of such valuable article or thing under the
Income-tax Act.

Many times, during the course of search it may not be practicable to seize any
books of account, other documents, money, bullion, jewellery or other valuable
article or thing, for reasons other than those mentioned in the second proviso to
section 132(1) (as discussed above). In such cases, as per section 132(3), the tax
authorities may serve an order on the owner or the person who is in immediate
possession or control thereof that he shall not remove, part with or otherwise
deal with it, except with the previous permission of such officer. Such officer may
take such steps as may be necessary for ensuring compliance with the provisions
of section 132(3).

Section 275A provides for prosecution in the case of contravention of any of the
above discussed provisions by the taxpayers. As per section 275A, whoever
contravenes of any of the above provisions shall be punishable with rigorous
imprisonment of upto a period of 2 years and shall also be liable for fine.

2. Failure to afford necessary facility to authorised officer to inspect books of account or

other documents as is required under section 132(1)(iib)

In a case where a search is conducted by the tax authorities, the tax authorities
as per

Section 132(1)(iib)may require any person who is found to be in possession or

control of any books of account or other documents maintained in the form of
electronic record as defined in clause (t) of sub-section (1) of section 2 of the
Information Technology Act,2000 (21 of 2000), to afford the authorised officer
the necessary facility to inspect such books of account or other documents..
Person who fails to provide such facility shall be punishable with rigorous
imprisonment of upto a period of 2 years and shall also be liable to fine.

3. Removal, concealment, transfer or delivery of property to thwart tax recovery

If a taxpayer fails to discharge his tax liability, then the tax authority can recover
the tax dues from him by attaching his movable and immovable property. If the
taxpayer fraudulently removes, conceals, transfers or delivers to any person, any
property or any interest therein , intending thereby to prevent that property or
interest therein from being attached for recovery of tax, then prosecution
proceedings can be initiated under section 276. As per section 276 a taxpayer
shall be punished with rigorous imprisonment for a term which may extend to
two years and shall also be liable for fine.

4. Failure to comply with provisions of section 178(1) and (3) dealing with company-in -
liquidation

As per section 178(1) every person:

(a) Who is the liquidator of any company which is being wound up, whether
under the orders of a Court or otherwise; or

(b) Who has been appointed the receiver of any assets of a company, shall, within
30 days after he has become such liquidator give notice of his appointment to the
tax authority who is entitled to assess the income of the company.

As per section 178(3) the liquidator:

(a) Shall not, without the leave of the Principal Chief Commissioner or Chief
Commissioner or Principal Commissioner or Commissioner, part with any of the
assets of the company or the properties in his hands until he has been notified by
the Assessing Officer in this regard; and

(b) On being so notified, shall set aside an amount, equal to the amount notified
and, until he so sets aside such amount, shall not part with any of the assets of
the company or the properties in his hands :

Nothing contained above shall debar the liquidator from parting with such
assets or properties for the purpose of the payment of the tax payable by the
company or for making any payment to secured creditors whose debts are
entitled under law for priority payment over debts due to Government on the
date of liquidation or for meeting such costs and expenses of the winding up of
the company as are in the opinion of the Principal Chief Commissioner or Chief
Commissioner or Principal Commissioner or Commissioner reasonable.

Section 276A provides for prosecution in the case of failure to give notice or
setting aside the sum in compliance with the above provisions of sections
178(1)/178(3) as well as prosecution in case the liquidator parts with any of the
assets of the company or the properties in his hands in contravention of the
provision of section 178(3). A person who fails to comply with these provisions
shall be punishable with rigorous imprisonment for a minimum period of 6
months which may extend to 2 years.

5. Failure to pay tax deducted at source or the tax payable under section 115-
O(2) or second proviso to section 194B:

If a person fails to pay to the credit of the Central Government: (i) the tax
deducted by him (i.e., TDS) or (ii) the dividend distribution tax (DDT) as per
section 115-O(2) or (iii) tax in respect of winning from lottery or crossword
puzzle as per section 194B , then such person shallbe punishable with rigorous
imprisonment which shall not be less than 3 months but which may extend to 7
years and with fine.

6. Failure to pay the tax collected under the provisions of section 206C

Section 206C governs the provisions relating to collection of tax at source. If a

person fails to pay the tax collected by him to the credit of the Government, then
as per section 276BB he shall be punishable with rigorous imprisonment for a
period of which shall not be less than 3 months but which may extend to 7 years
and with fine.

7. Wilful attempt to evade tax, penalty or interest

Section 276C provides for punishment in the case of wilful attempt to evade tax,
penalty or interest or under-reporting of income. As per section 276C if a person
wilfully attempts to evade tax, penalty or interest or under-reports his income,
then he shall be punished as follows:

• With rigorous imprisonment which shall not be less than 6

months but which may extend to seven years and with fine where
tax sought to be evaded exceeds Rs. 25 lakh (Rs. 1 lakh upto 30-6-
2012).
• With rigorous imprisonment which shall not be less than 3 months
but which may extend to two years (3 years upto 30-6-2012) and
with fine in other cases .
• Where tax sought to be evaded exceeds Rs. 25 lakh (Rs. 1 lakh till
30-6-2012), imprisonment could be for a period of not less than
6 months which may extend to 7 years and with fine.
• In other cases imprisonment cannot be of less than 3 months,
which may extend to 2 years (3 years upto 30-6-2012) and with
fine.

Willful failure to furnish return of income

Section 276CC provides for imprisonment in case of failure to file the return of
income. Section 276CC is attracted for any of the following defaults by the
taxpayer :

• Failure to file the return of income as per section 139(1).

• Failure to file the return of income in response to a notice issued
under section 142(1)(i) or section 148 or section 153A.

Punishment for the above failures shall be as under:

• Rigorous imprisonment which shall not be less than 6 months but

which may extend to seven years and with fine where tax sought
to be evaded exceeds Rs. 25 lakh (Rs. 1 lakh upto 30-6-2012).
• Rigorous imprisonment which shall not be less than 3 months but
which may extend to two years (3 years upto 30-6-2012) and with
fine in other cases .

The taxpayer shall not be proceeded against under this section for failure to
furnish in due time the return of income under section 139(1), if:

(a) The return is furnished by him before the expiry of the assessment year; or
(b) The tax payable by him on the total income determined on regular
assessment, as reduced by advance tax and TDS, if any, does not exceed Rs.
3,000.

9. Wilful failure to produce accounts and documents under section 142(1) or

to comply with a direction issued under section 142(2A)

Section 142(1) deals with the general provisions relating to an inquiry before
assessment. Under section 142(1), the Assessing Officer can issue notice asking
the taxpayer to file the return of income, if he has not filed the return of income
or to produce or cause to be produced such accounts or documents as he may
require and to furnish in writing and verified in the prescribed manner
information in such form and on such points or matters (including a statement
of all assets and liabilities of the taxpayer, whether included in the accounts or
not) as he may require.

Section 142(2A) deals with special audit. As per section 142(2A) if the conditions
justifying special audit given in section 142(2A) are satisfied, the Assessing
Officer may direct the taxpayer to get his accounts audited or re-audited from a
chartered accountant as nominated by the Principal Chief Commissioner or
Chief Commissioner or Principal Commissioner or Commissioner and to furnish
a report of such audit in the prescribed form.

Section 276D provides for prosecution in the case of wilful failure by the taxpayer
to produce accounts and documents under section 142(1) or to comply with a
direction issued under section 142(2A). As per section 276D, if a person wilfully
fails to produce accounts and documents as required in any notice issued under
section 142(1) or wilfully fails to comply with a direction issued to him under
section 142(2A), he shall be punishable with rigorous imprisonment for a term
which may extend to one year and with fine.

10. False statement in verification or delivery of false account, etc.

Section 277 provides for prosecution for making false statement or producing
false accounts / documents. If a taxpayer makes statement in any verification
under the Act or under any rules made there under, or delivers an account or
statement which is false, and which he either knows or believes to be false, or
does not believe it to be true, he shall be punishable as follows:

• With rigorous imprisonment which shall not be less than 6

months but which may extend to seven years and with fine where
tax sought to be evaded exceeds Rs. 25 lakh (Rs. 1 lakh upto 30-6-
2012).
 • With rigorous imprisonment which shall not be less than 3 months
but which may extend to two years (3 years upto 30-6-2012) and
with fine in other cases.

11. Falsification of books of account or document, etc., to enable any other person to evade
any tax, penalty or interest chargeable/liveable under the Act

Section 277A provides for prosecution in the case of falsification of books of

account or document etc. As per section 277A, if any person (hereafter referred
to as the first person) wilfully and with an intent to enable any other person
(hereafter referred to as the second person) to evade any tax or interest or
penalty chargeable and imposable under the Act, makes or causes to be made
any entry or statement which is false and which the first person either knows to
be false or does not believe it to be true, in any books of account or other
document relevant to or useful in any proceedings against the first person or the
second person under the Act, then the first person shall be punishable with
rigorous imprisonment for a term which shall not be less than 3 months but
which may extend to 2 years (3 years upto 30-6-2012) and with fine.

12. Abetment to make a false return, etc

As per section 278 if a person abets or induces in any manner another person to
make and deliver an account or a statement or declaration relating to any income
chargeable to tax which is false and which he either knows to be false or does not
believe it to be true or to commit an offence under section 276C(1), he shall be
punished as under:

• With rigorous imprisonment which shall not be less than 6

months but which may extend to seven years and with fine where
tax sought to be evaded exceeds Rs. 25 lakh (Rs. 1 lakh upto 30-6-
2012).
• With rigorous imprisonment which shall not be less than 3 months
but which may extend to two years (3 years upto 30-6-2012) and
with fine in other cases.

13. Second and subsequent offences under sections 276B, 276C(1), 276CC, 277 or 278

The provisions of sections 276B, 276C(1), 276CC, 277 or 278 have already been
discussed. Section 278A provides for prosecution in the case of second or
subsequent offence under those sections. As per section 278A, a person shall be
punishable with imprisonment for a period which shall not be less than 6 months
but which may extend to 7 years and with fine.
14. Punishment in case of offence by a company

As per section 278B, where an offence under the Income-tax Act has been
committed by a company (*), then every person who, at the time the offence was
committed was in charge of and was responsible to the company for the conduct
of the business of the company as well as the company shall be deemed to be
guilty of the offence and shall be liable to be proceeded against and punished
accordingly.

However if such person proves that the offence was committed without his
knowledge or that he had exercised all due diligence to prevent the commission
of such offence then he shall not be deemed to be guilty of the offence.

Where an offence under the Income-tax Act has been committed by a company
and it is proved that the offence has been committed with the consent or
connivance of, or is attributable to any neglect on the part of, any director,
manager, secretary or other officer of the company, such director, manager,
secretary or other officer shall also be deemed to be guilty of that offence and
shall be liable to be proceeded against and punished accordingly.

Where an offence under the Income-tax Act has been committed by a person,
being a company, such company shall be punished with fine and every person
referred to above or the director, manager, secretary or other officer of the
company referred to above, shall be liable to be proceeded against and punished
in accordance with the provisions of the Act.

(*) For the purposes of this section:

(a) “company” means a body corporate, and includes :-

(i) a firm; and

(ii) an association of persons or a body of individuals whether incorporated or

not; and

(b) “director” in relation to :-

(i) a firm, means a partner in the firm;

(ii) Any association of persons or a body of individuals, means any member

controlling the affairs thereof
15. Punishment in case of offence by Hindu Undivided Family

As per section 278C, where an offence under the Income-tax Act has been
committed by a Hindu Undivided Family, the karta shall be deemed to be guilty
of the offence and shall be liable to be proceeded against and punished
accordingly.

However, the karta shall not be liable to any punishment if he proves that the
offence was committed without his knowledge or that he had exercised all due
diligence to prevent the commission of such offence.

Where an offence has been committed by a Hindu Undivided Family and it is

proved that the offence has been committed with the consent or connivance of,
or is attributable to any neglect on the part of any member of the Hindu
Undivided Family, such member shall also be deemed to be guilty of that offence
and shall be liable to be proceeded against and punished accordingly.

16. Disclosure of particulars by public servant

Section 138(1) deals with disclosure of information by the tax authorities to other
officer, authority, etc. Section 138(2) relates to restriction on declaring of
information by the public servant. Section 280 provides for prosecution in the
case of disclosure of information by the public servant in contravention of
section 138(2). In such a case the public servant shall be punished with
imprisonment for a term which may extend to 6 months and with fine.

However, no prosecution shall be instituted against a public servant as discussed

above except with the previous sanction of the Central Government.

17. No imprisonment in case of reasonable cause for failure

As per section 278AA no person is punishable for any failure under section 276A
and

276B if he proves that there was reasonable cause for such failure.

18. Initiating prosecution with the previous sanction of tax authorities

As per section 279, prosecution for offences under section 275A, section 275B,
section 276, section 276A, section 276B, section 276BB, section 276C, section
276CC, section 276D, section 277, section 277A and section 278 are to be
instituted with the previous sanction of Principal Commissioner or
Commissioner or Commissioner (Appeals), The Principal Chief Commissioner or
Chief Commissioner or, as the case may be, Principal Director General or Director
General may issue such instructions or directions to the aforesaid income-tax
authorities as he may deem fit for institution of proceedings under this sub-
section.

19. Immunity from prosecution

As per section 278AB, a person may apply to the Principal Commissioner or

Commissioner for granting immunity from prosecution, if he has applied for
settlement under section 245C and the proceedings have abated under section
245HA. However, the application for immunity shall not be made after
institution of prosecution proceedings.

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Appeals and Revisions

Last updated on December 5th, 2019 at 03:04 pm

The party complaining is styled as the “Appellant” and the other party is known
as “Respondent”.

Under the scheme of the Income Tax Act, an assessment is normally the first
Stage determining the Taxable Income and The Tax, Interest or Sum Payable by
an Assessee.

The Act provides for various remedies available to an assessee on completion of

the assessment.

The primary remedies available to an assessee on completion of the assessment

are:

: APPEALS

: REVISION

: RECTIFICATION

All these remedies work in different areas. However, strictly speaking the
remedies are not alternative to each other but at times more than one remedial
proceeding may be used as complimentary to each other so as to achieve the best
result by applying optimum resources.

The procedures governing these remedial provisions are proposed to be

discussed hereunde
APPELLATE HIERARCHY

NATURE OF Against whose order it can be

TO WHOM IT SHOULD BE FIELD Who can
ACTION preferred

Against the order of

First Appeal Commissioner(appeals) [CIT (A)] Taxpayer
Assessing officer

Against the order of the Taxpayer

Second Appeal The Income Tax Appellate Tribunal
CIT(A) Tax

Appeal to Substantial question of law Taxpayer

High Court
high court arising out of ITAT order Tax

Appeal
Taxpayer
to supreme Supreme Court Judgment of High Court
Tax
court

APPEAL BEFORE THE COMMISSIONER OF INCOME-TAX(APPEALS)

An appeal before the Commissioner of income tax (Appeals) is an extremely

useful remedy available to an assessee.

The commissioner of Income Tax (Appeals) is the first appellate authority under
the scheme of the Act.

This forum helps in redressing the grievances that the assessee might
have against the assessment order passed in his case.

However, one should bear in mind that the right of appeal is not an inherent
right but it is a statutory right created due to the provisions of the statute

The proceedings of appeal work strictly as per the statutory provisions made in
this regard. Therefore, , it is essential to understand these provisions in greater
detail and know exactly what are the powers, rights and duties of the CIT (A) as
well as the assessee while dealing with the appeals.

Appealable Orders-Section 246A

Section 246A of the Act lists down the category of orders, which can be appealed
against. The List is an exhaustive list and not an inclusive list.
Accordingly, if any order does not find place in any of the clauses of section 246A,
the same becomes a non appealable order and the assessee has to exercise
certain other options to protect himself against such order.

Majority of the orders with which we deal in our day to day life are appealable.
However, it would be interesting to note the appealabilty or otherwise of few of
the orders as under:

APPEALABLE ORDERS (Illustrative

NON-APPEALABLE ORDERS (Illustrative list)
list)

Orders giving effect to an appellate

orderSection wise detail of such Order levying interest u/s 234A, 234B, or 234C in a case where there is n
orders are given under various from the order.- alternate remedy- waiver petition before the CIT
Subsections of Sec. 246A

Order denying the rectification of

Order imposing interest u/s. 220(2)- alternate remedy- wavier petition b
mistakes apparent from the records.

A protective assessment order

[Lalludas Children Trust vs. CIT (251-
ITR-50)) Guj.)]However, normally Order of revision u/s. 264- alternate remedy-writ petition before the Hig
Protective assessment orders are
dealt as Non-Appealable.

Order passed in reassessment Order of the commissioner passed u/s. 273A rejecting the application fo
proceedings. remedy- writ petition before the High Court.

Appeal against the order under section 154 wherein interest under section 244A
is reduced is maintainable.

APPEAL IN CASE OF AN AGREED ASSESSMENT

The issue whether an appeal can be preferred in the case of an agreed

assessment is not free from doubt.

The Bombay High Court in the case of Rameshchandra & Co. vs. CIT (169-ITR-
375) (Bom.) has held that when the additions are made on the basis of the
assessee’s own admissions, the assessment can not be subjected to appeal. A
similar view has been expressed by the Allahabad High Court in the case of
sterling Machine Tools Vs CIT (123-ITR-181)(All.)
As against this, the Punjab and Haryana High Court in the case of Chhatmull
Agarawal vs. CIT (115-ITR-694) (Punj) has held that an agreed assessment can
be subjected to appeal. The statutory right of appeal can not be taken away from
the assessee since he has consented to the additions/disallowances at the time
of the assessment. Under the Act, there is no provision for withdrawal of the
statutory right to appeal.

In view of the conflicting decisions, the maintainability or otherwise of an appeal

in such a situation will largely depend on the facts of each case. It seems that it is
difficult to contend that the appeal can be preferred in a case of admission made
by the assessee due to the decision of the Bom, HC in the case of Rameshchandra
& Co. However keeping in mind the statutory right of appeal, it seems that the
appeal can not be denied in a case where the addition/disallowance are agreed
by an assessee during assessment proceedings with a view to settle the matter
and buy peace of mind.

Section- 248- Appeal by person denying liability to deduct tax u/s. 195

Section 248 of the act deals with appeal in a case where under an agreement or
arrangement, tax deductible on any income, other than interest u/s. 195 is to be
borne by the payer and such payer claims that no tax was required to be deducted
on such income. In such a situation, the section provides that the payer shall first
pay the tax deductible on such income. If the CIT (A) issues a declaration as
aforesaid, then the tax deposited by him will be refunded to him.

Section 249(2)-Time Limit for filing appeal

As per section 249(2), an appeal shall be preferred within 30 days of the date of
service of notice of demand in the case of an appeal against an assessment or
penalty or of the intimation or any oeder sought to be appealed against. In the
case of an appeal u/s. 248, the same shall be preferred within 30days of the
payment of tax.

Where the assessment order was served on a person who was not an authorized
agent of the assessee and later on the assessee applied for and obtained a copy
of the assessment, it was held that time limit for filing the appeal should be
reckoned from the date on which the assessee obtained the copy of assessment
order and notice of demand and not from the earlier date of the service of the
assessment order.

Section 249 (3)- Condonation of delay in filing appeal

Section 249(3) enables the CIT (A) to admit an appeal after the examination of
the time limit of 30 days if he is satisfied that the appellant had sufficient cause
for not presenting it within the time limit prescribed.

In case of an appeal filed beyond the period of 30 days, it is recommended that

the same shall be accompanied by a petition for condonation of delay explaining
the reasons for the delay.

In appropriate cases, it is also advisable to file an affidavit confirming the

reasons for the delay. As far as possible an attempt shall be to explain the reasons
for each and every day’s delay in filing the appeal.

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Advance Tax
Last updated on November 28th, 2019 at 07:54 pm

Advance Tax can be simply understood as an advance estimation of total taxable

income and, thereafter, a presumptive calculation of the tax amount payable by
the assesse for the relevant financial year.

An assessee who is liable to pay advance tax is required to estimate his current
income and pay advance tax thereon without having to submit any estimate or
statement of income to the assessing authorities. In simpler words, it is payment
of the income tax in equal parts throughout the year, rather than paying the
lumpsum tax amount at the end of the year.

Applicability of Advance Tax Liability:

Advance Tax Liability is applicable on all tax payers, whether salaried,

freelancers or businesses. In case of salaried tax payers, if the employer deducts
tax at source or TDS, then there is no further need of payment of advance tax.

However, if such an assessee has any other income other than salary, then
he/she is required to meet advance tax liability for such income. Such incomes
may include capital gains on shares or house property, interest on investments,
etc. after making appropriate deductions for losses, if any.

How to Calculate Advance Tax?

Tax can be computed on the current income (estimated by the taxpayer) at the
rates in force during the financial year. Income received in the previous financial
year can be taken as the taxable income for the calculation of advance tax
liability. In case of businesses and professionals like doctors, lawyers, etc.
resident in India, whose gross receipts or turnover of businesses is less than ₹ 2
crore per annum, they are exempted from the mandatory payment of advance
tax. They have to pay 100% Advance Tax by 15th March. Such businesses are
relieved from maintaining books of accounts. However, they are not allowed to
deduct any business income against this business income.

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TDS
Last updated on December 5th, 2019 at 03:05 pm

TDS stands for tax deducted at source. As per the Income Tax Act, any company
or person making a payment is required to deduct tax at source if the payment
exceeds certain threshold limits. TDS has to be deducted at the rates prescribed
by the tax department.

The company or person that makes the payment after deducting TDS is called a
deductor and the company or person receiving the payment is called the
deductee. It is the deductor’s responsibility to deduct TDS before making the
payment and deposit the same with the government. TDS is deducted
irrespective of the mode of payment–cash, cheque or credit–and is linked to
the PAN of the deductor and deducted.

TDS is deducted on the following types of payments:

• Salaries
• Interest payments by banks
• Commission payments
• Rent payments
• Consultation fees
• Professional fees
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Advance Rulings
Last updated on December 3rd, 2019 at 10:59 am

What is advance ruling?

Any advance tax ruling is a written interpretation of tax laws. It is issued by tax
authorities to corporations and individuals who request for clarification of
certain tax matters. An advance ruling is often requested when the taxpayer is
confused and uncertain about certain provisions. Advance tax ruling is applied
for, before starting the proposed activity.

For example, under income tax, advance ruling is available in international

taxation. This is to help non-residents ascertain the income-tax liability, plan
their income-tax in advance and avoid long drawn and costly legal disputes.

As per GST, the advance ruling is a written decision given by the tax authorities
to an applicant on questions relating to the supply of goods/services.

Why is advance ruling under GST necessary?

The objective of any advance ruling, including under GST is to-

1. Provide certainty for tax liability in advance in relation to a future

activity to be undertaken by the applicant
2. Attract Foreign Direct Investment (FDI) – By clarifying taxation
and showing a clear picture of the future tax liability of the FDI.
The clarity and clean taxation will attract non-residents who do
not want to get involved in messy tax disputes.
3. Reduce litigation and costly legal disputes
4. Give decisions in a timely, transparent and inexpensive manner

When can one request for GST Advance Ruling?

Any taxpayer can request for advance ruling when he is uncertain of the
provisions. Advance tax ruling is applicable on“:
(a) Classification of any goods and/or services under the Act
(b) Applicability of a notification which affects the rate of tax
(c) Determination of time and value of supply of goods/services
(d) Whether input tax credit paid (or deemed to be paid) will be allowed
(e) Determination of the liability to pay tax on any goods/services
(f) Whether the applicant has to be registered under GST
(g) Whether any particular thing done by the applicant regarding goods/services
will result in a supply.

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Avoidance of Double Taxation Agreements

Last updated on December 5th, 2019 at 03:05 pm
Double Taxation Avoidance Agreement (DTAA) also referred as Tax Treaty is a
bilateral economic agreement between two nations that aims to avoid or
eliminate double taxation of the same income in two countries.

Example citing the working of DTAA:

An NRI individual living in X country maintains an NRO account with a bank based
in India. The interest income on the balance amount in the NRO account is
deemed as income that originates in India and hence is taxable in India.

Entitlement to benefits under DTAA requires submission of certain

documents: To be entitled to the benefits laid down under the provisions of the
DTAA, NRI individual needs to submit below listed documents in a timely
manner to the concerned deductor. Self-declaration or indemnity format. The
format for the same is available on the website of the bank. Self-attested PAN
card copy Self-attested visa and passport copy PIO proof copy in case renewal
of the passport is made during the course of the current financial year Tax
Residency Certificate (TRC): TRC is a crucial document that is to be submitted
with the deductor for availing the benefits of the DTAA agreement. The same can
be obtained from the government or tax authorities of the foreign nation where
the NRI is residing.

List of countries with whom India has DTAA arrangements Scenario of DTAA in
India: As of now, India has DTAA with 84 nations, including Armenia,
Bangladesh, Finland, Ireland,Japan, Kazakhstan, Greece, Italy and several
others. Further, India is constantly gearing to establish DTAA with other nations
as such agreements work towards promoting trade and investments among
contracted nations.