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Tax planning can be defined as an arrangement of one’s financial and economic affairs by taking complete legitimate benefit of all deductions, exemptions, allowances and rebates so that tax liability reduces to minimum. Essential features of tax planning are as under –

• It comprises arrangements by which tax laws are fully complied.


• All legal obligations and transactions (both individually and as a whole) are met.


• Transactions do not take the form of colourable devices (i.e., those devices where statute is followed in strict words but actually spirit behind the statute is marred would be termed as colourable devices).


• There is no intention to deceive the tax law's legal spirit

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The following are the broad areas of distinction between the two:

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Tax management involves the procedures of compliance with the statutory provisions of law. The following are the broad areas of distinction between tax planning and tax management.

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Remuneration planning – Making a selection between different possible remuneration plans keeping in view the following broad objectives is remuneration planning-

1. Whatever is paid by employer is deductible in the hands of the employer while calculating business income of the employer.
2. In the hands of the employee it is not chargeable to tax or it is subject to lower tax incidence.

Broad Hints – Remuneration should be paid in the form of basic salary, different allowances and different perquisites. Tax bill of employees can be reduced substantially if salary is divided into different allowances (which are not taxable or which are partially exempt from tax) and perquisites (which are taxable at concessional rate). The optimum combination of allowances and perquisites depends upon individual requirement of each employee taking into consideration present take home pay and future benefits of different items in salary structure.

• Salary – In case of new appointment, basic salary may be taken at 25 to 30 per cent of total pay package. There is no hard and fast rule. However, tax liability can be reduced if basic salary is reduced and the expenditure by the employer on allowance and perquisites is increased.


• Allowances – The following allowances can be given-


1. Education allowance for two children may be given wherever it is possible.
2. Uniform allowance may be given if the employer has uniform code in the organization.
3. Helper allowance may be given for engaging a helper at residence to complete office work after office hours.
4. Research allowance can be given for conducting a research on behalf of employer.


• Perquisites – A rent-free house may be given if the employee is interested in employer’s accommodation. If the employee owns a house which he has occupied for his own residence, the house may be taken by the employer on self lease and the same house may be allotted to the employee as rent-free perquisite.Besides, the following perquisites may be given to employees (in the same order of priority) as given below as far as possible-

1.) Tea, coffee, snacks, lunch/dinner in factory or office.

2.) Conference participation fees.

3.) Computer or laptop for office and private use.

4.) LTC twice in a block of four years.

5.) Medi-claim insurance premium for employee and his family members.

6.) Motor car for office and private use along with driver.

7.) Telephone at residence along with mobile phone.

8.) Staff welfare expenses.

9.) Free holiday home.

10.) Gift in kind.

11.) Club including health club.

12.) Scholarship to children.

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For the purpose of tax planning regarding income from house property, the following broad propositions should be borne in mind. However, these propositions would hold good in the context in which they have been made:

• If a person has occupied more than two houses for his own residence, only two houses of his own choice are treated as self-occupied and all the other houses are deemed to be let out. The tax exemption applies only in the case of two self-occupied houses and not in the case of deemed to be let out properties. Care should, therefore, be taken while selecting two houses to be treated as self-occupied to minimise tax liability.


• As interest payable out of India is not deductible if tax is not deducted at source (and in respect of which there is no person who may be treated as an agent under section 163), care should be taken to deduct tax at source in order to avail exemption under section 24(b).


• As amount of municipal tax is deductible on “payment” basis and not on “due” or “accrual” basis, it should be ensured that municipal tax is actually paid during the previous year if the assessee wants to claim deduction.


• As a member of a co-operative society to whom a building or part thereof is allotted or leased under a house building scheme is the deemed owner of the property, it should be ensured that interest payable (even if not paid) by the assessee, on outstanding instalments of the cost of the building, is claimed as a deduction under section 24.


• If an individual makes a cash gift to his wife who purchases a house property with the gifted money, the individual will not be deemed as fictional owner of the property under section 27(i) – K.D. Thakar v. CIT [1979] 120 ITR 190 (Guj.). Taxable income of the wife from the property is, however, includible in the income of individual in terms of section 64(1)(iv). Such income is to be computed under section 23(2) if she uses the house property for her own residential purposes. It can, therefore, be advised that if an individual transfers an asset, other than house property, even without adequate consideration, he can escape the deeming provision of section 27(i) and the consequent hardship.


• Under section 27(i), if a person transfers a house property without consideration to his/her spouse (not being a transfer in connection with an agreement to live apart), or to his minor child (not being a married daughter), the transferor is deemed to be the owner of the house property. This deeming provision was found necessary in order to bring this situation in line with the provision of section 64. But when the scope of section 64 was extended to cover transfer of assets without adequate consideration to son’s wife or minor grandchild by the Taxation Laws (Amendment) Act, 1975, with effect from the assessment year 1976-77 onwards, the scope of section 27(i) was not similarly extended. Consequently, if a person transfers house property to his son’s wife without adequate consideration, he will not be deemed to be owner of the property under section 27(i), but income earned from the property by the transferee will be included in the income of the transferor under section 64 – see CIT v. H.L. Gulati [1982] 11 Taxman 167 (All.). For the purpose of sections 22 to 27, the transferee will, thus, be treated as an owner of the house property and income computed in his/her hands is included in the income of the transferor under section 64. Such income is to be computed under section 23(2) if the transferee uses that property for self-occupation. Therefore, in some cases, it is beneficial to transfer the house property without adequate consideration to son’s wife or son’s minor child.

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For the purpose of tax planning regarding income under the head “Capital gains”, the following propositions should be borne in mind. However, these propositions would hold good in the context in which they have been made –

• Since long-term capital gains bear lower tax, taxpayers should so plan as to transfer their capital assets normally only 36 months (24 months/12 months in a few cases) after acquisition. It is pertinent to note that if the capital asset is one which became the property of the taxpayer in any of the manner specified in section 49(1), the period for which it was held by the previous owner is also to be counted in computing 36 months (24 months/12 months in a few cases).


• The assessee should take advantage of exemption under section 54 by investing the capital gain arising from the sale of residential house property in the purchase of another house within the specified period. It may be noted that for claiming exemption for the assessment year 2015-16 (or any subsequent year), the new house property should be situated in India.


• In order to claim advantage of exemption under sections 54B, 54D, 54EC and 54EE it should be ensured that the investment in new asset is made only after effecting transfer of capital assets.


• In order to take advantage of exemption under sections 54, 54B, 54D, 54EC, 54F, 54G and 54GA the taxpayer should ensure that the newly acquired asset is not transferred within three years from the date of acquisition. In this context, it is interesting to note that the transfer of a newly acquired asset according to the modes mentioned section 47 is not regarded as “transfer” even for this purpose. Consequently, newly acquired assets may be transferred even within 3 years of their acquisition according to the modes mentioned in section 47 without attracting capital gains tax liability. Alternatively, it will be advisable that instead of selling or converting assets acquired under sections 54, 54B, 54D, 54F, 54G and 54GA into money, the taxpayer should obtain loan against the security of such asset (even by pledge) to meet the exigency


• In two cases, surplus arising on sale or transfer of capital assets is chargeable to tax as short-term capital gain by virtue of section 50. These cases are:

(a) when written down value of a block of assets is reduced to nil, though all the assets falling in that block are not transferred,

(b) when a block of assets ceases to exist.

Tax on short-term capital gain can be avoided if –

a. another capital asset, falling in that block of assets, is acquired at any time during the previous year; or

b. benefit of section 54G/54GA is claimed.

Taxpayers desiring to avoid tax on short-term capital gains under section 50 on sale or transfer of capital asset, can acquire another capital asset, falling in that block of assets, at any time during the previous year.