TAX PLANNING

Unit 3
LEARNING OBJECTIVE
 Concepts relating to
 Tax Planning
 Tax Management and
 Tax Evasion.

 Tax Planning with reference to:

 Location of Undertaking;
 New Business- Nature of Business and Form of Organisation;
 Financial Management Decisions- Capital Structure, Dividend Policy;
 Managerial Decisions- Purchase or Hire, Make or Buy;
 Employees’ Remuneration
TAX PLANNING
Tax planning is an essential part of your
financial planning. Efficient tax planning
enables you to reduce your tax liability to
the minimum.
This is done by legitimately taking
advantage of all tax exemptions,
deductions rebates and allowances
TAX AVOIDANCE
Tax avoidance is minimising the
incidence of tax by adjusting the
affairs in such a manner that
although within the four corners of
the taxation laws, advantage is taken
by finding out loopholes in the laws
TAX MANAGEMENT
Tax management refers to the
compliance with the statutory provisions
of law.
While tax planning is optional, tax
management is mandatory.
OBJECTIVES OF TAX
PLANNING
Minimisation/Reduction of tax liability
Productive investment
Healthy growth of economy
Economic stability
AREAS OF TAX PLANNING
 Tax Planning with reference to:
 Location of Undertaking;
 New Business- Nature of Business and Form of Organisation;
 Financial Management Decisions- Capital Structure, Dividend
Policy;
 Managerial Decisions- Purchase or Hire, Make or Buy;
 Employees’ Remuneration
LOCATION OF UNDERTAKING
 Special provisions based on business location
 Under section 10AA in the case of newly established units in Special Economic
Zones
 Under section 10B in the case of a newly established hundred per cent export-
oriented
 Not available from AY 12-13
 Under section 80-IA in respect of profits and gains by an undertaking engaged in
infrastructure development undertaking
 Under section 80-IAB in respect of profits and gains by an undertaking or
enterprise engaged in development of Special Economic Zone
 Under section 80-IE in respect of profits and gains of certain undertakings in
North Eastern States.
SPECIAL ECONOMIC ZONES
 An entrepreneur as defined in SEZ Act, 2005

 who begins to manufacture or produce articles or things or provide any services during the
previous year relevant to any assessment year commencing on or after the 1st day of April,
2006, but before the first day of April, 2021
 First 5 years AY: 100% of profits and gains derived from the export, of such articles or things or
from services for a period of five consecutive assessment years.
 6th to 10th year: 50%

 11th to 15th year: up to 50% if equivalent amount is credited to a reserve account (to be called
the "Special Economic Zone Re-investment Reserve Account") to be created and utilized for
the purposes
 for the purposes of acquiring machinery or plant which is first put to use before the expiry of a period of
three years following the previous year in which the reserve was created; and
 until the acquisition of the machinery or plant as aforesaid, for the purposes of the business of the
undertaking other than for distribution by way of dividends or profits or for remittance outside India as
profits or for the creation of any asset outside India;
INFRASTRUCTURE
DEVELOPMENT
UNDERTAKING (U/S 80-IA)
 80-IA in respect of profits and gains by an undertaking engaged in
infrastructure development undertaking
 A deduction 100% for ten consecutive AY.
 any ten consecutive assessment years out of fifteen years beginning from the
year in which the undertaking or the enterprise develops and begins to operate
 any infrastructure facility
 starts providing telecommunication service
 develops an industrial park
 generates power or commences transmission
 distribution of power
 undertakes substantial renovation and modernisation of the existing transmission
 distribution lines
DEVELOPMENT OF SPECIAL
ECONOMIC ZONE (80-IAB)
 The development of Special Economic Zone should begin before the 1st
day of April, 2017.
 A deduction 100% for ten consecutive AY out of fifteen years
CERTAIN UNDERTAKINGS IN
NORTH EASTERN STATES (80-IE)
 A deduction 100% for ten consecutive AY.

 This section applies to any undertaking which has, during the period beginning on
the 1st day of April, 2007 and ending before the 1st day of April, 2017, begun or
begins, in any of the North-Eastern States,
 (i) to manufacture or produce any eligible article or thing;
 (ii) to undertake substantial expansion to manufacture or produce any eligible
article or thing;
 (iii) to carry on any eligible business.
 (a) hotel (not below two star category);
 (b) adventure and leisure sports including ropeways;
 (c) providing medical and health services in the nature of nursing home with a
minimum capacity of 25 beds;
 (d) running an old-age home, etc.
NATURE OF
BUSINESS
NATURE OF BUSINESS
Many incentives are available under the Act which are directly co-related in the
nature of Nature business. Some of these incentives are as follows:
 Exemption in the case of units in SEZ[Sec. 10AA]

 Investment allowance in a notified backward area in Andhra Pradesh, Bihar,

Telangana or West Bengal [sec. 32AD]
 Tea development account [Sec. 33AB].

 Telecommunication services [Sec, 35 ABB].

 Expenditure on specified business [Sec. 35AD].

 Weighted deduction for expenditure incurred on agricultural extension project [Sec.

35CCC].
 Weighted deduction for expenditure for skill development [Sec. 35CCD].

 Special provision for deduction in the case of business for prospecting for mineral
oil [Secs. 42 I and 44BB].
NATURE OF BUSINESS
CONTD…
 Special provisions for computing profits and gains for a business [Sec. 44AD].
 Special provisions in the case of business of plying, hiring or leasing goods carriages
[Sec.44AE].
 Profits and gains from industrial undertakings engaged in infrastructure, etc. [Sec. 80-IA]
 Profits and gains by an undertaking or enterprise engaged in development of Special Economic
Zone [Sec. 80-IAB]
 Profits and gains in respect of eligible start-up [Sec. 80-IAC]
 Profits and gains from certain industrial undertakings other than infrastructure development
undertakings [Sec. 80-IB ]
 Profits and gains in respect of housing projects [Sec. 80-IBA]
 Profits and gains of certain undertakings in certain special category of States [Sec. 80-IC]
 Deduction in respect of employment of new workmen [Sec. 80JJAA]
 Tonnage Tax Scheme [Secs. 115V to 115VZC—see para 77].
TAX PLANNING FOR TEA,
COFFEE OR RUBBER
 Income from the manufacture of Tea: 60% is agricultural income.
 Income from the manufacture of Coffee:75% is agricultural income for sale
of coffee grown and cured.
 Income from Rubber: 65% is agricultural income
TAX PLANNING FOR
SPECIFIED BUSINESS(35AD)
 Example
 setting up and operating a cold chain facility;
 setting up and operating a warehousing facility for storage of agricultural
produce;
 production of fertilizer in India;
 building and operating, anywhere in India, a hotel of two-star or above

 Capital expenditure on new business after 31.3.2010

 the expenditure should be incurred prior to the commencement of its
operations
 If there is loss, it can be carried forward and can also be set of against any
other specified business
TAX PLANNING FOR
ELIGIBLE BUSINESS (44AD)
 Resident
 An Individual, HUF, Partnership Firm only, who hasn’t claimed/ deduction
under other given sections.
 Gross receipts < 2 crores
 Business income will be
 6% of total turnover if transaction is not done in cash (i.e. done via cheque, net
banking, etc.)
 8% of total turnover if transaction is done in cash.
ILLUSTRATION
 A businessman is eligible to compute his income under section 44AD. From
the following information compute his business income :
 1. Sale by electronic clearing system through a bank 1,00,00,000
 2. other sale 80,00,000
Solution
Computation of Business Income u/s 44AD
1.On sale by electronic clearing system presumed income 6% of sale
6,00,000
2.On other sale—presumed income 8% of sale 6,40,000
Business Income 12,40,000
FORM OF ORGANISATION
 Individual
 Hindu Undivided Family
 Partnership Form of Organisation
 Company
INDIVIDUAL
 80C: Insurance premium, PPF, NSC (upto Rs.1.5 lakh).
 80CCC: Contribution to Pension Fund (upto Rs.1.5 lakh).
 80D: Health Insurance (upto Rs.25000).
 80DD: Medical treatment of the dependent (upto Rs.75000 & 1 lakh).
 80E: Interest on loan taken for higher studies
 80TTA: Interest on saving bank (upto Rs.10000).
 80TTB: Interest upto Rs.50000 for senior citizen
HUF
 80C
 80D
 80DD
 80TTA
FIRM/LLP
 In computing the business income the following payments to the partners are
deductible:
 Interest on capital or loan given to the firm at the rate mentioned in the partnership
deed but not exceeding 12% p.a.
 Remuneration to working partners as mentioned in the partnership deed n
exceeding the following limits :
 (i) on first 3,00,000 of the book profits @ 90% or 1,50,000, whichever is more;
 (ii) on balance of the book profits @ 60%

 Tax on its total income @30%.

 A firm is liable to pay surcharge @ 12% if total income exceeds one crore.

 A firm is liable to pay Health & Education cess @ 4% on the amount of income tax
and surcharge
COMPANY
 A domestic company is liable to pay tax

 (i) Where the total turnover or the gross receipt in the previous year does not
exceed 250 crore rupees @25%
 (ii) In any other case @30%

 Surcharge.

 (i) @7% if total income exceeds one crore but does not exceed ten crore

 (ii) @ 12% if total income exceeds f ten crore.

 Further, a company will be liable to pay Health & Education cess @ 4% on the
amount of income tax and surcharge.
ILLUSTRATION (FIRM
VERSUS COMPANY)
 A and B want to start a business, the estimated profits of which for the year are
10,00,000. They have two options for selecting a form of organisation
 (a) Partnership firm :
i. 12% interest on capital off 7,50,000 each.
ii. Salary 2,00,000 p.a. each.
iii. Equal distribution of remaining profits.

 (b) Company:
i. 5,00,000 each as share capital and 2,50,000 each as loan @ 15%.
ii. Salary 2,00,000 p.a. each.
iii. Distribution of remaining profits as dividends equally.

 Assumed company is liable to pay income tax @ 25% + Surcharge + Health &
Education cess. Which option is better from tax point of view. Ignore deductions and
rebates
(a) Partnership firm :
Estimated profits of business ₹ 10,00,000.00
Less : Interest to partners on 15,00,000 @ 12% p.a. ₹ 1,80,000.00
Book profits ₹ 8,20,000.00
Less : Remuneration to partners :
90% of 3,00,000 ₹ 2,70,000.00
60% of 5,20,000 ₹ 3,12,000.00
₹ 5,82,000.00
or 4,00,000 as per deed, whichever is less ₹ 4,00,000.00
Business Income being Total Income ₹ 4,20,000.00
Tax @ 30% ₹ 1,26,000.00
Add : Surcharge Nil
₹ 1,26,000.00
Add : Health & Education cess @ 4% ₹ 5,040.00
₹ 1,31,040.00
 Computation of Income and Tax Liability of Partners
A B
Interest ₹ 90,000.00 ₹ 90,000.00
Remuneration ₹ 2,00,000.00 ₹ 2,00,000.00
Share in Firm Exempt Exempt
₹ 2,90,000.00 ₹ 2,90,000.00
Tax including Health & E.C. ₹ 2,080.00 ₹ 2,080.00
₹ 2,87,920.00 ₹ 2,87,920.00
Add : 50% of (4,20,000 - 1,31,040) ₹ 1,44,480.00 ₹ 1,44,480.00
Net Income of each Partner ₹ 4,32,400.00 ₹ 4,32,400.00
Total Net Income ₹ 8,64,800.00
(b) Company:

Estimated profits of business ₹ 10,00,000.00

Less: Interest on 5,00,000 @ 15% ₹ 75,000.00
Less: Remuneration to directors ₹ 4,00,000.00 ₹ 4,75,000.00
Business Income being Total Income ₹ 5,25,000.00
Tax @ 25% ₹ 1,31,250.00
Add : Surcharge Nil
₹ 1,31,250.00
Add : Health & Education cess @ 4% ₹ 5,250.00
₹ 1,36,500.00

Profit after Tax = 5,25,000 - 1,36,500 ₹ 3,88,500.00

Tax on dividends @15% ₹ 58,275.00
Surcharge @12% ₹ 6,993.00
₹ 65,268.00
Health & Education cess @4% ₹ 2,610.72
₹ 67,878.72
 Computation of Income and Tax Liability of Directors/Shareholders

A B
Salary ₹ 2,00,000.00 ₹ 2,00,000.00
Interest ₹ 37,500.00 ₹ 37,500.00
Dividend Exempt Exempt
Total Income ₹ 2,37,500.00 ₹ 2,37,500.00
Tax Nil Nil

Computation of Net Income of Directors/Shareholders

A B
Salary received ₹ 2,00,000.00 ₹ 2,00,000.00
Interest ₹ 37,500.00 ₹ 37,500.00
Dividend 50% of (3,88,500 - 67,879) ₹ 1,60,310.50 ₹ 1,60,310.50
₹ 3,97,810.50 ₹ 3,97,810.50
Less : Tax Nil Nil
₹ 3,97,810.50 ₹ 3,97,810.50
Total Net Income = ₹ 7,95,621.00

In this case a partnership firm should be formed.

FINANCIAL
MANAGEMENT
DECISIONS
INTRODUCTION
The capital structure of a company refers to
the long-term finances used by the firm. Cost
of capital is an important factor in
determining the company's capital structure.
The decision regarding the capital structure
or the financial leverage or the financing
wise is based on the objective of achieving
the maximisation of shareholders wealth.
OPTIMUM CAPITAL
STRUCTURE
The capital structure is said to be optimum
when the firm has selected such a
combination of equity and debt so that
wealth of the firm (shareholder) is
maximum.
At this capital structure, the cost of capital
is minimum and market price per share is
maximum.
CAPITAL STRUCTURE
PLANNING
 Profitability: Minimise cost of financing and
Maximise earning per equity share.
 Flexibility: Funds can be raised whenever
needed.
 Conservation: The debt content in the capital
structure should not exceed the limit, which
the company can bear.
 Solvency: The capital structure should be such
that firm does not run the risk of becoming
CAPITAL STRUCTURE
PLANNING
 Control: The capital structure should be so devised that it involves
minimum risk of loss of control of the company.
 Risks: Suppliers of funds may withdraw funds(in case of heavy debts)
 Cost of capital: dividend on shares is not deductible while interest paid
on borrowed capital is allowed
 Corporate taxation
 Government policies: change in the lending policies, rates, SEBI
 Legal requirements
 Marketability: ability of the company to market corporate securities
 Timing: Proper timing of a security issue
CAPITAL STRUCTURE
PLANNING
 Size of the company: Small companies rely heavily equity while large
companies can issue different types of securities.
 Purpose of financing: shouldn’t be for non-productive purposes, like welfare
facilities to employees such as schools, hospitals
 Period of finance: Normally, debt is for 8-10 years; if funds are required
more or less permanently: equity
 Nature of enterprise: monopolies may go for borrowings
 Requirement of investors
 Provision for the future requirement of capital
ILLUSTRATION
 The directors of a Domestic Company, whose existing
capital is 1 crore all in Equity Shares, proposes to
expand its business for which an additional
investment of 50 lakh would be needed. The entire
money can be raised either by issue of Equity Shares
or by issue of 10% Debentures. They decide in favor
of issue of Equity Shares.
 As a Tax Consultant do you approve the proposal?
Assume that rate of return is 20% and rate of income
tax is 30%.
 Solution
Computation of Rate of Return on Capital
Issue of Issue of
Shares Debentures
Return @ 20% on 1.5 crore ₹ 30,00,000.00 ₹ 30,00,000.00
Less : Interest on debentures :
50,00,000 @ 10% ₹ - ₹ 5,00,000.00
Profit Before Tax ₹ 30,00,000.00 ₹ 25,00,000.00
Less : Tax @ 30% ₹ 9,00,000.00 ₹ 7,50,000.00
Profit After Tax ₹ 21,00,000.00 ₹ 17,50,000.00

Rate of Return on Capital before DDT 14.00% 17.50%

For expansion of business, the company should have issued debentures
instead of equity
ILLUSTRATION
 Trapti Limited wants to raise capital of 20,00,000 for a project
where earning before tax shall be 40% of the capital
employed. The company can raise debt fund @18%p.a.
Suggest which of the following 3 alternatives should it opt for:
 (a) 20,00,000 to be raised by Equity Capital.
 (b) 16,00,000 by Equity and 4,00,000 by Loans.
 (c) 4,00,000 by Equity Capital and 16,00,000 by Loans.
 Assume the company shall distribute the entire amount of
profit as dividend and tax rate is 27.82% and dividend tax is
17.472%.
 Solution
Alternative Alternative Alternative
A B C
Equity Rs. 20,00,000.00 Rs. 16,00,000.00 Rs. 4,00,000.00
Debt Rs. 4,00,000.00 Rs. 16,00,000.00
Earning before tax @ 40% Rs. 8,00,000.00 Rs. 8,00,000.00 Rs. 8,00,000.00
less : Interest on loan @ 18% Rs. - Rs. 72,000.00 Rs. 2,88,000.00
Profit before tax Rs. 8,00,000.00 Rs. 7,28,000.00 Rs. 5,12,000.00
less : Tax @ 27.82% Rs. 2,22,560.00 Rs. 2,02,529.60 Rs. 1,42,438.40
Profit after tax Rs. 5,77,440.00 Rs. 5,25,470.40 Rs. 3,69,561.60
Less : Tax on gross dividend @ 17.472% Rs. 1,00,890.32 Rs. 91,810.19 Rs. 64,569.80
Dividend to shareholders Rs. 4,76,549.68 Rs. 4,33,660.21 Rs. 3,04,991.80
Rate of Return 24% 27% 76%
Conclusion. The company should choose option C.
DIVIDEND POLICY
 Factors affecting Dividend Decisions
 Capital gains
 Dividends
 Reduction of uncertainty: The promise of future capital
gains or a future distribution of earnings, involves more
uncertainty than a distribution of current earnings.
 Indication of strength: The declaration and payment of
cash dividend carries some sort of confidence that the firm is
reasonably strong and healthy.
 Need for current income: Many shareholders require a
regular flow of income through their investments for their
day-to-day expenses.
TAX LIABILITY ON DIVIDEND
(AY 2019-20)
 DDT (15% + surcharge 12% + cess 4%)
 From 2016, Individuals, Hindu Undivided Family or partnership firms and
private trusts: dividend in excess of Rs.10 lakh would be chargeable at the
rate of 10%.
 Funds
 Debt oriented funds @ (25 % + surcharge 12% + cess 4%)
 Equity oriented mutual funds @ (10 % + surcharge 12% + cess 4%)
 The dividend received by investors is exempt in hands of the fund holder
CASE STUDY
X purchases 1,000 equity shares in A Ltd. At the rate of
Rs.16 per share on December 10, 1989. He gets 500
bonus shares (by virtue of his holding of 1,000 shares)
on January 10, 2004. Fair market value of shares of A
Ltd. On April1, 2001 is Rs.24. On March 13, 2019, he
transfers 1,000 original shares @Rs.81 per
share( brokerage 1.5%). On March 15, 2019 he
transfers 500 bonus shares @Rs.87 per
share( brokerage:1.5 percent). Find out the amount of
capital gains on the assumption the STT is not
applicable.
 Assessment Year 2019-20
Sale proceeds of 1000 original shares 81,000.00
Less: Indexed cost of acquisition (24000*280/100) 67,200.00
Less: Brokerage on transfer (@1.5%) 1,215.00
12,585.00
Sale proceeds of 500 bonus shares (87*500) 43,500.00
Less: Cost of acquisition Nil
Less: Brokerage on transfer (@1.5%) 652.50
42,847.50
MANAGERIAL
DECISIONS
Purchase or Hire, Make or Buy
TAX PLANNING IN RESPECT
OF OWN OR LEASE-
INTRODUCTION
 Lessor and Lessee
 Cash Position
 Depreciation
 Obsolescence risk
 Residual Value
 Profit Margin
 Consider profit after tax
ILLUSTRATION: PURCHASE
OR LEASE
 Cost of asset 1,00,000.
 Rate of depreciation 15%.
 Rate of interest 10%.
 Repayment of loan by the assessee 20,000 p.a.
 Rate of tax 26%.
 Residual value-20,000 after five years.
 Profit of the assesse 1,00,000 before depreciation, interest and
tax/before lease rent and tax
 Lease rent 30,000 p.a.
 Asset Purchased
Profit before depreciation and interest 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000 5,00,000
Less: Depreciation 15,000 12,750 10,838 9,212 7,830 55,629
Less: Interest 10,000 8,000 6,000 4,000 2,000 30,000
PBT 75,000 79,250 83,163 86,788 90,170 4,14,371
Tax @ 26% 19,500 20,605 21,622 22,565 23,444 1,07,736
PAT 55,500 58,645 61,540 64,223 66,726 3,06,634
Loss on Sale of Asset (100000-(55360+20000)) #NAME?
When asset is purchased profit is (306634-24370) #NAME?

Asset taken on lease

Profit before lease rent 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000 5,00,000
Lease rent 30,000 30,000 30,000 30,000 30,000 1,50,000
PAT 70,000 70,000 70,000 70,000 70,000 3,50,000
Tax @26% 18,200 18,200 18,200 18,200 18,200 91,000
PAT 51,800 51,800 51,800 51,800 51,800 2,59,000

When asset is taken on lease profit is 2,59,000

ILLUSTRATION
 The management of X Ltd. wants to acquire a new machine. The cash price
of the machine is 1,00,000. The company has enough cash reserves to
finance the purchase. However, it seeks your advice, whether from the
point of view of tax planning, it should buy the machine or get it on lease.
On the basis of the following particulars, explain the suitability of each
alternatives.
 (i) Rate of Income Tax : 35%.
 (ii) Rate of depreciation under the Income Tax Act : 25%.
 (iii) Expected life of the machine : 9 years.
 (iv) Lease rent: 31,000 per annum for the first five years and 300 per year
afterwards.
 (v) Cost of Capital: 14%
EVALUATION TO BUY
Asset Value = 100,000
Years Depreciation Tax Rate Tax Saving PV
1 25,000 35% 8,750.00 7,675
2 18,750 35% 6,562.50 5,050
3 14,063 35% 4,921.88 3,322
4 10,547 35% 3,691.41 2,186
5 7,910 35% 2,768.55 1,438
6 5,933 35% 2,076.42 946
7 4,449 35% 1,557.31 622
8 3,337 35% 1,167.98 409
9 2,503 35% 875.99 269
92,492 32,372 21,918

Cash Outflow - Cost of Machine 100,000

Less: Tax saving on account of Depreciation 21,918
Net Cash Outflow 78,082
EVALUATION TO LEASE
Year Lease Rent PV (Lease Rent) Tax Rate Tax Amount PV (Tax amount)
1 31,000 27,193 35% 10,850 9,518
2 31,000 23,853 35% 10,850 8,349
3 31,000 20,924 35% 10,850 7,323
4 31,000 18,354 35% 10,850 6,424
5 31,000 16,100 35% 10,850 5,635
6 300 137 35% 105 48
7 300 120 35% 105 42
8 300 105 35% 105 37
9 300 92 35% 105 32
106,879 37,408
Present Value of Cash Outflow 106,879
Less: PV of Tax Savings 37,408
Net Cash Outflow = 69,472
MAKE OR BUY
ILLUSTRATION
 A company requires a component. From the following information suggest to the
company whether it should make the component or buy it from the market:

 A. Making the component:

 B. Buying the component:
 1. A new machine will be purchased
for Rs.10,00,000. After five years it  Cost:
will be sold for Rs.2,00,000. If there is  Year 1 20 lacs
any loss on sale of machine, it will be  Year 2 22 lacs
set-off against any other short-term
 Year 3 24 lacs
capital gain
 Year 4 26 lacs
 2. Rate of depreciation 15%
 Year 5 30 lacs
 3. Manufacturing cost of component:
 Year 1 14 lacs
 Year 2 16 lacs
 Year 3 18 lacs
 Year 4 20 lacs
 Year 5 24 lacs
 Making the Component
Computation of Depreciation
Year Depreciation @15% WDV
Opening Balance 1,000,000 WDV = 443,705
1 150,000 850,000 Selling Price = 200,000
2 127,500 722,500 Capital Loss = 243,705
3 108,375 614,125 Saving in tax (STCL) 73,112
4 92,119 522,006
5 78,301 443,705
Computation of Cost of Component

Year Manufacturing Cost Depreciation Total Cost Tax Saving Net Cost

0 1,000,000
1 1,400,000 150,000 1,550,000 465,000 935,000
2 1,600,000 127,500 1,727,500 518,250 1,081,750
3 1,800,000 108,375 1,908,375 572,513 1,227,488
4 2,000,000 92,119 2,092,119 627,636 1,372,364
5 2,400,000 78,301 2,478,301 743,490 1,656,510
Sale of Machine (200,000)
7,073,112
Tax Saving 73,112
Net Cost 7,000,000
 (B) Buying the Component
Year Cost of Purchase Tax Saving Net Cost
1 2,000,000 600,000 1,400,000
2 2,200,000 660,000 1,540,000
3 2,400,000 720,000 1,680,000
4 2,600,000 780,000 1,820,000
5 3,000,000 900,000 2,100,000
Net Cost 8,540,000
EMPLOYEES’
REMUNERATIO
N
EMPLOYEE REMUNERATION
PLANNING
 Employer: Remuneration paid should be allowable expenditure
 Employee: Remuneration should be designed in such a way to minimize the
tax liability.
 Payment of salary/allowances and perquisites are allowable as deduction
(u/s 37(1)
 TDS should be deducted (u/s 192)
REMUNERATION PLANNING
 Salary
 Allowances
 Perquisites
SALARY
 The term ‘salary’ for the purposes of Income-tax Act will
include both
 monetary payments (e.g. basic salary, bonus, commission,
allowances etc.) as well as
 non-monetary facilities (e.g. housing accommodation,
medical facility, interest free loans etc).
 The term ‘salary’ has been defined differently for different
purposes in the Act
FEATURES
 Employer-employee relationship
 Salary paid tax-free
 Basis of charge
 ‘due’ basis or on ‘receipt’ basis, whichever is earlier.

 Loan or Advance against salary cannot be taxed as salary.

 Arrears of salary
 Annuity is treated as salary
 Gratuity [Section
10(10)]

Central / State
Government Non-government
Employees/ employees
Defense Service

Covered by the Not covered by

Payment of the Payment of
Gratuity Act, Gratuity Act,
Tax Free 1972 (exempt 1972 (exempt
from tax to the from tax to the
extent of least of extent of least of
the following) the following)
GRATUITY CONTD...
Covered by the Not covered by the
Payment of Gratuity Payment of Gratuity
Act, 1972 (exempt Act, 1972 (exempt
from tax to the extent from tax to the extent
of least of the of least of the
following) following)

(i) Rs. 20,00,000(Rs.

10,00,000 upto 28 March
(i) 20,00,000
2018)
(ii) Gratuity actually
(ii) Gratuity actually
received
received
(iii) Half month’s salary
(iii) 15 days’ salary based
based on last 10 months’
on last drawn salary for
average salary for each
each completed year of
completed year of service
service or part thereof in
excess of 6 months
ILLUSTRATION
Mr.Ravi retired on 15.6.2018 after completion of 26 years 8 months of service
and received gratuity of Rs. 6,00,000. At the time of retirement his salary was:
 Basic Salary : 5,000 p.m.
 Dearness Allowance : 3,000 p.m.
 Bonus : 12,000 p.a.

Compute his taxable gratuity assuming:

(a) He is non-government employee and covered by the Payment of Gratuity
Act 1972.
(b) He is non-government employee and not covered by Payment of Gratuity
Act 1972.
(c) He is a Government employee.
SOLUTION: (A) COVERED BY THE
PAYMENT OF GRATUITY ACT 1972
Gratuity received at the time of retirement 6,00,000
Less: Exemption under section 10(10) Least of the following:
i. Gratuity received = 6,00,000
ii. Statutory limit = 20,00,000
iii. 15 days salary based on last drawn salary for each completed year of service or part thereof in
excess of 6 months

15 x last drawn salary x years of service

26
15 x (Rs. 5,000 + Rs. 3,000) x 27 = 1,24,615
26
Exempted Gratuity 1,24,615
Taxable Gratuity= 6,00,000 - 1,24,615 4,75,385
SOLUTION: (B) NOT COVERED BY THE
PAYMENT OF GRATUITY ACT 1972
Gratuity received at the time of retirement 6,00,000
Less: Exemption under section 10(10) (Note) 1,04,000
Taxable Gratuity 4,96,000
Note: Exemption under section 10(10) is least of the following:
i. Gratuity received = 6,00,000
ii. Statutory limit = 20,00,000
iii. Half month’s salary based on average salary of last 10 months preceding the
month of retirement for each completed year of service.
i.e.
= ½ x Average Salary x years of service
= ½ x [(5000 + 3000 x 10)]/10 x 26 = 104000
SOLUTION: (C)
GOVERNMENT EMPLOYEE
Gratuity received at the time of retirement 6,00,000
Less: Exemption under section 10(10) 6,00,000

Taxable gratuity Nil

 Pension

Commuted Un-commuted

pension received
periodically is fully
taxable in the
hands of both
government and
non-government
employees
 Commuted Pension

Employees of the
Central
Government/local
authorities/Statutor Non-Government
y Employee
Corporation/membe
rs of the Defense
Services

If the employee is If the employee

Tax Free. in receipt of does not receive
gratuity any gratuity
 Non-Government
Employee
(Commuted
Pension)

If the employee is If the employee

in receipt of does not receive
gratuity any gratuity

Exemption = 1/3rd Exemption = ½ of

of the amount of the amount of
pension which he pension which he
would have would have
received had he received had he
commuted the commuted the
whole of the whole of the
ILLUSTRATION
Mr. Sagar retired on 1.10.2018 receiving Rs. 5,000 p.m. as pension. On
1.2.2019, he commuted 60% of his pension and received Rs. 3,00,000 as
commuted pension. You are required to compute his taxable pension
assuming:
a. He is a government employee.
b. He is a non-government employee, receiving gratuity of Rs. 5,00,000 at
the time of retirement.
c. He is a non-government employee and is in receipt of no gratuity at the
time of retirement.
SOLUTION: (A) HE IS A
GOVERNMENT EMPLOYEE.
Uncommuted pension received (October – March)
[(Rs.5,000 × 4 months) + (40% of Rs. 5,000 × 2 months)] =
24,000
Commuted pension received = 3,00,000
Less : Exempt u/s 10(10A) = 3,00,000
NIL

Taxable pension = 24,000

SOLUTION: (B) HE IS A NON-GOVERNMENT EMPLOYEE,
RECEIVING GRATUITY RS. 5,00,000 AT THE TIME OF
RETIREMENT.

Uncommuted pension received (October – March)

[(Rs.5,000 × 4 months) + (40% of Rs.5,000 × 2 months)] =24000 (A)
Commuted pension received = 3,00,000 (B)
Less : Exempt u/s 10(10A)
[(1/3) x (300000/60%) x 100%] = 1,66,667 (C)
Taxable commuted pension(3,00,000-1,66,667) = 1,33,333 (D = B –
C)

Taxable pension 1,57,333 (A + D)

SOLUTION: (C) HE IS A NON-GOVERNMENT EMPLOYEE
AND IS NOT IN RECEIPT OF GRATUITY AT THE TIME OF
RETIREMENT.
Uncommuted pension received (October – March)
[(Rs.5,000 × 4 months) + (40% of Rs.5,000 × 2 months)] = 24000 (A)
Commuted pension received = 3,00,000 (B)
Less : Exempt u/s 10(10A)
[(1/2) x (300000/60%) x 100%] = 2,50,000 (C)
Taxable commuted pension (3,00,000 – 2,50,000) = 50000 (D = B –
C)

Taxable pension = 74000 (A + D)

PENSION UNDER NEW
PENSION SCHEME
1. Employer’s contribution is first included in salary then a deduction is
available (to the extent 10 per cent of salary) under section 80CCD(2).
2. Employee’s contribution is deductible under section 80CCD(1) to the
extent of 10 % of salary.
3. When pension is received out of the aforesaid amount, it will be taxable
in the year of receipt.
LEAVE SALARY
 Leave salary received during the period of service is fully taxable.
 Where leave salary is received from two or more employers in the same
year, then the aggregate amount of leave salary exempt from tax cannot
exceed Rs. 3,00,000.
 Where leave salary is received in any earlier year from a former employer
and again received from another employer in a later year, the limit of Rs.
3,00,000 will be reduced by the amount of leave salary exempt earlier.
 Salary for this purpose means basic salary and dearness allowance, if
provided in the terms of employment for retirement benefits and
commission which is expressed as a fixed percentage of turnovers.
 ‘Average salary’ will be determined on the basis of the salary drawn during
the period of ten months immediately preceding the date of his retirement
whether on superannuation or otherwise.
 Leave Salary

Government Non-government
employees employees

Leave salary
received at the
time of
retirement is fully
exempt from tax.
 (i) Rs. 3,00,000

(ii) Leave salary

actually received

Leave salary received

at the time of (iii) 10 months’ salary
Non-government (on the basis of
retirement is exempt
employees (Leave average salary of last
from tax to the extent
Salary) 10 months )
of least of the
following :
(iv) Cash equivalent of
Earned leave
leave (based on last
entitlement cannot
10 months’ average
exceed 30 days for
salary immediately
every year of actual
preceding the date of
service rendered for
retirement) to the
the employer from
credit of the employee
whose service he has
at the time of
retired.
retirement or death.
ILLUSTRATION
Mr. Gupta retired on 1.12.2018 after 20 years 10 months of service, receiving leave
salary of 5,00,000. Other details of his salary income are:
Basic Salary 5,000 p.m. (Rs. 1,000 was increased w.e.f. 1.4.2018)
Dearness Allowance 3,000 p.m.
Commission 500 p.m.
Bonus 1,000 p.m.
Leave availed during service 480 days
He was entitled to 30 days leave every year.
You are required to compute his taxable leave salary assuming:
(a) He is a government employee.
(b) He is a non government employee.
SOLUTION: (A) HE IS A
GOVERNMENT EMPLOYEE.
Leave Salary received at the time of retirement Rs 5,00,000
Less : Exemption under section 10(10AA) Rs 5,00,000
Taxable Leave salary Nil
 
SOLUTION: (B) HE IS A NON-
GOVERNMENT EMPLOYEE
Leave Salary received at the time of retirement = 5,00,000
Less : Exempt under section 10(10AA)* = 31200
Taxable Leave Salary = 4,68,800

* See working note on next slide

WORKING NOTE: EXEMPTION UNDER
SECTION 10(10AA) IS LEAST OF THE
FOLLOWING:
 (i) Leave salary received = 5,00,000
 (ii) Statutory limit = 3,00,000
 (iii) 10 months salary based on average salary of last 10 months
 [10 x Salary of last 10 months i.e. Feb - Nov/10]
 = [(5000 x 8) + (4000 x 2) + (3000 x 10)] = 78000
 (iv) Cash equivalent of leave standing at the credit of the employee based on the average salary of
last 10 months (max. 30 days per year of service)
 Leave Due = Leave allowed – Leave taken
 = ( 30 days per year × 20 years ) – 480 days
 = 600 - 480
 = 120 days
 = (Leave due (in days)/30 days) x Average salary p.m.
 = [(120 days/30 days) x (Rs. 78000/10 months)] = Rs. 31,200
 Provident
Fund

Statutory Recognized Unrecognize Public

Provident Provident d Provident Provident
Fund Fund Fund Fund
STATUTORY PROVIDENT FUND
 It is a provident fund registered under Provident fund Act, 1925
 Employer’s Contribution
 Fully exempt

 Employee’s Contribution
 Eligible for deduction u/s 80C

 Interest Credited
 Fully exempt

 Amount received on retirement, etc.

 Fully exempt
RECOGNIZED PROVIDENT FUND
 Recognised by Commissioner of Income Tax
 Employer’s Contribution
 Contribution to 12% of salary is exempt, above that is added to salary income of the
employee.
 Employee’s Contribution
 Eligible for deduction u/s 80C

 Interest Credited
 Amount in excess of 9.5% p.a. is added to Income from Salaries and taxable

 Amount received on retirement, etc.

 Exempt subject to certain conditions.
 Fully exempt in case of an employee who has rendered continuous service for a period of 5 years
or more.
 Etc.(see notes)
UNRECOGNIZED PROVIDENT FUND
 Not recognised by the Commissioner of Income Tax

 Employer’s Contribution
 Not taxable

 Employee’s Contribution
 Not eligible for deduction

 Interest Credited
 Not taxable

 Amount received on retirement, etc.

 Contribution from employer and interest on that is taxable under the head Income
from Salaries;
 Contribution by an employee is not taxable, and
 Employee’s contribution interest is taxable under the head Income from Other Sources.
PUBLIC PROVIDENT FUND
 Public Provident Fund Act, 1968
 Employer’s Contribution
 Not applicable, as there is only assessee’s own contribution

 Employee’s Contribution
 Eligible for deduction u/s 80C

 Interest Credited
 Fully exempt

 Amount received on retirement, etc.

 Fully exempt
ALLOWANCES: FULLY
TAXABLE
(i) Entertainment Allowance
(ii) Dearness Allowance
(iii) Overtime Allowance
(iv) Fixed Medical Allowance
(v) City Compensatory Allowance
(vi) Interim Allowance (to meet increased cost of living in cities)
(vii) Servant Allowance
(viii) Project Allowance
(ix) Tiffin/Lunch/Dinner Allowance
(x) Any other cash allowance
(xi) Warden Allowance
(xii) Non-practicing Allowance
ALLOWANCES: PARTLY
TAXABLE
(i) House Rent Allowance [u/s 10(13A)]
(ii) Special Allowances [u/s 10(14)]
ALLOWANCES: FULLY
EXEMPT
(i) Allowance granted to Government employees outside India.
(ii) Sumptuary allowance granted to High Court or Supreme Court Judges
(iii) Allowance paid by the United Nations Organization.
(iv) Compensatory Allowance received by a judge
HOUSE RENT ALLOWANCE
[U/S 10(13A)]
 Least of the following is exempt:

a) Actual HRA Received

b) 40% of Salary (50%, if house situated in Mumbai, Calcutta, Delhi or Madras)
c) Rent paid - 10% of salary for the relevant period
* Salary= Basic + DA (if part of retirement benefit) + Turnover based
Commission
 Note:
 i. Fully Taxable, if HRA is received by an employee who is living in his own
house or if he does not pay any rent
 ii. It is mandatory for employee to report PAN of the landlord to the employer if
rent paid is more than Rs. 1,00,000
ILLUSTRATION
Mr. Raj Kumar has the following receipts from his employer:
(1) Basic pay 3,000 p.m.
(2) Dearness allowance (D.A.) 600 p.m.
(3) Commission 6,000 p.a.
(4) Motor car for personal use
(expenditure met by the employer) 500 p.m
(5) House rent allowance 900 p.m.

Find out the amount of HRA eligible for exemption to Mr. Raj Kumar assuming
that he paid a rent of Rs. 1,000 p.m. for his accommodation at Kanpur.
SOLUTION
HRA received 10,800
Less: Exempt under section 10(13A) [Note] 7,680
Taxable HRA 3,120

Working Note: Exemption shall be least of the following three limits:

(a) the actual amount received (900 × 12) = 10800
(b) excess of the actual rent paid by the assessee over 10% of his salary
= Rent Paid - 10% of salary for the relevant period
= (1,000×12) - 10% of [(3,000+600 ) × 12]
= (12,000 - 4,320) = 7680
(c) 40% salary as his accommodation is situated at Kanpur
= 40% of [(3,000+ 600) × 12] = 17,280
SPECIAL ALLOWANCES[U/S
10(14)]
 Children Education Allowance
 Up to Rs. 100 per month per child up to a maximum of 2 children is exempt

 Hostel Expenditure Allowance

 Up to Rs. 300 per month per child up to a maximum of 2 children is exempt

 Transport Allowance granted to an employee to meet expenditure for the purpose

of commuting between place of residence and place of duty
 Rs. 3,200 per month granted to an employee, who is blind or deaf and dumb or
orthopedically handicapped with disability of lower extremities
 Transport Allowance to an employee working in any transport business to meet his
personal expenditure during his duty performed in the course of running of such
transport from one place to another place provided employee is not in receipt of
daily allowance.
 Amount of exemption shall be lower of following:
 a) 70% of such allowance; or
 b) Rs. 10,000 per month.
SPECIAL ALLOWANCES[U/S
10(14)]
 Following are exempt to the extent of expenditure incurred

 Conveyance Allowance granted to meet the expenditure on conveyance in

performance of duties of an office
 Any Allowance granted to meet the cost of travel on tour or on transfer
 Daily Allowance to meet the ordinary daily charges incurred by an
employee on account of absence from his normal place of duty
 Helper/Assistant Allowance
 Research Allowance granted for encouraging the academic research and
other professional pursuits
 Uniform Allowance
PERQUISITES
 The term “perquisites” includes all benefits and amenities provided by the
employer to the employee in addition to salary and wages either in cash or
in kind which are convertible into money. These benefits or amenities may
be provided either voluntarily or under service contract. For income-tax
purposes, the perquisites are of three types:
 (i) Tax-free perquisites
 (ii) Taxable perquisites
 (iii) Perquisites taxable under specified cases.
TAX-FREE PERQUISITES
 Medical Facilities

 Refreshment

 Recreational facilities as a group

 Telephone facility (including mobile)

 Transport provided by the employer to the employees as a group

 Personal accident insurance

 Refresher Course

 Computer/laptops provided only for use, ownership is retained by the employer

 Rent free houses / conveyance to High Court & Supreme Court Judges

 Employers’ Contribution to Group Insurance Schemes

 Annual Premium by employer on policy taken on life of employee

TAXABLE PERQUISITES
 Rent Free Residential Accommodation
 Interest Free / Concessional Loan: exceeding Rs.20000, @ charged
by SBI
 Use of movable assets by employee / any member of his household:
10% p.a. OR hire charges
 Transfer of movable assets: different depreciation rate to reach asset
value. E.g. 50% for computer
 Provision of gas/electricity / water: actual amount paid, etc.
 Provision of free / concessional educational facilities: actual amount
paid, etc.
 Credit Card Expenses: : actual amount paid.
TAXABLE PERQUISITES
 Club expenditure: actual
 Health Club, Sports, Similar facilities: No perquisite, if allowed to all
employees.
 Motor Cars
 For official purpose only: Not a perquisite
 For personal use only: Actual amount spent
 Partly for Official and Partly for Personal:
 Up to 1600 cc, the taxable value of the perquisite would be INR 1800 pm
 > 1.6 litres, the taxable value of the perquisite would be INR 2400 pm
 If chauffer is also provided, INR 900 pm is to be added to either of the above, depending
on the engine capacity
RENT FREE RESIDENTIAL
ACCOMMODATION:
GOVERNMENT EMPLOYEE
 Licence Fee determined as per the Government Rules,
as reduced by rent actually paid by the employee for
unfurnished accommodation.
 For a furnished accommodation, 10% p.a. of the
furniture cost is added to the value obtained above
for unfurnished.
 In case the furniture is hired, the actual hire charges
would be added to the value obtained above for
unfurnished.
RENT FREE RESIDENTIAL
ACCOMMODATION:
NON-GOVERNMENT EMPLOYEE
(UNFURNISHED ACCOMMODATION)
(a) If the accommodation is owned by the employer, the value
would be based on the population, i.e.,
 (i) if in cities having a population of > 25 Lacs (2001 Census) - -
15% of Salary;
 (ii) if the population is between 10 Lacs up to 25 Lacs – 10% of
Salary;
 (iii) else 7.5% of Salary

 (b) If the accommodation is taken on lease by the employer,

the actual value of lease rentals paid by the employer subject
to a maximum of 15% of Salary is considered as Value.
RENT FREE RESIDENTIAL
ACCOMMODATION:
NON-GOVERNMENT EMPLOYEE
(FURNISHED ACCOMMODATION)
 For a furnished accommodation, 10% p.a. of the furniture cost is added to
the value obtained above for unfurnished.
 In case the furniture is hired, the actual hire charges would be added to the
value obtained above for unfurnished.
 In all cases, any amount recovered from the employee should be reduced to
arrive at the taxable value of the perquisite
 Where the accommodation is provided by the employer in a hotel (except
where the employee is provided such accommodation for a period not
exceeding in aggregate 15 days on the transfer from one place to another):
The perquisites value would be 24% of salary paid or payable for the
previous year or the actual charges paid or payable to such hotel, which is
lower, for the period during which such accommodation is provided as
reduced by the rent, if any, actually paid or payable by the employees.
ILLUSTRATION
Mr. C is a Finance Manager in ABC Ltd. The company has provided him with
rent-free unfurnished accommodation in Mumbai. He gives you the
following particulars:
Basic salary 6,000 p.m.
Dearness Allowance 2,000 p.m.
Bonus 1,500 p.m.
Even though the company allotted the house to him on 1.4.2018, he
occupied the same only from 1.11.2018. Calculate the taxable value of the
perquisite for A.Y. 2019-20.
SOLUTION
Value of the rent free unfurnished accommodation
= 15% of salary for the relevant period
= 15% of [(6000 + 2,000 + 1,500) × 5] [Note]
= 15% of 47,500 = 7,125.

Note: Since, Mr.C occupies the house only from 1.11.2011, we have to
include the salary due to him only in respect of months during which he has
occupied the accommodation. Hence salary for 5 months (i.e. from
1.11.2018 to 31.03.2019) will be considered.
DEDUCTION FROM SALARY
The following amounts shall be deducted in order to arrive at the chargeable income under the
head “Salaries”.
 Standard Deduction (16(ia))
 Rs.40,000 or the amount of salary, whichever is lower
 AY 20-21: Rs.50,000 or the amount of salary, whichever is lower

 Entertainment Allowance received by the Government employees (16 (ii))

 Fully taxable in case of other employees)
 Least of the following is deductible :
 a) Rs 5,000
 b) 1/5th of salary (excluding any allowance, benefits or other perquisite)
 c) Actual entertainment allowance received

 Employment Tax/Professional Tax (16(iii))

 Not applicable in NCR: Delhi, UP, Haryana
ANNEXURES
AY 19-20
 TAX RATES FOR AN
INDIVIDUALS
Senior Citizen Super Senior
Individual (Age less than 60
(Age above 60 Citizen (Age
Years)
Years) above 80 Years)
1 Up to Rs. 2,50,000 Nil Nil Nil
2 Rs. 2,50,000 to Rs. 3,00,000 5% Nil Nil
3 Rs. 3,00,000 to Rs. 5,00,000 5% 5% Nil
4 Rs. 5,00,000 to Rs. 10,00,000 20% 20% 20%
5 Above Rs. 10,00,000 30% 30% 30%
Less: Rebate under Section 87A: The rebate is available to a resident individual if his total income does not exceed Rs. 3,50,000.
The amount of rebate shall be 100% of income-tax or Rs. 2,500, whichever is less.

AY 20-21: Rebate under Section 87A: The rebate is available to a resident individual if his total income does not exceed Rs.
5,00,000. The amount of rebate shall be 100% of income-tax or Rs. 12,500, whichever is less.
TAX RATES FOR CORPORATE
ASSESSEE FOR THE A.Y.
2019-20
Status of Taxpayer Rates of income-tax

1 Firms/Local Authority 30%

2 Domestic Company 30%/25% #

3 Foreign Company 40%

 #
 Tax rate is 25% if turnover or gross receipts of the
domestic company in the previous year doesn't exceed
Rs. 250 crore
TAX RATES FOR CO-
OPERATIVES SOCIETIES FOR
THE A.Y. 2019-20
Income Rates of income-tax

1 Up to Rs. 10,000 10%

2 Rs.10,000 – Rs.20,000 20%

3 Above Rs. 20,000 30%

 RATES OF SURCHARGE
Rates of Surcharge
Taxable Income
Particulars
50 Lacs to 1 Crore 1 Crore to 10 Crores Exceeding 10 Crores
1 Individuals/HUF 10% 15% 15%

2 Firm/ Local Authority/ Co-operative Society Nil 12% 12%

3 Domestic Company Nil 7% 12%

4 Foreign Company Nil 2% 5%

5 Co-operative Societies Nil 12% 12%

 * The health &education cess at the rate of 4% shall be computed on aggregate of Income-Tax and Surcharge.
THANK YOU