Tax planning

1. An individual being a citizen of India, who is planning to

go out of India for employment purposes or as a member
of the crew of an Indian ship ,he should leave the country
before he completes his stay of 182 days during the
relevant previous year so that he becomes non-resident in
India and enjoy exemption on foreign incomes.
2.An individual , being a citizen of India or of Indian origin , who
has been staying out of India and wants to visit India, should
ensures that his stay in India during the previous year does not
exceed 181 days . If he wants to stay in India for more than
181days without any additional tax liability ,he should plan his
stay in India in such a way that the period of stay falls in two
previous years ,stay not exceeding181 days in one previous year
and not exceeding181 days in following previous year .
3. Any other individual can plan his stay in India upto 181 days
during previous year and can continue as a ‘non-resident’.
If his stay during 4 years preceding the previous year does not
exceeds 364 days . If his stay during 4 years preceding the
previous year exceeds 364 days ,he should not stay in India
during previous year for exceeding 59 days , which will make
him resident in India. If he wants to stay in India for more than 59
days , he should plan his stay not exceeding 59 days in one
previous year.
4.A HUF , Firm or Association of person becomes resident in
India if even a part of its management and control is situated
in India . To avoid such situation that Firm becomes resident
in more than one country at a time ,a part of that
management and control should not be situated in India.
5.Foreign income is not taxable in India if it is not received
in India and the assesse is non resident in India .Hence Non-
Resident person should receive foreign income outside India
and then remit to India . Thus they can save tax on their
foreign income.
6. Goods should be sold by a ‘non-resident’ (foreigner) to a
resident in India on ‘principal to principal’ basis and the
consideration of such sales must be directly received in
foreign country . In such a case it cannot be said that there is
any business connection between the non-resident seller and
the resident importer so that the income there for becomes
non taxable in India.
7.A non-resident Indian or his nominee or an individual who
has received the bond purchased in foreign country as a gift
from a non-resident Indian , should not be encashed before
maturity, because in such case exemption u/s 10(15) is not
avaliable
8. Where a non-Indian company is earning substantial
income in Indian but suffering losses outside India , it may
plan to become resident in India so that it can set off losses
incurred abroad against income earned in India
 Double Taxation is a situation in which the same income becomes
taxable in the hands of the same company or individuals (tax- payer)
in more than one country. It is a situation in which the tax payer
pays tax both in the country of residence as well as in the other
country from which he earns income. The situation of Double
Taxation arises due to different rules for taxation of income in
different countries.
 In order to reduce the tax burden of an assessee in relation to Double
Taxation, Central Government u/s 90 of the Income Tax Act has
been certified to enter into Double Tax Avoidance Agreements
(DTAA) with other countries. Where an assessee is a residence of
one country but has a source of income situated in other country it
gives rise to Double Taxation. India has entered into Double
Taxation Avoidance Agreements with 79 countries, including U.S.A,
Canada, U.K, Japan, Germany, Australia, Singapore, U.A.E and
Switzerland etc.
Exemption method – By which a particular income is
taxed in only one of the two countries.
Tax Relief method – Under this, an income is being
taxable in both countries in accordance with their respective
tax laws read with DTAA. However, the country of residence
of the tax payer allows him credit for the tax charged thereon
in the country of the source.
Remuneration to employees is a major expenditure for every
concern. However ,every expenditure in the form of remuneration
to employees is not deductible for tax purposes . At the same time
remuneration will be taxable in the hands of the employees in
certain case and will be exempt in certain other cases. Therefore
there should be tax planning from the point of views of both the
employees and employers in this respect.
The employer should device a salary structure for staff in such a
way that in computing his income chargeable under the head
‘Profit and Gains of business or profession ’ or income under the
head ‘Income from Other Source’ he gets the maximum
deductions and allowance and on the other hand the tax liability
of the employees is minimum . At the same time , employees
should be given a part of salary in the form of such allowance and
perquisites , which are either fully or partly exempt from tax.
Tax planning from the view point of the
Employer
The employer must decide the remuneration package of the
employee considering the following factors:-
1.There should be employer and employee relationship to
make the remuneration eligible for deduction .In the case of
‘contract for service’ there is no relationship as master and
servant but in case of ‘contract of service’ this relationship
exists.
2.Where buildings are taken on rent and allotted to the staff the
rent of the building is deductible .Further if he has agreed to bear
the cost of repair , land revenue , municipal taxes and insurance
premium in respect on such building , such expense are also
deductible.
3.The Income Tax Act does not provide for any ceiling limit on the
remuneration payable to employees .Similarly , remuneration may
be paid partly in cash and partly in the form of perquisites.
However ,certain expenses are fully deductible ,certain within
specified limits and certain are not deductible at all.
4. Where fans , air conditioners ,refrigerators, furniture etc.. are
provided by the employer at the residence of employees, it is
considered that these assets have been used for the purposes of
business. Expense incurred on repairs and insurance premium in
respect of such assets are deductible including depreciation
5.Expenses incurred on staff quarters to the employees of business is
treated as incurred for the purposes of business .Therefore repairs ,
land revenue , municipal taxes and insurance premium in respect on
such building , are fully deductible.
6.Bonus or commission to staff is deductible on the basics of actual
payment only and not accrual basics however it has been paid by the
employer on or before the due date applicable for furnishing the
return of income u/s 139(1) for the relevant previous year and
evidence of such payment is furnished along with return the deduction
will be allowable to same previous year to which it relates .
7.Any amount of premium paid by an employer by any mode of
payment other than cash ,for insurance on health of his
employees is allowed as deduction provided it is in accordance
with a scheme framed by the general insurance cooperation of
Indian and approved by the central govt.
8.Intrest concession allowed to employees to acquire asset is
deductible .If employer has borrowed fund for the purpose ,
interest on such loan is deductible in computing his income,
provided the borrowing are not made specifically for the purpose
of granting loans to the employees .
9.Any sum paid to the employees (salary and allowance) ,
expenditure incurred to provide perquisites or benefits or for
their welfare is deductible in the full but contribution to welfare
fund of the employees is not deductible.
10.Entertainment expense incurred by the employer are fully
deductible u/s37(1). Similarly expense on holiday home and
guest houses are deductible in full.
11.Any sum received by the employer from his employees as
contribution to any provident fund ,superannuation fund, any
fund setup under the provision of Employee’s state insurance
act ,1948, or any other fund for the welfare of the employees
must be deposited to the employees account in the relevant
fund on or before due date for crediting the amount to the
account , otherwise such receipts will be deemed to be income
and will be become fully taxable.
12.Revenue expenditure incurred by the company for the
purpose of promoting family planning among the staff , are
deductible in full .At the same time capital nature
expenditure incurred for the purpose can be written off 20%
each for 5 years in case of employer other than a company ,
the revenue expenses on family planning are deductible
u/s37(1).Such assesses can claim depreciation u/s 32 on
capital expenditure incurred for family planning among the
employees .
13.If any salary is payable outside India ,tax on it should be
deducted at source otherwise such payments shall be liable to
disallowed .Similarly , tax should be deducted at source in
case of salary payable in India or outside , otherwise penalty
u/s271C, shall be imposed on the employer .
14.The employer must ensure that the remuneration paid or
payable to a relative or to an associate concern is not
excessive or unreasonable because such excessive
remuneration shall be disallowed while determining the
income.
15.It should be ensured that the payment exceeding 10,000 is
made by account payee cheque or bank draft or by
depositing the amount directly in the bank account of the
employee concerned. Otherwise the payment will be fully
disallowed
16. No deduction is allowed in respect of sum paid by the assesse
as an employer towards a Non-statutory fund. Therefore the
employer should ensure that the contribution is not made to a non
statutory fund.
17. Sometimes , the employer may pay tax on behalf of employee
on the value of perquisites provided to an employee .But such
payment are not deductible in computing the income of employer .
Therefore ,from tax planning point of view it is better to the
employer to pay income tax allowance to the employee instead of
payment of tax on his behalf. The income tax allowance paid to the
employee can be deducted in computing the income of employer.
This will reduce his tax liability without increasing the tax liability
of the employee.
18.Payment of contribution to RPF , approved gratuity fund and
approved superannuation fund or bonus or commission to staff is
deductible even if the payment is not made within the previous year
but it is paid on or before on due date of furnishing the return by the
assesse . Therefore the employer can delay the payment of such
contribution up to the date of submission of return.
Employees can adopt a tax planning scheme after comparing the
relative advantages and disadvantages of different schemes. The
following are some of the important matters to be kept in mind
while doing tax planning .
1.When an employee takes salary in advance ,it is added in salary
income which increases the tax liability .But loan taken from the
employer is not taxable .Therefore it is better to take loan from the
employer instead of advance salary .However it should be borne in
mind that any concession in interest on loans exceeding 20000
shall be taxable perquisite.
2.Possible the employee should opt a salary package in which he gets
more fringe benefits which are not subject to tax.
3.If an employer provides an option of either rent free house or house
rent allowance , the employee should calculate his tax liability before
choosing one. In some case HRA will be beneficial while in some other
case choosing rent free house will be more attractive.
4.Employer’s contribution to recognised provident fund up to 12% of
salary of the employee is exempt while interest up to the specified limit
is exempt. Further , any amount received from the fund is also exempt.
Similarly , contribution to pension fund may reduce the income for the
time being but it will help to reduce tax liability and in future , after
retirement , the amount of pension may not be liable to tax or will be
taxable only at a lower rate . Moreover, the commuted value of pension
and the amount of gratuity also gets exemption u/s 10 upto the
specified limits.
5.If the employer is a closely-held company and if the employee
has a substantial interest in it ,loan should not be taken from the
employer .Because ,such loan to the extent of the accumulated
profit is treated as the deemed dividend , and taxable in the hand
of receipient even if it is repaid afterwards by the employee .
6.D.A received as per terms of employment increases the
exempted amount of gratuity , encashment of earned leave and
compensation on voluntary retirement. Further , it increases the
contribution of employer in RPF . However D.A , as per
employment in certain cases increases the tax incidence in
respect of house rent allowance or rent free house provided by
the employer and in certain cases decreases the tax incidence
.Therefore if the employee has an option to receive D.A as a part
of pay or otherwise ,a comparative study must be made before
exercising any such option.
7.As far as possible the spouse of an individual should not
receive salary , commission , fees, or other remuneration in
cash or in kind , from a concern in which such individual has
a substantial interest , because such income are liable to be
clubbed . However ,the income of the spouse shall not be
clubbed with the income of the individual , where the spouse
possesses technical or professional qualification and the
income is solely attributable to the application of any
knowledge , skill or experience.
8.Encashment of earned leave while in service is fully taxable but
after retirement gets exemption u/s (10AA).Therefore the
employee shall not encash the earned leave while in service ,
from tax point of view. However ,one should keep in mind the
interest loss also, from such decision . If the interest loss from not
encashing the earned leave is more than the tax liability , then it is
better to encash the amount while in service and pay tax on it.
9.An employee can take voluntary retirement from service (in
case of public sector company , any other company , an authority
established under central ,state ,or provincial act ,a local authority
,co-operative society )and the amount receivable on such
retirement is exempt up to 5,00,000. Therefore in certain cases it
may be beneficial for employees to take VRS ,avail exemption
and secure job somewhere else.
10. Where residential house has been provided by the
employer and put at the disposal of an employee , its
perquisites value is added to the salary income of the
employee whether the employee lives in it or not .If such
house is not intended to be used , it should be surrendered
before the income accrues to him to avoid tax on notional
income.
11.In case of an assesse intending to let out building ,plant
etc.. it is more beneficial from tax point of view , to let out
building along with plant , machinery and furniture . If so the
income will be assessed under the head ‘Profit and gain of
business or profession’ or ‘income from other source’ so that
the expenses including depreciation can be deducted from
income.
Tax proposals 2019-2020 at a glance for Individuals

 No tax on notional rent of second Self-occupied House under

“Income from House property” i.e. up to two self-occupied
house properties to be considered for exemption.
 Tax Rebate Limit under 87A increased from Rs. 3.5 lakhs to
Rs. 5 lakhs for taxpayers. The maximum limit of the tax rebate
increased to Rs.12,500 from the present limit of Rs. 2,500.
 TDS limit under Section 194A hiked from Rs 10,000 to Rs
40,000 on Post Office Savings and Bank Deposits.
 Standard Deduction for the salaried class increased from Rs
40,000 to Rs 50,000.
 Section 54 exemption now available on the second house
property, provided the capital gains is less than or equal to Rs.
2 crores – to be availed only once in a lifetime.