“You must pay taxes. But there’s no law that says you gotta leave a tip.” Morgan Stanley.
Legitimate tax planning is the rights of the taxpayers & can result in reduction in tax liabilities. Tax saved is also money earned and there is a legitimate way of planning it out. Proper tax planning can be done by using the benefits of eligible exemptions, permissible deductions, proper division and allowable diversion. However, all this should be done in a legal manner and taxpayers should not get indulged in tax evasion or tax avoidance. It is worthwhile to note the observation by Mumbai ITAT in the case of Michael E Desa Vs. ITO wherein it has observed as under:
“Minimisation of tax liability, as long as it is through legitimate tax planning and without using colourable devices, is not at all illegal; it is not even immoral as it is everybody’s duty to himself to manage his affairs properly within the framework of the law”
An illustrative list of a few common techniques of tax planning which can be used by the taxpayers are compiled hereunder. These are just a few concepts of tax planning and taxpayers can explore more and more options to save tax.
Deduction of Rs. 5,000/- towards preventive Health Check-up:
There is a deduction of Rs. 5000/- for preventive health check-up. This deduction is in addition to the deduction u/s 80D towards mediclaim policy. In view of the covid, awareness of health and increase in the facilities for medical testing coupled with home collection facilities, various taxpayers are incurring regular expenditure on preventive health checkup. Taxpayers should not forget to claim deduction of Rs. 5000/- towards such preventive health check-up.
Deduction towards Stamp Duty & Registration Charges: Taxpayers are well aware of the deduction available against principal & interest on housing loan. However, one deduction which is often ignored is the deduction available towards stamp duty & registration expenses incurred at the time of purchasing the house property. Subject to overall cap of Rs. 1.50 Lakh, taxpayers are eligible for deduction towards this expenses as well.
Not booking the loss on Mutual Funds & Shares: Booking the profit and deferring the loss is the part of human nature. However, every profit carries with it the incidence of tax. Taxpayers making investment in the share market & mutual funds may plan the transaction in such a way that the profit on such investment is also compensated by the loss (if any). This can be done by selling the loss making script on day one and purchasing back on the day two, so that the taxpayers can continue to hold the same script till its value rises significantly as per the taxpayer expectations. Taxpayers may further plan the transaction in such a way that the profit from equity shares and mutual funds is around Rs. 1 Lakh every year for tax optimization.
Planning for payment of LIC/PPF/ etc: Any single person cannot get more than Rs. 1.50 Lakh as deduction u/s 80C towards LIC/PPF etc. Still, there are instances wherein one person makes all the payments in the family. Plan it in such a way that everyone uses this payment gets divided amongst family members so as to avail the benefits of deduction optimally.
Purchasing House Property in the name of Single Person: Every individual taxpayer can claim deduction of Rs. 2 Lakh towards Interest on housing loan & Rs. 1.50 Lakh towards Principal Repayment of Housing Loan. It may be noted that the deduction is admissible only if the taxpayers own the house property and not otherwise. In case of a joint owner, the deduction can be claimed by all the joint owners individually. The high value property may be purchased by the taxpayers in joint names so that the deduction admissible u/s 80C & 24(b) can be claimed optimally by all the joint owners individually.
Not investing in National Pension Scheme (NPS): In addition to deduction of Rs. 1.50 Lakh U/s 80C, there is a deduction of Rs. 50,000/- for investment in NPS. Taxpayers are still not claiming this deduction. Instead of investment in FDR/Mutual funds, taxpayers may explore the possibility of making an investment of Rs. 50,000/- in NPS so as to claim deduction u/s 80CCD(1B).
Gifting the amount to Major Son/Daughter, etc: All income above Rs. 10 Lakh attracts a minimum tax rate of 31.20% under the old tax regime. It is followed by the impact of surcharge if income tax exceeds Rs. 50 Lakh. Such taxpayers may explore the possibility of tax & wealth planning by gifting the amount of the major son/daughter/ mother/father, etc. Taxpayers may note that a gift to only select few is subject to clubbing provision and not all. Such planning results saving tax by using the benefit of income slab & surcharge
These are just a few examples and illustrations to portray that the taxpayer can save tax by legally arranging its affairs in such a way that the tax impact is kept minimal. One should not evade tax but one should not stop the tax planning. It is worthwhile to read the observation of the Hon’ble Supreme Court in Mc Dowell & Company Limited vs The CTO as under:
“Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods”.