International Journal of Management and Social Sciences Research (IJMSSR) Volume 2, No. 5, May 2013
ISSN: 2319-4421
Income Tax Planning: A Study of Tax Saving Instruments Savita, Lecturer in Pt. Nakiram Sharma Government College, M. D. University, Rohtak Lokesh Gautam, Senior Manager, legal and Secretarial, Realtech Group, New Delhi
ABSTRACT Tax planning is an essential part of our financial planning. Efficient tax planning enables us to reduce our tax liability to the minimum. This is done by legitimately taking advantage of all tax exemptions, deductions rebates and allowances while ensuring that your investments are in line with their long-term goals. The purpose of the study is to find out the most suitable and popular tax saving instrument used to save tax and also to examine the amount saved by using that instrument. Over all findings reveals that the most adopted tax saving instrument is Life Insurance policy, which got the first rank in this study and the second most adopted tax saving instrument is Provident Fund.
Keywords Tax, Tax saving Instruments, Tax Planning, Tax Management, Tax Evasion and Tax Avoidance
TAX PLANNING: AN INTRODUCTION In other words all arrangements by which the tax is saved by ways and means, which comply with the legal obligation and requirements and are not colorable devices or tactics to meet the letters of law but not the sprite behind these, would constitute tax planning. Tax planning should not be done with an intent to defraud the revenue, All transactions entered into by an assessee could be legally correct, yet on the whole these transactions may be devised to defraud the revenue. All such devices where status is followed in strict words but actually spirit behind the statute is marred would be termed as colorable devices and they do not form part of the tax planning. All transactions in respects of tax planning must be in according with the true spirit of statute and should be correct in form and substance. The form and substance of a transaction is real test of any tax-planning device. The form of transaction, as it appears superficially and the real intention behind such transaction may remain concealed. Substance of a transaction refers to lifting the veil of legal documents and ascertaining the intention of parties behind the transaction. Tax planning is the arrangement of one’s affairs in such a manner that the tax planner may either reduce the incident of tax wholly or reduce it to maximum possible extent as may be permissible with in the framework of the taxation
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land. It does not amount to evasion of tax. It is an act of prudence and farsightedness on the part of the taxpayer who is entitle to reduce the burden of his tax liability to the maximum possible extent under the existing law. Tax planning ensures not only accruals of tax benefit with in the four corners of law, but it also ensures that the tax obligations are properly discharged to avoid penal provision. A. Tax Evasion And Tax Avoidance Tax Evasion: It refers to a situation where a person try to reduce his tax liability by deliberately suppressing the income or by inflating the expenditure showing the income lower than the actual income and resorting to various types of deliberate manipulations. An assessee guilty of tax evasion is punishable under the relevant law. Tax evasion may involve stating an untrue statement knowingly, submitting misleading documents, suppression of facts, not maintaining proper accounts of income earned (if required under the law) omission of material facts in assessments. An assessee, who dishonestly claims the benefit under the statute by making false statements, would be guilty of tax evasion. Tax avoidance: The line of demarcation between tax planning and tax avoidance is very thin and blurred. There could be element of mollified motive involved in the tax avoidance also. Any planning which, through done strictly according to legal requirements defeats the basic intention of the legislature behind the statute could be termed as instance of tax avoidance. It is usually done by adjusting the affair in such a manner the there is no infringement of taxation laws and b taking full advantage of the loopholes there in so as to attract the least incidence of tax. B.
Tax Planning Excludes Tax Planning is not tax evasion. It involves sensible planning of your income sources and investments. It is not tax evasion, which is illegal under Indian laws. Tax Planning is not just putting your money blindly into any 80C investments. Tax Planning is not difficult. Tax Planning is easy. It can be practiced by everyone and with a very little time commitment as long as one is organized with their finances.
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International Journal of Management and Social Sciences Research (IJMSSR) Volume 2, No. 5, May 2013
C. Types of Tax Planning The tax planning exercise ranges from devising a model for specific transaction as well as for systematic corporate planning. These are; Short and long range tax planning: Short range planning refers to year-to-year planning to achieve some specific or limited objective. For example, an individual assessee whose income is like to register unusual growth in a particular year as compared to the preceding year, may plan to subscribe to the PPF/NSC’s with in the prescribed limits in order to enjoy substantive tax relief. By investing in such a way, he is not making permanent commitment but is substantially saving in the tax Long range planning on the other hand involves entering in to activates, which may not pay off immediately, For example, when an assessee transfers his equity shares to his minor son he knows that the income from the shares will be clubbed with his own income, but clubbing would also cease after minor attains majority. Permissive tax planning: Permissive tax planning is tax planning under the express provisions of tax laws. Tax laws of our country offer many exemptions and incentives. Purposive Tax planning: Purposive tax planning is based on the measures, which circumvent the law. The permissive tax planning has the express sanction of the statute while the purposive tax planning does not carry such sanctions, For example, under section 60 to 65 of the income tax.1961 the income of the other persons is clubbed in the income of the assessee. If the assessee is in a position to plan in such a way that these provisions do not get attracted, such a plan would work in favor of the tax payer because it would increase his disposable resources. Such a tax plan could be termed as “Purposive Tax Planning”. D. Tax management Tax management is an internal part of the tax planning. It takes necessary precautions to comply with the legal formalities to avail the tax exemption/ deductions, rebates or relief as are contempt’s in the scheme of tax planning. Tax management plays a vital role in calming allowance, deductions and tax exemptions by complying with the required conditions. For example, Where an assessee follows mercantile system of accounting, the claim of expenses should be made, subject to the provisions of section 43B, on accrual bases, if the assessee fails to make such a claim, such expenses can not be deducted in subsequent years. Similarly, the specified deductions under section 80IA, section 80JJA, etc., cannot be allowed by the assessing officer suo motu. Tax management also protects an assessee against penalty and prosecution by discharging tax obligations in time. Thus, the study of tax planning is incomplete without tax management. Tax planning with out the study of tax
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management is like knowing the medicine with out knowing how to administer it.
2. THE POPULAR INVESTMENT OPTIONS PPF (with post offices/banks), statutory provident fund (deducted and paid by the employees). Life insurance premium (with the LIC or other private insurers). Unit-linked insurance (UTI & mutual funds). Equity-linked saving schemes. National Saving Certificates. Infrastructure bonds. Home loans.
3. TAX SAVING INSTRUMENTS Deduction under section 80C is allowed only to individual or HUF, up to a maximum limit of 1,00,000 Rs. and the deduction is allowed only when the amount has actually been paid by the assesseee. Following amount paid or deposited are allowed as deduction u/s 80C: Contribution / subscription to PPF, NSC, NSS, ULIP, ELSS Fixed Deposit with any schedule bank for at least 5 years Any sum deposited as five years’ time deposit in an account under the Post Office Time Deposit A. Equity Linked Saving Schemes ELSS is an instrument sold by mutual funds for the specific purpose of enabling taxpayers to save their taxes. The proceeds from ELSS are mostly invested in the stock market so that the investors get the benefit of appreciation in stock prices, thereby making the stock market work for investors. The tax deduction for ELSS is available under section 80C of the Income Tax Act 1961. B. Life and Medical Insurance Plans Life Insurance Policies have long been the most popular tax saving instruments among taxpayers. Insurance policies offer twin advantage for tax deductions on premium paid and insurance cover for the insurer and his family in the event of a financially debilitating event such as accident, death, etc. The premium paid on life insurance policies qualify for tax deductions under section 80C, subject to a maximum of Rs.1 lakh per annum. Most companies offering Life Insurance also offer medical insurance policies as well as pension plans which offer tax deduction under section 80D. Deduction is allowed to an individual/HUF for payment towards Medical Insurance Premium or to any
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International Journal of Management and Social Sciences Research (IJMSSR) Volume 2, No. 5, May 2013
contribution made to the central Government health Scheme by any mode other than cash. Maximum 15,000 (For insurance of individual, spouse, dependent children) or 20,000 in case of senior citizen, and Maximum 15,000 (For insurance of parents) or 20,000 if parents are senior citizen. C. Housing Loan Repayment of principal amount of loan taken for purchase/construction of residential house property from central/state Government, Bank, LIC, National Housing Bank or from employer (where employer is statutory corporation, public company, university, college, or local authority or co-operative society) under section 80C. Public Provident Fund: The contributions made to the Employees provident fund (EPF) and Public Provident Fund (PPF) are also eligible for tax deductions under section 80C.While the contribution paid to EPF and PPF by the employees are subject to the overall ceiling of Rs.1 Lakh under section 80C. D. National Savings Certificate: It can be bought at any post offices in the country. While there is no upper limit for investment, the tax deduction on NSC is available subject to overall limit of Rs.1 lakh under section 80C. E. Term Deposits and Bonds: Many of the commercial banks have fixed deposit schemes, which qualify for tax deductions. These deposits have a lock-in-period of five years. Investments in these deposits are subject to the overall ceiling limit of Rs.1 lakh per annum under section 80C. There are other specified expenses such as registration charges and stamp duty paid on house property, tuition fees for children’s education, among others, which qualify for deductions under section 80C. Under other sections,
expenses like conveyance allowance; food coupons etc. also qualify for deductions. There are also special deductions/concessions for senior and disabled tax payers.
4. RESEARCH METHODOLOGY Research methodology is a way to systematically solve the problem. The study of the research design is descriptive in nature because it throws light on relationship between age group and income level on tax saving amount. Research methodology for the present study is as follows: A. Objectives Of The Study The purpose of the study is to find out the most suitable tax saving instrument used to save tax and also to examine the amount saved by using that instrument. B. Sample Design The present study is based on convenience-cum-stratified sampling. Three heads of occupation have been taken as a sample and two sub-occupations have been identified from heads shown in table N0. 1. C. Sample Unit The scope of the tax includes the following areas, (a). Business class (b). Service class (c). Others, like commission agents The persons includes in this study are of different age groups and various income groups. The area of the study covers Haryana and Delhi/NCR, but for the purpose of collecting primary information form respondents the study has been limited to three heads of income tax. From 2 heads, 2 sub occupations have been selected. While selecting three heads enough care has been taken to see that this sample represents the whole of universe.
Heads
Table 1- Sample Unit Occupation
Sample
Salary
Teachers
15
Railway Employees
15
Shopkeepers
10
Advocates
10
Business & Profession Others
Commission Agents Total Source – based on primary data On the basis of above-mentioned five occupations selected from three main heads. The total sample size of respondents is 70, which constitutes 15 teachers, 15
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ISSN: 2319-4421
20 70
railway employees, 10 shopkeepers, 10 Advocates and 20 commission Agents.
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D.
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Analysis of the study General information: SEX
No.of respondents
60
53
50 40 30
Series1 17
20 10 0 male
female
Figure 1. Gender In the given figure X-axis represent Gender of respondents while Y-axis represents the total number of respondents. The total numbers of respondents are 70 in which there are
53 male & 17 female respondents. The percentage of male & female respondents is 75.8 % & 24.2 % respectively. location
no.of respondents
location 40 35
35
35
30 25 20 15 10 5 0 haryana
delhi/ncr categories
Figure 2. Geographical distribution In the given figure X-axis represent the Geographical distribution of study respondents while Y-axis represents the total number of respondents. The locations of the
respondents are, 35 from Haryana & 35 from Delhi/NCR having an equal percentage of 50% each.
Occupations
No.of respondent
25 20 20 15
15
15 10
10
shopkeepers
Advocates
10 5 0 Teachers
Railway employees
Commission Agents
sample category
Figure 3. Occupation
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International Journal of Management and Social Sciences Research (IJMSSR) Volume 2, No. 5, May 2013
In the given table X-axis represent the category of occupations respondents while Y-axis represents the total number of respondents. The total respondents are further divided in to six classes, which includes 15 teachers
25
(21.4%), 15 railway employees (21.4%), 10 shopkeepers (14.2%), 10 Advocates (14.2%), 20 Commission agents (28.4%).
21
20
No. of respondent
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18
17
20-30
15
11
30-40 40-50
10
50-60 3
5
60-70
0 1 Age
Figure 4. Age Group In the given figure No. 4 X-axis represent the age groups of respondents while Y-axis represents the total Number of respondents. The age of the respondents are classified in to five groups, In which 17 respondents (24.2%) are from the age group of 20-30, 21 respondents (30%) are from the age group of 30-40, 11 respondents (15.71%) are from the age group of 40-50, 18 respondents (25.7%) are
from the age group of 50-60, 3 respondents (4.2%) are from the age group of 60-70. Income Group Data was collected from various professionals, which belongs with different Income group. Following figure shows Income wise description of respondentsIncome group
30
30
30 25 20 no.of 15 respondent 10
<2 lakhs 2-5 lakhs 7
5-10 lakhs 3
5
<10 lakhs
0 1 income
Figure 5. Income Group In the given figure No. 5 X-axis represent the income groups of respondents while Y-axis represents the total number of respondents. The respondents below the income 2 lakh are 30 (42.8%), between the incomes of 2 to 5 lakh
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are 30 (42.8%), between the incomes of 5 to 10 lakh are 7 (10%) and the income more then 10 lakh are 3 (4.28%).
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International Journal of Management and Social Sciences Research (IJMSSR) Volume 2, No. 5, May 2013
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Investment in Tax Saving Instruments Tax saving investment
no. of respondents
25
23 20
20
18
<10,000 10,000-30,000
15
30,000-50,000 10
50,000-70,000
6 5
70,000-90,000
3
0 1 Tax saving amount in Rs.
Figure 6. Amount invest in Tax saving Investment In the given figure No. 6 X-axis represent the tax saving amount of respondents while Y-axis represents the total number of respondent. There are 23 respondents (32.8%), who save less then Rs. 10,000, 18 respondents (25.7%), who save between Rs. 10,000 to 30,000, 3 respondents (4.2%), who save between Rs. 30,000 to 50,000, 6 respondents (8.57%), who save between Rs. 50,000 to 70,000, and 20 respondents (28.57%), who save between Rs. 70,000 to 90,000.
50
no.of respondents
45
Long term Investment In tax Saving Instrument In the given figure No. 7 X-axis represent the investment in a long-term tax saving instruments while Y-axis represents the total number of respondent. There are 44 respondents (62.8%), who ensures that their investment in tax saving instruments are aligned to their long term financial goals, 8 respondents (11.4%) are saying no and 18 respondents (25.8%) don’t know about this.
44
40 35 30 25 18
20 15 8
10 5 0 yes
no
don't know
investment in a long term tax saving instruments
Figure 7. Long term Investment In TSI
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Preferred Tax Saving Instruments Table 2. Preferred Tax saving Instruments
Source- based on primary data According to these responses, rank is given to various tax saving instruments. The respondents preferred life insurance as the best tax saving instrument and ranked as One. Provident fund is the IInd highest ranked tax saving instrument while respondents ranked Fixed Deposits as IIIrd. Home Loan and Education Loan are the IVth highest
preferred tax saving instruments. National Saving Certificates ranked as Vth . Respondents preferred Unit Linked Plans as the VIth and Health Insurance as VIIth . Equity Linked Saving Scheme and Infra Bonds are ranked as VIIIth and IXth respectively.
Cross tabulation analysis between Age group/ Income group and Tax Saving Instruments Table 3-Analysis of tax saving amount with various age groups Tax Saving <10 10-30 30-50 50-70 amount (in Thousands) Age (In years) 11* 4 1 0 20-30
70-90
1
30-40
4
7*
0
4
6
40-50
3
3
1
0
4*
50-60
3
4
1
2
8*
60-70
2*
0
0
0
1
Source-based on primary data
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* Mode The rows in table 3 represent age groups while the columns represent tax saving amount. There are 11 respondents in the 20 to 30 age group, who saves less then Rs. 10,000 and so on. There are 4 respondents in the 30 to 40 age group, who saves between Rs. 10,000 to 30,000
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and so on. There are 3 respondents in the 40 to 50 age group, who saves between Rs. 30,000 to 50,000 and so on. There are 3 respondents in the 50 to 60 age group, who saves between Rs. 50,000 to 70,000 and so on. There are 2 respondents in the 60 to 70 age group, who saves between Rs. 70,000 to 90,000 and so on.
Table 4- Analysis of tax saving amount with various Income groups Tax Saving amount (in thousands)
<10
10-30
30-50
50-70
70-90
Income (in lakhs) <2
18*
11
0
0
1
2-5
5
7
2
5
11*
5-10
0
0
1
1
5*
> 10
0
0
0
0
3*
Source-based on primary data * Mode The rows represent income groups while the columns represent tax saving amount. There are 18 respondents in the income group of less then Rs. 2 lakhs, who saves less then Rs. 10,000 and so on. There are 5 respondents in the income group of Rs. 2 lakh to 5 lakhs, who saves between Rs. 10,000 to 30,000 and so on. There are 0 respondent in the income group of Rs. 5 to 10 lakh, who saves between Rs. 30,000 to 50,000 and so on. There are 0 respondent in the income group of more than Rs. 10 lakhs, who saves between Rs. 50,000 to 70,000 and so on.
5. FINDING AND SUGGESTIONS (a). On the bases of this study, the respondents rank various tax saving instruments according to their priority of saving tax. The most adopted tax saving instrument is Life Insurance policy, which got the first rank in this study. The second most adopted tax saving instrument is Provident Fund. Further, the third choice is Tax Saving Fixed Deposits. After that Home/Education Loans, National Saving certificates, Unit Linked Insurance Plans, Health Insurance Plans and Equity Linked Saving Schemes respectively. The instrument, which is least adopted, as tax saving instrument is Infrastructure Bonds, which got the ninth rank in this study. (b). On an analysis of tax saving amount with various age groups, it is found that, between the age group of 20 to
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30 and 60 to 70, the tax saving amount is less then Rs. 10,000, which shows that saving is very low in young age and old age. Where as, between the age group of 30 to 40, the tax saving amount increases between Rs. 10,000 to 30,000. Further, the tax saving amount is between Rs. 70,000 to 90,000 of the age groups between 40 to50 and 50 to 60, which shows the highest income saved of this study. (c). On an analysis of tax saving amount with various income groups, it is found that with the income of less then Rs. 2 lakhs, the tax saving amount is less then Rs. 10,000. Further, with the increase in income such as between Rs. 2 to 5 lakhs, 5 to 10 lakhs and more than ten lakhs, the tax saving amount is between Rs. 70,000 to 90,000. Which means that higher the income, higher the savings.
6. BIBLIOGRAPHY [1.] Banks, J., Andrew Dilnot and Sarah Tanner (1997): “Taxing Household Saving: What Role for the New Individual Savings Account?” Commentary No. 66, London: The Institute for Fiscal Studies. [2.] Capital Tax Group (1989): “Neutrality in the Taxation of Savings: An Extended Role for PEPs”, Commentary No. 17, London: Institute for Fiscal Studies. [3.] Chelliah, Raja J. (1996): “An Agenda for
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[4.]
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[6.]
[7.]
[8.] [9.] [10.]
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Comprehensive Tax Reform” Towards sustainable Growth- Essays in Fiscal and Financial Sector Reforms In India, Oxford University Press, New Delhi. Chelliah, Raja J. and R. Kavita Rao (2001): “Rational Ways of Increasing Tax Revenues in India” presented in World Bank Conference Fiscal Policies to Accelerate Economic Growth, New Delhi, May 21-22. Dr. Ahuja, Girish and Dr. Gupta, Ravi. (2007): “Systematic approach to Income Tax and Central Sales Tax” Book, Bharat Law House Pvt. Ltd. Publication, New Delhi. Lal, B.B and Vashisht, N. (2008): “Direct Taxes, Income Tax, Wealth Tax and Tax planning” Book, Pearson Education, New Delhi. Planning Commission, Government of India (2001): “Report of the Advisory Group on Tax Policy and Tax Administration for the Tenth Plan”, New Delhi. Dornbusch, R., Fischer, S., Startz R. (2004). Macroeconomics 9th Ed. New York: McGraw-Hill. Romer, D. (2001). Advanced macroeconomics (2nd Ed). New York: McGraw-Hill. Warner, KE. (1999). The psychology of saving. Cheltenham: Edward Elgar Publishing Limited.
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