Tax Planning | PAPER IV – RETAIL BANKING & WEALTH MANAGEMENT | Module D: Wealth Management
Tax Planning
1. Classification of Tax Structure in India
India follows a dual tax structure comprising:
- Direct Taxes (e.g., Income Tax, Corporate Tax)
- Indirect Taxes (e.g., GST, Excise, Customs Duty)
2. Financial Year, Assessment Year & Previous Year
Financial Year (FY): Period from 1st April to 31st March when income is earned.
Assessment Year (AY): The year following the Financial Year when the income is assessed and taxed.
Previous Year: Same as Financial Year – the year in which income is earned.
3. Residential Status
The residential status determines the scope of taxable income. It is categorized into:
- Resident and Ordinarily Resident (ROR)
- Resident but Not Ordinarily Resident (RNOR)
- Non-Resident (NR)
4. Important Terms
- Gross Total Income: Aggregate income before deductions.
- Total Income: Gross total income minus deductions under Chapter VI-A.
- Exempt Income: Income not included in total income (e.g., agricultural income).
5. Heads of Income
- Income from Salary
- Income from House Property
- Profits and Gains of Business or Profession
- Capital Gains
- Income from Other Sources
6. Income Tax Slab Rates (FY 2021-22 / AY 2022-23)
Old Regime
- Up to ₹2.5 lakh – Nil
- ₹2.5 lakh – ₹5 lakh – 5%
- ₹5 lakh – ₹10 lakh – 20%
- Above ₹10 lakh – 30%
New Regime (Optional)
- Up to ₹2.5 lakh – Nil
- ₹2.5 lakh – ₹5 lakh – 5%
- ₹5 lakh – ₹7.5 lakh – 10%
- ₹7.5 lakh – ₹10 lakh – 15%
- ₹10 lakh – ₹12.5 lakh – 20%
- ₹12.5 lakh – ₹15 lakh – 25%
- Above ₹15 lakh – 30%
7. New vs Old Tax Regime: Example
Example: Mr. A earns ₹12,00,000 in FY 2021-22.
Under Old Regime (after ₹2 lakh deduction): Taxable income = ₹10,00,000 → Tax = ₹1,12,500
Under New Regime (no deductions): Tax = ₹1,25,000
Conclusion: Old regime is better if deductions are available.
8. Tax Slabs for Non-Individuals
- Domestic Companies: 25%-30%
- Firms and LLPs: 30%
- Co-operative Societies: Progressive rates or 22% optional
9. Tax-Saving Investment Products
- ELSS (Equity Linked Saving Scheme)
- PPF (Public Provident Fund)
- NSC (National Savings Certificate)
- Life Insurance Premium
- Principal Repayment on Home Loan
10. Estate Planning
Estate planning through Wills and Trusts can help minimize tax liabilities and ensure smoother transfer of wealth to heirs.
11. Capital Gains Tax
Short-Term: Taxed at 15% if equity shares held < 12 months.
Long-Term: Taxed at 10% for gains exceeding ₹1 lakh after indexation benefits.
10 Medium-Hard Mathematical Examples
- Compute tax liability for ₹9,50,000 under both regimes (assume ₹1,50,000 80C deductions).
- If a house is sold after 3 years for ₹60,00,000 with indexed cost of ₹40,00,000, calculate LTCG tax.
- Resident individual earning ₹14,00,000 with ₹2,00,000 deduction – compare tax under both regimes.
- Capital gain of ₹2,50,000 on equity shares after 18 months – calculate tax.
- Calculate tax on business income of ₹18,00,000 for a partnership firm.
- Mr. B earns ₹6,00,000, pays ₹20,000 LIC and ₹30,000 PPF – find final tax under old regime.
- If Mr. C is RNOR and has foreign income of ₹3,00,000 – is it taxable?
- Tax liability for ₹4,80,000 salary with ₹20,000 HRA deduction.
- Income from all sources is ₹7,20,000 with ₹80C = ₹1,50,000 and ₹50,000 NPS – compute tax.
- Firm with ₹25,00,000 profit – compute tax including 12% surcharge.
10 Multiple Choice Questions (MCQs)
- What is the Financial Year in India?
- a) Jan 1 – Dec 31
- b) Apr 1 – Mar 31
- c) Jul 1 – Jun 30
- d) Oct 1 – Sep 30
- Which of the following is not a head of income?
- a) Salary
- b) Agricultural Income
- c) Capital Gains
- d) Business or Profession
- Under New Regime, what is the tax rate for income between ₹7.5 lakh to ₹10 lakh?
- a) 10%
- b) 15%
- c) 20%
- d) 30%
- Which investment gives tax deduction under Section 80C?
- a) Fixed Deposit for 2 years
- b) Public Provident Fund
- c) Recurring Deposit
- d) Saving Bank Interest
- What is the maximum exemption under Section 80C?
- a) ₹1,00,000
- b) ₹1,50,000
- c) ₹2,00,000
- d) ₹2,50,000
- Who is a Non-Resident for tax purpose?
- a) Stayed 182 days or more in India
- b) Stayed < 182 days in India
- c) Stayed more than 240 days
- d) Stayed more than 365 days
- Which of these is NOT eligible for tax deduction?
- a) Life Insurance Premium
- b) NSC
- c) Tuition Fee
- d) Lottery Winnings
- Which regime allows more exemptions and deductions?
- a) Old Regime
- b) New Regime
- c) Both equal
- d) Depends on income
- Capital gain tax on equity held >12 months and gain >₹1 lakh is:
- a) 5%
- b) 15%
- c) 10%
- d) Nil
- Trusts used in estate planning can:
- a) Be taxed higher
- b) Avoid all tax
- c) Help reduce tax liability
- d) Cannot own assets
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