Category Archives: Tax Planning and Investments

Conflicting Legally: Tax Evasion, Tax Avoidance and Tax Planning

Tax Evasion, Tax Avoidance and Tax Planning are three legally conflicting tax terms which keep on creating confusions time and again in the minds of tax payers.

The last quarter of the year is always about tax planning and this is also the time when we are filled up practically with all kinds of tax terms and tax related confusions. The above mentioned terms hold great importance for understanding tax planning and tax management and that is why it is significant that we learn the difference in Tax Evasion, Tax Avoidance and Tax Planning.

We need experts to talk about and explain the basics so that we can take prudent decisions and it is also very important to understand tax related legal parlance for making the right investment decisions.
Let us understand the meaning and comparison between the terms which forms the basis of Legal provisions in Indian Tax laws. i.e. Tax Evasion, Tax Avoidance and Tax Planning.

TAX EVASION

It refers to a situation where a person tries 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 laws. Tax evasion may involve stating an untrue statement knowingly, submitting misleading documents, suppression of facts in assessments. An assessee who dishonestly claims the benefit under the statute by making false statements, would be guilty of tax evasion.

For example, submitting of false financial statements, claiming false exemptions on the basis of fake documents, not reporting correct income and investing in various tax heaven countries in order to reduce there tax liabilities in India.

TAX AVOIDANCE

The line of demarcation between tax planning and tax avoidance is very thin and blurred. There could be elements of malafide motive involved in tax avoidance also. Any planning which, though done strictly according to legal requirements defeats the basic intent of Legislature behind the statute could be termed as instance of tax avoidance. It is usually done by adjusting the affairs in such a manner that there is no infringement of taxation laws and by taking full advantage of the loopholes therein so as to attract the least incidence of tax. Earlier tax avoidance was considered completely legitimate, but at present it may be illegitimate in certain situations.

For example, entering into transactions for the purpose of avoidance of taxes in order to defeat the intent of the legislation, such as forming of shell companies outside India to avoid tax here.

TAX PLANNING

It means arranging the financial activities in such a way that maximum tax benefits are enjoyed by making use of all beneficial provisions in the tax laws which entitle the assesse to get certain rebates and reliefs. This is permitted and not frowned upon by law. Thus, tax planning would imply compliance with the taxation provisions in such a manner that full advantage is taken of all tax exemptions, deductions, concessions, rebates and reliefs permissible under the Income-tax Act so that the tax incidence is the least. Tax planning can neither be equated to tax evasion nor to tax avoidance with reference to a company, it is the scientific planning of the company’s operations in such a way so as to attract minimum liability to tax or postponement or for the matter of deferment of the tax liability for the subsequent period by availing various incentives, concessions, allowances, rebates and relief’s provided for in the tax laws. They are meant to be availed of and they have certain clear objectives to achieve. Tax planning may, therefore, be regarded as a method of intelligent application of expert knowledge of planning corporate affairs with a view to securing consciously provided tax benefits on the basis of the national priorities in consonance with the interests of the state and the public at large.

For Example, taking benefits of deductions provided specifically under section 80C of the Income tax Act, claiming exemptions, investing in Special Economic Zones (SEZs), etc.

At a Glance Comparison:

Tax EvasionTax AvoidanceTax Planning
It is done by adopting dishonest means like falsification of accounts, concealment of income, etc.It is done in such a manner by which the tax liability is avoided by the use of artifice or device, defeating the basic intent of the legislature.It is done by availing maximum benefit of deductions, exemptions, rebates, etc. which are expressly provided by the government.
It is unlawful, unethical and illegal.It takes advantages of loopholes of law.It is acceptable to the judiciaries.
If attracts heavy penalties.It can only be curbed by amendments and circulars as is quite difficult to prove in court of law.It is justifiable and a rewarding concept for professionals.

We chose to share this post now, to help you with the upcoming tax season. For more clarity and to seek investment advice in pursuit of tax planning and tax saving, feel free to write to us, contact@sbsfin.com

Tax Planning through Deductions Under Section 80C

All of us engage in some economic activity and work hard to make a living. But as you start doing so you tend to attract the attention of the Income Tax Department, as they too are doing their task of taxing your income, as you earn. Our Government earns its revenue from the direct and indirect taxes we pay. Without which they will not be able to spend on infrastructure, education, health care etc.

And thus as responsible citizens it’s our duty to pay our taxes on time and also as we work hard to make a living, it becomes imperative for us to work a little more harder and smarter to save our taxes (the legal way-Government has given us enough incentives to save on taxes and invest in order to create wealth for ourselves ), so that it can help us make our dreams come true.

This is the time of the year when you start getting mails and calls from your Human Resource Department, a department you thought did not exist 😉 The threatening mails and calls make you scramble here and there.The task you’ve been avoiding now stares at you. It’s tax saving time and your deadline is approaching.

Amazing coincidence, your Banker happens to call just then. Luck, by chance. And you find yourself signing a new policy document. One more policy to keep with the several others you already own. But did you know that there are several other—non-insurance—products that can get the same tax benefit that an insurance policy does. Even within insurance, there are plans that get tax deduction and work better as a life cover. But these remain the financial world’s best kept secrets.

Here’s a run-down of products that get you the Rs1.5 lakh deduction u/s of 80 C of the Income Tax Act 1961.(Under section 80C, a deduction of Rs 1,50,000 can be claimed from your total income. In simple terms, you can reduce up to Rs 1,50,000 from your total taxable income through section 80C. This deduction is allowed to an Individual or a HUF?

Zero Risk Products for you Tax Planning

These carries either a government guarantee or have a fixed interest payout. The first two products should form the core of your 80C investments. And if you exhaust the entire limit in this, no need to buy more.

1. Employees’ Provident Fund (EPF): The first scheme that you get to buy the minute you begin work as an employee. Under this,12% of your basic (including dearness allowance and retaining allowance, if any) goes to this fund and your employer matches this by 12% of his contribution. From your employer’s contribution, 8.33% goes towards the Employees’ Pension Scheme (EPS) and 3.67% to EPF.

PF is automatically deducted from your salary. Both you and your employer contribute to it. While employer’s contribution is exempt from tax, your contribution is counted towards section 80 C investments.

Return:8.65%
Duration: Working Life
Safety: Zero Risk

2. Public Provident Fund (PPF): A 15-year cumulative recurring deposit that is fairly illiquid and is good to use as a long-term corpus building tool. Risk- and tax-free today, maximize your contribution to this.

Return 8.7%
Duration 15 years
Safety: Zero risk

3. National Savings Certificate (NSC): NSC is a tax-saving instrument with a maturity period of five years. A person can purchase an NSC for as low as Rs 100. Any investments in NSC are eligible for deduction under Section 80C. At present, the interest rate is 8.10 per cent p.a. This interest is compounded half yearly and is taxable. However, this being a cumulative scheme (i.e., interest is not paid to the investor but instead accumulates in the account), each year’s interest is considered reinvested in the NSC.  One of the preferred tax planning tool being recommended by financial advisors.

4. Fixed deposits for a duration of five years with banks and post offices. Though not very popular but these are mostly picked in the urgent tax planning schemes for people who do not set timely financial goals.

5. Senior Citizens Savings Scheme (SCSS): This scheme, as the name suggests, is meant only for senior citizens.

Any individual in the 60 or above age group can open an account under this scheme. An individual above 55 but less than 60, and having retired under a Voluntary Retirement Scheme or a Special Voluntary Retirement Scheme, can also open an account under this scheme, but such an account must be opened within three months of the retirement date.

If you are retired defense personnel, then you can open this account without any age limit, provided you fulfill other specified conditions.

Any investment in this account would be eligible as deduction under Section 80C. The current annual rate of interest offered under this scheme is 8.6 per cent payable quarterly. Please note that the interest is payable quarterly instead of compounded quarterly. Thus, unclaimed interest on these deposits won’t earn any further interest.

6. Sukanya Samriddhi Account: In this scheme, you can open an account on behalf of your minor daughter. Any amount deposited in this account would be eligible for deduction under Section 80C. Further, this account can be opened for a maximum of two girls and in case of twins this facility will be extended to the third child as well.

The amount has to be deposited in this account for 15 years. The account will be mature after 21 years, which means that you don’t have to deposit anything between the 16th and 21st year.

The minimum annual deposit is Rs. 1000, which can go up to Rs. 150000.

Interest rates on the deposit keep on changing every year. For FY2014-15 it was 9.1 per cent per annum, for FY2015-16 it was 9.2 per cent p.a. and for FY2016-17 it is 8.6 per cent p.a. The interest earned here is also tax-free.

7. Life Insurance Premiums Any amount that you pay towards life insurance premium for yourself, your spouse or your children can also be included in Section 80C deduction. Please note that the premium paid by you for your parents (father/ mother/ both) or your in-laws is not eligible for deduction under Section 80C. If you are paying premium for more than one insurance policy, all the premiums can be included.

Market-linked products

8. Equity-linked savings schemes (ELSS): These are diversified equity mutual funds that allow investors with risk taking ability to target a higher return. You are locked into the investment for three years, but the long-term capital gains are zero tax. You can choose a lump sum investment route or a systematic investment plan.

This is one of the best ways to grow your money and enjoy tax benefit simultaneously as the return generated by ELSS is much more than those generated by other investment products.

9. Unit linked Insurance Plan (ULIP) An insurance product which covers life insurance and also provides the benefits of equity investments, ULIPs have attracted the attention of investors and tax-savers because of their multiple advantages -life cover, tax-saving and also helping you grow your money by giving decent returns in the long-term.

10. New Pension System (NPS): This is relatively new, market linked vehicle for those who do not have an EPF facility to target long-term retirement planning.

Other Deductions

Tuition fee: School fees of up to two kids. This is one deduction which will make you feel good about having kids. Pay by cheque and keep the receipts to file along with your return.

Home loan: The Equated Monthly Installment (EMI) that you pay to repay your home loan consists of two components – Principal and Interest. The principal qualifies for deduction under Section 80C. Even the interest can save you significant income tax, but that would be under Section 24 and section 80EE of the Income Tax Act.

So if you have an outstanding home loan in your name, then the repayment of the principal amount made by you in a financial year can be claimed as deduction under Section 80C and you need not invest in other products specifically to avail tax benefits.

Further, any payment made to development authorities like Delhi Development Authority (DDA) in order to purchase a house (which has been allotted to you in a scheme made in this regard) also qualifies as deduction under section 80C.

“All men make mistakes, but only wise men learn from their mistakes.”- Sir Winston Churchill. The above proverb is very much relevant to our daily lives – be it handling finances or even in
any other facets of life.

Moreover, the famous author John C. Maxwell has also quoted “A man must be big enough to admit his mistakes, smart enough to profit from them, and strong enough to correct them.” But again this is conveniently forgotten by most, which often leads to failure to learn from mistakes, the arrogance to admit it and which thus leads you to repeat the same mistakes again.

While undertaking your tax planning exercise too, you tend to repeat the same mistake of waiting till the eleventh hour and are arrogant enough to admit it. As the financial year draws to a close, we all start feeling the heat and realize that yes, now we have to invest in order to save tax. But have you ever wondered whether it is the prudent way for tax planning?

Remember, waiting till the eleventh hour to undertake your tax planning exercise will often drive it towards mere “tax saving” rather than “tax planning”; which in our opinion is a sub optimal way to undertake a tax planning exercise.

Unlike “tax saving” which is generally done through investments in tax saving instruments/products, under “tax planning” we take into consideration one’s larger financial plan after accounting for one’s age, financial goals, ability to take risk and investment horizon (including nearness to financial goals). And by adapting to such a method of “tax planning”, you not only ensure long-term wealth creation but also protection of capital.

Hence, please remember to commence your “tax planning” exercise well in advance by complementing it with your overall investment planning exercise.

Above mentioned are few options on investments under section 80C. However, which one applies best to you depends on your financial goals and investment plan. If you find any of the mentioned products/schemes beneficial for your tax planning give us a shout and we are happy to help. You can write to contact@sbsfin.com

Source: Economic Times, Mint, PersonalFn