The Tax Planning – 4 Great Ways to reduce your Tax burden substantially!

Introduction

Tax planning is an art of reducing the tax burden legally. People generally understand tax planning as an illicit tax measure to reduce tax burden. However, this is not the case. Reducing tax illegally is known as tax avoidance.

An ethical tax planning is an art or professional knowledge to reduce the tax within the parameters of law. All the tax planning’s are important and independent. However, they are case specific and should be taken care off while filing the Income Tax Return (ITR) in India.

Hence, we will not waste your time anymore and proceed to the 4 great tax planning’s.

#Tax planning 1 - Capital gain tax is not applicable if cost is not ascertainable:

Let us consider a situation, if you have piece of land on which various trees are grown full size and you sell the trees and land separately. Now in case of land, the cost of land is ascertainable and capital gain can be easily calculated as we have the important figures, Sales vale and cost of acquisition.

However, in case of trees, the capital gain tax cannot be calculated at all, since we cannot ascertain the cost of trees self grown. In other words, where cost cannot be measured properly, the tax cannot be calculated and hence, capital gain is not applicable.

Other examples are calves where also cost of acquisition could not be ascertained and hence capital gain is not applicable at all.

Principle from the above example:

Therefore, where cost of capital asset cannot be determined, the capital gain cannot be calculated, this is as per the landmark judgment from the Supreme Court of India in case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC).

#Tax planning 2 – Reverse Mortgage Loan:

This is more off a facility than a tax planning however it is not very popular among the media and the banking companies. However, its utility is commanding.

Reverse Mortgage Loan is a facility for senior citizens those who had no income but own a property. Under this scheme, the senior citizens, who owns a property go to the bank. Bank mortgage the property and sanction the loan equivalent to 80% of the property value.

Under this scheme, bank either gives loan in Monthly installment, quarterly, annually or in lumpsum. Any amount received under this scheme is exempt from tax.

Further, the applicant need not repay this amount during his lifetime. After his death, the bank shall give the option to his legal heirs to repay the amount and take the property back or the bank will sell the property and offer the balance amount to legal heirs after setting off the loan amount.

"The scheme of Reverse Mortgage was introduced to protect the senior citizens. Hence, kindly share this article to aware the senior citizen about their rights."

#Tax planning 3 – Amount paid in excess of his credit balance to a retiring partner:

This tax planning had taken birth when a retiring partner takes the amount more than due to him. Let us understand it with an example: Suppose Mr. A is retiring from the firm and his share was Rs.1 Cr. However, he gets Rs.2 Cr from the firm. Firm paid him extra for the honor of the long lasting contribution made by that person.

As per the court, this extra 1 crore is not taxable at all, as it becomes the Capital Receipt in the hands of the retiring partner. Now, this planning saves him atleast Rs.30 lakh.

The Supreme court delivered the judgment, in case of CIT v. R. Lingmallu Raghukumar [2001] 247 ITR 801 (SC).

#Tax planning 4 – Gifting residential house to a family member before Transfer of Long term Capital Gain

This tax planning is also very beautifully designed. Suppose a person has two houses and a land. Now, he wants to sell the land. But if he sells the land, then he will be liable to tax on the profit earned by selling the land. To save tax, a person can invest the proceeds of the land into a residential property. However, this also comes up with a condition.

The condition is that the person should not own more than one residential property. In our case, he owns two residential property and therefore not eligible to claim exemption.

Now, the tax planning comes into picture. To become eligible for exemption, the person shall gift the house to one of his son. Now, the property received from relative is exempt from tax. Further, that person shall now own only one property and hence becomes eligible to claim the exemption under income tax.

Conclusion – This is not the end

This is not the end and only a beginning. We shall come back with another article on legitimate tax planning to help you reduce your tax liability legally. Further, you must make sure, that you don’t forget the above points while filing your Income Tax Return (ITR) in India.