Different Aspects of Tax Planning: formula sheet

Key formulas

Tax planning

Legal + within letter and spirit of law + genuine commercial purpose

Done in advance and openly, to use deductions, exemptions and lower rates.

Tax management

Compliance: books + TDS + advance tax + returns + assessments + appeals

Aims at avoiding interest, penalty and prosecution.

Tax avoidance

Follows letter of law + defeats its purpose (often artificial or no real business reason)

Not a crime by itself, but exposed to anti-avoidance rules.

Tax evasion

Illegal + deliberate concealment, falsification or suppression

Attracts penalty and prosecution.

Treaty purpose (section 159(3)(b))

Avoid double taxation without creating opportunities for non-taxation or reduced taxation through evasion or avoidance, including treaty-shopping

Shows the statute's stance against abusive arrangements.

Secondary adjustment (section 170)

Primary adjustment of ₹1 crore or more → secondary adjustment; unrepatriated excess money treated as advance; or option to pay additional tax at 18%

A statutory example of a rule that stops profit shifting.

Section 140 deduction

Deduction = 100% × profits and gains derived from the eligible business, for any 3 consecutive tax years out of 10 years from the year of incorporation

Claimed at the assessee's option. Profits of the eligible business only, and the deduction cannot exceed those profits.

Eligible start-up

Company or LLP + incorporated on or after 1 April 2016 but before 1 April 2030 + turnover not above ₹300 crore + certificate from the Inter-Ministerial Board

The turnover limit applies in the tax year relevant to the year of claim. Sole proprietors, partnership firms and others do not qualify.

Eligible business

Innovation, development or improvement of products, processes or services, or a scalable business model with high potential for employment generation or wealth creation

The start-up must be engaged in this business.

Conditions on formation

Not formed by splitting up or reconstruction of an existing business; not formed by transfer of previously used plant or machinery

Previously used plant transferred is ignored if its value is within 20% of the total value of plant and machinery used in the business. Imported plant used only abroad by another person, never used in India and with no depreciation allowed, is not treated as previously used.

Transfer between businesses

Goods or services transferred between the eligible business and another business of the assessee are taken at market value

This stops profit shifting into the deduction-eligible business. For specified domestic transactions, arm's length price applies.

No double deduction

Profits allowed under section 140 cannot be deducted again under other provisions of Part C of the Chapter

Total deduction cannot exceed the profits of the eligible business.

Audit condition

Accounts audited and audit report in prescribed form furnished by the specified date under section 63

Without this, the deduction is not admissible.

Post-tax cost of debt

Kd (post-tax) = Interest rate × (1 − tax rate)

Applies when the company has taxable profit to absorb the interest. With losses, the saving is deferred.

Tax saving on interest

Tax saving = Interest × tax rate

Use the rate given in the question, including surcharge and cess if stated.

Earnings per share

EPS = (EBIT − Interest) × (1 − t) ÷ Number of equity shares

Use to compare financing plans. Preference dividend, if any, is deducted after tax.

Net dividend in shareholder's hand

Net dividend = Dividend × (1 − shareholder's tax rate)

Dividend from a domestic company is taxed at the shareholder's own rate.

Bonus shares: cost and holding period

Cost of bonus shares = Nil; holding period starts from date of allotment

Original shares keep their original cost and holding period.

Capital gain on sale of shares

Gain = Sale price − Cost of acquisition (− transfer expenses)

Whether the gain is short-term or long-term depends on the holding period and the type of asset.

After-tax cost of a deductible expense

Net cost = Expense × (1 − t)

t is the effective tax rate as a decimal. Use for rent, repairs, interest, wages.

After-tax value of a taxable receipt

Net receipt = Receipt × (1 − t)

Applies to sale proceeds and taxable export incentives (section 26(2)(e)).

Tax shield on depreciation

Tax saving = Depreciation × t

Depreciation is non-cash. Only the tax saving is a cash flow.

Net cash cost of buying

Purchase price − PV of (Depreciation × t) − PV of after-tax salvage

Compare with the present value of after-tax lease rentals. Choose the lower. Add the interest tax shield only if the discount rate is not already the after-tax cost of debt; otherwise do not count interest again.

Net cash cost of leasing

PV of Lease rental × (1 − t)

Discount at the after-tax cost of borrowing if not stated.

Shutdown test

Continue if Contribution > Avoidable fixed costs

The test is contribution against avoidable fixed costs. Applying the same (1 − t) to both sides gives the same answer after tax. Unavoidable fixed costs are ignored. Tax on any loss depends on the set-off and carry-forward rules.

Amalgamation loss transfer

Loss of amalgamating company = deemed loss of amalgamated company for the tax year of amalgamation

Applies only to the cases listed in section 116(1) and only if section 116(4) conditions are met.

Amalgamating company conditions

Business run ≥ 3 years; ≥ ¾ of book value of fixed assets held 2 years before amalgamation, held continuously till amalgamation

Both limbs must be satisfied. Section 116(4)(a).

Amalgamated company conditions

Hold ≥ ¾ of book value of assets acquired for ≥ 5 years; continue the business ≥ 5 years; meet prescribed conditions

Failure makes the set-off made earlier taxable in the year of default (section 116(5)).

Demerger loss: directly relatable

Loss/depreciation directly relatable to transferred undertaking → resulting company

Section 116(6)(a).

Demerger loss: not directly relatable

Apportion in the ratio of assets retained : assets transferred

Section 116(6)(b). The share goes to the demerged or resulting company accordingly.

Carry forward cap

Inherited loss carried forward for not more than 8 tax years after the year the loss was first computed for the original predecessor

Section 116(12), for amalgamations or reorganisations effected on or after 1 April 2025.

SEZ unit deduction (section 144)

Deduction = amount calculated as per section 10AA of the 1961 Act, for the years that section would have allowed

Entrepreneur under the SEZ Act, 2005 who begins to manufacture, produce or provide services. Not a fresh formula.

OBU and IFSC deduction (section 147(1))

Deduction = 100% × qualifying income under section 147(3)

Assessee: scheduled bank or foreign bank with an OBU in an SEZ, or an IFSC unit.

Period for OBU (section 147(2)(a))

20 consecutive tax years from the relevant tax year

Plus 10 more years from 1 April 2026 if the tenth year of section 80LA deduction ended on 31 March 2025.

Period for IFSC unit (section 147(2)(b))

20 consecutive tax years out of 25 years from the relevant tax year, at the assessee's option

Earlier rule was 10 out of 15 years.

Filing conditions (section 147(4))

Accountant's report in prescribed form + copy of permission or registration, filed with the return

Permission under section 23(1)(a) of the Banking Regulation Act, 1949, or permission or registration under the IFSCA Act, 2019.

New unit anti-splitting rule (section 147(5))

Unit starting on or after 1 April 2026 must not be formed by splitting up, reconstruction, reorganisation or transfer of an existing Indian business

Otherwise no deduction.

Export incentive timing (section 278(2))

Taxable in the tax year when reasonable certainty of realisation is achieved

Applies to escalation claims and export incentives.

Default regime slabs (Section 202(1))

Up to ₹4,00,000: Nil | ₹4,00,001-8,00,000: 5% | ₹8,00,001-12,00,000: 10% | ₹12,00,001-16,00,000: 15% | ₹16,00,001-20,00,000: 20% | ₹20,00,001-24,00,000: 25% | Above ₹24,00,000: 30%

Applies to individuals, HUFs, AOPs (not co-operative societies), BOIs and certain artificial juridical persons unless the option under Section 202(4) is exercised. Surcharge, cess and any rebate are separate; apply them only if the question gives them.

Restrictions in the default regime (Section 202(2))

Total income computed without the listed exemptions and deductions; Chapter VIII deductions are barred except those under sections 124(1), 124(2), 125(2) and 146, which remain allowed; no set-off of house property loss against other heads; no set-off of carried-forward loss or depreciation attributable to the barred deductions

Also no exemption for allowances or perquisites provided under any other law. Every other Chapter VIII deduction is barred. Schedule III items 12 or 13 are barred other than those as may be prescribed. Section 202(3) deems such loss and depreciation to be fully given effect and not allowable later.

Option timing for a person with business or profession income (Section 202(4)(a))

Exercise on or before the due date under section 263(1); applies to later years; withdrawal allowed only once; after that, never eligible again unless business income ceases

If business income ceases, the clause (b) option becomes available.

Option timing for a person without business income (Section 202(4)(b))

Exercise along with the return of income to be furnished under section 263(1) for the tax year concerned

The section gives this timing only. Do not add rules for later years that the section does not state.

Employer pension contribution limit (Section 29(1)(b))

Deduction ≤ 14% × (basic salary + DA if terms so provide)

Excludes all other allowances and perquisites.

TDS on salary (Section 392(1))

Tax deducted = average rate × salary payable, where average rate = tax on estimated income ÷ estimated income

Rates are those for the tax year of payment.

Duty to furnish (section 508(1))

Listed person + responsible for registering or maintaining records of a specified financial transaction or reportable account → furnish statement

The information must be relevant and required for the Act. Period, time, form and manner are prescribed under section 508(2).

Defect in statement (section 508(5) and (6))

Intimation of defect → rectify within 30 days (extendable on application) → if not, treated as inaccurate information

The authority may extend the period at its discretion on an application.

Notice for non-furnishing (section 508(7))

Failure to furnish in time → notice → furnish within a period not exceeding 30 days from service

Penalty under section 454 runs from the day after the notice period ends.

Correcting inaccuracy (section 508(8))

Aware of inaccuracy → inform the authority and furnish correct information within 10 days

Failure can attract the penalty in section 455(1)(a).

Fee for late statement (section 427(3))

₹200 per day of default, not exceeding ₹1,00,000

A fee for failing to furnish within the time prescribed under section 508(2). It is without prejudice to other provisions of the Act.

Penalty for continued failure after notice (section 454)

₹1,000 per day from the day after the notice period expires, not exceeding ₹1,00,000

Applies where the statement is not furnished within the period in the section 508(7) notice. Substituted by Act No. 4 of 2026 w.e.f. 1-4-2026.

Penalty for inaccurate statement (section 455(1))

₹50,000 if inaccurate information is given and correct information is not furnished within the section 508(8) period, or due diligence under section 508(9) is not followed

The authority may direct the penalty.

Additional sum for reporting financial institution (section 455(2))

₹5,000 for every inaccurate reportable account, in addition to the section 455(1) penalty, if any

Applies if the inaccuracy is due to false or inaccurate information furnished by the account holder. The authority shall direct it.

Quick revision

• Tax planning is lawful, avoidance exploits the law against its intent, and evasion is illegal concealment or misstatement.
• In any comparison, use after-tax figures and end with a clear recommendation.
• State your assumptions about tax rates, regime and income level before computing.
• Tax advantages must never override commercial sense; say so when you recommend.
• Section 508(1) requires the specified persons to furnish a statement of specified financial transaction or reportable account.
• Specified financial transactions include purchase, sale or exchange, services, works contracts, investments or expenditure, and loans or deposits, as prescribed.
• Under section 508(5), a defect found must be rectified within thirty days of intimation, and the authority may extend this on application.
• An unrectified defect is treated as furnishing inaccurate information (section 508(6)).
• Under section 508(7), a notice to a defaulter gives up to thirty days to furnish the statement.
• Under section 508(8), you must report an inaccuracy you discover within ten days.
• Section 454 penalty after a notice is ₹1,000 per day of continued failure, capped at ₹1,00,000.
• Section 455(1) penalty is ₹50,000 for inaccurate information or a due diligence failure; section 455(2) adds ₹5,000 per inaccurate reportable account for a reporting financial institution, where the holder's false information caused it.

Common mistakes

• Treating tax planning and tax management as the same thing. Fix: Remember: planning reduces the tax payable; management ensures correct and timely compliance.
• Calling tax avoidance a crime. Fix: Say it is not an offence by itself but may be countered by anti-avoidance provisions.
• Allowing section 140 to a partnership firm or proprietor. Fix: Only a company or an LLP engaged in eligible business can be an eligible start-up. A partnership firm cannot.
• Giving the deduction for the first three years automatically. Fix: The assessee chooses any three consecutive tax years out of ten years starting from the year of incorporation.
• Deducting dividend from profit before computing company tax Fix: Dividend is an appropriation of profit after tax. Only interest on borrowed capital reduces taxable profit.
• Taxing bonus shares as income when received Fix: No income arises on receipt of bonus shares. The tax comes later, on sale, with cost taken as nil.
• Treating depreciation as a cash outflow, or ignoring its tax shield. Fix: Add it back as non-cash and include only Depreciation × t as a cash saving.
• Comparing pre-tax figures when tax rates or tax treatment differ between options. Fix: Convert every item to after-tax before comparing, and say so in the answer.
• Assuming every amalgamation passes losses to the new company. Fix: First check whether the amalgamation is one of the listed types. Then check section 116(4).
• Mixing up the three-fourths and the time periods between the two companies. Fix: Amalgamating company: three years in business, assets held for the two years before amalgamation. Amalgamated company: five years holding and business continuity.

Exam tips

• Write distinctions as a point-wise comparison of legality, intent, disclosure and consequence. Examiners can award marks quickly for each point.
• Add a small rupee example for each concept to turn a recall answer into an application answer.
• For scenario questions, state your classification first and justify it afterwards.
• Use statutory language carefully. Section 159(3)(b) and section 170 are safe references; do not add other section numbers unless certain.
• Do not name cases unless you are sure of the name and holding. A clear statement of the principle is enough.
• Write the section 140 conditions as a short list. Examiners reward each condition tested against the facts.
• Always state the numbers exactly: 100%, three consecutive years, ten years, 1 April 2016 to before 1 April 2030, ₹300 crore, 20%.
• In case questions, end with a clear recommendation and one line on non-tax factors.