Tax Planning for Salaried Individuals and Other Assessees

Understand Tax Planning for Salaried Individuals and Other Assessees

Key rules to remember

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.

How to solve Tax Planning for Salaried Individuals and Other Assessees questions

1. 1List all income heads and amounts. Note the person's status (individual, HUF, AOP) and whether there is business or profession income.
2. 2Compute total income under the default regime of Section 202: no listed exemptions or deductions, no house property loss set-off.
3. 3Compute total income under the optional route (after opting out under Section 202(4)) with the exemptions and deductions the question allows, using the slab rates and deduction data given in the question.
4. 4Apply the slab rates to each total income, then add surcharge and cess only if the question provides them.
5. 5Compare the two tax figures and recommend the lower one, stating the saving in rupees.
6. 6Check the option conditions: timing, and the one-time withdrawal rule if there is business income.
7. 7Suggest lawful restructuring: tax-efficient pay components, employer pension contribution, timing of TDS particulars under Section 392(4).
8. 8Close with a clear recommendation and a line that the plan is tax planning, not avoidance or evasion.

Quickest way: Break-even regime check

Common mistakes in Tax Planning for Salaried Individuals and Other Assessees

• Claiming deductions and allowances while computing tax under the default regime.

  Habit from the old pattern of computing income.

  Fix: Re-read Section 202(2). Under the default regime the listed exemptions and deductions are not allowed. Chapter VIII deductions are barred except those under sections 124(1), 124(2), 125(2) and 146, which remain allowed. Do not treat other Chapter VIII deductions as allowed. Claim the barred items only after opting out.

• Setting off house property loss against salary in the default regime.

  Students remember set-off as a general rule.

  Fix: Section 202(2)(b)(ii) bars set-off of house property loss with any other head under the default regime.

• Saying a business assessee can switch regimes every year.

  Confusing the rule with that for salaried persons.

  Fix: For business or profession income, the option once exercised applies to later years and may be withdrawn only once; after that it is not available again unless business income ceases.

• Applying the employer's 14% pension limit to total salary including all allowances.

  Treating 'salary' loosely.

  Fix: Use basic plus dearness allowance (if terms provide it) only. Other allowances and perquisites are excluded.

• Recommending a regime without a rupee comparison.

  Relying on a rule of thumb.

  Fix: Always show both computations and the difference. A regime is better only because the numbers say so.

• Treating evasion techniques such as hiding income as tax planning.

  Blurring planning, avoidance and evasion.

  Fix: Keep suggestions lawful and disclosed. Say that planning works within the law.

Worked examples