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Interest-free loans to family members from your own funds can go a long way to lawfully reduce your tax burden!

            “A Rupee saved is a Rupee earned,” says the well-known dictum. In the context of the current Indian Income-tax Law, one could modify this saying to read as “a Rupee saved from tax, equals one and a half Rupees earned.” Every Monday since August, 2010, ‘AM Tax Clues’ has endeavored to show its readers how to save their Rupee from tax, lawfully of course. And after 173 write-ups during the 40 months until date, as your columnist signs off and concludes this column today with a great sense of joy and fulfillment, a big thank you to dear readers, who have not only read, admired and appreciated this column, but also shared their critical feedback and meaningful response from time to time!

             In a fitting tribute to the inborn Amdavadi instinct of lawfully saving tax, discussed hereunder are replies to two very interesting reader’s queries: (more…)


Managing your money requires more skill than making it! Four investment jingles you must learn for happy investing!

   Investment planning is both an art and a science. It is a science, since it is based on sound information, tested principles and logical statistics. However, it is also an art, since it involves intelligent analysis, judicious decision-making and a sixth sense of visualization. The key to successful investment planning lies in making the right choice of investments which best suit your requirements.

   What are the important considerations which you as an investor must keep in mind while planning your investment portfolio? Security, yield and liquidity are the three guiding stars which should influence any investor in making his decision. (more…)


Liberal deductions provided under the I.T. Act in respect of expenditure for medical treatment & maintenance!

 The Income-tax Act provides for special deductions in computing the taxable income of a taxpayer who is disabled or who is required to incur expenditure for the medical treatment, training or rehabilitation of a disabled dependent or any amount deposited for the maintenance of such disabled dependent.

Similarly deduction is also allowed to a taxpayer who is required to incur any expenditure for the medical treatment of specified diseases or ailments, either for himself or a dependent relative.


            Under the provisions of Section 80U of the Income-tax Act a resident individual suffering from a permanent physical disability (including blindness) or mental retardation, is allowed a deduction of Rs.50,000 in the computation of his taxable income. (more…)


Special concessions are offered in case of one house property occupied by the taxpayer for his own residence!

Under the Income-tax Act, ‘income from house property’ is a separate head of income, under which the ‘annual value’ of a property, consisting of any building or land appurtenant thereto, of which the taxpayer is ‘the owner’ is chargeable to tax. If, however, a house property is occupied by the taxpayer for the purposes of his business or profession carried on by him value of such property is not chargeable to income tax.

The income from house property for purposes of income tax is based on the ‘annual value’ of the property. The concept of annual value is in effect not a real but a notional concept, since it is defined as ‘the sum for which the property might reasonably be expected to let from year to year.’ For purposes of computation of income under this head, house properties have been classified into the following two categories:

  •  Self-occupied Property (SOP);
  •  Let-out Property (LOP). (more…)


Clubbing provisions can be lawfully avoided if income of minor is strategically deferred beyond his minority!

Section 64(1A) of the Income-tax Act provides that “in computing the total income of any individual, there shall be included all such income as arises or accrues to his minor child.”

Two exceptions have been provided in regard to the above provisions in relation to the clubbing of income of a minor child with that of the parent, whose total income is greater. Accordingly, the following income earned by a minor shall be assessed in his own hands and not included with that of his parent:

  •  Income derived from manual work done by him.
  •  Income derived from any activity involving application of his skill, talent or specialized knowledge and experience (e.g. income of child artistes).

Moreover, in the above regard, Section 10(32) provides that where the income of an individual includes the income of his minor child under the provisions of Section 64, the individual shall be entitled to exemption of Rs.1,500 in respect of each minor child or the income of such minor includible under Section 64, whichever is lower. (more…)


Gujarat High Court holds capital gains on gifted or inherited assets also enjoy indexation from date of original holding!

Section 49(1) of the Income-tax Act provides that where the capital asset has been acquired by the taxpayer in any of the modes such as on partition of a Hindu Undivided Family or under gift or Will or by succession or inheritance, etc., the cost to the previous owner shall be deemed to be cost of acquisition of the taxpayer.

Similarly, Section 2(42A) provides that where a capital asset is acquired by way of gift or inheritance as mentioned in Section 49(1), period of holding of the previous owner shall also be included in the period of holding of the taxpayer.

In the above context, an interesting question that would arise for consideration is whether while computing the taxable capital gains arising on transfer of a capital asset acquired by a taxpayer under gift or inheritance, the ‘indexed cost of acquisition,’ as per the provisions of Section 48, has to be computed with reference to the year in which the previous owner first held the asset or the year in which the taxpayer became the owner of the asset.

Consider a case where your grandfather had acquired a plot of land for Rs.20 lakhs in late 1981, which you received by way of inheritance on his death in 2013 and you were planning to sell the same in early 2014 for a consideration of Rs.1.80 crore. Guess, what would be the income-tax you would be required to pay on your capital gains? Difficult to believe, but ‘zero tax’ is the correct answer. (more…)


Just light up bright lamps of tax saving for your family this Diwali, by understanding these simple basics!

In the words of the celebrated legal luminary and former Judge of the Supreme Court of India, Mr. Justice V.R. Krishna Iyer, “The citizen must pay his taxes but is entitled to plan his affairs to keep as much of his earnings as the policy of the law permits. This is neither avoidance nor evasion but prudence. Informed intelligence and honest fore-thought are virtues of a taxpayer.”


In a tax system that taxes income and wealth at a flat rate, without providing for any exemptions, deductions or reliefs, ‘tax planning’ would be an alien term. The study of tax planning assumes significance in a tax system like ours which has graded rates of tax and which provides the taxpayer opportunity to avail of incentives in the nature of exemptions, deductions and reliefs.

The Indian taxpayer is indeed fortunate to be in an enviable tax system around the turn of the millennium. It is difficult to believe that some 35 years ago, he was required to live with a system of direct taxes, where the maximum rate of Income-tax was 97.5%, Wealth-tax 5%, Estate Duty 85% and Gift-tax 75%. That was the time, when the eminent Jurist Shri Nani Palkhiwala used to describe India as the ‘highest taxed nation in the world.’ (more…)


With a net annual investment of just Rs.69,100 for 18 years, build tax free capital of Rs.43.59 lakhs for your child!

Every parent would naturally be concerned about building capital for his or her children, which would go to ensure meeting their financial requirements for higher education, marriage, settlement in life, etc. One of the major stumbling blocks in doing so are the clubbing provisions under Section 64(1A) of the Income-tax Act, which provide that any income arising to a minor child is required to be clubbed with the income of either the father or the mother, whosever’s total income is greater. Imaginative planning through investment in PPF can be resorted to achieve the objective of building up ‘tax free capital’ for children and in particular minors, successfully overcoming the hurdles of the clubbing provisions.


Investment in PPF can be usefully resorted to achieve the twin objectives of building up tax free capital as also securing valuable tax saving through deduction under Section 80C. Section 10(11) of the Income-tax Act provides that the interest @ 8.70% per annum earned on the balance in the PPF Account is totally exempt from Income-tax. Moreover, section 80C of the Income-tax Act provides that any contribution made by an individual even in the account of his children (either minor or major) also qualifies for deduction out of gross total income. As per the current provisions of the PPF Scheme, the maximum contribution that can be made in the PPF account during the financial year is Rs.1,00,000.   (more…)


Making of food products is manufacture & export by a 100% EOU can enjoy tax holiday holds ITAT Ahmedabad

If you thought that your favourite dhoklas and samosas were mere gastronomic delights you were mistaken. Infact, if a taxpayer has a 100% export oriented unit (EOU), which is actively engaged in making and exporting the same, he can even enjoy income-tax exemption for the profits earned therefrom under Section 10B of the Income-tax Act.

Upholding the above contention of the taxpayer in the case of Deepkiran Foods Pvt. Ltd. vs. ACIT (30 99), the Income-tax Appellate Tribunal (ITAT), Ahmedabad has rendered a very interesting decision. In this case, the taxpayer company was a 100% EOU engaged in the business of manufacturing and export of various food products like paratha, samosa, dhokla, idli, dahi vada, fried bhindi, pani puri, mint chutney etc. It claimed total exemption in respect of the profits earned under Section 10B. The Assessing Officer was of the view that preparation of eatable items by the taxpayer in its mechanized kitchen did not amount to manufacture or production within the meaning of the said section and, therefore, it was not eligible for exemption. The Commissioner (Appeals) upheld the view of the Assessing Officer and hence the matter was taken in second appeal before the ITAT.

Analyzing the facts of the case, the ITAT noted that the taxpayer held factory license for its 100% EOU unit for manufacture and export of food. Its factory premises were also licensed under Section 58 of the Customs Act, 1953 as a Private Bonded Warehouse for storing and manufacturing of food items. The value of plant and machinery and electrical installations as per the audited balance sheet was in excess of Rs. 20 crores, and the number of workers employed in its factory were in excess of 2000. The Tribunal observed that these facts had not been controverted by the revenue by bringing any contrary material on record and therefore the undisputed factual position was that the taxpayer unit was an industrial undertaking. (more…)


Any gift within the value of Rs.5,000 by an employer on a ceremonial occasion is tax exempt for his employees!

The noted Sufi writer Idries Shah once remarked, “If you give what can be taken, you are not really giving.” If you as an employer are trying to think of giving something to your employees during the coming festive season, out of which even the Taxman cannot take anything, here is a smart idea!

Rule 3(7)(iv) of the Income-tax Rules relating to valuation of perquisites provides that, “the value of any gift, or voucher, or token in lieu of which such gift may be received by the employee or by member of his household on ceremonial occasions or otherwise from the employer shall be determined as the sum equal to the amount of such gift. However, where the value of such gift, voucher or token, as the case may be, is below Rs.5,000 in the aggregate during the previous year, the value of perquisite shall be taken as nil.” (more…)

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