Introduction

In India, Many people don’t give heed to Tax treatment of their investment when they invest. For them “Tax Planning” means deductions esp. 80C. So at the end, they pay higher tax or fall to Tax-Evasion (ill-legal) practices. But now “Tax-Evasion” is becoming more and more tough. The reasons are:

  • E-governance or Technology
  • Regulatory norms such as “Prevention of Money Laundering Act 2002” asking for PAN card or go through KYC [know your client] procedure if investment is 50,000 or more
  • Tax deducted at Source (TDS) rules

So it is better to do Tax-Planning when your invest your hard-earned money to reduce tax liability “LEGALLY”. It is called Tax-Planning or Tax-Mitigation. This article will help to understand Tax Rules prevailing in INDIA. [Every year in the Budget such laws are modified, So in “April YYYY” we will update  the same]

Categorization of Money Earned

We earn money from our investments or salary or business. But according to Income Tax Act, they are dividend into three categories in one’s IT return. These are;

1) Income –

  • Salaried Person – Basic Salary, DA, HRA, Allowances (many), Contribution to PF etc… depends upon the company you are working for.  Because some company just pay Basic salary only.
  • Self-Employed – Income from the Business (expenses are allowable deduction)
  • Return from Some investments are also consider as INCOME. Such as Any FD (Bank, Post, Company), Post-office Scheme (NSC,SCSS,KVP,MIP), Bonds (RBI, Infrastructure), Debentures, Recurring Deposits, Rent …

2) Dividend –

  • In the hands of Investor, it is TAX-FREE. But the entity which issues Dividend has to pay Dividend Distribution TAX – DDT. So indirectly investor has already paid TAX to the Govt.
  • Portfolio Management Services (PMS), Stocks, Mutual Funds issue dividend

3) Capital Gains –

  • Based of duration, the investment’s return is sub-divided in Short Term Capital gain (STCG) and Long Term Capital Gain (LTCG). Taxation for the same is different.
  • Return from Stocks, PMS, Mutual Funds are normally fall under
  • Sold Listed Bonds/Debentures
  • GOLD / Property(Office, residential, land) / Silver / Jewellery