Tax Planning & Estate Planning

Tax Planning:
I.

The following is a brief guideline on the Residency Rules in India. Please consult the relevant text
books for further details and examples.
An individual is said to be a Resident in India in any previous year, if he
(a) is in India in a particular previous year for a period or periods amounting in all to 182 days or
more;
OR
(b) has within the four years preceding that previous year been in India for a period or periods
amounting in all to 365 days or more and for a period or periods amounting in all to 60 days
or more in that previous year.
In the case of an individual
1. who is a citizen of India and who leaves India in any previous year as a member of the crew of an
Indian ship for the purposes of employment outside India, then for the words 60 days,
appearing in sub-clause (b) shall be substituted for the words 182 days;
2. being a citizen of India, or a person of Indian origin, who, being outside India, comes on a visit to
India in any previous year, then for the words 60 days, appearing in sub-clause (b) shall be
substituted for the words 182 days.
A person is said to be Not Ordinarily Resident in India in any previous year if such person is
a non-resident in India in 9 out of the 10 previous years preceding that previous year, or has
during the 7 previous years preceding that previous year been in India for a period of, or periods
amounting in all to, 729 days or less.

II.

Capital gains calculation in case of sale/transfer of inherited property. We give below the complete
perspective of the query that will help you in the exam:
A per Section 49(1) of Income-tax Act, 1961: Where the capital asset became the property of the
assessee by succession, inheritance etc. the cost of acquisition of the asset shall be deemed to be
the cost for which the previous owner of the property acquired it (or for the year beginning on the
1st April, 1981, whichever is later), increased by the cost of any improvement of the assets incurred
or borne by the previous owner or the assessee, as the case may be.
Please note the following points which would be of significance in the exam:
If the property is acquired by the previous owner in the years prior to 1st April, 1981, the base
year for indexation to be considered is FY 1980-81: 100.

The higher of the cost of acquisition (by the previous owner) or fair value of the property as on
1st April, 1981, if given, is to be considered for arriving at the indexed cost of acquisition with
base year index FY 1980-81:100.
Any improvement cost incurred by the previous owner prior to 1st April, 1981 is to be ignored
for arriving at the indexed cost of acquisition, whether or not fair value is given/opted.
Other relevant points to be noted:
The sale/transfer value or stamp duty value, whichever is higher is to be considered.
From AY 2015-16, with prospective effect, advance received and forfeited, in connection with
transfer of capital asset, will be treated as income from other sources, and will not be
deducted from indexed cost of acquisition to avoid double taxation. So, any such amount
forfeited during FY 2014-15 shall be considered as income from other sources. However, any
such amount forfeited prior to FY 2014-15 shall be reduced from Acquisition price (or previous
owners cost of acquisition or fair value) before applying the cost indexation.
This method of computation remains exactly the same in case of gift deed, will and devolution as
well.
III.

Computation of Capital Gains in case of debt or income-oriented instruments such as bonds,

debentures, government securities, debt schemes of Mutual Funds, etc.
1. Bonds and debentures (including government bonds and NCD) are considered long-term if held
for more than 3 years. [However, if bonds, debentures, government securities are listed in a
recognized stock exchange, the holding period of more than 1 year is to be considered for long
term.] NO indexation benefit is allowed. They have to be considered for LTCG at 10.3% without
indexation.
2. Zero coupon bonds however are considered for long-term benefit if held for more than 1 year,
and at the option of taxpayer either at LTCG of 10.3% without indexation, or 20.6% with
indexation.
3. For debt-oriented mutual fund schemes (including Gold ETFs, FMPs) the long term definition
w.e.f. 11 July 2014 (applicable for this AY 2015-16) stands changed to more than 3 years. Also,
there is no lower of indexation/non-indexation applicable, and they will be taxed at 20.6% with
indexation only. [It may be noted that if the transfer takes place prior to 11 July 2014, the long
term is considered more than 12 months as also the benefit of lower of without indexation/with
indexation is eligible.]
4. The unlisted equity shares are to be considered for long-term if held for more than 3 years, and
transfer took place on or after 11 July 2014. [However, if the transfer had taken place prior to
11 July 2014 in unlisted shares, the holding period for long term is considered as more than 12
months.] Please note that the Case Study dates are 1st April 2014. If there is mention of a
hypothetical situation in the question body that the securities are sold then, the same is to be
considered in old tax regime. The long term capital gains would be at 20.6%.
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If listed shares are sold in off market or in case of buy back in equity shares, the taxation for long
term is considered if held for more than 12 months and the lower of 10.3% without indexation or
20.6% with indexation is applicable.
IV. The following are few facts to remember in Tax Planning with reference to Income-tax Act, 1961.
Advance tax has to be paid by all Income-tax assesses.
Mandatory E-filing of Income tax return by an individual/HUF assessee is applicable for total
income above Rs. 5 lakh.
A Partnership Firm is resident in India if control and management of its affairs is wholly or partly
situated within India
The foreign income for any relevant year is characterized by an income which is neither received
in India nor accrues/arises in India.
Gratuity receipt is exempt in the case of Government employees only.
In case of an unrecognized Provident Fund also, the employers contribution is exempt from tax
in the hands of the employee.
The pre-construction interest is allowed for deduction from Income under Section 24 in 5 equal
annual installments.
The maximum deduction allowable as interest on loan taken for repair work of self-occupied
house property is Rs. 30,000 per annum.
Under Section 54EC, the capital gains on transfer of asset should be invested within six months,
in approved infrastructure bonds (e.g. NHAI/REC) with a maximum limit up to Rs. 50 lakh.
Long term capital loss can be carried forward for a period of 8 years and can be set off against
long term capital gain only.
Unabsorbed depreciation element in the Business Loss can be carried forward for indefinite
period.
Losses incurred on a business account can be carried forward and set off against future business
income for eight assessment years, with even change in the nature of business.
Loss from speculation business can be carried forward for a period of 4 years only.

Estate Planning:
I.

The following are few facts to remember in Estate Planning.

Settlor is the person or firm that creates the trust.
Trustee is a person or a firm that holds or administers property or assets for the benefit of a
third party. Trustee has obligation to pay tax in the capacity of a representative assessee.
A Revocable and Discretionary Trust is the most appropriate form of trust if the Settler wishes
to exercise full control over the trust property and income.
An Irrevocable and Discretionary Trust is an appropriate form of trust for a Settler who wants
to safeguard family assets against the claims of the creditors (actual and/or potential) of
business debt.
The Trustee is the legal owner of property transferred to a Revocable Living Trust. However, the
income of a Revocable Living Trust is taxed in the hands of the Settler.

II.

Advantages of Trust form of Estate Planning:

Trust creation helps in bypassing probate process
Trust creation helps in safeguarding interests of family members, especially those with special
needs
Conditions can be attached to assets gifted to a Trust, for example, on attaining majority by
beneficiary
Future capital gains tax on assets transferred to trust could be lower

III. The following will help in respect of Estate Planning problems. They are some of the variants which
help take correct perspective of the things.
1. If the subject is a businessman or in a partnership, in case of death, his survivors would be
entitled to his stake in business at the time of exigency. For example:
a) If the company or business has taken a Keymans insurance on the life of the subject, the
value of insurance in case of exigency would be sum receivable on the business account, and
to the extent of subjects stake in the business the sum would form part of the estate.
b) If the business has provided any vehicle for use of the business to the subject, the value of
the vehicle (neither purchase value nor depreciated value) will not form part of the estate.
The reason being that the asset (vehicle) has already been counted in the value of the
business (asset and liability sides). However, the subjects personal vehicles at their
depreciated/market value would be counted in the estate.

c) The financial assets, whether the subject is second holder with the survivor, would not form
part of the estate to be distributed as the assets would then belong to the survivor.
However, assets held solely or jointly, where the subject is the first holder would form part
of the estate. This is a convenient rule for the questions prepared by us, and does not apply
universally as different type of assets, e.g. mutual funds, insurance, PPF, Demat account,
etc. have different rulings for estate purposes.
2. The trustee is liable to discharge the tax liability in respect of the income of the trust. The
cumulative amount of tax payable would be the sum of tax payable by individual beneficiaries of
the trust income distributed and assessed as per their respective tax brackets.
a) The simplest example can be a trust having two beneficiaries. The beneficiary may have
their own respective incomes. The trust income is distributed in the specified ratios to each
of them. One beneficiary after accounting for trust income remains in the 10% bracket,
while the other jumps to the 20% bracket. The individual tax amounts on only the trust
income allocated to each of the beneficiaries is calculated in their respective tax slabs. These
individual tax amounts are then added to compute the tax payable by the trustee as
representative assessee.
b) It is to be noted that the trustee is liable to pay the tax amount thus arrived at on only the
trusts income. The individual beneficiaries would be liable to pay tax on their respective
income (from other sources, salary, etc.), if any.
c) The complications in this kind of problem can be when the beneficiaries have different
determinate shares of the trust income, and some of them may have their own income
apart from the so allocated trust income.
3. The theoretical topics as specified in the syllabus may be covered best from the internet
(general search of statutes, investopedia, etc.). Some of them asked most frequently are listed
below:
a) Hindu Succession Act, 1956
b) Will and its types; Testamentary Succession
c) General Power of Attorney, conditions when it is revocable, who all can execute, etc.
d) Trusts and its features
e) Advantages of Trusts
f) The rates at which trusts are taxed
g) Provisions of the Trust Deed in order to get income tax exemption
h) Specific Irrevocable and Discretionary Irrevocable Trusts
i) Regulatory authority for offshore trusts
j) Constitution of trusts with appropriate properties (revocable, irrevocable, discretionary,
specific, determinate, indeterminate) in order to have controls, or safeguard assets (from
creditors in the future)