Library / Income-tax Act, 2025: The Professional's Master Guide
18. Tax Planning for Individuals and Families
Tax planning means arranging affairs, within the law, so that the tax is lower. It differs from tax evasion (concealing income or inflating expenses, which is a crime) and from impermissible avoidance (arrangements without commercial substance, caught by GAAR and specific rules). The ideas below are all lawful when implemented with genuine documentation.
18.1 Planning ideas for salaried individuals
Idea | How it works | Watch out for |
|---|---|---|
Choose the regime each year | Compute tax under both regimes after listing actual exemptions and deductions | Tell the employer at the start of the year to get TDS right |
Employer NPS contribution | Up to 14% of salary is deductible even in the new regime; it restructures taxable salary into retirement savings | The Rs. 7.5 lakh aggregate cap on employer contributions |
Use the updated allowance limits (old regime) | Children education and hostel allowances, meal vouchers and gifts within limits | Keep proof of expenditure where required |
Leased car or car perquisite | Perquisite value is fixed and often lower than the cost | Engine capacity and personal use rules |
Home loan with let out property (old regime) | Interest fully deductible under house property; loss set off up to Rs. 2 lakh; balance carried forward | Not useful in the new regime |
18.2 Planning ideas for families
Idea | How it works | Watch out for |
|---|---|---|
Gifts to parents or adult children with low-income | Gift is exempt (relative), and income from the gifted money is taxed in the recipient's hands (no clubbing for parents or adult children) | Clubbing applies for spouse, son's wife and minor children |
HUF as a separate taxpayer | Ancestral or inherited property income taxed in the HUF, with its own exemption limit | Conversions by members are clubbed |
Senior citizens' investments | Seniors get higher deductions (old regime) and the Rs. 12 lakh rebate (new regime); Form 121 avoids TDS | Seniors aged 75 plus with only pension and interest have simpler compliance |
Capital gains harvesting | Use the Rs. 1.25 lakh section 198 exemption each year | Genuine transactions on the exchange |
Spread investments across family members | Each person gets the Rs. 1.25 lakh equity LTCG exemption and slab benefits | Source of funds must be the member's own or a genuine non-clubbed gift |
Illustration 89: Gift to parents Sanjay (30% slab) gifts Rs. 20 lakh to his retired father, who has pension of Rs. 5 lakh. The father invests it in an FD at 7%, earning Rs. 1,40,000 a year. The gift is exempt, and the interest is not clubbed with Sanjay's income. In the father's hands, total income of about Rs. 6 lakh attracts no tax under the new regime (rebate). Had Sanjay kept the FD, tax would be Rs. 1,40,000 x 31.2% = Rs. 43,680 a year. The saving is lawful, provided the gift is genuine (bank transfer, gift deed) and the money belongs to the father thereafter. |
18.3 Planning ideas for business owners
- Presumptive schemes for small businesses and professionals, where actual profits are higher than the presumptive rate and record keeping costs are high.
- Choice of entity: proprietorship, firm, LLP or company, compared on tax rate, remuneration deductibility, dividend taxation, compliance cost and exit taxation.
- Remuneration to working partners within section 35 limits, taxed at the partner's slab rate rather than the firm's 30%.
- Section 200 for companies, once incentives run out.
- Timing: capital expenditure before the 180 day cut off (1 October) for full year depreciation, and payment of statutory dues and MSME dues in time.
- Section 146 deduction for additional employment, available even in the concessional regimes.
Illustration 90: Proprietorship vs company A consultant earns Rs. 60 lakh profit. As a proprietor (new regime), tax = Rs. 3,00,000 on the first Rs. 24 lakh plus 30% of Rs. 36 lakh = Rs. 13,80,000; with 10% surcharge and 4% cess, about Rs. 15.79 lakh. Through a company under section 200: if he takes salary of Rs. 24 lakh (tax about Rs. 2.93 lakh after the standard deduction) and the company retains Rs. 36 lakh (tax at 25.168% = about Rs. 9.06 lakh), total tax now is about Rs. 12 lakh. But when the retained profits are later paid out as dividend, further tax at his slab rate arises. The choice depends on how much profit is retained for growth, compliance cost, and the long-term plan. Do the numbers for the full cycle, including dividend or exit tax. |
Key point Do not implement a plan only because it reduces tax this year. Check the full cycle (entry, holding, exit), the commercial reason, documentation and GAAR exposure. A plan that fails on scrutiny often costs more than the tax it was meant to save. |
Chapter summary • Choose the regime each year; use employer NPS and updated allowance limits. • Gifts to parents and adult children shift income without clubbing. • Harvest capital gains within the Rs. 1.25 lakh exemption each year. • Compare entity forms over the full cycle, not only the current year. |
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