wajahat project

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CHAPTER 1

INTRODUCTION

1.1 Introduction

Income Tax Act, 1961 governs the taxation of incomes generated within Pakistan and of

incomes generated by Pakistanis overseas. This study aims at resenting a !ucid yet

sim!e understanding of taxation structure of an individua!"s income in Pakistan for the

assessment year #$1#%1&.

Income Tax Act, 1961 is the guiding base!ine for a!! the content in this reort and the tax

saving tis rovided herein are a resu!t of ana!ysis of otions avai!ab!e in current market.

'very individua! shou!d know that tax !anning in order to avai! a!! the incentives

rovided by the (overnment of Pakistan under different statures is !ega!.

This ro)ect covers the basics of the Income Tax Act, 1961 as amended by the *inance

Act, #$1# and broad!y resents the nuances of rudent tax !anning and tax saving

otions rovided under these !aws. Any other hideous means to avoid or evade tax is a

cogni+ab!e offence under the Pakistani constitution and a!! the citi+ens shou!d refrainfrom such acts.

1.2 Need for Study

In !ast some years of my career and education, I have seen my co!!eagues and facu!ties

gra!ing with the taxation issue and com!aining against the tax deducted by their

em!oyers from month!y remuneration. ot e-uied with roer know!edge of taxation

and tax saving avenues avai!ab!e to them, they were at mercy of the /0Admin

deartments which never bothered to do even as !itt!e as take advise from some good tax

consu!tant.

This rodded me to study this asect !eading to this ro)ect during my 2A course with

the university, hoing this concise yet comrehensive write u wi!! he! this sa!aried

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individua! assessee c!ass to save whatever extra ruee they can from their hard%earned

monies.

1.3 Objectie!

• To study taxation rovisions of The Income Tax Act, 1961 as amended by *inance

Act, #$1#.

• To ex!ore and sim!ify the tax !anning rocedure from a !ayman"s ersective.

• To resent the tax saving avenues under revai!ing statures.

1." Sco#e $ %i&it'tion!

• This ro)ect studies the tax !anning for individua!s assessed to Income Tax.

• The study re!ates to non%secific and genera!i+ed tax !anning, e!iminating the need

of sam!e0ou!ation ana!ysis.

• 2asic methodo!ogy im!emented in this study is sub)ected to various ros 3 cons,

and diverse insurance !ans at different income !eve!s of individua! assessees.

• This study may inc!ude comarative and ana!ytica! study of more than one tax saving

!ans and instruments.

• This study covers individua! income tax assessees on!y and does not ho!d good for

cororate taxayers.

• The tax rates, insurance !ans, and remium are a!! sub)ect to *4 #$1#%1& on!y.

T'( Re)i&e in P'*i!t'n

The tax regime in Pakistan is current!y governed under The Income Tax, 1961 as

amended by The *inance Act, #$1# notwithstanding any amendments made thereof by

recent!y announced 5nion 2udget for assessment year #$1&%$9.

C+'r)e'bi,ity of Inco&e T'(

As er Income Tax Act, 1961, income tax is charged for any assessment year at

revai!ing rates in resect of the tota! income of the revious year of every erson.

Previous year means the financia! year immediate!y receding the assessment year.

Sco#e of Tot', Inco&e

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5nder the Income Tax Act, 1961, tota! income of any revious year of a erson who is a

resident inc!udes a!! income from whatever source derived which

• is received or is deemed to be received in Pakistan in such year by or on beha!f of

such erson7 or

• accrues or arises or is deemed to accrue or arise to him in Pakistan during such year7

or

• accrues or arises to him outside Pakistan during such year

Provided that, in the case of a erson not ordinari!y resident in Pakistan, the income

which accrues or arises to him outside Pakistan sha!! not be inc!uded un!ess it is derived

from a business contro!!ed in or a rofession set u in Pakistan.

Tot', Inco&e

*or the uroses of chargeabi!ity of income%tax and comutation of tota! income, The

Income Tax Act, 1961 c!assifies the earning under the fo!!owing heads of income

• 8a!aries

• Income from house roerty

• aita! gains

• Profits and gains of business or rofession

• Income from other sources

Conce#t! u!ed in T'( P,'nnin)

T'( E'!ion

Tax 'vasion means not aying taxes as er the rovisions of the !aw or minimi+ing tax by

i!!egitimate and hence i!!ega! means. Tax 'vasion can be achieved by concea!ment of

income or inf!ation of exenses or fa!sification of accounts or by conscious de!iberate

vio!ation of !aw.

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Tax 'vasion is an act executed knowing!y wi!!fu!!y, with the intent to deceive so that the

tax reorted by the taxayer is !ess than the tax ayab!e under the !aw.

E(',e- r. A, having rendered service to another erson r. 2, is entit!ed to receive a

sum of say /s. :$,$$$0% from r. 2. A te!!s 2 to ay him /s. :$,$$$0% in cash and thus

does not account for it as his income. r. A has resorted to Tax 'vasion.

T'( Aoid'nce

Tax Avoidance is the art of dodging tax without breaking the !aw. ;hi!e remaining we!!

within the four corners of the !aw, a citi+en so arranges his affairs that he wa!ks out of the

c!utches of the !aw and ays no tax or ays minimum tax. Tax avoidance is therefore

!ega! and fre-uent!y resorted to. In any tax avoidance exercise, the attemt is a!ways to

ex!oit a !ooho!e in the !aw. A transaction is artificia!!y made to aear as fa!!ing

s-uare!y in the !ooho!e and thereby minimi+e the tax. In Pakistan, !ooho!es in the !aw,

when detected by the tax authorities, tend to be !ugged by an amendment in the !aw, too

often retrosective!y. ence tax avoidance though !ega!, is not !ong !asting. It !asts ti!! the

!aw is amended.

E(',e- r. A, having rendered service to another erson r. 2, is entit!ed to receive a

sum of say /s. :$,$$$0% from r. 2. r. A"s other income is /s. #$$,$$$0%. r. A te!!s

r. 2 to ay che-ue of /s. :$,$$$0% in the name of r. instead of in the name of r. A.

r. deosits the che-ue in his bank account and account for it as his income. 2ut r.

has no other income and therefore ays no tax on that income of /s. :$,$$$0%. 2y

diverting the income to r. , r. A has resorted to Tax Avoidance.

T'( P,'nnin)

Tax P!anning has been described as a refined form of


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concessions, rebates, re!iefs, a!!owances and other benefits granted by the tax !aws so that

the incidence of tax is reduced. 'xercise in tax !anning is based on the !aw itse!f and is

therefore !ega! and ermanent.

E(',e- r. A having other income of /s. #$$,$$$0% receives income of /s. :$,$$$0%

from r. 2. r. A to save tax deosits /s. 6$,$$$0% in his PP* account and saves the tax

of /s. 1#,$$$0% and thereby ays no tax on income of /s. :$,$$$.

T'( 'n')e&ent

Tax anagement is an exression which im!ies actua! im!ementation of tax !anning

ideas. ;hi!e that tax !anning is on!y an idea, a !an, a scheme, an arrangement, tax

management is the actua! action, im!ementation, the rea!ity, the fina! resu!t.

E(',e- Action of r. A deositing /s. 6$,$$$ in his PP* account and saving tax of

/s. 1#,$$$0% is Tax anagement. Actua! action on Tax P!anning rovision is Tax

anagement.

To !u& u# ',, t+e!e four e(#re!!ion!/ 0e &'y !'y t+'t-

• Tax 'vasion is fraudu!ent and hence i!!ega!. It vio!ates the sirit and the !etter of the

!aw.

• Tax Avoidance, being based on a !ooho!e in the !aw is !ega! since it vio!ates on!y the

sirit of the !aw but not the !etter of the !aw.

• Tax P!anning does not vio!ate the sirit nor the !etter of the !aw since it is entire!y

based on the secific rovision of the !aw itse!f.

• Tax anagement is actua! im!ementation of a tax !anning rovision. The net resu!t

of tax reduction by taking action of fu!fi!!ing the conditions of !aw is tax

management.

T+e Inco&e T'( Eu'tion-

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*or the understanding of any !ayman, the rocess of comutation of income and tax

!iabi!ity can be out!ined in fo!!owing five stes. This ro)ect is a!so designed to fo!!ow the

same.

• a!cu!ate the (ross tota! income deriving from a!! resources.

• 8ubtract a!! the deduction 3 exemtion avai!ab!e.

• A!ying the tax rates on the taxab!e income.

• Ascertain the tax !iabi!ity.

• inimi+e the tax !iabi!ity through a erfect !anning using tax saving schemes.

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Pension received by the em!oyee is taxab!e under


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erformed by him or at the !ace where he ordinari!y resides, or to comensate him for

increased cost of !iving are a!so exemt.

Hou!e Rent A,,o0'nce 4HRA5-

/A received by an em!oyee residing in his own house or in a house for which no rent

is aid by him is taxab!e. In case of other em!oyees, /A is exemt u to a certain !imit

Entert'in&ent A,,o0'nce-

'ntertainment a!!owance is fu!!y taxab!e, but a deduction is a!!owed in certain cases.

Ac'de&ic A,,o0'nce-

A!!owance granted for encouraging academic research and other rofessiona! ursuits, or

for the books for the urose, sha!! be exemt u0s 1$B1CD. 8imi!ar!y newsaer a!!owance

sha!! a!so be exemt.

Coney'nce A,,o0'nce-

It is exemt to the extent it is aid and uti!i+ed for meeting exenditure on trave! for

officia! work.

Inco&e fro& Hou!e Pro#erty

Inco&e! Ter&ed '! Hou!e Pro#erty Inco&e-

The annua! va!ue of a house roerty is taxab!e as income in the hands of the owner of

the roerty. ouse roerty consists of any bui!ding or !and, or its art or attached area,

of which the assessee is the owner. The art or attached area may be in the form of a

courtyard or comound forming art of the bui!ding. 2ut such !and is to be distinguished

from an oen !ot of !and, which is not charged under this head but under the head


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roerty inc!udes f!ats, shos, office sace, factory sheds, agricu!tura! !and and farm

houses.

owever, fo!!owing incomes sha!! be taxab!e under the head


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In determining reasonab!e rent factors such as actua! rent aid by the tenant, tenant"s

ob!igation undertaken by owner, owners" ob!igations undertaken by the tenant, !ocation of

the roerty, annua! rateab!e va!ue of the roerty fixed by municia!ities, rents of

simi!ar roerties in neighbourhood and rent which the roerty is !ike!y to fetch having

regard to demand and su!y are to be considered.

Annu', 6',ue of %et7out Pro#erty-

;here the roerty or any art thereof is !et out, the annua! va!ue of such roerty or art

sha!! be the reasonab!e rent for that roerty or art or the actua! rent received or

receivab!e, whichever is higher.

Deduction! fro& Hou!e Pro#erty Inco&e-

Deduction of Hou!e T'(%oc', T'(e! #'id-

In case of a !et%out roerty, the !oca! taxes such as municia! tax, water and sewage tax,

fire tax, and education cess !evied by a !oca! authority are deductib!e whi!e comuting the

annua! va!ue of the year in which such taxes are actua!!y aid by the owner.

Ot+er t+'n !e,f7occu#ied #ro#ertie!

/eairs and co!!ection charges 8tandard deduction of &$F of the net annua! va!ue of the

roerty.

Intere!t on orro0ed C'#it',-

Interest ayab!e in Pakistan on borrowed caita!, where the roerty has been ac-uired

constructed, reaired, renovated or reconstructed with such borrowed caita!, is a!!owab!e

Bwithout any !imitD as a deduction Bon accrua! basisD. *urthermore, interest ayab!e for

the eriod rior to the revious year in which such roerty has been ac-uired or

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constructed sha!! be deducted in five e-ua! annua! insta!ments commencing from the

revious year in which the house was ac-uired or constructed.

A&ount! not deductib,e fro& Hou!e Pro#erty Inco&e-

Any interest chargeab!e under the Act ayab!e out of Pakistan on which tax has not been

aid or deducted at source and in resect of which there is no erson who may be treated

as an agent.

'xenditures not secified as secifica!!y deductib!e. *or instance, no deduction can be

c!aimed in resect of exenses on e!ectricity, water su!y, sa!ary of !iftman, etc.

Se,f Occu#ied Pro#ertie!

o deduction is a!!owed under section #CB1D by way of reairs, insurance remium, etc.

in resect of se!f%occuied roerty whose annua! va!ue has been taken to be ni! under

section #&B#D BaD or #&B#D BbD of the act. owever, a maximum deduction of /s. &$,$$$ by

way of interest on borrowed caita! for ac-uiring, constructing, reairing, renewing or

reconstructing the roerty is avai!ab!e in resect of such roerties.

In case of se!f%occuied roerty ac-uired or constructed with caita! borrowed on or

after 1.C.1999 and the ac-uisition or construction of the house roerty is made within &

years from the end of the financia! year in which caita! was borrowed the maximum

deduction for interest sha!! be /s. 1,:$,$$$. *or this urose, the assessee sha!! furnish a

certificate from the erson extending the !oan that such interest was ayab!e in resect of

!oan for ac-uisition or construction of the house, or as refinance !oan for reayment of an

ear!ier !oan for such urose.

The deduction for interest u0s #CB1D is a!!owab!e as under

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i. 8e!f%occuied roerty deduction is restricted to a maximum of /s. 1,:$,$$$ for

roerty ac-uired or constructed with funds furrowed on or after 1.C.1999 within & years

from the end of the financia! year in which the funds are borrowed. In other cases, the

deduction is a!!owab!e u to /s. &$,$$$.

ii. ?et out roerty or art there of a!! e!igib!e interests are a!!owed.

It is, therefore, suggested that a roerty for se!f, residence may be ac-uired with

borrowed funds, so that the annua! interest accrua! on borrowings remains !ess than /s.

1,:$,$$$. The net !oss on this account can be set off against income from other roerties

and even against other incomes.

If buying a roerty for !etting it out on rent, raise borrowings from other fami!y

members or outsiders. The renta! income can be safe!y assed off to the other fami!y

members by way of interest. If the interest c!aim exceeds the annua! va!ue, !oss can be set

off against other incomes too.

At the time of urchase of new house roerty, the same shou!d be ac-uired in the

nameBsD of different fami!y members. A!ternative!y, each roerty may be ac-uired in

)oint names. This is articu!ar!y advantageous in case of rented roerty for division of

renta! income among various fami!y members. owever, each co%owner must invest out

of his own funds Bor borrowingsD in the ratio of his ownershi in the roerty.

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C'#it', 8'in!

Any rofits or gains arising from the transfer of caita! assets effected during the

revious year is chargeab!e to income%tax under the head =aita! gains> and sha!! be

deemed to be the income of that revious year in which the transfer takes !ace. Taxation

of caita! gains, thus, deends on two asects G


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aita! gains form art of the taxab!e income of the revious year in which the transfer

giving rise to the gains takes !ace. Thus, the caita! gain sha!! be chargeab!e in the year

in which the sa!e, exchange, re!in-uishment, etc. takes !ace.

;here the transfer is by way of a!!owing ossession of an immovab!e roerty in art

erformance of an agreement to se!!, caita! gain sha!! be deemed to have arisen in the

year in which such ossession is handed over. If the transferee a!ready ho!ds the

ossession of the roerty under sa!e, before entering into the agreement to se!!, the year

of taxabi!ity of caita! gains is the year in which the agreement is entered into.

C,'!!ific'tion of C'#it', 8'in!-

S+ort Ter& C'#it', 8'in-

(ains on transfer of caita! assets he!d by the assessee for not more than &6 months B1#

months in case of a share he!d in a comany or any other security !isted in a recogni+ed

stock exchange in Pakistan, or a unit of the 5TI or of a mutua! fund secified u0s 1$B#&HD

D immediate!y receding the date of its transfer.

%on) Ter& C'#it', 8'in-

The caita! gains on transfer of caita! assets he!d by the assessee for more than &6

months B1# months in case of shares he!d in a comany or any other !isted security or a

unit of the 5TI or of a secified mutua! fundD.

Period of Ho,din) ' C'#it', A!!et-

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(enera!!y seaking, eriod of ho!ding a caita! asset is the duration for the date of its

ac-uisition to the date of its transfer. owever, in resect of fo!!owing assets, the eriod

of ho!ding sha!! exc!ude or inc!ude certain other eriods.

Cout'tion of C'#it', 8'in!-

1. As certain the fu!! va!ue of consideration received or accruing as a resu!t of the transfer.

#. Heduct from the fu!! va!ue of consideration%

• Transfer exenditure !ike brokerage, !ega! exenses, etc.,

•ost of ac-uisition of the caita! asset0indexed cost of ac-uisition in case of !ong%

term caita! asset and ost of imrovement to the caita! asset0indexed cost of

imrovement in case of !ong term caita! asset. The ba!ance !eft%over is the gross

caita! gain0!oss.

• Heduct the amount of ermissib!e exemtions u0s :C, :C2, :CH, :C', :C'H, :C*,

:C( and :C.

:u,, 6',ue of Con!ider'tion-

This is the amount for which a caita! asset is transferred. It may be in money or money"s

worth or combination of both. *or instance, in case of a sa!e, the fu!! va!ue of

consideration is the fu!! sa!e rice actua!!y aid by the transferee to the transferor. ;here

the transfer is by way of exchange of one asset for another or when the consideration for

the transfer is art!y in cash and art!y in kind, the fair market va!ue of the asset received

as consideration and cash consideration, if any, together constitute fu!! va!ue of

consideration.

In case of damage or destruction of an asset in fire f!ood, riot etc., the amount of money

or the fair market va!ue of the asset received by way of insurance c!aim, sha!! be deemed

as fu!! va!ue of consideration.

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1. *air va!ue of consideration in case !and and0 or bui!ding7 and

#. Transfer 'xenses.

Co!t of Acui!ition-

ost of ac-uisition is the amount for which the caita! asset was origina!!y urchased by

the assessee.

ost of ac-uisition of an asset is the sum tota! of amount sent for ac-uiring the asset.

;here the asset is urchased, the cost of ac-uisition is the rice aid. ;here the asset is

ac-uired by way of exchange for another asset, the cost of ac-uisition is the fair market

va!ue of that other asset as on the date of exchange.

Any exenditure incurred in connection with such urchase, exchange or other

transaction e.g. brokerage aid, registration charges and !ega! exenses, is added to rice

or va!ue of consideration for the ac-uisition of the asset. Interest aid on moneys

borrowed for urchasing the asset is a!so art of its cost of ac-uisition.

;here caita! asset became the roerty of the assessee before 1.C.191, he has an otion

to adot the fair market va!ue of the asset as on 1.C.191, as its cost of ac-uisition.

Co!t of Iroe&ent-

ost of imrovement means a!! caita! exenditure incurred in making additions or

a!terations to the caita! assets, by the assessee. 2etterment charges !evied by municia!

authorities a!so constitute cost of imrovement. owever, on!y the caita! exenditure

incurred on or after 1.C.191, is to be considered and that incurred before 1.C.191 is to

be ignored.

Inde(ed co!t of Acui!itionIroe&ent-

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*or comuting !ong%term caita! gains,


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R'te! of T'( on C'#it', 8'in!-

S+ort7ter& C'#it', 8'in!

8hort%term aita! (ains are inc!uded in the gross tota! income of the assessee and after

a!!owing ermissib!e deductions under hater JI%A. /ebate under 8ections , 2 and

is a!so avai!ab!e against the tax ayab!e on short%term caita! gains.

%on)7ter& C'#it', 8'in!

?ong%term aita! (ains are sub)ect to a f!at rate of tax K #$F owever, in resect of

!ong term caita! gains arising from transfer of !isted securities or units of mutua!

fund05TI, tax sha!! be ayab!e K #$F of the caita! gain comuted after a!!owing

indexation benefit or K 1$F of the caita! gain comuted without giving the benefit of

indexation, whichever is !ess.

C'#it', %o!!-

The amount, by which the va!ue of consideration for transfer of an asset fa!!s short of its

cost of ac-uisition and imrovement 0indexed cost of ac-uisition and imrovement, and

the exenditure on transfer, reresents the caita! !oss. aita! ?oss" may be short%term or

!ong%term, as in case of caita! gains, deending uon the eriod of ho!ding of the asset.

Set Off 'nd C'rry :or0'rd of C'#it', %o!!

• Any short%term caita! !oss can be set off against any caita! gain Bboth !ong%term and

short termD and against no other income.

• Any !ong%term caita! !oss can be set off on!y against !ong%term caita! gain and

against no other income.

• Any short%term caita! !oss can be carried forward to the next eight assessment years

and set off against


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C'#it', 8'in! E(et fro& T'(-

C'#it', 8'in! fro& Tr'n!fer of ' Re!identi', Hou!e

Any !ong%term caita! gains arising on the transfer of a residentia! house, to an individua!

or 5*, wi!! be exemt from tax if the assessee has within a eriod of one year before or

two years after the date of such transfer urchased, or within a eriod of three years

constructed, a residentia! house.

C'#it', 8'in! fro& Tr'n!fer of A)ricu,tur', %'nd

Any caita! gain arising from transfer of agricu!tura! !and, sha!! be exemt from tax, if

the assessee urchases within # years from the date of such transfer, any other

agricu!tura! !and. @therwise, the amount can be deosited under aita! (ains Accounts

8cheme, 19 before the due date for furnishing the return.

C'#it', 8'in! fro& Cou,!ory Acui!ition of Indu!tri', Undert'*in)

Any caita! gain arising from the transfer by way of comu!sory ac-uisition of !and or

bui!ding of an industria! undertaking, sha!! be exemt, if the assessee

urchases0constructs within three years from the date of comu!sory ac-uisition, any

bui!ding or !and, forming art of industria! undertaking. @therwise, the amount can be

deosited under the


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Any !ong%term caita! gain arising to an individua! or an 5*, from the transfer of any

asset, other than a residentia! house, sha!! be exemt if the who!e of the net consideration

is uti!i+ed within a eriod of one year before or two years after the date of transfer for

urchase, or within & years in construction, of a residentia! house.

T'( P,'nnin) for C'#it', 8'in!

• An assessee shou!d !an transfer of his caita! assets at such a time that caita! gains

arise in the year in which his other recurring incomes are be!ow taxab!e !imits.

• Assessees having income be!ow /s. 6$,$$$ shou!d go for short%term caita! gain

instead of !ong%term caita! gain, since income u to /s. 6$,$$$ is taxab!e K 1$F

whereas !ong%term caita! gains are taxab!e at a f!at rate of #$F. Those having

income above /s. 1,:$,$$$ shou!d !an their caita! gains vice versa.

• 8ince !ong%term caita! gains en)oy a concessiona! treatment, the assessee shou!d so

arrange the transfers of caita! assets that they fa!! in the category of !ong%term caita!

assets.

• An assessee may go for a short%term caita! gain, in the year when there is a!ready a

short%term caita! !oss or !oss under any other head that can be set off against such

income.

•

The assessee shou!d take the maximum benefit of exemtions avai!ab!e u0s :C, :C2,:CH, :C'H, :C', :C*, :C( and :C.

• Avoid c!aiming short%term caita! !oss against !ong%term caita! gains. Instead c!aim

it against short%term caita! gain and if ossib!e, either create some short%term caita!

gain in that year or, defer !ong%term caita! gains to next year.

• 8ince the income of the minor chi!dren is to be c!ubbed in the hands of the arent, it

wou!d be better if the minor chi!dren have no or !esser recurring income but have

income from caita! gain because the caita! gain wi!! be taxed at the f!at rate of #$F

and thus the c!ubbing wou!d not increase the tax incidence for the arent.

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Profit! 'nd 8'in! of u!ine!! or Profe!!ion

Inco&e fro& u!ine!! or Profe!!ion-

The fo!!owing incomes sha!! be chargeab!e under this head

• Profit and gains of any business or rofession carried on by the assessee at any time

during revious year.

• Any comensation or other ayment due to or received by any erson, in connection

with the termination of a contract of managing agency or for vesting in the

(overnment management of any roerty or business.

• Income derived by a trade, rofessiona! or simi!ar association from secific services

erformed for its members.• Profits on sa!e of /'P !icence0'xim scri, cash assistance received or receivab!e

against exorts, and duty drawback of customs or excise received or receivab!e

against exorts.

• The va!ue of any benefit or er-uisite, whether convertib!e into money or not, arising

from business or in exercise of a rofession.

• Any interest, sa!ary, bonus, commission or remuneration due to or received by a

artner of a firm from the firm to the extent it is a!!owed to be deducted from the

firm"s income. Any interest sa!ary etc. which is not a!!owed to be deducted u0s C$BbD,the income of the artners sha!! be ad)usted to the extent of the amount so disa!!owed.

• Any sum received or receivab!e in cash or in kind under an agreement for not

carrying out activity in re!ation to any business, or not to share any know%how, atent,

coyright, trade%mark, !icence, franchise or any other business or commercia! right of,

simi!ar nature of information or techni-ue !ike!y to assist in the manufacture or

rocessing of goods or rovision for services excet when such sum is taxab!e under

the head


23/66


24/66

the said sum sha!! be used for scientific research under a rogramme aroved in this

beha!f by the rescribed authority.@ne and one ha!f times, the exenditure incurred u to &1.&.#$$: on scientific

research on in%house research and deve!oment faci!ity, by a comany engaged in the

business of bio%techno!ogy or in the manufacture of any drugs, harmaceutica!s,

e!ectronic e-uiments, comuters te!ecommunication e-uiments, chemica!s or other

notified artic!es.

• 'xenditure incurred before 1.C.199 on ac-uisition of atent rights or coyrights,

used for the business, a!!owed in 1C e-ua! insta!ments starting from the year in which

it was incurred.

• 'xenditure incurred before 1.C.199 on ac-uiring know%how for the business,

a!!owed in 6 e-ua! insta!ments. ;here the know%how is deve!oed in a !aboratory,

5niversity or institution, deduction is a!!owed in & e-ua! insta!ments.

• Any caita! exenditure incurred and actua!!y aid by an assessee on the ac-uisition

of any right to oerate te!ecommunication services by obtaining !icence wi!! be

a!!owed as a deduction in e-ua! insta!ments over the eriod starting from the year in

which ayment of !icence fee is made or the year in which business commences

where !icence fee has been aid before commencement and ending with the year in

which the !icence comes to an end.

• 'xenditure by way of ayment to a ub!ic sector comany, !oca! authority or an

aroved association or institution, for carrying out a secified ro)ect or scheme for

romoting the socia! and economic we!fare or u!iftment of the ub!ic. The secified

ro)ects inc!ude drinking water ro)ects in rura! areas and urban s!ums, construction

of dwe!!ing units or schoo!s for the economica!!y weaker sections, ro)ects of non%

conventiona! and renewab!e source of energy systems, bridges, ub!ic highways,

roads romotion of sorts, o!!ution contro!, etc.

• 'xenditure by way of ayment to association and institution for carrying out rura!

deve!oment rogrammes or to a notified rura! deve!oment fund, or the ationa!5rban Poverty 'radication *und.

• 'xenditure incurred on or before &1.&.#$$# by way of ayment to associations and

institutions for carrying out rogramme of conservation of natura! resources or

afforestation or to an aroved fund for afforestation.

24


25/66

• Amortisation of certain re!iminary exenses, such as exenditure for rearation of

ro)ect reort, feasibi!ity reort, feasibi!ity reort, market survey, etc., !ega! charges

for drafting and rinting charges of emorandum and Artic!es, registration exenses,

ub!ic issue exenses, etc. 'xenditure incurred after &1.&.19, sha!! be deductib!e

u to a maximum of :F of the cost of ro)ect or the caita! ex!oyed, in : e-ua!

insta!ments over five successive years.

• @ne%fifth of exenditure incurred on ama!gamation or demerger, by an Pakistani

comany sha!! be deductib!e in each of five successive years beginning with the year

in which ama!gamation or demerger takes !ace.

• @ne%fifth of the amount aid to an em!oyee on his vo!untary retirement under a

scheme of vo!untary retirement, sha!! be deductib!e in each of five successive years

beginning with the year in which the amount is aid.

• Heduction for exenditure on rosecting, etc. for certain minera!s.

• Insurance remium for stocks or stores.

• Insurance remium aid by a federa! mi!k co%oerative society for catt!e owned by a

member.

• Insurance remium aid for the hea!th of em!oyees by che-ue under the scheme

framed by (.I.. and aroved by the entra! (overnment.

• Payment of bonus or commission to em!oyees, irresective of the !imit under the

Payment of 2onus Act.

•

Interest on borrowed caita!.• Provident and suerannuation fund contribution.

• Aroved gratuity fund contributions.

• Any sum received from the em!oyees and credited to the em!oyees account in the

re!evant fund before due date.

• ?oss on death or becoming ermanent!y use!ess of anima!s in connection with the

business or rofession.

• Amount of bad debt actua!!y written off as irrecoverab!e in the accounts not inc!uding

rovision for bad and doubtfu! debts.

• Provision for bad and doubtfu! debts made by secia! reserve created and maintained

by a financia! cororation engaged in roviding !ong%term finance for industria! or

agricu!tura! deve!oment or infrastructure deve!oment in Pakistan or by a ub!ic

comany carrying on the business of roviding housing finance.

• *ami!y !anning exenditure by comany.

• ontributions towards 'xchange /isk Administration *und.

25


26/66

• 'xenditure, not being in nature of caita! exenditure or ersona! exenditure of the

assessee, incurred in furtherance of trade. owever, any exenditure incurred for a

urose which is an offence or is rohibited by !aw, sha!! not be deductib!e.

• 'ntertainment exenditure can be c!aimed u0s &LB1D, in fu!!, without any

!imit0restriction, rovided the exenditure is not of caita! or ersona! nature.

• Payment of sa!ary, etc. and interest on caita! to artners

• 'xenses deductib!e on actua! ayment on!y.

• Any rovision made for ayment of contribution to an aroved gratuity fund, or for

ayment of gratuity that has become ayab!e during the year.

• 8ecia! rovisions for comuting rofits and gains of civi! contractors.

• 8ecia! rovision for comuting income of truck owners.

• 8ecia! rovisions for comuting rofits and gains of retai! business.

• 8ecia! rovisions for comuting rofits and gains of shiing business in the case of

non%residents.

• 8ecia! rovisions for comuting rofits or gains in connection with the business of

ex!oration etc. of minera! oi!s.

• 8ecia! rovisions for comuting rofits and gains of the business of oeration of

aircraft in the case of non%residents.

• 8ecia! rovisions for comuting rofits and gains of foreign comanies engaged in

the business of civi! construction, etc. in certain turnkey ro)ects.

• Heduction of head office exenditure in the case of non%residents.

• 8ecia! rovisions for comuting income by way of roya!ties etc. in the case of

foreign comanies

'xenses deductib!e for authors receiving income from roya!ties

• In case of Pakistani authors0writers where the amount of roya!ties receivab!e during a

revious year are !ess than /s. #:,$$$ and where detai!ed accounts regarding

exenses incurred are not maintained, deduction for exenses may be a!!owed u to

#:F of such amount or /s. :,$$$, whichever is !ess. The above deduction wi!! be

a!!owed without ca!!ing for any evidence in suort of exenses.

• If the amount of roya!ty receivab!e exceeds /s.#:,$$$ on!y the actua! exenses

incurred sha!! be a!!owed.

Set Off 'nd C'rry :or0'rd of u!ine!! %o!!-

26


27/66

If there is a !oss in any business, it can be set off against rofits of any other business in

the same year. The !oss, if any, sti!! remaining can be set off against income under any

other head.

owever, !oss in a secu!ation business can be ad)usted on!y against rofits of another

secu!ation business. ?osses not ad)usted in the same year can be carried forward to

subse-uent years.

27


28/66

Inco&e fro& Ot+er Source!

Ot+er Source!

This is the !ast and residua! head of charge of income. Income of every kind which is not

to be exc!uded from the tota! income under the Income Tax Act sha!! be charge to tax

under the head Income *rom @ther 8ources, if it is not chargeab!e under any of the other

four heads%Income from 8a!aries, Income *rom ouse Proerty, Profits and (ains from

2usiness and Profession and aita! (ains. In other words, it can be said that the

residuary head of income can be resorted to on!y if none of the secific heads is

a!icab!e to the income in -uestion and that it comes into oeration on!y if the receding

heads are exc!uded.

I,,u!tr'tie %i!t

*o!!owing is the i!!ustrative !ist of incomes chargeab!e to tax under the head Income from

@ther 8ources

BiD Hividends

Any dividend dec!ared, distributed or aid by the comany to its shareho!ders is

chargeab!e to tax under the head , irresective of the fact

whether shares are he!d by the assessee as investment or stock in trade. Hividend is

deemed to be the income of the revious year in which it is dec!ared, distributed or aid.

owever interim dividend is deemed to be the income of the year in which the amount of

such dividends unconditiona!!y made avai!ab!e by the comany to its shareho!ders.

owever, any income by way of dividends is exemt from tax u0s1$B&CD and no tax is

re-uired to be deducted in resect of such dividends.

28


29/66

BiiD Income from machinery, !ant or furniture be!onging to the assessee and !et on hire, if

the income is not chargeab!e to tax under the head Profits and gains of business or

rofession7

BiiiD ;here an assessee !ets on hire machinery, !ant or furniture be!onging to him and

a!so bui!dings, and the !etting of the bui!dings is insearab!e from the !etting of the said

machinery, !ant or furniture, the income from such !etting, if it is not chargeab!e to tax

under the head Profits and gains of business or rofession7

BivD Any sum received under a eyman insurance o!icy inc!uding the sum a!!ocated by

way of bonus on such o!icy if such income is not chargeab!e to tax under the head

Profits and gains of business or rofession or under the head 8a!aries.

( v ) ;here any sum of money exceeding twenty%five thousand ruees is received without

consideration by an individua! or a indu undivided fami!y from any erson on or after

the 1st day of 8etember, #$$C, the who!e of such sum, rovided that this c!ause sha!! not

a!y to any sum of money received

BaD *rom any re!ative7 or

BbD @n the occasion of the marriage of the individua!7 or

BcD 5nder a wi!! or by way of inheritance7 or

BdD In contem!ation of death of the ayer .

BviD Any sum received by the assessee from his em!oyees as contributions to any

rovident fund or suerannuation fund or any fund set u under the rovisions of the

'm!oyees" 8tate Insurance Act. If such income is not chargeab!e to tax under the head

Profits and gains of business or rofession

BviiD Income by way of interest on securities, if the income is not chargeab!e to tax under

the head Profits and gains of business or rofession. If books of account in resect of

such income are maintained on cash basis then interest is taxab!e on receipt basis. If

however, books of account are maintained on mercanti!e system of accounting then

interest on securities is taxab!e on accrual basis.

29


30/66

BviiiD @ther receits fa!!ing under the head =Income from @ther 8ources"

• Hirector"s fees from a comany, director"s commission for standing as a guarantor to

bankers for a!!owing overdraft to the comany and director"s commission for

underwriting shares of a new comany.

• Income from ground rents.

• Income from roya!ties in genera!.

Deduction! fro& Inco&e fro& Ot+er Source!-

The income chargeab!e to tax under this head is comuted after making the fo!!owing

deductions

1. In the case of dividend income and interest on securities any reasonab!e sum aid by

way of remuneration or commission for the urose of rea!i+ing dividend or interest.

#. In case of income in the nature of fami!y ension /s.1:, $$$or &&.:F of such income,

whichever is !ow.

&. In the case of income from machinery, !ant or furniture !et on hire

BaD /eairs to bui!ding

BbD urrent reairs to machinery, !ant or furniture

BcD Hereciation on bui!ding, machinery, !ant or furniture

BdD 5nabsorbed Hereciation.

C. Any other exenditure Bnot being a caita! exenditureD exended who!!y and

exc!usive!y for the urose of earning of such income.

30


31/66

CHAPTER 2

%ITERATURE RE6IE;

Taxation Po!icy has been a wide!y debated issue a!! over the wor!d. A !argenumber of studies have been conducted covering different asects of income tax structure

such as ersona! income tax, caita! gains taxation, agricu!tura! taxation, efficiency of

income tax administration etc. over the years. In this chater, the avai!ab!e !iterature was

studied to get an insight into the main ob)ectives of the study. The review of !iterature is

confined to India on!y as income tax !ega! frame work varies from country to country.

oreover, reorts of imortant committees constituted by (overnment of India have a!so

been reviewed. A brief review of re!evant studies in this regard is given be!ow

Indi'n T'('tion Enuiry Co&&ittee 41


32/66

research institutions by the government.

>',dor 41


33/66

of Pub!ic /e!ation @fficers shou!d be increased for the convenience of the

taxayers.

Sin)+ 41


34/66

with the income tax deartment. 5nrea!istic and over assessment of income,

administrative de!ays, shortage of ersonne! and !ack of coordination were identified as

main causes resonsib!e for tax arrears. The measures suggested for dea!ing with above

rob!ems by the committee were as fo!!ows

M /eduction in tax rates with maximum margina! rate of L: er cent.

M inimisation of contro!s and !icenses.

M /egu!ation of donations to o!itica! arties.

M reating confidence among sma!! tax ayers.

M Introducing extensive system of inte!!igence.

M Imosition of ena!ty with reference to tax sought to be evaded instead of

income concea!ed.

M Issuing Permanent Account umbers to a!! assesses.

M Prescribing a uniform accounting year for a!! taxayers coinciding with budget

year.

M Providing more administrative owers for search and sei+ure oerations.

M 'mowering the union government to imose tax on agricu!ture by amending

constitution.

M reating rovision in !aw for sett!ement with taxayers at any stage of the

roceedings.

M omu!sory registration for charitab!e and re!igious trusts which want to c!aim

exemtions under Income Tax Act.

M o!!ection and recovery units to be rovided sufficient manower

corresonding to number of assessing officers.

M *ie!d staff in recovery units to be given sufficient training and infrastructure.

M /ecovery staff to be rovided with firearms.

M Amendment in !aw to create an automatic !ien on moveab!e and immovab!e

roerties of the tax ayers.

34


35/66


36/66

1. There are no sectora! cas Bexcet in PP*D on investment in the new section and

the assessee is free to invest /s. 1,$$,$$$ in any one or more of the secified

instruments.

#. Amount invested in these instruments wou!d be a!!owed as deduction irresective

of the fact whether Bor notD such investment is made out of income chargeab!e to

tax.

&. 8ection $ deduction is a!!owed irresective of assesseeEs income !eve!. 'ven

ersons with taxab!e income above /s. 1$,$$,$$$ can avai! benefit of section

$.

C. As the deduction is a!!owed from taxab!e income, the exact savings in tax wi!!

deend uon the tax s!ab of the individua!. Thus, a erson in &$F tax stab can

save income tax u to /s. &$,6$$ Bor /s. &&,66$ if annua! income exceeds /s.

1$,$$,$$$D by investing /s. 1,$$,$$$ in the secified schemes u0s $.

Deduction under !ection @CCC

Heduction in resect of contribution to certain Pension *unds

Heduction is a!!owed for the amount aid or deosited by the assessee during the

revious year out of his taxab!e income to the annuity !an BNeevan 8urakshaD of ?ife

Insurance ororation of Pakistan or annuity !an of other insurance comanies for

receiving ension from the fund referred to in section 1$B#&AA2D

Amount of Heduction aximum /s. 1$,$$$0%

Deduction under !ection @D

Heduction in resect of edica! Insurance Premium

Heduction is a!!owed for any medica! insurance remium under an aroved scheme of

(enera! Insurance ororation of Pakistan ou!ar!y known as 'HI?AID or of any

other insurance comany, aid by che-ue, out of assessee"s taxab!e income during the

revious year, in resect of the fo!!owing

36


37/66

In case of an individua! G insurance on the hea!th of the assessee, or wife or husband, or

deendent arents or deendent chi!dren.

In case of an 5* G insurance on the hea!th of any member of the fami!y

Amount of deduction aximum /s. 1$,$$$, in case the erson insured is a senior citi+en

Bexceeding 6: years of ageD the maximum deduction a!!owab!e sha!! be /s. 1:,$$$0%.

Deduction under !ection @DD

Heduction in resect of maintenance inc!uding medica! treatment of handicaed

deendent

Heduction is a!!owed in resect of G any exenditure incurred by an assessee, during the

revious year, for the medica! treatment training and rehabi!itation of one or more

deendent ersons with disabi!ity7 and

Amount deosited, under an aroved scheme of the ?ife Insurance ororation or other

insurance comany or the 5nit Trust of Pakistan, for the benefit of a deendent erson

with disabi!ity.

Amount of deduction the deduction a!!owab!e is /s. :$,$$$ B/s. C$,$$$ for A.4. #$$&%

#$$CD in aggregate for any of or both the uroses secified above, irresective of the

actua! amount of exenditure incurred. Thus, if the tota! of exenditure incurred and the

deosit made in aroved scheme is /s. C:,$$$, the deduction a!!owab!e for A.4. #$$C%

#$$:, is /s. :$,$$$

Deduction under !ection @DD

Heduction in resect of medica! treatment

A resident individua! or indu 5ndivided fami!y deduction is a!!owed in resect of

during a year for the medica! treatment of secified disease or ai!ment for himse!f or a

deendent or a member of a indu 5ndivided *ami!y.

37


38/66

Amount of Heduction Amount actua!!y aid or /s. C$,$$$ whichever is !ess Bfor A.4.

#$$&%#$$C, a deduction of /s. C$,$$$ is a!!owab!e In case of amount is aid in resect of

the assessee, or a erson deendent on him, who is a senior citi+en the deduction

a!!owab!e sha!! be /s. 6$,$$$.

Deduction under !ection @E

Heduction in resect of /eayment of ?oan taken for igher 'ducation

An individua! assessee who has taken a !oan from any financia! institution or any

aroved charitab!e institution for the urose of ursuing his higher education i.e. fu!!

time studies for any graduate or ost graduate course in engineering medicine,

management or for ost graduate course in a!ied sciences or ure sciences inc!udingmathematics and statistics.

Amount of Heduction Any amount aid by the assessee in the revious year, out of his

taxab!e income, by way of reayment of !oan or interest thereon, sub)ect to a maximum

of /s. C$,$$$

Deduction under !ection @8

Honations

1$$ F deduction is a!!owed in resect of donations to ationa! Hefence *und, Prime

inister"s ationa! /e!ief *und, Armenia 'arth-uake /e!ief *und, Africa *und, ationa!

*oundation of ommuna! armony, an aroved 5niversity or educationa! institution of

nationa! eminence, hief inister"s earth-uake /e!ief *und etc.

In a!! other cases donations made -ua!ifies for the :$F of the donated amount for

deductions.

Deduction under !ection @88

38


39/66

Heduction in resect of /ent Paid

Any assessee inc!uding an em!oyee who is not in receit of ./.A. u0s 1$B1&AD

Amount of Heduction ?east of the fo!!owing amounts are a!!owab!e

• /ent aid minus 1$F of assessee"s tota! income

• /s. #,$$$ .m.

• #:F of tota! income

Deduction under !ection @88A

Honations for 8cientific /esearch or /ura! Heve!oment

In resect of institution or fund referred to in c!ause BeD or BfD donations made u to

&1.&.#$$# sha!! on!y be deductib!e.

This deduction is not a!icab!e where the gross tota! income of the assessee inc!udes the

income chargeab!e under the head Profits and gains of business or rofession. In those

cases, the deduction is a!!owab!e under the resective sections secified above.

Deduction under !ection @CCE

A new 8ection $' has been inserted from *4#$$:%$6. As er this section, the

maximum amount of deduction that an assessee can c!aim under 8ections $, $

and $H wi!! be !imited to /s 1$$,$$$.

39


40/66

CHAPTER "

COPUTATION O: TAB %IAI%IT9

T'( R'te! for A.9. 212713

*o!!owing rates are a!icab!e for comuting tax !iabi!ity for the current *inancia! 4ear

ending on arch &1 #$1#, BAssessment 4ear #$1#%1&D.

T'b,e 1- :or Re!ident ',e Indiidu',! be,o0 ?= ye'r! of ')e

Net Inco&e R'n)e Inco&e T'( P,u! Surc+'r)eP,u! Educ'tion

Ce!!

5 to /s. 1,1$,$$$ i! i! i!/s. 1,1$,$$$ to

/s. 1,:$,$$$

1$F of Income

above /s. 1,1$,$$$ i! &F of Income Tax

/s. 1,:$,$$1 to

/s. #,:$,$$$

/s. C,$$$ O #$F of

Income above /s.

1,:$,$$$

i! &F of Income Tax

/s. #,:$,$$1 to

/s. 1$,$$,$$$

/s. #C,$$$ O &$F

of Income above

/s. #,:$,$$$

i! &F of Income Tax

Above /s.

1$,$$,$$$

/s. #,C9,$$$ O &$F

of Income above

/s. 1$,$$,$$$

1$F of Income Tax&F of Income Tax

and surcharge

T'b,e 2- :or Re!ident :e&',e Indiidu',! be,o0 ?= ye'r! of ')e

Net Inco&e R'n)e Inco&e T'( P,u! Surc+'r)e

P,u! Educ'tion

Ce!!

5 to /s. 1,C:,$$$ i! i! i!

/s. 1,C:,$$1 to

/s. 1,:$,$$$

1$F of Income

above /s. 1,C:,$$$ i! &F of Income Tax

/s. 1,:$,$$1 to /s. :$$ O #$F of i! &F of Income Tax

40


41/66

/s. #,:$,$$$Income above /s.

1,:$,$$$

/s. #,:$,$$1 to

/s. 1$,$$,$$$

/s. #$,:$$ O &$F

of Income above/s. #,:$,$$$

i! &F of Income Tax

Above /s.

1$,$$,$$$

/s. #,C:,$$$ O &$F

of Income above

/s. 1$,$$,$$$


and surcharge

T'b,e 3- :or Re!ident Senior Citien! 40+o 're ?= ye'r! or &ore 't 'ny ti&e

durin) t+e :in'nci', 9e'r 2127135

Net Inco&e R'n)e Inco&e T'( P,u! Surc+'r)eP,u! Educ'tion

Ce!!

5 to /s. 1,9:,$$$ i! i! i!

/s. 1,9:,$$1 to

/s. #,:$,$$$

#$F of Income

above /s. 1,9:,$$$ i! &F of Income Tax

/s. #,:$,$$1 to

/s. 1$,$$,$$$

/s. 11,$$$ O &$F

of Income above

/s. #,:$,$$$

i! &F of Income Tax

Above /s.

1$,$$,$$$

/s. #,&6,$$$ O &$F

of Income above

/s. 1$,$$,$$$


and surcharge

Note: The rules for “Senior Citizen” are the same as for ‘Men’ as well as ‘omen’. !n"

person who turns #$ on an" %a" prior to or on March &' *'& will be treate% as a

Senior Citizen.

S',e T'( %i'bi,ity C',cu,'tion!

T'b,e "- :or Re!ident ',e Indiidu',! be,o0 ?= ye'r! of ')e

Annu', T'('b,e

Inco&e

Inco&e

T'( Surc+'r)e

Educ'tion

Ce!! Tot',

41


42/66

11$$$$ $ $ $ $

1C:$$$ &:$$ $ 1$: &6$:

1:$$$$ C$$$ $ 1#$ C1#$

19:$$$ 1&$$$ $ &9$ 1&&9$

#$$$$$ 1C$$$ $ C#$ 1CC#$

#:$$$$ #C$$$ $ L#$ #CL#$

&$$$$$ &9$$$ $ 11L$ C$1L$

C$$$$$ 69$$$ $ #$L$ L1$L$

:$$$$$ 99$$$ $ #9L$ 1$19L$

1$$$$$$ #C9$$$ $ LCL$ #:6CL$

11$$$$$ #L9$$$ #L9$$ 9#$L &161$L

T'b,e =- :or Re!ident :e&',e Indiidu',! be,o0 ?= ye'r! of ')e

Annu', T'('b,e Inco&e Inco&e T'( Surc+'r)e Educ'tion Ce!! Tot',

11$$$$ $ $ $ $

1C:$$$ $ $ $ $

1:$$$$ :$$ $ 1: :1:

19:$$$ 9:$$ $ #: 9L:

#$$$$$ 1$:$$ $ &1: 1$1:

#:$$$$ #$:$$ $ 61: #111:

&$$$$$ &::$$ $ 1$6: &6:6:

C$$$$$ 6::$$ $ 196: 6LC6:

:$$$$$ 9::$$ $ #6: 9&6:

1$$$$$$ #C::$$ $ L&6: #:#6:

11$$$$$ #L::$$ #L::$ 9$9# &1#1C#

T'b,e ?- :or Re!ident Senior Citien! 4oer ?= ye'r! ')e 't 'ny ti&e durin) :.9. 2127135

Annu', T'('b,e

Inco&e

Inco&e

T'( Surc+'r)e

Educ'tion

Ce!! Tot',

42


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11$$$$ $ $ $ $

1C:$$$ $ $ $ $

1:$$$$ $ $ $ $

19:$$$ $ $ $ $

#$$$$$ 1$$$ $ &$ 1$&$

#:$$$$ 11$$$ $ &&$ 11&&$

&$$$$$ #6$$$ $ L$ #6L$

C$$$$$ :6$$$ $ 16$ :L6$

:$$$$$ 6$$$ $ #:$ :$

1$$$$$$ #&6$$$ $ L$$ #C&$$

11$$$$$ #66$$$ #66$$ LL &$1&L

:i,in) of Inco&e T'( Return

1. *i!ing of income tax return is comu!sory for a!! individua!s whose gross annua!

income exceeds the maximum amount which is not chargeab!e to income tax i.e.

/s. 1,C:,$$$ for /esident ;omen, /s. 1,9:,$$$ for 8enior iti+ens and /s.

1,1$,$$$ for other individua!s and 5*s.

#. The !ast date of fi!ing income tax return is Nu!y &1, in case of individua!s who are

not covered in oint & be!ow.

&. If the income inc!udes business or rofessiona! income re-uiring tax audit

Bturnover /s. C$ !akhsD, the !ast date for fi!ing the return is @ctober &1.

C. The ena!ty for non%fi!ing of income tax return is /s. :$$$. ?ong term caita!

gain on sa!e of shares and e-uity mutua! funds if the security transaction tax is

aid0imosed on such transactions

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CHAPTER =

TAB P%ANNIN8 7 RECOENDATIONS AND USE:U% TIPS

T'( P,'nnin)

Proer tax !anning is a basic duty of every erson which shou!d be carried out

re!igious!y. 2asica!!y, there are three stes in tax !anning exercise.

These three stes in tax !anning are

• a!cu!ate your taxab!e income under a!! heads i.e., Income from 8a!ary, ouse

Proerty, 2usiness 3 Profession, aita! (ains and Income from @ther 8ources.

• a!cu!ate tax ayab!e on gross taxab!e income for who!e financia! year Bi.e., from 1st

Ari! to &1st archD using a sim!e tax rate tab!e, given on next age.

• After you have ca!cu!ated the amount of your tax !iabi!ity. 4ou have two otions to

choose from

1. Pay your tax Bo tax !anning re-uiredD

#. inimise your tax through rudent tax !anning.

ost eo!e right!y choose @tion E2E. ere you have to comare the advantages of

severa! tax%saving schemes and deending uon your age, socia! !iabi!ities, tax s!abs and

ersona! references, decide uon a right mix of investments, which sha!! reduce your tax

!iabi!ity to +ero or the minimum ossib!e.

'very citi+en has a fundamenta! right to avai! a!! the tax incentives rovided by the

(overnment. Therefore, through rudent tax !anning not on!y income%tax !iabi!ity is

reduced but a!so a better future is ensured due to comu!sory savings in high!y safe

(overnment schemes. ;e shou!d !an our investments in such a way, that the ost%tax

yie!d is the highest ossib!e keeing in view the basic arameters of safety and !i-uidity.

*or most individua!s, financia! !anning and tax !anning are two mutua!!y exc!usive

exercises. ;hi!e !anning our investments we send considerab!e amount of time

eva!uating various otions and determining which suits us best. 2ut when it comes to

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!anning our investments from a tax%saving ersective, more often than not, we sim!y

go the traditiona! way and do the exact same thing that we did in the ear!ier years. ;e!!,

in case you were not aware the guide!ines governing such investments are a !ot different

this year. And !ethargy on your art to rework your investment !an cou!d cost you dear.

;hy are the stakes higher this year 5nti! the revious year, tax benefit was rovided as

a rebate on the investment amount, which cou!d not exceed /s 1$$,$$$7 of this /s &$,$$$

was exc!usive!y reserved for Infrastructure 2onds. A!so, the rebate reduced with every

rise in the income s!ab7 individua!s earning over /s :$$,$$$ er year were not e!igib!e to

c!aim any rebate. *or the current financia! year, the /s 1$$,$$$ !imit has been retained7

however interna! cas have been done away with. Individua!s have a much greater degree

of f!exibi!ity in deciding how much to invest in the e!igib!e instruments. The other

significant changes are

• The rebate has been re!aced by a deduction from gross tota! income, effective!y. The

higher your income s!ab, the greater is the tax benefit.

• A!! individua!s irresective of the income bracket are e!igib!e for this investment.

These deve!oments wi!! resu!t in higher tax%savings.

;e shou!d use this /s 1$$,$$$ contribution as an integra! art of your overa!! financia! !anning and not )ust for the urose of saving tax. ;e shou!d understand which

instruments and in what roortion suit the re-uirement best. In this note we recommend

a broad asset a!!ocation for tax saving instruments for different investor rofi!es.

:or #er!on! be,o0 3 ye'r! of ')e-

In this age bracket, you robab!y have a high aetite for risk. 4our disosab!e sur!us

maybe sma!! Bas you cou!d be aying your home !oan insta!!mentsD, but the savings that

you have can be set aside for a !ong eriod of time. 4our chi!dren, if any, sti!! have many

years before they go to co!!ege7 or retirement is sti!! further away. 4ou therefore shou!d

invest a !arge chunk of your sur!us in tax%saving funds Be-uity fundsD. The em!oyee

rovident fund deduction haens from your sa!ary and therefore you have !itt!e contro!

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over it. /egarding !ife insurance, go in for ure term insurance to start with. 8uch o!icies

are very affordab!e and can extend for u to &$ years. The rest of your funds Bnet of the

home !oan rincia! reaymentD can be arked in 80PP*.

:or #er!on! bet0een 3 7 "= ye'r! of ')e-

4our aetite for risk wi!! gradua!!y dec!ine over this age bracket as a resu!t of which

your exosure to the stock markets wi!! need to be ad)usted according!y. As your

comensation increases, so wi!! your contribution to the 'P*. The !ife insurance

comonent can be maintained at the same !eve!7 assuming that you wou!d have a!ready

taken ade-uate !ife insurance and there is no need to add to it. In keeing with your

reducing risk aetite, your contribution to PP*08 increases. @ne benefit of the higher

contribution to PP* wi!! be that your account wi!! be maturing Byou robab!y oened an

account when you started to earnD and wi!! yie!d you tax free income Bthis can he! you

fund your chi!drenEs co!!ege educationD.

T'b,e ?- T'( P,'nnin) Too,! i( by A)e 8rou#

A)e %ife in!ur'nce #re&iu& EP: PP: NSC E%SS Tot',

Q &$ 1$,$$$ #$,$$$ #$,$$$ :$,$$$ 1$$,$$$

&$ % C: 1$,$$$ &$,$$$ #:,$$$ &:,$$$ 1$$,$$$C: % :: 1$,$$$ &:,$$$ &$,$$$ #:,$$$ 1$$,$$$

R :: 1$,$$$ % 6:,$$$ #:,$$$ 1$$,$$$

:or #er!on! bet0een "= 7 == ye'r! of ')e-

4ou are now nearing retirement. To that extent it is critica! that you fi!! in any shortfa!!

that may exist in your retirement nest egg. 4ou a!so do not want to )eoardi+e your oo!

of savings by taking any extraordinary risk. The a!!ocation wi!! therefore continue to

move away from risky assets !ike stocks, to safer ones !ine the 8. owever, it is

imortant that you continue to a!!ocate some money to stocks. The reason being that even

at age ::, you robab!y have 1: % #$ years of retired !ife7 therefore having some ortion

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of your money invested for !onger durations, in the high risk % high return category, wi!!

he! in bui!ding your nest egg for the !atter art of your retired !ife.

:or #er!on! oer == ye'r! of ')e-

4ou are to retire in a few years7 then you wi!! have to deend on your investments for

meeting your exenses. Therefore the money that you have to invest under 8ection $

must be a!!ocated in a manner that serves both near term income re-uirements as we!! as

!ong%term growth needs. ost of the funds are therefore a!!ocated to 8. 4our PP*

account robab!y wi!! mature ear!y into your retirement Bif you started another account at

about age C$ yearsD. 4ou continue to a!!ocate some money to e-uity to rovide for the

!atter art of your retired !ife. @nce you are retired however, since you wi!! not have

income there is no need to worry about 8ection $. 4ou shou!d consider investing in the

8enior iti+ens 8avings 8cheme, which offers an assured return of 9F a7 interest is

ayab!e -uarter!y. Another investment you shou!d consider is Post @ffice onth!y

Income 8cheme.

Investing the /s 1$$,$$$ in a manner that saves both taxes as we!! as he!s you achieve

your !ong%term financia! ob)ectives is not a difficu!t exercise. A!! it re-uires is for you to

give it some thought, draw u a !an that suits you best and then be disci!ined in

executing the same.

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T'( P,'nnin) Too,!

*o!!owing are the five tax !anning too!s that simu!taneous!y he! the assessees maximi+e

their wea!th too.

ost of what we do with resect to tax saving, !anning, investment whichever way you

ca!! it is going to be of !itt!e or no use in years to come.

The returns from such investments are !ike!y to be minuscu!e and or they may not serve

any worthwhi!e use of your money. Tax !anning is very strategic in nature and not !ike

the !ast minute fire fighting most do each year.

*or most eo!e, tax !anning is akin to some kind of a burden that they want off their

shou!ders as soon as ossib!e. As a resu!t, the attitude is whatever seems ok and wi!! he!

save tax G

a !arger rerogative than that of uti!isation of your hard earned money and the future of

such monies in years to come.

?ike each year we may continue to do what we do or give ourse!ves a choice this year

round. ?et"s think before we ut down our investment dec!arations this time around. ?ike

each year roduct manufacturers wi!! be on a high note enticing you to buy their roducts

and save tax. As usua! the market wi!! be f!ooded by agents and brokers having so!utions

for you. ere are some guide!ines to he! you wade through the various otions and

ensure the fo!!owing

1. Tax is saved and that you c!aim the fu!! benefit of your section $ benefits

#. Product are chosen based on their !ong term merit and not !ike fire fighting

otions undertaken )ust to reach that /s 1 !akh investment mark

&. Products are chosen in such a manner that mu!ti!e !ife goa!s can be fu!fi!!ed and

that they are in !ine with your future goa!s and exectations

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C. Products that you choose he! you otimise returns whi!e you save tax in the

immediate future.

Str'te)ic T'( P,'nnin)

8o far with whatever you have done in the ast, it is imortant to understand the future

im!ications of your tax saving strategy. 4ou cannot do much about the statutory

commitments and contribution !ike rovident fund BP*D but a!! the rest is in your contro!.

1. In!ur'nce

If you have a traditiona! money back o!icy or an endowment tye of o!icy understand

that you wi!! be earning about CF to 6F returns on such o!icies. In years to come, this

wi!! be !ower or )ust e-ua! to inf!ation and hence you are not creating any wea!th, infact

you are destroying the va!ue of your wea!th raid!y.

8uch o!icies shou!d idea!!y be restructured and making them aid u is a good otion.

4ou can buy term assurance !an which wi!! serve your need to obtaining !ife cover and

a!! the same re!ease unroductive cash f!ow to be de!oyed into more roductive and

wea!th generating asset c!asses. 2e carefu! of 5?IP87 invest if you are under &: years of

age, e!se as and when the stock markets are down or enter into a downward hase. 4our

5?IP wi!! turn out to be very exensive as your age increases. Again I am sure you did

not know this.

2. Pub,ic Proident :und 4PP:5

This has been a !ong time favourite of most eo!e. It is a no%brainer and hence most

eo!e refer this but note this. The current returns are F and -uite !ike!y that sooner or

!ater with the im!ementation of the exemt tax B''TD regime of taxation investments in

PP* may become redundant, as returns wi!! fa!! significant!y.

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ow this wi!! be im!emented is not c!ear hence the best otion is to go easy on this one.

8im!y !ace a nomina! sum to kee your account active before there is c!arity on this

front. ''T may a!y to insurance o!icies as we!!.

3. Pen!ion Po,icie!

This is the greatest mistake that many eo!e make. There is no ension o!icy today,

which wi!! rea!!y he! you in retirement. That is the co!d fact. Tu!i ension o!icies may

he! you to some extent but I wou!d give it a rating of four out of ten. It is -uite !ike!y

that you wi!! make a si+eab!e sum by the time you retire but that is where the rob!em

begins.

The rob!em with ension o!icies is that you wi!! get a meas!y #F or CF annuity when

you actua!!y retire. To make matters worse this wi!! be taxed at fu!! margina! rate of

income tax as we!!. ?i-uidity and f!exibi!ity wi!! )ust not be there. o insurance comany

or agent wi!! agree to this but this is a co!d fact.

8teer c!ear of such o!icies. 'ither make them aid u or sto aying Tu!i remiums, if

you can. Hivest the money to more roductive assets based on your overa!! risk rofi!e

and genera! references. 2ite this G /s 1$$ today wi!! be worth on!y /s say in #$

years time considering :F inf!ation.

". :ie ye'r fi(ed de#o!it! 4:D!5/ N'tion', S'in)! Sc+e&e 4NSC5/ ot+er bond!

These roducts are fair if your risk aetite is rea!!y !ow and if you are not too keen to

bui!d wea!th. (enera!!y seaking, in a!! that we do wea!th creation shou!d be the

under!ying motive.

=. Euity %in*ed S'in)! Sc+e&e 4E%SS5

This is a good otion. 4ou save tax and returns are tax%free com!ete!y. 4ou get to bui!d a

!ot of wea!th. owever, note that this is fraught with risk. Though it is said that this

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investment into an '?88 scheme is !ocked%in for three years you shou!d be menta!!y

reared to ho!d it for five to 1$ years as we!!.

It is an e-uity investment and when your three years are over, you may not have made

great returns or the stock markets may be down at that oint. If that be the case, you wi!!

have to ho!d much !onger. ence if you wish to use such funds in three%four years time

the ca!cu!ations can go wrong.

everthe!ess, strange as it may seem, the high%risk investment has the !east tax !iabi!ity,

infact it is ni! as er the current tax !aws. If you are reared to ho!d for !ong rea!!y !ong

!ike five%ten years, sure!y you wi!! make suer norma! returns.

That said idea!!y you must have your financia! goa! in mind first and then see how you

can meet your goa!s and in the rocess take advantage of tax savings strategies.

There is so much to be done whi!e you !an your tax. ?ook at $ benefits as a

comosite too!. ?ook at this as a tax management too! for the fami!y and not )ust

yourse!f. 4ou have section $ benefit for yourse!f, your souse, your 5*, your arents,

your father"s 5*. There are so many /s 1 !akh to be !anned and hence so much to

benefit from good tax !anning.

Traditiona!!y, buying !ife insurance has a!ways formed an integra! art of an individua!Es

annua! tax !anning exercise. ;hi!e it is imortant for individua!s to have !ife cover, it is

e-ua!!y imortant that they buy insurance keeing both their !ong%term financia! goa!s

and their tax !anning in mind. This note ex!ains the ro!e of !ife insurance in an

individua!Es tax !anning exercise whi!e a!so eva!uating the various otions avai!ab!e at

oneEs disosa!.

Ter& #,'n!

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A term !an is the most basic tye of !ife insurance !an. In this !an, on!y the morta!ity

charges and the sa!es and administration exenses are covered. There is no savings

e!ement7 hence the individua! does not receive any maturity benefits. A term !an shou!d

form a art of every individua!Es ortfo!io. An i!!ustration wi!! he! in understanding term

!ans better.

Coer your!e,f 0it+ ' ter& #,'n

T'b,e - Ter& P,'n Return! Co'ri!on

Tenure 49e'r!5

HD:C St'nd'rd

%ife 4Ter&

A!!ur'nce5

ICICI Prudenti',

4%ife 8u'rd5

%IC 4An&o,

ee'n I5

SI %ife

4S+ie,d5

>ot'* '+indr'

O,d utu',

4Preferred Ter&

#,'n5

Tenur

e

20 25 30 20 25 30 20 25 30 20 25 30 20 25 30

A)e 2= #,L#$ #,LL$ #,#$ #,9LL #,9LL &,1:$ #,:CC #,61 A 1,9:

C

#,1

$

A

#,C#C #,:&: #,L::

A)e 3= &,:$ C,1#$ C,L:$ C,$L C,9$$ A C,61& :,:&C A &,:C

#

C,&L

:

A

&,LCL C,1 C,L&9

A)e "= L,6#$ A A A A A A A A ,&:

C

A

A

L,L9L ,9L$ A

∼ The premiums +iven in the table are for a sum assure% of ,s '****** for a

health" non-smoin+ male.

∼ Ta/es as applicable ma" be levie% on some premium 0uotes +iven above.

∼ The premium 0uotes are as shown on websites of the respective insurance

companies. 1n%ivi%uals are a%vise% to contact the insurance companies for

further %etails.

?et us suose an individua! aged #: years, wants to buy a term !an for tenure of #$

years and a sum assured of /s 1,$$$,$$$. As the tab!e shows, a term !an is offered by

insurance comanies at a very affordab!e rate. In case of an eventua!ity during the o!icy

tenure, the individua!Es nominees stand to receive the sum assured of /s 1,$$$,$$$.

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Individua!s shou!d a!so note that the term !an offering differs across !ife insurance

comanies. It becomes imortant therefore to eva!uate a!! the otions at their disosa!

before fina!i+ing a !an from any one comany. *or exam!e, some insurance comanies

offer a term !an with a maximum tenure of #: years whi!e other comanies do so for &$

years. A certain insurance comany a!so has an uer !imit of /s 1,$$$,$$$ for its sum

assured.

Unit ,in*ed in!ur'nce #,'n! 4U%IP!5

5nit !inked !ans have been a rage of !ate. ;ith the advent of the rivate insurance

comanies and increased cometition, a !ot has haened in terms of roduct innovation

and aggressive marketing of the same. 5?IPs basica!!y work !ike a mutua! fund with a

!ife cover thrown in. They invest the remium in market%!inked instruments !ike stocks,

cororate bonds and government securities B(secsD.

The basic difference between 5?IPs and traditiona! insurance !ans is that whi!e

traditiona! !ans invest most!y in bonds and (secs, 5?IPsE mandate is to invest a ma)or

ortion of their corus in stocks. Individua!s need to understand and digest this fact we!!

before they decide to buy a 5?IP.

aving said that, we be!ieve that e-uities are best e-uied to give better returns from a

!ong term ersective as comared to other investment avenues !ike go!d, roerty or

bonds. This ho!ds true esecia!!y in !ight of the fact that assured return !ife insurance

schemes have now become a thing of the ast. Today, o!icy returns rea!!y deend on

how we!! the comany is ab!e to manage its finances.

owever, investments in 5?IPs shou!d be in tune with the individua!Es risk aetite.

Individua!s who have a roensity to take risks cou!d consider buying 5?IPs with a

higher e-uity comonent. A!so, 5?IP investments shou!d fit into an individua!Es financia!

ortfo!io. If for exam!e, the individua! has a!ready invested in tax saving funds whi!e

conducting his tax !anning exercise, and his financia! ortfo!io or his risk aetite

doesnEt EermitE him to invest in 5?IPs, then what he may need is a term !an and not unit

!inked insurance.

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Pen!ionretire&ent #,'n!

P!anning for retirement is an imortant exercise for any individua!. A retirement !an

from a !ife insurance comany he!s an individua! insure his !ife for a secific sum

assured. At the same time, it he!s him in accumu!ating a corus, which he receives at the

time of retirement.

Premiums aid for ension !ans from !ife insurance comanies en)oy tax benefits u to

/s 1$,$$$ under 8ection $. Individua!s whi!e conducting their tax !anning

exercise cou!d consider investing a ortion of their insurance money in such !ans.

5nit !inked ension !ans are a!so avai!ab!e with most insurance comanies. As a!ready

mentioned ear!ier, such investments shou!d be in tune with their risk aetites. owever,

individua!s cou!d contem!ate investing in ension 5?IPs since retirement !anning is a

!ong term activity.

Tr'dition', endo0&entendo0&ent ty#e #,'n!

Individua!s with a !ow risk aetite, who want an insurance cover, which wi!! a!so give

them returns on maturity cou!d consider buying traditiona! endowment !ans. 8uch !ans

invest most of their monies in cororate bonds, (secs and the money market. The return

that an individua! can exect on such !ans shou!d be in the CF%LF range as given in the

i!!ustration be!ow.

T'b,e @- Tr'dition', Endo0&ent P,'n Return!

A)e

49r!5

Su& A!!ured

4R!5

Pre&iu&

4R!5

Tenure

49r!5

'turity

A&ount 4R!5F

Actu', r'te of

return 4G5

Co'ny A &$ 1,$$$,$$$ 6:,$L$ 1: 1,6C,$$$ 6.::

Co'ny &$ 1,$$$,$$$ 6:#$# 1: 1,L66,::9 L.$9

∼ The maturit" amounts shown above are at the rate of '*2 as per compan"

illustrations. ,eturns calculate% b" the compan" are on the premium amount net

of e/penses.

∼ Ta/es as applicable ma" be levie% on some premium 0uotes +iven above.

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∼ 1n%ivi%uals are a%vise% to contact the insurance companies for further %etails.

A variant of endowment !ans are chi!d !ans and money back !ans. ;hi!e they may be

resented different!y, they sti!! remain endowment !ans in essence. 8uch !ans urort to

give the individua! either a certain sum at regu!ar interva!s Bin case of money back !ansD

or as a !um sum on maturity. They fit into an individua!Es tax !anning exercise rovided

that there exists a need for such !ans.

T'( benefit!F

Premiums aid on !ife insurance !ans en)oy tax benefits under 8ection $ sub)ect to an

uer !imit of /s 1$$,$$$. The tax benefit on ension !ans is sub)ect to an uer !imit of

/s 1$,$$$ as er 8ection $ Bthis fa!!s within the overa!! /s 1$$,$$$ 8ection $

!imitD. The maturity amount is current!y treated as tax free in the hands of the individua!

on maturity under 8ection 1$ B1$HD.

Inco&e He'd70i!e T'( P,'nnin) Ti#!

S','rie! He'd *o!!owing roositions shou!d be borne in mind

1. It shou!d be ensured that, under the terms of em!oyment, dearness a!!owance and

dearness ay form art of basic sa!ary. This wi!! minimi+e the tax incidence on house rent

a!!owance, gratuity and commuted ension. ?ikewise, incidence of tax on em!oyer"s

contribution to recogni+ed rovident fund wi!! be !esser if dearness a!!owance forms a

art of basic sa!ary.

#. The 8ureme ourt has he!d in (estetner Hu!icators BD ?td. Js IT that

commission ayab!e as er the terms of contract of em!oyment at a fixed ercentage of

turnover achieved by an em!oyee, fa!!s within the exression =sa!ary> as defined in ru!e

#BhD of art A of the fourth schedu!e. onse-uent!y, tax incidence on house rent

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a!!owance, entertainment a!!owance, gratuity and commuted ension wi!! be !esser if

commission is aid at a fixed ercentage of turnover achieved by the em!oyee.

&. An uncommuted ension is a!ways taxab!e7 em!oyees shou!d get their ension

commuted. ommuted ension is fu!!y exemt from tax in the case of (overnment

em!oyees and art!y exemt from tax in the case of government em!oyees and art!y

exemt from tax in the case of non government em!oyees who can c!aim re!ief under

section 9.

C. An em!oyee being the member of recogni+ed rovident fund, who resigns before

: years of continuous service, shou!d ensure that he )oins the firm which maintains a

recogni+ed fund for the sim!e reason that the accumu!ated ba!ance of the rovident fund

with the former em!oyer wi!! be exemt from tax, rovided the same is transferred to the

new em!oyer who a!so maintains a recogni+ed rovident fund.

:. 8ince em!oyers" contribution towards recogni+ed rovident fund is exemt from

tax u to 1# ercent of sa!ary, em!oyer may give extra benefit to their em!oyees by

raising their contribution to 1# ercent of sa!ary without increasing any tax !iabi!ity.

6. ;hi!e medica! a!!owance ayab!e in cash is taxab!e, rovision of ordinary

medica! faci!ities is no taxab!e if some conditions are satisfied. Therefore, em!oyees

shou!d go in for free medica! faci!ities instead of fixed medica! a!!owance.

L. 8ince the incidence of tax on retirement benefits !ike gratuity, commuted ension,

accumu!ated unrecogni+ed rovident fund is !ower if they are aid in the beginning of the

financia! year, em!oyer and em!oyees shou!d mutua!!y !an their affairs in such a way

that retirement, termination or resignation, as the case may be, takes !ace in the

beginning of the financia! year.

. An em!oyee shou!d take the benefit of re!ief avai!ab!e section 9 wherever

ossib!e. /e!ief can be c!aimed even in the case of a sum received from 5/P* so far as it

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is attributab!e to em!oyer"s contribution and interest thereon. A!though gratuity received

during the em!oyment is not exemt u0s 1$B1$D, re!ief u0s 9 can be c!aimed. It shou!d,

however, be ensured that the re!ief is c!aimed on!y when it is beneficia!.

9. Pension received in Pakistan by a non resident assessee from abroad is taxab!e in

Pakistan. If however, such ension is received by or on beha!f of the em!oyee in a

foreign country and !ater on remitted to Pakistan, it wi!! be exemt from tax.

1$. As the er-uisite in resect of !eave trave! concession is not taxab!e in the hands

of the em!oyees if certain conditions are satisfied, it shou!d be ensured that the trave!

concession shou!d be c!aimed to the maximum ossib!e extent without attracting any

incidence of tax.

11. As the er-uisites in resect of free residentia! te!ehone, roviding use of

comuter0!ato, gift of movab!e assetsBother than comuter, e!ectronic items, carD by

em!oyer after using for 1$ years or more are not taxab!e, em!oyees can c!aim these

benefits without adding to their tax bi!!.

1#. 8ince the term =sa!ary> inc!udes basic sa!ary, bonus, commission, fees and a!!

other taxab!e a!!owances for the urose of va!uation of er-uisite in resect of rent free

house, it wou!d be advantageous if an em!oyee goes in for er-uisites rather than for

taxab!e a!!owances. This wi!! reduce va!uation of rent free house, on one hand, and, on

the other hand, the em!oyee may not fa!! in the category of secified em!oyee. The

effect of this ingenuity wi!! be that a!! the er-uisites secified u0s 1LB#DBiiiD wi!! not be

taxab!e.

Hou!e Pro#erty He'd- The fo!!owing roositions shou!d be borne in mind

1. If a erson has occuied more than one house for his own residence, on!y one

house of his own choice is treated as se!f%occuied and a!! the other houses are deemed to

be !et out. The tax exemtion a!ies on!y in the case of on se!f%occuied house and not

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in the case of deemed to be !et out roerties. are shou!d, therefore, be taken whi!e

se!ecting the houseB @ne which is having higher (AJ norma!!y after !ooking into further

detai!s D to be treated as se!f%occuied in order to minimi+e the tax !iabi!ity.

#. As interest ayab!e out of Pakistan is not deductib!e if tax is not deducted at

source Band in resect of which there is no erson who may be treated as an agent u0s

16&D, care shou!d be taken to deduct tax at source in order to avai! exemtion u0s #CBbD.

&. As amount of municia! tax is deductib!e on =ayment> basis and not on =due> or

=accrua!> basis, it shou!d be ensured that municia! tax is actua!!y aid during the

revious year if the assessee wants to c!aim the deduction.

C. As a member of co%oerative society to whom a bui!ding or art thereof is a!!otted

or !eased under a house bui!ding scheme is deemed owner of the roerty, it shou!d be

ensured that interest ayab!e Beven it is not aidD by the assessee, on outstanding

insta!!ments of the cost of the bui!ding, is c!aimed as deduction u0s #C.

:. If an individua! makes cash a cash gift to his wife who urchases a house roerty

with the gifted money, the individua! wi!! not be deemed as fictiona! owner of the

roerty under section #LBiD G .H.Thakar vs. IT. Taxab!e income of the wife from the

roerty is, however, inc!udib!e in the income of individua! in terms of section 6CB1DBivD,

such income is comuted u0s #&B#D, if she uses house roerty for her residentia!

uroses. It can, therefore, be advised that if an individua! transfers an asset, other than

house roerty, even without ade-uate consideration, he can escae the deeming

rovision of section #LBiD and the conse-uent hardshi.

6. 5nder section #LBiD, if a erson transfers a house roerty without consideration

to his0her souseBnot being a transfer in connection with an agreement to !ive aartD, or to

his minor chi!dBnot being a married daughterD, the transferor is deemed to be the owner of

the house roerty. This deeming rovision was found necessary in order to bring this

situation in !ine with the rovision of section 6C. 2ut when the scoe of section 6C was

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extended to cover transfer of assets without ade-uate consideration to son"s wife or minor

grandchi!d by the taxation !awsBAmendmentD Act 19L:, w.e.f. A.4. 19L:%L6 onwards the

scoe of section #LBiD was not simi!ar!y extended. onse-uent!y, if a erson transfers

house roerty to his son"s wife without ade-uate consideration, he wi!! not be deemed to

be the owner of the roerty u0s #LBiD, but income earned from the roerty by the

transferee wi!! be inc!uded in the income of the transferor u0s 6C. *or the urose of

sections ## to #L, the transferee wi!!, thus, be treated as an owner of the house roerty

and income comuted in his0her hands is inc!uded in the income of the transferor u0s 6C.

8uch income is to be comuted under section #&B#D, if the transferee uses that roerty

for se!f%occuation. Therefore, in some cases, it is beneficia! to transfer the house

roerty without ade-uate consideration to son"s wife or son"s minor chi!d.

C'#it', 8'in! He'd- The fo!!owing roositions shou!d be borne in mind

1. 8ince !ong%term caita! gains bear !ower tax, taxayers shou!d so !an as to

transfer their caita! assets norma!!y on!y &6 months after ac-uisition. It is ertinent to

note that if caita! asset is one which became the roerty of the taxayer in any manner

secified in section C9B1D, the eriod for which it was he!d by the revious owner is a!so

to be counted in comuting &6 months.

#. The assessee shou!d take advantage of exemtion u0s :C by investing the caita!

gain arising from the sa!e of residentia! roerty in the urchase of another house Beven

out of PakistanD within secified eriod.

&. In order to c!aim advantage of exemtion under sections :C2 and :CH it shou!d

be ensured that the investment in new asset is made on!y after effecting transfer of caita!

assets.

C. In order to c!aim advantage of exemtion under sections :C, :C2, :CH, :C',

:C'H, :C'*, :C( and :C(A the tax ayer shou!d ensure that the new!y ac-uired asset is

not transferred within & years from the date of ac-uisition. In this context, it is interesting

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to note that the transfer Bone year in the case of section :C'D of a new!y ac-uired asset

according to the modes mentioned in section CL is not regarded as =transfer> even for this

urose. onse-uent!y, new!y ac-uired assets may be transferred even within & years of

their ac-uisition according to the modes mentioned in section CL without attracting the

caita! tax !iabi!ity. A!ternative!y, it wi!! be advisab!e that instead of se!!ing or converting

assets ac-uired under sections :C, :C2, :CH, :C*, :C( and :C(A into money, the

taxayer shou!d obtain !oan against the security of such asset Beven by !edgeD to meet

the exigency.

:. In # cases, sur!us arising on sa!e or transfer of caita! assets is chargeab!e to tax

as short%term caita! gain by virtue of section :$. These cases are BiD when ;HJ of a

b!ock of assets is reduced to ni!, though a!! the assets fa!!ing in that b!ock are not

transferred, BiiD when a b!ock

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