CPFA - Module 7 PDF...CPFA - Module 7 Tax and Estate Planning – Types of taxes Unit 8: Weighting 18%_Part 1 2 Types of Taxes The two broad categories of tax collected by the government

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Tax and Estate Planning – Types of taxes

Unit 8: Weighting 18%_Part 1

2

Types of Taxes

� The two broad categories of tax collected by the government are

� Direct taxes: impact and incidence on the same person. For eg. Income tax and wealth tax

� Indirect taxes: impact and incidence on different persons . For e,g, excise and custom duties

� Income tax laws in India comprise of the following

� The Income Tax Act, 1961

� The Income Tax Rules, 1962

� The Finance Acts

� CBDT circulars

� Judicial precedents

3

Chargeability of Tax on Income

� If the total income of a person for a previous year exceeds the maximum amount

exempt from tax, then the excess income is chargeable to tax.

� Such a person is an assessee

� The income is taxed at the tax rates applicable for the assessment year

� A “person” for the purpose of Income Tax includes

� An individual, HUF, Company, Firm. Association of persons, local authority

� ‘Income’ under the IT Act, 1961 includes

� Profits & gains, Dividends,

� Value of perquisites received by an employee or from a business or profession

� Capital gains

� Prize money from lotteries, horse race, TV shows, card games

� Income may be in cash or kind

� Illegal income is also taxable

� All income earned need not be taxable.

4

Other Definitions

� Previous year is the financial year immediately preceding an assessment year

� Income earned in a previous year is taxed in the assessment year

� Assessment year is the period of 12 months commencing from April 1st of every year.

� Income earned in a previous yeas is assessed in the assessment year and taxes paid

� Basic amount not chargeable to tax is the exemption limit for income, below which

total income is not taxed

� Assessee is the person who earns income and is liable to pay tax under the IT Act.

� The rates at which income will be taxed will depend upon the type of person

5

Tax rates for Assessment Year 2013--14

6

Individuals (other than women and senior citizens who are resident in India) / Hindu Individuals (other than women and senior citizens who are resident in India) / Hindu Individuals (other than women and senior citizens who are resident in India) / Hindu Individuals (other than women and senior citizens who are resident in India) / Hindu

Undivided Family (HUF), Association of Persons (AOP) and Body of Individuals (BOI)Undivided Family (HUF), Association of Persons (AOP) and Body of Individuals (BOI)Undivided Family (HUF), Association of Persons (AOP) and Body of Individuals (BOI)Undivided Family (HUF), Association of Persons (AOP) and Body of Individuals (BOI)

Income (Rs.)Income (Rs.)Income (Rs.)Income (Rs.) Rate of TaxRate of TaxRate of TaxRate of Tax

Upto Rs. 1,80,000 Nil

1,80,001 - 5,00,000 10%

5,00,001 - 8,00,000 20%

8,00,001 and above 30%

Please see workbook (Ch 8_Workbook.xls) to get a better understanding of how tax liability

is calculated)

Tax Rates for Assessment Year 2013-14

7

Women resident in India less than 60 years of ageWomen resident in India less than 60 years of ageWomen resident in India less than 60 years of ageWomen resident in India less than 60 years of age



1,90,001 - 5,00,000 10%

5,00,001 - 8,00,000 20%

8,00,001 and above 30%


8

Resident Senior Citizens (60 years to 80 years of age)Resident Senior Citizens (60 years to 80 years of age)Resident Senior Citizens (60 years to 80 years of age)Resident Senior Citizens (60 years to 80 years of age)


Upto Rs. 2,50,000

Nil

2,50,001 - 5,00,000 10%

5,00,001 - 8,00,000

20%

8,00,001 and above 30%


9

Resident Very Senior Citizens (above 80 years of age)Resident Very Senior Citizens (above 80 years of age)Resident Very Senior Citizens (above 80 years of age)Resident Very Senior Citizens (above 80 years of age)



5,00,001 - 8,00,000 20%

8,00,001 and above 30%


10

Firms and CompaniesFirms and CompaniesFirms and CompaniesFirms and Companies

Rate of TaxRate of TaxRate of TaxRate of Tax

Income < Income < Income < Income <

Rs.1,00,00,000Rs.1,00,00,000Rs.1,00,00,000Rs.1,00,00,000

Income > Income > Income > Income >

Rs.1,00,00,000Rs.1,00,00,000Rs.1,00,00,000Rs.1,00,00,000

Firms 30%

30%

Domestic Company 30%

30% plus 5%

surcharge

Education Cess of 2% and Higher and Secondary Education Cess of 1% is

applicable on the tax calculated in all cases mentioned above as well as the

previous slides.

Total Income and Status of Person

� The income of a previous that will be considered for tax purposes and its treatment will

depend upon the residential status of the individual.

� Residential status of an individual may be

� Resident

� Resident but not ordinarily resident

� Non-resident

� The residential status of a person is determined every year.

� Resident Indian

� All income received or accrued, in India or outside, is considered for taxation

� Non-resident Indian

� Only income earned or accrued in India will be considered for taxation

� Resident but not-ordinarily resident Indian

� All income earned or accrued outside India will be taxed in India, if earned from a profession

set-up or controlled in India.

11

Determining Residential Status

� An individual will be considered resident in a previous year if

1. He has stayed in India for a period of at least 182 days in the previous year

� If he has not stayed in India for at least 182 days in a previous year, he may still be

considered a resident if:

1. He has stayed in India for at least 60 days in the previous year and 365 days or more in the

four years immediately preceding the previous year.

� The minimum period of stay of 182 days is mandatory to claim Indian resident status,

for

� Indian Citizens leaving India on a Indian crew ship

� Indian citizens living abroad and visiting India

� Anyone not qualifying as Indian resident as above, is deemed to be a non-resident

Indian.

12

Not Ordinarily Resident

� There are two variations to the resident and non-resident category

� Resident AND ordinarily resident

� Resident BUT not ordinarily resident

� An individual’s status is resident AND ordinarily resident if the following additional

conditions are met

� He has been a resident in India in at least two out of the 10 years immediately preceding the

previous year

� He has been in India for 730 days or more in the seven years preceding the previous year

� If either of the above two conditions are not satisfied, the individual is considered

resident BUT NOT ordinarily resident.

13

Determining Residential Status

� Mrs. Vaidya, leaves for the USA to visit her daughter in May 2010. She comes back in

February 2011. What is her residential status for 2010-2011 if this is her first visit

abroad?

� Mr. Arora is an Indian citizen, who is visiting India since January 31, 2010. When

should he leave India, if he wants to retain his NRI status for the previous year 2011-

12. Assume he has not been in India for 365 days in the last four years.

14

Income Tax Procedures

� A permanent account number (PAN) is mandatory for all persons whose total income

exceeds the basic exemption limit under section 139A

� PAN has to be quoted on all correspondence relating to tax

� Section 139(1) requires every person to file a return of income in the prescribed form

within the specified dates

� Companies : 30th September of the assessment year

� Non-corporate under audit : 30th September of the assessment year

� Non-corporate, non-audit : 31st July of the assessment year

� A belated return can be filed before the end of 1 year from the relevant assessment

year

� Errors and omissions can be corrected by filing a revised return

� The return has to filed by the authorized person: individual, Karta, managing partner,

director

15

Income Tax Payment

� Tax due from a person is collected at different levels

� Tax deducted at source (TDS): Tax is deducted at the time of payment of certain income such

as interest, commission, rent etc. Payers of income are responsible for deducting the tax.

� Proportions of the estimated tax liability of a year should be paid as advance tax.

� For individuals and firms:

� 15th September: At least 30% of the tax liability

� 15th December: At least 60% of the tax liability

� 15th March: Full tax liability

� For corporate assessees:

� 15 June : up to 25% of the tax liability

� 15th September: At least 50% of the tax liability

� 15th December: At least 75% of the tax liability

� 15th March: Full tax liability

� Self-assessment tax after taking into consideration TDS and advance tax paid.

16

Wealth Tax

� Wealth tax is payable on the net wealth for every assessment year at the rate of 1% on

the amount by which the wealth exceeds Rs.30,00,000 as on the valuation date

� Applicable to individuals, HUFs, companies

� Valuation date is the last date of the previous year

� Net wealth is the difference between the aggregate value of the asset and the value of

all debts incurred in relation to the assets.

� Assets included for the purpose of estimating wealth are house, motor car, jewellery,

yachts, urban land, cash in hand

� Interest in the property held by an HUF of which the person is a member, will not be

considered for purpose of wealth tax.

17

Clubbing of Assets

� In the case of the following transfers, the assets will continued to be assessed in the

hands of the transferor for the purpose of wealth tax

� Transfer to spouse or other specified relatives for inadequate consideration

� Assets held by minor child

� Assets transferred under revocable transfers

� Assets transferred to an HUF

� Please attempt Quick Exercise 8.1


18

Summary - 1

� Direct and Indirect taxes are the two broad categories of taxes collected by

government.

� Income Tax laws in India are drawn from the Income Tax Act, 1961, The Income tax

rules, 1962, the Finance Act and various circulars issued by CBDT and other judicial

precedents

� Tax is chargeable on assessees if sums exceed the exemption limit.

� A senior citizen, is an individual above 60 years of age. The income limit exempt from

tax, for this category, is Rupees 2,50,000.

� A very senior citizen is an individual above 80 years of age. The income limit exempt

from tax, for this category, is Rupees 5,00,000.

� Income of a firm or a domestic company is liable for tax at the rate of 30%. (plus

surcharge of 5% in case of domestic company with income over Rs. 1 crore)

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Summary - 2

� Incomes include Profits, gains, dividends, salaries, rent, capital gains, prize money etc..

� Previous year is the financial year immediately preceding an assessment year

� Assessment year is the period of 12 months commencing from April 1st of every year.

� The income of a person, that is liable for tax in India , will depend upon the residential

status of a person., which in turn is dependant on the period of stay in country.

20

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Income Tax Provisions

Unit 8: Weighting 18% _ Part 2

21

Exempt Income

� Section 10 of the IT Act lists out the income that are exempt from tax

� Section 10(1A) exempts agricultural income from tax. This includes income from

� Agricultural land in India used for agricultural purposes

� Processing of agricultural produce and operations

� Farmhouse

� If the net income from agriculture exceeds Rs. 5000 and the individual has taxable

non-agricultural income, then incremental tax has to be paid on agricultural income

� Section 10(2A) exempts the income representing the share of a partner in a firm from

tax

� Section 10(5) exempts from tax concession received by an employee for proceeding on

leave to any part of India, subject to prescribed conditions.

� Concession received for travel to any place following retirement or termination from service is

also exempt

22

Exempt Income – II

� Any amount received as retirement dues by way of gratuity, pension, leave

encashment, retrenchment compensation and voluntary retirement compensation

� Exemption will be up to prescribed limits. Any amount above the limits will be taxed under the

head ‘Income from salary’.

� Section 10(10D) exempts from tax any amount received from an insurance policy,

including bonus.

� Section 10 (32) exempts from tax, the income of a minor child clubbed with that of the

parent, to the extent of the lower of Rs.1500 or actual income.

� Dividends received from a company or mutual funds, on which dividend distribution tax

has already been paid, are exempt from tax in the hands of the investor.

� Long-term capital gains realized from the sale of shares of a company or units of

equity-oriented mutual funds, are exempt from tax

� If they are sold through a recogonized stock exchange

� If securities transaction tax (STT)has been paid

23

Heads of Income For Computation of Total Income

� Income of an individual that is chargeable to tax has to be classified under one of the

following heads of income:

� Income from salary

� Income from house property

� Profits and gains from business or profession

� Capital gains

� Income from other sources

24

Income From Salary

� Income from salary includes:

� Wages

� Annuity/pension

� Gratuity

� Other retirement benefits

� Fees, commissions, perquisites and profits in lieu of salary

� Advance salary

� Allowances

25

Allowances

� Allowances are paid to the employee in addition to salary, to meet specific expenses.

� Common allowances include Dearness allowance, House rent allowance, Children’s

education, Leave travel, Medical, Transport.

� Tax treatment of allowances differ.

� Fully taxable: Special allowance and overtime

� Exempt to the limit of actual expense or allowance received, whichever is lower: Conveyance,

Uniform, Medical.

� Exempt to the extent of allowance received or limit specified by the IT Act, whichever is lower:

Children’s education, Transport

26

House Rent Allowance

� House Rent Allowance is exempt up to the lower of the following parameters

prescribed by the IT Rules:

� Actual amount of HRA received

� Amount equal to 50% of salary for the relevant period, if the property is situated in the four

metros; 40% for other cities

� Rent paid in excess of 10% of salary for the relevant period

Salary includes basic salary and dearness allowance

� HRA exemption is not available if the house is owned by the employee or no rental

expenditure is being incurred.

27

Perquisites

� Perquisites are benefits, services given to an employee, over an above the salary. The

monetary value of the perquisite is subject to tax.

� Taxable perquisites include

� Value of rent-free accommodation provided or concession in rent

� Any obligation of the employee being met by the employer

� Contributions made to wards insurance or annuity for the employee over and above what is

prescribed, such as a recognized provident fund, superannuation fund

� Sweat equity transferred to the employee free of cost or at concessional rates.

� Any contribution to superannuation fund over Rs. One lakh

28

Tax-Free Perquisites

� Medical facilities provided to employee or their family at a medical facility maintained

by the employer or reimbursements made for medical expenses up to a limit of Rs.

15,000 per annum

� Refreshments provided during office hours and meal vouchers

� Interest-free or concessional loans up to Rs.20,000

� Reimbursement of telephone bills

29

Income From House Property

� Income earned from a house property is chargeable to tax in the hands of the owner/

deemed owner under the head Income from house property

� Should be the owner of the property

� Property should not be used for the purpose of business by the individual

� It must consist of land and building

� If a property is transferred to a spouse or minor child, without adequate compensation,

is it not valid.

� The transferor is the deemed owner and income from property is taxable in his hands.

� The income that is taxed will be computed as:

� Gross Annual Value of the property

Less Municipal Taxes and Unrealized rent

� =Net Annual Value

Less Standard deductions and/or interest payable

� =Income from House Property

30

Gross Annual Value

� The Gross Annual Value of a property is the higher of the following values

� Higher of municipal valuation and fair rent

� The standard rent under the Rent control Act, if applicable

� The actual rent received

� If the property is self-occupied, then the annual value is taken as nil

� If the individual has more than one property for purpose of his residence, then any one , at his

option, can be considered as self-occupied.

31

Net Annual Value and Deductions

� The Gross Annual Value is adjusted by the following deductions to arrive at the Net

Annual Value

� Municipal taxes actually paid by the owner in the previous year

� Unrealized rent, if any, in case of let-out properties.

� From the Net Annual Value, the following deductions are allowed

� In case of let-out properties, standard deduction of 30% of the net annual value and interest

paid on cost of acquisition of property

� For self-occupied property, interest paid on loan for acquisition


32

Income from Business and Profession

� Income from business or profession carried on by an individual in a previous year, after

adjusting for expenses, is chargeable to tax.

� Income includes interest, commission, salary, bonus received or accruing, or profits earned

from the business

� The value of any benefits or perquisites arising out of income or profession is also charged

under this head

� Expenses under the act relevant for this head of income can be classified as

� Expenses that are expressly deductable

� Expenses that are generally deductable

� Expenses that are expressly disallowed

33

Expenses that are Expressly Deductable

� Rents, rates, taxes, insurance premiums paid on plant & machinery, building & stock in

trade,

� Bonus and commissions paid

� Interest paid on borrowed capital

� Depreciation

34

Depreciation

� Depreciation is allowed as expenses that is deducted from the income of a business or

profession

� Depreciation is a decrease in the accounting value of an asset, caused by wear and tear or

obsolescence.

� The IT Act specifies the rates of depreciation applicable for different tangible and

intangible assets

� The assets specified by the Act are Buildings , Plant & Machinery, Furniture and Intangible

assets.

� Intangible assets refer to goodwill, trade mark, patents

� The Written Down Value method is used for calculating depreciation

35

Expenses Allowed and Not Allowed

� Expenses generally allowed include

� Printing & stationery expenses

� Legal expenses

� Staff welfare expenses

� Expenses not allowed include

� Income tax paid on income from business and profession

� Wealth tax paid

� Expenses exceeding Rs.20,000/day not paid by account payee cheque

� Payments made to partners of a firm as interest, salary or other remuneration in excess of

specified limits

� It is mandatory for books of account to be maintained and audited, to arrive at correct

estimates of income , expenses and tax liability, in all cases where :

� Income from business exceeds Rs. 60 lakh, in a previous year.

� Income from profession exceeds Rs.15 Lakh, in a previous year. (To be increased to Rs. 100

lakh from PY 2012-13.)

36

Capital Gains

� The profits or gains from the transfer of a capital asset is chargeable to tax

� Capital asset includes movable or immovable property, excludes personal assets except

jewellery, paintings or works of art.

� Transfer includes sale, exchange, relinquishment of an asset or extinguishing a right,

compulsory acquisition under a law

� Transfer does NOT include

� Gift

� Transfer under a will or irrevocable trust

� Distribution of the assets of an HUF

� Capital gains are charged to tax in the year of transfer

37

Categorization of Capital Gains

� Capital gains can be categorized based on the holding period of the asset before

transfer.

� If the asset has been held for period not exceeding 36 months, immediately before

transfer, the gains, if any, is considered short-term in nature

� For units of mutual funds, shares of companies whether quoted or unquoted and quoted

securities holding period of not more than 12 months is considered for short-term capital

gains

� Long-term capital gains is that which is not short-term capital gains

38

Computation of Capital Gains

39

Concept of Indexation

� The cost of acquisition and the cost of improvement, for the calculation of capital

gains, may be indexed for inflation

� (Cost of Acquisition/improvement)* (Cost of inflation index in the year of transfer / Cost of

inflation index in the year of acquisition or improvement)

� Tarun sold a house in May 2011 for Rs. 85 lakh. He had purchased the house in

January 2005 for Rs. 50 lakh. What is the capital gains chargeable to tax after

considering indexation

� Indexed purchase price= 50 lakh*785/480= 81.77 lakh

� The LTCG chargeable to tax = 85 lakh - 81.77lakh = 3.23 lakh

� Please see workbook (Ch8_Workbook.xls) to get a better understanding of the concept.

� Long term Capital gains tax can be paid at 10% of gains without indexation in case of

securities, units of mutual funds and zero coupon bonds if the same is lower than taxes

at 20% with indexation.

40

Exemptions

� In the calculation of capital gains for tax, certain exemptions are provided by the IT Act

� Section 54 exempts long-term capital gains from sale of residential house from tax to

the extent that the gains has been invested in another residential property

� Applicable only to individuals and HUFs

� Should have been purchased within six months of sale

� Section 54EC , exempts long-term capital gains on the transfer of any capital asset if

they are invested in bonds specified for this exemption

� Exemption available up to a limit of Rs. 50 lakhs per financial year

41

Income From Other Sources

� Income that cannot be categorized under any of the other heads of income is

accounted under this head. It includes

� Dividends

� Winnings from lotteries, races and other games of chance or skill

� Contributions received towards PF, superannuation

� Deemed gifts.

Where the sum of money received without consideration exceeds Rs.50,000

Where the fair value of the movable or immovable property transferred without

consideration exceeds Rs.50,000

� Gifts received from specified relatives or on the occasion of marriage or under a will or

inheritance is not taxed.


42

Clubbing of Income

� Clubbing of Income provisions of the IT Act discourages the transfer of property or

income to another with the intention of avoiding or reducing tax liability

� If the consideration for transfer is inadequate, the income shall be clubbed and assessed in

the hands of the transferor

� Common income that is liable to be clubbed includes

� Remuneration from a concern in which the spouse is a majority stakeholder

� Income from assets transferred without or with inadequate consideration

� Income from assets transferred to specified relatives such as daughter-in law

� Income of minor child

� Income of HUF property converted by the individual into an HUF property

43

Set-Off & Carry Forward Of Losses

� Losses incurred in a previous year can be set off against income earned under the

same head or other heads of income, subject to rules.

� Losses can also be carried forward, to be set-off against income from subsequent years.

� Losses from house property can be set-off against income from other house properties

or other income for a period of 8 years.

� Losses from business or profession can be set off against income from the same head

or other heads of income. Losses can be carried forward for a period of 8 years

� Losses from speculative business can be set-off against profits under the same type.

44

Set-off and Carry Forward of Capital Losses

� Losses under the head capital gains can be set-off against gains under the same head

only

� Short-term capital losses can be set-off against short or long-term capital gains

� Long-term capital losses can be set-off against long-term capital losses only

� Long-term capital loss from sale of equity shares cannot be set-off against any other capital

gains

� Capital loss can be carried forward for a period of 8 years

45

Loss Under the Head Income From Other Sources

� Losses under this head can be se-off against income under the same head or other

heads of income

� Losses cannot be carried forward

� Loss under this head from the activity of owning racing horses can be set off against gains

from the same activity only


46

Dividend & Bonus Stripping Provisions

� Loss on sale of units or securities will not be considered for set-off or carry forward for

computing total income if

� The units or securities are bought within the period of 3 months prior to the record date for

dividend or bonus and

� The securities are sold within 9 months of the record date

47

Gross Total Income

� The Gross Total Income of an individual comprises of the income under all the various

heads.

� Adjustment is made for set-off and carry forward provisions as applicable.

� Section VI-A, specifies the deductions allowed from the total income of an individual.

� Covered in sections 80C to 80U

� Deductions given for specific expenditures and payments

� Deductions cannot exceed the total income

48

Deductions Under Section 80C

49

100% of the amount invested or Rs.1,00,000, whichever is less, is available as

deduction from total income

Deductions under Section 80C

50

Deductions under Section 80C

51

Deduction Under Section 80CCC

52

Deduction under this section is available within the over all limit of Rs.

1,00,000 available for sections 80C, 80CCC, 80CCD

Deduction under Section 80CCD

53

Deduction under this section is available within the over all limit of Rs. 1,00,000 available for sections 80C, 80CCC, 80CCD

Deduction under Section 80CCF

54

Deduction Under Section 80D

55

Other Deductions

� These are other deductions allowed:

� Section 80DD allows deduction on expenses of maintenance of disabled persons up to a limit

of Rs. 50,000 for normal disability or Rs. 1,00,000 for severe disability.

� Section 80DDB allows deduction of the expenditure on medical treatment for specified

diseases such as Parkinson, up to a limit of Rs.60,000 for senior citizens and Rs.40,000 for

others

� Section 80 E allows the entire interest paid on education loan as deduction from the

assessment year relevant to the previous year in which the assessee begins paying interest

and seven subsequent years

� Section 80 G allows all assessees to claim deduction up to specified limits for contributions

made to charitable organisations.

� Section 80 GG provides deduction to an assessee not receiving HRA for rent paid by him up to

specified limits

� Section 80 U allows deductions for persons with disabilities of Rs. 50,000 for normal disability

and Rs. 1,00,000 for severe disability


56

Taxation of NRI

� Covered under special provisions of unit XIIIA of the IT Act

� Need not file returns if the only income is under this head

� The following incomes of NRIs are exempt from tax

� Interest earned on NRE account

� Interest earned on FCNR and RFC deposit

� Foreign exchange assets are investments acquired out of convertible foreign exchange.

They include:

� Shares in a company

� Debentures & deposits of a company which is not a private company

� Any government securities such as NSC

� Any investment income or long-term capital gains from assets other than specified assets is

taxed at 20%

� Long-term capital gains from specified assets is taxed at 10%

57

Taxation of NRIs-II

� NRIs who opt to be governed by the special provisions will not be eligible for deductions

under unit VIA for these incomes.

� Indexation benefits is also not allowed

� Capital gains arising out sale/transfer will be exempt from tax if the net consideration

is invested in other specified assets.

� The provisions of unit XIIIA can continue to apply even after an individual becomes

resident, to the extent of the specified assets

58

Summary I

� Some incomes are exempt from tax.

� The heads of income for computation of total income are income from salary, house

property, gains from business and profession, capital gains and other sources.

� The gross value of property is higher of actual rent received, fair rent or standard rent.

� Net annual value is arrived at after deductions such as standard deduction, interest on

loan for acquisition.

� Annual value of self-occupied property is zero.

� Income from business/profession is taxed after adjusting for expressly and generally

deductable expenses, like depreciation, rents, interest paid on borrowed capital, legal

exp, staff welfare expenses etc.

� Capital gains on capital assets is chargeable to tax include movable or immovable

property, including jewelry, art work etc. There are also exemptions granted up to Rs

50 lakh, if invested in specific bonds.

59

Summary II

� The cost of acquisition and the cost of improvement, for the calculation of capital

gains, may be indexed based on cost of inflation index.

� There are set-off and carry forward of losses provision as per tax laws.

� There are deductions from gross total income under various sections such as Section

80C 80CCC, 80D, 80DD,80 DDB,80E,80G, 80GG and 80U.

� Interest earned on NRE account and FCNR and RFC deposits are exempt from tax.

� NRIs are covered under provisions of unit XIIIA of the IT Act unless choose not to by

giving the relevant declaration.

� Capital gains exemption for investing in specific assets is available to NRIs.

60

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Estate Planning

Unit 8: Total Weighting 18% - Part 3

61

Estate Planning

� Estate planning is the process undertaken to pass on the property of an individual on

his death to legal heirs

� Testator is the person whose property will be passed on to heirs

� Tax efficient transfer of estate is important

� Wills, Power of Attorney and Trusts are ways in which estate planning is done

� Property, for the purpose of estate planning, includes movable and immovable property

62

Wills

� A will is a legal statement made by an individual on how his property has to be

distributed on his death

� A will comes into effect only on the death of the testator

� It can be revoked, cancelled or changed at any time before it comes into force

� Codicil is an instrument used to add/explain/alter the dispositions made in a will

� Probate is process by which a will is certified by a competent court

� Beneficiary is a person who inherits property under a will

� Executor is the legal representative of the deceased person and the property vests in him till

distribution

63

Types of Will

� The following are various types of wills:

� Individual wills are individually written

� Holographic will is hand written by the testator

� Conditional will takes effect on the occurrence of a specified event

� Joint will is made by two persons in the same document

� Living will is a written direction to a doctor to stop treatment that merely extends life in a

terminally ill situation

� Oral will are made orally

Prevalent in the defense services

64

Power of Attorney (PoA)

� PoA is an instrument that authorizes a person to act on behalf of the grantor

� Donor and Donee are the two parties to a PoA

� Both parties should be competent to contract

� Types of PoA

� General PoA: Authorizes the donee to act on all matters for the donor including operating bank

account, matters of property, legal matters

� Specific PoA: Authorizes the donee to act on a specific matter

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Trusts

� A trust is created when the legal title of a property is transferred from the owner to

another to be held for the benefit of another party

� Settlor is the creator of the trust

� Trustee and beneficiaries are the other parties to a trust

� The property that is transferred to a trust does not form part of the property of the

settlor

� Types of trusts

� Public charitable or religious trusts: Income is used for religious or charitable purpose

� Private trusts: Income and property is used for the benefit of identified beneficiaries.

� The distribution of property among the beneficiaries may be specified by the settlor or

decided by the trustee, depending upon the terms of the trust.


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Summary

� Testator is the person whose property will be passed on to heirs

� A will comes into effect only on the death of the testator although it can be revoked at

any time before it comes into force.

� Executor is the legal representative of the deceased person and the property vests in

him till distribution

� Codicil is an instrument used to add/explain/alter the dispositions made in a will

� Probate is process by which a will is certified by a competent court

� Holographic will is hand written by the testator

� General POA, Special POA are types of POA that give authorization to a person to act

on behalf of grantor.

� There are different types of trust, public or private trusts.

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