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Tax Planning for salaried employees

Table of Content

[Webinar] New in Budget 2023

For Individuals

  • 87A rebate limit increased from 25 lakhs to 7 lakhs (for new tax regime) + Slab rates changed
  • Reduced surcharge: India's highest tax rate for personal income is currently 42.74%. The new tax regime will reduce the highest surcharge rate from 37% to 25%. After this, the maximum tax rate will be 39%.
  • Leave encashment: The budget has proposed increasing the limit of tax exemption on leave encashment on the retirement of non-government salaried employees from 13 lakhs to 25 lakhs.
  • New TDS guidelines: Net winnings from online games to attract 30% TDS.

Tax basics

  • A total of 50% of income Govt is from Income tax.
  • We pay two types of tax: Direct and Indirect.
  • Every Taxpayer is an Assesse but not the reverse.

PAN Card

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I-T Act

  • Sections, Sub-sections, Chapters
  • Govt. creates new rules for Finance Act in the Budget for the umbrella I-T Act, which CBDT executes.
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Income

  • Two types:
    • Revenue: Salary, Dividend, Rent, Interest β†’ Kind of regular income
      • Taxable unless made exempt
    • Capital: Capital gain on Property sale, Gift/Loan
      • Exempt unless specifically made Taxable

FY and AY

  • We earn in FY; the Govt takes from us on AY.
  • Always subtract one year from AY to get the FY. If AY is 2021-22, FY is 2020-21.
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Residential Status

Who is Resident Indian

  • A: If you are in India for more than 182 days or
  • B: Current FY 60 days + last four years total stay more than 365 days, then you are a Resident Indian.
  • B is not applicable for seafarers, only A.

Tax Applicability

  • A Resident Indian is liable to pay their Global Income taxes in India.
  • An NR Indian must pay only their Indian income taxes in India, not global income.
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Accrued Income

  • Income earned in India by an NR means Income accrued in India. The NR needs to pay tax on the income. The German consultant came to Utkal Tannery for factory Quality control.
  • Similarly, an Infosys guy on a three-monthly trip to the USA, whatever s/he will earn will be income accrued outside India and taxable in India.
IAI: Income Accrued in India, IAOI: IA Outside India, IRI: Income Received in India, IROI: IR Outside IN
IAI: Income Accrued in India, IAOI: IA Outside India, IRI: Income Received in India, IROI: IR Outside IN

Tax break

Three types are there
  1. Exemption
    1. Agricultural Income β†’ Exempted
    2. Salary Income β†’ Not exempted
  1. Deduction
    1. 50,000 deduction in salaried income
  1. Rebate
    1. It is applied to Tax payable, not Taxable Income, unlike the other two above.
    2. If your income is < 5 Lakhs, the minimum tax of 12,500 will be a tax rebate.

Tax Rate

Two rates are there:
  1. Normal Rate: Salary β†’ 30%
  1. Special Rate:
    1. Short-term Capital Gain β†’ 15%
    2. Long-term CG β†’ 10%
    3. Real Estate long-term CG β†’ 20%
    4. Casual Income/Lottery β†’ 30%
  • Final Tax Liability = (Normal Rate Tax + Special Rate Tax) + Surcharge + CESS
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Payment of Tax Liability

TDS

  • The employer pays the Govt by deducting the salary of the Employee.
  • You may have other incomes like Dividends, Capital gain; based on that, we need to file ITR.

Advanced Tax

  • You must pay progressive tax if the net tax liability is more than 10,000 in an FY.
  • The due dates are like below. In this case, suppose you have to pay 1 lakh tax.
    • Due Date
      Tax liability % to be paid
      Min amount to be paid
      15 / 6
      25%
      25,000
      15 / 9
      50%
      50,000
      15 / 12
      75%
      75,000
      15 / 3
      100%
      1,00,000
  • Senior citizens (> 60 yrs) is not needed to pay advanced taxes.
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Self Assessment Tax

  • The extra tax you calculate and pay to Govt. is called SAT.

Regular Assessment Tax

  • The extra tax that I-T officials calculate and ask you to pay to the Govt. is called RAT.
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Module 1: Income Tax Return

  • Types of ITR forms:
    • Forms
      Applicable to
      Balance Sheet
      ITR1
      Simplest Form for Salaried Individuals
      ❌
      ITR2
      Little complex form for Salaried Individuals
      ❌
      ITR3
      Salaried + Non-presumptive Business Income
      βœ…
      ITR4
      Salaried + Presumptive Business Income
      βœ…
      ITR5
      Not for Individuals
      γ…€
      ITR6
      Not for Individuals
      γ…€
      ITR7
      Not for Individuals
      γ…€
      • Types based on the due date:
        • Original: Before 31st July of AY or any grace period given by Govt.
        • Belated: After the above due date, + May be late fees applicable.
        • Revised: Other than the above two, if you want can file a revised return
      • No chance of getting a refund from Govt. without filing an ITR.

      Penalties/Fees for not filing ITR

      • Three months to 7 years in jail if eligible but not filing.
      • 1000 to 5000 fees for not filing ITR.
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      Benefits of ITR filing

      1. Loan
      1. Insurance
      1. Govt. Incentives
      1. Employment
      1. Children
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Module 2: Understanding Income

There can be five types of income called FIVE HEADS.
  1. Salaries
  1. Rent
  1. Biz profits
  1. Capital Gain
  1. Other sources

Business and Profession Income

  • Business: Taking risks to gain revenue.
  • A profession can be of 2 types:
    • Specified: CA, Software Engineer, Doctor
    • Non-specified: Trainer, Live lecturer
  • Business Income:
    • Actual Income
    • Presumptive Income β†’ Initially till two crores follow presumptive income
      • Banking transactions show 6% as income.
      • Cash transactions show 8% as income.
  • Professional Income:
    • Actual Income
    • Presumptive Income β†’ Till 50 Lakhs, 50% of income can be shown
  • Allowable Expenses:
    • Expenses incurred to earn such income β†’ Salary, Software, Staff welfare, Electricity bill, Office rent, Stationary, Fuel, Printing, Air Conditioner
    • Depreciation: Car depreciated value β†’ Only for Business income, not for salaried

House Property

Types:
  1. Self-occupied
  1. Rented
Type
House property Tax?
Bungalow
βœ…
Flat
βœ…
Plot
❌
Commercial Shop
βœ…
Rented Unit
βœ…
Self-occupied
❌
Deductions:
  1. 24(a) 30% of the annual rent income
  1. 24(b) Interest from borrowed capital
    1. Upto 2 lakhs per FY in self-occupied
    2. No limit if rented to someone else on rental income β†’. However, please also note that maximum loss from house property which may be claimed to be set off against any other income would be restricted to Rs. 2 lakhs only per the present law.
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Capital Gain Income

  • Capital Asset can be any asset except the following:
    • Personal Effects
    • Material Stock in Trade
    • Rural Agricultural grand
    • and more
  • Capital Gain will come under taxable income only if we have sold a Capital Asset.
  • Intraday income: Goes under business head income, not in CG income β†’ Speculative income
  • Delivery Income: Goes under Capital Gain income
  • Future and Options: Business Income
Indexation Benefits
  • Indexation benefit is applicable only for Long Term Capital Gains (LTCG).
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Type
Holding period
Long-Term Capital Gain?
Tax Rate
Stock dividend
N/A
N/A
30%*
Stock
≀ 12 months
❌
15%
Stock
> 12 Months
βœ…
Post 1lakh 10% without indexation
Equity MF
≀ 12 months
❌
15%
Equity MF
> 12 Months
βœ…
Post 1lakh 10% without indexation
Bond/Debenture
≀ 12 months
❌
30%*
Bond/Debenture
> 12 Months
βœ…
10%
Bond Interest
N/A
N/A
30%*
Unlisted Share, Real estate
≀ 24 months
❌
20%
Unlisted Share, Real estate
> 24 Months
βœ…
30%*
Debt MF and others
≀ 36 months
❌
30%*
Debt MF and others
> 36 Months
βœ…
30%*
Dividend from Debt MF
N/A
N/A
30%*
*assuming your Tax slab rate is highest, i.e., 30%
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Module 3: Income from Salary

  • Advanced salary will be regarded as income on the year received than due.
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  • Any gift or perks from an employer over 5000 INR comes under taxable income.

Deduction

  • Standard Deduction β†’ 50,000 blanket deduction
  • Professional Tax β†’ State collects this.
  • Entertainment Tax β†’ In 99.99% of cases, this is only for Govt. employees
  • In ESOP, the gain will be taxed as CG.
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Taxable
Non-Taxable
Pension
Reimbursements
Ex-Gratia/Bonus
γ…€
Advance Salary
γ…€
Leave Encashment (running employment)
Leave Encashment (At retirement)
Statutory Bonus
γ…€
Stipend/Scholarship from employer Hospital
Stipend/Scholarship from Institute IISc
Flexi pay
γ…€

Module 4: Exemptions of Allowances and Retirement Benefits

  • Allowances are by default Taxable unless Exempted.

HRA

HRA can be claimed in the following scenarios:
  1. The HRA component is present in the salary slip.
  1. You are paying rent
How is HRA calculated?
The least of the following three shall be exempt HRA amount:
  1. Actual HRA Received
  1. Rent paid minus 10% of salary
  1. 50% of the Salary for metro and 40% for non-metro
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Provident Fund

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  • If withdrawn before five years of service, then (maybe Employer contribution is?) Taxable. PF Transfer is recommended.
  • If the employee leaves the job due to health reasons or the company got closed, then PF withdrawal is not taxable.

Retrenchment Compensation (Termination)

Least of the following:
  • 5 Lakhs
  • The actual amount received or
  • 15 days pay * Number of service years
Is exempted from Taxable income.

LTA

S 10(5): Leave Travel Allowance or Leave Travel Concession
  • Value of travel concession or assistance received for two journeys in a block of 4 years is exempt in connection with the employee's proceeding:
    • On leave to any place in India.
    • To any place in India after retirement from service or after the termination of his service
    • THE ENTIRE AMOUNT WILL BE TAXABLE where LTC is received without performing a journey.
    • The exemption is available only in respect of fair, i.e., it does not include boarding and lodging, conveyance, etc. do not qualify for the exemption.
    • Expenses should be incurred on the travel of the employee and his family, which includes the spouse, two children (including stepchild and adopted child), and the employee's parents, brothers, and sisters who are wholly or mainly dependent on the Employee.
  • Now 2022 to 2025 LTA period is in progress.

Gratuity

  • For Govt. employees, gratuity is non-taxable.
  • For other employees, the least of the below three will be exempt:
    • Gratuity = ( BA + DA ) * 15/26 * Years of service
    • Actual Gratuity received or
    • 20 Lakhs

Pension

  • Commuted Pension = 1/3 * Total Pension
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  • Commuted pension is exempted.
  • However, Pension comes under taxable income.
  • If the primary pension taker dies and their spouse receives the pension, this entire income is exempted.
    • There will be no standard deduction of 50k.
    • The last 33% of the pension amount, or 15000, will be exempted; the rest will go under income from other sources.

Leave Encashment

  • Govt. employees are fully exempted from EL encashment.
  • For non-Govt employees, the least of the following will be exempted.
    • Actual amount received
    • Ten months' average salary
    • The cash equivalent of unveiled leave calculate based on a maximum of 30 days of leave for year of actual service rendered or
    • Three lakhs

Voluntary Retirement

Least of
  • 5 Lakhs or
  • Actual Amount of compensation received
Is exempted from Taxable income.

Module 5: Deduction

Deduction in salary:
  1. Standard Deduction β†’ 50k
  1. Entertainment Allowance
  1. Employment Tax β†’ 2400 (varies from state to state)

House Property Scenarios

Danish has a salary of 10 lakhs, with an HRA of 2 lakhs.
He has both an SO and a Rented property.
  • He is giving House loan Interest for SO and Rental 2,50,000 and 3,00,000, respectively.
  • House loan principal he is paying as 40k and 60k w.r.t SO and RP.
  • He is getting 2,75,000 rent from the rental property.
What is his taxable income?
  • Standard deduction: 50k
  • For SO:
    • HRA supposes the least of all 4 is two lakhs itself.
    • Negative income: 2 lakhs
    • Principal: 40,000 β†’ 80C
    • SO income: -4 lakhs 40 thousand
  • For RP:
    • Negative Income: 2 Lakhs
    • Income: 2,75,000
    • Principal: 60,000 β†’ 80c
    • RP income: 75,000 - 60k = 15,000
Taxable income =
10,00,000 - (50,000 + 4,40,000 ) + 15,000 = 5,25,000

NPS

There are three sections:
  • 80CCD(1) β†’ Employee
  • 80CCD(1B) β†’ Employee
  • 80CCD(2) β†’ Employer
    • There is no upper cap exemption limit here; Except
    • 10% of your BA + DA is the cap for non-govt and 14% for govt. Employees.
Limit:
  • 80C + 80CCC + 80CCD(1) = 1,50,000 maximum
Taxability:
  • Tier-1: Non-taxable
  • Tier-II: Taxable
  • Before Retirement:
    • Partial withdrawal: 25% Non-taxable
    • Up to 20% of Corpus can be withdrawn in a lump sum. Tax-free.
    • If Corpus < Rs.1 lac, then the employee can withdraw the entire corpus
  • At Retirement:
    • 60% lumpsum at the time of retirement: Non-taxable
    • Other 40% at the time of retirement, i.e., pension, Annuity Scheme: Taxable
    • The employee can withdraw the entire corpus if Corpus < Rs. 2 lac.
  • Once the employee exits the scheme, he cannot rejoin the scheme.
Partial Withdrawal Rules:[Conflicting references are there; need to verify]
  • NPS member for a minimum of 10 years
  • A maximum 25% withdrawal of your total contribution is allowed.
  • Only THREE times in a lifetime partial withdrawal is allowed.
Upon exit at retirement age defined by the Company, Employee gets following flexibilities:
  • Defer the Annuity investment for three years from retirement age OR
  • Defer the Corpus withdrawal till 70 years of age OR
  • Withdraw Corpus in lumpsum or installments (max 10) OR
  • Keep on investing in NPS till 70 years of age.
If the Employee opts to defer investment in Annuity or withdrawal, the amount remains invested and keeps growing.
Suggestion:
  • First fill 80CCD(1B) to reach 50k cap
  • Then go for 80CCD(1) if you have contributed more than 50k in NPS.
  • For employer contribution, we can go up to any amount in 80CCD(2); however, it should be a maximum of 10% of the BA + DA limit.

Savings and FD Interest

Savings Account:
  1. Non Senior Citizen 80TTA
    1. Interest from:
      1. Schedule bank
      2. Corporate bank
      3. Post office saving
    2. No FD/RD interest exempt
    3. Only Savings Account interest up to 10k is exempted.
  1. Senior Citizen 80TTB
    1. FD/RD interest + SA interest maximum 50,000
    2. Both 80TTA and 80TTB can not be claimed.

Rent when HRA not received

80GG
Least of the following:
  1. 5,000 per month, i.e., 60,000 per year
  1. 25% of total income
  1. Rent paid - 10% of salary
Self-employed can also take this deduction.

House Property

House Property (HP) can be rented or self-occupied (SO).
  • The annual value (AV) of SO property is 0.
  • AV of rented property is the rent.
Two types of deductions are there on both the Rented and SO properties.
  1. Take 30% of AV/Rent as a standard deduction. β†’ This Govt. gives a maintenance charge
  1. Loan Interest on HP β†’ This can be shown as negative income or loss.
Loan Interest:
  1. Interest paid
    1. Till two lakhs deduction in SO property
    2. No limit on the Rented property (RP)
      1. However, loan interest can be shown as negative income in an FY maximum of 2 lakhs (cap is there).
      2. Rest additional interest can be carried forward to next year(s) where the interest is < 2lakhs
  1. Principal deduction from 80c
  1. If stamp duty value of property is upto Rs. 45 lakh then only 80EEA deduction shall be available otherwise not.

Other 80C

  • PPF is EEE
    • Investing β†’ Exempt
    • Interest β†’ Exempt
    • Withdrawing while maturity β†’ Exempt
  • ELSS is ETT
    • Investing β†’ Exempt
    • Interest β†’ Taxable
    • Withdrawing while maturity β†’ Taxable
  • House Property
    • Stamp duty
    • Registration charge &
    • Home loan principal payment
  • Insurance
    • Exempt Premium is capped till 10% of the sum assured value (SAV).
      • Suppose an SAV is 10 lakh; then its premium of 1 lakh only will be non-taxable rest will be taxable.
  • Sukanya Samriddhi Yojana is EET
  • Senior Citizen Saving Scheme is ETT

Health Insurance

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Three types:
  1. Individual Premium
    1. It cannot be cash
  1. Medical Expenses and
    1. If either you or your parents are senior citizens and have not taken an insurance policy
    2. It cannot be cash
  1. Preventive Health Checkups
    1. Total family maximum 5000 INR
    2. Can be cash
If paid once, a two-year premium can be claimed in two years.

Education Loan

  • 80E provides a deduction only in interest payments, not in principle.
  • Only if paid then only it can be claimed.
  • Therefore, if no interest is paid during the Morartium period (e.g., five years for B.Tech), then no 80E can be claimed.
  • EL can be taken only for:
    • Self
    • Spouse and
    • Children
  • Higher Education, both inside or outside India >10+2, is covered.

Donations

80G has two categories
  1. 100%
    1. No limit
    2. Cap: 10% of adjusted gross total income
  1. 50%
    1. No limit
    2. Cap: 10% of adjusted gross total income
  • A receipt is mandatory for > 2000 payments.

Diseases and Disability

80DD, 80DDB, 80U
80DD
  • If insurance is taken on rehabilitation for a dependent with a disability, then up to 75k deduction is there.
  • For severe disability, 1,25,000
80DDB
  • Medical Expenses for severe diseases like Cancer
  • 40,000 deduction in cancer
  • Prescription required
  • After Insurance coverage, if some amount to 40k is given out of pocket, that will be eligible for deduction.
  • If paying for dependents, then the limit will increase to 1,20,000
80U
  • If assesse is PH.
  • 75,000 deduction on normal disability
  • 1,25,000 for severe disabilities.

Module 6: Gift, Loan Repayment

Taxation of Gift

Section 56 (2)(x)
Gifts from I-T PoV look like this:
  • Money
  • Real Estate
  • Other Assets
    • Jewellery
    • Shares
    • Artwork
    • Drawing/Painting
    • Sculptures
  • Car and A/C are not gifts from PoV of I-T.
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Exempt:
  • From specified persons/relatives
  • Who are called relatives?
      1. Spouse of the individual;
      1. brother or sister of the individual;
      1. brother or sister of the spouse of the individual;
      1. brother or sister of either of the parents of the individual;
      1. any lineal ascendant or descendant of the individual;
        1. Children, Grandchildren, Parents, Grandparent, Great grandparents
        2. Not children of daughter
        3. Not the parents of the mother
      1. any lineal ascendant or descendant of the spouse of the individual;
        1. Parents-in-law, Grandparents-in-law
      1. spouse of the person referred to in clauses (2) to (6);
  • On Special events like Weddings, gifts are exempt.
  • What are the events:
      1. From any relative; or
      1. on the occasion of the marriage of the individual; or
      1. under a will or by way of inheritance; or
      1. in contemplation of the death of the payer or donor, as the case may be; or
      1. from any local authority as defined in the Explanation to Clause (20) of Section 10; or
      1. from any fund or foundation or university or other educational institution or hospital or
      1. Other medical institutions or
      1. any trust or institution referred to in clause (23C) of section10; or
      1. from or by any trust or institution registered under 72 [section 12A or section 12AA or section 12AB or
Non-exempt:
  • From non-specified persons. However, there are a few exceptions to this like:
    • Gift amount ≀ 50,000
      • Aggregation happens
    • Real estate stamp duty value ≀ 50,000
      • Here aggregation does not happen.
    • For other assets also ≀ 50,000
      • Aggregation happens
  • In the case of aggregation, if we cross the 50k limit under a category in an FY, the whole gifted amount will be taxable. E.g., if you receive 40k from A and 15k from B, the whole 55k will be taxable; there will be no 50k deduction and a 5k taxable concept here.
  • On Non-special events
Further suggestions:
  • Keep receipts of the gifts as usually, I-T notice comes after 3-4 years of FY.
  • If we take 2 Lakhs or more in cash from any person (relative or non-relative), the entire amount becomes a penalty.

Clubbing Provisions

Section 64
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Total Income = Ch IV + Ch V - (Ch VI - Ch VI A)
  • Income received thru spouse, parents, or minor comes back to the club in your income.
  • The interest income received through minors gets a 1500 exemption.
  • Suppose your FIL deposits some amount in your daughter’s name, which earns an income. Then the income will be clubbed to the parent with the highest income, and it remains the same until the daughter ceases to exist as a minor, even if the highest earner parents change later.

Acceptance and Repayment of Loan

  • Any loan from any person worth more than 20,000 in cash, then the entire amount will become taxable.
  • While repaying this loan, the entire amount will become a penalty if you again pay it back in cash.

Module 7: Other Sources of Income

Income from Business or Profession

  • Business losses can not be adjusted with Salary income.
  • Presumptive income is the income you are about to receive but not yet received. In that case, 50% of that presumptive income must be shown.
  • The slab rate is the Business income tax rate.

Other Income

  • Slab rate taxation

Capital gain income

What are not capital assets (CA)?
  1. Stock in trade/Store
  1. Personal Effect:
    1. Items unrelated to business, like PC, Own Car, etc., are movable properties.
    2. RE, though, can be personal as immovable will be CA.
  1. Rural Agriculture land
Other we discussed broadly above.

Module 8: Tax slabs and Computation

To be done later…

Module 9: Tax Planning

Tax Planning
  • Without breaking I-T rules if we can minimize taxable income and maximize return.
  • Assuming NIL interest and penalty.
Tax Avoidance
  • Without knowing if you made a mistake.
Tax Evasion
  • Deliberately not informing I-T on income.
  • This is illegal and may cost a penalty once found out in the future.
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Tax Planning Modes

Best 80C channels
  • PPF β†’ E E E
    • PPF is a good option even in the age of low return age as today due to its EEE option. It can be contributed even if the 1,50,000 cap has already crossed.
    • For minors’ you can start PPF account early for them so that just when they cease to be minors they have access to PPF withdrawal.
  • NSC
    • Till 5 years all interests received are non-taxable, but from 6th year it become taxable as the scheme matures in 5 years.
  • SSY
    • All interests are exempt. It comes under EEE.
    • Both PPF and SSY for a child is possible.
  • Insurance
    • Premium ≀ 10% of Sum Assured Value (SAV) is Exempt.
    • 10L SAV, 1.2L premium, After 5 years matured with 17L; 17 - (1.2 * 5) = 11L β†’ Taxable
    • 10L SAV, 0.8L premium, After 8 years matured with 15L, 15 - (0.8 * 8) = 8.6L β†’ Non taxable as Premium is ≀ 10% of SAV
  • ELSS
    • Lowest Lock-in period

Other ways to save tax

  • Tax planning through Political donation
  • NPS
  • 80E Education loan interest
  • Medical expenses
  • EV β†’ Loan interest upto 1.5L deducted
  • Tax Harvesting
    • Long term gaining upto 1 Lakh on share market is tax free.
  • Save interest through TDS rather than Advance Tax
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Scheme
Tax Rate
Maturity period
PPF
EEE
15 years
NSC
EET
6 years
SSY
EEE
21 years
Insurance
Premium > 10% SAV β†’ EET Premium ≀ 10% SAV β†’ EEE
Depends
ELSS
LTCG β‰₯ 1L β†’ EET LTCG < 1L β†’ EEE
3 years
Provident Fund
PPF + PF > 1.5L β†’ Interest more than 2.5L will be taxable PPF + PF ≀ 1.5L β†’ EEE
At Retirement
Tax saver FD
ETE
5 years
NPS
EEE/T At retirement 60% β†’ Exempt 40% Annuity β†’ Taxable
At Retirement

Home Loan

  • 30% of rental income is deducted.
  • 2 Lakhs on Home loan interest amount is deducted.

Utilizing Spouse, Child, Parent and HUF

  • Suppose you transfer money to spouse and she buys gold in that. then there is no annual appreciation on that. therefore no tax need to be paid. Otherwise as per law for the income from that sent amount I have to pay tax (30% for FD and 10% for ELSS)
  • In case of minor invest in a Mutual Fund on his/her name once s/he reaches 18 years, you withdraw the amount for their Education. In that case it will come under his/her name and will not be taxable to you or taxable in a lower rate.
  • The same can be done by transferring to HUF as well.
  • Mother not earning. Keeping FD in her account, interest upto 2,50,000 will not be taxable as below the taxable limit.
  • Also can be done in case of Major son till he starts earning.
  • Buying shares through grandchildren and sell them when they major. Before major if you sell it will be clubbed on highest GTI (Gross Total Income) parents taxable income.


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