Capital Gains tax is a tax on the gains made by assesses while selling assets. It does not relate to one's income. As such it has a special treatment in the Income tax act. Since the amounts involved are generally high, one must take care in making investments in the most tax efficient way.

Basically capital gain is calculated as the difference between the consideration or sale price received, as reduced by the purchase cost. The act allows a cost acquisition indexation which is designed to offset for inflation in the years between purchase and sale of an asset. By this the original price of the asset, for tax calculation purposes, is boosted by an incremental annual percentage specified by the department. Hence the purchase price for calculating tax will be more than the actual price paid. Cost of improvements made to the asset is also reduced from the consideration received. This relates particularly to sale of real estate assets.

Expenses incurred wholly and exclusively with sale or transfer

Cost of acquisition

Gross Short Term Capital Gain

Exemptions under sec. 54B/54D54G/54GA

Net Short Term Capital Gain

On which: Tax as per normal income tax slabs

Long Term Capital Gains

Full value of consideration

Expenses incurred wholly and exclusively with sale or Transfer

Indexed cost of acquisition

Indexed cost of improvement

Gross Long Term Capital Gains

Less Exemptions under sec. 54/54B/54D/54EC/54ED/54EE/54F/54GB

Tax at 20% on the balance as computed.

Advance tax too should be paid

The money received from sale of property must be deposited in a Capital Gains Account in a bank. Deposits can be done in instalments or at one go and the account can be either a fixed or savings deposit account. It can be opened only in specified banks and must mention clearly that it is an account under the scheme. The deposit must be made before filing the return of income tax. This is only a temporary account for keeping funds, to be used for buying or building a new house. Withdrawals from this account can be used only for building or buying purposes. Taxpayers can use this exemption only for the net consideration or the capital gain amount.

Long term capital losses can be set off against only long term gains, while short term losses can be set off against short term losses. The capital loss must be from an earlier date. Losses can be carried forward for eight years. Long term loss from sale of securities cannot be set off. Hence this loss cannot be carried forward.

There are several exemptions from capital gains. Taxpayers should evaluate these avenues while making decisions to sell properties and invest. The amount of exemption would be calculated based on the proportionate amount invested in each asset, based on sale and purchase prices.

1. Sale of a residential unit can be offset by an investment in a new residential house.
2. Sale of an agricultural land can be offset by an investment made in another agricultural land.
3. Capital gains from compulsory acquisition of lands and buildings of an industrial undertaking; investment made for purchase of land or building to shift or re-establish the industrial undertaking.
4. Long term capital gains resulting from transfer of machinery or plant or building or land of an industrial undertaking situated in an urban area; may be invested in machinery or plant or building or land for the purpose of shifting the industrial undertaking to any area other than an urban area.
5. Capital gains on sale of asset other than a residential house and investment made in a residential dwelling.
6. Investments in financial assets and investments under Sec. 54EC.

This avenue can be used by those persons who already have a house. Under this scheme any amount from Rs. 20,000 to Rs, 50,00,000 can be invested in fully secured bonds issued by NHAI, REC etc. Holding period is three years. The bonds cannot be pledged and if sold before that period, capital gains would become chargeable.

This section was introduced in 2012. This allows assesses to invest in shares of companies engaged in production and manufacturing goods. The section has a five year window, starting from 1, April 2012 and ending on 31st March 2017.

1. The date of incorporation of the company should not be prior to the 1st day of April of the financial year in which the capital gain arises and not later than the due date of furnishing return of income.
2. The company should be engaged in the production of an article or a thing.
3. The company should qualify as a small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006.
4. The eligible assessee, before the due date of furnishing the return of income u/s 139(1) of the Act, must utilize the amount of net consideration for subscribing to the ordinary shares of an eligible company.
5. After subscription of shares, the eligible assessee should hold more than 50% of the share capital of the company or should be entitled to more than 50% of the voting rights in the company.
6. The eligible company, within one year from the date of subscription, should utilize the amount for purchase of capital asset.
7. The new asset must be purchased by the company, within a maximum time period of one year from the date of subscription to the ordinary shares by the assessee.
8. New asset means new plant and machinery but does not include second hand machinery, equipment installed in a residential accommodation, a vehicle, office appliances and computers.

Under this section, assesses may invest in a 'fund of funds' which will fund start-ups. The amount invested cannot exceed Rs. 50,00,000 and the lock in period is three years. The government aims to garner as much as Rs. 10,000 crores from this scheme.

Profits and gains from any business, profession or vocation are chargeable to income tax. This head includes a wide ambit of income sources and hence it is no surprise that it accounts for a high percentage of the tax collected. Assesses can be individuals, partnerships, Hindu Undivided Families, Companies or Association of Persons. Income is computed based on sales as reduced by allowable expenses. Incomes can be even illegal, yet it would be subject to tax. Income from speculation is taxed separately. Loss from business can be set off against income over a period of several years, in accordance with relevant rules. The accounting method used can be either on cash or mercantile basis.

According to the Income tax Act 1961, the following incomes are chargeable to tax under the head Profits and Gains of Business or Profession. The profits and gains of any business or profession, which was carried on by the assessee at any time during the previous year.

1. Any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management;
2. Any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of the agency;
3. Income derived by a trade, professional or similar association from specific services performed for its members;
4. Profits on sale of a licence granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947);
5. Cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India;
6. Any duty of customs or excise re-paid or re-payable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971;
7. Any profit on the transfer of the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade Development and Regulation) Act, 1992 (22 of 1992);
8. Any profit on the transfer of the Duty Free Replenishment Certificate, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992) ;
9. The value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;
10. Any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm;
11. Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy;
12. Any sum, whether received or receivable, in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as a deduction under section 35AD.

Sections from 30 to 37 detail the deductions that are available to be set off against profits from business or profession. Some of the allowable expenses are as follows:

1. Sec. 30: - Any rent, rates, taxes, insurance premiums paid by the assessee during the previous year in respect of the place for business purpose.
2. Sec. 31: - Any amount spent on repairs, insurance or hire charges, on plant, machinery, furniture.
3. Sec. 32: Depreciation on fixed assets like buildings, plant and machinery, furniture and other fixed assets is allowed. After 1, April, 1998, intangible assets like patents knowhow copyright, trademarks, licenses or any other right of business or commercial nature are also eligible for depreciation. An important condition is that the asset must be put to use during the previous year for which depreciation is claimed. Further, the assets must be owned in full or in part by the assesse. Depreciation can be claimed even on assets bought under a scheme of hire purchase.
4. Depreciation can be classified into three parts:
1. Normal Depreciation
2. Additional Depreciation
3. Depreciation on SLM (straight line method) basis in case of electricity companies

Normal depreciation is provided on block of assets method on WDV (written down value) of the block as on every 31st March. Depreciation is provided in full for the whole year, except when an asset is bought and put to use for less than 180 days during the year, in which case only 50% is allowed. Unabsorbed depreciation can be set off against other heads except salary or can be carried forward to future years (subject to rules).

5. Sec 36:
   1. Interest on borrowed capital, used for business
   2. Bonus or commission to employees: deduction subject to section 43B
   3. Discount on issue of zero coupon bonds to be allowed as deduction on pro-rata basis
   4. Employer's contribution to recognized provident fund or approved superannuation fund subject to section 43B
   5. Employer's contribution to approved gratuity fund subject to section 43B
   6. Insurance on health of employees by any mode other than cash
   7. Insurance premium on stocks
6. Other sections

Expenses of licenses to operate telecommunication services can be written off in equal installments over the useful period of the license Expenses incurred prior to starting a business or preliminary expenses can be written off at 5% every year.

Further, under section 37(1) any expense that a normally prudent person will make for the purpose of his/her business and which can be related to the business can be deducted. The only condition is that it should have been spent wholly and exclusively for the purpose of business or profession.

Expenses incurred by a particular business cannot be transferred to another business. Expenses incurred during a financial year cannot be used for setoff for any other year. Capital expenditure cannot be set off. All expenses must be of revenue nature. If expenses allowed in an earlier year are recovered, it will be subject to income tax. It is up to the assesse to show that any expenditure is permissible for deduction.

Assessing officer may disallow payments made to the assesse's relatives, if in his opinion it is in excess of market value.

Any payment in cash exceeding Rs. 20000, or Rs.35000 in case of payment to a transporter engaged in plying, hiring, transporting etc., in a day will be disallowed.

The following sums can be claimed only on actual payment before due date of filing:

1. Amounts payable by employer by way of contribution to provident fund or superannuation fund or any other employee benefit fund.
2. Amounts payable as bonus, commission to employees for services rendered.
3. Amounts payable by employer in lieu of leave salary to employee.
4. Amounts payable by way of tax, cess, duty or fee under any law and by whatever name called.
5. Amounts payable as interest on loan borrowed from public financial institutions or state financial institutions.
6. Amounts payable as interest on loan taken from scheduled bank including co-operative societies.
7. Maintenance of books of accounts - If in any of the three preceding years income exceeds Rs. 1, 20,000 or if gross sales exceed 10, 00,000, the assesse must maintain prescribed books of accounts. Audit of accounts is compulsory if gross receipts of a profession exceeds Rs. 25, 00,000 or in the case of a business Rs. 1, 00, 00,000.

If gross receipts of an eligible business does not exceed Rs. 2, 00, 00,000, assesses can declare 8% of such receipts as presumptive income. For specified professions like accountancy and interior decoration, if gross receipts does not exceed Rs. 50,00,000 assesses can declare 50% as income and pay the relevant tax.

Assesses can invest money in research activities which are related to their business with outside institutions. A weighted deduction of 175% of the actual expenditure is available. Similar deduction is available for monies given for research to Universities and other approved institutions, whether or not the research carried out is related to the assesse's business. If the money is given for social science and statistical research, then 125% deduction would be available.

A weighted deduction of 200% is available when money is given in response to a specific direction of a prescribed authority to National Laboratories, Universities, IITs, and specified persons approved by prescribed authorities.

A weighted deduction of 125% can be availed for money given to an Indian company engaged in scientific research, even if the research is not related to the assesse's business. Further, capital expenditure incurred for the purpose of research can be debited in full to the profit and loss account and if profits are insufficient to absorb this, the excess can be set off against other heads of income and if any is still remaining, the unadjusted balance can be carried forward. Stocks of raw materials, consumables and finished goods also play an important role in determining profits.

Income from house property encompasses all income from land and building and other real estate assets. It is defined as income from, 'house property which consists of any building or land appurtenant thereto of which the assesse is the owner'. (IT Act, 1961). 'House property' includes flats, shops, office space, factory sheds, agricultural land and farm houses, godowns, cinema buildings, workshop buildings and hotel buildings. However, income from vacant or open plots of land without any construction is taxed under 'Income from Other Sources or as business income.

The annual value of property consisting of any building or lands appurtenant thereto of which the assesse is the owner shall be subject to Income-tax. Further, the following conditions must be fulfilled. The property must consist of buildings and lands appurtenant thereto, while the assesse must be the owner of such house property. Though the property may be used for any purpose, it should not be used by the owner for the purpose of any business or profession carried on by him, the profit of which is chargeable to tax. (IT Act, 1961).

It is important to note that ownership of property includes lease-hold rights, free-hold rights and deemed ownership. 'Owner' for this purpose means a person who can exercise the rights of the owner not on behalf of the owner but in his own right. A person entitled to receive income from a property in his own right is to be treated as its owner, even if no registered document is executed in his name

For tax purposes, property is taxed on the basis of an "Annual Value'. Section 23(1) (a) of the Income Tax Act says that the annual value any property is the sum which the property might fetch when let out for rent. This is calculated on the basis of actual rent received or receivable, municipal value, fair rent of the property and standard rent. Further, annual rent is the sum left after deducting municipal taxes. This can be explained as follows: determine Gross Annual Value as above, and from this deduct municipal taxes actually paid. This will give the net annual value which is the subject matter of income tax.

Property consists of self-occupied property, which is property used by the owner for his/her own personal purposes. Let out house property is property that is let out on rent. This distinction is important as tax treatment differs for the two conditions.

Standard deduction - An assesse is allowed a deduction of 30% of the annual value of any property he/she owns. This is allowed for routine expenses like maintenance etc. Interest on borrowed capital - Interest on amounts borrowed for purposes of construction, repairs, renewals and purchase of property is allowed as a deduction. The interest should be computed and claimed separately. It is immaterial whether the interest has been actually paid or not paid during the year. [Circular No. 363, dated 24.06.1983]

New measures - In the 2016 Budget a provision 80EE has been introduced. An additional deduction for interest to the tune of Rs. 50,000 can be availed, subject to the following conditions:

1. 1. This deduction would be allowed only if the value of the property purchased is less than Rs. 50 Lakhs and the value of loan taken is less than Rs. 35 Lakhs.
2. 2. The loan should be sanctioned between 1st April 2016 and 31st March 2017.
3. 3. The benefit of this deduction would be available till the time the repayment of the loan continues.

Financial advisors can play a useful role in advising clients on investment strategies while assessing their portfolios. House property when used judicially can be a good source for tax savings, which revolve around principles embedded in the Act itself.

The main benefit is that one can claim interest on borrowed capital even though there is no formal income inflow from the property. The limit is for deduction of interest is Rs.2,00,000. This amount will lower the overall taxable amount. Another Rs.1,50,000 is available for repayment of the principal amount under section 80C. However, this is valid only for fully constructed houses. Interest during construction period is accumulated and written off once construction is over. If the house is sold before five years have elapsed after construction, the principal payment is deemed as income of the year in which the deduction is claimed and taxed.

When property is let out and rent is received, apart from the standard deduction to cover repairs, maintenance and such expenses, municipal taxes actually paid can be claimed. Further 30% can be deducted for repairs and maintenance. This means that only 70% of income from house property is taxable; a huge saving.But the icing on the cake is that the entire amount of interest paid on housing loans can be claimed without any limit. If rent collected is Rs.120 and Rs. 20 is paid as municipal taxes this would give a net annual value of Rs.100. Of this 30% or Rs. 30 can be claimed as standard deduction.

1. Owning property jointly:

This will split the income among multiple owners. In this case, the owners can avail of a joint loan as well. The advantage would be that the interest and principal amounts paid can be claimed separately and to the full extent by each joint owner.

2. Managing multiple properties:

Only the property registered as one's residence will fall under the 'self-occupied' property status. Hence choose the property with the highest income as your self-occupied property and declare the rest as let out properties. Please remember that empty houses too will be assessed and taxed. Hence take care to let out all properties.

3. Buying new properties:

Equally, if you already have a property in your name, you can buy new properties in the names of your spouses or relatives. Another idea in the same direction would be to settle existing properties on your children, thus freeing yourself to acquire new properties.

4. Living away:

Even in cases where owners are living away from their homes and claiming HRA, benefits under the Income from House Property head can be utilised. Thus investment in property can be used not only to hedge against inflation but can form the basis for sound tax planning in itself.

5. Capital Gains:

Any property that is held for over three years by the original owner or by successors would be deemed to be a long term capital asset. Sale of such assets would be subject to long term capital gains tax at a flat 20% on the value realised. Costs of improvements can be deducted for calculating tax. Another deduction is investment in Capital Gains Bonds, up to a maximum of Rs. 50, 00,000. Investment in a residential property is fully exempt for one house property.

'Gross salary' means: basic salary or wages, bonus, gratuity (beyond exempted limit), leave salary or encashment, advance salary, arrears of salary, commission and fees, remuneration for extra work, ex-gratia and pension. It also includes various allowances like house rent allowance, city compensatory allowance, dearness allowance and any other special allowances. Perquisites like free accommodation, free gas, electricity, and domestic help. Club fees are also covered. Gross salary includes retrenchment compensation received.

The following items are not included: family pension, gratuity on retirement, medical treatment reimbursement, sumptuary allowance, uniform expenses, leave travel concession, free meals at workplace and leave encashment on retirement.

'Net salary' refers to the income remaining after deducting exemptions under sec. 10 and deductions under sec.16 and professional tax paid. This is the income chargeable to tax. From this income other allowable deductions are reduced to arrive at the income actually liable for tax.

Perquisite are payments which may be defined as a casual emolument or benefit attached to an office or position. This is in addition to salary or wages. Under the Income tax, the following perquisites are taxable in all cases: concessional rent for house, rent free accommodation, free supply of gas, electricity, water, free or concessional education arrangements for employees' children, payment of Professional tax and Income Tax on salary of servant employed by employee; motor car or any other conveyance for personal use of employee and reimbursement of medical expenditure. Free meals in excess of Rs. 50, club facilities, credit card fees, use of movable assets, interest free loans and tour expenses.

The following perquisites are not taxed: use of laptops and computers, leave travel concession, free telephone, interest free loans (other than for medical purposes) not more than Rs. 20,000, free medical and recreational facilities. Some perquisites like employer owned car used for both personal and official purposes, free education of children, free gas electricity are taxable in the hands of specified persons only.

The following are the benefits that one may expect to get on retirement. These are gratuity, commutation of pension, leave encashment, retrenchment compensation, compensation on voluntary retirement, Provident Fund, Superannuation Fund and the National Pension Scheme.

Any gratuity paid to government employees including employees of local authorities is fully exempt. For other employees, these payments are taxed, though with some exemptions. Reliefs in other cases will be granted by the Central Board of Direct Taxes, after ascertaining the merits of each case.

Currently the only deduction permitted under sec. 16 is the Entertainment Allowance with a limit of Rs. 5000.

Profit in lieu of salary is defined as: the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his/her employment or the modification in the terms and conditions relating to such. This includes amounts received from a provident fund or other funds to the extent to which it does not consist of contributions by the assessee or interest on such contribution. Any sum received under a Keyman Insurance Policy including the sum allocated by way of bonus on such policy. Amount due to or received, whether in lump sum or otherwise, by any assessee from any person either before joining employment with that person, or after cessation of employment with that person. However gratuity, commuted value of pension and retrenchment compensation is excluded. Similarly, receipts from a statutory provident fund or a fund set up under the Provident Funds Act are fully exempt.

An important factoid about salaries is that owing to the transparent nature of compensation, the room for tax planning is limited. Nevertheless the following are some ways in which a handsome amount can be saved.

1. Housing

Amount paid towards rent of a house is exempt, subject to certain limitations. Exemption on housing loan can be availed even when one is living in a rented accommodation, as well as house rent allowance.

2. Leave travel

Leave travel allowance can be used to reduce tax outgo. This is available for travel within India. Two journeys in a block of four calendar years qualify for deduction.

3. National Pension Scheme

Employer's contribution to NPS of up to 10 per cent of basic plus DA is allowed for deduction under section 80CCD (2). This can be availed in addition to the Rs. 1.50 lakh limit under sec. 80C and the Rs. 50,000 limit under sec. 80CCD.

4. Bonus

Bonus income is fully taxable. Yet an employee can use other provisions as above to reduce the TDS amount that an employer normally deducts. While this does not save tax as such, proper planning and disclosure of savings will help avert excess tax deductions from salary and hence the need for claiming refunds.

5. Reimbursements

Opting for reimbursements like telecom expenses, books, fuel expenses, driver salary, food coupons, and dress expenses can reduce tax pay-out.

6. Salary advance

Advances are taxed in the year in which they are received. Interest free loans other than for medical purposes are taxed as perquisites.

7. ESOPs

Employee stock options are fully taxable. Esops are taxed on the basis of the price the employee pays for them and the fair market value on the date of opting for Esops. Usually the fair market value will be higher. Employees may use their discretion based on market conditions to maximise income and minimise taxation.

From an investment and financial advisory point of view there are many avenues of saving taxes by making investments in items like shares, debt instruments.

Below is a list of some benefits. It must be noted that deductions cannot exceed Gross Total Income.