Tax Planning Is Just Plain Common Sense

Most people think of tax planners as wise old men in white hair who study the arcane tax laws and come up with brilliant interpretations of little known sections of the Income tax law. Many times, it is indeed so. But many times, tax planning consists of simple common-sense approach to understand the final objective and aim to achieve it in a slightly different fashion to obtain a tax effective solution.

My friend Rakesh Mehra’s case illustrates this point perfectly. Rakesh’s father Mr. Roshan Mehra is 84 years old retired IAS officer. He has pension income of 60,000 p.m. He lives with Rakesh in Mumbai. Rakesh has a brother Rishi who lives in Delhi. Both Rakesh and Rishi are financially well off. Mr. Roshan Mehra has a flat in Panvel that he had bought in 2001. Its indexed cost is around Rs. 18 lakhs. Its current value is around Rs. 1.1 crore. He wishes to sell the flat and distribute the sale proceeds equally among both Rishi and Rakesh even while he is living. He does not wish to purchase another flat but still wants to save on Capital gains tax to the extent legitimately possible.


In the normal course, if Mr. Roshan Mehra were to sell the flat; he would have taxable long-term capital gains of Rs. 92 lakhs. If he does not do any Best Taxation Planning Services in India he would have to pay capital gains tax of Rs. 21 lakhs approx. (calculated at 22.66% of Rs. 92 lakhs).  The balance amount left from the sale consideration of Rs. 1.10 crores after paying long term capital gain tax of Rs. 21 lakhs would be Rs. 89 lakhs which he can gift equally to both Rakesh and Rishi who would end up getting Rs. 44.50 lakhs each.

A straight forward Tax Planning Services  :

suggestion was for Mr. Mehra to invest in capital gain bonds of NHAI (or REC) for Rs. 50 lakhs. This would bring down the taxable capital gains to Rs. 42 lakhs and the capital gains tax would come down to Rs. 10 lakhs approx. (22.66% of Rs. 42 lakhs). The balance amount left from the sale consideration after the investment of Rs. 50 lakhs and tax of Rs. 10 lakhs would be Rs. 50 lakhs. Mr. Mehra could gift Rs. 25 lakhs each to Rishi and Rakesh. Additionally, he could gift another Rs. 25 lakhs each after 3 years when the capital gain bonds mature.

In this way Rakesh and Rishi would get Rs. 50 lakhs each in 2 tranches (instead of 44.50 lakhs) and Mr. Mehra could also enjoy the interest on the bonds during the 3-year holding period.

Instead I suggested that Mr. Roshan Mehra gift the flat itself to his 2 sons. Gifts to close relatives enjoys concessional stamp duty rates in Maharashtra (total cost around Rs. 40,000 all inclusive) and there are no income tax implications on any of the parties. The sons could now sell the flat and the taxable capital gains in the hands of each of them would be Rs. 46 lakhs. Each of them would now receive Rs. 55 lakhs on which they need not pay any capital gain tax if they invest in capital gain bonds of Rs. 46 lakhs each. Also, Rishi had just bought a residential property in Delhi and hence would not even need to invest in capital gain bonds to claim exemption.

This is a common-sense application :

of the Tax Planning maxim called gift the asset rather than gifting the money obtained from selling the asset. Nothing complicated about this tax planning technique. Similarly there are numerous examples in which one can apply the existing tax provisions to do some smart and common sensical tax planning.

Harsh is a professional writer and a widely published author on a variety of topics including finance, Tax, investments, insurance & accounting.