Tax Planning – Income Tax, Capital Gains & Key Deductions – NISM Series XA Short Notes (Part 10)
Welcome to Part 10 of the PassNISM short notes series for NISM Series XA – Investment Adviser (Level 1). Tax planning is a vital part of financial advisory. A well-structured tax plan can legally save a client lakhs of rupees every year and significantly improve net investment returns. This post covers income tax structure, key deductions, and capital gains taxation — all tested in the NISM XA exam.
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Basics of Income Tax in India
India follows a progressive income tax system — the higher your income, the higher the percentage you pay. Income tax is governed by the Income Tax Act, 1961 and administered by the Central Board of Direct Taxes (CBDT).
Types of Income (5 Heads)
- Salary Income – Income from employment; includes basic pay, HRA, allowances, perquisites
- Income from House Property – Rent received; if self-occupied, notional income is nil
- Income from Business / Profession – Net profit from business or professional practice
- Capital Gains – Profit from sale of capital assets (shares, property, gold, mutual funds)
- Income from Other Sources – Interest from savings/FDs, dividends, lottery, gifts above ₹50,000 from non-relatives
Income Tax Slabs – FY 2024–25 New Tax Regime (Default from FY 2024–25)
| Income Slab | Tax Rate |
|---|---|
| Up to ₹3,00,000 | Nil |
| ₹3,00,001 – ₹7,00,000 | 5% |
| ₹7,00,001 – ₹10,00,000 | 10% |
| ₹10,00,001 – ₹12,00,000 | 15% |
| ₹12,00,001 – ₹15,00,000 | 20% |
| Above ₹15,00,000 | 30% |
- Standard deduction of ₹75,000 for salaried individuals under new regime (from FY 2024–25)
- Rebate under Section 87A: Tax is nil if total income ≤ ₹7 lakh under new regime
- Most deductions (80C, 80D, HRA, LTA) are NOT available under the new regime
Old Tax Regime (Optional)
| Income Slab | Tax Rate |
|---|---|
| Up to ₹2,50,000 | Nil |
| ₹2,50,001 – ₹5,00,000 | 5% |
| ₹5,00,001 – ₹10,00,000 | 20% |
| Above ₹10,00,000 | 30% |
- All deductions (80C, 80D, HRA, LTA, home loan interest, etc.) available
- Rebate under Section 87A: Tax is nil if total income ≤ ₹5 lakh
💡 Adviser Tip: If a client has high deductions (80C fully utilised + HRA + 80D + home loan), the old regime may still save more tax. Always calculate both and advise accordingly.
Key Tax Deductions and Exemptions Section 80C – Most Popular Deduction
Maximum deduction: ₹1.5 lakh per year
Eligible investments and payments:
- ELSS (Equity Linked Savings Scheme) mutual funds — 3-year lock-in
- PPF (Public Provident Fund) — 15-year lock-in
- EPF employee's own contribution
- NSC (National Savings Certificate)
- 5-year Tax Saver Fixed Deposits with banks
- Life insurance premium payments
- SCSS (Senior Citizens' Savings Scheme)
- Sukanya Samriddhi Yojana (SSY) — for girl child below 10 years
- Principal repayment of home loan
- Tuition fees for children (up to 2 children)
Section 80D – Health Insurance Premium
| Policy For | Deduction Limit |
|---|---|
| Self, spouse, children (below 60 years) | Up to ₹25,000 |
| Self, spouse, children (60+ years) | Up to ₹50,000 |
| Parents (below 60 years) | Additional ₹25,000 |
| Parents (60+ years) | Additional ₹50,000 |
| Maximum possible total deduction | ₹1,00,000 (if both self and parents are senior citizens) |
Section 80CCD(1B) – Additional NPS Deduction
Additional ₹50,000 deduction for contribution to NPS Tier I account, over and above the ₹1.5 lakh 80C limit. Applicable under the old regime only.
Section 24(b) – Home Loan Interest
Interest on home loan for a self-occupied property: up to ₹2 lakh per year deduction. For rented property, the actual interest paid is deductible (no cap, but loss set-off limited to ₹2 lakh under new rules).
Section 10(14) – Allowances Exempt from Tax
- HRA (House Rent Allowance) – Exempt to the extent of least of: actual HRA, 50% of salary (metro) or 40% (non-metro), or actual rent paid minus 10% of salary
- LTA (Leave Travel Allowance) – Exempt for domestic travel for self and family; twice in a 4-year block
Capital Gains Taxation
Capital Gain = Sale Price – Cost of Acquisition – Cost of Improvement – Transfer Expenses
For inherited assets: Cost = cost to the previous owner
Classification: Short-Term vs Long-Term
| Asset | STCG Holding Period | LTCG Holding Period |
|---|---|---|
| Listed Equity Shares / Equity MF | < 12 months | ≥ 12 months |
| Debt Mutual Funds | Any period (post Apr 2023) | Not applicable (all at slab) |
| Immovable Property (House / Land) | < 24 months | ≥ 24 months |
| Unlisted Shares | < 24 months | ≥ 24 months |
| Gold / Jewellery | < 24 months | ≥ 24 months |
Capital Gains Tax Rates (FY 2024–25 Post Budget)
| Asset | STCG Rate | LTCG Rate |
|---|---|---|
| Listed Equity / Equity MF | 20% | 12.5% (above ₹1.25 lakh; no indexation) |
| Property / Gold / Unlisted Shares | Slab rate | 12.5% (no indexation from FY 2024–25) |
| Debt Mutual Funds (post Apr 2023) | Slab rate | Slab rate (no LTCG benefit) |
💡 Important Budget 2024 Change: Indexation benefit on property and gold has been removed for assets sold after July 23, 2024. LTCG rate reduced from 20% to 12.5% to compensate.
Tax Loss Harvesting
A strategy where investors deliberately book losses on underperforming investments to offset capital gains, reducing overall tax liability. Set-off rules:
- STCL (Short-Term Capital Loss) can set off against both STCG and LTCG
- LTCL (Long-Term Capital Loss) can set off only against LTCG
- Unabsorbed capital losses can be carried forward for 8 assessment years
Advance Tax
If estimated tax liability exceeds ₹10,000 in a year, the taxpayer must pay tax in instalments during the year (advance tax) instead of waiting for year-end:
- 15% by June 15
- 45% by September 15
- 75% by December 15
- 100% by March 15
Failure to pay advance tax attracts interest under Sections 234B and 234C.
TDS on Investment Income
| Income Type | TDS Rate | Threshold |
|---|---|---|
| Bank FD Interest | 10% | Above ₹40,000/year (₹50,000 for senior citizens) |
| Mutual Fund Dividend (IDCW) | 10% | Above ₹5,000/year |
| Equity MF Redemption (NRI) | 15% STCG / 10% LTCG | — |
| Property Purchase (buyer deducts) | 1% | Property value ≥ ₹50 lakh |
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