46. Tax Planning for Making a Will !

Every person, particularly after the age of 50, must prepare a Will to provide for a smooth, litigation-free transfer of assets to his/her family in the manner in which he desires. There are certain important aspects of making a Will, which should be taken care of so that a valid Will can be properly drafted. Besides, there are various income tax advantages to the legatees and other members of the family through a proper drafting of one’s Will.

Making a Valid Will

A Will is a disposition of property made by a person during his lifetime but which is intended to take effect only after his demise. A Will takes effect only on the death of its author or testator. During his lifetime, the Will remains an ambulatory document which can be revoked at any time without any legal difficulty whatsoever. For a valid Will, it is necessary that it should be made in conformity with the law of the country in which the immovable property is situated. It should also be in conformity with the law of the testator’ s domicile which means the domicile of the testator at the time of making the Will. Wills made by Hindus, Buddhists, Jams and Sikhs as per the Hindu Wills Act, 1870, read with the Indian Succession (Amendment) Act, 1926, are required to be in writing, signed by the testator, or any person in his presence by his direction, and attested by at least two witnesses. There is no particular form of Will prescribed by law.

An important aspect of the Will is a clause regarding the appointment of an executor or executors. Where the Will contains a trust, trustees should also be appointed. Legacies and devices in a Will can be specific as well as general. A specific legacy or device is the bequest of a definite thing or property out of the estate of the testator. Annuity can also be granted under a Will, which means a fixed payment of money periodically. A Will does not require any stamp paper. It can be simply written on plain paper in any language.

Creation of HUF through a Will

One of the important means of tax planning to be adopted through a Will is the creation of a Hindu Undivided Family by way of transfer of property to one’s son, spouse and children in such a manner that all these persons can constitute a separate Hindu Undivided Family if there is no such HUF already in existence. This Hindu Undivided Family would be able to enjoy the separate exemption limit applicable to it under the Finance Act for the time being in force.

Bequests to Family Members

Bequests can be made to minor children or minor grand children of the testator through a Will. Similarly, a Will can be adopted as a proper device for transfer of property by way of bequests to other members of the family including daughters-in-law and other relatives as a result of which there would be a lot of income tax saving. Funds could easily be transferred to one’s spouse through Will and obviously the provisions of clubbing under Section 64(1) of the I.T. Act would not be applicable.


Tax Planning for a Discretionary Trust through Will

A discretionary trust can be created through a Will for the benefit of some persons particularly the members of the family whether alive at the time of making the Will or to be born later. It would not be hit by the provisions of Section 164 of Income Tax Act regarding the charging of income tax at maximum marginal rate in the case of a discretionary trust. This is because it is provided in clause (ii) of the first proviso to Section 164(1) of the iT. Act that if there is only one trust declared by a Will, then the income of the discretionary trust would be chargeable to income tax as if it were the total income of an individual or an association of persons. Thus, income tax saving up to ` 50,000 per year could be achieved.

Tax Planning for a Trust for Business through Will

Normally, the business income of a trust is chargeable to tax at a maximum rate of tax, as per the provisions of Section 161 (IA) of the I. T. Act. However, the proviso to Section 161(JA) provides that where the income of any private specific trust declared by a Will consists of or includes, any profits or gains of business, the rule regarding the chargeability of income at the maximum marginal rate would not be applicable, provided the trust so declared by any person by Will is exclusively for the benefit of any relative dependent on him for support. and maintenance and such a trust is the only trust so declared by him. Similar is the provision contained in the second proviso to Section 164(1) which provides that in the case of a discretionary trust declared by a Will which carries on a business, the profits and gains of the business of such a discretionary trust would not be liable to income tax at the maximum marginal rate if the profits and gains are receivable under such trust exclusively for the benefit of any relative dependent on him for support and maintenance and such a trust is the only trust so declared by him. Thus, through proper tax planning, a taxpayer can declare a discretionary trust for the exclusive benefit of his dependent relatives through only one such trust in a manner that the income of the discretionary trust after the demise consisting of his profits and gains of a business would be liable to tax like the income of an individual and not be chargeable at the maximum rate of tax.

Assessment of Executor after the Death of a Testator

After the death of an individual, the income of the estate of the testator is chargeable in the hands of the executor under the provisions of Section 168 of the I. T. Act. So long as the distribution of the estate is not complete, the executor would continue to be assessed in respect of the income of the estate of the deceased person as a separate person enjoying the separate exemption limit of ` 2,00,000 at present. This would result into a lot of income tax saving through proper tax planning. Thus, the file of a deceased person even after death can be continued for a long time by proper drafting of a Will.

The tax planning aspects of Will described above clearly show how tax can be saved by a clear drafting a Will. Which is why, it is absolutely necessary that a Will be properly drafted so that the various tax advantages can be enjoyed by the members of the family or other relatives to whom assets are bequeathed through a Will.
Sec. 143(3) : Scrutiny Assessments by Income Tax Department
“Penalties” Under Income Tax Act. 1956
How is a Search Operation Conducted by Income Tax Department ?
Surveys for Checking Ostentatious Expenditure
Surveys for Enforcing Compliance with Provisions of TDS
“Summon” U/s 131 of Income Tax Act.
Investigation by Income Tax Department:
Appellate Authorities of Income Tax Department
Power to Call for Information U/s Sec. 133(6) of Income Tax Act.
Specific Surveys U/s 133A(1) of Income Tax Act.
Types Of Income Subject To TDS [Deduction Of Tax At Source]
Pre-Requisite For Claiming Income Tax Refund
Benefits of Filing Income Tax Returnsn
Section-139(9): Defective Tax Return
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How is a Search Operation Conducted by Income Tax Department ?
The provisions relating to search and seizure are contained in section 132 of the Income Tax Act, 1961.
Sec. 143(3) : Scrutiny Assessments by Income Tax Department
Scrutiny assessment refers to the examination of a return of income by giving an opportunity to the assessee to substantiate the income declared and the expenses, deductions, losses, exemptions, etc. claimed in the return with the help of evidence..
“Penalties” Under Income Tax Act. 1956
Penalties by way of monetary payments are charged under the Income Tax Act for various defaults relating to payment of taxes, maintenance of accounts, for noncompliance and non co-operation during proceedings, for evasion of tax, etc..
Income of Individuals And HUFs – As a Tax Payers Under Income Tax Act, 1961.
The individual tax payers and also the HUFs while proceeding to calculate the net taxable income in the first phase are required to arrive at the gross total income under different heads of income...
Types Of Income Subject To TDS [Deduction Of Tax At Source]
The following types of incomes are mainly subject to deduction of tax at source: (a) Salaries Section 192. (b) Interest on securities Section 193..
Pre-Requisite For Claiming Income Tax Refund
For claiming income tax refund the first prerequisite is that there should have been excess tax paid or deducted at source on the basis of return of income.
Section-139(1) : Provision for Voluntary Income Tax Return
Every person,— (a) being a company or a firm; (whether having income or loss) or (b) being a person other than a company or a firm if his total income or the total ncome of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax, shall file a return of his income in the prescribed form.
Benefits of Filing Income Tax Returnsn
We have heard many a times that every individual whose total income exceeds the maximum exemption limit is obligated to furnish his/her Income Tax Return or ITR.
Section-139(9): Defective Tax Return
Where the Assessing Officer considers that the return of income furnished by the assessee is defective, he may intimate the defect to the assessee and give him an opportunity to rectify the defect within a period of 15 days from the date of intimation.
Section 139(5) : Revised Income Tax Return
If any person, having furnished a return u/s 139(1), or in pursuance of a notice issued under section 142(1), discovers any omission or any wrong statement therein, he may furnish a revised return at any time.
Section-139(4A) : Income Tax Return of Charitable and Religious Trusts
Every person in receipt of income derived from property held under trust or other legal obligation wholly or partly for charitable or religious purposes or of income being voluntary contributions referred to in section 2(24)(iia) shall.
Section-139(4) : Belated Income Tax Return
If an assessee has not furnished a return of his income within the time allowed to him under section 139(1) or within the time allowed under a notice issued under section 142(1).
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