What is Tax Planning ?
Tax planning is an essential part of your financial planning. Efficient tax planning enables you to reduce your tax liability to the minimum. This is done by all legal steps by taking advantage of all tax exemptions, deductions rebates and allowances allowed under government policies while ensuring that your investments are in line with your long term goals.
What tax planning is not?...
1)Tax Planning is NOT tax evasion.
2)It involves sensible planning of your income sources and investments. It is not tax evasion which is illegal under Indian laws.
3)Tax Planning is NOT just putting your money blindly into any 80C investments.
4)Tax Planning is NOT difficult. Tax Planning is easy. It can be practiced by everyone and with a very little time commitment as long as one is organized with their finances.
5)Selecting tax saving investments
Consideration of following points is necessary before your tax saving investments for the year:
Liquidity: How quickly will you need the money? Will you need to access the money within the next year or two years or over what duration ?None of the above instruments let you withdraw your money quickly, in fact there is a minimum three year lock in for all tax saving investments.
Risk and Return: How much risk do you want to take. There is a trade off between the two, some instruments are very low risk, but as a result they give low returns which are capped.
Inflation protection: The instruments that give you a low return typically are the worst type of investments regarding inflation. This is important because many of the instruments give you a fixed rate of interest, and lock in your money for a long period. This is not a good protection against inflation.
Tax Exemption: All tax saving investments under Section 80C are alike in one respect that they are tax exempt when they are invested. But they differ with respect to the tax on the income you earn from such an investment as well as the tax on the maturity of the investment
How can I save Taxes this year?
Some of the Sections of Income Tax Act, 1961 are detailed below which detail few exemptions and categories of exempt income that you can take advantage of:
Section 80C: Investment in specified instruments and expensesSection 80C gives every income tax payer up to a maximum of Rs. 1,00,000 tax free income in a year if they invest in or buy the following instruments. Please not that this is a combined total of Rs. 1,00,000 and not an individual figure for every instrument:
1. Premium for Life Insurance or ULIP
2. Provident Fund (PF) contribution
3. Public Provident Fund (PPF) - only up to Rs. 70,000 in a year
4. Repayment of home loan principal
5. Equity Linked Savings Schemes (ELSS) of Mutual Fund Companies
6. Infrastructure Bonds
7. National Savings Certificates (NSC)
8. Tax Saving Fixed Deposits with Banks
9. Tuition Fees of children
Section 80D: Health Insurance PremiumYou can take advantage of an annual deduction of Rs. 15,000 from taxable income for payment of Health Insurance premium for self and dependants. For senior citizens, this deduction is Rs. 20,000.
Section 80E: Interest paid on educational loans
You can claim a deduction on the interest paid on loans taken for higher education for yourself, your spouse and children. There is no limit on the amount of deduction you can claim. The only thing to keep in mind is that the program for which the loan is taken should be a graduate or post-graduate program in engineering, medicine or management or a post-graduate course in the pure or applied sciences.
Section 80G: Donations to Charitable institutions
You can claim a deduction for any donation that you might have made to a charitable fund or institution. However, please note that these donations should be made only to specified institutions. And a proper proof of payment must be provided for the same. Based on the classification of the charity , you can claim either 100% or 50% of the donated amount as deduction. The deduction might also be subject to a certain limit again based on the type of charity that you are donating money
Section 24: Interest paid on housing loan
Under Section 24, a maximum of Rs 1,50,000 can be deducted from your taxable income as interest repayment for a self occupied house. Please note that this deduction is not available if you the house is still under construction and you do not have occupation of the house.
Provisions that you should take advantage of if you are a salaried employee:
Section 10(13A) : House Rent Allowance
You can take advantage of the provisions under this section if you are renting an accommodation. These provisions will not be available to you if you stay in a rent-free accommodation or live with your family or in your own house.
Under Section 10(13A), HRA is exempt to the least of the following: i) 50/40 per cent of basic salary= Dearness Allowance (if, applicable), ii) excess of rent paid over 10 per cent of basic salary; and iii) actual HRA received. Lets illustrate this calculation with an example:
Paying Rent to parents or relativesIf you want to pay rent to your parents or any relatives (like uncle/cousin) whom you are staying with. You will need to treat them as landlords. And request the owner of the house (which will be one of your parents) to declare it in his/ her personal income tax return. This will prevent any litigation in the future.
Section 10 (14) Rule 2BB(10) : Transport AllowanceTransport allowance granted for commuting between your residence and place of work is exempt up to Rs. 800 a month. You can take advantage of this provision to get a tax exemption of Rs 9600 annually by providing your employer with bills or a self declaration.
Section 17(2) : Medical ReimbursementYou can claim exemption up to Rs 15,000 annually on actual expenditure incurred on your medical treatment or for treatment of any of your dependants. Moreover, there is no restriction of approved hospitals or clinic for the same. This is exempt only on provision of actual bills.However, if the amount is paid out as an allowance not a reimbursement then it would be fully taxable.
Income Tax Liability for financial year 2007-08 and accounting year 2008-09
The income tax which is charged to you is based on the tax slabs declared by the Government in its annual budget every year. The following table encapsulates the tax slabs applicable this year.
(Financial Year 2007-2008 )
Taxable Income Slab Tax Rate
Upto Rs. 1,10,000 Up to Rs. 1,45,000 (for women) nil
Up to Rs. 1,95,000 (for residents, 65 years or above) nil
Rs. 1,10,000 – Rs. 1,50,000 10%
Rs. 1,50,001 – Rs. 2,50,000 20%
Rs. 2,50,001 – Rs. 10,00,000 30%
Above Rs. 10,00,001 30% + 10% surcharge on tax
Note: In addition, an education cess of 3% is charged on the entire tax amount including surcharge
Please note that the taxable income is arrived at after adding all your different sources of income and subtracting the deductions that you have taken advantage of under Section 80.
Income Tax Liability for financial year 2008-09 and accounting year 2009-10
The income tax which is charged to you is based on the tax slabs declared by the Government in its annual budget every year. The following table encapsulates the tax slabs applicable this year. (Financial Year 2008-2009 )
Taxable Income Slab Tax Slab
Upto Rs. 1,50,000Up to Rs. 1,80,000 (for women) NIL
Up to Rs. 2,25,000 (for residents, 65 years or above) NIL
Rs. 1,50,000 – Rs. 3,00,000 10%
Rs. 3,00,001 – Rs. 5,00,000 20%
Rs. 5,00,001 – Rs. 10,00,000 30%
Above Rs. 10,00,001 30% + 10% surcharge on tax
Note: In addition, an education cess of 3% is charged on the entire tax amount including surcharge
Please note that the taxable income is arrived at after adding all your different sources of income and subtracting the deductions that you have taken advantage of under Section 80.