In absence of tax planning, it has been observed that individuals (often salaried ones) end up paying more taxes than they are obligated to.
While lack of sufficient time to conduct the tax-planning exercise is a reason, largely, this can be attributed to lack of awareness about different incentives, allowances and rebates under the Income Tax Act. Apart from the Section 80C deductions which are quite popular, there are various other sections which can help salaried individuals save taxes.
We believe there is a need for salaried individuals to devote adequate time and effort to the tax planning exercise and be aware of the various benefits that they can avail of. In this blog, we present few tax-planning tips that can aid salaried individuals minimise their tax liability.
1. Utilise the entire Section 80C Deduction (Maximum cap is Rs 100,000/-)
- Utilize the deduction for cost of purchase or construction of a residential house property :
Many of the people still confused that only home loan repayment is deductible under section 80C and expenditure incurred by self on purchase or construction is not deductible however as per the provisions of tax laws ‘ any sum towards the cost of purchase or construction of a residential house property (including the repayment of loans taken from Government, bank, LIC, NHB, specified assessee’s employer etc., and also the stamp duty, registration fees and other expenses for transfer of such house property to the assessee) is deductible.
- Tuition fees;
Tuition fees paid (excluding any payment towards any development fees or donation or payment of similar nature), to any university, college, school or other educational institution situated within india for the purpose of full time education of any two children of the individual is allowed as deduction under Section 80C.
- Following investments/contributions qualify for Section 80C deductions,
- Public Provident Fund
- National Saving Certificate
- Accrued interest on National Saving Certificate
- Life Insurance Premium
- Equity Linked Savings Schemes (ELSS)
- 5-Year fixed deposits with banks and Post Office
(The above list of investment/contributions is not exhaustive)
2. Deductions beyond Section 80C
For salaried individuals whose gross total income exceeds Rs 300,000 pa, deductions under Section 80C may not be sufficient to reduce the overall tax liability. In such cases they can consider the following:
- Interest Component on Home loan: Individuals intending to buy a house should consider opting for a home loan. Interest payments of up to Rs 150,000 pa are eligible for deduction under Section 24.
- Medical insurance: An individual who pays medical insurance premium for self or spouse/dependent children is allowed a deduction of up to Rs 15,000 pa under section 80D. An additional deduction of up to Rs 15,000 pa is allowed for premium payment made for parents. In case the parents are senior citizens, then the maximum deduction allowed is Rs 20,000 per year.
- Donations: Subject to the stated limits, donations to specified funds/institutions are eligible for tax benefits under Section 80G for 50%/100% of the amount donated.
- Educational loan: under section 80E, an individual can claim entire amount of interest on loan taken from any financial institution or any approved charitable institution for his/her higher education or for the purpose of higher education of his /her spouse, children and legal guardian of the individual.
- Interest on deposits in saving account: interest upto Rs 10,000/- shall be allowed to be deducted if account is held with a bank or post office.
- Rajiv Gandhi Equity Saving Scheme : on fulfillment of the prescribed conditions, an individual can get deduction of 50% of the amount invested in notified shares (maximum cap Rs 25,000/-).
- Maintenance including medical treatment of handicapped dependent: on fulfillment of conditions specified under sec 80DD, an individual can claim maximum Rs 50,000 pa. (Rs 100,000 p.a. for severe disability) for expenditure incurred on medical treatment, training and rehabilitation of a disabled dependent.
- Deduction in respect of Medical treatment: an amount up to Rs 40,000/- (Rs 60,000/- in case of senior citizen) for expenditure actually incurred for medical treatment of such diseases or ailment specified in Rule 11 DD (Some of the diseases are Parkisons Disease, malignant cancers, full blown AIDS, Chronic renal failure, thalassaemia etc.) for self or dependent relative can be claimed as deduction under section 80DDB.
- Person with disability: Rs 50,000/- in case of a person with disability and Rs 100,000/- in cases of a person with severe disability.
3. Restructure the salary
Restructuring the salary and including certain components can go a long way in reducing the tax liability. Unlike eligible investments which lead to an additional cash outflow, restructuring the salary is a more ‘efficient’ means of claiming tax benefits. The following can form a part of one’s salary structure:
- Food coupons like Sodexo and Ticket Restaurant; they are exempt from tax up to Rs 31,200 per year (upto Rs 50 per meal during working hours, generally considered two meals a day).
- Medical expenses which are reimbursed by the employer are exempt up to Rs 15,000 per year.
- Individuals living in a rented accommodation should have House Rent Allowance (HRA) as part of their salary.
- Transport allowance is exempt upto Rs 800 per month (Rs 1600 p.m. for blind/handicapped).
- Leave Travel Allowance (LTA) can be claimed twice in a block of four years for domestic travel.
4. Claim tax benefits on house rent paid
A. If HRA in part of salary
This deduction is available under section 10(13A) & Rule 2A and is least of the following
- 40% of salary (50% if house situated at metro city)
- HRA actually received in respect of the period during which the accommodation is occupied
- Rent paid – (10% of Salary)
B. If HRA in not part of salary
This deduction is available under Section 80GG and is least of the following:
- 25% of the total income or,
- Rs 2,000 per month or,
- Excess of rent paid over 10% of total income.
Please note that the above deduction will be denied if the taxpayer or his spouse or minor child owns a residential accommodation in the location where the taxpayer resides or performs his office duties.
5. Opt for a joint home loan
The principal repayment on a home loan is eligible for a deduction of up to Rs 100,000 pa and the interest paid is eligible for a deduction of up to Rs 150,000 per year.
In cases where the home loan is for a substantial sum, it is not uncommon for the interest and principal repayment to exceed the stated limit. To ensure that the tax benefit is optimally utilised, an individual can consider opting for a joint loan with his spouse or parent or sibling.
This will ensure that both the co-owners can claim tax deductions in the proportion of their holding in the loan. The co-owner falling in the higher tax bracket should hold a higher proportion of home loan to ensure that the tax benefits are maximised.
Benefits of tax-planning
Given that the tax-planning exercise can aid salaried individuals to both save on tax and accumulate wealth, they would do well to offer the exercise the importance that it deserves.
Have a wonderful tax planning season!
Apurva Business Support Service