Most often we all wait till the last moment to do anything in life. Tax planning and contributing to tax saving investment is no different. During the last few weeks of any financial year we make hasty decisions to invest in tax saving instruments. In the process we end up buying products which are not right for us.
Tax planning should be done early and put in action over the entire year. This helps us in scheduling and planning our monetary outflows in tax saving investments over the entire year instead of contributing lumpsum in the last quarter. It also gives us ample time to understand and evaluate different options that are specific to your financial situation. Start your tax planning now for Assessment Year 2011-12.
Here are some simple tips for planning your taxes this financial year:
Know your tax liability
The first step is to know how much tax would you be paying in Financial Year 2010-11. If you are wondering, “how to do that?”, well you can refer our earlier post that provided a simple excel based tax calculator for FY-2010-11.
Once you know the tax liability you can start planning to optimizing your tax saving plans.
Utilize Income Tax Deductions under Section 80C
The most popular section in your tax planning is Section 80c. It provides up to Rs. 1 lacs in deductions (and another 20,000 for investments in infrastructure bonds). Investment options under this section include Employee Provident Fund (EPF), Public Provident Fund (PPF) contribution, National Savings Certificate (NSC), Long term Fixed Deposit (5-years), life insurance policies, Equity Linked Savings Schemes (ELSS), Unit Linked Insurance Plans (ULIPs), School Fees, Home Loan Principal repayment.
You can choose the best tax saving plan that suits your profile and risk appetite. Safe investors can go for assured returns Small Savings Plans while aggressive investors may look at ELSS schemes to invest.
Tip : Many of us a salaried employees and have contribution to Employee Provident Fund. For Jump starting your tax planning, deduct your contribution to EPF from 1 lac. This is the amount that you need to additionally invest under Section 80c.
This year Finance Minister has allowed a deduction of an additional amount of Rs.20,000 for investment in long-term infrastructure bonds as notified by the Central Government. This would be over and above the existing limit of Rs.1 lakh on tax savings.
Tip : Provision for investing Rs. 20,000 in Infrastructure Bonds to maximize your tax savings in Financial Year 2010-11.
Claim deduction for Medical Insurance Premium (Section 80D)
Medical insurance is an imperative, especially in a country like ours, where the State does not cover medical costs. You should take a medical insurance cover for yourself as well as your family, irrespective of the tax deductions available.
Any premium that you pay for your, your spouse, or dependent children’s medical insurance is allowed as a deduction, subject to a ceiling of Rs 15,000. If you are a senior citizen (i.e. an individual resident in India who is of the age of sixty-five years or more), a higher deduction of Rs 20,000 is available.
If you pay for the medical insurance of your parents then you get an additional deduction of Rs. 15,000 or 20,000 in case any of your parent is a senior citizen.
If you are a senior citizen the enhanced deduction is allowed only if the premium is paid by cheque.
Tip : Irrespective of the tax benefits, medical insurance should be taken by every individual. It has a very important role in your overall financial plan and provides you cover against any unforeseen medical emergency.
Avail deduction of Interest paid on Housing Loan (Section 24)
It is smarter to take housing loan even if you have the money to buy a house outright. Home loans are one of the cheapest forms of loans available and also offer tax benefits. On the first house, interest up to Rs 1,50,000 is tax deductible.
For the second house, the entire interest without any limit is eligible for tax deduction. However, the annual value of building or land (i.e the potential of property to generate income) owned by you is chargeable under income from house property. This means, even if the property is vacant, the fair rent for that property is considered in your income and deduction of full interest on home loan is granted to you.
Tip : You will benefit if the annual value of the second house is less than the actual interest paid by you for the home loan during the year. To claim it you can specify the net amount in Income from House property taking into account, the Annual value, less 30% of annual value less any interest paid on borrowed capital to acquire, construct, repair, renew the said property.
Get HRA Exemption for Rent paid (Section 10)
Those who stay in rented house are provided relief through HRA exemption. House Rent Allowance (HRA), which falls under the head Salary, is a component that has a part of it exempt from tax liability. So, if you are getting HRA it should be ensured that a rent receipt is given to the employer to reduce the taxable portion of HRA.
The extent of exemption is calculated as the lowest of following three values :
- The excess of actual rent paid over 10% of the basic salary
- Actual HRA received
- If you live in a Metro i.e. Delhi, Chennai, Kolkata, or Mumbai then 50% otherwise 40% of basic salary received.
Tip : If you stay in rented house, provide your rent particulars to your employer so that you can get the relief of HRA exemption.
Many people have confusion on whether they can claim deduction of Interest paid on Housing Loan as well as HRA Exemption for Rent paid. Yes, you can claim both these deductions together, provided your own property is not close to your place of work and due to which you have to stay in a rented accommodation. In such scenario you can specify your own property as self occupied and claim the deduction under Section 24. Otherwise, you can claim it by taking the annual value or the actual rent received from your own property as specified above.
Avail any other deductions allowed in Income Tax Act.
Interest on Education Loan (Section 80E)
Under section 80E, you can avail tax deduction with respect to the interest paid on repayment of education loan taken from a bank or any other financial institutions in India or worldwide, for higher education.
Charitable donations (Section 80G)
While donations should not be made simply for tax purposes but for philanthropic reasons, you can always make a couple more at the end of the year to lower your tax. You get a tax relief if you donate to institutions approved under Section 80G of the Income Tax Act. The rate of deduction is either 50 or 100 per cent, depending on the choice of the charity fund.
Tip : There is no restriction on the amount given to charity. However, donations must be made only to specified trusts and also only donations of up to 10 per cent of your total income qualify for such a deduction. Remember to get receipts whenever you make any charitable donation.
Handicapped Dependent and Medical Treatment (Section 80DD)
Under section 80DD deduction can be claimed in respect of maintenance including medical treatment of handicapped dependents. In this case, deductions up to Rs. 50,000 or 75.000 can be claimed based on the severity.
Further deduction, in respect of medical treatment of specified life threatening diseases, is available under section 80DDB. Deduction is also available in case of a person with disability.
Making use of all these exemptions and deductions lowers taxable income and consequently minimizes your tax outgo.