Tax planning is an essential part of financial planning. Efficient tax planning enables one to reduce tax liability to the minimum. This is done by legitimately taking advantage of all tax exemptions, deductions, rebates and allowances while ensuring that investments are in line with long term goals.
How to Plan?
1. Spread the taxable income among various members in your family;
2. Take full advantage of tax exemptions available under the law;
3. Take full advantage of permissible tax deductions and rebates available on stipulated tax saving investments
4. Make optimum use of tax-exempted incomes; and
Utilizing the deductions under Chapter VI A
1. Section 80C
Under Section 80C, the maximum deduction available is Rs 100,000 pa. Ideally, salaried individuals whose gross total income is equal to or more than Rs 250,000 should utilise the entire Rs 100,000 limit.
Let us consider the case of two individual whose taxable income is Rs 600,000 on of who utilises only half of the available Rs 100,000 limit. He would end up paying an additional tax of Rs 10,300 as opposed to an individual with the same taxable income, but has utilised the entire limit.
Following investments/contributions qualify for Section 80C deductions,
- Public Provident Fund
- National Saving Certificate
- Accrued interest on National Saving Certificate
- Life Insurance Premium
- Tuition fees paid for children’s education (maximum 2 children)
- Principal component of home loan repayment
- Equity Linked Savings Schemes (ELSS)
- 5-Year fixed deposits with banks and Post Office
2. Beyond Section 80C
For salaried individuals whose gross total income exceeds Rs 250,000 pa, deductions under Section 80C may not be sufficient to reduce the overall tax liability. In such cases following can be considered :
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.
Salaried individuals who plan to pursue higher education can avail of an education loan as the entire interest is eligible for deduction. The loan can be for self, spouse or child from an approved charitable institution or a notified financial institution.
3. Restructuring the salary
Restructuring the salary and including certain components can help a great deal 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 part of one’s salary structure:
- Food coupons like Sodexo and Ticket Restaurant are exempt from tax up to Rs 15600 p.a
- Medical expenses reimbursed by the employer are exempt up to Rs 15,000 per year.
- Individuals living in a rented accommodation can have House Rent Allowance (HRA) as part of their salary.
- Transport allowance is exempt up to Rs 800 per month.
- Leave Travel Allowance (LTA) can be claimed twice in a block of four years for domestic travel.
4. Claiming tax benefits on house rent paid
Where HRA doesn’t form part of salary and for individuals having income from sources other than salary, rent paid by them for residential accommodation can be availed as a deduction under Section 80GG. The deduction is restricted to the least of the below:
- 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 joint Home Loans
As discussed earlier, 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
Tax planning has several advantages, the below listed are few of such advantages:
- Reduce Tax burdance by strategically planning and sharing income among the family members
- Helps plan retirement
- Accumulation of wealth
- Promotes savings by investing in tax saving schemes