1/17/2016 Investment planning: Tips to reduce your tax burden

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It's that time of the year again when people start planning their taxes. Most delaythis till the last moment and then invest without giving serious thought to the tax-saving instruments at hand. That's why we thought we should warm you up well inadvance so that you can make the best use of all the options.

MAKING RS 1-LAKH LIMIT COUNT

You can claim a deduction of up to Rs 1 lakh under Sections 80C, 80CCC and80CCD. If you are in the 30% tax bracket, you can save up to Rs 30,900 byinvesting in the following approved tax-saving instruments.

Employee Provident Fund (EPF):You must contribute at least 12% of your salary-basic pay, dearness allowance(including cash value of any food concession) and retention allowance-towardsEPF. This is deductible under Section 80C.

Premature withdrawal is allowed only under conditions specified by thegovernment. If the amount is withdrawn before five years of subscription to thescheme, the tax benefits that have been availed on it are cancelled.

Public Provident Fund (PPF):Any resident Indian can invest in PPF and claim income tax deduction. Anindividual can also contribute on behalf of a Hindu Undivided Family. One can alsoinvest in the name of spouse and children. However, tax deduction is available onlyon contributions up to Rs 1 lakh. At present, PPF is offering 8.7% annual interest.The interest earned is tax-free.

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Lowering the BurdenStart tax planning well before the year ends. We bring you all the options you can avail of to reducethe tax burden.

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Senior Citizen Savings Scheme (SCSS):People above 60 years (or those above 55 years who have taken voluntaryretirement) can invest in SCSS. The maturity period is five years, though it can beextended by another three years.

One can deposit only once any amount in multiples of Rs 1,000 but not more thanRs 15 lakh. At present, SCSS is offering 9.2% annual interest, which is paidquarterly. The interest earned is taxable.

National Savings Certificate (NSC):You can invest in five- and 10-year NSCs. Five-year NSCs are offering 8.5% a yearwhile 10-year NSCs are paying 8.8%. The interest earned is taxed. There is norestriction on the amount that can be invested, though tax deduction can beclaimed only up to Rs 1 lakh.

Bank, post-office deposits:Investment in five-year bank and post-office fixed deposits is eligible for taxdeduction. The interest earned is taxable.

National Pension System (NPS):Employee contribution towards NPS Tier-I account (where no withdrawal isallowed) up to 10% of basic plus dearness allowance is tax deductible.

Life insurance schemes:Investment in a life insurance scheme (unit-linked, traditional endowment or termplan) with sum assured at least 10 times the annual premium is eligible for taxdeduction within the Rs 1 lakh limit. Returns from these schemes are not taxed. Theminimum policy term is five years. Premiums paid for annuity plans of life insurersare also tax deductible.

Tax-saving mutual funds:These are equity mutual fund schemes with a lock-in of three years. Investment inthese funds is tax deductible up to Rs 1 lakh. One can continue to remain investedeven after the lock-in period. Capital gains and dividends are not taxed.

Home loan principal repayment:The principal component of a home loan repayment is tax deductible up to Rs 1lakh. However, if the property is sold before five years of the purchase, the amountclaimed as deduction is taxed in the year the house is sold.

Children's tuition fee:Tuition fee for educational institutes in India for full-time education of two personsis also eligible for deduction.

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BEYOND RS 1-LAKH LIMIT

By now you must have realised that the Rs 1 lakh limit is too small. That is why youneed to look at options under Sections 80C, 80CCC and 80CCD as well.

Rajiv Gandhi Equity Savings Scheme:Under this, first-time equity investors can invest up to Rs 50,000 in approvedstocks and mutual funds and claim tax deduction on 50% of the amount, or Rs25,000, under Section 80 CCG of the Income Tax Act. But to claim this exemption,their income should not be more than Rs 12 lakh a year. They should also have ademat account. They can avail of the tax benefit under the scheme for three years.

Employer's NPS contribution:If you have subscribed to corporate NPS, under which both you and your employercontribute 10% of basic salary and dearness allowance towards your NPS account,the employer's contribution is deductible under Section 80CCE. This is over andabove the Rs 1 lakh limit (employee contribution to NPS falls within this limit).

Health insurance premium:One can claim deduction for healthinsurance premium paid for self, spouse,children and parents under Section 80D.The limit is Rs 20,000 for senior citizensand Rs 15,000 for others. If you are payinghealth insurance premium for your parents,you can additionally claim up to Rs 20,000in case of senior citizens and up to Rs 15,000in other cases. Expenses incurred up to Rs5,000 on preventive health checks are alsodeductible within this limit.

Expenses for treatment ofhandicapped dependent:If any of your dependent relative (spouse,children, parents or siblings) ishandicapped, expenses incurred towards hisor her treatment and maintenance are

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deductible up to Rs 1 lakh if the disability issevere or Rs 50,000 otherwise.

Deduction in case of disabledpersons:An individual suffering from physicaldisability can claim up to Rs 1 lakhdeduction in case of severe disability or Rs50,000 otherwise.

Medical expenditure on self ordependent relative:Up to Rs 40,000 spent on treatment ofspecified diseases suffered by self or adependent relative is tax deductible. Somespecified diseases include malignant cancer,AIDS, chronic renal failure andThalassaemia. You need to furnish acertificate by a registered doctor to claimthese deductions.

Interest paid on education loan:Interest paid on education loan to financehigher education of self, spouse, children ora person of which the individual is a legalguardian is deductible under Section 80E.Loans taken to fund any regular orvocational course are also eligible under thisSection. The deduction is available for eightyears or till the interest is paid in full,whichever is lower.

Interest repayment on home loan:The interest paid on a loan taken to buy ahouse for living is deductible up to Rs 1.50lakh a year. If the loan is for a propertywhere the person does not live, the totalinterest paid is tax deductible.

However, no tax deduction is available on under-construction properties. Taxbenefits can be claimed for five years after the completion of the project.

An additional Rs 1 lakh deduction is allowed on interest payment if the loan amountis less than Rs 25 lakh and the value of the property is less than Rs 40 lakh. This isonly for those who are buying their first home in 2013-14.

Deduction on house rent:Your salary has a component called Housing Rent Allowance (HRA). This is exemptfrom tax if you live in a rented house.

The exemption is least of the following: 1) actual HRA received from your employer, 2) actual house rent paid by you minus 10% of basic salary, or 3) 50% of basic salary if you live in a metro city or 40% of basic salary if you live in anon-metro city.

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If the HRA is not part of your salary, you can still claim deduction on the rent paid.The deduction is the least of the following: (a) rent paid less 10% of taxable income,(b) 25% of the taxable income or, (c) Rs 2,000 a month.

Donations, royalty and patents:Royalty earned on patents and books (other than text books) is exempt from tax upto Rs 3 lakh in each case. Donations to political parties and for scientific research,rural development and government relief works are also deductible. The deductioncan be 100% or 50% depending upon the beneficiary.

Though in many cases there is no limit on the donation amount, in some cases, ifthe donation exceeds 10% of the gross salary, no deduction is allowed on the excessamount.

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