Most of us among salaried income are worried of increasing Income Tax liabilities. It even pinches more as and when pay and position increases, However most of the people are unaware of the fact that after proper detailing the tax burden can be reduced. One must have a basic understanding about Income Tax planning which can be explored and utilized for reducing tax outgo on regular basis ,which is as under :
We have to pay taxes on two types of income in general –
01. Income from work, employment, business or profession.
02. Income over the accumulated savings and investments we keep for various life goals and emergency purposes in various means, which can be divided in further two types – a. Physical Assets like Real Estate, Commodities, etc. b. Securities and Alternative Assets like Bank Deposit, Fixed Deposit, NSC, Govt Securities, Insurance policies, Mutual Fund, equity shares, loans, PMS, etc. Income comes in the form of Interest, Dividend, Rent, etc.
Income tax law in our country allows various prescribed ways to calculate tax and claim deduction under various sections of the act to reduce our tax liability and plan for the taxes we have to pay. For the purpose of identifying options we can categorise them in two – a. General Options, b. Smart options.
a. General options : We say them general because these are the opportunities available to claim for any taxpayer if the required conditions are fulfilled. These are by and large available either against the investments and some expenditures under various prescribed schemes.
i. Deduction for investments done during the year :
Sum of Rs. 150000/– maximum if invested in various qualified options like Life Insurance policy, NSC, ELSS scheme of Mutual fund, Pension plan, etc qualify to get full amount of deduction till the amount paid during current financial year. They qualify under section 80C, 80CCC, 80 CCD of the Income tax Act. An additional deduction upto Rs. 50000/- is also allowed under section 80 CCD (1B) if the investment is done in National Pension Scheme.Some of the expenditure like Children Education Fee, House Loan principal repayment, etc also qualify under this category.
ii. Now let we take the various deductions available against expenditure of various nature –
a. U/s 80 D : Health Insurance Premium – You can pay premium upto Rs. 25000/- on self, spouse and dependent children and in case of Sr citizen parents can take additional Rs. 25000 to Rs. 50000/- on different age brackets of them. b. U/s 80 DD : This is allowable for rehabilitation of handicapped dependent relatives. One can claim upto Rs. 75000 to Rs. 125000/- depends upon the mentioned criteria. c. U/s 80 DDB : This is allowed for expenditure on prescribed ailments on decises treatment for self and dependent relatives upto Rs. 40000/- to Rs. 100000/- as per the mentioned criteria. d. U/s 80 E: This is allowed on interest paid on education loan for higher education for self, spouse and children. There is no upper cap of amount of interest payment but should be allowed for maximum upto 8 years only. e. U/s 80 EE : This is allowed on interest payment of first time home owners as additional rebate with certain condition on loan amount and cost of the loan. f. U/s 80 G: This is allowed on donations given to various charitable trusts, societies, government schemes, etc. There is certain criteria prescribed to qualify the same and the amount of allowable deduction under various categories of donations. g. U/s 80 GG : This is allowed on the house rent paid by an individual who is not getting any HRA allowance and not owning any residential property as per the criteria prescribed in law. h. U/s 80 RRB : This is allowed on the royalty money received by any individual on patent of any nature upto Rs. 300000/-. i. U/s 80TTA : This is allowed on interest received from any bank saving account upto Rs. 10000/-. j. U/s 80 TTB : This is allowed on interest received from any bank on Fixed Deposit upto Rs. 50000/- to a Sr citizen only k. U/s 24 : Interest paid on housing loan is allowed as deduction upto Rs. 200000/- on self occupied property. In case of joint ownership the amount of deduction is available to all the owners independently.
l. A sum of Rs. 40000/- as Standard deductionis also allowed to a salaried person.
m. Professional Tax paid or deducted by the employer is also allowed as deduction.
n. HRA received from employer is also allowed as deduction with certain prescribed criteria in law.
o. Leave Travel allowance received from employer is also allowed for deduction with certain criteria in law.
p. If any amount of earlier year arrears of salary received in current year is also required to calculate as per the separate guideline prescribed u/s 89 (1) of the law.
Smart options : Till now we have discussed the options of claimable expenditure for tax calculation and the investments which qualify for lowering our tax outgo. In smart options we are going to discuss the options through which you can reduce your tax outgo. We can divided the above options in three types of tax arbitrage options –
01.Tax Deferral : This way of tax planning minimize the potentially compounding effect of taxes by paying them at the end of the investment holding period. Strategies that fall under this category focus on long term capital gains, low turnover, and loss harvesting through recognizing portfolio gains and losses simultaneously.
02.Tax Avoidance : This way of tax planning is through investing in tax free securities. Special saving accounts and tax free bonds are examples of investment securities that generate tax free returns.
03.Tax reduction : This way of tax planning is through invest in securities that require less direct tax payment. Capital gains may be taxed at a lower rate than income, so securities that generate returns mainly as price appreciation offer the investor a lower effective tax rate.
About Author : Pramod Saraf, CFA, has a gratifying career span of 20 years in Financial and Strategic Planning. Possess thorough knowledge of effective financial products, investment policies and market dynamics with insight into Shares, Equities, Mutual Funds, stocks and Insurance Products.