by Ajit V Burli; Money Wise; Jan-2016
Every individual, businessmen or any person generating income is required to incur a cost called “Tax” on the amount earned by them. Each of such person should not only have knowledge of different kind of applicable taxes but also should have knowledge of how to do Tax Planning. More importantly they should know how to best take advantage of these changing laws and regulations in order to improve your financial life and accomplish their family’s dreams? Maybe timely and up to date tax planning is one of the answer to this.
What is Tax Planning and why is it required?
Preparation to determine the quantum of tax to be paid – completely, accurately and economically to escape from tax and lessening of Tax outflows by legal means can be termed as tax planning. Tax planning is required to be done during the year and before the end of the period for which the tax is required to be paid.
Tax planning is not the same as Tax evasion. Tax evasion is application by the tax payer of illegal or fraudulent means to defeat or lessen the payment of taxes which is not permissible and punishable under the law.
What are Deductions under Chapter VI-A?
Indian tax laws contain certain provisions which are intended which act as an incentive for achieving certain desirable socio-economic objectives. These provisions are contained in Chapter VI A of the Income Tax Act, 1961 and are in the form of deductions (Sec 80C to Sec 80U) from the Gross Total Income. By reducing the chargeable income, these provisions reduce the tax liability and reduce the post-tax income. Two basic rules for claiming deductions: –
- Aggregate Deduction cannot exceed Gross Total Income
- Proof of such Investments /Expenditure needs to be maintained
Deductions u/s 80C, 80D, are most frequently used deductions by the individual assesse while computing their net taxable Income.
What are Deductions u/s 80C?
In order to encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act 1961. Investments made under such schemes are referred to as 80C investments. Savings under section 80C can be broadly classified as investment based and non-investment based. Provident Fund (PF), Public Provident Fund (PPF), Employees’ Provident Fund (EPF), National Savings Certificates (NSC), National Pension System (NPS), Fixed deposit (FD) and Equity Linked Savings Scheme (ELSS) come are investment based savings; while principal repayment of home loan, tuition fee are non-investment based.
- Life Insurance Premiums: Any amount that you pay towards life insurance premium for yourself, your spouse or your children can be included in section 80C deduction. If you are paying premium for more than one insurance policy, all the premiums can be included. Besides this, investments in unit-linked insurance plans (ULIPs) that offer life insurance with benefits of equity investments are also eligible for deduction under Section 80C.
- Provident Fund & Voluntary Provident Fund: Provident Fund is deducted directly from your salary by your employer. The deducted amount goes into a retirement account along with your employer’s contribution. While employer’s contribution is exempt from tax, your contribution (i.e., employee’s contribution) is counted towards section 80C investments. You can also contribute additional amount through voluntary contributions (VPF). The current rate of interest is 5% per annum and interest earned is tax-free.
- Public Provident Fund: An account can be opened with a nationalized bank or Post office. The current rate of interest is 8%, which is tax-free and the maturity period is 15 years. The minimum amount of contribution is Rs 500 and the maximum is Rs 100,000.
- Equity-Linked Savings Scheme (ELSS): Mutual funds offer you specially-created tax saving funds called ELSS. These schemes invest your money in equities and hence, return is not guaranteed. Money invested here is locked for a period of three years.
- Home Loan Principal Repayment: Your EMI consists of two components, namely principal and interest. The principal component of the EMI qualifies for deduction under Section 80C.
- Tution Fees: Deduction under this section is available for tuition fees paid on two children’s education. If Assessee have more than two children then he can claim tuition fees paid of only two children’s. The Deduction is available for any two children.
- National Savings Certificate: These are 6-year small-savings instrument, where the rate of interest is 8% and is compounded half-yearly. The interest accrued every year is liable to tax but the interest is also deemed to be reinvested and thus eligible for section 80C deduction.
- Stamp Duty and Registration Charges for Home: The amount you pay as stamp duty when you buy a house, and the amount you pay for the registration of the documents of the house can be claimed as deduction under section 80C. However, this can be done only in the year in the year of purchase of the house.
- Five-Year Bank fixed deposits: Tax-saving fixed deposits (FDs) of scheduled banks with a tenure of five years are also entitled for section 80C deduction.
For financial year 2015-16 that aggregate amount of deduction under section 80C, 80CCC and 80CCD shall not exceed Rs. 150,000
What are Deductions under Section 80 D?
Deduction in respect of Medical Insurance Premium (Mediclaim) paid to keep in force insurance by individual either on his own health or on the health of spouse, dependent parents and children or HUF on the health of any members of the family. Available Deduction under section 80D
- Up to Rs 25,000 for self, spouse and dependent children
- Up to Rs 30,000 for senior citizen parents
- Additional Rs 5000 for health checkups
Prime factors on which investments / expenditure for tax planning depends ?
Various factors to be considered at the time of making investments is age group , income bracket , risk appetite etc. Before making investments related to tax saving it is always important that the individuals must analyse on below 2 prime factors: –
- Age group of the Individual
- Income bracket of the Individual
Below stated are the tax savings patterns individuals of different age groups may follow: –
Below are the tax saving patterns, individuals with different income brackets may follow: –
Available deductions under Chapter VI A (Sec 80C to Sec 80U ) and amounts of Deduction available: