Tax planning: Don’t follow the herd

Nov 12 2012, 09:28 IST
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SummaryThe Income Tax Act allows for several ways to save your tax outgo.

Divya Prasad is worried. Reason — the accounts department of her office has told her to furnish proof of investments planned by her during the year to lessen the tax outgo, something that she is clueless about. And she does what most of us do in a situation like this — call up an agent, pay up a certain fee and asking him for advice.

This is that time of the year when individual taxpayers start scrambling to plan out tax saving options. While the employer is under obligation to consider all investment proofs provided by an employee to tabulate the tax outgo, if the employee misses out on any detail or proof, he or she can always claim the investments in the Income-tax Return filed for the year and claim refund, since the employer has already deducted the extra tax on the investment portion for which the employee had not provided proof.

Tax experts say that most people do not have any idea on where to park money for saving taxes and most of the time simply rush in to invest in the same tax-saving instruments as their peers. Neither does it help them in proper saving on tax outgo nor does it lead to prudent tax planning.

There are a few crucial points one must keep in mind while working out the maths of saving tax. According to Vineet Aggarwal, director, KPMG, the first concern should the need for liquidity. Taxpayers must bear in mind the period when they want to access the money they are investing. Secondly, they need to be clear about their risk appetite and be cautious about the safety of their investment. “You also need to consider the tax aspect after investment. You must check the tax on the maturity of investment or the income arising out of it and accordingly take an informed decision,” says Aggarwal.

This is made easier as tax payers can take recourse to various websites that offer insights on tax saving plans, including sites of banks and financial service providers that advise, calculate and explain the options available. These websites also offer help in filing returns. However, for the salaried class, here are a few things that can be done to minimise the tax burden and maximise returns in the long run :-

Section 80C of the Income Tax Act: This section in the I-T Act provides tax breaks for investing in certain financial products. This was provided for by the government to encourage savings in the country. Section 80C investments include life insurance policy, Public Provident Fund (PPF), provident fund (PF), equity-linked savings scheme, home loan principal repayment, New Pension Scheme (NPS), pension products, mutual funds and tuition fee for up to two children. The section offers deduction up to Rs 1 lakh for the taxpayers. Under PPF alone, you are allowed to invest up to Rs 1 lakh per annum. Many experts are of the view that the PPF is one of the best options available for tax planning. This is because, not only the investment in the PPF is tax free, the interest earned is also tax free.

The New Pension Scheme (NPS) is also, what tax experts say, a “fantastic” avenue to put in your money for tax saving purpose as up to 10 per cent of an employee’s basic salary put in the NPS is tax deductible. However, you can avail of the benefit only if the employer has included this benefit in the CTC (cost to company).

Aggarwal says that people often ignore the tuition fee component while working on their tax saving plans. “Those who don’t have enough cash to invest in 80C schemes can easily use this if they have children studying. There is no ceiling on the fee. It is allowed up to Rs 1 lakh”. The benefit is available for maximum of two children. The principal repayment on a home loan is eligible for a deduction of up to Rs 1 lakh per annum.

Medical claims: Under Section 80D, if you have a medical insurance, a deduction of Rs 15,000 per annum on premium is allowed while an additional deduction of up to Rs 15,000 per annum is allowed for premium payment made for parents. In this year’s Budget, within the existing limit for deduction for health insurance, the government has allowed a deduction of up to Rs 5,000 for preventive health check-up. You will be able to claim this as well this fiscal year.

Home Loan Interest repayment: Individuals who have bought a house through home loan are allowed to claim a deduction of up to Rs 1.5 lakh per annum on the interest payments. This falls under Section 24 of the I-T Act. This is a good option for taxpayers who are not able to utilise section 80C savings options sufficiently.

Further, experts believe that if you are planning to take a substantial home loan this year, it would be beneficial if you opt for a joint home loan with spouse or parents. This will lead to maximisation of savings as both owners will be able to claim tax deductions on the proportion of their loan holding. It is advisable that the person who falls in higher tax bracket should hold higher proportion of the loan to get the maximum benefit.

Loan for higher education: Taxpayers who have taken loans for higher education of their children or relatives, can avail of this benefit. The entire interest paid on the loan amount is allowed for deduction.

Rajiv Gandhi Equity Savings Scheme: Though the scheme has not been notified so far by the government, once operationalised, it would provide tax advantage to first-time retail investors with an annual income of up to Rs 10 lakh. Deduction of 50 per cent would be available for investing up to Rs 50,000 in equity. The scheme has a lock-in period of three years and it can be availed of only once in a lifetime. Stocks listed under the BSE 100 or CNX 100 or PSUs classified as Navratnas, Maharatnas or Miniratnas are eligible.

More options:- Apart from these options, individuals who live in rented accommodations can claim rent paid by them up to the House Rent Allowance (HRA) provided to them. Similarly, transport allowance is exempt up to Rs 800 per month, leave travel allowance (LTA) can be claimed twice in block of four years for domestic travel. The one thing you must avoid doing is rushing to make all these investments during February-March as almost always it leads to no or minimal returns on your investment due to lack of planning.


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