What is tax planning?
Tax planning is the analysis of an individual’s financial situation from a tax efficiency point of view so as to plan an individual’s finances in the most optimized way. It allows an individual to make the best use of various taxes. Income tax planning involves planning under various provisions of the Indian taxation laws. In India, tax planning offers provisions such as deduction, contributions, incentives, exemptions.
Advantages of tax planning:
- To reduce tax liabilities
Individuals wish to reduce their tax burden and save money for their future. With the various benefits offered under the Income Tax Act 1961, you can reduce your payable tax by arranging your investments. The Act offers many tax planning investment schemes that can reduce your tax liability.
2. Minimise litigation
Minimising litigation saves the taxpayer from legal liability. Litigate is to resolve tax disputes with
local, federal, state or foreign tax authorities.
3. Leverage productivity
The core tax planning objective is channelizing funds from taxable sources to different income-generating plans. This ensures optimal utilization of funds for productive causes.
4. Ensure economic stability
Effective tax planning and management of income provides a healthy inflow of white money that show sound progress of the economy. This benefits both the citizens and the economy. Every taxpayer’s money is devoted to the betterment of the country.
How to save taxes?
- Section 80C
Taxpayers are provided with several options to reduce their tax liabilities. There are various sections of the Indian Income Tax law that offer tax deductions and exemptions, of which, Section 80C is the most popular tax-saving instrument. Here is a quick look at how you can save tax by using various deductions allowed under the Income-tax Act.
Section 80C It is the most commonly used section where an individual can save tax by investing or spending a maximum of Rs 1.5 lakh in a financial year in/on specified avenues. Some of the commonly used investment/expenditure avenues under Section 80C are Employees Provident Fund (EPF), Public Provident Fund (PPF), Equity-linked savings scheme (ELSS) mutual funds, National Pension System (NPS), repayment of the principal amount of home loan, children school fees etc.
- Section 80CCD (1b)
You can further save tax by investing additional Rs 50,000 in NPS. Do keep in mind that this deduction is available over and above the tax benefit available under section 80C. Thus, you can save tax by investing up to Rs 2 lakh in a financial year -Rs 1.5 lakh under section 80C and Rs 50,000 under Section 80CCD(1b).
- Section 80CCD (2)
This deduction is available on the employer’s contribution to an employee’s Tier-I NPS account. A maximum contribution of 10% of the basic salary plus dearness allowance (if applicable) is allowed under this section.
- Section 80D
Premium paid for the health insurance policy of self, spouse and dependent children can be claimed as deduction under section 80D of the Income-tax act up to Rs 25,000. In addition to that, the premium paid for the health insurance of parents can offer an additional tax break up to Rs 25,000. If your parents are senior citizens (age 60 years and above), then this tax break would go up to a maximum of Rs 50,000. Therefore, health insurance premiums paid for self (including spouse and dependent children) and senior citizen parents can help you save tax up to Rs 75,000 in a financial year. If both the taxpayer and parents are senior citizens then, the maximum deduction of Rs 1 lakh can be claimed in a financial year.
If your senior citizen parents are not covered under any health insurance policy, then the medical expenses incurred for them can be claimed as a deduction under section 80D. The maximum amount that can be claimed as a deduction under section 80D for medical bills in this manner is currently Rs 50,000.
- Section 80DD and Section 80DDB
Apart from section 80D, there are two other sections that can help you save tax in case of medical expenses incurred for disabled and/or specified persons. Section 80DD offers a tax break on the medical expenses incurred for a dependent disabled person. Dependent here includes spouse, children, parents, brothers, and sisters of the individual.
The deduction allowed depends on whether the dependent is disabled or severely disabled. If the dependent is at least 40% disabled, then the maximum deduction that can be claimed is Rs 75,000. On the other hand, if the disability is 80% or more, then it is considered a severe disability and the maximum deduction that can be claimed is Rs 1.25 lakh.
Section 80DDB offers a deduction for the medical expenses incurred for the treatment of specified illnesses such as cancers, chronic kidney diseases, etc. This deduction can be claimed for the expenses incurred on self or the dependent. For individuals below 60 years of age, whether self or dependent, the maximum deduction allowed is Rs 40,000. For senior citizens aged 60 years and above, the maximum deduction that can be claimed is Rs 1 lakh. The list of diseases for which deduction can be claimed under this section is specified in the Income-tax Act.
- Section 80U
If you are an individual with a disability of 40% and above, then you can claim a tax break under section 80U. However, deductions under sections 80U and 80DD cannot be claimed simultaneously.
Deduction under section 80U is claimed by the disabled individual whereas deduction under section 80DD is claimed by the dependent who has incurred expenses for the treatment of the disabled individual. The deduction amount under Section 80U for disability and severe disability is the same as mentioned in section Section DD
- Interest on Housing Loan
Apart from the tax benefit available on home loan principal repayment under section 80C, one can also claim tax benefit on a maximum of Rs 2 lakh on the interest paid on the loan during a financial year. If you are paying interest on a home loan for an under-construction property, this benefit will be available after the possession of the house, provided it happens within five years. The interest paid during the construction period can be accumulated and claimed in five equal installments after getting possession of the house.
- Section 80EEA
If you have taken a home loan to buy a house under the affordable housing segment during FY 2020-21, then you are eligible to claim an additional tax break on interest paid up to a maximum of Rs 1.5 lakh. This deduction is available over and above section 24 (mentioned above) where you get a tax benefit of up to Rs 2 lakh. However, there are certain conditions that you must satisfy before claiming tax benefits under Section 80EEA.
- Section 80G
Contributing to charity can also help you save tax. If you donate to specified government notified funds under section 80G you can claim up to 100% of the donation as a deduction from your gross total income thereby reducing your taxable income and consequently the tax
- Section 80TTA
Interest earned on balances in savings accounts held with banks or post offices is taxable under Income from other sources. However, interest earned from these sources up to Rs 10,000 in a financial year can be claimed as a deduction from gross total income under section 80TTA.
- Section 80TTB
Senior citizens (those aged 60 years and above) can claim a maximum deduction of Rs 50,000 from gross total income under this section. The deduction can be claimed on the interest earned from specified sources such as savings account, fixed deposits, senior citizen savings account etc.
- Section 80E
Interest paid on an education loan will also get you a tax break. Only individuals can claim this deduction. HUFs are not entitled to this deduction. There is no limit on the maximum amount that one can claim as a deduction from gross total income under this section in a financial year. However, the benefit is available for a maximum of 8 years from the start date of loan repayment.
Tax Planning is not a day’s work and has to be carried out considering the financial goals, liquidity position, and taxability on returns etc. A taxpayer can save the tax as well as build wealth alongside by doing tax planning in advance.
The most feared and most awaited event of the year; The Budget. Every person, every industry waited patiently for the announcement from our respected Finance Minister Nirmala Sitharaman.
With COVID-19 pandemic on the backdrop, India was waiting for a “get well soon”.
Let’s see what the Budget 2021 brought forward for us – Decoding Budget 2021:
1. No changes in personal income tax
Budget 2021 did not alter the personal income tax structure which meant that the common man is not burdened with tax levy this time. However, we have tried to summarise a few pointers to understand the changes
2. No ITR filing for senior citizen above the age of 75 years
Budget 2021 dictates that Senior citizens above the age of 75 years need not file Income Tax returns henceforth. However, this exemption is valid only if the senior citizen has income from pension and interest.
Only snitch here is that the bank interest should have been received from the same bank where the pension gets deposited.
3. Prefilled Income Tax Returns
Ease of filing will be achieved as a result of Prefilled Income tax returns with the details of interest, dividend, capital gains etc. This is a welcome change since time will be saved and accuracy will be achieved.
Capital gains especially for trading in shares and mutual funds is a very cumbersome task. Prefilled details of capital gain will be a relief.
4. Dividend not required to be considered for determining the advance tax
The dividend has been made taxable only on the receipt or declaration of the same from the view of Advance Tax calculation.
Earlier the taxpayers would need to pay the interest due to underestimation of dividend income while calculating the advance tax. However, with the change in Budget 2021, the taxpayer need not consider dividend in advance tax calculation unless it is declared or paid. This will reduce the interest and penalty on advance tax payments of the taxpayers.
Related article: Reviewing Your Financial Plan? Keep This Checklist Handy
5. Taxability of Interest on Employees Provident Fund (EPF) contribution
Interest on EPF contribution in excess of Rs. 2.5 lakhs, however, will be taxed only if withdrawn in such year.
This move is expected to divert the investors away from EPF, so that the investors would prefer to move in the funds to more lucrative options.
6. Double TDS rate where the taxpayer does not file Income Tax Return (ITR)
Budget 2021 has prescribed TDS at double rates where the taxpayer does not file Income Tax return.
This will encourage and push the non filers to file their ITR, which will increase the coverage of Income Tax.
7. Deduction for interest exemption of Affordable Housing remains unchanged this year too
The deduction will be allowed till the year-end i.e. March 2022, on the Affordable Housing Scheme for Rs. 1.5 lakhs.
This was a specific benefit given by Budget 2019, however, FM has reconsidered extending the same to the year 2021 is a positive sign for especially migrant workers and the lower working class.
Related article : How to select a suitable Tax regime for Yourself?
8. ULIPs brought into the tax net
Budget 2021 has brought in ULIPs under taxability net, prescribing that the capital gains on ULIPs will be taxable if the yearly premium is more than Rs. 2.5 lakhs.
ULIPs were having a specific advantage over regular ELSS (Equity Linked Saving Schemes) Funds due to no restriction on premium payments. However, with this amendment, ULIPs are pretty much at par with Mutual Funds.
9. Revision of return preponed by 3 months
Henceforth the taxpayers would be required to file the revised / belated returns by December 31st of every assessment year.
10. Rush start to Startups
Budget 2021 has boosted up the way ahead for the startups by prescribing some booster doses for revival and growth.
11. Removal of condition of waiting period for conversion of One Person Company (OPC)
Budget 2021 has removed the waiting period of 2 years for converting the OPC into a public limited company or private limited company.
12. No Cap on paid-up capital and turnover
Budget 2021 has eliminated the restrictions with respect to paid-up capital and turnover.
13. Non-Resident Indians (NRI) can incorporate OPC in India
This amendment will bring in the most required capital inflow in India especially in start ups.
14. Emphasis on healthcare
COVID-19 was an alarming state of events in the year 2020, which has reaffirmed the need to improve healthcare and sanitization activity.
15. Increased spending to 137% on Healthcare facilities.
Prime Minister Atmanirbhar Swasth Bharat Yojana will have competitive healthcare facilities with this spending.
16. COVID-19 Vaccine
FM has assured that more vaccines will be available soon and an amount of Rs. 35000 crores would be spent on vaccine efforts.
17. Privatisation, Divestment and Foreign Direct Investment (FDI)
Budget 2021 hs been truly an example of a progressive budget since it has talked in lengths and details about Divestment, privatization and foreign direct investment in government companies and public sector units
18. The monetisation of assets of PSUs
FM has announced that assets of Railways, Airports etc will be monetised through National Asset Monetisation Plan.
19. Disinvestment of PSUs (Public Sector Units)
List of PSUs will be made which are targeted for disinvestment and strategic disinvestment will be carried out to garner the funds
20. Changes in the Insurance Act to attract FDI (Foreign Direct Investment)
Budget 2021 has raised the FDI limit to 74% which was 49% earlier. This will attract more international players into the Insurance field due to allowability f foreign ownership.
21. Acche din for Government schemes
- Free Cooking gas
- Application of Minimum Wages Act to all workers inclusive etc.
Decoding Budget 2021 in all can be looked like more of an ambitious budget which has paved the way for the much sluggish economy bearing the impact of COVID19 hit. However, there is too less for the common man in terms of tax impacts and exemptions, apart from health and wellbeing concerns.
For any assistance on Financial planning and Tax planning book your appointment now – Click here
Our respected Finance Minister came up with an option of opting for an old or new tax regime whichever is beneficial to the taxpayer. Both the regimes have their own pros and cons of their own. This article will sum up the benefits as well as downsides of both the regimes which will help you in choosing a suitable regime for yourself.
Let’s see what Old Tax Regime was all about:
The old regime is the one that existed all these years which comes with allowed deductions and exemptions. Tax rates in the old scheme are divided into 3 slabs which may sound on the higher side but the impact can be reduced with the help of allowable deductions and exemptions.
Most of the deductions and exemptions were to provide relief to the salaried individuals. Some of the deductions are allowed alike to all who do not need any payment or expenditure. Some of the deductions need to have an amount spent or invested as prescribed in the Income Tax Law.
Let’s have a look at the allowable deductions and exemptions under the Old Tax Regime
- Standard Deduction
There is a standard deduction of Rs. 50,000/- which is applicable to the individual. A standard deduction can be claimed against the salary income without any conditions or restrictions.
- HRA exemption
HRA is part of any salary structure usually, which refers to House Rent Allowance. HRA can be claimed as exempt to the lower of
- Actual HRA
- 50% / 40% of Salary
- Annual rent paid less 10% of salary
Exempted HRA would be allowed as exemption against salary income only on submission of authentic rent receipts.
- Deduction under section 80C
Deduction under section 80C is restricted to Rs.150000 which is allowable as a deduction against gross total income. Deduction under section 80C can be availed if the taxpayer invests in any of the combinations of the following savings/ investment options.
- PPF (Public Provident Fund)
- NSC (National Savings Certificate)
- 5 Years Term deposit with banks
- LIC (Life Insurance Corporation) premiums
- EPF (Employees Provident Fund)
- ELSS (Equity Linked Saving Scheme)
- ULIPs (Unit Linked Insurance Premium) etc.
- Deduction under section 80D
Deduction under section 80D is allowed against investment in Medical/ Health Insurance. Payment of health insurance premium for self and family is allowable as a deduction. However, proof of investment is required to be maintained in this case also.
The tax rates under Old Regime are as below:
|0 – Rs.2,50,000/-||Nil|
|Rs.2,50,001 – Rs.5,00,000/-||5%|
|Rs.5,00,001 – Rs.10,00,000/-||20%|
Related Article: Old vs New tax regime – Check what Mr. Shah opted for?
Let’s now understand the New Tax Regime
The new scheme comes with totally different tax rate slabs without allowable deductions or exemptions. If any taxpayer is unable to make any tax-saving investments then the new tax scheme would definitely be a better choice.
Following are the tax rates under the New Regime
|0 – Rs.2,50,000/-||Nil|
|Rs.2,50,001 – Rs.5,00,000/-||5%|
|Rs.5,00,001 – Rs.7,50,000/-||10%|
|Rs.7,50,001 – Rs.10,00,000/-||15%|
|Rs.10,00,001 – Rs.12,50,000/-||20%|
|Rs.12,50,001 – Rs.15,00,000/-||25%|
If any taxpayer opts for New Tax Regime, then he would be eligible to take benefit of these tax rate slabs. However, no deductions or exemptions prevalent under the Old Tax Regime will be allowed if any person opts for a New Tax Regime.
How to choose a suitable Tax Regime?
- First, calculate tax under the Old Regime which will require you to collect all proof of investments etc. for claiming the deductions.
- Don’t forget to claim the standard exemption against the salary income if your employer has not considered it.
- Now calculate tax under the New Regime which will require you to simply calculate the tax on gross total income without considering the deductions or exemptions.
- Compare both the Tax Regimes to understand which is beneficial for you as a taxpayer.
- You are free to choose the beneficial tax regime based on tax-saving you make.
- If you have not made any investments in tax-saving instruments then it is better to calculate the tax impact under the new scheme first. Then calculate tax under the old scheme, assuming that you have made the proposed investments. Then it will be a reasonable base for decision making whether to opt for the old or new tax regime.
- Usually, New Tax Scheme is better to opt for where the taxpayer revolves around taxable income of Rs. 750,000. This is the threshold wherein the New Tax Regime may fair better than the Old regime.
- However, for the taxpayers earning above Rs.10 lakhs, the Old Tax Regime is better. This is because it allows you to reduce the tax incidence through deductions and exemptions.
Also check out: 5 Major Types of Taxes We Pay In India – MintyApp Blog
There is no fair and square rule which will prescribe or suggest the tax regime which you should opt for. However, there are some tax calculators which allow you to calculate tax under both tax regimes. This would definitely help you choose a suitable choice.
For any assistance on Tax planning and Tax planning book your appointment now – Click here
House Rent Allowance Vs Home Loan
Taxpayers would like to know their entitlement to deductions towards the payments for housing accommodation and their entitlement for house rent exemption.
Tax Benefit on House Rent Allowance
An allowance that is provided by an employer to the employee to cover the expenses of the accommodation rent which the employee may incur for his housing purpose is known as House Rent Allowance (HRA). The House Rent Allowance which is waged by the employer to the employee is taxable under the head of “Income from Salaries”
As per the Income Tax Act of India, the employee/assessed is exempted from paying income tax return online that’s why House Rent Allowance has picked up such a great amount of significance in the late years.
Formula = HRA received – (less) Exempt = Taxable Amount.
Tax Benefit on Home loans
Under section 80C of the Income Tax Act, the maximum deduction allowed for the repayment of the principal amount of home loan is Rs. 1.5 lakh. Deduction under section 80C also includes investments done in the PPF Account, Equity Oriented Mutual funds, Tax Saving Fixed Deposits, National Savings Certificate, etc. subject to the maximum of Rs. 1.5 lakhs.
Besides this, there are stamp duty and registration charges that one can claim under the aforementioned section. Though, the claim can only take place in the year in which the payment has been made.
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Why does the Government want to take away our money? What are they using it for? Why do we have to pay tax on the all the income we earn? These are some of the most common questions, taxpayers ask. Well, India is a democratic country, so you have no choice but to pay tax. However, what you do have, is options to save the tax that you pay. The reason as to why we have to pay tax, is basically because, the government uses that same money to fund projects, that are for the betterment of the country.
Few examples would be, construction of roads, free education for under privileged children, pension to retired employees, etc. Though due to corruption, all the money paid as taxes is not being used to it’s full potential. This doesn’t mean that people should try and find out ways to hide their income, so that they can avoid paying taxes, because if you get caught, then there is a possibility, you will end up paying much more than, you initially had to pay as tax.
People mistake tax evasion for tax planning, they think that, by hiding their income, they are planning their taxes. Tax evasion is wrong, because here, taxpayers do not use the tax saving tools to avoid paying taxes, they hide their income which is illegal and this, results in black money. It is always better to be safe than sorry, so pay your taxes, if you don’t, then the penalty charges may come crashing down on you.
Another reason why you must pay taxes is because, when you go in for a home loan, one of the documented proof that is required is your current and previous years Income Tax Return Filings. Also while making your passport these document proofs are required. So if you actually go to see, there’s not only the penalty charges, that you will have to face, but also, a lot more is at stake too.
If you do not know how to file your taxes, or how to show the other income you receive, take the help of a Chartered Accountant, they are tax experts, so they will not only file your taxes the right way, but also tell you where and how you can save more of your taxes.
When do we have to pay tax
As mentioned above, tax is levied on those earning income, it could from different avenues, like house property, salary or business, capital gains, winning a lottery, etc. There is a certain limit up to which your income earned will be exempt from tax, but any income received over and above that, will be taxed.
People find it unfair, that they have to pay tax on every income that they earn. That’s why for different incomes, it is taxed differently. For higher risk investments, the tax rate is very low as compared to the less risky investments. For example, those investing in equity, after one year of holding the investment, it becomes tax free upto 1 lakh of gain, but if it is held for less than a year, then it is taxable at 15% + 4% education cess.
The fact that all incomes are taxed differently, reduces the stress of the people. For example, investors can plan their investments in such a way, that they receive the maximum amount of their income earned. Whereas salaried employees can save tax only depending on their income and they have very limited options to invest in, that will save their tax.
Let us look at the tax slab rates for individuals, falling in different categories as per old as well as new tax slab in Table 1 below:
Related Article : New Tax Regime Vs Old Tax Regime -Which one should you opt for?
An education cess will also be applied at 4%, along with the above tax rates. Please note that there are some pointers to keep in mind, apart from the above table:
- Individual earning income over and above 50 lacs but below 1 crore, have to pay an additional surcharge of 10% on the tax. Surcharge further increases based on taxable income.
- Earlier dividend was tax free upto 10 lacs, but now any dividend received is a taxable income for the investor. Please keep in mind that it will be taxed as per your slab rates.
- If the total income is less than Rs.5 lakhs, the rebate shall be either 100% of the income tax or Rs. 12,500/-, whichever is less. This rebate can be availed under section 87A.
We pay so many types of taxes in India, directly or indirectly. Today we will focus on 5 major taxes an individual has to pay on the income he receives. Listed below are the incomes:
- Salary income:
Income received by an employee from an employer, for the services rendered by the employee. It could either be in the form of monetary or non – monetary benefits. Some parts of the salary are fully taxable and some are exempt up to a certain limit. Each company forms their salary structure in a different way. Observe the Table 2 below and understand the different sections of the salary.
These are the main parts, that a salary structure consists of. Once employees claim all the exemptions available, then they also can claim the deductions available to them, under different sections, for example 80C, 80D, 80G, etc. So after taking benefit of all the exemptions and deductions, the final gross salary will be considered and taxed according to the slab rates above, in Table 1.
- Income from Business / Profession:
Any profit earned or gain received from an individual’s business or profession, will be taxed under this head. Let us understand what is a business and what is a profession:
Business: Any activity related to trade, commerce and manufacturing, with the intention of earning profit is known as business.
Profession: Any person who uses their skillful knowledge, in their field of expertise, to render their services for a certain amount of fees. For example, Lawyers, Doctors, Chartered Accountants and other professionals.
How is tax implied?
Tax is charged on the profit earned by businessman or professional and not on the turnover or sales consideration. All the expenses incurred on the business or profession can be claimed against the income. Some of these expenses are, stationery, transport cost, internet charges, etc. So once all the expenses are deducted from the income, the remaining part will be the profit earned, which will be taxed.
When tax audit is applicable?
Business: If the business sale crosses over 1 crore.
Profession: If the professional income exceeds 50 lakhs.
Note: If the assessee earns income below 2 crores, and if no books of accounts are maintained, then he has an option to opt for presumptive taxation, which means, 8% of the turnover is considered as the profit earned for non-digital transactions and 6% for digital transactions , and tax is levied on that.
- Income from Capital Gain:
Any income or gain earned on an appreciated capital ( movable / immovable ) of an individual, will be taxed under this head of income, with subject to certain exemptions. The capital gain incurred can be short term capital gain or long term capital gain, it all depends on ‘for how long the asset is held’. The below table will make your concept clear.
There are certain ways to save your income tax on long term capital gains.
4. Income from House Property
If the asset is sold, before the completion of the minimum holding period, then it is considered as short term capital gain. And if it is sold, after the completion of the minimum holding period, then it will attract long term capital gains. Also note that the 4% which is added is the education cess which is charged. Tax charged on capital gain from house property, can be exempted under section 54, subject to certain conditions.
Any income from any land, building or apartment, which is owned by the assessee, but not utilized for any business or professional purposes, is taxed under this head of income. Let us look at the following points:
- If a person has multiple properties, then he / she can claim only two as self occupied and the others by default become Let out or Deemed to be let out.
- The deductions that one can claim from income from house property are municipal taxes ( which are actually paid), 30% on the annual value, which is a standard deduction.
- Interest on house loan can also be claimed, upto a limit of 2 lakhs in a financial year.
A major example of this is, an individual having 2 flats, he stays in one and gives the other on rent, so the rent, becomes the income of the individual, and after availing the above deductions, the income will be taxed according to the tax slab of an individual.
- Income from other sources:
Income which is earned from anywhere else, apart from the income received under the above heads, will be considered and taxed as income from other sources. Some examples of this income are, winnings from a lottery / betting / game show, gifts, foreign dividend, interest income on investment and securities, rental income from plant, machinery and buildings,
- Any brokerage charges paid, eg. commission.
- Depreciation can also be claimed.
- Any other expenditure incurred ( not capital expenditure ) for the purpose of generating such income.
So after, the deductions, the income will be taxed as per the slab rates of an individual.
The above are the major taxes we pay on the various incomes we earn. Now I’m sure many of you are clear on what incomes you earn and under which heads they are taxed. So pay your taxes on time, SAVE as much, of your taxes as you can, of course through the tax saving tools offered to you. When you have a choice to choose the right path, why go down the wrong?
Tax Awareness’ is keeping yourself up to date with current tax rules made. Tax is vast and it is very difficult too, to keep up with the changes in these rules every year. And it is because of this lack of awareness, people just pay the tax that gets deducted from their salary. They feel that tax is so complicated, that is better to just pay it off. Some people have had bad investment experiences, so they do not want to take the risk of investing again. All these problems are caused due to unawareness of the deductions available.
If asked, what is basic tax deduction that everyone knows about, all will say section 80C, but people are still unaware of the investment tools available under it. Many people completely exhaust their deductions under this section, by investing in popular investments like PPF, life insurance, principal amount of the housing loan, fixed deposits, etc. They invest the maximum amount which is Rs. 1.5 lakhs p.a.
A person’s 3 to 4 months salary gets deducted in a year, towards paying taxes. Can’t believe it? well it’s true. I’m sure those of you who are paying taxes without trying to save them, are now thinking twice. You should, you will be shocked to see the difference of how much you can save, and how much you were actually paying. A normal salaried man will be clueless as to what are the changes in the tax rules, so he/she should seek a consultant’s help. There’s one more added benefit to savings your taxes, you are also creating wealth for your future use. For example, if you invest in an ELSS fund, you are claiming your tax deduction under section 80C, as well as building up a corpus for the future.
This table will show you the comparison of the tax treatment, of some of the popular investments under section 80C:
|Tax savings tools||Lock in duration||Pre – tax rates||Post tax amount|
|Equity Linked Savings Scheme (ELSS)||3 years||12% – 14%||After the lock in period, gain more than 1 lac is taxable at 10%.|
|Life Insurance||5 years minimum||4 – 6%||The claim is tax free|
|National Saving Certificate||5 years||6.8%||Interest is taxable|
|Public Provident Fund||15 years||7.10%||Tax free|
|5 year Fixed Deposit||5 years||5.5-6.7%||Interest is taxable|
Now look at the investment avenues, under section 80C, and see where you can save more :
1. Registration charges and stamp duty for a house:
The registration fees you pay for registering your documents of the house and the stamp duty that you pay, these amounts can be claimed as deductions under section 80C. Many people don’t even know that such a deduction exists. Well now you know.
2. Sukanya Samriddhi Account:
In this scheme, you can open an account on behalf of your minor daughter till the age of 10. Any amount deposited in this account would be eligible for deduction under Section 80C. Further, this account can be opened for a maximum of two girls and in case of twins this facility will be extended to the third child as well.
3. Children’s education fees:
Your child’s education fees can also be claimed under this section. Many people are not aware of this deduction as well. Of course, you have to show the receipts of the school fees to claim as deduction. Those people without children, cannot make such claims.
4. Public Provident Fund:
also known as PPF. It is one of the best assured investments. It is completely tax free. The current rate of interest is 8.7% it’s for a term of 15 years, with minimum amount Rs. 500 and maximum amount Rs. 150000/-. The only problem is that the interest rate is not fixed.
5. Provident Fund (PF) and Voluntary Provident Fund (VPF):
In your PF, both you and the employer contributes, while the employer’s contribution is exempt, your contribution is available for deduction under section 80C. VPF is the extra contribution that you make apart from your contribution with your employer.
6. Life insurance premiums and ULIPS:
Life insurance premiums take for self, spouse or children only, can be claimed as deduction, under this section. If you are paying more than one premium, it can be included in this deduction. The same goes for ULIP.
7. Equity Linked Saving Schemes (ELSS):
If anyone invests in this fund, there is a lock in period for 3 years. This means that you cannot withdraw the money for 3 years. So if this fund is kept for 3 years, then you are eligible for deduction under this section.
The EMI consists of 2 amounts, Interest and principal amount, so in this case, only the principle amount is up for deduction here. Interest amount can be claimed as deduction under section 24 as a loss from house property.
9. POTD – Post Office Time Deposit:
They are similar to fixed deposits. The interest earned is taxable but can be claimed under this section. The rate of interest is compounded quarterly but paid annually. Time deposit of tenure 5 years is eligible for deduction under 80C.
10. Fixed Deposits (FDs):
If fixed deposit, is kept in the bank for 5 years, then it is eligible for deduction. Please note that this FD needs to be “Tax Saving FD”. Therefore, one needs to mention in the bank that they want to invest in tax saving FD and not just a regular 5 years FD. However, the interest income will be taxable.
This is a 5 year small saving scheme, available for deduction. The interest is fully taxable but as it is reinvested, the interest is also eligible for 80C deduction.
The interest income is chargeable to tax but amount invested can be claimed as deduction under this section.
Everyone wants to save tax, but awareness is the barrier. These tax saving tools can help you get yourself started. As mentioned earlier, that tax is vast and only with an expert’s help, you can make use of all the tax deductions properly. So it’s better to take the help of an expert, so you can save more of your in hand salary. If you can save it, why pay it!
‘Tax’ a most feared word. No one likes to pay tax, since it’s a compulsory contribution. People think that paying tax is a waste of their hard earned money, because money is going out in form of tax but the money is not reaching the right hands. The more you earn the higher tax bracket you fall into. But having said that, there are plenty of tax saving tools out there. Of course it’s not possible for a layman to know all the tax rules, but if the tax cut is a huge amount then tax planning is required.
What is tax planning?
Well, let’s just say, if you do tax planning, then you can take more of your hard earned money home. Tax planning is making maximum use of the tax saving tools, to take more of your earnings home. Of course everyone’s earnings, situation, assets, etc are different, so different tax rules apply to different people. People think it’s normal that their tax gets cut, because they earn that much, but what they don’t realize is that, if they put in a little efforts, they can save part or the whole tax that gets cut. If they are not sure of how to save the tax, then take help of a consultant. Here also people make a fuss that fees are expensive. What is not considered is that, the tax that is getting cut is much more than the fees of the consultant.
Now a days, people are realizing the importance of tax planning. They are actually taking it seriously and showing in interest saving their taxes. But still in our many years of experience, there are some that do not know the basic deductions. There are some who have exhausted the basic deductions and still a huge chunk is getting cut. This is because they do not know about the other tax saving tools. One of the main reasons as to why people do not know the tax rules or tools, is because some rules change every year and it is difficult to keep up for a normal person. Tax is complicated, there’s only so much one can learn about the deductions, it is not possible to learn everything. Even chartered accounts and other tax experts reach where they are after years of experience and training.
Here are some pointers to keep in mind, before you think ‘It’s okay if my tax is getting cut’:
Why Pay, When You Can Save
Even though the Govt. has made tax a compulsory contribution, tools to save the same contribution is also given. If you don’t know about the tax saving tools or you’ve not updated yourself on it or not aware of the changes in the tax rules. then take help of a consultant. So when you can save and take the award of your hard work home, why let it go.
Must read: Tax Planning demystified
Hard Earned Money
Nobody works for free, unless you are doing charity work. People work so hard and put in all their efforts just so that, their family can live a better life. But it’s such a disappointment when they realize, that their 2 to 3 months salary goes in paying annual tax. When you’ve worked so hard for it, your are completely entitled to it. So tax planning is very necessary to take more of your salary home.
Invest The Surplus
Is your salary going in paying tax and the rest to meet your monthly expenses that very little is left to invest? This is where tax planning can help. After your tax planning is done, you’ll be surprised to see how much you can save. That money saved can be invested in tax free investments. This way you can earn out of the tax saved.
Some people don’t realize that they can bring their tax down to nil if they use the tax saving tools to the maximum. Tax planning is very necessary, as the tax saved can be invested in tax free instruments and the amount gained can be used to fund a certain goal. So put some thought into saving your taxes, don’t let it just get cut.
So as you can see, that all these pointers are for your benefit only. Once you do your tax planning, you’ll be surprised at how much your gonna save. Tax planning is very important and it’s good to see that people are making efforts to save their tax. At the same time, it’s also sad to see that some people are not doing anything to save their taxes, either because they do not know the basic tax saving tools or don’t want to seek a consultant’s advice because of the high fees. Having said that, there are many ways in which people can be helped. Tax planning seminars, tax planning workshops, there are companies which provide such services. One can even update themselves on the new tax rules. So save as much as you can, after all it is your hard earned money.
For many people, tax planning is all about how to save taxes. However, there are various sections under Income Tax Act of India in which you can claim specific expenses as deductions. To reduce taxes it is not only important to invest but it is important to properly arrange financial affairs as well. To reduce the tax burden for its citizens, Indian Government each year through the budgetary proposal introduces legitimate ways to save on tax.
It is important for every taxpayer to know which all expenses are allowed as a deduction for tax planning purpose. Let us discuss few of the common expenses that can be claimed as deductions under various sections of Income Tax Act in India.
- Children Tuition Fees :- Taxpayers are allowed to claim tuition fees paid on two children’s education in a Financial Year. Under section 80C of Income Tax Act India, you can claim up to Rs.1.5 lacs as a deduction towards actual tuition fee paid for dependent children. You can claim tuition fees paid for two dependent children. However, both husband and wife have a separate limit. Therefore, if both are working, each parent can claim benefit up to two children.
- Stamp duty and registration charges paid on the purchase of a new house :- Stamp Duty and Registration Charges are major cost component of new house purchase. It’s around 8% to 10% of your new house cost. To incentivize taxpayer, Government has included stamp duty and registration charges as an eligible deduction from the total income under the section 80C of income tax act.
- Expenses incurred on specified diseases like AIDS, Cancer or other neurological diseases :- Under section 80DDB a taxpayer can claim amount spend on medical treatment of self or dependent on specified diseases like AIDS, Cancer or other neurological diseases. Point to remember here is the condition to receive such tax benefit is that there is no medical reimbursement by any insurance company or employer for this amount. The maximum limit on tax benefit is as follows.
|The maximum limit on tax benefit||A.Y. 2019-20 onwards till date|
|Individual below < 60 Age||40000|
|Individual above > 60 Age but below < 80 Age||100000|
|Individual above > 80 Age||100000|
Amount allowed as deduction is the least of above specified amount or actual amount spent.
- Medical Expenses incurred on expenses on disable dependent :- To provide relief to a taxpayer who has disabled dependent or dependent with a severe disability can seek a tax deduction for expenses on medical treatment or amount deposited under a prescribed scheme for the maintenance of the dependent. Under section 80 DD for F.Y. 2020-21, if the disabled dependent is suffering from 40% or more disability, a maximum limit on amount can be claimed as a deduction is Rs. 75,000/- and the same for a disabled dependent who is suffering from severe disability i.e. 80% or more disability, a maximum limit on amount can be claimed as the deduction is Rs. 125,000/-.
- Deduction for rent paid by an individual :- Section 80GG can be claimed as a deduction for rent paid subject to some condition. You get the lowest of the following values as tax-free deduction
- Rs.5000 per month
- 25% of total income (total income is calculated excluding capital gains and other deductions)
- Actual rent exceeding 10% of income (income would be calculated excluding capital gains and other deductions)
Even if you are self-employed professional, businessman or salaried individual you can claim 80GG benefit. The most important condition to claim benefit under this section is you should not have received HRA benefit during the years and you must pay rent for the house you reside in. There are few more important conditions to be fulfilled to get the benefit under section 80GG. The amount is rather small but a rupee saved is rupee earned.
These were some of the important expenses which can help you save taxes.
Income tax is always a complicated subject. It’s difficult to understand for a layman. For a salaried person understanding complicated and confusing tax terminology is a nightmare. Through this article we will make your life simple and make you understand tax jargon in an easier manner. In today’s article we will discuss about the basic difference between Exemption, Deduction and Rebate.
Is an amount which is part of your total income but it’s exempt from tax. It means while calculating taxable income some sources of earning is exempt. For example u/s. 10(10D) maturity proceeds of Life Insurance policy is exempt from taxes. In this case while calculating taxable income we will not include life insurance maturity proceeds. In simple term, Tax exemption means tax free sources of earning. It’s advisable to include more and more of exempt sources of earning which will help us to reduce taxable income and in turn tax liability.
Few of the popular example to understand Exemption are
- From salary income based on specific calculation House Rent allowance (HRA) is exempt
- Gratuity received on retirement from employer is also exempt upto a specific amount
- Maturity proceed from PPF account is exempt
It is an amount invested or expenditure allowed under specific section to be reduced from total taxable income. For example, if we invest in 5 year tax saving Bank FD, the investment amount is allowed to be deducted from total taxable income. Amount paid towards mediclaim policies for self and dependents is allowed to be deducted from total income.
Few of the popular example to understand deduction are
- U/s. 80C – Investment or expenditure upto 1.5 lacs p.a. is allowed as deduction from total income. For e.g. Investment in ELSS Scheme of Mutual funds or expenditure towards school tuition fees for two kids are eligible expenses for 80C.
- U/s. 80D – Payments for medical insurance premium for self & dependent and for dependent parents is allowed as deduction from total income.
- U/s. 80DD – Expenditure towards medical treatment of disabled dependent is allowed as deduction from total income upto a specific amount.
It is a different concept all together. Tax Rebate is an amount which is deducted from total tax payable.Unlike deductions which are reduced from total income, Tax rebate is an amount which is deducted directly from your taxes.
An individual can claim rebate of Rs 12500 if he has taxable income less than Rs 5 Lacs. In this case Rs.12500 is reduced from total tax payable before education cess.
To conclude, All three are an important tools for tax planning. Understanding of these three tax terminology will help us to increase tax free income and know tax deductible investment / expenditure. Exemption and Deduction will reduce taxes indirectly. While tax rebate will help us to reduce tax liability directly.
I’m sure that, more than half of the nation, wishes that, they din’t have to pay tax. Life would be a lot easier, if we din’t have to pay. Sadly that’s not possible in India. This is because most of our Government earnings are dependent in the public through tax. It is our duty as citizens of India to pay tax, where our money goes, is a whole different thing all together. If we try to avoid taxes, we may end up paying more of it, if we get caught.
Must read: Tax Planning For Salaried Youngsters
Some may feel that, they work so hard to earn their salary, and a huge chunk goes towards taxes. Did you know that almost 3 months of your salary goes in paying tax, in a year? Surprised? well you should be. If the Government has imposed tax on the public, it has also come up with tax rules where you can save your tax. In fact, planning your taxes well, can allow you to save most of your money, which can be used to fund other goals. Some people are still not aware of the basic tax exemptions available to them. Whereas some people just make use of only the basic tax exemptions and the deductions related to their salary income.
Salary is not the only income a person has. A person can receive income from the assets held by them. One can have many assets like, cars, houses, properties, investments, etc. Some of these assets depreciate and some appreciate. For example, a house, it’s value will only appreciate and on the other hand, a car’s value will depreciate. So the income received on these assets is called capital income.
If the income from such asset is more than the cost at which it was bought, it is known as capital gain, but if the cost of the asset was more than the price at which it was sold, it brings in a capital loss. Now, we also have long term capital gain and short term capital gain.
Any capital asset, that attracts a gain or loss, if sold in less than 36 months, it will be considered as short term capital gain or loss. If the asset is held for more than 36 months and then sold, the gain or loss will be treated as long term capital gain or loss.
However, in case of property, the holding period is 24 months. This means, if a property is sold within 24 months, the gain or loss will be treated as short term capital gain or loss and vice-versa.
Only in the case of shares and securities, the time period is less than 12 months, it attracts short term capital gain and loss, and if it is more than 12 months, then long term capital gain or loss.
So, the different tax rules are made according to, how long the asset has been in ownership of the individual.
More tax can be saved on long term capital gains. The tax deducted is less from a long term capital gain, than from a short term capital gain. Let us take an example of the sale of a debt mutual fund which attracts a gain. If the sale is done within 3 years, it is obviously a short capital gain, so here the taxpayer will have to pay tax according to their tax slab. So, if any taxpayer falls in the 20% tax slab, they will have to pay 20% tax on the short tern capital gain. But if it was held for more than 36 months, they will have to pay 20% with indexation benefit.
Let us now look at the computation of how a long term capital gain is taxed.
1. Sale/consideration of the asset – (XXXXX)
2. Less: Indexed Cost of Acquisition (COA) (XXXXX)
3. Less: Indexed Cost of improvement (COI) (XXXXX)
4. Gross total LTCG (XXXXX)
5. Less: Exemption under various sections (XXXXX)
(54, 54B, 54D, etc.)
6. Net LTCG (XXXXX)
(Calculations: Indexed Cost of Asset = COA / CII of year of acquisition X CII which the assets is transferred.) (CII = Cost Inflation Index.)
There are many ways to save tax incurred on the long term capitals gains by you. Given below are the sections where you can save your tax on the capital gains:
|SECTIONS||CAPITAL ASSET||TAX EXEMPTION ON THE CAPITAL GAIN|
|54EC||Any capital asset||
|54 F||Any capital asset excluding house property.||
|54 B||Agricultural land||
|10(38)||Sale of shares and equity mutual funds covered under Securities Transaction Task (STT) .||Exempt till a gain of 1,00,000. For any gain above 1 lac, 10% of gain needs to be paid as tax.|
Please note the following points:
- Under section 54, the lower of the 2 will be exempt:
- Amount of capital gain
- Amount of investment in the new house.
- That under section 54 F, If only part of the consideration is invested, then exemption shall be considered proportionately,
i.e. Amount Exempt = Capital gain X (amount invested/ net sale consideration)