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.
Nowadays, you must be hearing people investing in international equities. Also, many advisors might be talking to you about investing in international markets and get some global exposure. You must be hearing terms like “overseas investments”, “international equity” and “Global Diversification”.
In the last year during the COVID-19 pandemic, the number of folios in mutual fund schemes that invest overseas has increased to 4.4 lakhs from 1.44 lakhs. AUM (Asset under management) also rose to Rs.6482 crores from Rs.2470 crores.
What exactly all this means? Let us find out this in detail.
Before moving on to whether we should be investing overseas or not, let us first understand why there is a so much hype about it. Following are some of the reasons:-
- Post the announcement of the enormous stimulus package in the US, interest in the US market increased.
- Companies whose major business is online is expected to do well during and post COVID- 19 pandemic. Most of these companies are based in US like Facebook, Amazon, Netflix, alphabet etc. These companies are expected to comfortably face even huge disruptions that are happening owing to on and off lockdown in different parts of the world.
- Looking at the advance technology and huge investments capabilities, it can be seen that developed economies like US is more likely to overcome the coronavirus pandemic sooner than developing economies like India.
If you are not a seasoned investor and find it difficult to understand international markets, the best way is to take mutual fund route. You can benefit by taking advantage of professional expertise of the fund manager in picking up specific stocks and also the market. Almost all the Asset Management companies offer international funds.
What are international Funds?
International funds are type of mutual funds where the investor’s pool of money is invested in international equity markets. One can either invest lump sum or through SIP as well. Investments done in these funds can be made in stocks of companies all over the world.
Taxation of these funds
It is crucial to understand the taxation aspect of these international funds while taking a decision to invest in them. For the purpose of taxation, the schemes are exactly the same as debt schemes. This means the investor will either have a short-term capital gain or long-term capital gain based on a holding period of 36 months. If an investor holds this fund for less than 36 months, it will be considered short-term and will be taxed at the slab rate applicable.
On the other hand, if the investor sells the investment after holding it for more than 36 months, it will be considered a long-term capital gain. This long-term capital gain will be taxed at the rate of 20% with indexation benefit.
There are certain domestic equity schemes offered by AMCs that have some exposure of 20% -30% in international equity. The advantage here is that you get some exposure to US markets and it is more tax-efficient than international funds as these are taxed as equity funds. This implies that long-term capital gains are taxed at 10% only if the gain exceeds 1 lakh and short-term capital gain is taxed at just 15%. Here, long-term and short-term will be decided based on a holding period of 12 months.
Getting global exposure has many benefits. One of the major ones is diversification of your portfolio not only in India but all over the world. It is always suggested to not park all your investments in one asset class. If we move one step ahead, you should also diversify your investments in each asset class as well. Investing in US and other countries will diversify your money in different economies. It protects your money and reduce risk to certain level.
Also, if you are looking to send your kids abroad for education, you can look at investing in international funds. This will help you to capitalize on dollar rates.
Related Article : Benefits of investing in global markets
Should you invest?
Now the main question arises, should you invest or not?
If you understand the international markets well, then only go ahead investing in international funds, otherwise it will do more harm than good. It is not recommended to invest major part of your portfolio globally. For balanced diversification and hedging purposes, limit your global exposure to 10%-15% of your entire portfolio.
It is further suggested to opt for schemes which focusses on US markets. It will be a good choice for Indian investors. If your risk appetite is high, you can also invest directly into US stocks instead of mutual funds.
Having said all this, it is always of utmost importance to understand the product where you are investing. Not only be aware of return potential but also don’t overlook risk associated with it.
Tax saving without investing? Seems like a dream, isn’t it? But yes, it’s true! There are certain exemptions and certain deductions which you can claim and gain the tax savings without investing a penny. Generally, these will come in the form of a loss from a certain head of income or certain expenses. So why wait? Let’s see what all is there in store for you.
Housing loan benefit
Those of you who have purchased the house by obtaining the housing loan will get benefit from such loan from your taxable income. Want to know how? The principal repaid during a financial year in the form of EMIs will form part of section 80C deduction income tax act (up to Rs.150000). On the other hand, you will also be eligible to claim loss under the head “Income from house property” with respect to interest paid each year.
Where self-owned house properties are eligible for interest deduction up to Rs.200000, rental properties have the privilege to avail unlimited interest claim. However, the overall loss one can claim under the head of House Property is restricted to Rs 2 lakh only in a financial year. The unclaimed amount can be carried forward to the next year. Carry forward is allowed upto 8 years. So practically whatever you are spending on loan repayment i.e. interest and principal both, will earn you a manageable tax deduction.
Additionally, second homes are eligible for standard deduction @30% also from the annual value (for deemed let out homes) or rent received (for let out properties). This results in just 70% of rent or annual value taxed and then setting it off with interest claim.
Deduction under section 80E is available to those taxpayers who have taken the education loan for higher studies for himself, spouse and children. However, this deduction is limited to the extent of interest paid on such education loans. There is no upper limit of interest to claim under this section. So whatever is your interest cost, you can claim fully. This deduction is restricted to the period of 8 years or term period of loan repayment whichever is earlier.
Tax saving with respect to section 80E will be hence, available without investing in any of the tax saving instruments. Rather, this is the benefit available to those paying interest on education loan, even if it is for higher education courses abroad.
This is one more expense which forms part of Section 80C deduction. Such deduction can be claimed for the maximum of two children. But, you can claim tuition fees paid for both the children for any academic year. This deduction cannot be claimed for any donation or coaching class fees etc.
Employees EPF contribution
Every salaried employee is likely to get his salary mandatory deducted for EPF (Employees Provident Fund) which forms part of retirement benefit. Apart from its post-retirement benefits, you can claim deduction under section 80C with respect to such contribution to EPF. Since, higher the salary, higher will be the EPF contribution, if you are already in higher tax brackets, it will be evident that your section 80C deduction threshold will be fully exhausted with this just one deduction. This will leave no room or requirement for further tax saving investments unless you are investing to save rather than just save taxes.
LTA (Leave Travel Allowance)
The Income Tax department has already taken note that people spend on travel and has enlisted LTA as one of the valid vacation based deductions. LTA is available to most of the employees as a part of their CTC. However, this portion of your salary structure can only be exempted subject to certain restrictions.
- LTA exemption can be availed only for travel expenses i.e. to and fro expenses with respect to a travel destination. This means that no exemption for hotel expenses, local conveyance or sightseeing etc.
- It can be availed only up to certain limits as specified in the rules. For e.g. if you are traveling by air, then LTA can be exempted only up to fare equal to the economy fare of the airline.
- This exemption is not available for overseas travel, hence if you are having combined plans of domestic and foreign travel, you better take separate tickets for domestic and foreign travel, since you can claim domestic travel expenses only.
If you are staying in a rented apartment, then a sizable amount of your income is spent on paying rent. You can use this expense to lower your tax liability. If you are salaried, then you must be receiving House rent allowance as part of your CTC. You will be eligible to claim HRA exemption as prescribed in Income tax act.
If you are not salaried or your employer doesn’t provide you with HRA as part of your CTC, then what to do? You can still claim the benefit of your rent paid under section 80GG upto 5000 per month.
So these were some of the exemptions or deductions that you can avail without making any investments. This will help you to reduce tax liability by making use of the expenses you already make. Apart from the above, you are also eligible to get a standard deduction of 50,000 if you’re salaried. If you have any further queries and to plan your taxes, you can get in touch with one of our Tax experts who can guide you to lower your tax outgo.
With the tax return filing season around the corner, many of you must be planning your taxes or reviewing your tax status. After putting so much effort in earning money, who likes paying taxes on their incomes?
No one does, right?. But, like it or not, as per the current tax regulations, if your income is anywhere above Rs. 5 lakhs in a financial year, you would have to pay taxes. However, income tax regulations are not so bad after all. They allow you to lower your tax liability by various options. It is because of these options that everyone plans their taxes to make most of it. Everyone wants to avail the maximum reduction in their tax liability. Tax exemptions and Tax deductions are two such options which allow lowering of your tax liability.
Tax Exemptions and Tax Deductions
To most of the people, these two terms sound similar. But they are not. Meaning and usage are completely different.
Most of us substitute tax exemption for a tax deduction and vice-versa due to lack of technical knowledge. They are, after all, getting a reduced tax liability. So, why bother with the details?
Let us now understand that Tax Exemption and Tax Deduction are two separate terms with separate tax treatments. Thus, knowing their difference is necessary.
Before moving on to the differences, it is important to understand the various heads of income as per income tax act. There are 5 sources of income namely:
- Income from Salary
- Income from House Property
- Profits/ Gains from business or profession
- Capital Gains
- Income from Other sources
An individual can earn income from either one or two or all the above heads of income. So in order to ascertain the total income an individual earns, we need to total the income from all the sources whichever is applicable. This total is called Gross total income.
Now that you have understood the concept of Gross total income, we will move on to see the meaning of Tax Exemption and Tax Deduction.
Tax exemption can be an income or an investment which is not taxable. These incomes or investments pertain to a specific head of income and can be claimed from those heads only. After deducting allowed exemptions from the specific income head, the different heads of income are totalled to arrive at the gross income.
For instance, under the ‘Income from salary’ head, you can claim an exemption for House Rent Allowance (HRA), Leave Travel Allowance (LTA) and Leave Encashment. After these exemptions are availed, the taxable portion of ‘Income from Salary’ would be obtained.
Tax exemptions can also be termed as tax free incomes. For eg, interest income of PPF, Maturity/Death benefit from life insurance policies. In short, incomes which are not taxable in the first place.
Read More :- Tax planning and its benefits
Now let us see what are Tax deductions. It also lets you lower your tax liability. Once you compute your gross total income, the Income Tax Act allows you to deduct some amount from your income. So that your income reduces and thereby reduces your tax liability.
This amount is based on certain investments or expenses you make in a financial year as per Income Tax Act called Deductions. Allowed deductions can be found in Chapter VIA of the Income Tax Act. This chapter contains sections 80C to 80U.
Common examples include life insurance premiums, health insurance premiums, ELSS investments, PPF investment, Repayment of principal component of home loan etc.
Moreover, there are certain other deductions available from a particular head, like standard deduction from salary income, Interest paid on home loan from “Income from house property” which help in lowering tax outgo.
Tax deductions are deducted from the gross total income or individual head to help save taxes.
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Now let us compare the two –
Exemption Vs Deduction
Tax exemption – The allowed exemptions are not included in your taxable income. They are deducted first to arrive at your gross total income.
Tax deduction – Deductions remain clubbed with your income. Once the gross total income is calculated, the deductions are deducted to arrive at Net taxable income. On this income, tax slabs are applied to calculate the tax amount.
Tax exemption – Exemptions are applied at each head of income to get the taxable amount of that particular head.
Tax deduction – Deductions are applied to your gross total income.
Tax exemption – It consists of those items which are not taxable.
Tax deduction – Deductions are those items which are taxable but because of the provisions of the act, their taxability has been reduced.
So, though exemptions and deductions have the same goal – reduction of your tax outgo, they are different. You should know the difference to file your taxes properly. Mistakes in tax filing can lead to penalties and unnecessary hassles. Though they sound technical the concept of exemptions and deductions is not complicated. Just a little understanding is all you need. So, the next time you file your taxes, know which items are exemptions, which are deductions and how they differ.