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Basic Tax Planning Guide

It's that time of year when you have to plan yous investments to optimally save taxes.  Use this Basic Tax Planning Guide as a reference point when you do it

IT SectionProductsMaximum Investment AmountSaving upto*
80CMF - ELSS15000046350
Insurance - Term Plan
80D: Health InsuranceSelf2500015450
Parents (age less than 60 years)
Self2500016955
Parents (age more than 60 years)30000
80CCDNPS - Tier1 5000015450

The five heads of Income classified under Income Tax Act are

  • Income from Salaries
  • Income from House Property
  • Income from Business and Profession
  • Capital Gains and
  • Income from Other Sources

The Income from different sources is taxed differently. There are many exemptions and deductions mentioned under Income Tax Act which help in minimizing one's tax liability. Some of the deductions are based on investments made by the taxpayer in tax saving investment schemes. The risks, returns, liquidity, and the taxability differ from scheme to scheme. Hence, an individual's tax planning should involve a proper mix of right kind of instruments/schemes. Investment of surplus income should be done keeping in mind the source(s) of income, period of investment of funds, type and amount of tax benefits available, liquidity and safety of investments etc. Some of the instruments with a brief description about their investment benefits from tax saving perspective are described below:

 

House Property

Repayment of housing loan up to Rs. 1,50,000/- (inclusive of other investment u/s 80C, 80CCC and 80CCD) is eligible for deduction u/s 80C of the Income Tax Act.

Further, deduction on interest on housing loan up to Rs. 2,00,000/- per annum is available under Section 24(b) of the Income Tax Act. Further, if the house is actually let out or deemed as let out then the ceiling of Rs. 200,000 on the deduction of interest is not applicable. But budget 2017 has capped the set-off of loss under the head house property to max Rs. 2,00,000/-, against income under any other head of income (viz. salary, interest, etc.)
 

Equity Linked Savings Scheme (ELSS)

Simply put, ELSS are the tax saving mutual funds. As the name suggests investment in such Mutual Funds qualifies for deduction under section 80C of the Income Tax Act (Max Limit is Rs.150,000/- including other investments). These funds have a lock-in period of minimum three years. Income earned on such mutual funds either by way of dividends or by way of capital gains is totally tax free in the hands of investors. But budget 2018 has proposed to impose the tax on long term capital gain on transfer of listed shares or equity oriented MFs if the gain amount exceeds Rs. 1,00,000 for the financial year.
 

Life Insurance

Premium paid for life insurance of self, spouse or children are eligible for deduction u/s 80C of the Income tax act. Total exemption available is limited to a maximum amount of Rs. 150,000/- under Section 80C including investments under section 80C, 80CCC and 80CCD. Further, deduction on premium paid under a life insurance policy is further restricted to 10% of the sum assured under the policy. Sum received (including bonus) under a life insurance policy except for sum received under sub-section (3) of section 80DDA or under a Keyman insurance policy is totally exempted from tax under the Income Tax act subject to certain conditions.
 

Health Insurance

The total maximum deduction that can be claimed under section 80D is as follows
 

Deductions u/s 80D:

Age of IndividualDeduction for self and familyAge of ParentsDeduction for parentsTotal Deduction
 (a) (b)(c) = (a) + (b)
Below 60 years25,000Below 60 years25,00050,000
Below 60 years25,000Above 60 years50,00075,000
Above 60 years50,000Above 60 years50,000100,000
 

Interest on Educational Loans

Deduction is available under section 80E of Income Tax Act for any amount paid in the previous year by an assessee out of his income chargeable to tax, by way of interest on loan taken by him from any financial institution or any approved charitable institution for the purpose of pursuing his higher education or for the purpose of higher education of Self, Spouse or Children.
 

Public Provident Fund (PPF) Account

Investment in PPF account of self, spouse or child is eligible for deduction u/s 80C of the Income Tax Act. This account matures after 15 years from the date of opening the account. The entire balance in the account can be withdrawn at maturity however partial withdrawals are permissible from 7th year. Maximum amount which can be invested in a year in this account is restricted to Rs. 150,000. Current rate of interest is 7.8% pa. Interest earned on the deposits in PPF is fully exempted.
 

Bank Term Deposit Scheme

The investment under this scheme in banks is eligible for deduction under section 80C of the Income Tax Act. The term of such deposits is of five years and such deposits cannot be encashed before maturity. Interest on such deposits is taxable.
 

Post Office Deposit Schemes

  • Senior Citizen Saving Scheme

    • This scheme facilitates senior citizens to earn a regular and a relatively higher interest income on their investments. Interest is received on a quarterly basis. Amount Invested under this scheme in Post Offices is eligible for exemption u/s 80C of the Income Tax Act. The account matures after 5 years. However, it can be extended for additional 3 years. The maximum amount which can be invested in this account is Rs. 15 lakhs. Interest earned on this scheme is taxable.
  • Post Office Time Deposit Scheme

    • Investment in 5 year post office time deposit qualifies for the deduction under section 80C. Interest on such deposits is taxable.
  • National Savings Certificates (NSCs)

    • NSCs are popular Tax Saving instruments for many middle class families. Amount invested in NSCs is eligible for tax deduction under Section 80C of Income Tax Act. The certificate comes 5 years maturity. The interest accrued on NSCs is taxable but is eligible for deduction u/s 80C of the Income Tax Act.
 

National Pension Scheme

  • Contribution by an individual to an account opened under National Pension System qualifies for the deduction
    1. Tax benefit for Salaried: An employee is eligible for tax deduction up to 10% of (Basic Salary +DA) under Section 80 CCD(1) within the overall ceiling of Rs. 1,50,000 under Sec 80 CCE with additional tax deduction up to Rs. 50,000 under Section 80CCD(1B)
    2. Tax benefit for Self-employed: Self-employed is eligible for tax deduction up to 20 % of gross income under Sec 80 CCD (1) within the overall ceiling of Rs. 1,50,000 under Sec 80 CCE with additional tax deduction up to Rs. 50,000 under Section 80CCD(1B)
  • Employer's contribution to an individual's account under National Pension Scheme for an amount up to 10% of (basic salary + DA) is eligible for deduction. This deduction is over and above the limit of Rs. 150,000.

Note: The limit for aggregate of deductions available under sections 80C, 80CCC and 80CCD (individual's contribution to NPS account) is Rs. 1,50,000/-

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