I am sure, by the start of this new year, all of us started thinking about tax planning for this financial year. Ideally we should have started planning for this in April-2010, to get the optimum benefit. Let us discuss what we can do in the remaining 3 months of this financial year.
Actually, tax planning should be considered in accordance with the overall asset allocation of our portfolios, because all tax savings instruments will be either equity or debt.
We can discuss the tax planning in 2 heads. Tax Deduction by way of investments in specified products, Tax deduction by way of certain expenses.
A. Investment oriented deductions.
1. Under Section 80 C of the Income Tax Act, there are certain investments which qualify for deduction upto 1 Lakh in a year (overall limit). Most common instruments in this group are ELSS, Life insurance premium including pension policies and ULIPs, EPF,PPF,NPS,NSC, 5 year Bank FD, Senior Citizens Savings scheme and Post office Time Deposits.
2. Under Section 80 CCF, you can invest upto 20,000 in any infrastructure bonds and claim deduction as per your income tax slab. This 20,000 is in addition to the 1 Lakh limit for section 80C.
B. Expense Oriented Deductions.
The following expenses are eligible for deduction from your gross total income, before calculating income tax.
1. Principal repayment upto 1lakh under a home loan under Section 80 C.
2. Tuition fee paid for maximum 2 children upto 1 Lakh under Section 80C.
3. Health insurance premium: If you spend for health insurance premium for self and family an amount upto Rs.15, 000 can be deducted from the gross total income. Another 15000 is exempted for paying health insurance premium for parents. This amount is 20,000, if parents are senior citizens.
4. Education Loan interest : If you have taken educational loan for higher studies for yourself, spouse or children, the interest paid on the loan can be deducted from the gross total income. There is no upper limit for this deduction under Section 80 E.
5. Donations: Under Section 80G, you can donate upto 10% of your total income to specified charitable institutions. You will get deduction of 50% or 100% of the donation, depending on the institution.
6. Loan Interest paid for housing loan for self occupied house upto 1.5 Lakhs is eligible for deduction from the taxable income. There is no upper limit for deduction, if the house is rented out or deemed to be rented.
7. If you have a dependent who is disabled, you can claim a deduction against expense incurred on him under Section 80DD. The limit per year is Rs.50, 000/- and if the disability is severe, the limit is 1 Lakh.
8. If you have a dependent, who suffers from an ailment specified under Section 80 DDB, you can claim a deduction upto 40,000 in a year. This is 60,000 if the patient is senior citizen.
9. A tax payer, who is disabled can claim a deduction of Rs.75, 000/- in a year under Section 80U.If the disability is severe (80% or above), the deduction is 1 Lakh in a year.
10. Under section 80 GGC, you can claim deduction for the donation made to a political party. There is no upper limit for this, as Sec.80G.
C. Other Deductions.
1. Even if you are not getting HRA, as part of your salary or if you are self employed professional or business man, under Section 80 GG, you can claim deduction for the rent paid. You can claim the least of the following:
a) Rent paid – 10% of the total income.
b) 25% of the total income.
c) Rs.2000/- per month.
2. You can set off short term capital losses against long term capital gains. Suppose you have made some long term capital gain by selling some property or gold. If you have made some short term capital losses by trading, that losses can be deducted from the long term capital gains to reduce your overall tax liability.
For a salaried person, first calculate the yearly outgo in PF, existing Life Insurance etc. Then calculate the tuition fee paid and principal repayment of housing loan if any. You can deduct the total of all these from 1 Lakh to arrive at the gap in 80C. You can then decide in which instrument this amount is to be invested according to your pre decided asset allocation.
Planning at the beginning of the financial year will help you in deciding the proper asset allocation and investing in them. This will help you in matching your tax planning with the overall financial planning. Anyway, let us do this for next financial year.