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Preface
All of us engage in some economic activity and work hard to make a living. But as you start
doing so, you tend to attract the attention of the Income Tax Department, as they too are doing
their task of taxing your income, as you earn. And thus as we work hard to make a living, it
becomes imperative for us to work a little more harder and smarter to save our taxes (the legal
way) too, so that it can help us make our dreams come true - A dream of buying a better car,
bigger house etc.
But, remember in the quest of attaining the same, if you keep your tax planning exercise
pending till the eleventh hour, it would be merely a tax saving exercise leading to sub-optimal
gains.
The Union Budget 2015-16 was a balancing act by Modi-led-NDA Government with the finance
minister leaving something for all. The focus was promoting growth and providing social
security to electorates, yet walk tight on the path of fiscal consolidation. The Government set a
3.9% of GDP for the fiscal year 2015-16, 3.5% for 2016-17 and for the ensuing year 3.0%.
Hence, although the aam aadmi had many expectations, a few were honoured but there were
pleasant surprises too.
This 2015 edition of the Money Simplified Guide on Tax Planning will give you a perspective on
how you can plan your taxes smartly. As you may know, every penny saved, is a penny earned.
Thus you should take enough care and prudence in the tax planning exercise considering your
age, income, ability to take risk and financial goals, so that your tax planning can complement
your investment planning.
Also, realisation will dawn on you that theres more to tax planning than just investing in tax
saving instruments available under Section 80C, of the Income Tax Act, 1961. There are many
other provisions that can provide you tax benefits. A simple thing like taking a loan for buying a
house can make you eligible to get tax benefits.
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Keeping this philosophy in mind, PersonalFN through this Money Simplified Guide would like
tohelp you do just that - with a lot of knowledge and expertise poured into this Guide, in a
simple and easy to understand manner.
So, read on and wish you all VERY HAPPY TAX PLANNING!!
Team Personal FN
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Disclaimer
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Index
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05
06
Section III: Your small steps (to Tax Planning) can take you leaps
Steps to tax planning
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12
17
18
24
31
Section VI: How your home loan can help in tax planning
40
45
Annual Value
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Deductions
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49
54
56
59
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Remember when you think about insuring yourself, it should purely mean protecting your life against any
unforeseen events; and thus you should be ideally buying only pure term insurance plans, which gives
due importance to your human life value. It is noteworthy that ULIPs are investment-cum-insurance
plans where for the premium paid, the insurance cover offered under these plans is far less (usually 10
times of your annual premium) when compared to pure term life insurance plans; where for a lesser
premium amount you get a greater life insurance cover which is precisely what a life insurance plan is
intended for.
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To bring to your notice, our Income Tax Act, 1961 also considers the humane side of our life and also
gives deductions for contributions you make on such developments. So, in case if you pay your medical
insurance premium, incur expenditure on the medical treatment of a dependant handicapped, donate
to specified funds for specified causes, contribute in monetary form to political parties or electoral trusts,
take a loan for pursuing higher education or if you are an individual suffering from specified diseases;
then all this too can help you effectively plan your tax obligations, optimally reducing your tax liability.
Moreover, taking into account the urge to buy your dream home by taking a home loan can also extend
tax saving benefits to you.
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provisions of the Income Tax Act applicable to the aforementioned sources of income), as well
as by availing deductions to GTI.
Now, one may ask how do I undertake this activity if Im a novice?
Well, the answer is pretty simple! You can either get it done at the company you work for
(many organisations do offer this facility), ask your CA / tax consultant to do it, or use the
convenience of the new and updated tax portals that have emerged in the more recent times.
But, along with all this please do not forget to do your self-study to carry out effective tax
planning exercise. One must note that it is vital to know at least those provisions of the Income
Tax Act, which directly have an impact on your personal finances.
Step 2: Compute the Net Taxable Income
After having done with computation of GTI by using the relevant provisions of the Income Tax
Act for each source of income, the next step is to compute your Net Taxable Income (NTI).
Under NTI from the GTI, the various deductions under chapter VIA which allow for deduction
under Section 80 of the Income Tax Act, should be accounted for (i.e. subtracted from your
GTI), which would thus reduce your taxable income. These deductions enable you to reduce the
tax liability, as it covers Sections for:
Investing in tax saving instruments (your most loved and sought after Section 80C, along
with RGESS - Rajiv Gandhi Equity Savings Scheme)
Donations
Expenditure on handicapped dependent
Premium payment for your medical insurance
Interest paid on loan taken for higher education
Rent paid for residential accommodation
Expenditure incurred on a specified diseases suffered by you
and many more!
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Remember, if you use the respective provisions effectively to do tax planning, it will enable you
to achieve the long-term objective of wealth creation.
Step 3: Calculate the tax payable
After having effectively saved tax in the prudent way mentioned above, the next step is to
compute your tax liability based on the present income tax slabs, and thereafter file your
income tax returns.
The income tax rates for Individuals and HUFs for FY 2015-16 are as follows:
Net Taxable Income (in Rs)
Rate
Nil
10%
20%
30%
# For senior citizens (aged above 60 but below 80), with NTI falling between Rs 3,00,001 to Rs
5,00,000 the first slab of tax rate is @ 10%.
## For very senior citizens (i.e. individuals who are 80 years of age and above), NTI the base
exemption limit stands at Rs 5 lakh of their income and thus income over Rs 500,001 to Rs
10,00,000 is taxable @ 20%.
Moreover, you would also have to pay an education cess @ 2% + 1% secondary and higher
education cess a total of 3% as cess on your computed tax liability.
Also, note that an additional surcharge @ 12% would be levied if your total income in the
financial year exceeds Rs 1 crore. This one-time surcharge will be in addition to the total 3%
education cess that is paid on the total income-tax.
Union Budget 2013-14 had introduced a new Section 87A (which allows a Tax Credit or Special
Rebate of Rs 2,000 to individuals whose NTI is below Rs 5 lakhs), the rebate still holds and is
limited to the extent of your tax liability or Rs 2,000 whichever is less.
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So if your tax liability is say Rs 1,500, you will get a tax credit of only Rs 1,500 under Section 87A
and no tax will be payable.
Now let us see how you can compute your income tax liability:
Say if your net taxable income after availing for all deductions available is Rs 12 Lakh in the
current financial year, then your tax liability will be computed as under:
Computation of Tax Liability (2015-16)
Gross Total Income (a)
Tax
Rate
Investments done in FY2015-16
PPF
15,50,000
50,000
ELSS
50,000
50,000
1,50,000
2,00,000
12,00,000
Nil
Rs 2,50,001 to Rs 500,000
10%
25,000
Rs 500,001 to Rs 10,00,000
20%
1,00,000
30%
60,000
1,85,000
Education Cess
3%
5,550
1,90,550
Age
Your age and the tenure of your investment play a vital role in your asset allocation. The
younger you are more risk you can take and vice-a-versa. Hence, for prudent tax planning
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too, if you are young, you should allocate more towards market-linked tax saving
instruments such as Equity Linked Saving Schemes (ELSS), Rajiv Gandhi Equity Savings
Scheme (RGESS), Unit Linked Insurance Plans (ULIPs) and National Pension System (NPS),
as at a young age the willingness to take risk is high. One may also consider taking a home
loan at a younger age, as the number of years of repayment is more along with your
willingness to take risk being high.
Also a noteworthy point is the earlier you start with your investments, the greater is the
tenure you get while investing in an investment avenue, which can enable you to make
more aggressive investments and create wealth over the long-term to meet your financial
goals.
Lets understand this much better with the help of an illustration.
An early bird gets a bigger pie
Particulars
Suresh
Mahesh
25
30
35
60
60
60
35
30
25
7,000
7,000
7,000
10%
10%
10%
2,65,76,466
1,58,23,415
Rajesh
92,87,834
The above table reveals that, Suresh starts at age 25, and invests Rs 7,000 per month in an
ELSS / Tax saving mutual fund scheme through SIPs (Systematic Investment Plans) until
retirement (age 60). His corpus at retirement is approximately Rs 2.65 crore. Mahesh starts
at age 30, a mere 5 years after Suresh, and invests the same amount in ELSS (through SIPs)
until retirement (also at age 60). His corpus builds up to approximately Rs 1.58 crore, note
the difference between the 2 corpuses here. And lastly, we have Rajesh, the late bloomer of
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the lot. He begins investing at age 35, the same amount every month in an ELSS as Suresh
and Mahesh, and invests up to his retirement (also at age 60). His corpus is, in comparison,
a meagre Rs 92 lakh.
The following graph clearly indicates the gap between the accumulated corpuses for similar
level of investment per month.
For some of you young people, pursuing higher education may be a priority. But there may
be a case you do not have enough corpus (funds) garnered by you. However, you need not
worry, as there are several banks willing to offer higher education loan; and if you avail the
same, the interest paid by you on such loan taken will be eligible for tax benefit (under
section 80E of the Income Tax Act which is discussed ahead in this guide).
Income
Similarly, if your income is high, your willingness to take risk is high. This thus can work in
your favour, as you have sufficient annual GTI which allows you to park more money
towards market-linked tax saving investment instruments, for generating higher returns and
creating a good corpus for your financial goal(s). Also, on account of the higher GTI your
eligibility to take a home loan also increases, which can also help you to optimally reduce
your tax liability.
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Yes, one may say that if I have a high income, - why do I need a home loan. I can straight
away go ahead and buy the property!
Sure you can, but the Income Tax Act provides you the tax benefit for repayment of
principal amount along with the interest on loan taken, which you will miss.
Also, considering that you are financially strong, you can also donate some of your money
towards a noble cause, as doing so will make you eligible for a tax benefit (under section
80G of the Income Tax Act which is discussed ahead in this guide).
Similarly, if your income is not high enough or if you do not want to put your money at risk;
you can invest in tax saving instruments which provide you assured returns. These
instruments can be Public Provident Fund (PPF), National Savings Certificates (NSCs), 5 Yr
Bank Fixed Deposits, 5 Yr Post Office Time Deposits and Senior Citizen Savings Scheme
(provided you are a senior citizen).
Financial goals
The financial goals which one sets in life, also influences the tax planning exercise. So, say
for example your goal is retiring from work 5 years from now, then your tax saving
investment portfolio will also be less skewed towards market-linked tax saving instruments,
as you are quite near to your goal and your regular income would stop.
Likewise if you are many years away from your financial goal, you should ideally allocate
maximum allocation to market linked tax saving instruments and less towards those tax
saving instruments which provide you low assured returns.
Risk Appetite
Your willingness to take risk which is a function of your age, income, expenses, nearness to
goal, will be an important determinant while doing your tax planning exercise. So, if your
willingness to take risk is high (aggressive), you can skew your tax saving investment
portfolio more towards the market-linked instruments. Similarly, if your willingness to take
risk is relatively low (conservative), your tax saving investment portfolio can be skewed
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towards instruments which offer you assured returns, and if you are a moderate risk taker
you can take a mix of 60:40 into market-linked tax saving instruments and assured return
tax saving instruments respectively.
We reckon the fact that prudent tax planning exercise can be time consuming and
complex. But please note the fact that its an annual activity which every tax payer has to
go through and if you start early and plan properly, the task becomes easier.
Remember, delay will only ensure that you invest at the last moment but not in line with
the parameters discussed above. If you are hard pressed for time, consider hiring a
competent tax consultant along with an investment advisor.
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You may say but there is risk involved. Well, no doubt about that; but in order to even out
the shocks of volatility in the equity markets you can adopt the SIP route of investing here
which will provide you the advantage of compounding along with rupee-cost averaging.
SIPs provide cushion against market volatility
While SIPs in ELSS can help you tackle volatility and may help you gradually create wealth in the
long run, a noteworthy point about SIP investments in ELSS is that your every SIP installment
(which can be monthly, quarterly or half yearly) should complete the minimum lock-in period.
Get wealthy Sip by Sip
While considering an ELSS mutual fund for your market-linked tax-saving portfolio, give
importance to those ELSS mutual funds that have completed at least 3 years of track record and
select schemes from mutual fund houses which follow strong investment systems and
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processes. Dont get lured just by returns clocked because theres more to evaluating a mutual
scheme than just returns. Moreover, past performance does not guarantee that the fund will
continue to fare in the same manner in the future. Hence look for the consistency in the
performance instead, with relevance to risk and returns, portfolio turnover ratio, expense ratio
and the portfolio characteristics of a tax saving fund(s).
Deduction: The maximum tax benefit which an Individual or HUF can enjoy under Section 80C is
Rs 1.50 lakh p.a. Moreover, if you make any long term gains at the time of exit, any time after
the end of the lock-in period; you will not have to pay any Long Term Capital Gains Tax (LTCG).
2. Pension Funds:
Pension funds offered by mutual funds can not only be used for tax planning, but are also an
effective instrument to plan for a blissful retired life. Pension funds allocate 60% money into
debt and remaining in equity. At the vesting age, you can opt for regular pension or
systematically withdraw the units. They are okay if you want to kill two birds in one short,
namely tax planning and retirement planning; but may not help in maximising wealth due to a
dominant portion of the assets skewed towards debt. Also, being a debt-oriented scheme they
arent very tax efficient due to liability of LTCG tax.
Deduction: The amount invested in pension funds qualifies for deduction under Section 80C,
subject to a maximum limit of Rs 1.50 lakh p.a.
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Hence, apart from the insurance cover (which is usually 10 times your annual premium) offered
under these plans, the returns which you would get are completely market-linked as your
premium amount (after accounting for allocation and other charges) is invested in equity and
debt securities.
And in order for you to track such plans the NAV is declared on a regular basis. These policies
have a minimum 5 year lock-in period, and also have a minimum premium paying term of 5
years. The overall term of the policy would vary from product to product.
In case of any eventuality, the beneficiaries would be paid the sum assured or fund value,
whichever is higher.
But a noteworthy point is, while some well selected ULIPs may add value to your portfolio in the
long-term; your insurance and investment needs should be dealt separately, thus enabling you
to have an optimum insurance coverage and the right investment instruments for long-term
wealth creation.
Deduction: The premium which you pay for your ULIP would be eligible for tax benefit, subject
to the maximum eligible amount of Rs 1.50 lakh p.a. as available under Section 80C. Moreover,
a positive point is that at maturity the amount which you or your beneficiary would receive is
tax free (exempt) as per the provisions of Section 10(10D) of the Income Tax Act.
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In this account your minimum investment amount is Rs 500 per contribution and Rs 6,000
per year, and you are required to make minimum 4 contributions per year. Under this
account, premature withdrawals (upto a maximum of 20% of the total investment) is not
permitted before attainment of 60 years, however the balance 80% of the pension wealth
has to be utilised by you to buy a life annuity.
Tier-II Account:
For opening this account you will have to make a minimum contribution of Rs 1,000 per
annum. The minimum number of contributions is 4, subject to a minimum contribution of
Rs 250. However, if you open an account in the last quarter of the financial year, you will
have to contribute only once in that financial year. You will be required to maintain a
minimum balance of Rs 2,000 at the end of the financial year. In case you dont maintain
the minimum balance in this account and do not comply with the number of contributions
in a year, a penalty of Rs 100 will be levied. Moreover, in order to have Tier-II account, you
first need to have a Tier-I account. Tier-II account is a voluntary account and withdrawals
will be permitted under this account, without any limits.
Even if you hold both the above accounts under NPS, only the Tier-I account will be eligible for
tax benefits.
While investing money in NPS, you have two investment choices i.e. Active or Auto choice.
Under the Active choice asset class, your money will be invested in various asset classes
termed as ECG viz. E (Equity), C (Credit risk bearing fixed income instruments other than
Government Securities) and G (Central Government and State Government bonds); where you
will have an option to decide your asset allocation into these asset classes. In case of Auto
Choice, your money will be invested in the aforesaid asset classes in accordance with
predetermined asset allocation.
But remember, the return on your investment is not guaranteed as it is market-linked. At the
age of 60 years, you can exit the scheme; but you are required to invest a minimum 40% of the
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fund value to purchase a life annuity. And the remaining 60% of the money can be withdrawn in
lump sum or in a phased manner upto your age of 70 years.
In our view this product is not very appealing for creating a substantial corpus to meet your
retirement need. Rather, if you chalk-out a prudent financial plan with the help of a financial
planner, and invest wisely as per the plan laid out (which would mostly recommend you equity
allocating higher to equity at an younger age, and then as your age progresses balance the
asset allocation between equity and debt instruments), then the corpus which you would be
able to create will be substantial enough to meet your retirements needs. Also the money
withdrawn under this scheme, even at the age of 60 is taxable.
Deduction: Those who are salaried employees may claim deduction under Section 80C upto Rs
1.50 lakh for their own contributions towards NPS account. In addition to this, a deduction can
be claimed under Section 80CCD if there is any contribution made by the employer but only
upto 10% of their salary (for this purpose, salary construes as Basic Salary plus Dearness
Allowance). It is noteworthy that the deduction under Section 80CCD can be claimed over and
above the permissible deductions under Section 80C.
So if an Individual contributes alone from his income towards NPS, it will be considered within
the limits of Rs 1. 5 lakh p.a. under Section 80C.
It is only if the employer contributes to employee for NPS Section 80 CCD is applicable.
So to avail this extra tax exemption limit, the employees need to convince their employers to
start contributing to NPS.
However, those who are self-employed can avail deduction under Section 80CCD upto 10% of
their gross total income (which is comprised of income computed under different heads before
reducing it by all other deductions available under Section 80). In addition to deductions under
Section 80CCD, self-employed people are also entitled to deductions under Section 80C for
other instruments eligible therein.
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Non-Resident Indians (NRIs) also can now actively participate in NPS to save money for their
golden years.
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Deduction: Over here too the premium which you pay for such non-unit linked life insurance
plans would be eligible for tax benefit, subject to the maximum eligible amount of Rs 1.50 lakh
p.a. under Section 80C. Moreover, a positive point is that at maturity the amount, which you or
your beneficiary would receive, is exempt (tax free) as per the provisions of Section 10(10D) of
the Income Tax Act.
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credit of your account in the immediate 4th year immediately preceding the year of withdrawal
or at the end of the preceding year, whichever is lower. And in case if your term of 15 year is
over, you can withdraw the entire amount together with the interest accrued till the last day of
the month, preceding the month in which application for withdrawal is made.
After your term of 15 years is over if you wish to renew your account, you can do so for a
period of another 5 years at the rate of interest prevailing then, without having the compulsion
of putting any further deposits in case of extension. The withdrawal in case of extended
accounts is permissible once in every financial year. But the total withdrawal should not exceed
60% of the balance accumulated to the account at the commencement of the extension period
(of 5 years).
In case you wish to invest in the name of HUF, you cannot do so. The government has
discouraged HUFs from taking advantage of a scheme whose objective is to create retirement
nest egg for resident individuals. Earlier an HUF could open a PPF account and save tax on the
deduction, which has been stopped with effect from May 2005. However, existing PPF accounts
of HUFs will continue to operate normally until maturity, but cannot be extended beyond
maturity, and no new HUF PPF accounts can be opened.
It is noteworthy that if you are risk averse, then this product is best in its class for tax planning.
Moreover, it also offers you an appealing tax-free return of around 8% p.a. (compounded
annually).
Deduction: The contributions which you make to the accounts mentioned above, are eligible
for tax benefit but subject to the maximum eligible amount of Rs 1.50 lakh p.a. as per Section
80C.
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The minimum amount which you can invest is Rs 100, with no maximum limit to the same. NSC
maturing in 5 years offers interest @ 8.5% p.a. compounded half-yearly whereas NSC maturing
in 10 years offers interest @ 8.8% p.a. compounded half-yearly, thus giving you an effective
interest rate of 8.68% p.a. and 8.99% p.a. The interest income accrues annually and is
reinvested further in the scheme till maturity (i.e. 5 or 10 years) or until the date of premature
withdrawals.
Premature withdrawals are permitted only in specific circumstances such as death of the
holder.
Deduction: Your investment in NSC is eligible for a deduction of upto Rs 1.50 lakh p.a. under
Section 80C. Furthermore, the accrued interest which is deemed to be reinvested in a financial
year qualifies for deduction under Section 80C in the respective financial year. However, the
interest income is chargeable to tax in the year in which it accrues. But in case if you have no
other income apart from interest income, then in order to avoid Tax Deduction at Source (TDS),
you can submit a declaration in Form 15-G (for general or non-senior citzens) or Form 15-H (for
senior citizens) as applicable.
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Similarly 5 Yr Post Office Time Deposits (POTDs) also offer you a tax benefit under Section 80C.
You can open the account either in single name or jointly or even in the name of a minor
(through a guardian) who has attained the age of 10.
The minimum investment amount is Rs 200, and there isnt any upper limit. However, similar to
other tax saving instruments, the investment amount over Rs 1.50 lakh will not be eligible for
any tax benefit.
A 5-Yr POTD earns a return of 8.5% p.a. (compounded quarterly) but paid annually. Hence, say
if you deposit an amount of Rs 10,000, the interest income, which you will fetch, would
approximately be Rs 877 p.a. As regards premature withdrawals are concerned, they are
permitted only after 1 year from the date of deposit and interest on such deposits shall be
calculated at the rate, which shall be 1% less than the rate specified for a period of 5-Year
deposit.
Deduction: Your investment in both these schemes is eligible for a deduction of upto Rs 1.50
lakh p.a. under Section 80C. But as mentioned above, the interest earned on your investments
will be taxable.
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you can extend the SCSS account can be extended for a period of 3 years but within 1 year from
the maturity by giving application in prescribed format.
Premature withdrawals are permitted only after one year from the date of opening the
account. If you withdraw between 1 and 2 years, 1.5% of the initial amount invested will be
deducted. And in case if you withdraw after 2 years, 1.0% of the balance amount is deducted. In
case of accounts which are extended after maturity, the accounts can be closed anytime after
expiry of one year of extension without any deduction.
Deduction: Your investments upto Rs 1.50 lakh in SCSS are entitled for a deduction under
Section 80C. However, the interest earned by you would be subject to tax deduction at source.
But in case if you have no other income apart from interest income, then in order to avoid Tax
Deduction at Source (TDS), you can submit a declaration in Form 15-G (for general or nonsenior citizens) or Form 15-H (for senior citizens) as applicable.
Options Galore - Snapshot of Section 80C
Schemes
Type
Growth
Growth
Growth
Interest Rate
Min Max
Investment
Term
Premature
Withdrawal
Withdrawal
allowed post
lock-in
Tax on returns
Section No.
80C
Capital gains
are tax free
Capital gains
post lock-in are
tax free
Yes
Yes
80C**
Capital gains
taxed on
withdrawal
Interest
income is tax
free
Bank Deposits
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Recurring
8.7% p.a.
15 years^
Rs 500 - Rs 1. 5 lakh
Yes*
80C
Deposit
5 & 10 years
Rs 100 - No upper
Limit
No
80C
Fixed Deposit
5 years
No upper Limit
No
80C
5 years
Rs 200 - No upper
Limit
Yes*
80C
5 years
Rs 1,000 - Rs 15 lakh
Yes*
80C
5-40 years
Premium depends
upon the insurance
cover
Varies from
policy to policy
Fixed Deposit
Deposit
Insurance
5-Yr: 8.5%;
(compounded
quarterly & paid
annually
9.30% p.a. (payable
quarterly)
Sum Assured Only
(i.e. Insurance Cover)
Interest
accrued
is taxed every
year as per
ones incometax slab
Redemption
amount is tax
free
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* Partial withdrawals allowed subject to conditions; ^can be extended in tranches of 5 years; ** additional deduction of Rs 50,000 can be
claimed under section 80CCD over and above Rs 1.50 lakh under section 80C; #varies from banks to banks, but the data sourced here is of
prominent banks
(Source: Personal FN Research)
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However, while paying the premium you need to ensure that the payment is made in any mode
other than cash.
Within the limit of Rs 25,000 (and Rs 30,000 in case of senior citizens), the deduction of Rs
5,000 is allowed for your expenses towards preventive health checkups. This means if you are
paying a premium of less than Rs 10,000; you may avail this benefit and save tax.
If you are very senior citizens who may not be covered by health insurance, the Union Budget
2015-16 has allowed a deduction of Rs 30,000 towards expenditure incurred on your medical
treatment.
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It is noteworthy that over here, the term dependent being a person with disability means
your spouse, children, parents, brothers and sisters.
Moreover, in order to claim the deduction you need to submit a medical certificate issued by a
medical authority along with your return of income. Also if you are claiming a deduction in your
tax returns for such an expenditure incurred or amount deposited, your dependent cannot
claim a deduction under Section 80U in case hes (handicapped dependent) filing his tax returns
separately.
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Amount Deductible
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
50%
50%
50%
50%
50%
Note: There are also other funds and charitable institutions that are eligible for deduction under Section 80G.
While there are 3.3 million registered NGOs and scores of causes, selecting a genuine charity is
a challenge. To deal with this concern, HelpYourNGO has set up an initiative which can help you
make a well-informed donation decision. The organisation promotes philanthropy through
transparency, by providing easy access to financials of over 240 NGOs and allows comparison of
data and ratios across multiple parameters.
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1. Rent paid in respect to property occupied for residential use (Section 80GG):
If you are a self-employed or a salaried individual who is not in receipt of any House Rent
Allowance (HRA), and is paying a rent for an accommodation (irrespective of whether furnished
or unfurnished) occupied for residential use, then you can claim a deduction under this section.
But as a pre-condition for availing deduction under this section,
-
You must pay rent for the house you live in, and should not get HRA for even a part of
the year
You should not own and occupy any other house anywhere
You or your spouse or your minor child or Hindu Undivided Family (if you are part of
one) must not own any residential accommodation in the city you reside or work in.
And the deduction which will be available to you under this section is the least of:
25% of your total income or,
Rs 2,000 per month or,
Rent paid in excess of 10% of your total income
To claim deduction under section 80GG, you need to file a declaration in Form No. 10BA
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Blindness
Low vision
Leprosy-cured
Hearing impairment
Locomotor disability
Mental retardation
Mental illness
The deduction available under this section is flat (i.e. fixed) Rs 75,000, immaterial of the
expenditure incurred. But if the disability is severe in nature (i.e. 80% or above), then one is
entitled to flat (i.e. fixed) deduction of Rs 1.25 lakh.
However in order to avail of the deduction, you need to be an individual resident in India during
the financial year for which you are claiming the deduction. Also you need to file the copy of
certificates issued by the medical authority, at the time of filing returns.
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investors are defined as those individuals whose PAN do not reflect any equity transaction.
Since the scheme was introduced for novice investors only i.e. for those who are entering the
market for the first time, the benefit u/s 80CCG was to be claimed only in the first year.
However, in the budget 2013-14, it was extended to first-three successive years.
The objective of the scheme is to encourage flow of savings in the financial instruments and
improve the depth of the domestic capital market. In order to device safety measures for new
investors investing in direct equity through the RGESS, the stocks of Maharatna, Navaratna and
Miniratna, besides the top 100 stocks (BSE 100 or CNX 100) listed on the stock exchanges are
considered under RGESS. The argument for proposing investments only from the large caps and
PSU domain is, not only to provide security but also to ensure liquidity.
The first time investors can take benefit of RGESS, by investing in eligible stocks, RGESS eligible
close-ended Mutual Fund schemes and RGESS eligible Exchange Traded Funds. To make it
convenient to identify the eligible stocks and mutual funds, the stock exchanges shall furnish
list of RGESS eligible stocks / ETFs / MF schemes on their website. Further, the list shall also be
forwarded to the depositories at monthly intervals and whenever there is any change in the
said list. For this purpose, mutual fund houses shall communicate the list of RGESS eligible
mutual fund schemes / ETFs to the stock exchanges.
The money invested under RGESS is subject to an overall lock-in period of 3 years, though one
can sell / pledge / hypothecate their securities after the expiry of the mandatory lock-in period
of 1 year, but he cannot withdraw the money before 3 years. i.e. Investors may be allowed to
churn their portfolio after completion of fixed lock in period of 1 year, but his account will be
converted into an ordinary demat account only on completion of 3 years.
It is noteworthy that only individuals can avail tax deduction under section 80CCG. HUFs and
others are not eligible for any tax deduction under section 80CCG.
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Limit
80D
80DD
80E
80G
80GG
80GGC
80U
80CCG
80DDB
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being subject to any maximum limit. This applies even in the case where you have two home
loans for two different properties, where one is self-occupied and the other is let out on rent.
Similarly, if you have taken a loan for the purpose of reconstructing, repairing or renewing the
property, the amount of deduction under Section 24(b) you are eligible for will be restricted to
Rs 30,000, irrespective whether you want to stay in it or let it out on rent.
Lets understand with an example how home loan taken for buying your dream home to stay
in it (SOP) can reduce the total tax payable by you.
Lets assume you earn Rs 6.5 lakh p.a. by way of salary and have taken a home loan of Rs 40
lakh for buying your dream home and you have decided to stay in it. The home loan is for
tenure of 20 years and the rate of interest is 9.0% p.a., the Equated Monthly Installments (EMI)
you need to pay is Rs 35,989.
6,50,000
40,00,000
Tenure (yrs.)
20
9.0
EMI (Rs)
35,989
74,908
1,50,000
25,750*
5,150*
20,600*
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The above table clearly shows the benefit of availing a housing loan if you are contemplating
buying a house. The total tax payable on your income without a home loan works out to Rs
25,750; while after availing a home loan works out to Rs 5,150, thereby saving you a tax outgo
of Rs 20,600.
Maximise your tax benefits
Now, lets delve deeper into the benefits available. Say, your interest amount in the first year is
Rs 3.57 lakh which is much more than the maximum amount (of Rs 2.00 lakh) allowed as a
deduction. Your principal repayment amount of Rs 74,908 is within the Rs 1.50 lakh limit
allowed under Section 80C. But, it takes away almost half of the amount eligible under Section
80C and leaves you with - Rs 75,092- to claim towards other tax saving instruments such as PPF,
NSC, Life Insurance, ELSS, POTDs.
Now consider, you have invested in the following manner under Section 80C.
Particulars
Principal Repayment
Life Insurance
PPF
EPF
NSC
Total
Claim deductions
under Section 80 C
Contributed but can't
claim tax benefit
Amt. ( Rs)
74,908
50,000
60,000
20,000
20,000
224,908
150,000
74,908
The amount eligible is more than what you can claim. Yes, you have an option of not investing
in PPF, POTDs or NSC but these are assured return schemes with attractive returns. And as said
earlier your portfolio should always comprise of a mix of assured return and market-linked
return instruments, in a composition which is in accordance to your financial goals and
willingness to take risk. Hence, ignoring these investment avenues may not be prudent from
financial planning perspective.
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So, now the next question is how do you claim maximum available deductions to minimise your
tax liability? The answer lies in taking a joint home loan. A joint home loan can be taken with
your spouse or relative.
Lets understand with an example how a joint home loan with your spouse can help reduce
your tax liability.
Assume your spouse and you decide to take a joint home loan of the same amount as
mentioned above and share the loan in ratio of 50:50.
Particulars
Gross Salary (Rs)
Home Loan Amount (Rs)
Tenure (yrs)
Rate of Interest p.a.
EMI (Rs)
Annual Interest Paid (Rs)
Principal paid in the 1st year (Rs)
Life Insurance (Rs)
You
Your Spouse
650,000
650,000
4,000,000
20
9.0%
35,989
178,480
178,480
37,454
37,454
50,000
50,000
1,00,000
1,00,000
3,65,934
3,65,934
15,934
15,934
25,750
5,150
7,367
25,750
25,750
7,367
20,600
36,767
Note:* calculations are done assuming that home loan and the EMI paid by the assessee and the spouse are in the ratio 50:50
(Source: Personal FN Research)
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Now since your spouse is a co-owner and has contributed towards repayment of the loan she
too would be eligible for the tax benefit (both principal and interest component).
So, as indicated in the table above, if the principal and interest amount is shared equally
between your spouse and you, the contribution per person comes to Rs 37,454 for principal
repayment and Rs 1.78 lakh for interest payment. The principal amount is now half of what was
earlier which allows you to claim deductions towards other contributions. At the same time it
reduces the tax liability to a significant extent and leads to a household saving of upto Rs
36,767. As compared to a Single home loan, a Joint home loan leads to an additional household
saving of Rs 16,167.
From the tax planning point of view, it is vital to ensure that the higher earning member pays
higher portion of the home loan EMI. This is because the tax benefit accrues in proportion to
your contribution towards loan repayment.
So, remember if you plan to buy a house, it makes sense to include your spouse as a co-owner;
especially if your spouses income is taxable. This will result in higher tax saving in addition to
boosting your loan eligibility.
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Now you may ask How can the income tax authority tax me, if I have not let out my property
on rent?
Well, thats because annual value of your property after providing for deduction available
under Section 24(b) is taxed under the head Income from House Property. A noteworthy
point is, term house property includes building(s) or land appurtenant (i.e. attached) thereto
as well.
And now the next question which may be popping on your mind is What is annual value of
the property and which deductions are available?
Annual Value:
To understand that better let us take a case where you have let out the property (LOP) and
then DLOP.
In cases where you are enjoying a regular income from the property in the form of rent, then
the annual value of your property would be calculated by adopting the following steps:
a) Find out the reasonable expected rent of the property (which is municipal rent or fair
rent, whichever is higher)
b) Consider the rent actually received / receivable*
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In case you own more than one house, and the other house(s) apart from the one where you
are staying is vacant throughout the month, then the other house property(s) would be
considered as a Deemed to be Let Out Property(s) - DLOPs. Moreover, you would be liable to
pay tax on such property(s) after having calculated the Gross Annual Value (GAV), which will be
calculated in the same way as for LOP. But the only difference being that, here rent would be
the standard rent calculated as per the municipal laws.
Thereafter, if you as the landlord are paying any municipal taxes towards these properties, then
those would be subtracted to obtain the Net Annual Value (NAV).
Remember, over here in case you have multiple DLOPs, then you have an option to consider
one of property as a SOP and the rest would be considered as DLOPs under the present Income
Tax law. So, say you have 4 such DLOPs then you should ideally select the property with the
highest GAV as a SOP property, as the remaining properties available with you will have a lower
GAV. Having said that, it would prudent to weigh the pros and cons by undertaking a
comparative analysis to optimize your tax planning exercise.
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Self-Occupied Property
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You need not worry here if you are occupying the property throughout the financial year for
your stay (i.e. residential use) as the NAV of the property will be considered as Nil.
However, if you are occupying the property for some part of the year and the rest of the year
you have earned an income by letting it out, then proportionately for the rest of the year when
the property was let out, the calculation of annual value would be applicable as that of LOP.
Deductions:
After having calculated the Net Annual Value (NAV) as seen above, you are eligible to claim
deductions under Section 24, which further reduces your taxability under this head of income.
You broadly get the following deductions:
Standard Deduction [Section 24(a)]
Owning a home and maintaining the same costs you money. But irrespective of the fact
whether you have incurred any expenditure or not to do so, you will be eligible to claim a flat
deduction of 30% calculated on the NAV of the property. And this deduction is of specific use if
ones property is LOP and / or DLOP. In case if the property is SOP, then you are not eligible to
claim any deduction as the NAV of your SOP is Nil.
Interest on borrowed capital [Section 24(b)]
As reiterated above (in the home loan section), if one wisely takes a home loan for buying a
house property then the interest so paid on the borrowed capital will make you eligible for
deduction under Section 24(b), irrespective whether the house property is SOP, LOP or DLOP.
In case of SOP the income from house property will be negative income, (if interest is paid on
capital borrowed by you to buy or construct or reconstruct or renew or repair the house),
which will enable you to reduce your overall Gross Total Income (GTI). In case of other
properties i.e., LOP and DLOP the income from house property will be positive, but would be
reduced to the extent of standard deduction and interest paid.
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The quantum of deduction depends upon the purpose for which you take a loan i.e. purchase,
construction, reconstruction, repair or renewals, and also the type of property i.e. SOP, LOP
or DLOP.
Hence, in case you have taken a loan for the purpose of purchase or acquisition of the house
which is an SOP, then you will be eligible for a maximum deduction of a sum of Rs 2.00 lakh. But
if the loan is taken for the purpose of repair, renewal, or reconstruction, then the eligible
deduction is restricted to Rs 30,000.
Now if the property is LOP or DLOP, then you do not have any maximum restriction for claiming
interest so it can be above the otherwise limit of Rs 2.00 lakh, irrespective of the usage i.e.
whether for the purpose of purchase, construction, reconstruction, repair or renewals.
Remember, while everyone buys house property(s), it is important to avail the benefits available under
the Income Tax Act, wisely as this would enable in optimally saving your tax liability, and of course enjoy
the fruits of your investment made too and / or enjoy the comfort of your dream house.
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However in order to obtain an exemption, you are required to submit appropriate and
adequate proof of payment of rent for the entire period for which you want to claim
exemption. But, if you as an employee are getting an HRA of less than Rs 3,000 per month, you
are not required to provide a rent receipt to your employer.
Also you need to note an important change in HRA rules introduced in FY 2013-14. As per the
circular issued by the Central Board of Direct Taxes (CBDT) in October 2013, if you are paying an
annual rent of more than Rs 1.00 Lakh or Rs 8,333 per month, then you will have to report the
Permanent Account Number (PAN) of your landlord to the employer (Earlier you had to furnish
a copy of the PAN card of your landlord only if your annual rent exceeded Rs 1.80 lakh, or Rs
15,000 per month). If your landlord does not have a PAN then you need to file a declaration to
this effect from your landlord along with the name and address of the landlord.
The maximum exemption which you can enjoy for HRA is as under:
In Chennai/ Delhi/ Kolkata/ Mumbai
In other cities
Least of:
Least of:
Actual HRA
Actual HRA
50% of salary*
40% of salary*
*Salary for this purpose includes basic salary + dearness allowance (if in terms of service)
(Source: Personal FN Research)
Here a noteworthy point is, if your rent is very high and if you are not fully covered by the HRA
limit, then it would be wise to pick a company leased accommodation (if the company in which
you work in offers so), as this company leased accommodation would constitute to be the perk
value and would be taxed @ 15% of your gross income. Sure, the perk value is taxable but it still
works out to be more effective for tax planning, than opting for a HRA that doesnt fully cover
your rent.
Leave Travel Concession (LTC):
While you may be fond of opting for a leave and travel with your family for a holiday, dont
forget to assess what tax benefits are extended to you for doing so. The Income Tax Act
provides you tax concession if you have actually incurred expenditure on your travel fare
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anywhere in India, either alone or along with your family members (i.e. your spouse, children,
parents, brothers and sisters who are mainly or wholly dependent on you). But such exemption
is limited to the extent of actual expenses incurred i.e. you can claim exemption on the LTC
amount OR the actual amount incurred, whichever is lower.
Also the exemption extended to you under the Act is for two journeys performed in a block of
four calendar years. And the current block of four calendar years is from 2014 to 2017 (i.e. from
January 1, 2014 to December 31, 2017); the next block will be from 2018 to 2021 (i.e. from
January 1, 2018 to December 31, 2021).
As per the present Income Tax Rule, the exemption would be available to you in the following
manner:
Particulars
Where the journey is performed by air
Amount exempt
Amount of "economy class" airfare of the national carrier by the
shortest route to the place of destination or amount actually
spent, whichever is less.
Amount of air-conditioned first class rail fare by the shortest
route to the place of destination or amount actually spent,
whichever is less.
Air-conditioned first class rail fare by the shortest route to the
place of destination or amount actually spent, whichever is less.
In case you do not avail of a LTC or if you travel just once in the four calendar year of the block
period (2014-2017), then you will be allowed to carry-over the concession to the first calendar
year (2018) of the next block 2018-2021, but for only one journey. In addition to this, you will
be eligible to travel two more times in the next block.
It is vital that you utilise your leaves wisely and travel to any of your loved holiday destination in
India, as this will not only de-stress you, but also help you in reducing your tax liability. After
you have returned from your journey, in an excitement please do not tear your travel tickets /
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boarding pass (for air travel) as you need to submit them to your employer so that your tax
liability can be reduced.
If you are married with kids, and if your employer is providing with education allowance, then
do not refrain from availing it, as this can again help you in reduction of your tax liability. The
exemption extended to you under the Income Tax Act is Rs 100 per month for a maximum of
two children (i.e. in other words Rs 2,400 p.a. totally). Similarly, if your children are staying in a
hostel then a maximum of Rs 300 per month per child but subject to a maximum of two
children will be available to you as an exemption (i.e. Rs 7,200 per annum).
Meal Allowance through Food Coupons / Food Cards:
While you may be tempted to increase your NTH (in the cash form) you should not ignore to
avail the food coupon / food card benefit, if your employer provides one. This is because
effective utilization of the same will enable you to effectively reduce your tax liability along with
getting the feeling of being pampered by your employer.
The exemption amount which you can enjoy is Rs 50 per meal available only in respect of meals
during office hours. However, the exemption is also available in case your employer provides
you food vouchers / cards of value of which can be used at eating joints. The exemption limit in
this case is restricted to Rs 2,500 per month for a food voucher / card value.
So remember, if your employer is providing you food coupon / card dont refrain from availing
the same for a maximum voucher value of Rs 2,500 every month.
Medical reimbursement:
During the year if you and / or your family members have visited a doctor or bought medicines
from a chemist, all the expenditure incurred by you and / or your family members during the
year for medical purpose too would help you in reducing your tax liability.
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As per the Income Tax Act, the maximum amount of deduction available with you is Rs 15,000
for every financial year, and to claim the same you are required to submit, to your employer,
the medical bills for the financial year stating the amount in total which you intend to claim.
Similarly, it is noteworthy that if your medical insurance premium is paid by the employer or
reimbursed, then that too will not be subject to tax. Also if your employer is providing medical
facility in hospital or clinic owned by him, local authority, Central Government or State
Government then medical expenditure incurred under such a hospital too, would not be
subject to any tax.
So, next time when you get your pay cheques in hand please evaluate the aforementioned
points, and assess whether every component in your salary is structured well and to do so you
can certainly talk to your Human Resource (HR) department, as they too may help you on this.
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Nil
15%
Nil
*In case of equities, the holding period over 1 year is Long Term for LTCG tax, while less than 1 year is Short Term for STCG tax.
(Source: Personal FN Research)
As can be seen in the table above, for equity oriented funds, while the tax implication for long
term capital gains (LTCG) and dividends for individuals are nil, Short Term Capital Gains (STCG)
are taxed at 15%.
For non-equity oriented funds, long term capital gains are taxed at 20% with indexation.
Indexation lets an individual adjust the purchase price of the mutual fund units by taking into
account inflation, thus enabling you to reduce your tax outgo. Short term capital gains for nonequity oriented funds are added to the total income and taxed as per ones tax slab, which
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means that if you come in the 30% tax bracket, your short term capital gains arising from the
sale of mutual fund units will be taxed at 30%. In case of dividends, as the fund house will have
to pay Dividend Distribution Tax (DDT), they are tax free in the hands of the investor.
Therefore, it is important to consider the tax implications before investing or redeeming your
money from mutual funds.
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The first due date is September 15, where you are required to pay at least 30% of the tax
payable as advance tax.
The second due date is December 15, where at least 60% needs to be paid.
And the third instalment, is on March 15, where 100% of the tax payable needs to be paid.
If you defer any of these payments, then a simple interest of 1% per month would be levied as
penalty.
Lose the rights of make any amendments:
Did you miss some key information or forgot to claim a significant tax saving benefit while filing
your return? Well, there is always a chance of such human error while filing an I-T return. If you
dont file your I-T returns before the due date, you would not be allowed to make any changes
later in case of any errors while filing returns. But if you have filed your returns by the
aforementioned deadline, you enjoy the right to correct any errors and make changes in your
tax form any number of times before March 31 or till the time your returns are assessed,
whichever is earlier.
Lose your chance of carrying forward losses:
You may have a capital gain loss in your investment portfolio. Income tax act allows you to carry
forward losses to adjust against future gains.
If you havent filed your returns on or before the due date, you are disallowed from carrying
forward losses. But if the returns are filed by the due date, carry forward of losses for the next 8
years is allowed to adjust it with gains that you may make in the future.
Besides, not filing your I-T return on time bring along other peril such as:
-
Risk of prosecution under the relevant provisions of the Income Tax Act, 1961 which may
also lead to imprisonment from 6 months to 7 years plus the fine
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Impediments in obtaining bank loan or even a credit card (as I-T returns often validate your
credit worthiness before financial institutions)
Impediments in your visa application approval, if you have plans to travel abroad
Hence, make sure that you file your I-T returns and pay your taxes before the due date. Filing IT returns apart from being viewed as a legal responsibility, should also be considered as a moral
responsibility. It earns you the dignity of consciously contributing to the development of the
nation. This apart, your I-T returns validate your credit worthiness before financial institutions
and make it possible for you to access many financial benefits such as bank credits etc.
Even if you arent earning income which comes under the tax bracket; it is always advantageous
to file your returns. But while you do so, make sure the correct form is filed.
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Form Number
Exempt income
Lottery winnings
Foreign asset
Pension income
Foreign income
Lottery winnings
Income from horse races
Own more than 1 house property
Agricultural income more than Rs 5000
Foreign asset
Foreign income
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Lottery winnings
Foreign asset
Foreign income
Account numbers for all the accounts (current and savings) held at any time during the
previous year for which income is being reported; and
IFSC Codes
Disclosure of assets held by foreign nationals: Foreign nationals who had acquired assets
when they were non-residents wont be required to disclose them, as long as no income is
being earned from them in the previous year
Moreover, CBDT has made it mandatory for all individuals with a taxable income of over Rs
5 lakh to file their I-T returns online.
Remember that if you have an Aadhar card and have fed the same while filing your I-T returns,
then the process of filing return online would be hassle-free and even obtaining refunds may
not be delayed. This would do away with the risk in sending verification forms physically to the
CPC in Bengaluru, where forms may not reach on time or even getting lost in transit.
Nevertheless, even if you do not have an Aadhar card, go ahead and file your I-T return on time
and make sure you make all necessary disclosures.
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XII - Conclusion
In the previous pages of this guide we have seen that your extra step towards the tax planning
way would enable you to wisely reduce your tax liability. Remember waiting till the eleventh
hour to do your tax planning exercise, is not going to help in a big way. It would just lead to tax
saving and not tax planning. Just to reiterate, while you have host of tax-saving investment
options available under Section 80C, following an asset allocation model (for your tax planning
exercise), in accordance to your age, ability to take risk and investment horizon is going to make
your tax saving portfolio look more prudent. In other words, tax planning as an exercise is not
just limited to filing returns and paying taxes. It is a process whereby your larger financial plan
needs to be taken into consideration after accounting for the above mentioned factors.
Also, one needs to look beyond the ambit of Section 80C, as you may exhaust the limit of Rs
1.50 lakh and still find it insufficient to reduce your tax liability. So, you should access the other
deductions available under Section 80 (as mentioned above) and the exemptions too.
Moreover, while you are working hard with an organisation to make a living; remember to
effectively know and structure each component of your salary income in order to effectively
save more tax, which in a way will help you in buying all the comforts and luxuries in life.
PersonalFN thinks that while you must take help of your tax consultant while filing your returns
and seek opinion from him, a self-study approach on your tax planning exercise is also quite
necessary as one should be well versed with at least those tax provisions which affect us
directly. And with that note we wish you all Happy Tax Planning!!
General Disclaimer: This communication is for general information purposes only and should not be construed as a
prospectus, offer document, offer or solicitation for an investment or investment advice.
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Contact us
Head Office
Mumbai
101, Raheja Chambers ,
213, Free Press Journal Marg,
Nariman Point,
Mumbai - 400 021.
Tel: +91-22-6136 1200
Email: info@personalfn.com
Website: www.personalfn.com
CIN: U65990MH1989PTC054667
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