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Tips for easing your tax burden
Tax-saving is the first level of financial planning. If one is salaried this would start from the declaration of investments that will be made at the beginning of the financial year. Execution on the same would follow during the year with culmination of providing tax proofs at the end of the year.
While no declarations need to be made for the non-salaried, you need to finish your investment during the year and proofs only need to be submitted while filing your tax returns.
You not only save tax from these avenues, but also get the returns that the avenue provides. There is wide range of investment avenues that you can choose from. This year there are additional deductions available on the infrastructure deposits to the extent of Rs 20,000.
Net taxable income = Gross salary Tax free perquisites Exemptions Deductions under different sections
On this net taxable income, you apply the personal tax rates and cess on the taxes computed. (God is kind, part of my income is tax free!).
If there was one free lunch that the Income Tax Department has generously extended towards the tax saving hungry salaried class, then that is called the 'Exemptions'.
These are income components whereby, if you plan right, not a single penny goes out of your pocket towards taxes. However, keep in mind there are limits for most of these and hence provides little respite for high tax playeRs Some of the exemptions are listed below in the table below:
| Permitted exemptions |
| Amount received from life insurance policies |
| House rent allowance provided least of these conditions are met: |
| Actual amount of HRA |
| Rent paid: 10 per cent of basic salary |
| 3. 5 per cent of salary in 4 metros or 40 per cent salary for other cities |
| Conveyance allowance of Rs 800 per month is the limit |
| Leave travel concession: Subject to the following conditions |
| 2 trips in a block of 4 years |
| Amount not exceeding air-economy or Rail-AC 1 |
| Fare shall be for journey to the place of destination by the shortest route |
Spend more, get tax benefit
Absurd as it may sound, but the golden rule is consumption will lead to growth of the economy. However, you cannot go on a shopping spree buying luxuries or durables and claim tax benefit. The company extends tax benefit only to a select few items which are termed as perquisites:
Tax-free perquisites include food coupons, telephone bills, medical re-imbursements.
There are a few perquisites that trigger some additional income called perquisites. Benefits like company car, fuel and maintenance is one of them that would still save taxes compared to the peak tax rates.
These can go a long way in reducing your tax liability.
Deduct my taxes, I have made investments
There is also relief for someone who is ready to spill the dough. Two of the most popular avenues for deductions which will provide benefit u/s 80C (also the new 80CCF) and 80D, we have covered the main deductions for your reference:
| Section | Option | Amount |
| 80C | Equity linked mutual funds, National Saving Certificates, Provident Fund, Insurance, Pension plan, Home loan principal, Tuition fees | Maximum Rs 1,00,000 (PPF up to Rs 70,000 only) |
| 80CCF | Infrastructure Bond (As per Budget 2010-11) | Maximum Rs 20,000 |
| 80D | Mediclaim premium | Maximum Rs 15,000 (Rs 15,000 additional if availed for parents); Rs 20,000 for senior citizens |
| 80DD | Treatment of handicap dependants | Fixed at Rs 50,000 |
| 80DDB | Treatment of dreaded diseases | Maximum Rs 40,000 |
| 80E | Repayment of higher education loan | No limit (For interest only) |
| 80G | Contribution towards charity | 100 per cent or 50 per cent allowed (cannot exceed 10 per cent of taxable income) |
Liability with a 'twist'
Apart from exemptions and deductions, the home loan liability is another favourite amongst salaried individuals.
It is often seen that, individuals on the pretext of availing tax benefit, fail to understand that this is a liability and one needs to avail mortgage / life cover.
The deduction available towards home loan is as stated below:
| Section | Permitted limits |
| 24(2) | Self-occupied property |
| Interest on borrowed capital for purchase/construction deduction: Currently Rs 150,000 (Self-occupied property) | |
| 24(1) | If house given on rent |
| Deduction of 30 per cent available on rental income on net annual value (Rent minus taxes) for property given out on rent in addition to deduction of interest |
It all boils down to slabs
After calculation of taxable income, one can actually calculate the tax payable for himself/herself. The table below gives the tax slab available for an individual assessee:
Tax slab:
| Income tax slab (in Rs) | Tax |
| Up to Rs 1.6 lakh (Men) | Nil |
| Up to Rs 1.9 lakh (Women) | Nil |
| Up to Rs 2.4 lakh (Senior citizens) | Nil |
| Rs 1.6 lakh to Rs 5 lakh | 10 per cent |
| Rs 5 lakh to Rs 8 lakh | 20 per cent |
| Greater than Rs 8 lakh | 30 per cent |
A cess of 3 per cent will be charged on tax payable based on the tax slabs above.
Example:
The net tax payable of a person earning Rs 4,00,000 per annum in salary is shown in the table below. His basic salary is Rs 10,000 per month, conveyance allowance is Rs 800 per month and he is paying PF of Rs 1,250 per month.
| Particulars | Amount |
| Gross salary | Rs 4,00,000 |
| HRA (least of 3 conditions) | Rs 48,000 |
| Conveyance | Rs 9,600 |
| Total taxable income (After exemptions) | Rs 3,42,400 |
| PF | Rs 15,000 |
| Insurance | Rs 40,000 |
| Infrastructure bonds | Rs 20,000 |
| Fixed deposit | Rs 25,000 |
| Mediclaim premium | Rs 15,000 |
| Net taxable amount | Rs 2,27,400 |
| Tax payable | Rs 6,740 |
| Cess @ 3 per cent | Rs 202 |
| Net tax payable | Rs 6,942 |
Without the exemptions and deductions, he would have ended up paying Rs 24,720 in taxes and that translates towards a savings of Rs 19,838 per annum. This can be routed towards savings, which will enable one to build a corpus for your financial goals.
Things to keep in mind
Here's a summary of what you should be doing to save tax:
- Declare tax-saving investments that you are planning at the earliest
- Implement the tax-saving investments right at the beginning of the year. You will be in a position to use an SIP approach for the market-linked investments. This would also help reduce risk
- Avail HRA / LTA / medical re-imbursement
- Understand the salary structure to get maximum benefits (especially all the tax free perquisites)
- Use a combination of short / long / medium term options while investing
- If it is difficult to cough up the tax saving investments, use the shortest term options so that you can rotate the money after every 3 years. You can also use a dividend option on your ELSS funds in that case
- Put your money to use but, tread with care. Prioritise tax-efficient return avenues
- Align all your tax-saving investments with your financial goals
- Your life and your health (and family's) is of prime importance, avail a cover, you will also save tax
Anil Rego is the founder and CEO of Right Horizons , an investment advisory and wealth management firm that focuses on providing financial solutions that are specific to customer needs.