Tax Planning

Introduction

Proper tax planning is a basic duty of every person which should be carried out religiously. Basically, there are three steps in tax planning exercise. These three steps in tax planning are:

Calculate your taxable income under all heads ie, Income from Salary, House Property, Business & Profession, Capital Gains and Income from Other Sources.

Calculate tax payable on gross taxable income for whole financial year (i.e.,From 1st April to 31st March) using a simple tax rate table, given on next page.

After you have calculated the amount of your tax liability. You have two options to choose from:

1. Pay your tax (No tax planning required)
2. Minimise your tax through prudent tax planning.
3. Most people rightly choose Option ‘B’. Here you have to compare the advantages of several tax saving schemes and depending upon your age, social liabilities, tax slabs and personal preferences, decide upon a right mix of investments, which shall reduce your tax liability to zero or the minimum possible.

Every citizen has a fundamental right to avail all the tax incentives provided by the Government. Therefore, through prudent tax planning not only income-tax liability is reduced but also a better future is ensured due to compulsory savings in highly safe Government schemes. We sincerely advise all our readers and clients to plan their investments in such a way, that the post-tax yield is the highest possible keeping in view the basic parameters of safety and liquidity

Tax Planning – Tax Saving

After assessing your tax liability, the next step is tax planning. It involves selecting the right tax saving instruments and making investments accordingly.

Deductions from Taxable Income:

Deduction under section 80C

This new section has been introduced from the Financial Year 2005-06.

Under this section, a deduction of up to Rs. 1,00,000 is allowed from Taxable Income in respect of investments made in some specified schemes.

Specified Investment Schemes u/s 80C and u/s 80CCC (1)

1. Life Insurance Premiums
2. Contributions to Employees Provident Fund/GPF
3. Public Provident Fund (maximum Rs 70,000 in a year)
4. NSC (National Savings Certificates)
5. Unit Linked Insurance Plan (ULIP)
6. Repayment of Housing Loan (Principal)
7. Equity Linked Savings Scheme (ELSS) of Mutual Funds
8. Tuition Fees including admission fees or college fees paid for full-time education of any two children of the assessee (Any development fees or donation or payment of a similar nature shall not be eligible for deduction).
9. Infrastructure Bonds issued by Institutions/ Banks such as IDBI, ICICI, REC, PFC etc.
10. Interest accrued in respect of NSC VIII issue.
11. Pension scheme of LIC of India or any other insurance company.
12. Fixed Deposit with Banks having a lock-in period of 5 Years

Notes:

1. There are no sectoral caps (except in PPF) on investment in the new section and the assessee is free to invest Rs. 1,00,000 in any one or more of the specified instruments.
2. Amount invested in these instruments would be allowed as deduction irrespective of the fact whether (or not) such investment is made out of income chargeable to tax.
3. Section 80C deduction is allowed irrespective of the assessee’s income level. Even persons with taxable income above Rs. 10,00,000 can avail the benefit of section 80C.
4. Some of the popular pension plans are Jeevan Suraksha by LIC, Life Time Pension By ICICI Prudential Life Insurance, Aviva Life – Pension Plus by Aviva Life Insurance, Max-Easy Life policy by Max New York Life, Nirvana Plus by Tata AIG Life Insurance etc.

Please note that because the deduction is allowed from taxable income, the exact savings in tax will depend upon the tax slab of the individual. Thus, a person in the 30% tax slab can save income tax up to Rs. 30,900 (or Rs. 33,990 if annual income exceeds Rs. 10,00,000) by investing Rs. 1,00,000 in the specified schemes u/s 80C.

Deduction under section 80D.

Under this section, deduction of up to Rs 40,000 can be claimed in respect of premium paid by cheque towards health insurance policy of various General Insurance companies like Royal Sundaram Health Shield Gold, Reliance Healthwise etc. Such premium can be paid towards health insurance of spouse, dependent parents as well as dependent children.as per following table:

Accordingly a person who is falls/in the 30% tax bracket can save income tax up to Rs 4,635 (or Rs. 5099 if the annual income exceeds Rs 10,00,000) by paying Rs 15,000 as premium for Mediclaimâpolicy in a year.

Deduction under section 24(b)
Under this section, interest on borrowed capital for the purpose of house purchase or construction is deductible from taxable income up to Rs. 1,50,000 with some conditions to be fulfilled