Time to complete your tax planning:

The current financial year has come to an end and it's time for individuals to give the final touches to their income tax planning and savings.

There are many sections defined under the Income Tax Act that enable individuals to save tax by investing in various qualified instruments.

It's time for investors to review their investments in tax-saving instruments and look at possibilities to save maximum possible tax in the current financial year.

These are some of the major sections that enable you to reduce your income tax liability:

Section 80C:

Section 80C of the Income Tax Act allows income tax exemptions to individuals on investments in certain instruments. The maximum limit to claim deduction under this Section is Rs 1 lakh.


You can invest Rs 1 lakh in one or more of these instruments to avail tax rebate under Section 80C.

Employee Provident Fund and Public Provident Fund
Life insurance (term insurance as well as endowment plans)
Pension plans
Equity-linked savings schemes (ELSS) of mutual funds
Specified government infrastructure bonds
Principal repayment of housing loans
National Savings Certificates (NSC) and interest accruals on previous years' NSCs can also be added to the Section 80C limit

Infrastructure bond:

You can invest in specified long-term infrastructure bonds to claim a deduction up to Rs 20,000. The tax rebate for infrastructure bonds is in addition to Section 80C.

Home loan benefits: Housing loans provide tax relief. The principal repayment of a housing loan attracts rebate under Section 80C up to Rs 1 lakh and the interest payment attracts a rebate of Rs 1.5 lak

Medical insurance:

In addition to Section 80C, there is Section 80D that enables an individual to claim rebate on mediclaim policies. Payment of premium for medical insurance (mediclaim) is eligible for tax exemption up to Rs 15,000. You can avail this deduction on medical insurance premium paid for yourself, spouse, parents and children.

Other deductions for salaried taxpayers: If your employer provides medical allowance, you can available an income tax deduction of up to Rs 15,000 per year by offering proof of the relevant expenses.

If the employer gives leave travel allowance as a part of your salary, you can avail income tax deduction on travel expenses (family travel expenses can also be covered if family travels along with the taxpayer).

Leave travel allowance can be availed twice in a block of four calendar years. Presently, the block applicable is from 2010 to 2013. Leave travel allowance can only be availed on the expenses incurred on domestic travel. However, the travel mode can be anything (taxi, bus, train or air).

Time to review savings:

Since it is the end of the financial year, it is advisable for you to review your tax savings and planning, and explore available options to minimise the tax liability.

These are some factors you should keep in mind while taking decisions on saving tax:

First of all, try to exhaust the quota for Section 80C.

You can look at various options to invest and save tax under Section 80C

Salaried people can also look at saving tax by planning the expenditures under medical allowance, child education allowance and conveyance allowance

Investing in a medical insurance policy is another option to save tax, if your Section 80C limit is already exhausted. However, it is not advisable to take another medical policy just for the sake of saving tax, if you already have one.
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Source: ET

A better way to save tax:

Following are some major investment avenues that offer tax benefits and should form a part of your tax-planning portfolio.

1. Public Provident Fund (PPF)   Eligibility : Any individual who has invested in PPF   Investment amount : The minimum and maximum investment amounts are Rs. 500 and Rs. 70,000 p.a. respectively   Returns & Tenure : Public Provident Fund (PPF) is an assured return scheme which is compounded @ 8% annually (i.e. it offers guaranteed returns) and that runs over a 15 year period   Deductions : Investments in PPF are eligible for Section 80C deductions. Also the interest income from PPF is tax-free You can make smaller contributions to the PPF account. The same will help you build a risk-free corpus for the future. 2. National Savings Certificate (NSC) Investment amount : The minimum investment amount is Rs. 100, while there is no upper limit for investing in NSC   Returns & Tenure : National Savings Certificate (NSC) is another assured return scheme of 8% which is compounded half yearly. An investor is required to make a lumpsum investment that matures after 6 years   Deductions : The interest income from NSC is paid on maturity; the same is taxable. Interest accrued on NSC is considered to be reinvested; hence, it is eligible for reinvestment under Section 80C 3. Equity Linked Savings Scheme (ELSS) Eligibility : Any individual who has invested in an ELSS   Investment amount : The minimum investment amount is Rs. 500, while there is no upper limit for investing in ELSS   Return & Tenure : No fixed returns as money is invested in equities. There is a 3-year lock-in period   Deductions : Investments in ELSS are eligible for Section 80C deductions. Also, the interest income from ELSS is tax-free except for STT it is payable 4. Life Insurance/Term plans/ ULIPs   Eligibility : Any individual who has invested in Life insurance/Term plans/ ULIPs   Investment amount : It varies with different plans   Return & Tenure : For ULIPS, no fixed returns; it depends upon the performance of the scheme and the lock-in period is  3 years   Deductions : The amount you withdraw is tax free 5. Employee Provident Fund (EPF)   Eligibility : It is available only for salaried employees   Investment amount : The employee is free to increase his/her contribution but the employer need not increase this beyond the mandatory 12% of the basic salary   Return & Tenure : The rate of return is 9.5% p.a.   Deductions : Investments in EPF are eligible for deductions under Sec 80C. The amount you withdraw is tax free 6. Tax-saving fixed deposits   Eligibility : Any individual who has invested in a Tax-saving fixed deposits   Investment amount : The minimum and maximum investment amounts are Rs. 100 and Rs. 1,00,000 p.a. respectively   Return & Tenure : At present most banks offer a rate of return in the range of 8-8.5% & an additional 0.5% is offered to senior citizens. Tax-saving fixed deposits have a 5-year investment tenure   Deductions : Investments in tax-saving FDs are eligible for deductions under Sec 80C. The interest income from tax-saving fixed deposits is chargeable to tax and subject to TDS (tax deduction at source) Tax-saving fixed deposits can be utilised like NSC, to meet future needs that will arise over a predictable period. 7.  Senior Citizen Saving Scheme Eligibility : Any individual who has invested in a Senior Citizen Saving Scheme   Investment amount : The minimum and maximum investment amounts are Rs. 1,000 and Rs. 15,00,000 p.a. respectively   Return & Tenure : At present most banks offer a rate of return in the range of 9.5% payable quarterly. Tax-saving fixed deposits have 3 - 5 year investment tenure   Deductions : Investments in SCSS are eligible for Sec 80C deductions. The amount you withdraw is tax free 8. Investment bonds   Investment amount : The investment should not exceed Rs. 1,00,000   Return & Tenure : These are issued by infrastructure companies at different rates of interest for a period of 3-5 years   Deductions : Investments in bond are eligible for Sec 80C deductions. The principal amount and the interest earned are both tax-free 9. Health Insurance   Eligibility : Insurance for the health of the assessee, or spouse, or [dependent] parents or dependent children   Investment amount : Maximum Rs.15,000 (Rs. 20,000 in case any person insured is a senior citizen) This deduction under Section 80D is over and above the deduction of Rs. 1 lakh under Section 80C. 10. Home Loan   Eligibility : Any individual who has availed for home loan   Deductions : The principal amount & the interest paid are both tax-free Under section 24(b), for interest paid the maximum deduction permissible in a financial year for the original loan (if any) plus for any additional loans taken is Rs. 1,50,000.

In addition to the above, principal repayment of the loan/capital borrowed is eligible for deduction of upto Rs. 1,00,000 (in a financial year) under Section 80C

Deductions:

Section 80C

Investments upto Rs.1 lakh are eligible for exemption under this section. Investments in NSC, PPF, FD with scheduled banks and Life Insurance are some of the options available under this section.

Section 80D

Under this section, medical insurance premiums of upto Rs.15,000 and upto Rs. 20,000 (for senior citizens) are eligible for deduction.

Section 10D

Any sum received under a life insurance policy, including the sum allocated by way of bonus on such a policy is exempt from tax. (certain exceptions apply in special cases)

Section 24(b)

Interest upto Rs.1.5 lakh per year paid on a housing loan is eligible for deduction under this section.

Section 80G

Under this, contributions/donations made to specified organisations and/or charities are eligible for deduction (50% or 100% depending on specific cases)

Section 80E

Under this section, interest paid on an education loan is eligible for deduction and can be availed for a maximum of 8 years.

Tax-saving scheme for investors who are averse to equities

Now is the time to work out the best tax-saving schemes. Equity Linked Saving Schemes (ELSS) and ULIPs (Unit Linked insurance Plans) have had been the flavour for past couple of years and all traditional saving instruments were relegated.

But the things sound different this year. The retail investors are still cautious about investment in equities as revealed by MF industry’s AUM (assets under management) composition in the past few months.

Obviously, investors are looking for alternative tax-savings instruments, which are safer and steadier than high volatile equities. For them, ET Intelligence Group is revisiting all these forgotten saving avenues.

Most of such assured returns on tax-saving products are offered by schemes floated by the Indian Postal department. One such product is National Saving Certificate (NSC).

This scheme is specially designed for IT (Income Tax) assessees. The amount invested under NSC (maximum up to Rs 1 lakh per annum) is exempted from tax liability. Such invested amount fetches a fixed rate of interest at 8% compounded half yearly. Thus, the scheme combines growth in money with reduction in tax liability.

Buying NSC is very easy. Any individual can purchase NSC in the denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000 from any post office in the country. Payments can be made in cash, cheque or demand draft (DD) drawn in favour of the post master.

However, the issue of certificate will be subject to the realisation of the cheque, pay order, DD. To make things easy, one may facilitate the whole process through an authorized agent free of cost.

NSC is a long-term investment option offering assured returns. NSC is issued for a maturity period of six years.

Also, the rate of return is fixed at 8% per annum compounded half yearly. This 8% is not sensitive to interest rate cycle.

It means the rate offered on NSC does not fluctuate like deposit rates offered by banks on fixed deposits.

Unlike the bank FDs, there is no option for periodical interest payment. Rather the interest paid annually gets reinvested every year and the accrued interest is paid along with the principle at the time of maturity.

If someone buys NSC worth Rs 50,000 today, he/she is entitled to get around Rs 80,000 at the end of 6th year. Instead if someone parks the equivalent amount in bank deposits for six years at present, the maturity proceeds will be around Rs 77,000 (interest + principle). It is because the deposit rate offered by banks is lower around 7-7 .5% (It differs from bank to bank).

Obviously investment in NSC at this juncture looks attractive than bank deposits.

The added advantage is that NSC can also be transferred from one post office to another. The important thing to note that there is no upper limit on investment in NSC.

However, investment up to Rs 1,00,000 per annum qualifies for IT Rebate under section 80C of IT Act.

All these may tempt one to go for NSC, but there are a few disadvantages too. Firstly, NSC is not liquid instrument. Once the NSC is purchased, one cannot withdraw money from it. The premature withdrawals can be done under specific circumstances only, such as death of the holder, forfeit by the pledge or under court's order.

Another major disadvantage is interest paid at the time of maturity is not tax-free. Only the soothing factor in that the interest accrued on NSC does not attract TDS (no tax deduction at source).

In short, considering the lower deposit rates offered by banks, NSC could be an ideal investment for those investors who are seeking tax benefits on a long term basis and are not bothered about liquidity.
~ET

TAX SAVING

Q1. How do I save tax?

A.You can reduce your tax liability by taking advantage of the various tax deductions.Under Section 80C of the Income tax Act, 1961 you can reduce your total taxable income by up to Rupees One lakh by making specified investments. There are other sections of the Act as well like 80 D, 80 E, and Section 24 under which you can reduce your total taxable income.

Q2. What are the income tax slabs for the current financial year 2009-10?

A.Tax rate for Individual are revised as under:

Income Range	Individual	Woman	Senior Citizen
Upto Rs. 160,000	Nil	Nil	Nil
Rs. 160,001 to Rs. 190,000	10%	Nil	Nil
Rs. 190,001 to Rs. 240,000	10%	10%	Nil
Rs. 240,001 to Rs.300,000	10%	10%	10%
Rs. 300,001 to Rs. 500,000	20%	20%	20%
Above Rs. 500,000	30%	30%	30%

Previously existing surcharge of 10% on individuals  has been abolished. Education Cess @ 3% remains unchanged.

Q3. What are the various categories of deduction?

A. Currently Income tax Act, 1961 provides for following deductions to reduce the tax liability

• Deduction under Section 80C  - Various Investments options like Insurance ,PPF , ELSS etc.
• Deductions under Section 80D – Medical insurance premium
• Deductions under Section 80E – Interest on Education loan 
• Deductions under Section 80 G - Donation
• Deductions under Section 24  - Interest on loan for purchase of house property

Q4. How do I calculate my tax liability

A. You can calculate your Net taxable income by reducing the various deductions available under sections 80C to 80U and Section 24 (few examples were given in Question No-3) from your gross total income. (Gross total income is calculated by adding income under five heads –income from salary, house property, capital gains, business and profession & other sources.).You can then use the tax slabs applicable in your case to calculate tax liability for the year.

Q5. What facts should I consider while making my tax saving decision?

A. It is advisable that Investments in “tax instruments” should never be done merely to save taxes. The decision to invest should be made keeping in view security, long term goals, liquidity and returns (After-tax) like any other investments.