It's that time of the year when your office asks for your tax-saving investment plans for the new financial year.
Here's a dummies' guide on the tax breaks available to a salaried individual and how to make the most of them
EVERY year as the financial year comes to a closure, like most of the salaried taxpayers, you start scrambling for arranging tax-related investments and documents that you need to submit to your organisation to save your hard-earned money. Tax saved is income earned.
There are numerous ways and opportunities available to you so that you can minimise your tax liability legally. Although Albert Einstein had once admitted "the hardest thing in the world to understand is income tax", it really does not require a genius to understand taxation and plan tax saving options.
As the year has just started, it is the right time to plan for a higher take home pay. It is prudent to start deciding on your investments from the beginning to avoid payment of additional taxes from your coffers. Here are a few tips: Structure your salary: As per the law, tax is required to be deducted at source by an employer. In most companies, the employees are given the option of structuring their salaries tax-efficiently to minimise their tax burden.
Some ways of structuring salary could be as follows – individuals staying in a rented accommodation may structure part of their salary towards house rent allowance and keep it in line with the rent paid for the accommodation. Medical reimbursements up to Rs 15,000 per annum can be claimed as exempt from tax if the employee submits supporting bills.
An individual is also allowed tax exemption towards transport allowance up to Rs 800 per month. Additionally, depending on the company policy, employees may also opt for an employer-provided car for official and personal purposes. The same will be taxed as a perquisite in the hands of the employee at a discounted value of Rs 2,400 per month and an additional Rs 900 per month if a chauffeur is also provided with the car.
Any amount that is recovered from the employee will be reduced to arrive at the perquisite value. The above options may bring some breather from taxes.
Buy a house: If you plan to buy a house and obtain a loan for the same, it may help in minimising your tax.
In case of a self-occupied property, an exemption up to Rs 1,50,000 can be claimed with respect to the interest paid on such loan. Additionally, the repayment of principal paid can also be claimed as a deduction up to Rs 1,00,000 under section 80C of the act.
An option that married couples may explore is buying a house jointly and applying for a joint housing loan and then both will be able to claim a deduction for the principal and the interest amounts paid separately from their incomes to the extent of their respective share in the house and the loan.
Capital gains: Gains from sale of a capital asset are taxed as capital gains.
Broadly, if the assets such as real estate and gold are held for a period of three years or more, then the gain arising from the sale of such assets are long-term capital gains and are taxed at the rate of 20 per cent, subject to indexation. If the assets are held for less than three years and sold, then the gain on sale is short-term capital gain, which is taxed at the normal rate, that is, at the rate of 30 per cent if the person is in the highest tax bracket.
On the other hand, if such assets are held for less than one year and then sold, the gains, subject to certain conditions, are taxed at the rate of 15 per cent. Thus, individuals should plan to invest their money in line with their financial goals.
Gifts: Gifts are taxable subject to a few exceptions. Gifts received from anyone during special occasions such as marriage are exempt from tax. Any sum of money received as gift up to Rs 50,000 from a person other than the specified relatives is also exempt from tax.
Proposed investments: There are many investment options under section 80C of the act that enable tax payers to reduce their taxable income by a maximum of Rs 1,00,000. Some of the prominent options are contribution to employees' provident fund (EPF), public provident fund (PPF), national savings certificate (NSC) and life insurance premium. Keeping in view the importance of education in our country, the government allows the taxpayer to claim deduction for paying tuition fees of his child up to Rs 1,00,000 for his full time education.
Besides Section 80C, an individual may invest additional Rs 20,000 in infrastructure bonds which is allowed as deduction under section 80CCF. Taking medical insurance for self/spouse/dependent children and parents, allows a tax benefit u/s 80D of the act of up to Rs 15,000. If the medical insurance is being taken for a senior citizen, a deduction of Rs 20,000 can be availed.
In case an individual has taken an education loan, the interest payable for that loan is deductible from the taxable income under section 80E of the act.
If an individual plans to make a donation to certain other specified institutions/funds, an exemption of the amount, either 100 per cent or 50 per cent as the case may be, can be claimed under section 80G of the act.
Also, an individual can claim a deduction under section 80GG of the act, in case he is staying in a rented accommodation and does not own a house property in the city of workplace.
The amount allowed as deduction would be the minimum of the rent paid in excess of 10 per cent of the total income or Rs 2,000 per month or 25 per cent of the total income as specified.
However, if he is already claiming an exemption for the rent paid from the HRA received from his employer, he cannot claim the deduction again under this section.
Individuals who see a liquidity crunch in the near future should opt for short term investments, and those who have spare funds for a long period of time can look at investing in long term avenues that are more secure and give a higher return on investment.
