|Easy Tax Saving Tips Beyond Section 80C
It’s that time of the year again, when most people make their Tax Saving investments.
This article is not going to tell you that youshouldn’t wait till the last minute. You must make your tax saving investments diligently over the year.
We will only tell you what’s available, and what’s good for you, from a tax saving point of view.When we think about making tax saving investments, the first thing that comes to mind is Section 80C.But readers, slow down.
There are some things you need to keep in mind about Section 80C. And once we’ve gone through these things, we’ll see what else you can do, that does not involve making fresh investments, to save tax.Let’s finish off with 80C first and then we’ll move on to other deductions you can use.
First, Know Your 80C.
The most common investments people think of, when they think of 80C are PPF and ELSS..
But hang on.
- You’ve been contributing to your own Employee Provident Fund (EPF) all year.
Find out what this figure is from your friendly neighbourhood HR department, and make a note of it.
- Also, do you have a home loan? If yes, the principal repayment this year counts under 80C as well.
Call your bank / housing finance company and ask them for a copy of your amortization table to see how much principal you have repaid this year.
- Have you been sold a ULIP recently? If yes, then first read more about ULIPs and prepare yourself better, but also – your premium, or atleast part of your premium, is deductible under 80C too.
- Invested into any 5 year FDs in the last Financial Year? These funds count as well.
- Pension funds,
- National Savings Certificate,
- Senior Citizen Savings Scheme investments
- Investments into the National Pension Scheme
- Any life insurance premium you might be paying…
All of these investments are deductible under 80C.Total up everything that applies to you, and now you’ll know what you have left to invest under 80C to meet your Rs. 1 lakh deductible limit.Now that you know this, lets see where you can put this money.
- PPF: a well-loved option. Earning interest of 8.6% per year, with tax deduction on the investment, and no tax on maturity, these are all great qualities. This is definitely a good investment option. Remember to limit your investment to Rs. 100,000 per year, any investment above this amount does not get any tax deduction.
- ELSS: You can invest up to Rs. 1 lakh into a good equity linked savings scheme, it has a lock in period of 3 years and is currently tax free on maturity as it is equity. When the Direct Tax Code comes out, this might or might not change, we will have to wait and see.
- INSURANCE: Insurance is the avenue where you can get rebate u/s 80C upto Rs. 1 Lakh as well as the assurance that your family will be financially secured when you are not around. Maturity amount of will be tax free.
So remember, 80C involves a lot more than just PPF, ELSS and INSURANCE. Remember to submitproof of investment when quoting 80C investments on your tax return. Now we can see what else the IT Act has to offer.
New Scheme : The Rajiv Gandhi Equity Saving Scheme.
The Rajiv Gandhi Equity Saving Scheme is exclusively for first time retail investors with annual income of below Rs 10 lakh. The maximum investment permissible under the scheme is Rs 50,000 and the investor would get a 50% deduction of the amount invested from the taxable income for that year.
Got Health Insurance?
This is Section 80D.
A straightforward mediclaim policy can save you tax on the premium paid.
If you are paying premium for yourself, spouse and kids, you can avail up to Rs. 15,000 deduction per annum (Rs. 20,000 if you’re a senior citizen) and you can also avail deduction for premiums you are paying for your parents (Rs. 20,000 if they are senior citizens, Rs. 15,000 if they are not).
There’s a reason that the IT Act includes this deduction – because it’s important for people to have health insurance. So if you don’t have a simple mediclaim policy, do opt for one immediately and also make use of the tax benefits.
Taken an education loan?
This is Section 80E.
If you have taken an education loan for yourself, your spouse, your kids, or even of a child of whom you are a legal guardian, then every year you can avail a full deduction of the interest you are paying on the loan (capped at 8 years).
Living on rent?
Show your rent receipts to claim deduction using your HRA (House Rent Allowance) benefit available to you in your salary structure. You can avail the least of the following:
- Actual HRA received
- Rent paid in excess of 10% of your salary (Basic + DA)
- 50% of salary (Basic + DA) if you live in a metro, 40% of salary (Basic + DA) if you live in any other city
Claimed your medical bills reimbursement?
Like everybody else, you probably spend some money on medicines each year. Keep the bills (just like everybody else does), and claim a reimbursement up to Rs. 15,000 per financial year. This has to be on actual bills paid, and you have to produce the original bills. Speak to your HR department, they will ask you to fill up a simple form, produce the bills, and will adjust it with the allowance you are entitled to.
Have you taken a holiday anytime in this past year?
Kept your travel expense records? You can claim your Leave Travel Allowance as an exemption as well, for travel within India, for yourself and your dependents who have travelled with you. Speak to your HR department, fill a small basic form, produce your tickets, and you can claim your LTA peacefully.
Your Action Steps
Once you’ve done all these things, and saved tax because of them, remember, make your tax saving investments on time, and save yourself the trouble of running around at the last minute, and the unpleasant feeling of being nagged by your well-meaning financial planning company.
You can invest in your PPF and your ELSS through the year rather than at the very end. The next time you take a holiday, keep your travel expense records such as flight or train tickets for yourself and your dependents. Keep a shoe box aside to hang on to your medical bills through the year. And of course, plan your tax saving investments in line with your larger financial plan.
How Mom and Dad can cut your tax
Invest in their name if they are in a lower tax bracket: Every adult enjoys a basic tax exemption limit. For senior citizens (above 65 years),the basic exemption limit is ` 2.4 lakh a year. If any or both of your parents do not have a high income but you have an investible surplus, you can avoid tax by transferring money to them which can then be invested in their name.
There is no tax on such gifts and the income from the investments will be treated as theirs. There are plenty of options. The Senior Citizens Savings Scheme offers an attractive 9% return per annum. But the income is taxable and the investor must be over 55 years. The Public Provident Fund offers tax free income but there is a limit of ` 100,000 a year. Invest in your parents’ names if your own limit is exhausted. Or open a demat account in their name and dabble in stocks. Short term capital gains will not attract 15% tax if the basic exemption limit has not been crossed.
This strategy won’t work in the case of your spouse or minor children. Any amount given to a spouse is tax free but if it’s invested, the income is treated as that of the giver. Similarly, income from investments in a minor child’s name is added to the income of the parent who earns more and is taxed accordingly. No such clubbing provisions come into play when money is transferred to a parent. There is also no limit on the amount you can give to your parents.
FAMILY & HOUSE
Pay them rent if you live in their house: Do you live in your parents’ house? You can pay them rent to claim House Rent Allowance exemption. This is possible only if the property is registered in the name of your parent. The owner will be taxed for the rental income after a 30 % deduction. So, if you pay your father a rent of 3 lakh a year (` 25,000 a month), he will be taxed for only 2.1 lakh. It gets better if the property is jointly owned by bothparents. Then you can divide the rent two ways so that thetax liability gets split between the two parents. If their income exceeds the basic exemption limit, you can help them save tax by investing in their name under Section 80 C options such as the Senior Citizens Saving Scheme, five year bank fixed deposits or tax saving equity mutual funds.
However, this tax free window will becomesmaller next year after the proposed Direct Taxes Code (DTC)comes into effect from April 2012.The DTC has proposed to bring down the 30 % standard deduction on rental income to 20 %. This would push up the tax liability of the senior citizens who receive rent from property.
Also, many of the existing tax saving options will no longer be available under the DTC regime. Sell them shares and offset losses: Tax laws allow you to adjust short term losses from stocks against certain gains. But what if you have been holding junk stocks in your portfolio for more than a year? If you ask your broker to sell them, you won’t be able to adjust the long term capital losses against any gain. However, if you sell them through an off market transaction where no securities transaction tax is paid, you are not only allowed to adjust the loss against a gain, but also carry forward the unadjusted loss for up to eight financial years.
That’s easier said than done. It’s already tough finding buyers for junk stocks on the exchanges. Finding one for a private deal is infinitely more difficult. It’s here that your parents can help you. Sell the junk stocks to them in an off market transaction. An off market transaction is a private deal between the buyer and seller without the exchange as an intermediary. The losses you book can then be adjusted against capital gains from other assets such as property, gold, debt funds, etc.
It can also be carried forward for up to eight financial years. Keep a few things in mind while you go about this. The sale should be at the market price of the shares and the buyer should pay the sum by cheque. Otherwise, the tax man might treat the transfer as a gift. Buy them a health insurance policy: This is the simplest and most commonly used strategy to save tax through your parents. Buy a health insurance policy for them and get deduction for the premium paid under Section 80 D. Up to ` 15, 000 a year is deductible from your taxable income if you buy a health insurance policy for your parents.
If the parents are senior citizens, the deduction is even higher at ` 20,000. This deduction is over and above the ` 15,000 that one can claim as deduction for the health insurance premium paid for himself and his family (spouse and children). Also, this deduction is available irrespective of whether the parents are financially dependent on the tax payer or not. The tax saving potential of this option too will shrink after the DTC comes into effect in April 2012.
It has proposed to reduce the deduction for health insurance, life insurance and tuition fees for children to a combined limit of 50,000. That would be a setback for those looking for tax savings from health and life insurance. However, it should not keep you from buying a health insurance cover for your parents. After all, they looked after your needs when you were a child. Now it is time you repay that debt.
Beware of receiving money
Any gift received from or given to non relatives above ` 50,000 is taxable. If you receive more than ` 50,000 during a financial year without any consideration, then, the entire sum is taxable. Below
mentioned points are some exceptions to the case:
• On the occasion of marriage
• Under a will or by way of inheritance
• Gift from a relative
• In contemplation of death
The limit of ` 50,000 is for the entire financial year (Apr 1, 2010 to Mar 31, 2011), irrespective of the number of people from whom you have received the money. For example if you received Rs. 10,000 from six persons, you will have to pay tax on the entire sum of 60,000.
Also a gift received in kind, such as property, paintings, bonds, debentures and jewellery without consideration is also taxable. If you are gifted a painting worth `2 lakh, it will be included in your income and taxed as per your slabs. However if a property is received on consideration which is less than stamp duty value, then it will not be included in your income.
INTEREST ON HIGHER EDUCATION LOAN IS FULLY DEDUCTIBLE – NO LIMIT
Which loans qualify for deduction? The loan should be taken for higher studies from any financial institution or approved charitable institution. Personal loans from individuals, relatives and friends, are not eligible for this deduction, as is the case with home loan.You can claim deduction for interest for up to eight years from the start of the assessment year when you begin repaying your education loan. There is no limit on the amount of interest on which deduction is allowed for education loan. Payment should be made from taxable income only. Start paying interest right from the first year to maximise income tax benefits.
Banks charge lowerrates of interest too from those paying interest during the study period. Parents should encourage children to take education loan and save their funds for retirement. This helps children save money compulsorily, when they have a job but no family. Otherwise, they might spend all their income in the initial years and you will become dependent on them during retirement years.
You can always support your children as a surety for the higher education loans need but funds should be borrowed keeping in view the rate of interest, repayment tenure, surplus income of new joiners and no limit tax benefit. Taking a car loan will not help a salaried person save tax . However if you have taken education loan, you can keep your tax liability low and your parents’ heads high. As a parent, a better gift to your child is to fund his/her higher education, instead of a car!
As the Government, under section 80E, has said that you can claim deduction if you have paid interest, out of your income chargeable to tax, on the loan taken for your higher education or your relative’s (spouse or children) higher education. Now the legal guardian is also allowed to claim deduction.
Higher education involves full-time studies for a graduate or post-graduate course in engineering, medicine, management; or for post-graduate course in applied sciences, or pure sciences, including mathematics and statistics. The vocational studies pursued after passing senior secondary is also included.Payment should be made from taxable income only
DIVIDENDS ARE TAX FREE
Dividend is tax free in individual’s hands but it is not regular. If you have surplus funds, you should invest them in growth mutual funds and get tax-free income from dividends. For emergency funds requirement you can sell a part of your portfolio, money gets credited in your account within 2 days.
The risk of investment in equity versus keeping in fixed deposit can be minimised by regular investments for long term only. In the long term, equity has given the best return among all the assets including real estate. In 2008, the recession that started from America was a result of default in home mortgage and prices of houses came down very sharply.
Hence, keeping all your money in real estate is also risky. Diversify into other assets like equities and mutual funds. How to build it: You should start a Systematic Investment Plan or SIP in equities if know the markets and have appetite for higher risk otherwise mutual fund is the best option. Mutual funds reduce the risk by investing in number of companies, sector and asset class like bonds etc. Moreover,mutual funds have the professional expertise for investing in equities and offer a lot of flexibility to customise as per your required funds flow and risk profile.
SWP (SYSTEMATIC WITHDRAWL PLAN)
GREAT VALUE FOR TAX FREE RETIREMENT
Mutual fund’s Systematic Withdrawal Plan (SWP) offers great value in terms of tax free monthly expenses after retirement. Systematic withdrawal plan is the opposite of system investment plan (SIP). You can receive commuted pension at retirement and put the money in SWP. It is convenient to manage SWP through ATMs/internet as compared to NSC or post office deposits.A fixed amount will be withdrawn every month from your SWP and deposited to your account.
The balance amount remains invested in Mutual fund. You can customise the cash flow as per your needs. How to build it: If you are young, start SIP in diversified equity fund and start building your retirement corpus. This category has given the best return over the long term among all investments.
Last ten years average of top ten diversified funds is between 20% to 25% p.a. In case you want to take low risk, opt for balance funds. At the age of 25 years, if you start investing ` 5000/- p m in a fund that grows as low as 12% a year, even then your corpus at 60 will be ` 2,75,00,000/-. Start early and select the top performing mutualfunds instead of new fancy names.
The mutual fund management expenses are regulated by SEBI and maximum limits are already there i.e. 2.25%. These expenses are already deducted from the NAV, and are hence very transparent. The next decade is projected for India’s best growth and wealth will be created. Don’t miss it. All this is 100% tax free!! You can customise the cash flow as per your needs
HOW TO MAKE YOUR SALARY PACKAGE TAX EFFICIENT
Make your salary package tax-efficient by planning your income tax well. For income tax planning, you can structure your pay package so that it includes various tax-free payments rather than getting it all as basic salary.
Some of the common payments are:
• House rent allowance (HRA)
• Transport allowance
• Reimbursement of medical expense, hotel bills,
foreign travel of spouse, and books
• Car provided by company
• Food coupons
• Leave travel concession (LTC)
Your EPF (employee provident fund) contribution is at your discretion; you may adjust it depending on your other investment needs. It is a good idea to raise your employers contribution up to 12% of your salary, as it is exempt from tax. Though you get tax benefit on certain allowances mentioned above, all perquisites are taxable as normal salary. Some common perquisites which are taxable as normal salary are:
• Loan at an interest rate lower than SBI PLR
• Rent-free accommodation
AVOID REFUND DELAY DO NOT PAY EXCESS TAX
One of the most painful aspects of tax planning is waiting for a tax refund. Taxpayers sometimes have to wait for years before they get their money back. In some cases, taxpayers have to pay out-of-pocket expenses (up to 10% of the refund amount) to get it moving.
The simplest way to avoid these delays is to ensure that you do not pay more tax than is due in a year. For salaried people, this is possible if they submit proof of their investments to their employer well in time. Otherwise, the employer will have no choice but to deduct additional tax.
Sometimes, the proof of investment submitted is inadequate or needs more details. For instance, the employee will submit house rent receipts without the landlord’s PAN details or a receipt of a mutual fund without the time stamp on it. Therefore, submit the proof of investments well in time to avoid any last-minute glitches. Another reason for excess tax deduction could be that the employee has not given his PAN number to the company.
You must also check if your employer has correctly noted the details and is depositing the tax with your PAN number. This is important because in case of a mismatch due to a clerical error, you might find that your tax has been credited to some other PAN number. If there is a mistake, ask the employer to file “correction statement” to rectify it.
Even if you submit all the proofs of investment in time, some excess tax might still get deducted. This can be the TDS on interest from bank fixed deposits and bonds. In some cases, even though you are not in the income tax net or have already factored that income in your tax payments, TDS will be deducted.
You have a better chance of getting this excess payment refunded to you if you file your return online. Ever since the income tax department started processing returns electronically, the time taken for issuing refund cheque has reduced dramatically. If you have given correct bank details (account number, bank name, branch code and address), you can get the money in your account within days of the assessment of your return.
Tips for tax planning:
Medical treatment expenses upto Rs. 15,000/- p.a. can be claimed as deduction from salary Conveyance allowance upto max. of Rs. 800/- p.m.(i.e. Rs.9,600 p.a.) can be claimed as deduction from salary Interest on Housing loan is available as deduction (Upto Rs.150,000/- in case of self occupied property & Unlimited in case of let out property). Life insurance premium paid for spouse or child also qualifies for deduction under S. 80C Capital gains on sale of house property can be avoided by purchasing another house property within 2 years after or 1year before date of sale.
Long term capital gains on listed shares/securities is not taxable. Take home loan jointly with your spouse. Thus total deduction under section 80 C will be 2 lacs and total interest claimed can be upto. Rs. 3 lacs thereby saving upto Rs. 5 lacs income p.a. (i.e. tax saving of over Rs. 1.5lacs) Salary can be structured in such a way so that all benefits in form of exemption limits are fully utilized. E.g. asking your employer to contribute full 12% of salary in form of PF component instead, if the current contribution is less than 12 %. Always take a receipt of donation. The same may be eligible for a deduction under section 80 G.
Don’t forget to claim tution fees of your childrens education as allowable deduction under section 80 C Stamp duty charges and registration charges paid while purchasing new house is eligible for tax deduction under Section 80C. Ø Other deductions that can be claimed from Total Income (Tax planning tips):
Section 80 D: Mediclaim Policy premium. Limit: Rs. 15,000/- (Rs. 20,000/- for senior citizen) to cover your spouse, you and dependent children plus Rs. 15,000/- if you pay medical insurance premium for your parents i.e. a total of Rs. 30,000/-. Payment should be made by cheque. Section 80 E: Loan to pursue higher education such as full time graduation and post graduation. The entire amount of interest which you pay on the loan during the financial year is eligible for deduction under this section. You should avail of a loan from an approved charitable institution or a notified financial institution. The deduction is available for a maximum of 8 years or till the interest is fully paid off, whichever is earlier. Total deduction of Rs. 130,000/- can be claimed for just 80 C & 80 D as under: 80 C : Rs. 1 lac 80 D: Rs. 30 K