Tips on Tax Planning

CA Ayush Agarwal (Kolkata-Pune-Mumbai) (27186 Points)

01 February 2010

Tips on Tax Planning

Ø Salary Return to be filed: on or before 31^st July every year and in no case should be delayed beyond 31^st March failing which penalty of Rs. 5,000/- could be levied.

Ø Tax Rates

Net Taxable Income for FY 2008-09	Rate for FY 2008-09	Computation Formulae: 08-09	Net Taxable Income for FY 2009-10	Rate for FY 2009-10
	NIL	-	Upto 160,000 Upto 190,000 Upto 240,000	NIL
	10%	Multiply by 0.1 & Deduct 15000 Deduct 18000 (Women) Deduct 22500 (Senior Cit.)	Upto 300,000	10%
Upto 150,000 Upto 180,000 (Women) Upto 225,000 (Senior Citizen)	20%	Multiply by 0.2 & Deduct 45000 Deduct 48000 (Women) Deduct 52500 (Senior Cit.)	300,000 - 500,000	20%
Upto 300,000	30%	Multiply by 0.3 & Deduct 95000 Deduct 98000 (Women) Deduct 102500 (Senior Cit.)	Above 500,000	30%

Ø Section 80 C: Investment Options: upto maximum of Rs. 1 lac

Investment avenues	Risk	Returns potential	Indicative Return	Liquidity	Remarks
*Fixed Returns Products*
PPF	NIL	Low	8% p.a.	No withdrawal till expiry of 6 years. Then one withdrawal per year.	Max. 70K, 15 yrs lock in & Rate of interest may be revised. Interest inc. exempt
NSC	NIL	Low	8% h.y.	No Liquidity (6 yr Lock in) Exceptional encashment possible after 1 yr	R.s 100 invested will grow to Rs. 160 on maturity. Only Last yr interest inc. taxable
Bank Deposits	NIL	Low	Varies from 6.00% to 7.75% p.a.	No Liquidity. Comes with a 5 yr lock in.	Interest income is chargeable to tax
Post Office Time Deposits	NIL	Low	7.5% p.a.	High Liquidity. Premature withdrawal results into penalty in form of low interest	5 yr. tenure. Interest income is chargeable to tax
Senior citizens savings savings scheme	NIL	Low	9% p.a.	Medium. Can go for pre closure after 1 yr. attracting penalty from 1% - 1.5%	Interest income is chargeable to tax
*Market Linked Products*

ELSS: Mutual funds	Medium to High	Medium to High. Market linked.	Avg. return for last 5 yrs. is ~18% - 20%	Medium. 3 yrs lock-in.	SIP & Lump sum options available.
ULIPs	Medium to High	Medium to High. Market linked.	Around 8 - 20%	Medium. 3 / 5 yrs lock-in.	Various fund options/switches available.
Life insurance polices(Non Ulips)	Low	Low to Medium	Around 6% to 12%	Medium. Surrender charges applicable.	Regular and Single premium option available
National Pension scheme	Medium to High	Medium to High. Market linked.	Sufficient data not available	Low. Hold till one attains 60 years.	Tier I & Tier II a/c. Life annuity to be purchased @ 60

Ø Section 80 C: Other deductions from Total Income

Tuition fees paid for children’s education (maximum 2 children)
Principal component of home loan repayment
Stamp duty and Reg. fees paid on purchase of property
Infrastructure Bonds

Ø Hints 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

5 Must haves for your Financial Planning

Pure Term Plan (Protection cover) based on Human Life Value (HLV)
Mutual Fund SIP for disciplined investing
Type II ULIP where future premiums are paid by the insurer in case of death for child education / marriage etc.
PPF / Pension plan (Retirement corpus)
Gold ETF (typically 10% - 15% of your portfolio)