The financial year will come to an end in a couple of months, so it is imperative that you take a careful look at your investments (if you haven’t already), so you don’t end up paying half of your year’s earnings in taxes. Aruna Rathod gets you expert advice to take full advantage of deductions, exemptions and rebates to minimise your tax outgoings.
Manisha Verma, an IT professional from Mumbai, has been diligently saving at least 30 per cent of her salary for the past five years that she has been working. Not a big one for investments like equities or mutual funds, she prefers to keep her money secure in bank fixed deposits, regularly making FDs for one-year period whenever her savings add up to #1 lakh. On maturity of FDs every year, the 10 per cent TDS is deducted on the interest by the bank and Manisha routinely renews the principal and the remaining interest to enhance her savings. It was only in July this year that the bank officer brought it to her notice that she could have not only saved the tax deducted at source, but also considerably saved on her overall income tax dues had she made five-year tax-free FDs instead of making them for one year.
A back-of-the hand calculation reveals that Manisha would have saved more than Rs1 lakh on income tax through the same FDs if only she had made them for the 5-year period that qualifies for tax exemption. Under section 80C of the Income Tax Act, 1961, investment of up to #1,50,000 per annum in 5-year bank FD qualifies for deduction from an individual’s total income, which translates into a tax saving of #30,000 per annum if a person is under the 20 per cent income tax bracket.
Planning is important
While ignorance about investments and tax-saving instruments can lead to loss of money, proper tax planning reduces the tax liability by complying with the provisions of law in a systematic manner.Tax planning is a legal and an acceptable exercise to analyse one’s financial situation and plan from a tax perspective. “In simple words, the purpose of tax planning is to reduce the tax liability by making optimum use of all permissible allowances, deductions, concessions, exemptions, rebates and exclusions,” says Abhishek Ranjan Singh, Managing Director of ARS Solutions, an investment-planning firm, adding that tax planning involves taking complete tax benefit by making use of all provisions and relaxations provided in the tax law. Tax planning is not only helpful to save tax, but right financial planning goes a long way in wealth creation.
Investment options to save tax
As per Income Tax rules and laws, there are some deductions that are allowed for tax saving investments. Here are some tax-saving options that not only help you save tax but also help you earn tax-free income. Not all are the same in terms of features and asset-class, so making the right choice is essential which depends on tax liabilities, future financial goals and one’s risk taking ability according to financial liabilities and an individual’s age.
Claim HRA as well as home loan benefits
One can claim both house rent allowance (HRA) exemption as well as the tax benefits on the interest paid on a home loan. Many organizations do not allow employees to claim both benefits. Their logic is that HRA is exempt if you are paying rent and home loan benefits apply only for a self-occupied house. HRA and interest on home loan are two separate provisions and claiming one of them as a deduction does not influence the other. “The taxpayer may own any number of flats, either in the same city that he works in or anywhere else in the whole of India or for that matter abroad, but that in no way influences the HRA deduction that he is entitled to,” says Singh. In the highest tax bracket, a deduction for
#1. 5 lakh will bring down your income tax by 46,350.
Get deduction for rent even without HRA
House rent can account for as much as 40-50% of the total household expense. That’s why the house rent allowance is exempt from tax to a certain limit. Even if your salary does not include an HRA component or you are a self-employed professional, under Section 80GG, you can claim deduction of the rent paid. One can claim a deduction of up to #2,000 per month, bringing down the income tax by at least #7,400 a year.
Deductions when someone is ill
The treatment of a chronic illness can be a drain on the finances of a taxpayer. That’s why the Income Tax Act allows a taxpayer to claim a deduction of #40,000 if he has a dependant who suffers from any of the ailments specified under Section 80DDB. “The deduction is higher at #60,000 if the patient is a senior citizen,” says Singh. Dependants can include spouse, children, parents and siblings.If a dependent is a patient, the taxpayer’s liability comes down by #12,360 in the highest income bracket. If the patient is a senior citizen, the tax is reduced by #18,540. All one needs as proof is a certificate of illness from
a government hospital.
Use education loan to lower tax
To encourage education, the government offers a deduction that can lower the cost of an education loan. The interest paid on an education loan is fully deductible from taxable income under Section 80E. Till a few years back, this deduction was available only to the borrower. Now, even a parent or a spouse can avail of it. What’s more, this now includes loans taken for vocational courses. If a parent or legal guardian takes the loan, he can claim deduction for the interest paid for up to eight successive years, starting from the year in which the interest is first paid. If you take a #10 lakh education loan at 10% interest for
8 years, you can save a total of #1.41 lakh in tax in the highest tax bracket. This will bring down the effective cost of the loan to 7% per annum.
Disabilities can be tax savers
If a taxpayer suffers from a disability, he can claim deduction of #75,000 under Sec 80U. If he has a disabled dependant, he can claim the deduction under Sec 80DD. Disability includes blindness, low vision, leprosy, hearing impairment, loco-motor disability, mental retardation and mental illness and deduction is available only if the impairment is at least 40%. If the disability is severe (80% or above), the deduction is #1 lakh a year. The dependant could include the taxpayer’s spouse, children, parents and even siblings. A deduction of #75,000 can cut annual tax by #23,175 in the highest tax bracket. In case of severe disability, the tax is reduced by #30,900.
Take unlimited deduction for your second home loan
When it comes to buying a second house, the taxman can be very encouraging. Under Section 24B, one can claim deduction of up to #1.5 lakh for interest paid on a home loan. But if the taxpayer buys a second house through another home loan and gives it on rent, the entire interest paid on the home loan during a given year can be claimed as a deduction. If you have taken a home loan of #50 lakh at 9.5% for 20 years, your interest payment in the first year would be #4.7 lakh and you can save tax up to #1.09 lakh.
With inputs from Abhishek Ranjan Singh,
Founder ARS Solutions
