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Preface

All of us engage in some economic activity and work hard to make a living. But as you start

doing so you tend to attract the attention of the Income Tax Department, as they too are doing

their task of taxing your income, as you earn. And thus as we work hard to make a living, it

becomes imperative for us to work a little more harder and smarter to save our taxes (the legal

way) too, so that it can help us make our dreams come true - A dream of buying a better car,

bigger house etc.

But, remember in the quest of attaining the same, if you keep your tax planning exercise

pending till the eleventh hour, then it would be merely a “tax saving” exercise leading to sub-

optimal gains.

The full Union Budget 2014-15 was not a populist one and therefore there have been just a few

new tax benefits this time. The new Government has allocated higher amounts to

developmental projects, but has made it a tight rope walk in the endeavour to achieve the fiscal

deficit target of 4.1% of the GDP. Nonetheless, you need to be particular about tax planning;

because as it’s said every penny saved, is a penny earned.

This 2015 edition of the guide on Tax Planning has been written with the purpose of helping

you plan your taxes smartly. If one incorporates the financial planning aspects such as his age,

income, ability to take risk and financial goals in the tax planning exercise, then one can wisely

complement tax planning to investment planning as well.

Also, realisation will dawn on you that there’s more to tax planning than - just investing in tax

saving instruments under Section 80C, of the Income Tax Act, 1961. There are many other

provisions that can provide you tax benefits. A simple thing like taking a loan for buying a house

can make you eligible to get tax benefits.

So, read on and wish you all VERY HAPPY TAX PLANNING!!

Team Personal FN

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Disclaimer

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Index

Section I: Tax Saving Vs. Tax Planning 05

Section II: 4 Mistakes individuals do while saving tax 06

Section III: Your small steps (to “Tax Planning”) can take you leaps

Steps to “tax planning” 09

Parameters for prudent tax planning 12

Section IV: Optimal tax planning with section 80C 17

Tax planning with market-linked instruments 18

Tax planning the assured return way 23

Section V: Thinking beyond Section 80C 31

Section VI: How your home loan can help in tax planning 39

Section VII: House Property and taxes 45

Section VIII: Save tax on your hard earned salary 49

Section IX: Conclusion 54

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I - Tax Saving Vs. Tax Planning

“All men make mistakes, but only wise men learn from their mistakes.”- Sir Winston Churchill.

The above proverb is very much relevant to our daily lives - be it handling finances or even in

any other facets of life.

Moreover the famous author John C. Maxwell has also quoted “A man must be big enough to

admit his mistakes, smart enough to profit from them, and strong enough to correct them.” But

again, this is conveniently forgotten by many, which often leads to failure to learn from

mistakes, the arrogance to admit it and which thus leads you to repeat the same mistakes

again.

While undertaking their tax planning exercise too, many individuals tend to repeat the same

mistake of waiting till the eleventh hour and are arrogant enough to admit it.

As the financial year draws to a close, we all start feeling the heat and realise that yes, now we

have to invest in order to save tax. But have you ever wondered whether it is the prudent way

for tax planning?

Remember, waiting till the eleventh hour to undertake your tax planning exercise will often

drive it towards mere “tax saving” rather than “tax planning”; which in our opinion is a sub-

optimal way to undertake a tax planning exercise.

Unlike “tax saving” which is generally done through investments in tax saving instruments /

products, under “tax planning” we take into consideration one’s larger financial plan after

accounting for one’s age, financial goals, ability to take risk and investment horizon (including

nearness to financial goals). And by adapting to such a method of “tax planning”, you not only

ensure long-term wealth creation but also protection of capital.

Hence, please remember to commence your “tax planning” exercise well in advance by

complementing it with your overall investment planning exercise.

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II - 4 Mistakes individuals do while saving tax

We recognise the fact that many of you are too busy throughout the year, in your economic

activities intended to make a living. But if you show the same dedication in your tax planning

exercise, the same will enable you to save more and fulfil all your dreams in life. Our experience

reveals following 4 mistakes which individuals do while saving taxes.

1. Doing your tax planning at the last moment:

The root of all mistakes in tax planning lies in waiting till the last minute to save taxes, which

eventually leads to mere tax saving, rather than tax planning. And this in return is a sub-optimal

way of saving taxes, caused by the sheer attitude of delay. Your last moment hurry, will often

lead you to forgetting or ignoring the facets of financial planning such as your age, income,

ability to take risk and financial goals (explained further in this guide) thus guiding you to not

complement your tax planning exercise with investment planning.

Remember waiting till the eleventh hour, is just going to lead you to a path of sub-optimal tax planning

exercise, which would destroy the essence of holistic tax planning.

2. Unnecessarily Buying Insurance Plans for the purpose of Tax Saving:

As you near the end of the financial year, many of you might have received telephone calls from

insurance companies and agents pestering you to buy an investment cum insurance plan –

typically market linked i.e. Unit Linked Insurance Plans (ULIPs) or some kind of Endowment

plans. And many of you realising the need to save your taxes, even entertain these calls and

eventually tear a cheque for buying one. But do you ever wonder whether you have done the

right thing?

The answer in our opinion is a sheer “No”. And that’s because of the ignorance and / or

arrogance (of not admitting your mistakes) which you might have, while doing your tax saving

investments.

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Remember when you think about insuring yourself, it should purely mean protecting your life against any

unforeseen events; and thus you should be ideally buying only pure term insurance plans, which gives

due importance to your human life value. It is noteworthy that ULIPs are investment-cum-insurance

plans where for the premium paid, the insurance cover offered under these plans is far less (usually 10

times of your annual premium) when compared to pure term life insurance plans; where for a lesser

premium amount you get a greater life insurance cover – which is precisely what a life insurance plan is

intended for.

3. Ignoring power of compounding through tax saving mutual funds:

Many of you absolutely rule out the concept of power of compounding to your portfolio despite

the fact that your age, income, ability to take risk, along with your financial goals supporting

you to take risk. It is noteworthy that if you want to meet and / or elevate your standard of

living going forward, you need to beat the rate of inflation. And thus, the role of equity as an

asset class cannot be ignored in one’s tax saving portfolio too. While some do consider - tax

saving mutual funds in their tax saving portfolio, the ideal composition (depending on your

suitability) is not maintained, which leads the tax saving portfolio to give sub-optimal returns.

It is noteworthy that being risk averse is well appreciated by us. But if your age, income, ability to take

risk and financial goals, permit you to take equity exposure, one should not ignore the same.

4. Failing to optimize all available options for tax saving:

For many, tax planning starts as well as ends with Section 80C - which enunciates investment

instruments for tax saving. But investing only in these investment instruments would not lead

to optimal reduction of your tax liability. There are many other options available other than

section 80C which you should look into. Thinking beyond 80C may help you save more for your

other financial goals.

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To bring to your notice, our Income Tax Act, 1961 also considers the humane side of our life and also

gives deductions for contributions you make on such developments. So, in case if you pay your medical

insurance premium, incur expenditure on the medical treatment of a “dependant” handicapped, donate

to specified funds for specified causes, contribute in monetary form to political parties or electoral trusts,

take a loan for pursuing higher education or if you are an individual suffering from “specified” diseases,

then all this too can help you effectively plan your tax obligations, thus optimally reducing your tax

liability. Moreover, taking into account the urge to buy your dream home by taking a home loan can also

extend tax saving benefits to you.

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III - Your small steps can take you forward by leaps

There is an old Chinese proverb which says, “It is better to take many small steps in the right

direction than to make a great leap forward only to stumble backward.” which in our opinion

applies even to your “tax planning” exercise.

Remember, it is vital for you to step-by-step ascertain where you stand, in terms of your Gross

Total Income and Net Taxable Income, so that you effectively undertake your tax planning

exercise which in turn would deliver you the objective of long-term wealth creation along with

capital protection.

In the past if you have taken your tax planning decisions at the last moment, never mind. But,

please learn from them and don’t repeat the same mistakes again. Adopt the prudent steps

while doing your tax planning.

Steps to “tax planning”:

Step 1: Compute the Gross Total Income

The process of tax planning begins with computation of your Gross Total Income (GTI). This step

enables you to ascertain the total income earned by you during a financial year, from various

under-mentioned sources of income, and helps you to judge where you stand.

Income from salary

Income from house property

Profits and gains from business & profession

Capital gains (short term and long term) and

Income from other sources.

Hence, GTI is the total income earned by an individual before availing any deductions under the

Income Tax Act, 1961. And it is vital to know the same, in order for you to undertake your tax

planning effectively, so that you can plan within the sources of income (by using the relevant

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provisions of the Income Tax Act applicable to the aforementioned sources of income), as well

as by availing deductions to GTI.

Now, one may ask – “how do I undertake this activity if I’m a novice?”

Well, the answer is pretty simple! You can either get it done at your company (many

organisations do offer this facility), ask your CA / tax consultant to do it, or use the convenience

of the new and updated tax portals that have emerged in the more recent times. But, along

with all this please do not forget to do your self-study to carry out effective tax planning

exercise. One must note that it is vital to know at least those provisions of the Income Tax Act,

which directly have an impact on your finances.

Step 2: Compute the Net Taxable Income

After having done with computation of GTI by using the relevant provisions of the Income Tax

Act for each source of income, the next step is to compute your Net Taxable Income (NTI).

Under NTI from the GTI, the various deductions allowed under the Income Tax Act, should be

accounted for (i.e. subtracted from your GTI), which would thus reduce your taxable income.

These deductions enable you to enjoy reduction in tax liability, as it covers Sections under the

Income Tax Act for:

Investing in tax saving instruments (your most loved and sought after Section 80C, along

with the recently introduced RGESS - Rajiv Gandhi Equity Savings Scheme)

Donations

Expenditure on handicapped dependent

Premium payment for your medical insurance

Interest paid on loan taken for higher education

Rent paid for residential accommodation

Expenditure incurred on a specified diseases suffered by you

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Remember, if you use the respective provisions effectively to do tax planning, it will enable you

to achieve the long-term objective of wealth creation.

Step 3: Calculate the tax payable

After having effectively saved tax in the prudent way mentioned above, the next step is to

compute your tax liability based on the present income tax slabs, and thereafter file your

income tax returns.

The income tax rates for Individuals and HUFs for FY 2014-15 are as follows:

Net Taxable Income (in Rs) Rate

Upto Rs 2,50,000 (for general tax payers – male and female)

Nil Upto Rs 3,00,000 (for senior citizens, above 60 years of age) Upto Rs 5,00,000 (for very senior citizens aged 80 and above)

Rs 2,50,001 to Rs 5,00,000 # 10%

Rs 5,00,001 to Rs 10,00,000 20%

Above Rs 10,00,000 30% Source: Finance Act 2014, Personal FN Research)

# For senior citizens (aged above 60 but below 80), with NTI falling between Rs 3,00,001 to Rs

5,00,000 will be taxable @ 10%. For very senior citizens (individuals who have completed 80

years of age), the base exemption limit stands at Rs 5 lakh of their income.

Moreover, you would also have to pay an education cess @ 3% on your computed tax liability.

Also, note that an additional surcharge @ 10% would be levied if your total income in the

financial year exceeds Rs 1 crore. The levy of this one time surcharge was announced in the

Union Budget 2013-14 in order to generate more tax revenue by increasing the tax liability of

the rich. This one-time surcharge, - will be in addition to the education cess of 3% that is paid

on the total income-tax.

Union Budget 2013-14 had introduced a new Section 87A (which allows a Tax Credit or Special

Rebate of Rs 2,000 to individuals whose NTI is below Rs 5 lakhs), the rebate will be limited to

the extent of your tax liability or Rs 2,000 whichever is less. -

So if your tax liability is say Rs 1,500, you will get a tax credit of only Rs 1,500 under Section 87A

and no tax will be payable.

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Now let us see how you can compute your income tax liability:

Say if your net taxable income after availing for all deductions available is Rs 12 Lakh in the

current financial year, then your tax liability will be computed as under:

Computation of Tax Liability (2014-15)

Taxable Income (in Rs) 12,00,000

Upto 2,50,000 Nil -

Rs 2,50,001 to Rs 500,000 10% 25,000

Rs 500,001 to Rs 10,00,000 20% 1,00,000

Rs 10,00,001 & above 30% 60,000

Tax payable (in Rs) 1,85,000

Education Cess 3% 5,550

Total Tax (in Rs) 1,90,550

(Source: Personal FN Research)

Parameters for “prudent tax planning”:

A Prudent exercise of tax planning also extends to appropriate investment planning, which also

takes into account your ideal asset allocation by considering the under-mentioned factors.

Hence after you have utilised the tax provisions within each head / source of income for

effective reduction in GTI, you must also consider the following parameters as these will enable

you to optimally reduce your tax liability.

Age

Your age and the tenure of your investment play a vital role in your asset allocation. The

younger you are more risk you can take and vice-a-versa. Hence, for prudent tax planning

too, if you are young, you should allocate more towards market-linked tax saving

instruments such as Equity Linked Saving Schemes (ELSS), Unit Linked Insurance Plans

(ULIPs) and National Pension System (NPS), as at a young age the willingness to take risk is

high. One may also consider taking a home loan at a younger age, as the number of years

of repayment is more along with your willingness to take risk being high.

Also a noteworthy point is the earlier you start with your investments, the greater is the

tenure you get while investing in an investment avenue, which can enable you to make

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more aggressive investments and create wealth over the long-term to meet your financial

goals.

Let’s understand this much better with the help of an illustration.

An early bird gets a bigger pie

Particulars Suresh Mahesh Rajesh

Present age (years) 25 30 35

Retirement age (years) 60 60 60

Investment tenure (years) 35 30 25

Monthly investment (Rs) 7,000 7,000 7,000

Returns per annum 10% 10% 10%

Sum accumulated (Rs) 2,65,76,466 1,58,23,415 92,87,834

(Source: Personal FN Research)

Note: The names and returns mentioned above are an assumption and used for illustration purpose only

The above table reveals that, Suresh starts at age 25, and invests Rs 7,000 per month in an

ELSS / Tax saving mutual fund scheme through SIPs (Systematic Investment Plans) until

retirement (age 60). His corpus at retirement is approximately Rs 2.65 crore. Mahesh starts

at age 30, a mere 5 years after Suresh, and invests the same amount in ELSS (through SIPs)

until retirement (also at age 60). His corpus builds up to approximately Rs 1.58 crore, note

the difference between the 2 corpuses here. And lastly, we have Rajesh, the late bloomer of

the lot. He begins investing at age 35, the same amount every month in an ELSS as Suresh

and Mahesh, and invests up to his retirement (also at age 60). His corpus is, in comparison,

a meagre Rs 92 lakh.

The following graph clearly indicates the gap between the accumulated corpuses for similar

level of investment per month.

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(Source: Personal FN Research)

For some of you young people, pursuing higher education may be a priority. But there may

be a case you do not have enough corpus (funds) garnered by you. However, you need not

worry, as there are several banks willing to offer higher education loan; and if you avail the

same, the interest paid by you on such loan taken will be eligible for tax benefit (under

section 80E of the Income Tax Act – which is discussed ahead in this guide).

Income

Similarly, if your income is high, your willingness to take risk is high. This thus can work in

your favour, as you have sufficient annual GTI which allows you to park more money

towards market-linked tax saving investment instruments, for generating higher returns and

creating a good corpus for your financial goal(s). Also, on account of the higher GTI your

eligibility to take a home loan also increases, which can also help you to optimally reduce

your tax liability.

Yes, one may say that if I have a high income, - why do I need a home loan. I can straight

away go ahead and buy the property!

Sure, you can do so, but the Income Tax Act provides you the tax benefit for repayment of

principal amount along with the interest on loan taken, which you will miss.

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Also, given that you are financially strong, you can also consider donating some of your

money towards a noble cause, as doing so will make you eligible for a tax benefit (under

section 80G of the Income Tax Act – which is discussed ahead in this guide).

Similarly, if your income is not high enough or if you do not want to put your money at risk;

you can invest in tax saving instruments which provide you assured returns. These

instruments can be Public Provident Fund (PPF), National Savings Certificates (NSCs), 5 Yr

Bank Fixed Deposits, 5 Yr Post Office Time Deposits and Senior Citizen Savings Scheme

(provided you are a senior citizen).

Financial goals

The financial goals which one sets in life, also influences the tax planning exercise. So, say

for example your goal is retiring from work 5 years from now, then your tax saving

investment portfolio will also be less skewed towards market-linked tax saving instruments,

as you are quite near to your goal and your regular income would stop.

Likewise if you are many years away from your financial goal, you should ideally allocate

maximum allocation to market linked tax saving instruments and less towards those tax

saving instruments which provide you low assured returns.

Risk Appetite

Your willingness to take risk which is a function of your age, income, expenses, nearness to

goal, will be an important determinant while doing your tax planning exercise. So, if your

willingness to take risk is high (aggressive), you can skew your tax saving investment

portfolio more towards the market-linked instruments. Similarly, if your willingness to take

risk is relatively low (conservative), your tax saving investment portfolio can be skewed

towards instruments which offer you assured returns, and if you are a moderate risk taker

you can take a mix of 60:40 into market-linked tax saving instruments and assured return

tax saving instruments respectively.

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Yes, we reckon the fact that “prudent tax planning” exercise can be time consuming and

complex. But please note the fact that it’s an annual activity which every tax payer has to

go through – and if you start early and plan properly, the task becomes easier.

Remember, delay will only ensure that you invest at the last moment but not in line with

the parameters discussed above. If you are hard pressed for time, consider hiring a

competent tax consultant along with an investment advisor.

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IV - Optimal tax planning with section 80C

Section 80C of the Income Tax Act enables an individual or a Hindu Undivided Family (HUF) to

effectively invest in tax saving instruments, in order to optimally reduce their tax liability. This is

seen as one of the most sought after sections when it comes to tax planning.

In order to leave more money in the hands of the salaried class, hit by rising prices, the new

Government increased tax exemption limit for investments from Rs 1 lakh p.a. to Rs 1.5 lakh

p.a. under Section 80C of the Income Tax Act.

It offers a host of popular investment instruments mentioned below which qualify you for a

deduction from your Gross Total Income (GTI):

Life Insurance Premium

Public Provident Fund (PPF)

Employees’ Provident Fund (EPF)

National Saving Certificate (NSC) , including accrued interest

5-Year fixed deposits with banks and Post Office

Senior Citizens Savings Scheme (SCSS)

National Pension System (NPS)

Unit-Linked Insurance Plans (ULIPs)

Equity Linked Savings Schemes (ELSS)

Tuition fees paid for children’s education (maximum 2 children)

Principal repayment on Housing Loan

Hence, if you invest in any or all of the aforementioned instruments; you would qualify for

deduction under this section subject to the maximum of Rs 1,50,000 p.a. But we think rather

than just merely investing in any of the above tax saving instruments, you can also use these tax

saving instruments for prudent tax planning.

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Now you may ask “how”?

Well, it’s simple! In the aforementioned list you can classify the tax saving instruments into

those offering variable returns (i.e. market-linked instruments) and those offering fixed returns

(i.e. assured return instruments). By doing so you would be able to ascertain which investment

instrument suits you best (taking into account the factors mentioned above) and would extend

your tax planning exercise to investment planning too.

Let’s discuss in detail the classification into market-linked tax saving instruments and assured

return tax saving instruments.

Tax Planning with market-linked instrument:

If you are young, income is high, and therefore willingness to take risk is high along with your

financial goals being far away, then this category would be suitable for you. Under this category

you can invest in the capital markets, which will give you variable returns. Following are the

market linked tax saving instruments that are available for investment under section 80C.

1. Equity Linked Savings Schemes (ELSS):

These are mutual fund schemes, which are 100% diversified equity funds providing tax saving

benefits. And these are popularly known as Tax Saving Mutual Funds or ELSS. A distinguishing

feature about them is that they are subject to a compulsory lock-in period of three years, but

the minimum application amount in most of them is as little as Rs 500, with no upper limit. In

ELSS, you can either make lump sum investments or investments through the Systematic

Investment Plan (SIP).

And if you ask, who can invest in ELSS? Individual, HUF and specified investors under Income

Tax Act, 1961 can invest in ELSS. It is noteworthy that, in the long-term if you intend to create

wealth, then this tax saving instrument can give you luring inflation-adjusted returns.

You may say – “but there is risk involved”. Well, no doubt about that; but in order to even out

the shocks of volatility in the equity markets you can adopt the SIP route of investing here

which will provide you the advantage of “compounding” along with “rupee-cost averaging”.

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SIPs provide cushion against market volatility

(Source: ACE MF, Personal FN Research)

Get wealthy Sip by Sip

(Source: ACE MF, Personal FN Research)

While SIPs in ELSS can help you tackle volatility and may help you gradually create wealth in the

long run, a noteworthy point about SIP investments in ELSS is that your every SIP installment

(which can be monthly, quarterly or half yearly) should complete the minimum lock-in period of

3 years.

Deduction: The maximum tax benefit which an Individual or HUF can enjoy under Section 80C is

Rs 1,50,000 p.a. Moreover, if you make any long term gains at the time of exit, any time after

the end of the lock-in period; then you would not have to pay any Long Term Capital Gains Tax

(LTCG).

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2. Unit-Linked Insurance Plans (ULIPs):

These are typically insurance-cum-investment plans which enable you to invest in equity and /

or debt instruments depending on what suits you as per your age, income, risk profile and

financial goals. All you simply need to do is, select the allocation option as provided by the

insurance company offering such a plan. Generally they are classified as “aggressive” (which

invests in equity), “moderate or balanced” (which invests in debt as well as equity) and

“conservative” (which invests purely in debt instruments).

Hence, apart from the insurance cover (which is usually 10 times your annual premium) offered

under these plans, the returns which you would get would be completely market-linked as your

premium amount (after accounting for allocation and other charges) is invested in equity and

debt securities.

And in order for you to track such plans the NAV is declared on a regular basis. These policies

have a minimum 5 year lock-in period, and also have a minimum premium paying term of 5

years. The overall term of the policy would vary from product to product.

In case of any eventuality, the beneficiaries would be paid the sum assured or fund value,

whichever is higher.

But a noteworthy point is, while some well selected ULIPs may add value to your portfolio in the

long-term; your insurance and investment needs should be dealt separately, thus enabling you

to have an optimum insurance coverage and the right investment instruments for long-term

wealth creation.

Deduction: The premium which you pay for your ULIP would be eligible for tax benefit, subject

to the maximum eligible amount of Rs 1,50,000 p.a. as available under Section 80C. Moreover,

a positive point is that at maturity the amount which you or your beneficiary would receive is

tax free (exempt) as per the provisions of Section 10(10D) of the Income Tax Act.

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3. National Pension System (NPS):

National Pension System which was earlier available only for Government employees was later

on May 1, 2009 also introduced for people in the unorganised (private) sector, as need for

deeper participation in the pension contribution (through this product) was felt.

For NPS, if you (eligibility age: from 18 years to 60 years) belong to the unorganised sector (i.e.

private sector); the contributions done by you towards the scheme would be voluntary, and

you can invest in any of the two under-mentioned accounts:

Tier-I Account:

In this account your minimum investment amount is Rs 500 per contribution and Rs 6,000

per year, and you are required to make minimum 4 contributions per year. Under this

account, premature withdrawals (upto a maximum of 20% of the total investment) is not

permitted before attainment of 60 years, however the balance 80% of the pension wealth

has to be utilised by you to buy a life annuity.

Tier-II Account:

For opening this account you will have to make a minimum contribution of Rs 1,000 per

annum. The minimum number of contributions is 4, subject to a minimum contribution of

Rs 250. However, if you open an account in the last quarter of the financial year, you will

have to contribute only once in that financial year. You will be required to maintain a

minimum balance of Rs 2,000 at the end of the financial year. In case you don’t maintain

the minimum balance in this account and do not comply with the number of contributions

in a year, a penalty of Rs 100 will be levied. Moreover, in order to have Tier-II account, you

first need to have a Tier-I account. Tier-II account is a voluntary account and withdrawals

will be permitted under this account, without any limits.

Even if you hold both the above accounts under NPS, only the Tier-I account will be eligible for

tax benefits.

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While investing money in NPS, you have two investment choices i.e. “Active” or “Auto” choice.

Under the “Active” choice asset class, your money will be invested in various asset classes

termed as ECG viz. E (Equity), C (Credit risk bearing fixed income instruments other than

Government Securities) and G (Central Government and State Government bonds); where you

will have an option to decide your asset allocation into these asset classes. In case of Auto

Choice, your money will be invested in the aforesaid asset classes in accordance with

predetermined asset allocation.

But remember, the return on your investment is not guaranteed as it is market-linked. At the

age of 60 years, you can exit the scheme; but you are required to invest a minimum 40% of the

fund value to purchase a life annuity. And the remaining 60% of the money can be withdrawn in

lump sum or in a phased manner upto your age of 70 years.

In our opinion this product is not very appealing for creating a substantial corpus to meet your

retirement need. Rather, if you chalk-out a prudent financial plan with the help of a financial

planner, and invest wisely as per the plan laid out (which would mostly recommend you equity

allocating higher to equity at an younger age, and then as your age progresses balance the

asset allocation between equity and debt instruments), then the corpus which you would be

able to create will be substantial enough to meet your retirements needs. Also the money

withdrawn under this scheme, even at the age of 60 is taxable.

Deduction: Those who are salaried employees may claim deduction under Section 80C upto Rs

1,50,000 for their own contributions towards NPS account. In addition to this, they are entitled

to claim deductions under Section 80CCD if there is any contribution made by their employer

but only upto 10% of their salary (for this purpose, salary construes as Basic Salary plus

Dearness Allowance). It is noteworthy that the deduction under Section 80CCD can be claimed

over and above the permissible deductions under Section 80C.

So if an Individual contributes alone from his income towards NPS, it will be considered within

the limits of Rs 1,50,000 p.a. under Section 80C.

It is only if the employer contributes to employee for NPS – Section 80 CCD is applicable.

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So to avail this extra tax exemption limit, the employees need to convince their employers to

start contributing to NPS.

However, those who are self-employed can avail deduction under Section 80CCD upto 10% of

their gross total income (which is comprised of income computed under different heads before

reducing it by all other deductions available under Section 80). In addition to deductions under

Section 80CCD, self-employed people are also entitled to deductions under Section 80C for

other instruments eligible therein.

Tax Planning the “assured return” way:

Unlike the case presented above (i.e. tax planning with market-linked instruments), if your age,

income, risk profile and financial goals do not permit you to invest in market-linked instruments

(for your tax planning) along with the fact that your risk taking ability is low; then you should

plan investing in tax saving instruments which offer you assured returns. Under these

instruments there is zero risk of erosion to your capital. Following are the tax saving

instruments available under this category:

1. Non-Unit Linked Life Insurance Plans:

Life Insurance plans can be broadly classified as “pure term life insurance plans” and

“investment-cum-life insurance plans”.

Pure term life insurance plans are authentic in nature, as they cater to the need of only

protection and not investment. Hence such plans offer a high life insurance coverage at low

premiums. Generally the term insurance plans offer a policy term of 10, 15, 20, 25 or 30 years.

Investment-cum-life insurance plans on the other hand, as the name suggest offer you an

investment option along with insurance option. But here your insurance coverage is far lesser,

than the one provided under pure term insurance plans. So, you pay a high premium, which

gets invested, but insurance coverage on the other hand is meagre. Such insurance plans can be

offered in various forms such as ULIPs (as discussed above), endowment plans, money back

plans, pension plans etc.

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We think that while you are considering your insurance needs, you should ideally look at only

pure term life insurance plans, thus keeping your insurance needs separate from investment

needs.

Deduction: Over here too the premium which you pay for such non-unit linked life insurance

plans would be eligible for tax benefit, subject to the maximum eligible amount of Rs 1,50,000

p.a. as available under Section 80C. Moreover, a positive point is that at maturity the amount,

which you or your beneficiary would receive, is exempt (tax free) as per the provisions of

Section 10(10D) of the Income Tax Act.

2. Public Provident Fund (PPF):

The PPF scheme is a statutory scheme of the Central Government of India.

In order to invest in PPF, you are required to open a PPF account (which is irrespective of your

age) at your nearest post office or public sector (nationalized) bank providing this facility. You

can open the account in your name, and also in the name of your wife as well as children. If you

do not wish to open a separate account in the name of your wife as well as children, you can

nominate them; but joint application is not permissible.

The account so opened will have an expiry term of 15 years from the end of the year in which

the initial investment (subscription) to the account is made. You can invest in the account

ranging from a minimum of Rs 500 to a maximum of Rs 150,000 in a financial year (You see, the

new Government has increased the maximum limit that can be invested in PPF from earlier Rs 1

lakh p.a. to Rs 1.5 lakh p.a.) in order to enjoy the tax saving benefit under Section 80C, and the

amount to the credit of your account will be entitled to a tax-free interest at 8.7% p.a (w.e.f.

April 1, 2013). Your annual deposit in the PPF account should at least be Rs 500, and you have

the convenience of depositing in either lump sum or in installments not exceeding 12 such

installments. However, a noteworthy point is that it is not necessary to deposit every month

and the amount too can be any amount in multiples of Rs 5, subject to the minimum (Rs 500) and

maximum (Rs 1,50,000) amount.

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The interest to the account will be calculated on the lowest balance to the credit of the account

between the close of the 5th day and the end of the month, and will be credited to the account

on 31st of March, each year.

As regards withdrawal from the account is concerned; it is permitted any time after the expiry

of 5 years from the end of the year in which initial investment (subscription) to the account is

made. However, your withdrawal will be restricted to 50% of the amount which stood to the

credit of your account in the immediate 4th year immediately preceding the year of withdrawal

or at the end of the preceding year, whichever is lower. And in case if your term of 15 year is

over, you can withdraw the entire amount together with the interest accrued till the last day of

the month, preceding the month in which application for withdrawal is made.

After your term of 15 years is over if you wish to renew your account, you can do so for a

period of another 5 years at the rate of interest prevailing then, without having the compulsion

of putting any further deposits in case of extension. The withdrawal in case of extended

accounts is permissible once in every financial year. But the total withdrawal should not exceed

60% of the balance accumulated to the account at the commencement of the extension period

(of 5 years).

In case you wish to invest in the name of HUF, you cannot do so. The government has

discouraged HUFs from taking advantage of a scheme whose objective is to create retirement

nest egg for resident individuals. Earlier an ‘HUF’ could open a PPF account and save tax on the

deduction, which has been stopped with effect from May 2005. However, existing PPF accounts

of HUFs will continue to operate normally until maturity, but cannot be extended beyond

maturity, and no new HUF PPF accounts can be opened.

It is noteworthy that if you are risk averse, then this product is best in its class for tax planning.

Moreover, it also offers you an appealing tax-free return of around 8% p.a. (compounded

annually).

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Deduction: The contributions which you make to the accounts mentioned above, would be

eligible for tax benefit but subject to the maximum eligible amount of Rs 1,50,000 p.a. as

available under Section 80C.

3. National Savings Certificate (NSC):

The NSC is also a scheme floated by the Government of India, and one can invest in the same

through his / her nearest post office, as the scheme is available only with India Post. The

certificates can be made in your own name, jointly by two adults, or even by a minor (through

the guardian), and has a tenure of 5 years or 10 years.

The minimum amount which you can invest is Rs 100, with no maximum limit to the same. NSC

maturing in 5 years offers interest @ 8.5% p.a. compounded half-yearly whereas NSC maturing

in 10 years offers interest @ 8.8% p.a. compounded half-yearly, thus giving you an effective

interest rate of 8.68% p.a. and 8.99% p.a. The interest income accrues annually and is

reinvested further in the scheme till maturity (i.e. 5 or 10 years) or until the date of premature

withdrawals.

Premature withdrawals are permitted only in specific circumstances such as death of the

holder.

Deduction: Your investment in NSC is eligible for a deduction of upto Rs 1,50,000 p.a. under

Section 80C. Furthermore, the accrued interest which is deemed to be reinvested in a financial

year qualifies for deduction under Section 80C in the respective financial year. However, the

interest income is chargeable to tax in the year in which it accrues. But in case if you have no

other income apart from interest income, then in order to avoid Tax Deduction at Source (TDS),

you can submit a declaration in Form 15-H (for general) or Form 15-G (for senior citizens) as

applicable.

4. Bank Deposits and Post Office Time Deposits:

The 5-Yr tax saving bank fixed deposits available with your bank is also eligible for a deduction

under Section 80C and comes with a lock in period of 5 years. The minimum amount that you

can invest is Rs 100 with an upper limit of Rs 1,50,000 in a financial year. The interest rates

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offered by banks under 5-Yr tax saving fixed deposits are currently in the range of 8.5% p.a. to

9% p.a.

However, the interest earned here would be subject to tax deduction at source, making it

detrimental for your tax planning, but again you can submit a declaration in Form 15-H (for

general) or Form 15-G (for senior citizens) as applicable for not deducting tax at source.

Similarly 5 Yr Post Office Time Deposits (POTDs) also offer you a tax benefit under Section 80C.

You can open the account either in single name or jointly or even in the name of a minor

(through a guardian) who has attained the age of 10.

The minimum investment amount is Rs 200, and there isn’t any upper limit. However, similar to

other tax saving instruments, the investment amount over Rs 1,50,000 will not be eligible for

any tax benefit.

A 5-Yr POTD earns a return of 8.5% p.a. (compounded quarterly) but paid annually. Hence, say

if you deposit an amount of Rs 10,000, the interest income, which you will fetch, would

approximately be Rs 867 p.a. As regards premature withdrawals are concerned, they are

permitted only after 1 year from the date of deposit and interest on such deposits shall be

calculated at the rate, which shall be 1% less than the rate specified for a period of 5-Year

deposit.

Deduction: Your investment in both these schemes is eligible for a deduction of upto Rs

1,50,000 p.a. under Section 80C. But as mentioned above, the interest earned on your

investments will be taxable.

. 5. Senior Citizens Savings Scheme (SCSS):

Well, the SCSS is an effort made by the Government of India for the empowerment and

financial security of senior citizens. So, in case if you are over 60 years old, you are eligible to

invest in this scheme. Moreover, if you have attained 55 years of age and have retired under a

voluntary retirement scheme; then too you are eligible to enjoy the benefits of this scheme.

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In order to avail the benefits of this scheme, you are required to open a SCSS account (either in

a single name, or jointly along with your spouse) at your nearest post office or any nationalised

bank. You can do a onetime deposit under this scheme subject to the minimum investment

amount of Rs 1,000 and a maximum of Rs 15,00,000. The maturity period provided for this

scheme is 5 years offering a rate of interest of 9.20% p.a. payable on a quarterly basis (i.e. on

March 31, June 30, September 30 and December 31) every year from the date of deposit.

Premature withdrawals are permitted only after one year from the date of opening the

account. If you withdraw between 1 and 2 years, 1.5% of the initial amount invested will be

deducted. And in case if you withdraw after 2 years, 1.0% of the balance amount is deducted.

Deduction: Your investments upto Rs 1,50,000 in SCSS are entitled for a deduction under

Section 80C. However, the interest earned by you would be subject to tax deduction at source.

But in case if you have no other income apart from interest income, then in order to avoid Tax

Deduction at Source (TDS), you can submit a declaration in Form 15-H (for general) or Form 15-

G (for senior citizens) as applicable.

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Options Galore - Snapshot of Section 80C

Schemes Type Interest Rate Term Min – Max Investment Premature Withdrawal Section No.

Tax planning with market-linked instruments

Tax Saving Funds/ ELSS Growth Market-Linked Returns Term: Ongoing

Lock-in-period: 3 years Rs 500 - No upper Limit No 80C

Unit Linked Insurance Plans (ULIPs)

Growth Market-Linked Returns Term: 10 - 20 years;

Lock-in-period: 5 years Premium varies from scheme to

scheme Yes 80C & 10(10D)

National Pension System Growth Market-Linked Returns 30-35 years Rs 6,000 Yes 80C

Tax planning the "assured return" way

Public Provident Fund Recurring 8.7% p.a. 15 years Rs 500 - Rs 1,50,000 Yes 80C

National Savings Certificate – 5 Yr

Deposit 8.5% (compounded

half-yearly) 5 years Rs 100 - No upper Limit No 80C

National Savings Certificate – 10 Yr

Deposit 8.8% (compounded

half-yearly) 10 years Rs 100 - No upper Limit No 80C

Bank Deposits Fixed

Deposit 8.50% to 9.50% p.a. 5 years No upper Limit No 80C

Post Office Time Deposit Fixed

Deposit

5-YR: 8.5%; (compounded

quarterly & paid annually

5 years Rs 200 - No upper Limit Yes 80C

Senior Citizens Savings Schemes

Deposit 9.20% p.a. (payable

quarterly) 5 years Rs 1,000 - Rs 15,00,000 Yes 80C

Non-ULIP Insurance Plans Sum Assured Only

(i.e. Insurance Cover) 5-40 years

Premium depends upon the insurance cover

Varies from policy to policy

80C & 10(10D)

(Source: Personal FN Research)

6. Tuition fees paid for children’s education (maximum 2 children):

The tuition fees that you pay to any university, college, school or other educational institution

situated within India for your children’s education is also eligible for deduction under Section

80C. However the fees paid towards any coaching center or private tuition may not be eligible.

Also you need to note that this deduction is available only to Individual Assessee and not for

HUF, and is limited to Rs. 1,50,000 and a maximum of 2 children. If someone has four children,

then the husband and wife both can enjoy a separate limit of two children each, so they can

separately claim deduction (upto Rs 1,50,000) for 2 children each, subject to the amount they

have actually paid.

7. Principal repayment on Housing Loan:

You always wanted to have your dream home and now you have been able to get it with the

help of a housing loan from a bank or a financial institution. But after you have got your home

through this loan, you have the obligation to repay the principal amount of the loan on time.

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The “repayment of principal amount”, makes you eligible to claim a deduction upto a sum of Rs

1,50,000 under Section 80C; and that benefit is available with you immaterial of the fact

whether you stay in the same property (Self Occupied Property - SOP), or have let it out on rent

(Let Out Property LOP). You can also claim tax benefit on the interest you pay on your housing

loan, but under a separate section (Section 24 which is covered in detail at the later stage in the

guide)

In case you have taken a second home loan for another property, then the principal amount

repaid (up to Rs 1,50,000) for the home loan taken only on your self-occupied property qualifies

for deduction under Section 80C. You cannot claim deduction for the principal repayment made

against the home loan on the other property.

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V - Thinking beyond Section 80C

Well, most people think that tax planning ends with Section 80C; but please note that there’s

more to tax planning than just investment instruments specified under Section 80C. Our Income

Tax Act, 1961 also considers the humane side of our life and also gives deduction for such

expenditure. So, in case if you pay your medical insurance premium, incur expenditure on the

medical treatment of a “dependant” handicapped, donate to specified funds for specified

causes, contribute in monetary form to political parties or electoral trusts, take a loan for

pursuing higher education or if you are an individual suffering from “specified” diseases; then

all this too can help you effectively plan your tax obligations, thus optimally reducing your tax

liability.

So, let’s understand how each of the above expenses for a cause or an investment, can help you

in effective tax planning. Herein below is the list of some major ones.

1. Premium paid for medical insurance (Section 80D):

The premium paid by you on medical insurance policy (commonly referred to as a mediclaim

policy) to cover your spouse and you, dependent children and parents against any unexpected

medical expenses, qualifies for a deduction under Section 80D.

The maximum amount allowed annually as a deduction (from your GTI) is Rs 15,000, in case if

you pay for yourself, spouse and dependent children. And if you are a senior citizen, the

maximum deduction gets extended to Rs 20,000.

Further, if you pay medical insurance premium for your parents (irrespective of whether they

are dependent on you or not), you can claim an additional deduction of upto Rs 20,000 in case

parents are senior citizens or Rs 15,000 in other cases under this section. So, for example, if you

pay a premium of Rs 15,000 for yourself and Rs 17,000 for your parents, you will be eligible for

a total deduction of Rs 30,000 only, assuming your parents are not senior citizens.

However, while paying the premium you need to ensure that the payment is made in any mode

other than cash.

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Within the limit of Rs 15,000 (and Rs 20,000 in case of senior citizens), the deduction of Rs

5,000 is allowed for your expenses towards preventive health checkups. This means if you are

paying a premium of less than Rs 10,000; you may avail this benefit and save tax.

2. Maintenance including medical treatment of a handicapped dependent (Section 80DD):

If you have incurred any expenditure in the form of medical treatment (including nursing),

training and rehabilitation for a handicapped “dependent” suffering from disability, then the

expenditure so incurred by you qualifies for deduction under Section 80DD of the Income Tax

Act. Similarly, if you have deposited a sum of money under any scheme framed in this behalf by

LIC (Life Insurance Corporation of India) or any other insurer or administrator or a specified

company (approved by the Board), for maintenance of the “dependent” being a person with

disability; also qualifies for a deduction under Section 80DD.

The quantum of deduction here depends upon the severity of the disability suffered by the

“dependent”. Hence, if the “dependent” is suffering from 40% of any disability *Specified under

section 2(i) of the Person with Disability (Equal Opportunities, Protection of Rights and Full

Participation) Act, 1955], then you would be entitle to a deduction of a fixed sum of Rs 50,000

p.a. from your GTI irrespective of the expenditure incurred or amount deposited. Similarly, if

the “dependent” is suffering from severe disability (i.e. 80% of any disability), then you claim a

higher deduction of fixed sum of Rs 1,00,000, from your GTI irrespective of the expenditure

incurred or amount deposited.

It is noteworthy that over here the term “dependent” being a person with disability means your

spouse, children, parents, brothers and sisters.

Moreover, in order to claim the deduction you need to submit a medical certificate issued by a

medical authority along with your return of income. Also if you are claiming a deduction in your

tax returns for such an expenditure incurred or amount deposited, your “dependent” cannot

claim a deduction under Section 80U in case he’s (handicapped dependent) filing his tax returns

separately.

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3. Expenditure incurred on your medical treatment (Section 80DDB):

If you have incurred expenditure on your medical treatment or for your “dependents”, then too

the expenditure so incurred, makes you eligible for deduction under Section 80DDB of the

Income Tax Act.

The deduction from your GTI, which you are entitled to, is Rs 40,000 or the amount actually

paid, whichever is lower. And if you are a senior citizen, then you are eligible for a deduction of

Rs 60,000 or the amount actually paid, whichever is lower.

It is noteworthy that over here the term “dependent” means your wholly or mainly dependent

spouse, children, parents, brothers and sisters. Also, in order to claim a deduction under this

section, you are required to submit a medical certificate from a doctor (neurologist, oncologist,

urologist, haematologist, immunologist, or any other specialist) working in a Government

hospital.

4. Repayment of loan taken for pursuing higher education (Section 80E):

While pursuing a personal goal of enrolling for “higher education” in order to be competitive

enough to meet your financial goals; the Income Tax Act offers you deduction (from your GTI),

when you take a loan to fulfil such dreams.

Sure, you can also take an education loan for your wife’s or children’s education or for any

person (minor) for whom you are the legal guardian. But that makes you eligible for deduction

under Section 80E of the Income Tax Act, to the extent of the interest paid on such a loan

taken. It is noteworthy that HUFs are not allowed to claim deduction under section 80E in

respect of interest paid on loan taken for higher education.

The deduction is available for a maximum of 8 years or till the interest is paid, whichever is

earlier. So, to simplify it further, the deduction is available from the year in which you start

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paying the interest on the loan, and the seven immediately succeeding financial years or until

the interest is paid in full, whichever is earlier.

It is noteworthy that, here the term “higher education” means full-time studies for any

graduate or post-graduate course in engineering (including technology / architecture),

medicine, management or for post-graduate courses in applied science or pure science

including mathematics and statistics. But from the Finance Act of 2011 its scope is extended to

cover all fields of studies (including vocational studies) pursued after passing the Senior

Secondary Examination or its equivalent from any school, board or university recognised by the

Central or the State Government or local authority or any other authority authorised by the

Central or the State Government or local authority to do so. However, no deduction is available

for part-time courses.

It is noteworthy that deduction can be claimed only if the loan has been taken from a bank,

approved financial institution or an approved charitable institution.

5. Donations to certain funds and charitable institutions (Section 80G):

As mentioned earlier that our Income Tax Act considers the humane side of our life, and so if on

humanitarian grounds you donate to certain specified funds, charitable institutions, approved

educational institutions etc., the donation amount qualifies for deduction under this section.

The deductions allowed can be 50% or 100% of the donation, subject to the stated limits as

provided under this section. For example, donations to “National Defence Fund” set up by the

Central Government are allowed 100% deduction, while for “Prime Minister Drought Relief

Fund” are allowed at 50%. If you make donations to any of the host of notified funds and / or

charitable institutions, you are eligible for deduction under Section 80G.

Funds / Charitable Institutions Amount Deductible

National Defence Fund 100%

Prime Minister’s National Relief Fund 100%

Prime Minister’s Armenia Earthquake Relief Fund 100%

Africa (Public Contributions – India) Fund 100%

National Foundation for Communal Harmony 100%

Approved university / educational institution 100%

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Chief Minister’s Earthquake Relief Fund 100%

National Children’s Fund 50%

Jawaharlal Nehru Memorial Fund 50%

Prime Minister’s Drought Relief Fund 50%

Indira Gandhi Memorial Trust 50%

Rajiv Gandhi Foundation 50% Note: There are also other funds and charitable institutions that are eligible for deduction under Section 80G.

(Source: Personal FN Research)

While there are 3.3 million registered NGOs and scores of causes, selecting a genuine charity is

a challenge. To deal with this concern, HelpYourNGO has set up an initiative which can help you

make a well-informed donation decision. The organisation promotes philanthropy through

transparency, by providing easy access to financials of over 240 NGOs and allows comparison of

data and ratios across multiple parameters.

Visit www.HelpYourNGO.com to Evaluate and then Donate to the right cause.

In order to claim deduction under this section, you are required to attach a proof of payment

along with your return of income.

6. Rent paid in respect to property occupied for residential use (Section 80GG):

If you are a self-employed or a salaried individual who is not in receipt of any House Rent

Allowance (HRA), and is paying a rent for an accommodation (irrespective of whether furnished

or unfurnished) occupied for residential use, then you can claim a deduction under this section.

But as a pre-condition for availing deduction under this section,

- You must pay rent for the house you live in, and should not get HRA for even a part of

the year

- You should not own and occupy any other house anywhere

- You or your spouse or your minor child or Hindu Undivided Family (if you are part of

one) must not own any residential accommodation in the city you reside or work in.

And the deduction which will be available to you under this section is the least of:

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25% of your total income or,

Rs 2,000 per month or,

Rent paid in excess of 10% of your total income

To claim deduction under section 80GG, you need to file a declaration in Form No. 10BA

7. Contributions made to any political parties or electoral trust (Section 80GGC):

Say, if you have some nepotism for any political party or electoral trust as you appreciate the

work done by them; and therefore decide to make a monetary contribution to the party or

electoral trust, then the amount so contributed would be eligible for a deduction under this

section.

8. Specified disability(s) (Section 80U):

As said earlier, that our Income Tax Act, 1961 considers the humane side of life; so if you as an

individual resident in India is suffering from any specified disability i.e. if you are suffering 40%

or more than 40% of any of the below specified diseases, then you would be eligible for

deduction under this section.

Specified disabilities:

Blindness

Low vision

Leprosy-cured

Hearing impairment

Locomotor disability

Mental retardation

Mental illness

The deduction available under this section is flat (i.e. fixed) Rs 50,000, immaterial of the

expenditure incurred. But if the disability is severe in nature (i.e. 80% or above), then one is

entitled to flat (i.e. fixed) deduction of Rs 1,00,000.

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However in order to avail of the deduction, you need to be an individual resident in India during

the financial year for which you are claiming the deduction. Also you need to file the copy of

certificates issued by the medical authority, at the time of filing returns.

9. Rajiv Gandhi Equity Savings Scheme (RGESS):

The Finance Act 2012 introduced a new Section 80CCG on ‘Deduction in respect of investment

made under an equity savings scheme’ to give 50% tax break to new investors who can invest

up to Rs. 50,000 and whose gross total annual income is less than or equal to Rs. 10 lakhs (New

investor is defined as individual whose PAN does not reflect any equity transaction). Later in the

union budget 2013-14, the limit was increased to Rs 12 lakh. Since the scheme was introduced

for novice investors only i.e. for those who are entering the market for the first time, the

benefit u/s 80CCG was to be claimed only in the first year. However, in the budget 2013-14, it

was extended to first-three successive years.

The objective of the scheme is to encourage flow of savings in the financial instruments and

improve the depth of the domestic capital market. In order to device safety measures for new

investors investing in direct equity through the RGESS, the stocks of Maharatna, Navaratna and

Miniratna, besides the top 100 stocks (BSE 100 or CNX 100) listed on the stock exchanges are

considered under RGESS. The argument for proposing investments only from the large caps and

PSU domain is, not only to provide security but also to ensure liquidity.

The first time investors can take benefit of RGESS, by investing in eligible stocks, RGESS eligible

close-ended Mutual Fund schemes and RGESS eligible Exchange Traded Funds. To make it

convenient to identify the eligible stocks and mutual funds, the stock exchanges shall furnish

list of RGESS eligible stocks / ETFs / MF schemes on their website. Further, the list shall also be

forwarded to the depositories at monthly intervals and whenever there is any change in the

said list. For this purpose, mutual fund houses shall communicate the list of RGESS eligible MF

schemes / ETFs to the stock exchanges.

The money invested under RGESS is subject to an overall lock-in period of 3 years, though one

can sell / pledge / hypothecate their securities after the expiry of the mandatory lock-in period

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of 1 year, but he cannot withdraw the money before 3 years. i.e. Investors may be allowed to

churn their portfolio after completion of fixed lock in period of 1 year, but his account will be

converted into an ordinary demat account only on completion of 3 years.

It is noteworthy that only individuals can avail tax deduction under section 80CCG. HUFs and

others are not be eligible for any tax deduction under section 80CCG.

Options Galore - Snapshot of deduction under other 80s

Section Quick Description of Deduction Limit

80D Premium paid for medical insurance

Maximum upto Rs 15,000 or Rs 20,000 in case of senior citizen. Additional deduction of upto Rs 20,000 is available on premium paid for parents. The maximum amount of exemption that can be availed by an individual is Rs 40,000

80DD Maintenance including medical treatment of a handicapped dependent who is a person with disability

Rs 50,000, irrespective of the amount incurred or deposited. However in case of disability of more than 80% a higher deduction of flat Rs 1,00,000 shall be allowed.

80DDB Expenditure incurred in respect of medical treatment Actual incurred, with a ceiling of up to Rs 40,000 or Rs 60,000 in case of senior citizen, whichever is lower

80E Repayment of loan taken for pursuing higher education Maximum deduction for interest paid for a maximum of 8 years or till such interest is paid, whichever is earlier

80G Donations to certain funds and charitable institutions Maximum deductions allowed can be 50% or 100% of the donation, subject to the stated limits as provided under this section

80GG Rent paid in respect of property occupied for residential use

Maximum deduction allowed is least of the following: Rs 2,000 per month; 25% of total income; Excess of rent paid over 10% of total income

80GGC Contribution made to any political parties or electoral trust

Amount donated to political party is fully exempt

80U Person suffering from specified disability(s) Rs 50,000, irrespective of the amount incurred or deposited. However in case of disability of more than 80% a higher deduction of flat Rs 1,00,000 is allowed.

80CCG Rajiv Gandhi Equity Savings Scheme (RGESS) Maximum deduction allowed is 50% of investment upto Rs 50,000, only for first time investors having total income of less than or equal to Rs 12 Lakhs.

(Source: Personal FN Research)

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VI – How your home loan can help in tax planning

While all of us have a dream of buying a dream home or constructing or reconstructing or

repairing our homes, it’s also important to consider the tax angle when we decide to do any of

these activities. For some of us, the amount of wealth we have created allows buying or

constructing or reconstructing or repairing or renewing homes from our own funds - i.e.

without opting for a “home loan”; but again doing so precludes you to avail of the tax benefit,

which are attached if one takes a home loan for such activities.

Just to reiterate, please don’t rule out the financial planning aspect of number of years left with

you for repayment of your home loan.

Yes, our Income Tax Act, 1961 too considers our desire to buy or construct or reconstruct or

repair or renew our dream home and gets a little benevolent, if one avails of a loan to fulfill

these desires for one’s dream home. The Act encourages you to buy, to do the aforementioned

activities (for your home) with a loan, as it provides you with tax benefits (that come along with

it). Both, “repayment of principal amount” and “payment of interest” are eligible for tax

benefit.

As we know that the “repayment of principal amount”, makes you eligible to claim a deduction

upto a sum of Rs 1,50,000 under Section 80C; and that benefit is available with you immaterial

of the fact whether you stay in the same property (Self Occupied Property - SOP), or have let it

out on rent (Let Out Property LOP).

As far as the payment of interest amount (for the loan amount availed) is concerned, it’s

available for deduction under Section 24(b). In the full budget announced in July 2014, the new

Government also increased the deduction limit on interest payment of a home loan on a self-

occupied property from Rs 1.5 lakh to Rs 2 lakh. So, if you buy or acquire a house and decide to

stay in the same (SOP), then from this fiscal the maximum sum of Rs 2,00,000 p.a. can be

availed by you as a deduction for interest. However, if you have let out the property on rent

(LOP), then the actual interest payable is eligible for deduction, thus not being subject to any

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maximum limit. This applies even in the case where you have two home loans for two different

properties, where one is self-occupied and the other is let out on rent.

Similarly, if you have taken a loan for the purpose of reconstructing, repairing or renewing the

property, the amount of deduction under Section 24(b) which you’ll be eligible for will be

restricted to Rs 30,000, irrespective whether you want to stay in it or let it out on rent.

Let’s understand with an example how home loan taken for “buying” your dream home to stay

in it (SOP) can reduce the total tax payable by you.

Let’s assume you earn Rs 6,50,000 p.a. by way of salary and have taken a home loan of Rs

40,00,000 for buying your dream home and you have decided to stay in it. The home loan is for

a tenure of 20 years and the rate of interest is 9.0% p.a., the Equated Monthly Installments

(EMI) you need to pay is Rs 35,989.

Tax savings on account of home loan

Gross Annual Salary (Rs) 6,50,000

Loan Amount (Rs) 40,00,000

Tenure (yrs.) 20

Rate of Interest p.a.( % ) 9.0

EMI (Rs) 35,989

Annual Interest Paid (Rs) 3,56,960

Principal paid in the 1st year (Rs) 74,908

Contributions towards tax-efficient instruments (Rs) 1,50,000

Tax paid without availing home loan benefits (Rs) 25,750*

Tax paid after availing home loan benefits (Rs) 5,150*

Tax Savings (Rs) 20,600*

(*tax calculated after giving effect for education cess)

(Source: Personal FN Research)

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The above table clearly shows the benefit of availing a housing loan if you are contemplating

buying a house. The total tax payable on your income without a home loan works out to Rs

25,750. The same with a home loan works out to Rs 5,150, thus saving you Rs 20,600.

Maximise your tax benefits

Now, let’s delve deeper into the benefits available. Say your interest amount in the first year is

Rs 3,56,960 which is much more than the maximum amount of Rs 2,00,000 allowed as a

deduction. Your principal repayment amount of Rs 74,908 is within the Rs 1,50,000 limit

allowed under Section 80C. However, it takes away almost half of the amount eligible under

Section 80C and leaves you with - Rs 75,092- to claim towards other tax saving instruments

such as PPF, NSC, Life Insurance, ELSS, POTDs.

And now consider, you have invested in the following manner under Section 80C.

Particulars Amt. ( Rs)

Principal Repayment 74,908

Life Insurance 50,000

PPF 60,000

EPF 20,000

NSC 20,000

Total 224,908

Claim deductions under Section 80 C 150,000

Contributed but can't claim tax benefit 74,908

(Source: Personal FN Research)

The amount eligible is more than what you can claim. Yes, you have an option of not investing

in PPF, POTDs or NSC but these are assured return schemes with attractive returns. And as said

earlier your portfolio should always comprise of a mix of assured return and market-linked

return instruments, in a composition which is in accordance to your financial goals and

willingness to take risk. Hence, ignoring these investment avenues may not be prudent from

financial planning perspective.

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So, now the next question is how do you claim maximum available deductions to minimise your

tax liability? The answer lies in taking a joint home loan. A joint home loan can be taken with

your spouse or relative.

Let’s understand with an example how a joint home loan with your spouse can help reduce

your tax liability.

Assume your spouse and you decide to take a joint home loan of the same amount as

mentioned above and share the loan in ratio of 50:50.

Particulars You Your Spouse

Gross Salary (Rs) 650,000 650,000

Home Loan Amount (Rs) 4,000,000

Tenure (yrs) 20

Rate of Interest p.a. 9.0%

EMI (Rs) 35,989

Annual Interest Paid (Rs) 178,480 178,480

Principal paid in the 1st year (Rs) 37,454 37,454

Life Insurance (Rs) 50,000 50,000

Other contributions towards tax-efficient instruments (Rs)

1,00,000

1,00,000

Total amount contributed under section 80C & 24(b) (Rs) 3,65,934 3,65,934

Amount which cannot be claimed to reduce tax liability (Rs) 15,934 15,934

Tax Paid when: (Rs)

1. No home loan benefit availed 25,750 25,750

2. Single home loan benefit availed 5,150 25,750

3. Joint home loan benefit availed 7,367 7,367

Total Household Tax Savings (Single Home Loan) (Rs) 20,600

Total Household Tax Savings (Joint Home Loan) (Rs) 36,767 Note: * calculations are done assuming that home loan and the EMI paid by the assessee and the spouse are in the ratio 50:50

(Source: Personal FN Research)

Now since your spouse is a co-owner and has contributed towards repayment of the loan she

too would be eligible for the tax benefit (both principal and interest component).

So, as indicated in the table above, if the principal and interest amount is shared equally

between your spouse and you, the contribution per person comes to Rs 37,454 for principal

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repayment and Rs 178,480 for interest payment. The principal amount is now half of what was

earlier which allows you to claim deductions towards other contributions. At the same time it

reduces the tax liability to a significant extent and leads to a household saving of upto Rs

36,767. As compared to a Single home loan, a Joint home loan leads to an additional household

saving of Rs 16,167.

From the tax planning point of view, it is vital to ensure that the higher earning member pays

higher portion of the home loan EMI. This is because the tax benefit accrues in proportion to

your contribution towards loan repayment.

So, remember if you plan to buy a house, it makes sense to include your spouse as a co-owner;

especially if your spouse’s income is taxable. This will result in higher tax saving in addition to

boosting your loan eligibility.

Additional benefit to first-time home buyers (Under Section 80EE)

In the union budget 2013-14, the finance minister introduced a new benefit for first time home

buyers looking for affordable houses. So individuals who have borrowed between April 01,

2013 and March 31, 2014 are entitled to get extra benefit in tax breaks. Besides, standard

deduction of upto Rs 2,00,000, such borrowers are now allowed to claim an additional

deduction of upto Rs 1,00,000 (U/S 80EE) for the interest payable on loan of less than Rs

25,00,000. It is noteworthy that this is a one-time benefit and can be claimed over two Financial

Years (FYs) in piecemeal manner spreading over two financial years i.e. FY 2013-14 and FY 2014-

15.

Who is eligible?

Only individual assessees can claim the benefit and that too only if they do not own any

residential property before buying the one for which the tax benefits would be claimed.

Other conditions to avail benefit under section 80EE

- The assessee should be a first time home buyer, he does not own any other house on

the date of sanction and this house should be used for self-occupancy

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- The value of residential house shouldn’t exceed Rs 40, 00,000

- Loan amount sanctioned shouldn’t exceed Rs 25,00,000 and is sanctioned in the FY

2013-14

- The loan must be obtained from a bank or a public listed company whose main objective

is to provide long term housing finance.

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VII - House Property and taxes

After showing benevolent side by providing you with the tax benefit, for availing a home loan

(to buy or construct or reconstruct or repair or renew), the Income Tax Act then eyes the house

property* owned by you for taxing the same. And this applies especially when you have an

income from let out property, or in case where you have more than one property which aren’t

let out on rent, but which are vacant (known as Deemed to be Let Out Property – DLOP).

*Owning a farm house, which forms a part of your agriculture income, is not brought under the tax net.

Now you may ask – “How can the income tax authority tax me, if I have not let out my property

on rent”?

Well, that’s because “annual value” of your property after providing for deduction available

under Section 24(b) is taxed under the head “Income from House Property”. A noteworthy

point is, term “house property” includes building(s) or land appurtenant (i.e. attached) thereto

as well.

And now the next question which may be popping on your mind is – “What is annual value of

the property and which deductions are available?”

Annual Value:

To understand that better let us take a case where you have let out the property (LOP) and

then DLOP.

Let Out Property (LOP)

In cases where you are enjoying a regular income from the property in the form of rent, then

the annual value of your property would be calculated by adopting the following steps:

a) Find out the reasonable expected rent of the property (which is municipal rent or fair

rent, whichever is higher)

b) Consider the rent actually received / receivable*

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c) Take whichever is higher from a) and b)

d) Calculate loss due to vacancy (i.e. in case if the property is vacant for period(s) during

the financial year)

e) The difference between step c) and step d), will be your “annual value” – which is here

referred to as the “Gross Annual Value” (GAV)

Now when we go one step further and minus the municipal taxes paid by you (on the property)

from “step e)” you’ll arrive at the “Net Annual Value” of your property. But to avail the

deduction for municipal taxes; they have to be paid by the landlord only.

*Note: Rent earned by you from the property is calculated after subtracting any unrealised rent from the tenant

(i.e. in case if he defaults to pay)

Deemed to be Let Out Property (DLOP)

In case you own more than one house, and the other house(s) apart from the one where you

are staying are vacant throughout the month, then the other house property(s) would be

considered as a “Deemed to be Let Out Property(s)” - DLOPs. Moreover, you would be liable to

pay tax on such property(s) after having calculated the Gross Annual Value (GAV), which will be

calculated in the same way as for LOP. But the only difference being that, here rent would be

the standard rent calculated as per the municipal laws.

Thereafter, if you as the landlord are paying any municipal taxes towards these properties, then

those would be subtracted to obtain the Net Annual Value (NAV).

Remember, over here in case you have multiple DLOPs, then you have an option to consider

one of property as a SOP and the rest would be considered as DLOPs under the present Income

Tax law. So, say you have 4 such DLOPs then you should ideally select the property with the

highest GAV as a SOP property, as this optimises your tax planning exercise, as the remaining

properties available with you will have a lower GAV.

Self-Occupied Property

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You need not worry here if you are occupying the property, throughout the financial year for

your stay (i.e. residential use) and thus the NAV of the property will be considered as Nil.

But if you are occupying the property for some part of the year, and the rest of the year you

have earned an income by letting it out, then proportionately for the rest of the year when the

property was let out, the calculation of “annual value” would be applicable as that of LOP.

Deductions:

After having calculated the Net Annual Value (NAV) as seen above, you are eligible to claim

deductions under Section 24(b), which further reduces your taxability under this head of

income. You broadly get the following deductions:

Standard Deduction [Section 24(a)]

Owning a home and maintaining the same costs you money. But irrespective of the fact

whether you have incurred any expenditure or not to do so, you will be eligible to claim a flat

deduction of 30% calculated on the NAV of the property. And this deduction is of specific use if

one’s property is LOP and / or DLOP. In case if the property is SOP, then you are not eligible to

claim any deduction as the NAV of your SOP is Nil.

Interest on borrowed capital [Section 24(b)]

As reiterated above too (in the home loan section), if one wisely takes a home loan for buying a

house property then the interest so paid on the borrowed capital will make you eligible for

deduction under Section 24(b), irrespective whether the house property is SOP, LOP or DLOP.

In case of SOP the income from house property will be negative income, (if interest is paid on

capital borrowed by you to buy or construct or reconstruct or renew or repair the house),

which will enable you to reduce your overall Gross Total Income (GTI). In case of other

properties – i.e., LOP and DLOP the income from house property will be positive, but would be

reduced to the extent of standard deduction and interest paid.

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The quantum of deduction depends upon the purpose for which you take a loan – i.e. purchase,

construction, reconstruction, repair or renewals, and also the type of property – i.e. SOP, LOP

or DLOP.

Hence, in case you have taken a loan for the purpose of purchase or acquisition of the house

which is an SOP, then you will be eligible for a maximum deduction of a sum of Rs 2,00,000. But

if the loan is taken for the purpose of repair, renewal, or reconstruction, then the eligible

deduction is restricted to Rs 30,000.

Now if the property is LOP or DLOP, then you do not have any maximum restriction for claiming

interest – so it can be above the otherwise limit of Rs 2,00,000, irrespective of the usage – i.e.

whether for the purpose of purchase, construction, reconstruction, repair or renewals.

Remember, while everyone buys house property(s), it is important to avail the benefits available under

the Income Tax Act, wisely as this would enable in optimally saving your tax liability, and off course enjoy

the fruits of your investment made too and / or enjoy the comfort of your dream house too.

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VIII - Save tax on your hard earned salary

While many of you in employment take enormous efforts to earn a salary, it is also equally

important in our opinion that you restructure your salary well, in order to save tax on your hard

earned salary. And mind you, if you do so you’ll have a greater “Net Take Home” (NTH) pay,

which will allow you to streamline your finances well and also, help you buy physical assets

such as your dream house and a dream car.

Many of you today get a big fat pay cheque, but it is important that one restructures the vital

components of salary well in order to be saved from being taxed.

The vital component of salary, where restructuring can be required is as under:

Basic Salary:

While this is the base of your head of income – “income from salary”, it is important that you

have your basic salary set right. This is because the basic salary constitutes 30% – 40% of your

Cost-to-Company (CTC). So, having a very high basic component may lead to having a high tax

liability in absolute Indian rupee terms. But similarly if you reduce your basic salary

considerably, then you would lose out on the other benefits such as Leave Travel Allowance

(LTA), House Rent Allowance (HRA) and superannuation benefits associated with your basic.

House Rent Allowance (HRA):

If you are paying rent for an accommodation, and if your organisation extends you HRA

benefits, then this is another vital component which can help you to reduce your tax liability.

But it should be noted that you cannot pay rent for the house which you own and if you are

residing in it.

Hence, now on the other hand if you are staying in a rented house and you are the one paying

the rent, then HRA exemption [under Section 10(13A)] can be availed for the period during

which you occupy the rented house during the financial year.

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However in order to obtain an exemption, you are required to submit appropriate and

adequate proof of payment of rent for the entire period for which you want to claim

exemption. But, if you as an employee are getting an HRA of less than Rs 3,000 per month, you

are not required to provide a rent receipt to your employer.

Also you need to note an important change in HRA rules introduced in FY 2013-14. As per the

circular issued by the Central Board of Direct Taxes (CBDT) in October 2013, if you are paying an

annual rent of more than Rs 1 Lakh or Rs 8,333 per month, then you will have to report the

Permanent Account Number (PAN) of your landlord to the employer (Earlier you had to furnish

a copy of the PAN card of your landlord only if your annual rent exceeded Rs 1.80 lakh, or Rs

15,000 per month). If your landlord does not have a PAN then you need to file a declaration to

this effect from your landlord along with the name and address of the landlord.

The maximum exemption which you can enjoy for HRA is as under:

In Chennai/ Delhi/ Kolkata/ Mumbai In other cities

Least of: Least of:

Actual HRA Actual HRA

Rent paid in excess of 10% of salary* Rent paid in excess of 10% of salary*

50% of salary* 40% of salary*

*Salary for this purpose includes basic salary + dearness allowance (if in terms of service)

(Source: Personal FN Research)

Here a noteworthy point is, if your rent is very high and if you are not fully covered by the HRA

limit, then it would be wise to pick a company leased accommodation (if the company in which

you work in offers so), as this company leased accommodation would constitute to be the perk

value and would be taxed @ 15% of your gross income. Sure, the perk value is taxable but it still

works out to be more effective for tax planning, than opting for a HRA that doesn’t fully cover

your rent.

Leave Travel Concession (LTC):

While you may be fond of opting for a leave and travel with your family for a holiday, don’t

forget to assess what tax benefits are extended to you for doing so. The Income Tax Act

provides you tax concession if you have actually incurred expenditure on your travel fare

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anywhere in India either alone or along with your family members (i.e. your spouse, children,

parents, brothers and sisters who are mainly or wholly dependent on you). But such exemption

is limited to the extent of actual expenses incurred i.e. you can claim exemption on the LTA

amount OR the actual amount incurred, whichever is lower.

Also the exemption extended to you under the Act is for two journeys performed in a block of

four calendar years. And the current block of four calendar years is from 2014 to 2017 (i.e. from

January 1, 2014 to December 31, 2017); the next block will be from 2018 to 2021 (i.e. from

January 1, 2018 to December 31, 2021).

As per the present Income Tax Rule, the exemption would be available to you in the following

manner:

Particulars Amount exempt

Where the journey is performed by air Amount of "economy class" airfare of the national carrier by the shortest route to the place of destination or amount actually spent, whichever is less.

Where the journey is performed by rail Amount of air-conditioned first class rail fare by the shortest route to the place of destination or amount actually spent, whichever is less.

Where the places of origin of journey and destination are connected by rail and journey is performed by any mode of transport other than air.

Air-conditioned first class rail fare by the shortest route to the place of destination or amount actually spent, whichever is less.

Where the place of origin of journey and destination (or part thereof) are not connected by rail

> Where a recognised public transport exists First class or deluxe class fare by the shortest route or the amount spent, whichever is less.

> Where no recognised public transport system exists Air-conditioned first class rail fare by the shortest route (as if the journey is performed by rail) or the amount actually spent, whichever is less.

(Source: Personal FN Research)

In case you do not avail of a LTC or if you travel just once in the four calendar year of the block

period (2014-2017), then you will be allowed to carry-over the concession to the first calendar

year (2018) of the next block 2018-2021, but for only one journey. In addition to this, you will

be eligible to travel two more times in the next block.

It is vital that you utilise your leaves wisely and travel to any of your loved holiday destination in

India, as this will not only de-stress you, but also help you in reducing your tax liability. After

you have returned from your journey, in an excitement please do not tear your travel tickets /

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boarding pass (for air travel) as you need to submit them to your employer so that your tax

liability can be reduced.

Education allowance:

If you are married with kids, and if your employer is providing with education allowance, then

do not refrain from availing it, as this can again help you in reduction of your tax liability. The

exemption extended to you under the Income Tax Act is Rs 100 per month for a maximum of

two children (i.e. in other words Rs 2,400 p.a. totally). Similarly, if your children are staying in a

hostel then a maximum of Rs 300 per month per child but subject to a maximum of two

children will be available to you as an exemption (i.e. Rs 7,200 per month).

Meal Allowance through Food Coupons / Food Cards:

While you may be tempted to increase your NTH (in the cash form) you should not ignore to

avail the food coupon / food card benefit, if your employer provides one. This is because

effective utilization of the same will enable you to effectively reduce your tax liability along with

getting the feeling of being pampered by your employer.

The exemption amount which you can enjoy is Rs 50 per meal available only in respect of meals

during office hours. However, the exemption is also available in case your employer provides

you food vouchers / cards of value of which can be used at eating joints. The exemption limit in

this case is restricted to Rs 2,500 per month for a food voucher / card value.

So remember, if your employer is providing you food coupon / card don’t refrain from availing

the same for a maximum voucher value of Rs 2,500 every month.

Medical reimbursement:

During the year if you and / or your family members have visited a doctor or bought medicines

from a chemist, then all the expenditure incurred by you and / or your family members during

the year for medical purpose too, would help you in reducing your tax liability.

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As per the Income Tax Act, the maximum amount of deduction available with you is Rs 15,000

for every financial year, and to claim the same you are required to submit, to your employer,

the medical bills for the financial year stating the amount in total which you intend to claim.

Similarly, it is noteworthy that if your medical insurance premium is paid by the employer or

reimbursed, then that too will not be subject to tax. Also if your employer is providing medical

facility in hospital or clinic owned by him, local authority, Central Government or State

Government then medical expenditure incurred under such a hospital too, would not be

subject to any tax.

So, next time when you get your pay cheques in hand please evaluate the aforementioned

points, and assess whether every component in your salary is structured well – and to do so you

can certainly talk to your Human Resource department, as they too may help you on this.

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IX - Conclusion

In the previous pages of this guide we have seen that your extra step towards the tax planning

way would enable you to wisely reduce your tax liability. Remember waiting till the eleventh

hour to do your tax planning exercise, is not going to help in a big way. It would just lead to “tax

saving and not “tax planning”. Just to reiterate, while you have host of tax-saving investment

options available under Section 80C, following an asset allocation model (for your tax planning

exercise), in accordance to your age, ability to take risk and investment horizon is going to make

your tax saving portfolio look more prudent even from a financial planning perspective.

Also one needs to look beyond the ambit of Section 80C, as you may exhaust the limit of Rs

1,50,000 and still find it insufficient to reduce your tax liability. So, you should access the other

deductions available under Section 80 (as mentioned above) and the exemptions too.

Moreover, while you are working hard with an organisation to make a living; remember to

effectively know and structure each component of your salary income in order to effectively

save more tax, which in a way will help you in buying all the comforts and luxuries in life.

PersonalFN thinks that while you must take help of your tax consultant while filing your returns

and seek opinion from him, a self-study approach on your tax planning exercise is also quite

necessary as one should be well versed with at least those tax provisions which affect us

directly. And with that note we wish you all Happy Tax Planning!!

General Disclaimer: This communication is for general information purposes only and should not be construed as a

prospectus, offer document, offer or solicitation for an investment or investment advice.

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Contact us

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Website: www.personalfn.com

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