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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 economic activity 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 we can 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.

This 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 your age, income, ability to

take risk and financial goals to tax planning exercise, then one can wisely complement tax

planning to investment planning as well.

Also, realisation will dawn on you that theres more to tax planning than the mere Rs 1 lakh

limit 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!!

TeamPersonal FN

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Disclaimer

Quantum Information Services Private Limited (PersonalFN) is enrolled as AMFI Registered Mutual Fund Advisor (ARMFA) under

AMFI Registration No. ARN- 1022 and adheres to AMFI Guidelines and Norms for Intermediaries (AGNI), and all its employees

engaged in distribution of Mutual Fund products have passed the prescribed AMFI certification examination. This is a

generalized Service, provided on an "As Is" basis by PersonalFN. PersonalFN and its affiliates disclaim any warranty of any kind,imputed by the laws of any jurisdiction whether in or outside India, whether express or implied, as to any matter whatsoever

relating to the Service, including without limitation the implied warranties of merchantability, fitness for a particular purpose.

PersonalFN will and its subsidiaries / affiliates / sponsors / trustee or their officers, employees, personnel, directors will not be

responsible for any direct/indirect loss or liability incurred to the user or any other person as a consequence of his or any other

person on his behalf taking any investment decisions based on the above recommendation. This is not a specific advisory

service to meet the requirements of a specific client. Use of the Service is at any persons, including a Client's, own risk. The

investments discussed or recommended under this service may not be suitable for all investors. Investors must make their own

investment decisions based on their specific investment objectives and financial position and using such independent advisors

as they believe necessary. Information herein is believed to be reliable but PersonalFN does not warrant its completeness or

accuracy. The Service should not be construed to be an advertisement for solicitation for buying or selling of any securities. All

intellectual property rights emerging from this guide are and shall remain with PersonalFN. This guide is for users personal use

and the user shall not resell, copy, or redistribute this guide, or use it for any commercial purpose. Please read the Terms of Useon the website www.personalfn.com.

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Index

Section I: Introduction 05

Tax Saving Vs. Tax Planning

Section II: Mistakes which you have been doing while saving tax 06

Section III: Your small steps (to Tax Planning) can take you leaps 09

Steps to tax planning

Parameters for prudent tax planning

Section IV: Optimal tax planning with section 80C 17

Tax planning the assured return way

Tax planning with market-linked instrument

Section V: Thinking beyond section 80C 30

Section VI: Your home loan and tax planning 37

Section VII: House Property and taxes 42

Section VIII: Save tax on your hard earned salary 46

Section IX: Conclusion 51

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I - Introduction

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 most, 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 your tax planning exercise too, you 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 ones larger financial

plan after accounting for ones 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 - Mistakes which you have been doing 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 5

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 eleventh hour 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 procrastination. Waiting till the eleventh

hour, 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, is just going to lead you to a path of sub-optimal tax planning

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

2. Buying Unit Linked Insurance Plans:At the end of the financial year, many of you must have attended telephone calls of insurance

agents pestering you to buy an investment cum insurance plans typically market linked i.e.

Unit Linked Insurance Plans. And many of you realising the need to save 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?

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The answer in our opinion is a sheer No. And thats be cause of the ignorance and / or

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

investments.

Remember when you are thinking of insuring yourself, it should purely mean protecting your life against

any contingent events; and thus given that you should be ideally buying only pure term life 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 your annual premium) when compared to pure term life insurance plans; where for

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

intended for.

3. Ignoring power of compounding through tax saving mutual funds:Many of you despite the fact that age, income, ability to take risk along with financial goals

support you to take risk, you absolutely rule out the concept of power of compounding to your

portfolio. 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, role of equity as an asset class

cannot be ignored in ones tax saving portfolio too. While some do consider the tax saving

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

ability to take risk and financial goals) 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.

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4. Not optimizing all options for tax saving:For many tax planning starts as well as ends with Section 80C - which enunciates investment

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

optimal reduction of tax liability.

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

deduction for contributions made for financing our countrys infrastructure development. 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, take into account the urge to buy your dream home by

taking a loan, the Act also extends 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 eleventh hour, never mind. But,

please learn from them and dont the 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.

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Hence, GTI is the total income earned by one 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 provisions

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

availing deductions to GTI.

Now, one may askhow do I undertake this activity if Im a novice?

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

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

tax portals that have emerged in 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 its 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 Section 80CCF)

Donations

Expenditure on handicapped dependent

Premium payment for your medical insurance

Interest paid on loan taken for higher education

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Rent paid for residential accommodation

Expenditure incurred on a specified diseases suffered by you

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 tax

returns.

The income tax rates for Individuals and HUFs for FY 2011-12 are as follows:

Net Taxable Income (in Rs) RateUpto 1,80,000

NilUpto 1,90,000 (for women)

Upto 2,50,000 (for senior citizens)

1,60,001 to 5,00,000 10%

5,00,001 to 8,00,000 20%

8,00,001 & above 30%

(Source: Finance Act 2010, PersonalFN Research)

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

So, say if your net taxable income (NTI) after availing for all deductions available is Rs 10,00,000

then your tax liability will be computed as under:

Computation of tax liability (2011-12)

Taxable Income (inRs) 10,00,000Upto 180,000 Nil -

160,001 to 500,000 10% 32,000

500,001 to 800,000 20% 60,0008,00,001 & above 30% 60,000

Tax payable (inRs) 1,52,000Education Cess 3% 4,560

Total Tax (inRs) 1,56,560(Source: PersonalFN Research)

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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 Scheme (NPS), as at a young the willingness to take risk is

high. One may also consider taking a home loan when you are young as; number of years

of repayment are 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 thetenure you get while investing in an investment avenue, which enables one to make more

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

Lets understand this much better with the help of an illustration.

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An early bird gets a bigger pie

Particulars Suresh Mahesh Sandesh

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: PersonalFN Research)

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

ELSS 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 ELLSS scheme (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 Sandesh, the late bloomer of

the lot. He begins investing at age 35, the same amount monthly in an ELSS Scheme as

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

comparison, a meagre Rs 92 lakh.

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(Source: PersonalFN Research)

One can also consider donating an affordable amount 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).

For some of you young people, perusing 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 the 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 if I have a high income, then why I need a home loan. I can straight away

go ahead and buy!

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

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

Also given that you are rich, you can also consider donating some of your money towards a

noble cause, which can also enable you to enjoy 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 (i.e. it is low), 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 be also less skewed towards market-linked tax saving instruments,

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

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

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

instruments (tax saving) which provide you 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

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

tax saving instruments respectively.

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

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

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

Remember, procrastination will only ensure that you invest at the last moment and 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 you to effectively invest in tax saving instruments, in

order to optimally reduce your tax liability; and this is seen as one of the most sought after

sections when it comes to tax planning. 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 Scheme (NPS)

Unit-Linked Insurance Plans (ULIPs)

Equity Linked Savings Schemes (ELSS)

Tuition fees paid for childrens education (maximum 2 children)

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 Rs1,00,000 p.a. But we think rather

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

these tax saving instruments for prudent tax planning by recognising your age, income, financial

goals and risk appetite.

Now you may ask how?

Well, its 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 suits you

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best (taking into account the factors mentioned above) and will also extend your tax planning

exercise to investment planning too.

Lets 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 suit you. Under this category you are

investing in the capital markets, giving you variable returns. Following tax saving instruments

are available for investment.

1. Equity Linked Savings Schemes (ELSS):

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

And these are popularly known as Tax Saving Mutual Funds. 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. You can either

make lump sum investments or investments through the Systematic Investment Plan (SIP).

It is noteworthy that, in the long-term if you intend to create wealth by hedging the inflation

risk, then this tax saving instrument can give you luring returns.

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Performance of Tax Saving Mutual FundsSIP is the way to go

Scheme Name 1-Yr Returns (%) 3-Yr Returns (%) 5-Yr Returns (%)

SIP Lump sum SIP Lump sum SIP Lump sum

Baroda Pioneer ELSS '96-6.06 -9.36 3.08 21.69 3.04 1.83

Birla SL Tax Relief '96 (D)

-11.56 -12.62 1.58 23.90 2.41 2.78

Canara Robeco Equity Tax Saver (D)

-2.41 -1.61 11.71 31.94 13.14 12.60

DSPBR Tax Saver (G)

-8.39 -9.50 5.16 24.96 6.25 7.90

Fidelity Tax Advt (G)

-4.24 -4.23 10.52 29.20 10.53 9.81

Franklin India Taxshield (G)

-0.63 0.75 11.82 28.81 10.72 9.30

HDFC TaxSaver (G)

-5.88 -6.65 10.11 31.43 10.08 7.78

ICICI Pru Tax Plan (G)-3.15 -4.78 12.04 34.38 10.98 6.87

IDFC Tax Saver (G)

-3.03 -4.98 7.01 23.30 - -

Kotak Tax Saver (G)

-5.88 -7.11 4.79 22.59 3.51 2.43

L&T Tax Saver (G)

-8.97 -11.69 2.88 24.54 2.82 -0.10

Quantum Tax Saving (G)

0.54 -3.19 12.17 28.60 - -

SBI Magnum TaxGain'93 (G)

-3.82 -5.80 4.59 22.80 4.59 3.75

Sundaram Tax Saver (G)

-1.69 -6.09 4.13 20.09 5.85 7.08

Taurus Tax Shield (G)

-5.76 -6.12 6.48 26.89 9.32 11.95

Average

-4.73 -6.20 7.20 26.34 7.17 6.46

(Source: ACE MF, PersonalFN Research)

Yes, you may saybut 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, PersonalFN Research)

Get wealthy Sip by sip

(Source:ACE MF, PersonalFN Research)

However a noteworthy point in SIP investing for 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 you can enjoy is Rs 1,00,000 p.a. under section

80C. 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) too.

2. Unit-Linked Insurance Plans (ULIPs):

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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 is invests purely in debt instruments).

Hence apart from the insurance cover (which is 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 the optimum insurance coverage and the right investment instruments for long-term

wealth creation.

Deduction: The premium which you paying for your ULIP plans would be eligible for tax benefit,

subject to the maximum eligible amount of Rs1,00,000 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.

3. National Pension Scheme (NPS):

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

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

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

For NPS, if you (eligibility age: from 18 to 60) 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 dont maintain

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

in a year, a penalty of Rs100 will be levied. Moreover, in order to have this account, you

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

be permitted under this account, without any limits.

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 viz. E

(Equity), C (Credit risk bearing fixed income instruments other than Government Securities) and

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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 your

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

allocation at 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 under this scheme, when one

withdraws money, at the age of 60 it is taxable.

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 1,00,000 p.a. as

available under Section 80C.

Tax Planning the assured return way:

Unlike the case presented above (i.e. under 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 theres zero risk of erosion to your capital. Following are the tax saving

instruments available under this category:

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1. Non-Unit Linked Life Insurance Plans:

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

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

investment option as well as an 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 plan, pension plans etc.

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 paying for your such non-ULIP life insurance

plans would be eligible for tax benefit, subject to the maximum eligible amount of Rs 1,00,000

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.

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

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

do not wish to do so, you can also nominate them; but joint application is not permissible.

The account so opened will have an expiry term of 15 years from the end of 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 100,000 in a financial year in order to enjoy the tax

benefit under Section 80C, and the amount to the credit of your account will be entitled to a

tax-free interest at 8.6% p.a. Your each deposit in the PPF account should at least be Rs 500,

and one has the convenience of depositing in either lump sum or in convenient 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 subject to the minimum (Rs 500)

and maximum (Rs 1,00,000) amount.

The interest to the account will 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 account on

March 31, 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 (which can be 8%) 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).

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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 8% p.a. (compounded annually).

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 1,00,000 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 your nearest post offices, as the scheme is available only with the 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 @ 8.4% p.a. compounded half-yearly whereas NSC maturing

in 10 years offers interest @ 8.7% p.a. compounded half-yearly, thus giving you an effective

interest rate of 8.58% p.a. and 8.90% 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 100,000 p.a. under

Section 80C. Furthermore, the accrued interest which is deemed to be reinvested qualifies for

deduction under Section 80C. 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.

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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. The minimum amount that you can invest is Rs 100 with an upper limit of Rs

1,00,000 in a financial year. The interest rates offered by some of the popular banks are as

under:

Bank Name

Interest Rate(s) (%)

General

Senior

Citizens

Axis Bank Ltd. 8.25 9.25

HDFC Bank Ltd. 9.25 9.75

ICICI Bank Ltd. 8.75 9.25

IDBI Bank Ltd. 9.50 10.25

State Bank of India 9.25 9.75

(Source: Respective banks website, PersonalFN Research)

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.

The account can be opened by you either in single name or jointly or even by a minor (through

a guardian) who has attained the age of 10.

The minimum investment amount is Rs 200, and there isnt any upper limit. However, the

investment amount over Rs 1,00,000 will not be eligible for any tax benefit.

A 5-Yr POTD earns a return of 7.5% p.a. (compounded quarterly), but paid annually. Hence, say

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

be Rs 771 p.a.

As regards premature withdrawals are concerned, they are permitted only after 6 months from

the date of deposit with a penalty in the form of loss of interest.

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

1,00,000 p.a. under Section 80C. But as mentioned above, the interest earned on your

investments will be subject to tax deduction at source. However, 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.

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.

In order to avail the benefits of this scheme, you are required to open an 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 Rs1,000 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% 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.

After one year from the date of opening the account, premature withdrawals are permitted. 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 1,00,000 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 Secti

Tax planning with market-linked instruments

Saving Funds/ ELSS Growth Market-Linked ReturnsTerm: Ongoing

Lock-in-period: 3 yearsRs 500 - No upper Limit No 8

t Linked Insurance Plans

Ps)Growth Market-Linked Returns

Term: 10 - 20 years;

Lock-in-period: 5 years

Premium varies from scheme to

schemeYes 80C &

ional Pension Scheme Growth Market-Linked Returns 30-35 years Rs 6,000 Yes 8Tax planning the "assured return" way

lic Provident Fund Recurring 8% p.a. 15 years Rs 500 - Rs 70,000 Yes 8ional Savings Certificate

Deposit8.4% (compounded

half-yearly)5 years Rs100 - No upper Limit No 8

ional Savings Certificate

YrDeposit

8.7% (compounded

half-yearly)10 years Rs100 - No upper Limit No 8

k DepositsFixed

Deposit8.25% to 10.25% p.a. 5 years No upper Limit No 8

t Office Time DepositFixed

Deposit

1-YR: 6.25%;

2-YR: 6.50%;

3-YR: 7.25%;

5-YR: 7.50%;

(compounded

quarterly & paid

annually

1-5 years Rs200 - No upper Limit Yes 8

ior Citizens Savings

emesDeposit

9% p.a. (payable

quarterly)5 years Rs 1,000 - Rs 15,00,000 Yes 8

n-ULIP Insurance PlansSum Assured (i.e.

Insurance Cover)5-40 years

Premium depends upon the

insurance cover

Varies from

policy to policy80C &

(Source: PersonalFN Research)

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V - Thinking beyond Section 80C

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

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

contributions made for financing our countrys infrastructure development. 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, lets 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 dependant or not on you), you can claim an additional deduction of upto Rs 15,000 under

this section. So, for example, if you pay a premium of Rs15,000 for yourself and Rs15,000 for

your parents, you will be eligible for a total deduction of Rs30,000.

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

other than cash.

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2. Maintenance including medical treatment of a handicapped dependent (Section 80DD):If you have incurred any expenditure in the form 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 thedependent. 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 100,000, 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 hes (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

Rs60,000 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 wifes or childrens 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.

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

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

the interest is paid in full, whichever is earlier.

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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 now from present 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

5. Donations to certain funds and charitable institutions (Section 80G):As mentioned earlier that our Income Tax Act, 1961 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%. Under the Income Tax Act, if you make donations to any of the host

of notified funds and / or charitable institutions, you are eligible for deduction under Section

80G.

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Funds / Charitable Institutions Amount Deductible

National Defence Fund 100%

Prime Ministers National Relief Fund 100%

Prime Ministers Armenia Earthquake Relief Fund 100%

Africa (Public Contributions India) Fund 100%

National Foundation for Communal Harmony 100%

Any approved university or educational institution 100%

Maharashtra Chief Ministers Relief Fund and Chief Ministers Earthquake Relief

Fund 100%

Any fund set up by Gujarat State Government for providing relief to earthquake

victims 100%

Jawaharlal Nehru Memorial Fund 50%

Prime Ministers Drought Relief Fund 50%

National Childrens 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. The full list is available here:

http://www.incometaxindia.gov.in/Acts/INCOME TAX Act/80g.asp

(Source: PersonalFN Research)

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 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 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 or your spouse or your

minor child must not own any residential accommodation either in India or abroad.

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

25% of the total income or,

Rs2,000 per month or,

Excess of rent paid over 10% of total income

http://www.incometaxindia.gov.in/Acts/INCOME%20TAX%20Act/80g.asphttp://www.incometaxindia.gov.in/Acts/INCOME%20TAX%20Act/80g.asphttp://www.incometaxindia.gov.in/Acts/INCOME%20TAX%20Act/80g.asp

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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. not suffering from not

less than 40% any specified diseases given below, 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 Rs1,00,000.

However in order to avail of the deduction, one needs to file copy of certificates issued by the

medical authority, at the time of filing returns.

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9. Investment in long-term infrastructure bonds (Section 80CCF):In the Finance Act 2010, the Government introduced this new section, (and even extended the

benefits of this section in the Finance Act, 2011) which enables you to invest an additional sum

of money in long-term infrastructure bonds (notified by the Central Government), and avail a

deduction over and above the investment limit of Rs1,00,000 specified under section 80C.

But under this section from a tax deduction purpose only a sum upto Rs 20,000 would be

eligible for a deduction.

Options Galore - Snapshot of deduction under other 80s

Section Quick Description of Deduction Limit

80D Premium paid for medical insuranceMaximum uptoRs 15,000 or Rs 20,000 in case of

senior citizen

80DDMaintenance including medical treatment of a

handicapped dependent who is a person with disability

Rs50,000, irrespective of the amount incurred or

deposited. However in case of disability of more than

80% a higher deduction of flat Rs 75,000 shall be

allowed.

80DDB Expenditure incurred in respect of medical treatmentActual incurred, with a ceiling of up toRs 40,000 orRs

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

80GGRent paid in respect of property occupied for residential

use

Maximum deduction allowed is least of the following:

Rs2,000 per month; 25% of total income; Excess of

rent paid over 10% of total income

80GGCContribution made to any political parties or electoral

trustAmount 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 Rs100,000 is allowed.

80CCF Investment in long-term infrastructure bonds Maximum deduction allowed is Rs 20,000.

(Source: PersonalFN Research)

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VI - Your home loan and tax planning

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

constructing or reconstructing or repairing our homes, its

also important to consider the tax angle when we decide to

do any of these activities. For some, the amount of wealth

they 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.

But again just to reiterate please dont 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 ones 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.

The repayment of principal amount, makes you eligible to claim a deduction upto a sum ofRs

100,000 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 has let it out on rent

(Let Out Property LOP).

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

available for deduction under section 24(b). So, if you buy or acquire a house and decide to stay

in the same (SOP) then the maximum sum Rs 150,000 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 maximum limit.

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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 youll be eligible for will be

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

Lets 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.

Lets assume you earn Rs 650,000 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

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

(EMI) is Rs 35,989.

Tax savings on account of home loan

Gross Annual Salary (Rs) 650,000

Loan Amount (Rs) 4,000,000

Tenure (yrs) 20

Rate of Interest p.a.( % ) 9.0

EMI (Rs) 35,989

Annual Interest Paid (Rs) 356,960

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

Tax paid without availing home loan benefits (Rs) 45,320*

Tax paid after availing home loan benefits (Rs) 24,720*

Tax Savings (Rs) 20,600*

(*tax calculated after giving effect for education cess)

(Source: PersonalFN Research)

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

45,320. The same with a home loan works out to Rs 24,720, thus saving you Rs 20,600.

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Maximise your tax benefits

Now, lets delve deeper into the benefits available. Your interest amount in the first year is Rs

356,960 which is much more than the maximum amount of Rs 150,000 allowed as a deduction.

Your principal repayment amount of Rs 74,908 is within the Rs100,000 limit allowed under

Section 80C. However, it takes away a big chunk of the amount eligible under Section 80C and

leaves you with little (i.e. Rs 25,092) 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 10,000

PPF 20,000

EPF 10,000

NSC 20,000

Total 134,908

Claim deductions

under Section 80 C 100,000

Contributed but can't

claim tax benefit 34,908

(Source: PersonalFN 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.

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.

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Lets 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 shares 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) 10,000 10,000

Other contributions towards tax-efficient

instruments (Rs) 50,000 50,000

Total amount contributed under section 80C

& 24(b) (Rs) 247,454 247,454

Amount which cannot be claimed to reduce

tax liability (Rs) 28,480 28,480

Tax Paid when: (Rs)

1. No home loan benefit availed 53,560 50,470

2. Single home loan benefit availed 24,720 21,630

3. Joint home loan benefit availed 24,982 31,509

Total Household Tax Savings (Single Home

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

Loan) (Rs) 57,156Note: * calculations on the done assuming the spouse here is a woman. Assumption made that home loan and the EMI paid by you and your

spouse are in the ratio 50:50

(Source: PersonalFN 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

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

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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

57,156. As compared to a Single home loan, a Joint home loan leads to a saving of Rs 36,556.

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 spouses income is taxable. This will result in higher tax saving in addition to

boosting your loan eligibility.

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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 arent 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 askHow can the income tax authority tax me, if I have not let out my property

on rent?

Well, thats because annual value of your property after proving 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

also.

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:

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

rent, whichever is higher)

b) *Consider rent actually received / receivable

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 taxed paid by you (on the property)

from step e) youll arrive at the Net Annual Value of your property. But to avail the

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

*Note: Rent earned by you from the property is calculated after subtracting 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 theses 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 an SOP and the rest would be considered as DLOPs as the present Income

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

highest GAV as an SOP property, as this optimise your tax planning exercise, as the remaining

properties available with you will have a lower GAV.

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Self Occupied Property

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

ones 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 an 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 other properties

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

the extent to standard deduction and interest paid.

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 we eligible for a maximum deduction of a sum of Rs 1,50,000. But if

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

isrestricted toRs30,000.

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 Rs1,50,000, 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 youll have a

greater Net Take Home (NTH) pay, which will allow you to

streamline your finances well and also 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 components of salary, where restructuring is requires 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 with the other benefits such as Leave Travel Allowance

(LTA) and superannuation benefits associated with your salary.

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.

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Hence, now on the other if you are staying in a rented house 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.

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 is drawing an HRA upto Rs 3,000 per month, you are not

required to provide a rent receipt to your employer.

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

In Chennai/ Delhi/ Kolkata/ Mumbai In other citiesLeast 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: PersonalFN Research)

Here a noteworthy points is, if you are 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 than doesnt

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, dont

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

anywhere in India either alone or along with your family members (i.e. your spouse, children,

parents, brothers and sisters who mainly or wholly dependent on you).

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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 2010 to 2013 (i.e. from

January 1, 2010 to December 31, 2013).

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 existsFirst 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: PersonalFN Research)

In case you have not availed of a LTC and have not travelled in any of the four calendar year

block period, then you are allowed to carry-over the concession to the first calendar year of the

next block, but for only one journey.

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 tax liability. After you

have returned from your journey, in an excitement please do not tear your travel tickets /

boarding pass (for air travel) as you need to submit them to your employer so that your tax

liability can be reduced.

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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).

Food Coupons / Cards:

While you may be tempted to increase your NTH (in the cash form) you should not ignore to

avail the food coupon / 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 dont 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 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,

medical bills for the financial year stating the amount in total which you intend claiming.

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 the human resource department, as they too may help you on this.

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Contact us

Mumbai

101, Raheja Chambers,

213, Free Press Journal Marg,

Nariman Point,

Mumbai - 400 021.

Tel: +91-22-6136 1200

Fax: +91-22-6136 1222

Email:info@personalfn.com

mailto:info@personalfn.commailto:info@personalfn.commailto:info@personalfn.commailto:info@personalfn.com