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Investment planning: Tips to reduce your tax burden

Investment planning: Tips to reduce your tax burden

It's that time of the year again when people start planning their taxes. Most delay this till the last moment and then invest without giving serious thought to the tax-saving instruments at hand. We bring you all the options you can avail of to reduce the tax burden.

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Photo: ReutersPhoto: Reuters
Dipak Mondal
  • Dec 2, 2013,
  • Updated Dec 6, 2013 12:11 PM IST
It's that time of the year again when people start planning their taxes. Most delay this till the last moment and then invest without giving serious thought to the tax-saving instruments at hand. That's why we thought we should warm you up well in advance so that you can make the best use of all the options.MAKING RS 1-LAKH LIMIT COUNTYou can claim a deduction of up to Rs 1 lakh under Sections 80C, 80CCC and 80CCD. If you are in the 30% tax bracket, you can save up to Rs 30,900 by investing in the following approved tax-saving instruments.
  • Employee Provident Fund (EPF):
You must contribute at least 12% of your salary-basic pay, dearness allowance (including cash value of any food concession) and retention allowance-towards EPF. This is deductible under Section 80C.Premature withdrawal is allowed only under conditions specified by the government. If the amount is withdrawn before five years of subscription to the scheme, the tax benefits that have been availed on it are cancelled.
  • Public Provident Fund (PPF):
Any resident Indian can invest in PPF and claim income tax deduction. An individual can also contribute on behalf of a Hindu Undivided Family. One can also invest in the name of spouse and children. However, tax deduction is available only on contributions up to Rs 1 lakh. At present, PPF is offering 8.7% annual interest. The interest earned is tax-free.
  • Senior Citizen Savings Scheme (SCSS):
People above 60 years (or those above 55 years who have taken voluntary retirement) can invest in SCSS. The maturity period is five years, though it can be extended by another three years.One can deposit only once any amount in multiples of Rs 1,000 but not more than Rs 15 lakh. At present, SCSS is offering 9.2% annual interest, which is paid quarterly. The interest earned is taxable.
  • National Savings Certificate (NSC):
You can invest in five- and 10-year NSCs. Five-year NSCs are offering 8.5% a year while 10-year NSCs are paying 8.8%. The interest earned is taxed. There is no restriction on the amount that can be invested, though tax deduction can be claimed only up to Rs 1 lakh.
  • Bank, post-office deposits:
Investment in five-year bank and post-office fixed deposits is eligible for tax deduction. The interest earned is taxable.
  • National Pension System (NPS):
Employee contribution towards NPS Tier-I account (where no withdrawal is allowed) up to 10% of basic plus dearness allowance is tax deductible.
  • Life insurance schemes:
Investment in a life insurance scheme (unit-linked, traditional endowment or term plan) with sum assured at least 10 times the annual premium is eligible for tax deduction within the Rs 1 lakh limit. Returns from these schemes are not taxed. The minimum policy term is five years. Premiums paid for annuity plans of life insurers are also tax deductible.
  • Tax-saving mutual funds:
These are equity mutual fund schemes with a lock-in of three years. Investment in these funds is tax deductible up to Rs 1 lakh. One can continue to remain invested even after the lock-in period. Capital gains and dividends are not taxed.
  • Home loan principal repayment:
The principal component of a home loan repayment is tax deductible up to Rs 1 lakh. However, if the property is sold before five years of the purchase, the amount claimed as deduction is taxed in the year the house is sold.
  • Children's tuition fee:
Tuition fee for educational institutes in India for full-time education of two persons is also eligible for deduction.
BEYOND RS 1-LAKH LIMITBy now you must have realised that the Rs 1 lakh limit is too small. That is why you need to look at options under Sections 80C, 80CCC and 80CCD as well.
  • Rajiv Gandhi Equity Savings Scheme:
Under this, first-time equity investors can invest up to Rs 50,000 in approved stocks and mutual funds and claim tax deduction on 50% of the amount, or Rs 25,000, under Section 80 CCG of the Income Tax Act. But to claim this exemption, their income should not be more than Rs 12 lakh a year. They should also have a demat account. They can avail of the tax benefit under the scheme for three years.
  • Employer's NPS contribution:
If you have subscribed to corporate NPS, under which both you and your employer contribute 10% of basic salary and dearness allowance towards your NPS account, the employer's contribution is deductible under Section 80CCE. This is over and above the Rs 1 lakh limit (employee contribution to NPS falls within this limit).
  • Health insurance premium:
One can claim deduction for health insurance premium paid for self, spouse, children and parents under Section 80D. The limit is Rs 20,000 for senior citizens and Rs 15,000 for others. If you are paying health insurance premium for your parents, you can additionally claim up to Rs 20,000 in case of senior citizens and up to Rs 15,000 in other cases. Expenses incurred up to Rs 5,000 on preventive health checks are also deductible within this limit.
  • Expenses for treatment of handicapped dependent:
If any of your dependent relative (spouse, children, parents or siblings) is handicapped, expenses incurred towards his or her treatment and maintenance are deductible up to Rs 1 lakh if the disability is severe or Rs 50,000 otherwise.
  • Deduction in case of disabled persons:
An individual suffering from physical disability can claim up to Rs 1 lakh deduction in case of severe disability or Rs 50,000 otherwise.
  • Medical expenditure on self or dependent relative:
Up to Rs 40,000 spent on treatment of specified diseases suffered by self or a dependent relative is tax deductible. Some specified diseases include malignant cancer, AIDS, chronic renal failure and Thalassaemia. You need to furnish a certificate by a registered doctor to claim these deductions.
  • Interest paid on education loan:
Interest paid on education loan to finance higher education of self, spouse, children or a person of which the individual is a legal guardian is deductible under Section 80E. Loans taken to fund any regular or vocational course are also eligible under this Section. The deduction is available for eight years or till the interest is paid in full, whichever is lower.
  • Interest repayment on home loan:
The interest paid on a loan taken to buy a house for living is deductible up to Rs 1.50 lakh a year. If the loan is for a property where the person does not live, the total interest paid is tax deductible.However, no tax deduction is available on under-construction properties. Tax benefits can be claimed for five years after the completion of the project.An additional Rs 1 lakh deduction is allowed on interest payment if the loan amount is less than Rs 25 lakh and the value of the property is less than Rs 40 lakh. This is only for those who are buying their first home in 2013-14.
  • Deduction on house rent:
Your salary has a component called Housing Rent Allowance (HRA). This is exempt from tax if you live in a rented house. The exemption is least of the following: 1) actual HRA received from your employer, 2) actual house rent paid by you minus 10% of basic salary, or 3) 50% of basic salary if you live in a metro city or 40% of basic salary if you live in a non-metro city.If the HRA is not part of your salary, you can still claim deduction on the rent paid. The deduction is the least of the following: (a) rent paid less 10% of taxable income, (b) 25% of the taxable income or, (c) Rs 2,000 a month.
  • Donations, royalty and patents:
Royalty earned on patents and books (other than text books) is exempt from tax up to Rs 3 lakh in each case. Donations to political parties and for scientific research, rural development and government relief works are also deductible. The deduction can be 100% or 50% depending upon the beneficiary.Though in many cases there is no limit on the donation amount, in some cases, if the donation exceeds 10% of the gross salary, no deduction is allowed on the excess amount.

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It's that time of the year again when people start planning their taxes. Most delay this till the last moment and then invest without giving serious thought to the tax-saving instruments at hand. That's why we thought we should warm you up well in advance so that you can make the best use of all the options.MAKING RS 1-LAKH LIMIT COUNTYou can claim a deduction of up to Rs 1 lakh under Sections 80C, 80CCC and 80CCD. If you are in the 30% tax bracket, you can save up to Rs 30,900 by investing in the following approved tax-saving instruments.
  • Employee Provident Fund (EPF):
You must contribute at least 12% of your salary-basic pay, dearness allowance (including cash value of any food concession) and retention allowance-towards EPF. This is deductible under Section 80C.Premature withdrawal is allowed only under conditions specified by the government. If the amount is withdrawn before five years of subscription to the scheme, the tax benefits that have been availed on it are cancelled.
  • Public Provident Fund (PPF):
Any resident Indian can invest in PPF and claim income tax deduction. An individual can also contribute on behalf of a Hindu Undivided Family. One can also invest in the name of spouse and children. However, tax deduction is available only on contributions up to Rs 1 lakh. At present, PPF is offering 8.7% annual interest. The interest earned is tax-free.
  • Senior Citizen Savings Scheme (SCSS):
People above 60 years (or those above 55 years who have taken voluntary retirement) can invest in SCSS. The maturity period is five years, though it can be extended by another three years.One can deposit only once any amount in multiples of Rs 1,000 but not more than Rs 15 lakh. At present, SCSS is offering 9.2% annual interest, which is paid quarterly. The interest earned is taxable.
  • National Savings Certificate (NSC):
You can invest in five- and 10-year NSCs. Five-year NSCs are offering 8.5% a year while 10-year NSCs are paying 8.8%. The interest earned is taxed. There is no restriction on the amount that can be invested, though tax deduction can be claimed only up to Rs 1 lakh.
  • Bank, post-office deposits:
Investment in five-year bank and post-office fixed deposits is eligible for tax deduction. The interest earned is taxable.
  • National Pension System (NPS):
Employee contribution towards NPS Tier-I account (where no withdrawal is allowed) up to 10% of basic plus dearness allowance is tax deductible.
  • Life insurance schemes:
Investment in a life insurance scheme (unit-linked, traditional endowment or term plan) with sum assured at least 10 times the annual premium is eligible for tax deduction within the Rs 1 lakh limit. Returns from these schemes are not taxed. The minimum policy term is five years. Premiums paid for annuity plans of life insurers are also tax deductible.
  • Tax-saving mutual funds:
These are equity mutual fund schemes with a lock-in of three years. Investment in these funds is tax deductible up to Rs 1 lakh. One can continue to remain invested even after the lock-in period. Capital gains and dividends are not taxed.
  • Home loan principal repayment:
The principal component of a home loan repayment is tax deductible up to Rs 1 lakh. However, if the property is sold before five years of the purchase, the amount claimed as deduction is taxed in the year the house is sold.
  • Children's tuition fee:
Tuition fee for educational institutes in India for full-time education of two persons is also eligible for deduction.
BEYOND RS 1-LAKH LIMITBy now you must have realised that the Rs 1 lakh limit is too small. That is why you need to look at options under Sections 80C, 80CCC and 80CCD as well.
  • Rajiv Gandhi Equity Savings Scheme:
Under this, first-time equity investors can invest up to Rs 50,000 in approved stocks and mutual funds and claim tax deduction on 50% of the amount, or Rs 25,000, under Section 80 CCG of the Income Tax Act. But to claim this exemption, their income should not be more than Rs 12 lakh a year. They should also have a demat account. They can avail of the tax benefit under the scheme for three years.
  • Employer's NPS contribution:
If you have subscribed to corporate NPS, under which both you and your employer contribute 10% of basic salary and dearness allowance towards your NPS account, the employer's contribution is deductible under Section 80CCE. This is over and above the Rs 1 lakh limit (employee contribution to NPS falls within this limit).
  • Health insurance premium:
One can claim deduction for health insurance premium paid for self, spouse, children and parents under Section 80D. The limit is Rs 20,000 for senior citizens and Rs 15,000 for others. If you are paying health insurance premium for your parents, you can additionally claim up to Rs 20,000 in case of senior citizens and up to Rs 15,000 in other cases. Expenses incurred up to Rs 5,000 on preventive health checks are also deductible within this limit.
  • Expenses for treatment of handicapped dependent:
If any of your dependent relative (spouse, children, parents or siblings) is handicapped, expenses incurred towards his or her treatment and maintenance are deductible up to Rs 1 lakh if the disability is severe or Rs 50,000 otherwise.
  • Deduction in case of disabled persons:
An individual suffering from physical disability can claim up to Rs 1 lakh deduction in case of severe disability or Rs 50,000 otherwise.
  • Medical expenditure on self or dependent relative:
Up to Rs 40,000 spent on treatment of specified diseases suffered by self or a dependent relative is tax deductible. Some specified diseases include malignant cancer, AIDS, chronic renal failure and Thalassaemia. You need to furnish a certificate by a registered doctor to claim these deductions.
  • Interest paid on education loan:
Interest paid on education loan to finance higher education of self, spouse, children or a person of which the individual is a legal guardian is deductible under Section 80E. Loans taken to fund any regular or vocational course are also eligible under this Section. The deduction is available for eight years or till the interest is paid in full, whichever is lower.
  • Interest repayment on home loan:
The interest paid on a loan taken to buy a house for living is deductible up to Rs 1.50 lakh a year. If the loan is for a property where the person does not live, the total interest paid is tax deductible.However, no tax deduction is available on under-construction properties. Tax benefits can be claimed for five years after the completion of the project.An additional Rs 1 lakh deduction is allowed on interest payment if the loan amount is less than Rs 25 lakh and the value of the property is less than Rs 40 lakh. This is only for those who are buying their first home in 2013-14.
  • Deduction on house rent:
Your salary has a component called Housing Rent Allowance (HRA). This is exempt from tax if you live in a rented house. The exemption is least of the following: 1) actual HRA received from your employer, 2) actual house rent paid by you minus 10% of basic salary, or 3) 50% of basic salary if you live in a metro city or 40% of basic salary if you live in a non-metro city.If the HRA is not part of your salary, you can still claim deduction on the rent paid. The deduction is the least of the following: (a) rent paid less 10% of taxable income, (b) 25% of the taxable income or, (c) Rs 2,000 a month.
  • Donations, royalty and patents:
Royalty earned on patents and books (other than text books) is exempt from tax up to Rs 3 lakh in each case. Donations to political parties and for scientific research, rural development and government relief works are also deductible. The deduction can be 100% or 50% depending upon the beneficiary.Though in many cases there is no limit on the donation amount, in some cases, if the donation exceeds 10% of the gross salary, no deduction is allowed on the excess amount.

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