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Preface
All of us engage in some economic activity and work hard to make a living. But as you start
doing so, you tend to attract the attention of the Income Tax Department, as they too are doing
their task of taxing your income, as you earn. And thus as we work hard to make a living, it
becomes imperative for us to work a little more harder and smarter to save our taxes (the legal
way) too, so that it can help us make our dreams come true - A dream of buying a better car,
bigger house etc.
But, remember in the quest of attaining the same, if you keep your tax planning exercise
pending till the eleventh hour, it would be merely a “tax saving” exercise leading to sub-optimal
gains.
The Union Budget 2015-16 was a balancing act by Modi-led-NDA Government with the finance
minister leaving something for all. The focus was promoting growth and providing social
security to electorates, yet walk tight on the path of fiscal consolidation. The Government set a
3.9% of GDP for the fiscal year 2015-16, 3.5% for 2016-17 and for the ensuing year 3.0%.
Hence, although the aam aadmi had many expectations, a few were honoured but there were
pleasant surprises too.
This 2015 edition of the Money Simplified Guide on Tax Planning will give you a perspective on
how you can plan your taxes smartly. As you may know, every penny saved, is a penny earned.
Thus you should take enough care and prudence in the tax planning exercise considering your
age, income, ability to take risk and financial goals, so that your tax planning can complement
your investment planning.
Also, realisation will dawn on you that there’s more to tax planning than just investing in tax
saving instruments available 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.
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Keeping this philosophy in mind, PersonalFN through this Money Simplified Guide would like
tohelp you do just that - with a lot of knowledge and expertise poured into this Guide, in a
simple and easy to understand manner.
So, read on and wish you all VERY HAPPY TAX PLANNING!!
Team Personal FN
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Disclaimer
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PersonalFN is strictly prohibited and shall be deemed to be copyright infringement
Quantum Information Services Pvt. Limited (PersonalFN) is not providing any investment advice through this service and, does
not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial
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personnel, directors will not be responsible for any direct / indirect loss or liability incurred by the user as a consequence of him
or any other person on his behalf taking any investment decisions based on the contents and information provided herein. This
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The user must make his own investment decisions based on his specific investment objective and financial position and using
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remain with PersonalFN. This is for your personal use and you shall not resell, copy, or redistribute this guide or any part of it,
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Index
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Section I: Tax Saving Vs. Tax Planning 05
Section II: 4 Mistakes that individuals make while saving tax 06
Section III: Your small steps (to “Tax Planning”) can take you leaps
Steps to “tax planning” 09
Parameters for prudent tax planning 12
Section IV: Optimal tax planning with section 80C 17
Tax planning with market-linked instruments 18
Tax planning the assured return way 24
Section V: Thinking beyond Section 80C 31
Section VI: How your home loan can help in tax planning 40
Section VII: House Property and taxes 45
Annual Value 45
Deductions 47
Section VIII: Save tax on your hard earned salary 49
Section IX: Tax implication for other mutual fund holdings 54
Section X: Penalties of non-filing of returns / non-payment of taxes 56
Section XI: Income tax return forms 59
Section XII: Conclusion 61
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I - Tax Saving Vs. Tax Planning
“All men make mistakes, but only wise men learn from their mistakes.”- Sir Winston Churchill.
The above proverb is very much relevant to our daily lives - be it handling finances or even in
any other facets of life.
Moreover the famous author John C. Maxwell has also quoted “A man must be big enough to
admit his mistakes, smart enough to profit from them, and strong enough to correct them.” But
again, this is conveniently forgotten by many, which often leads to failure to learn from
mistakes, the arrogance to admit it and which thus leads you to repeat the same mistakes
again.
While undertaking their tax planning exercise too, many individuals tend to repeat the same
mistake of waiting till the eleventh hour and are arrogant enough to admit it.
As the financial year draws to a close, we all start feeling the heat and realise that yes, now we
have to invest in order to save tax. But have you ever wondered whether it is the prudent way
for tax planning?
Remember, waiting till the eleventh hour to undertake your tax planning exercise will often
drive it towards mere “tax saving” rather than “tax planning”; which in our opinion is a sub-
optimal way to undertake a tax planning exercise.
Unlike “tax saving” which is generally done through investments in tax saving instruments /
products, under “tax planning” we take into consideration one’s larger financial plan after
accounting for one’s age, financial goals, ability to take risk and investment horizon (including
nearness to financial goals). And by adapting to such a method of “tax planning”, you not only
ensure long-term wealth creation but also protection of capital.
Hence, please remember to commence your “tax planning” exercise well in advance by
complementing it with your overall investment planning exercise.
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II - 4 Mistakes individuals make while saving tax
We recognise the fact that many of you are too busy throughout the year, in your economic
activities intended to make a living. But if you show the same dedication in your tax planning
exercise, the same will enable you to save more and fulfil all your dreams in life. Our experience
reveals following 4 mistakes that individuals do while saving taxes.
1. Undertaking tax planning at the last moment:
The root of all mistakes in tax planning lies in waiting till the last minute to save taxes, which
eventually leads to mere tax saving, rather than tax planning. And this in return is a sub-optimal
way of saving taxes, caused by the sheer attitude of delay. Your last moment hurry, will often
lead you to forgetting or ignoring the facets of financial planning such as your age, income,
ability to take risk and financial goals (explained further in this guide) thus guiding you to not
complement your tax planning exercise with investment planning.
Remember waiting till the eleventh hour, is just going to lead you to a path of sub-optimal tax planning
exercise, which would destroy the essence of holistic tax planning.
2. Unnecessarily Buying Insurance Plans for the purpose of Tax Saving:
As you near the end of the financial year, many of you might have received telephone calls from
insurance companies and agents pestering you to buy an investment cum insurance plan –
typically market linked i.e. Unit Linked Insurance Plans (ULIPs) or some kind of Endowment
plans. Realising the need to save your taxes, you may’ve even entertained these calls and
eventually doled a cheque to buy one. But have you introspected whether you’ve done the
right thing? Maybe no; either because of ignorance and / or arrogance or in the urgency to save
tax with some eleventh hour tax planning.
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Remember when you think about insuring yourself, it should purely mean protecting your life against any
unforeseen events; and thus you should be ideally buying only pure term insurance plans, which gives
due importance to your human life value. It is noteworthy that ULIPs are investment-cum-insurance
plans where for the premium paid, the insurance cover offered under these plans is far less (usually 10
times of your annual premium) when compared to pure term life insurance plans; where for a lesser
premium amount you get a greater life insurance cover – which is precisely what a life insurance plan is
intended for.
3. Ignoring power of compounding through tax saving mutual funds:
Many individuals absolutely rule out the concept of power of compounding to the portfolio
despite the fact that age, income, ability to take risk, along with financial goals may support you
to take risk. It is noteworthy that if you want to meet and / or elevate your standard of living
going forward, you need to beat the rate of inflation. And thus, the role of equity as an asset
class cannot be ignored in one’s tax saving portfolio too. While some do consider - tax saving
mutual funds in their tax saving portfolio, the ideal composition (depending on the suitability) is
not maintained, which leads the tax saving portfolio to give sub-optimal returns.
It is noteworthy that being risk averse is well appreciated by us. But if your age, income, ability to take
risk and financial goals, permit you to take equity exposure, one should not ignore the same.
4. Failing to optimize all available options for tax saving:
For many, tax planning starts as well as ends with Section 80C - which enunciates investment
instruments for tax saving. But investing only in these investment instruments would not lead
to optimal reduction of your tax liability. There are many other options available other than
section 80C which you should look into. Thinking beyond 80C may help you save more for your
other financial goals.
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To bring to your notice, our Income Tax Act, 1961 also considers the humane side of our life and also
gives deductions for contributions you make on such developments. So, in case if you pay your medical
insurance premium, incur expenditure on the medical treatment of a “dependant” handicapped, donate
to specified funds for specified causes, contribute in monetary form to political parties or electoral trusts,
take a loan for pursuing higher education or if you are an individual suffering from “specified” diseases;
then all this too can help you effectively plan your tax obligations, optimally reducing your tax liability.
Moreover, taking into account the urge to buy your dream home by taking a home loan can also extend
tax saving benefits to you.
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III - Your small steps can take you forward by leaps
There is an old Chinese proverb which says, “It is better to take many small steps in the right
direction than to make a great leap forward only to stumble backward”, which in our opinion
applies even to your “tax planning” exercise.
Remember, it is vital for you to step-by-step ascertain where you stand, in terms of your Gross
Total Income and Net Taxable Income, so that you effectively undertake your tax planning
exercise which in turn would deliver you the objective of long-term wealth creation along with
capital protection.
In the past if you have taken your tax planning decisions at the last moment, never mind. But,
please learn from them and don’t repeat the same mistakes again. Adopt the prudent steps
while doing your tax planning.
Steps to “tax planning”:
Step 1: Compute the Gross Total Income
The process of tax planning begins with computation of your Gross Total Income (GTI). This step
enables you to ascertain the total income earned by you during a financial year, from various
under-mentioned sources of income, and helps you to judge where you stand.
� Income from salary
� Income from house property
� Profits and gains from business & profession
� Capital gains (short term and long term) and
� Income from other sources.
Hence, GTI is the total income earned by an individual before availing any deductions under the
Income Tax Act, 1961. And it is vital to know the same, in order for you to undertake your tax
planning effectively, so that you can plan within the sources of income (by using the relevant
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provisions of the Income Tax Act applicable to the aforementioned sources of income), as well
as by availing deductions to GTI.
Now, one may ask – “how do I undertake this activity if I’m a novice?”
Well, the answer is pretty simple! You can either get it done at the company you work for
(many organisations do offer this facility), ask your CA / tax consultant to do it, or use the
convenience of the new and updated tax portals that have emerged in the more recent times.
But, along with all this please do not forget to do your self-study to carry out effective tax
planning exercise. One must note that it is vital to know at least those provisions of the Income
Tax Act, which directly have an impact on your personal 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 under chapter VIA which allow for deduction
under Section 80 of 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 reduce the
tax liability, as it covers Sections for:
� Investing in tax saving instruments (your most loved and sought after Section 80C, along
with RGESS - Rajiv Gandhi Equity Savings Scheme)
� Donations
� Expenditure on handicapped dependent
� Premium payment for your medical insurance
� Interest paid on loan taken for higher education
� Rent paid for residential accommodation
� Expenditure incurred on a specified diseases suffered by you
� …and many more!
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Remember, if you use the respective provisions effectively to do tax planning, it will enable you
to achieve the long-term objective of wealth creation.
Step 3: Calculate the tax payable
After having effectively saved tax in the prudent way mentioned above, the next step is to
compute your tax liability based on the present income tax slabs, and thereafter file your
income tax returns.
The income tax rates for Individuals and HUFs for FY 2015-16 are as follows:
Net Taxable Income (in Rs)))) Rate
Upto Rs 2,50,000 (for general tax payers – male and female)
Nil Upto Rs 3,00,000 for senior citizens 60 years and above but below 80)
Upto Rs 5,00,000 (for very senior citizens aged 80 and above)
Rs 2,50,001 to Rs 5,00,000 # 10%
Rs 5,00,001 to Rs 10,00,000## 20%
Above Rs 10,00,000 30%
Source: Finance Act 2015, Personal FN Research)
# For senior citizens (aged above 60 but below 80), with NTI falling between Rs 3,00,001 to Rs
5,00,000 the first slab of tax rate is @ 10%.
## For very senior citizens (i.e. individuals who are 80 years of age and above), NTI the base
exemption limit stands at Rs 5 lakh of their income and thus income over Rs 500,001 to Rs
10,00,000 is taxable @ 20%.
Moreover, you would also have to pay an education cess @ 2% + 1% secondary and higher
education cess – a total of 3% as cess on your computed tax liability.
Also, note that an additional surcharge @ 12% would be levied if your total income in the
financial year exceeds Rs 1 crore. This one-time surcharge will be in addition to the total 3%
education cess that is paid on the total income-tax.
Union Budget 2013-14 had introduced a new Section 87A (which allows a Tax Credit or Special
Rebate of Rs 2,000 to individuals whose NTI is below Rs 5 lakhs), the rebate still holds and is
limited to the extent of your tax liability or Rs 2,000 whichever is less.
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So if your tax liability is say Rs 1,500, you will get a tax credit of only Rs 1,500 under Section 87A
and no tax will be payable.
Now let us see how you can compute your income tax liability:
Say if your net taxable income after availing for all deductions available is Rs 12 Lakh in the
current financial year, then your tax liability will be computed as under:
Computation of Tax Liability (2015-16)
Gross Total Income (a) Tax
Rate 15,50,000
Investments done in FY2015-16
PPF 50,000
ELSS 50,000
Principal Repayment on Home Loans 50,000
Eligible for deduction u/s. 80C (b) 1,50,000
Interest on Home loan u/s 24b (C) 2,00,000
Net Taxable Income (in Rs) (a) – (b) – (c) 12,00,000
Upto 2,50,000 Nil -
Rs 2,50,001 to Rs 500,000 10% 25,000
Rs 500,001 to Rs 10,00,000 20% 1,00,000
Rs 10,00,001 & above 30% 60,000
Tax payable (in Rs) 1,85,000
Education Cess 3% 5,550
Total Tax Liability (in Rs) 1,90,550
(Source: Personal FN Research)
Parameters for “prudent tax planning”:
A Prudent exercise of tax planning also extends to appropriate investment planning, which also
takes into account your ideal asset allocation by considering the under-mentioned factors.
Hence after you have utilised the tax provisions within each head / source of income for
effective reduction in GTI, you must also consider the following parameters as these will enable
you to optimally reduce your tax liability.
� Age
Your age and the tenure of your investment play a vital role in your asset allocation. The
younger you are more risk you can take and vice-a-versa. Hence, for prudent tax planning
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too, if you are young, you should allocate more towards market-linked tax saving
instruments such as Equity Linked Saving Schemes (ELSS), Rajiv Gandhi Equity Savings
Scheme (RGESS), Unit Linked Insurance Plans (ULIPs) and National Pension System (NPS),
as at a young age the willingness to take risk is high. One may also consider taking a home
loan at a younger age, as the number of years of repayment is more along with your
willingness to take risk being high.
Also a noteworthy point is the earlier you start with your investments, the greater is the
tenure you get while investing in an investment avenue, which can enable you to make
more aggressive investments and create wealth over the long-term to meet your financial
goals.
Let’s understand this much better with the help of an illustration.
An early bird gets a bigger pie
Particulars Suresh Mahesh Rajesh
Present age (years) 25 30 35
Retirement age (years) 60 60 60
Investment tenure (years) 35 30 25
Monthly investment (Rs) 7,000 7,000 7,000
Returns per annum 10% 10% 10%
Sum accumulated (Rs) 2,65,76,466 1,58,23,415 92,87,834
(Source: Personal FN Research)
Note: The names and returns mentioned above are an assumption and used for illustration purpose only
The above table reveals that, Suresh starts at age 25, and invests Rs 7,000 per month in an
ELSS / Tax saving mutual fund scheme through SIPs (Systematic Investment Plans) until
retirement (age 60). His corpus at retirement is approximately Rs 2.65 crore. Mahesh starts
at age 30, a mere 5 years after Suresh, and invests the same amount in ELSS (through SIPs)
until retirement (also at age 60). His corpus builds up to approximately Rs 1.58 crore, note
the difference between the 2 corpuses here. And lastly, we have Rajesh, the late bloomer of
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the lot. He begins investing at age 35, the same amount every month in an ELSS as Suresh
and Mahesh, and invests up to his retirement (also at age 60). His corpus is, in comparison,
a meagre Rs 92 lakh.
The following graph clearly indicates the gap between the accumulated corpuses for similar
level of investment per month.
(Source: Personal FN Research)
For some of you young people, pursuing higher education may be a priority. But there may
be a case you do not have enough corpus (funds) garnered by you. However, you need not
worry, as there are several banks willing to offer higher education loan; and if you avail the
same, the interest paid by you on such loan taken will be eligible for tax benefit (under
section 80E of the Income Tax Act – which is discussed ahead in this guide).
� Income
Similarly, if your income is high, your willingness to take risk is high. This thus can work in
your favour, as you have sufficient annual GTI which allows you to park more money
towards market-linked tax saving investment instruments, for generating higher returns and
creating a good corpus for your financial goal(s). Also, on account of the higher GTI your
eligibility to take a home loan also increases, which can also help you to optimally reduce
your tax liability.
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Yes, one may say that if I have a high income, - why do I need a home loan. I can straight
away go ahead and buy the property!
Sure you can, but the Income Tax Act provides you the tax benefit for repayment of
principal amount along with the interest on loan taken, which you will miss.
Also, considering that you are financially strong, you can also donate some of your money
towards a noble cause, as doing so will make you eligible for a tax benefit (under section
80G of the Income Tax Act – which is discussed ahead in this guide).
Similarly, if your income is not high enough or if you do not want to put your money at risk;
you can invest in tax saving instruments which provide you assured returns. These
instruments can be Public Provident Fund (PPF), National Savings Certificates (NSCs), 5 Yr
Bank Fixed Deposits, 5 Yr Post Office Time Deposits and Senior Citizen Savings Scheme
(provided you are a senior citizen).
� Financial goals
The financial goals which one sets in life, also influences the tax planning exercise. So, say
for example your goal is retiring from work 5 years from now, then your tax saving
investment portfolio will also be less skewed towards market-linked tax saving instruments,
as you are quite near to your goal and your regular income would stop.
Likewise if you are many years away from your financial goal, you should ideally allocate
maximum allocation to market linked tax saving instruments and less towards those tax
saving instruments which provide you low assured returns.
� Risk Appetite
Your willingness to take risk which is a function of your age, income, expenses, nearness to
goal, will be an important determinant while doing your tax planning exercise. So, if your
willingness to take risk is high (aggressive), you can skew your tax saving investment
portfolio more towards the market-linked instruments. Similarly, if your willingness to take
risk is relatively low (conservative), your tax saving investment portfolio can be skewed
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towards instruments which offer you assured returns, and if you are a moderate risk taker
you can take a mix of 60:40 into market-linked tax saving instruments and assured return
tax saving instruments respectively.
We reckon the fact that “prudent tax planning” exercise can be time consuming and
complex. But please note the fact that it’s an annual activity which every tax payer has to
go through – and if you start early and plan properly, the task becomes easier.
Remember, delay will only ensure that you invest at the last moment but not in line with
the parameters discussed above. If you are hard pressed for time, consider hiring a
competent tax consultant along with an investment advisor.
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IV - Optimal tax planning with section 80C
Section 80C of the Income Tax Act enables an individual or a Hindu Undivided Family (HUF) to
effectively invest in tax saving instruments, in order to optimally reduce their tax liability. This is
seen as one of the most sought after sections when it comes to tax planning.
In order to leave more money in the hands of the salaried class, hit by rising prices, the
deduction limit under this Section is currently at Rs 1.50 lakh p.a..
The Section offers you host of popular investment instruments mentioned hereunder which
qualify you for a deduction from your Gross Total Income (GTI):
� Life Insurance Premium
� Public Provident Fund (PPF)
� Employees’ Provident Fund (EPF)
� National Saving Certificate (NSC) , including accrued interest
� 5-Year fixed deposits with banks and Post Office
� Senior Citizens Savings Scheme (SCSS)
� National Pension System (NPS)
� Unit-Linked Insurance Plans (ULIPs)
� Equity Linked Savings Schemes (ELSS)
� Pension Funds
� Tuition fees paid for children’s education (maximum 2 children)
� Principal repayment on Housing Loan
Hence, if you invest in any or all of the aforementioned instruments; you would qualify for
deduction under this section subject to the maximum of Rs 1.50 lakh p.a. But we think rather
than just merely investing in any of the above tax saving instruments, you can also use these tax
saving instruments for prudent tax planning.
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Now you may ask “how”?
Well, it’s simple! In the aforementioned list you can classify the tax saving instruments into
those offering variable returns (i.e. market-linked instruments) and those offering fixed returns
(i.e. assured return instruments). By doing so you would be able to ascertain which investment
instrument suits you best (taking into account the factors mentioned above) and would extend
your tax planning exercise to investment planning too.
Let’s discuss in detail the classification into market-linked tax saving instruments and assured
return tax saving instruments.
Tax Planning with market-linked instrument:
If you are young, income is high, and therefore willingness to take risk is high along with your
financial goals being far away, then this category would be suitable for you. Under this category
you can invest in the capital markets, which will give you variable returns. Following are the
market linked tax saving instruments that are available for investment under section 80C.
1. Equity Linked Savings Schemes (ELSS):
These are mutual fund schemes, which are 100% diversified equity funds providing tax saving
benefits. And these are popularly known as Tax Saving Mutual Funds or ELSS. A distinguishing
feature about them is that they are subject to a compulsory lock-in period of usually three
years, but the minimum application amount in most of them is as little as Rs 500, with no upper
limit. In ELSS, you can either make lump sum investments or investments through the
Systematic Investment Plan (SIP).
And if you ask, who can invest in ELSS? Individuals, HUF and specified investors under the
Income Tax Act, 1961 can invest in ELSS. It is noteworthy that, in the long-term if you intend to
create wealth, then this tax saving funds can give you luring inflation-adjusted returns.
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You may say – “but there is risk involved”. Well, no doubt about that; but in order to even out
the shocks of volatility in the equity markets you can adopt the SIP route of investing here
which will provide you the advantage of “compounding” along with “rupee-cost averaging”.
SIPs provide cushion against market volatility
(Source: ACE MF, Personal FN Research)
While SIPs in ELSS can help you tackle volatility and may help you gradually create wealth in the
long run, a noteworthy point about SIP investments in ELSS is that your every SIP installment
(which can be monthly, quarterly or half yearly) should complete the minimum lock-in period.
Get wealthy Sip by Sip
(Source: ACE MF, Personal FN Research)
While considering an ELSS mutual fund for your market-linked tax-saving portfolio, give
importance to those ELSS mutual funds that have completed at least 3 years of track record and
select schemes from mutual fund houses which follow strong investment systems and
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processes. Don’t get lured just by returns clocked because there’s more to evaluating a mutual
scheme than just returns. Moreover, past performance does not guarantee that the fund will
continue to fare in the same manner in the future. Hence look for the consistency in the
performance instead, with relevance to risk and returns, portfolio turnover ratio, expense ratio
and the portfolio characteristics of a tax saving fund(s).
Deduction: The maximum tax benefit which an Individual or HUF can enjoy under Section 80C is
Rs 1.50 lakh p.a. Moreover, if you make any long term gains at the time of exit, any time after
the end of the lock-in period; you will not have to pay any Long Term Capital Gains Tax (LTCG).
2. Pension Funds:
Pension funds offered by mutual funds can not only be used for tax planning, but are also an
effective instrument to plan for a blissful retired life. Pension funds allocate 60% money into
debt and remaining in equity. At the vesting age, you can opt for regular pension or
systematically withdraw the units. They are okay if you want to kill two birds in one short,
namely tax planning and retirement planning; but may not help in maximising wealth due to a
dominant portion of the assets skewed towards debt. Also, being a debt-oriented scheme they
aren’t very tax efficient due to liability of LTCG tax.
Deduction: The amount invested in pension funds qualifies for deduction under Section 80C,
subject to a maximum limit of Rs 1.50 lakh p.a.
3. Unit-Linked Insurance Plans (ULIPs):
These are typically insurance-cum-investment plans which enable you to invest in equity and /
or debt instruments depending on what suits you as per your age, income, risk profile and
financial goals. All you simply need to do is, select the allocation option as provided by the
insurance company offering such a plan. Generally they are classified as “aggressive” (which
invests in equity), “moderate or balanced” (which invests in debt as well as equity) and
“conservative” (which invests purely in debt instruments).
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Hence, apart from the insurance cover (which is usually 10 times your annual premium) offered
under these plans, the returns which you would get are completely market-linked as your
premium amount (after accounting for allocation and other charges) is invested in equity and
debt securities.
And in order for you to track such plans the NAV is declared on a regular basis. These policies
have a minimum 5 year lock-in period, and also have a minimum premium paying term of 5
years. The overall term of the policy would vary from product to product.
In case of any eventuality, the beneficiaries would be paid the sum assured or fund value,
whichever is higher.
But a noteworthy point is, while some well selected ULIPs may add value to your portfolio in the
long-term; your insurance and investment needs should be dealt separately, thus enabling you
to have an optimum insurance coverage and the right investment instruments for long-term
wealth creation.
Deduction: The premium which you pay for your ULIP would be eligible for tax benefit, subject
to the maximum eligible amount of Rs 1.50 lakh 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.
4. National Pension System (NPS):
National Pension System which was earlier available only for Government employees was later
on May 1, 2009 also introduced for people in the unorganised (private) sector, as need for
deeper participation in the pension contribution (through this product) was felt.
For NPS, if you (eligibility age: from 18 years to 60 years) belong to the unorganised sector (i.e.
private sector); the contributions done by you towards the scheme would be voluntary, and
you can invest in any of the two under-mentioned accounts:
� Tier-I Account:
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In this account your minimum investment amount is Rs 500 per contribution and Rs 6,000
per year, and you are required to make minimum 4 contributions per year. Under this
account, premature withdrawals (upto a maximum of 20% of the total investment) is not
permitted before attainment of 60 years, however the balance 80% of the pension wealth
has to be utilised by you to buy a life annuity.
� Tier-II Account:
For opening this account you will have to make a minimum contribution of Rs 1,000 per
annum. The minimum number of contributions is 4, subject to a minimum contribution of
Rs 250. However, if you open an account in the last quarter of the financial year, you will
have to contribute only once in that financial year. You will be required to maintain a
minimum balance of Rs 2,000 at the end of the financial year. In case you don’t maintain
the minimum balance in this account and do not comply with the number of contributions
in a year, a penalty of Rs 100 will be levied. Moreover, in order to have Tier-II account, you
first need to have a Tier-I account. Tier-II account is a voluntary account and withdrawals
will be permitted under this account, without any limits.
Even if you hold both the above accounts under NPS, only the Tier-I account will be eligible for
tax benefits.
While investing money in NPS, you have two investment choices i.e. “Active” or “Auto” choice.
Under the “Active” choice asset class, your money will be invested in various asset classes
termed as ECG viz. E (Equity), C (Credit risk bearing fixed income instruments other than
Government Securities) and G (Central Government and State Government bonds); where you
will have an option to decide your asset allocation into these asset classes. In case of Auto
Choice, your money will be invested in the aforesaid asset classes in accordance with
predetermined asset allocation.
But remember, the return on your investment is not guaranteed as it is market-linked. At the
age of 60 years, you can exit the scheme; but you are required to invest a minimum 40% of the
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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 view this product is not very appealing for creating a substantial corpus to meet your
retirement need. Rather, if you chalk-out a prudent financial plan with the help of a financial
planner, and invest wisely as per the plan laid out (which would mostly recommend you equity
allocating higher to equity at an younger age, and then as your age progresses balance the
asset allocation between equity and debt instruments), then the corpus which you would be
able to create will be substantial enough to meet your retirements needs. Also the money
withdrawn under this scheme, even at the age of 60 is taxable.
Deduction: Those who are salaried employees may claim deduction under Section 80C upto Rs
1.50 lakh for their own contributions towards NPS account. In addition to this, a deduction can
be claimed under Section 80CCD if there is any contribution made by the employer but only
upto 10% of their salary (for this purpose, salary construes as Basic Salary plus Dearness
Allowance). It is noteworthy that the deduction under Section 80CCD can be claimed over and
above the permissible deductions under Section 80C.
So if an Individual contributes alone from his income towards NPS, it will be considered within
the limits of Rs 1. 5 lakh p.a. under Section 80C.
It is only if the employer contributes to employee for NPS – Section 80 CCD is applicable.
So to avail this extra tax exemption limit, the employees need to convince their employers to
start contributing to NPS.
However, those who are self-employed can avail deduction under Section 80CCD upto 10% of
their gross total income (which is comprised of income computed under different heads before
reducing it by all other deductions available under Section 80). In addition to deductions under
Section 80CCD, self-employed people are also entitled to deductions under Section 80C for
other instruments eligible therein.
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Non-Resident Indians (NRIs) also can now actively participate in NPS to save money for their
golden years.
Tax Planning the “assured return” way:
Unlike the case presented above (i.e. tax planning with market-linked instruments), if your age,
income, risk profile and financial goals do not permit you to invest in market-linked instruments
(for your tax planning) along with the fact that your risk taking ability is low; then you should
plan investing in tax saving instruments which offer you assured returns. Under these
instruments there is zero risk of erosion to your capital. Here are the tax saving instruments
available under this category:
1. Non-Unit Linked Life Insurance Plans:
Life Insurance plans can be broadly classified as “pure term life insurance plans” and
“investment-cum-life insurance plans”.
Pure term life insurance plans are authentic indemnification plans, as they cater to the need of
only protection and not investment. Hence such plans offer a high life insurance coverage at
low premiums. Generally the term insurance plans offer a policy term of 10, 15, 20, 25 or 30
years.
Investment-cum-life insurance plans on the other hand, as the name suggest, offer you an
investment option along with insurance option. But here, your insurance coverage is far lesser
than the one provided under pure term insurance plans. You pay a high premium, which gets
invested, but insurance coverage on the other hand is meagre. Such insurance plans are offered
in various forms such as ULIPs (as discussed above), endowment plans, money back plans,
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.
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Deduction: Over here too the premium which you pay for such non-unit linked life insurance
plans would be eligible for tax benefit, subject to the maximum eligible amount of Rs 1.50 lakh
p.a. under Section 80C. Moreover, a positive point is that at maturity the amount, which you or
your beneficiary would receive, is exempt (tax free) as per the provisions of Section 10(10D) of
the Income Tax Act.
2. Public Provident Fund (PPF):
The PPF scheme is a statutory scheme of the Central Government of India.
In order to invest in PPF, you are required to open a PPF account (which is irrespective of your
age) at your nearest post office or public sector (nationalized) bank providing this facility. You
can open the account in your name, and also in the name of your wife as well as children. If you
do not wish to open a separate account in the name of your wife as well as children, you can
nominate them; but joint application is not permissible.
The account so opened will have an expiry term of 15 years from the end of the year in which
the initial investment (subscription) to the account is made. You can invest in the account
ranging from a minimum of Rs 500 to a maximum of Rs 150,000 in a financial year in order to
enjoy the tax saving benefit under Section 80C, and the amount to the credit of your account
will be entitled to a tax-free interest at 8.7% p.a. Your annual deposit in the PPF account should
at least be Rs 500, and you have the convenience of depositing in either lump sum or in
installments not exceeding 12 such installments. However, a noteworthy point is that it is not
necessary to deposit every month and the amount too can be any amount in multiples of Rs 5,
subject to the minimum (Rs 500) and maximum (Rs 1,50,000) amount.
The interest to the account will be calculated on the lowest balance to the credit of the account
between the close of the 5th
day and the end of the month, and will be credited to the account
on 31st
of March, each year.
As regards withdrawal from the account is concerned; it is permitted any time after the expiry
of 5 years from the end of the year in which initial investment (subscription) to the account is
made. However, your withdrawal will be restricted to 50% of the amount which stood to the
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credit of your account in the immediate 4th
year immediately preceding the year of withdrawal
or at the end of the preceding year, whichever is lower. And in case if your term of 15 year is
over, you can withdraw the entire amount together with the interest accrued till the last day of
the month, preceding the month in which application for withdrawal is made.
After your term of 15 years is over if you wish to renew your account, you can do so for a
period of another 5 years at the rate of interest prevailing then, without having the compulsion
of putting any further deposits in case of extension. The withdrawal in case of extended
accounts is permissible once in every financial year. But the total withdrawal should not exceed
60% of the balance accumulated to the account at the commencement of the extension period
(of 5 years).
In case you wish to invest in the name of HUF, you cannot do so. The government has
discouraged HUFs from taking advantage of a scheme whose objective is to create retirement
nest egg for resident individuals. Earlier an ‘HUF’ could open a PPF account and save tax on the
deduction, which has been stopped with effect from May 2005. However, existing PPF accounts
of HUFs will continue to operate normally until maturity, but cannot be extended beyond
maturity, and no new HUF PPF accounts can be opened.
It is noteworthy that if you are risk averse, then this product is best in its class for tax planning.
Moreover, it also offers you an appealing tax-free return of around 8% p.a. (compounded
annually).
Deduction: The contributions which you make to the accounts mentioned above, are eligible
for tax benefit but subject to the maximum eligible amount of Rs 1.50 lakh p.a. as per Section
80C.
3. National Savings Certificate (NSC):
The NSC is also a scheme floated by the Government of India, and one can invest in the same
through his / her nearest post office, as the scheme is available only with India Post. The
certificates can be made in your own name, jointly by two adults, or even by a minor (through
the guardian), and has a tenure of 5 years or 10 years.
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The minimum amount which you can invest is Rs 100, with no maximum limit to the same. NSC
maturing in 5 years offers interest @ 8.5% p.a. compounded half-yearly whereas NSC maturing
in 10 years offers interest @ 8.8% p.a. compounded half-yearly, thus giving you an effective
interest rate of 8.68% p.a. and 8.99% p.a. The interest income accrues annually and is
reinvested further in the scheme till maturity (i.e. 5 or 10 years) or until the date of premature
withdrawals.
Premature withdrawals are permitted only in specific circumstances such as death of the
holder.
Deduction: Your investment in NSC is eligible for a deduction of upto Rs 1.50 lakh p.a. under
Section 80C. Furthermore, the accrued interest which is deemed to be reinvested in a financial
year qualifies for deduction under Section 80C in the respective financial year. However, the
interest income is chargeable to tax in the year in which it accrues. But in case if you have no
other income apart from interest income, then in order to avoid Tax Deduction at Source (TDS),
you can submit a declaration in Form 15-G (for general or non-senior citzens) or Form 15-H (for
senior citizens) as applicable.
4. Bank Deposits and Post Office Time Deposits:
The 5-Yr tax saving bank fixed deposits available with your bank is also eligible for a deduction
under Section 80C and comes with a lock in period of 5 years. The minimum amount that you
can invest is Rs 100 with an upper limit of Rs 1,50,000 in a financial year. The interest rates
offered by banks under 5-Yr tax saving fixed deposits are currently in the range of 8.00% p.a. to
8.25% p.a.
However, the interest earned here would be subject to tax deduction at source, making it
detrimental for your tax planning, but again you can submit a declaration in Form 15-G (for
general or non-senior citizens) or Form 15-H (for senior citizens) as applicable for not deducting
tax at source.
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Similarly 5 Yr Post Office Time Deposits (POTDs) also offer you a tax benefit under Section 80C.
You can open the account either in single name or jointly or even in the name of a minor
(through a guardian) who has attained the age of 10.
The minimum investment amount is Rs 200, and there isn’t any upper limit. However, similar to
other tax saving instruments, the investment amount over Rs 1.50 lakh will not be eligible for
any tax benefit.
A 5-Yr POTD earns a return of 8.5% p.a. (compounded quarterly) but paid annually. Hence, say
if you deposit an amount of Rs 10,000, the interest income, which you will fetch, would
approximately be Rs 877 p.a. As regards premature withdrawals are concerned, they are
permitted only after 1 year from the date of deposit and interest on such deposits shall be
calculated at the rate, which shall be 1% less than the rate specified for a period of 5-Year
deposit.
Deduction: Your investment in both these schemes is eligible for a deduction of upto Rs 1.50
lakh p.a. under Section 80C. But as mentioned above, the interest earned on your investments
will be taxable.
5. Senior Citizens Savings Scheme (SCSS):
Well, the SCSS is an effort made by the Government of India for the empowerment and
financial security of senior citizens. So, in case if you are over 60 years old, you are eligible to
invest in this scheme. Moreover, if you have attained 55 years of age and have retired under a
voluntary retirement scheme; then too you are eligible to enjoy the benefits of this scheme.
In order to avail the benefits of this scheme, you are required to open a SCSS account (either in
a single name, or jointly along with your spouse) at your nearest post office or any nationalised
bank. You can do a onetime deposit under this scheme subject to the minimum investment
amount of Rs 1,000 and a maximum of Rs 15 lakh. The maturity period provided for this scheme
is 5 years offering a rate of interest of 9.30% 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 maturity,
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you can extend the SCSS account can be extended for a period of 3 years but within 1 year from
the maturity by giving application in prescribed format.
Premature withdrawals are permitted only after one year from the date of opening the
account. If you withdraw between 1 and 2 years, 1.5% of the initial amount invested will be
deducted. And in case if you withdraw after 2 years, 1.0% of the balance amount is deducted. In
case of accounts which are extended after maturity, the accounts can be closed anytime after
expiry of one year of extension without any deduction.
Deduction: Your investments upto Rs 1.50 lakh 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-G (for general or non-
senior citizens) or Form 15-H (for senior citizens) as applicable.
Options Galore - Snapshot of Section 80C
Schemes Type Interest Rate Term
Min – Max
Investment
Premature
Withdrawal Section No.
Tax on returns
Tax planning with market-linked instruments
Tax Saving Funds/ ELSS Growth Market-Linked
Returns
Term: Ongoing;
Lock-in-period:
3 years
Rs 500 - No upper
Limit
Withdrawal
allowed post
lock-in
80C
Capital gains
are tax free
Unit Linked Insurance Plans
(ULIPs) Growth
Market-Linked
Returns
Term: 10 - 20
years;
Lock-in-period:
5 years
Premium varies from
scheme to scheme Yes 80C & 10(10D)
Capital gains
post lock-in are
tax free
National Pension System
(NPS) Growth
Market-Linked
Returns 30-35 years
Rs.500 per month or
Rs 6,000 per annum,
no upper limit
Yes 80C**
Capital gains
taxed on
withdrawal
Tax planning the "assured return" way
Public Provident Fund Recurring 8.7% p.a. 15 years^ Rs 500 - Rs 1. 5 lakh Yes* 80C
Interest
income is tax
free
National Savings Certificate Deposit
8.5% for 5 yr deposit
8.8% for 10 yr deposit
(both compounded
half-yearly)
5 & 10 years Rs 100 - No upper
Limit No 80C
Interest
accrued
is taxed every
year as per
one’s income-
tax slab
Bank Deposits Fixed Deposit 8.00% to 8.25% p.a.# 5 years No upper Limit No 80C
Post Office Time Deposit Fixed Deposit
5-Yr: 8.5%;
(compounded
quarterly & paid
annually
5 years Rs 200 - No upper
Limit Yes* 80C
Senior Citizens Savings
Schemes Deposit
9.30% p.a. (payable
quarterly) 5 years Rs 1,000 - Rs 15 lakh Yes* 80C
Non-ULIP Insurance Plans Insurance Sum Assured Only
(i.e. Insurance Cover) 5-40 years
Premium depends
upon the insurance
cover
Varies from
policy to policy 80C & 10(10D)
Redemption
amount is tax
free
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* Partial withdrawals allowed subject to conditions; ^can be extended in tranches of 5 years; ** additional deduction of Rs 50,000 can be
claimed under section 80CCD over and above Rs 1.50 lakh under section 80C; #varies from banks to banks, but the data sourced here is of
prominent banks
(Source: Personal FN Research)
6. Tuition fees paid for children’s education (maximum 2 children):
The tuition fees that you pay to any university, college, school or other educational institution
situated within India for your children’s education is also eligible for deduction under Section
80C. However the fees paid towards any coaching center or private tuition may not be eligible.
Also you need to note that this deduction is available only to Individual Assessee and not for
HUF, and is limited to Rs 1.50 lakh and a maximum of 2 children. If someone has four children,
then the husband and wife both can enjoy a separate limit of two children each, so they can
separately claim deduction (upto Rs 1.50 lakh) for 2 children each, subject to the amount they
have actually paid.
7. Principal repayment on Housing Loan:
You always wanted to have your dream home and now you have been able to get it with the
help of a housing loan from a bank or a financial institution. But after you have got your home
through this loan, you have the obligation to repay the principal amount of the loan on time.
The “repayment of principal amount”, makes you eligible to claim a deduction upto a sum of Rs
1.50 lakh under Section 80C; and that benefit is available with you irrespective whether you
stay in the same property (Self Occupied Property - SOP), or have let it out on rent (Let Out
Property LOP). You can also claim tax benefit on the interest you pay on your housing loan, but
under a separate section (Section 24 which is covered in detail at the later stage in the guide)
In case you have taken a second home loan for another property, then the principal amount
repaid (up to Rs 1.50 lakh) for the home loan taken only on your self-occupied property
qualifies for deduction under Section 80C. You cannot claim deduction for the principal
repayment made against the home loan on the other property.
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V - Thinking beyond Section 80C
Well, most people think that tax planning ends with Section 80C; but please note that there’s
more to tax planning than just investment instruments specified under Section 80C. Our Income
Tax Act, 1961 also considers the humane side of our life and also gives deduction for such
expenditure. So, in case if you pay your medical insurance premium, incur expenditure on the
medical treatment of a “dependant” handicapped, donate to specified funds for specified
causes, contribute in monetary form to political parties or electoral trusts, take a loan for
pursuing higher education or if you are an individual suffering from “specified” diseases; then
all this too can help you effectively plan your tax obligations, thereby optimally reduce your tax
liability.
So, let’s understand how each of the above expenses for a cause or an investment, can help you
effectively in 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 Union Budget 2015-16 has increased the maximum amount allowed annually as a
deduction (from your GTI) to Rs 25,000 (from Rs 15,000 earlier), in case you are non-senior
citizen paying self, spouse and dependent children. For senior citizens too, the maximum
deduction has been increased to Rs 30,000 (from Rs 25,000 earlier). Therefore together the
deduction stands at Rs 55,000.
So, if you pay medical insurance premium for your parents (irrespective of whether they are
dependent on you or not), you can claim an additional deduction of upto Rs 30,000 in case
parents are senior citizens or Rs 25,000 in other cases under this section. So, for example, if you
pay a premium of Rs 15,000 for yourself and Rs 20,000 for your parents, you will be eligible for
a total deduction of Rs 35,000 only, assuming your parents are not senior citizens.
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However, while paying the premium you need to ensure that the payment is made in any mode
other than cash.
Within the limit of Rs 25,000 (and Rs 30,000 in case of senior citizens), the deduction of Rs
5,000 is allowed for your expenses towards preventive health checkups. This means if you are
paying a premium of less than Rs 10,000; you may avail this benefit and save tax.
If you are very senior citizens who may not be covered by health insurance, the Union Budget
2015-16 has allowed a deduction of Rs 30,000 towards expenditure incurred on your medical
treatment.
2. Maintenance including medical treatment of a handicapped dependent (Section 80DD):
If you have incurred any expenditure in the form of medical treatment (including nursing),
training and rehabilitation for a handicapped “dependent” suffering from disability, then the
expenditure so incurred by you qualifies for deduction under Section 80DD of the Income Tax
Act. Similarly, if you have deposited a sum of money under any scheme framed in this behalf by
LIC (Life Insurance Corporation of India) or any other insurer or administrator or a specified
company (approved by the Board), for maintenance of the “dependent” being a person with
disability; also qualifies for a deduction under Section 80DD.
The quantum of deduction here depends upon the severity of the disability suffered by the
“dependent”. Hence, if the “dependent” is suffering from 40% of any disability [Specified under
section 2(i) of the Person with Disability (Equal Opportunities, Protection of Rights and Full
Participation) Act, 1955], then you would be entitle to a deduction of a fixed sum of Rs 75,000
p.a. from your GTI irrespective of the expenditure incurred or amount deposited (Earlier this
limit was Rs 50,000, which was increased by Rs 25,000 in the Union Budget 2015-16). Similarly,
if the “dependent” is suffering from severe disability (i.e. 80% of any disability), then you claim
a higher deduction of fixed sum of Rs 1.25 lakh), from your GTI irrespective of the expenditure
incurred or amount deposited (This limit was earlier Rs 1 lakh, which was increased by Rs
25,000 in the Union Budget 2015-16).
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It is noteworthy that over here, the term “dependent” being a person with disability means
your spouse, children, parents, brothers and sisters.
Moreover, in order to claim the deduction you need to submit a medical certificate issued by a
medical authority along with your return of income. Also if you are claiming a deduction in your
tax returns for such an expenditure incurred or amount deposited, your “dependent” cannot
claim a deduction under Section 80U in case he’s (handicapped dependent) filing his tax returns
separately.
3. Expenditure incurred on your medical treatment (Section 80DDB):
If you have incurred expenditure on your medical treatment or for your “dependents”, then too
the expenditure so incurred, makes you eligible for deduction under Section 80DDB of the
Income Tax Act.
The deduction from your GTI, which you are entitled to, is Rs 40,000 or the amount actually
paid, whichever is lower. And if you are a senior citizen, then you are eligible for a deduction of
Rs 60,000 or the amount actually paid, whichever is lower. But those with age 80 and above,
classified as very senior citizens, are eligible for deduction of Rs 80,000 by the virtue of
benevolence extended by the last Union Budget.
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.
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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.
You can even take an education loan for your wife’s or children’s education or for any person
(minor) for whom you are the legal guardian. But that makes you eligible for deduction under
Section 80E of the Income Tax Act, to the extent of the interest paid on such a loan taken. It is
noteworthy that HUFs are not allowed to claim deduction under section 80E in respect of
interest paid on loan taken for higher education.
The deduction is available for a maximum of 8 years or till the interest is paid, whichever is
earlier. So, to simplify it further, the deduction is available from the year in which you start
paying the interest on the loan, and the seven immediately succeeding financial years or until
the interest is paid in full, whichever is earlier.
Here the term “higher education” means full-time studies for any graduate or post-graduate
course in engineering (including technology / architecture), medicine, management or for post-
graduate courses in applied science or pure science including mathematics and statistics. But
from the Finance Act of 2011 its scope is extended to cover all fields of studies (including
vocational studies) pursued after passing the Senior Secondary Examination or its equivalent
from any school, board or university recognised by the Central or the State Government or local
authority or any other authority authorised by the Central or the State Government or local
authority to do so. However, no deduction is available for part-time courses.
It is vital to note that deduction can be claimed only if the loan has been taken from a bank,
approved financial institution or an approved charitable institution.
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5. Donations to certain funds and charitable institutions (Section 80G):
As mentioned earlier that our Income Tax Act considers the humane side of our life, and so if on
humanitarian grounds you donate to certain specified funds, charitable institutions, approved
educational institutions etc., the donation amount qualifies for deduction under this Section.
The deductions allowed can be 50% or 100% of the donation, subject to the limits stated under
the provision of this Section. For example, donations to “National Defence Fund” set up by the
Central Government are allowed 100% deduction, while for “Prime Minister Drought Relief
Fund” are allowed at 50%. If you make donations to any of the host of notified funds and / or
charitable institutions, you are eligible for deduction under Section 80G.
Funds / Charitable Institutions Amount Deductible
National Defence Fund 100%
Prime Minister’s National Relief Fund 100%
Prime Minister’s Armenia Earthquake Relief Fund 100%
Africa (Public Contributions – India) Fund 100%
National Foundation for Communal Harmony 100%
Approved university / educational institution 100%
Chief Minister’s Earthquake Relief Fund 100%
Swachch Bharat Kosh 100%
Clean Ganga Fund 100%
National Fund for Control of Drug Abuse 100%
National Children’s Fund 50%
Jawaharlal Nehru Memorial Fund 50%
Prime Minister’s Drought Relief Fund 50%
Indira Gandhi Memorial Trust 50%
Rajiv Gandhi Foundation 50% Note: There are also other funds and charitable institutions that are eligible for deduction under Section 80G.
(Source: Personal FN Research)
While there are 3.3 million registered NGOs and scores of causes, selecting a genuine charity is
a challenge. To deal with this concern, HelpYourNGO has set up an initiative which can help you
make a well-informed donation decision. The organisation promotes philanthropy through
transparency, by providing easy access to financials of over 240 NGOs and allows comparison of
data and ratios across multiple parameters.
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Visit www.HelpYourNGO.com to Evaluate and then Donate to the right cause.
In order to claim deduction under this section, you are required to attach a proof of payment
along with your return of income.
1. Rent paid in respect to property occupied for residential use (Section 80GG):
If you are a self-employed or a salaried individual who is not in receipt of any House Rent
Allowance (HRA), and is paying a rent for an accommodation (irrespective of whether furnished
or unfurnished) occupied for residential use, then you can claim a deduction under this section.
But as a pre-condition for availing deduction under this section,
- You must pay rent for the house you live in, and should not get HRA for even a part of
the year
- You should not own and occupy any other house anywhere
- You or your spouse or your minor child or Hindu Undivided Family (if you are part of
one) must not own any residential accommodation in the city you reside or work in.
And the deduction which will be available to you under this section is the least of:
� 25% of your total income or,
� Rs 2,000 per month or,
� Rent paid in excess of 10% of your total income
To claim deduction under section 80GG, you need to file a declaration in Form No. 10BA
2. Contributions made to any political parties or electoral trust (Section 80GGC):
Say, if you are an ardent follower of 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.
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3. Specified disability(s) (Section 80U):
As said earlier, that our Income Tax Act, 1961 considers the humane side of life; so if you as an
individual resident in India is suffering from any specified disability i.e. if you are suffering 40%
or more than 40% of any of the below specified diseases, then you would be eligible for
deduction under this section.
Specified disabilities:
� Blindness
� Low vision
� Leprosy-cured
� Hearing impairment
� Locomotor disability
� Mental retardation
� Mental illness
The deduction available under this section is flat (i.e. fixed) Rs 75,000, immaterial of the
expenditure incurred. But if the disability is severe in nature (i.e. 80% or above), then one is
entitled to flat (i.e. fixed) deduction of Rs 1.25 lakh.
However in order to avail of the deduction, you need to be an individual resident in India during
the financial year for which you are claiming the deduction. Also you need to file the copy of
certificates issued by the medical authority, at the time of filing returns.
4. Rajiv Gandhi Equity Savings Scheme (RGESS) (Section 80CCG):
The Finance Act 2012 introduced a new Section 80CCG on ‘Deduction in respect of investment
made under an equity savings scheme’ to give 50% tax break to new investors who can invest
up to Rs 50,000 and whose gross total annual income is less than or equal to Rs 12 lakh. New
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investors are defined as those individuals whose PAN do not reflect any equity transaction.
Since the scheme was introduced for novice investors only i.e. for those who are entering the
market for the first time, the benefit u/s 80CCG was to be claimed only in the first year.
However, in the budget 2013-14, it was extended to first-three successive years.
The objective of the scheme is to encourage flow of savings in the financial instruments and
improve the depth of the domestic capital market. In order to device safety measures for new
investors investing in direct equity through the RGESS, the stocks of Maharatna, Navaratna and
Miniratna, besides the top 100 stocks (BSE 100 or CNX 100) listed on the stock exchanges are
considered under RGESS. The argument for proposing investments only from the large caps and
PSU domain is, not only to provide security but also to ensure liquidity.
The first time investors can take benefit of RGESS, by investing in eligible stocks, RGESS eligible
close-ended Mutual Fund schemes and RGESS eligible Exchange Traded Funds. To make it
convenient to identify the eligible stocks and mutual funds, the stock exchanges shall furnish
list of RGESS eligible stocks / ETFs / MF schemes on their website. Further, the list shall also be
forwarded to the depositories at monthly intervals and whenever there is any change in the
said list. For this purpose, mutual fund houses shall communicate the list of RGESS eligible
mutual fund schemes / ETFs to the stock exchanges.
The money invested under RGESS is subject to an overall lock-in period of 3 years, though one
can sell / pledge / hypothecate their securities after the expiry of the mandatory lock-in period
of 1 year, but he cannot withdraw the money before 3 years. i.e. Investors may be allowed to
churn their portfolio after completion of fixed lock in period of 1 year, but his account will be
converted into an ordinary demat account only on completion of 3 years.
It is noteworthy that only individuals can avail tax deduction under section 80CCG. HUFs and
others are not eligible for any tax deduction under section 80CCG.
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Options Galore - Snapshot of deduction under other 80s
Section Quick Description of Deduction Limit
80D Premium paid for medical insurance
Maximum upto Rs 25,000 for non-senior citizens and
Rs 30,000 in case of senior citizen. Therefore together
the deduction stands at Rs 55,000
80DD Maintenance including medical treatment of a
handicapped dependent who is a person with disability
Rs 75,000, irrespective of the amount incurred or
deposited. However in case of disability of more than
80% a higher deduction of flat Rs 1.25 lakh shall be
allowed.
80DDB Expenditure incurred in respect of medical treatment
Actual incurred, with a ceiling of up to Rs 40,000 or Rs
60,000 in case of senior citizen, whichever is lower.
But for those with age 80 and above, classified as very
senior citizens, the eligible deduction is Rs 80,000
80E Repayment of loan taken for pursuing higher education
Maximum deduction for interest paid for a maximum
of 8 years or till such interest is paid, whichever is
earlier
80G Donations to certain funds and charitable institutions
Maximum deductions allowed can be 50% or 100% of
the donation, subject to the stated limits as provided
under this section
80GG Rent paid in respect of property occupied for residential
use
Maximum deduction allowed is least of the following:
Rs 2,000 per month; 25% of total income; Excess of
rent paid over 10% of total income
80GGC Contribution made to any political parties or electoral
trust Amount donated to political party is fully exempt
80U Person suffering from specified disability(s)
Rs 75,000, irrespective of the amount incurred or
deposited. However in case of disability of more than
80% a higher deduction of flat Rs 1.25 lakh is allowed.
80CCG Rajiv Gandhi Equity Savings Scheme (RGESS)
Maximum deduction allowed is 50% of investment
upto Rs 50,000, only for first time investors having
total income of less than or equal to Rs 12 Lakhs.
(Source: Personal FN Research)
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VI – How your home loan can help in tax planning
While all of us have a dream of buying a dream home or constructing or reconstructing or
repairing our homes, it’s also important to consider the tax angle when we decide to do any of
these activities. For some of us, the amount of wealth we have created allows buying or
constructing or reconstructing or repairing or renewing homes from our own funds - i.e.
without opting for a “home loan”; but again doing so precludes you to avail of the tax benefit,
which are attached if one takes a loan for such activities.
Just to reiterate, please don’t rule out the financial planning aspect of number of years left with
you for repayment of your home loan.
Yes, our Income Tax Act, 1961 too considers our desire to buy or construct or reconstruct or
repair or renew our dream home and gets a little benevolent, if one avails of a loan to fulfill
these desires for one’s dream home. The Act encourages you to buy, to do the aforementioned
activities (for your home) with a loan, as it provides you with tax benefits (that come along with
it). Both, “repayment of principal amount” and “payment of interest” are eligible for tax
benefit.
As we know that the “repayment of principal amount”, makes you eligible to claim a deduction
upto a sum of Rs 1.50 lakh under Section 80C; and that benefit is available with you irrespective
whether you stay in the same property (Self Occupied Property - SOP), or have let it out on rent
(Let Out Property LOP).
As far as the payment of interest amount (for the loan amount availed) is concerned, it’s
available for deduction under Section 24(b). In the first full budget of the Modi-led-NDA
Government announced in July 2014, the deduction limit on interest payment of a home loan
on a self-occupied property was increased from Rs 1.50 lakh to Rs 2.00 lakh. So, if you buy or
acquire a house and decide to stay in the same (SOP), then from this fiscal the maximum sum of
Rs 2.00 lakh 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, thereby not
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being subject to any maximum limit. This applies even in the case where you have two home
loans for two different properties, where one is self-occupied and the other is let out on rent.
Similarly, if you have taken a loan for the purpose of reconstructing, repairing or renewing the
property, the amount of deduction under Section 24(b) you are eligible for will be restricted to
Rs 30,000, irrespective whether you want to stay in it or let it out on rent.
Let’s understand with an example how home loan taken for “buying” your dream home to stay
in it (SOP) can reduce the total tax payable by you.
Let’s assume you earn Rs 6.5 lakh p.a. by way of salary and have taken a home loan of Rs 40
lakh 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., the Equated Monthly Installments (EMI)
you need to pay is Rs 35,989.
Tax savings on account of home loan
Gross Annual Salary (Rs) 6,50,000
Loan Amount (Rs) 40,00,000
Tenure (yrs.) 20
Rate of Interest p.a.( % ) 9.0
EMI (Rs) 35,989
Annual Interest Paid (Rs) 3,56,960
Principal paid in the 1st year (Rs) 74,908
Contributions towards tax-efficient instruments (Rs) 1,50,000
Tax paid without availing home loan benefits (Rs) 25,750*
Tax paid after availing home loan benefits (Rs) 5,150*
Tax Savings (Rs) 20,600*
(*tax calculated after giving effect for education cess)
(Source: Personal FN Research)
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The above table clearly shows the benefit of availing a housing loan if you are contemplating
buying a house. The total tax payable on your income without a home loan works out to Rs
25,750; while after availing a home loan works out to Rs 5,150, thereby saving you a tax outgo
of Rs 20,600.
Maximise your tax benefits
Now, let’s delve deeper into the benefits available. Say, your interest amount in the first year is
Rs 3.57 lakh – which is much more than the maximum amount (of Rs 2.00 lakh) allowed as a
deduction. Your principal repayment amount of Rs 74,908 is within the Rs 1.50 lakh limit
allowed under Section 80C. But, it takes away almost half of the amount eligible under Section
80C and leaves you with - Rs 75,092- to claim towards other tax saving instruments such as PPF,
NSC, Life Insurance, ELSS, POTDs.
Now consider, you have invested in the following manner under Section 80C.
Particulars Amt. ( Rs)
Principal Repayment 74,908
Life Insurance 50,000
PPF 60,000
EPF 20,000
NSC 20,000
Total 224,908
Claim deductions
under Section 80 C 150,000
Contributed but can't
claim tax benefit 74,908
(Source: Personal FN Research)
The amount eligible is more than what you can claim. Yes, you have an option of not investing
in PPF, POTDs or NSC but these are assured return schemes with attractive returns. And as said
earlier your portfolio should always comprise of a mix of assured return and market-linked
return instruments, in a composition which is in accordance to your financial goals and
willingness to take risk. Hence, ignoring these investment avenues may not be prudent from
financial planning perspective.
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So, now the next question is how do you claim maximum available deductions to minimise your
tax liability? The answer lies in taking a joint home loan. A joint home loan can be taken with
your spouse or relative.
Let’s understand with an example how a joint home loan with your spouse can help reduce
your tax liability.
Assume your spouse and you decide to take a joint home loan of the same amount as
mentioned above and share the loan in ratio of 50:50.
Particulars You Your Spouse
Gross Salary (Rs) 650,000 650,000
Home Loan Amount (Rs) 4,000,000
Tenure (yrs) 20
Rate of Interest p.a. 9.0%
EMI (Rs) 35,989
Annual Interest Paid (Rs) 178,480 178,480
Principal paid in the 1st year (Rs) 37,454 37,454
Life Insurance (Rs) 50,000 50,000
Other contributions towards tax-efficient instruments (Rs)
1,00,000
1,00,000
Total amount contributed under section 80C & 24(b) (Rs) 3,65,934 3,65,934
Amount which cannot be claimed to reduce tax liability (Rs) 15,934 15,934
Tax Paid when: (Rs)
1. No home loan benefit availed 25,750 25,750
2. Single home loan benefit availed 5,150 25,750
3. Joint home loan benefit availed 7,367 7,367
Total Household Tax Savings (Single Home Loan) (Rs) 20,600
Total Household Tax Savings (Joint Home Loan) (Rs) 36,767
Note:* calculations are done assuming that home loan and the EMI paid by the assessee and the spouse are in the ratio 50:50
(Source: Personal FN Research)
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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 1.78 lakh for interest payment. The principal amount is now half of what was
earlier which allows you to claim deductions towards other contributions. At the same time it
reduces the tax liability to a significant extent and leads to a household saving of upto Rs
36,767. As compared to a Single home loan, a Joint home loan leads to an additional household
saving of Rs 16,167.
From the tax planning point of view, it is vital to ensure that the higher earning member pays
higher portion of the home loan EMI. This is because the tax benefit accrues in proportion to
your contribution towards loan repayment.
So, remember if you plan to buy a house, it makes sense to include your spouse as a co-owner;
especially if your spouse’s income is taxable. This will result in higher tax saving in addition to
boosting your loan eligibility.
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VII - House Property and taxes
After showing benevolent side by providing you with the tax benefit, for availing a home loan
(to buy or construct or reconstruct or repair or renew), the Income Tax Act then eyes the house
property* owned by you for taxing the same. And this applies especially when you have an
income from let out property, or in case where you have more than one property which aren’t
let out on rent, but which are vacant (known as Deemed to be Let Out Property – DLOP).
*Owning a farm house, which forms a part of your agriculture income, is not brought under the tax net.
Now you may ask – “How can the income tax authority tax me, if I have not let out my property
on rent”?
Well, that’s because “annual value” of your property after providing for deduction available
under Section 24(b) is taxed under the head “Income from House Property”. A noteworthy
point is, term “house property” includes building(s) or land appurtenant (i.e. attached) thereto
as well.
And now the next question which may be popping on your mind is – “What is annual value of
the property and which deductions are available?”
Annual Value:
To understand that better let us take a case where you have let out the property (LOP) and
then DLOP.
� Let Out Property (LOP)
In cases where you are enjoying a regular income from the property in the form of rent, then
the annual value of your property would be calculated by adopting the following steps:
a) Find out the reasonable expected rent of the property (which is municipal rent or fair
rent, whichever is higher)
b) Consider the rent actually received / receivable*
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c) Take whichever is higher from a) and b)
d) Calculate loss due to vacancy (i.e. in case if the property is vacant for period(s) during
the financial year)
e) The difference between step c) and step d), will be your “annual value” – which is here
referred to as the “Gross Annual Value” (GAV)
Now when we go one step further and minus the municipal taxes paid by you (on the property)
from “step e)” you’ll arrive at the “Net Annual Value” of your property. But to avail the
deduction for municipal taxes; they have to be paid by the landlord only.
*Note: Rent earned by you from the property is calculated after subtracting any unrealised rent from the tenant
(i.e. in case if he defaults to pay)
� Deemed to be Let Out Property (DLOP)
In case you own more than one house, and the other house(s) apart from the one where you
are staying is vacant throughout the month, then the other house property(s) would be
considered as a “Deemed to be Let Out Property(s)” - DLOPs. Moreover, you would be liable to
pay tax on such property(s) after having calculated the Gross Annual Value (GAV), which will be
calculated in the same way as for LOP. But the only difference being that, here rent would be
the standard rent calculated as per the municipal laws.
Thereafter, if you as the landlord are paying any municipal taxes towards these properties, then
those would be subtracted to obtain the Net Annual Value (NAV).
Remember, over here in case you have multiple DLOPs, then you have an option to consider
one of property as a SOP and the rest would be considered as DLOPs under the present Income
Tax law. So, say you have 4 such DLOPs then you should ‘ideally’ select the property with the
highest GAV as a SOP property, as the remaining properties available with you will have a lower
GAV. Having said that, it would prudent to weigh the pros and cons by undertaking a
comparative analysis to optimize your tax planning exercise.
� Self-Occupied Property
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You need not worry here if you are occupying the property throughout the financial year for
your stay (i.e. residential use) as the NAV of the property will be considered as Nil.
However, 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, which further reduces your taxability under this head of income.
You broadly get the following deductions:
� Standard Deduction [Section 24(a)]
Owning a home and maintaining the same costs you money. But irrespective of the fact
whether you have incurred any expenditure or not to do so, you will be eligible to claim a flat
deduction of 30% calculated on the NAV of the property. And this deduction is of specific use if
one’s property is LOP and / or DLOP. In case if the property is SOP, then you are not eligible to
claim any deduction as the NAV of your SOP is Nil.
� Interest on borrowed capital [Section 24(b)]
As reiterated above (in the home loan section), if one wisely takes a home loan for buying a
house property then the interest so paid on the borrowed capital will make you eligible for
deduction under Section 24(b), irrespective whether the house property is SOP, LOP or DLOP.
In case of SOP the income from house property will be negative income, (if interest is paid on
capital borrowed by you to buy or construct or reconstruct or renew or repair the house),
which will enable you to reduce your overall Gross Total Income (GTI). In case of other
properties – i.e., LOP and DLOP the income from house property will be positive, but would be
reduced to the extent of standard deduction and interest paid.
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The quantum of deduction depends upon the purpose for which you take a loan – i.e. purchase,
construction, reconstruction, repair or renewals, and also the type of property – i.e. SOP, LOP
or DLOP.
Hence, in case you have taken a loan for the purpose of purchase or acquisition of the house
which is an SOP, then you will be eligible for a maximum deduction of a sum of Rs 2.00 lakh. But
if the loan is taken for the purpose of repair, renewal, or reconstruction, then the eligible
deduction is restricted to Rs 30,000.
Now if the property is LOP or DLOP, then you do not have any maximum restriction for claiming
interest – so it can be above the otherwise limit of Rs 2.00 lakh, 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 of course enjoy
the fruits of your investment made too and / or enjoy the comfort of your dream house.
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VIII - Save tax on your hard earned salary
While many of you in employment take enormous efforts to earn a salary, it is also equally
important in our opinion that you restructure your salary well, in order to save tax on your hard
earned salary. And mind you, if you do so you’ll have a greater “Net Take Home” (NTH) pay,
which will allow you to streamline your finances well and also, help you buy physical assets
such as your dream house and a dream car.
Many of you today get a big fat pay cheque, but it is important that one restructures the vital
components of salary well in order to be saved from being taxed.
The vital component of salary, where restructuring can be required is as under:
� Basic Salary:
While this is the base of your head of income – “income from salary”, it is important that you
have your basic salary set right. This is because the basic salary constitutes 30% – 40% of your
Cost-to-Company (CTC). So, having a very high basic component may lead to having a high tax
liability in absolute Indian rupee terms. On the other hand, if you reduce your basic salary
considerably, you would lose out on the other benefits such as Leave Travel Allowance (LTA),
House Rent Allowance (HRA) and superannuation benefits associated with your basic.
� House Rent Allowance (HRA):
If you are paying rent for an accommodation, and if your organisation extends you HRA
benefits, then this is another vital component which can help you to reduce your tax liability.
But it should be noted that you cannot pay rent for the house which you own and if you are
residing in it.
Hence, now on the other hand if you are staying in a rented house and you are the one paying
the rent, then HRA exemption [under Section 10(13A)] can be availed for the period during
which you occupy the rented house during the financial year.
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However in order to obtain an exemption, you are required to submit appropriate and
adequate proof of payment of rent for the entire period for which you want to claim
exemption. But, if you as an employee are getting an HRA of less than Rs 3,000 per month, you
are not required to provide a rent receipt to your employer.
Also you need to note an important change in HRA rules introduced in FY 2013-14. As per the
circular issued by the Central Board of Direct Taxes (CBDT) in October 2013, if you are paying an
annual rent of more than Rs 1.00 Lakh or Rs 8,333 per month, then you will have to report the
Permanent Account Number (PAN) of your landlord to the employer (Earlier you had to furnish
a copy of the PAN card of your landlord only if your annual rent exceeded Rs 1.80 lakh, or Rs
15,000 per month). If your landlord does not have a PAN then you need to file a declaration to
this effect from your landlord along with the name and address of the landlord.
The maximum exemption which you can enjoy for HRA is as under:
In Chennai/ Delhi/ Kolkata/ Mumbai In other cities
Least of: Least of:
Actual HRA Actual HRA
Rent paid in excess of 10% of salary* Rent paid in excess of 10% of salary*
50% of salary* 40% of salary*
*Salary for this purpose includes basic salary + dearness allowance (if in terms of service)
(Source: Personal FN Research)
Here a noteworthy point is, if your rent is very high and if you are not fully covered by the HRA
limit, then it would be wise to pick a company leased accommodation (if the company in which
you work in offers so), as this company leased accommodation would constitute to be the perk
value and would be taxed @ 15% of your gross income. Sure, the perk value is taxable but it still
works out to be more effective for tax planning, than opting for a HRA that doesn’t fully cover
your rent.
� Leave Travel Concession (LTC):
While you may be fond of opting for a leave and travel with your family for a holiday, don’t
forget to assess what tax benefits are extended to you for doing so. The Income Tax Act
provides you tax concession if you have actually incurred expenditure on your travel fare
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anywhere in India, either alone or along with your family members (i.e. your spouse, children,
parents, brothers and sisters who are mainly or wholly dependent on you). But such exemption
is limited to the extent of actual expenses incurred i.e. you can claim exemption on the LTC
amount OR the actual amount incurred, whichever is lower.
Also the exemption extended to you under the Act is for two journeys performed in a block of
four calendar years. And the current block of four calendar years is from 2014 to 2017 (i.e. from
January 1, 2014 to December 31, 2017); the next block will be from 2018 to 2021 (i.e. from
January 1, 2018 to December 31, 2021).
As per the present Income Tax Rule, the exemption would be available to you in the following
manner:
Particulars Amount exempt
Where the journey is performed by air
Amount of "economy class" airfare of the national carrier by the
shortest route to the place of destination or amount actually
spent, whichever is less.
Where the journey is performed by rail
Amount of air-conditioned first class rail fare by the shortest
route to the place of destination or amount actually spent,
whichever is less.
Where the places of origin of journey and destination are connected
by rail and journey is performed by any mode of transport other
than air.
Air-conditioned first class rail fare by the shortest route to the
place of destination or amount actually spent, whichever is less.
Where the place of origin of journey and destination (or part
thereof) are not connected by rail
> Where a recognised public transport exists First class or deluxe class fare by the shortest route or the
amount spent, whichever is less.
> Where no recognised public transport system exists
Air-conditioned first class rail fare by the shortest route (as if
the journey is performed by rail) or the amount actually spent,
whichever is less.
(Source: Personal FN Research)
In case you do not avail of a LTC or if you travel just once in the four calendar year of the block
period (2014-2017), then you will be allowed to carry-over the concession to the first calendar
year (2018) of the next block 2018-2021, but for only one journey. In addition to this, you will
be eligible to travel two more times in the next block.
It is vital that you utilise your leaves wisely and travel to any of your loved holiday destination in
India, as this will not only de-stress you, but also help you in reducing your tax liability. After
you have returned from your journey, in an excitement please do not tear your travel tickets /
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boarding pass (for air travel) as you need to submit them to your employer so that your tax
liability can be reduced.
� Education and Hostel 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 annum).
� Meal Allowance through Food Coupons / Food Cards:
While you may be tempted to increase your NTH (in the cash form) you should not ignore to
avail the food coupon / food card benefit, if your employer provides one. This is because
effective utilization of the same will enable you to effectively reduce your tax liability along with
getting the feeling of being pampered by your employer.
The exemption amount which you can enjoy is Rs 50 per meal available only in respect of meals
during office hours. However, the exemption is also available in case your employer provides
you food vouchers / cards of value of which can be used at eating joints. The exemption limit in
this case is restricted to Rs 2,500 per month for a food voucher / card value.
So remember, if your employer is providing you food coupon / card don’t refrain from availing
the same for a maximum voucher value of Rs 2,500 every month.
� Medical reimbursement:
During the year if you and / or your family members have visited a doctor or bought medicines
from a chemist, all the expenditure incurred by you and / or your family members during the
year for medical purpose too would help you in reducing your tax liability.
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As per the Income Tax Act, the maximum amount of deduction available with you is Rs 15,000
for every financial year, and to claim the same you are required to submit, to your employer,
the medical bills for the financial year stating the amount in total which you intend to claim.
Similarly, it is noteworthy that if your medical insurance premium is paid by the employer or
reimbursed, then that too will not be subject to tax. Also if your employer is providing medical
facility in hospital or clinic owned by him, local authority, Central Government or State
Government then medical expenditure incurred under such a hospital too, would not be
subject to any tax.
So, next time when you get your pay cheques in hand please evaluate the aforementioned
points, and assess whether every component in your salary is structured well – and to do so you
can certainly talk to your Human Resource (HR) department, as they too may help you on this.
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IX - Tax implication for other mutual fund holdings
As discussed earlier in this guide, if you make any long term gains at the time of exit (any time
after the end of the lock-in period) from your ELSS holdings, you would not be liable to pay
Long Term Capital Gains Tax (LTCG). Moreover, the amount re-invested in tax saving
instruments will be eligible for deduction under section 80C subject to maximum limit of Rs
1.50 lakh. That’s about ELSS funds.
When it comes to tax implications for other mutual fund holdings, it established upon whether
you hold equity oriented funds or non-equity oriented funds. Equity oriented funds are those in
which 65% of the investible corpus in invested in Indian equities, while non-equity funds are
those which invest less than 65% in Indian equities – these include debt funds (such as income
funds, liquid funds, gilt funds, floating rate funds, Fixed Maturity Plans (FMPs), Monthly income
Plans, (MIPs), Gold ETFs and so on.
How are gains / dividends from other mutual fund holdings taxed?
Tax implication Equity oriented funds Non-equity oriented funds
Long Term Capital Gain (LTCG)* Nil
10% without indexation
20% with indexation
(whichever is beneficial, should be
opted)
Short Term Capital Gain (STCG)* 15% Gains are added to total income and
taxed as per one’s tax slab
Tax implication of dividends received Nil
Fund house pays DDT but dividends
received are nil in the hands of the
investor
*In case of equities, the holding period over 1 year is ‘Long Term’ for LTCG tax, while less than 1 year is ‘Short Term’ for STCG tax.
(Source: Personal FN Research)
As can be seen in the table above, for equity oriented funds, while the tax implication for long
term capital gains (LTCG) and dividends for individuals are nil, Short Term Capital Gains (STCG)
are taxed at 15%.
For non-equity oriented funds, long term capital gains are taxed at 20% with indexation.
Indexation lets an individual adjust the purchase price of the mutual fund units by taking into
account inflation, thus enabling you to reduce your tax outgo. Short term capital gains for non-
equity oriented funds are added to the total income and taxed as per one’s tax slab, which
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means that if you come in the 30% tax bracket, your short term capital gains arising from the
sale of mutual fund units will be taxed at 30%. In case of dividends, as the fund house will have
to pay Dividend Distribution Tax (DDT), they are tax free in the hands of the investor.
Therefore, it is important to consider the tax implications before investing or redeeming your
money from mutual funds.
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X- Penalties of non-filing of returns / non-payment of taxes
Missing the deadline for filing I-T returns can give you sleepless nights. Here are some vital
points which talk about the consequences that you as an individual assesse might face if you
don’t file your returns and / or pay your taxes on time…
� What if you missed your tax filing deadline:
If you don’t file your I-T returns by the due date, you can still do so before the end of the
assessment year, without paying any penalties. As per Section 139(4) of the Income-Tax Act,
1961, one is allowed to file his / her I-T returns until 1 year of the completion of the relevant
assessment year or before the completion of the assessment, whichever is earlier.
For the financial year 2015-16, the relevant assessment year is 2016-17. So if you miss filing
your income tax return by the due date i.e. July 31 2016, you can still file your I-T returns before
the end of assessment year i.e. at the latest by March 31, 2017. However, if the returns aren’t
filed before March 31, 2017 a penalty of Rs 5,000 may be levied subject to the decision of the
Assessing Office (who holds the right to waive off this penalty).
� What if you haven’t paid your tax due on time:
If you haven’t paid your tax due on time, then a penal interest of 1% per month (simple
interest) will be levied on the amount of tax due or balance tax payable from the due date to
the actual date of filling of your returns. However if you are lucky enough to have no tax
payable, you won’t be liable to pay any interest even if you file your return after due date but
before the end of relevant assessment year.
� Did you miss paying your advance tax:
If the amount of tax that you are liable to pay exceeds Rs 10,000, then advance tax needs to be
paid in 3 instalments.
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- The first due date is September 15, where you are required to pay at least 30% of the tax
payable as advance tax.
- The second due date is December 15, where at least 60% needs to be paid.
- And the third instalment, is on March 15, where 100% of the tax payable needs to be paid.
If you defer any of these payments, then a simple interest of 1% per month would be levied as
penalty.
� Lose the rights of make any amendments:
Did you miss some key information or forgot to claim a significant tax saving benefit while filing
your return? Well, there is always a chance of such human error while filing an I-T return. If you
don’t file your I-T returns before the due date, you would not be allowed to make any changes
later in case of any errors while filing returns. But if you have filed your returns by the
aforementioned deadline, you enjoy the right to correct any errors and make changes in your
tax form any number of times before March 31 or till the time your returns are assessed,
whichever is earlier.
� Lose your chance of carrying forward losses:
You may have a capital gain loss in your investment portfolio. Income tax act allows you to carry
forward losses to adjust against future gains.
If you haven’t filed your returns on or before the due date, you are disallowed from carrying
forward losses. But if the returns are filed by the due date, carry forward of losses for the next 8
years is allowed to adjust it with gains that you may make in the future.
Besides, not filing your I-T return on time bring along other peril such as:
- Risk of prosecution under the relevant provisions of the Income Tax Act, 1961 which may
also lead to imprisonment from 6 months to 7 years plus the fine
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- Impediments in obtaining bank loan or even a credit card (as I-T returns often validate your
credit worthiness before financial institutions)
- Impediments in your visa application approval, if you have plans to travel abroad
- Problems in registration of immovable property
Hence, make sure that you file your I-T returns and pay your taxes before the due date. Filing I-
T returns apart from being viewed as a legal responsibility, should also be considered as a moral
responsibility. It earns you the dignity of consciously contributing to the development of the
nation. This apart, your I-T returns validate your credit worthiness before financial institutions
and make it possible for you to access many financial benefits such as bank credits etc.
Even if you aren’t earning income which comes under the tax bracket; it is always advantageous
to file your returns. But while you do so, make sure the correct form is filed.
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XI - Income tax return forms
Earlier this year, the Central Board of Direct Taxes (CBDT) announced a few changes in the
Income Tax Return (ITR) forms, as a measure to keep black money in check. It was a move for
the welfare of the nation as a whole. However, many across industries found the forms to be
quite cumbersome due to the exhaustive disclosure norms. Hence, on May 31, 2015, the
Government introduced some further changes in these ITR forms. So, please take note of the
forms to be filed…
Form Number Applicable in case you have the following
incomes
Not applicable in case you have the following
incomes
ITR 1 [For individuals having
income from salaries, one
house property, other
sources (interest etc.)]
Income from salary Income from capital gains
Income from other sources Profits and gains from business and profession
Exempt income Lottery winnings
Own only 1 house property Income from horse races
Agricultural income up to Rs 5000 Foreign asset
Pension income Foreign income
ITR 2 (For Individuals and
HUFs not having Income
from Business or
Professions)
Income from salary Profits and gains from business and profession
Income from capital gains
Income from other sources
Lottery winnings
Income from horse races
Own more than 1 house property
Agricultural income more than Rs 5000
Foreign asset
Foreign income
ITR 2A (For Individuals and
HUFs not having Income
from Business or
Profession and Capital Gains
and who do not hold
foreign assets)
Own more than 1 house property Income from capital gains
Agricultural income more than Rs 5000 Profits and gains from business and profession
Foreign asset
Foreign income
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ITR 4S (For individuals or
HUFs who have
presumptive business
income)
Presumptive business income Lottery winnings
Income from salary Income from horse races
Income from other sources Income from capital gains
Own only 1 house property Foreign asset
Agricultural income up to Rs 5000 Foreign income
Other changes applicable for assessment year 2015-16 are:
� Foreign Travel: Now onwards, those making foreign trips will need to furnish only the
passport number in ITR-2 and ITR-2A
� Bank account details: Going forward, the bank-wise closing balance in all accounts will not
be required to be disclosed. Moreover, you won’t have to give disclosures for dormant
accounts that have not been in operation during the previous 3 years. Only the following
details will be required to be disclosed:
- Account numbers for all the accounts (current and savings) held at any time during the
‘previous year’ for which income is being reported; and
- IFSC Codes
� Disclosure of assets held by foreign nationals: Foreign nationals who had acquired assets
when they were non-residents won’t be required to disclose them, as long as no income is
being earned from them in the ‘previous year’
� Moreover, CBDT has made it mandatory for all individuals with a taxable income of over Rs
5 lakh to file their I-T returns online.
Remember that if you have an Aadhar card and have fed the same while filing your I-T returns,
then the process of filing return online would be hassle-free and even obtaining refunds may
not be delayed. This would do away with the risk in sending verification forms physically to the
CPC in Bengaluru, where forms may not reach on time or even getting lost in transit.
Nevertheless, even if you do not have an Aadhar card, go ahead and file your I-T return on time
and make sure you make all necessary disclosures.
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XII - Conclusion
In the previous pages of this guide we have seen that your extra step towards the tax planning
way would enable you to wisely reduce your tax liability. Remember waiting till the eleventh
hour to do your tax planning exercise, is not going to help in a big way. It would just lead to “tax
saving and not “tax planning”. Just to reiterate, while you have host of tax-saving investment
options available under Section 80C, following an asset allocation model (for your tax planning
exercise), in accordance to your age, ability to take risk and investment horizon is going to make
your tax saving portfolio look more prudent. In other words, tax planning as an exercise is not
just limited to filing returns and paying taxes. It is a process whereby your larger financial plan
needs to be taken into consideration after accounting for the above mentioned factors.
Also, one needs to look beyond the ambit of Section 80C, as you may exhaust the limit of Rs
1.50 lakh and still find it insufficient to reduce your tax liability. So, you should access the other
deductions available under Section 80 (as mentioned above) and the exemptions too.
Moreover, while you are working hard with an organisation to make a living; remember to
effectively know and structure each component of your salary income in order to effectively
save more tax, which in a way will help you in buying all the comforts and luxuries in life.
PersonalFN thinks that while you must take help of your tax consultant while filing your returns
and seek opinion from him, a self-study approach on your tax planning exercise is also quite
necessary as one should be well versed with at least those tax provisions which affect us
directly. And with that note we wish you all Happy Tax Planning!!
General Disclaimer: This communication is for general information purposes only and should not be construed as a
prospectus, offer document, offer or solicitation for an investment or investment advice.
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Contact us
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