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Tax planning is an essential part of your financial planning. Efficient tax planning enables you to
reduce your tax liability to the minimum. This is done by legitimately taking advantage of all tax
exemptions, deductions rebates and allowances while ensuring that your investments are in line
with your long term goals.
• Tax Planning is NOT tax evasion. It involves sensible planning of your income
sources and investments. It is not tax evasion which is illegal under Indian
laws.
• Tax Planning is NOT just putting your money blindly into any 80C
investments.
• Tax Planning is NOT difficult. Tax Planning is easy. It can be practiced by
everyone and with a very little time commitment as long as one is organized
with their finances.
a. You will have certain needs and goals to meet. Understand what those are and then figure out
how to maximize tax efficiency in your effort to meet them. Tax planning should be a part of the
overall financial planning that you must do.
For instance, you might be getting married and need to buy a house. In this situation you need to
get insurance to protect you spouse if they are financially dependant upon you, as well as you
need to get a home loan. What should you prioritize and what do you have the capacity to afford?
If you blindly put money into an insurance policy, it might not even be sufficient to give you
adequate insurance cover. However, if you choose to pay off the principal on your home loan,
that could be a better option in this situation.
b. Do not blindly invest money with the the first agent that you might come across. You might
end up making mistakes. A lot of people end up buying insurance policies with minimal
insurance coverage or putting money in instruments where they cannot access the money when
they need it.
c. Do not make last minute decisions just because your payroll department has reminded you that
the internal deadline for submitting proofs is approaching. Tax planning involves planning in
advance to avoid the last minute scramble.
Selecting tax saving investments
You should think about the following criteria, before selecting your tax saving investments for
the year:
• Liquidity: How quickly will you need the money? Will you need to access the
money within the next year or two years or over what duration ?
None of the above instruments let you withdraw your money quickly, in fact
there is a minimum three year lock in for all tax saving investments.
• Risk and Return: How much risk do you want to take. There is a trade off
between the two, some instruments are very low risk, but as a result they
give low returns which are capped.
• Inflation protection: The instruments that give you a low return typically
are the worst type of investments regarding inflation. This is important
because many of the instruments give you a fixed rate of interest, and lock in
your money for a long period. This is not a good protection against inflation.
• Tax Exemption: All tax saving investments under Section 80C are alike in
one respect that they are tax exempt when they are invested. But they differ
with respect to the tax on the income you earn from such an investment as
well as the tax on the maturity of the investment
There are 4 most commonly used deductions that most people can avail of. These are popularly
known by the section of the Income Tax Act under which they appear. Click on each of them to
get more details.
80C deduction: Up to Rs.1 lakh, and used towards certain investments, payment of insurance
premium, repayment of home loan principal amount, provident fund etc.
80E deduction: Deduction of entire amount of interest paid on higher education loan for any
family member
In addition to these, there are numerous other deductions that are less common or that might not
usually apply to you. Please check with your tax advisor if you might be eligible for any other
deductions. Click here to read more about them.
This allows a deduction for specific investment, contribution, deposits or payments made by the
taxpayer during the tax year.
The most commonly used eligible instruments towards the 80C deductions are:
• Life insurance premium, including premium for a unit-linked insurance plan (ULIP)
• Contribution to Public Provident Fund or Provident Fund
• Investment in pension plans
• Investment in Equity Linked Savings Schemes (ELSS) of mutual funds
• Home loan principal repayment
• Investment in Infrastructure Bonds, National Savings Certificates
• Payment of tuition fees to for full-time education of any 2 children of an individual
• Fixed deposit with any scheduled bank or post office for 5 years
• Senior citizens savings scheme
Please check with your tax advisor in case from time to time there are other instruments that
become eligible under 80C.
This allows a deduction for the payment of your medical insurance premium.
All individuals and HUF (Hindu Undivided Family). The amount must have been paid using the
taxpayer’s income chargeable to tax.
In case an individual is taking the deduction, the medical insurance policy can be take in the
name of any of the following: the taxpayer or the spouse, parents or dependent children of the
taxpayer.
In case a HUF is taking the deduction, the medical insurance policy can be taken in the name of
any member of the family.
The general deduction available to each taxpayer is Rs.15,000, for self, spouse and children. An
additional deduction for parents is Rs. 15,000. If the amount paid is for a senior citizen, then one
can claim an additional exemption of Rs.5,000.
All medical insurance policies are eligible for the 80D deduction up to the specified amount.
Please remember that the premium towards the policy cannot have been paid in cash.
Please check with your tax advisor in case from time to time there are some changes to the
amount or type of deduction available under 80D.
This allows a deduction for payment of interest of loan taken towards higher education.
The deduction can be taken by the taxpayer for his/her higher education loan or for any member
of the taxpayer’s family. The amount must have been paid using the taxpayer’s income
chargeable to tax.
The entire payment of interest is deductible. The deduction is available for a maximum period of
8 years or till the principal and interest amount have been repaid, whichever comes earlier.
The 80E deduction is usable only in the case of loan taken for higher education from a financial
institution or recognized charitable institution. In this context, higher education means full-time
studies for any graduate or post-graduate course specifically in engineering, medicine,
management, applied sciences, mathematics or statistics. Please make yourself familiar with
whether your course and subject of study are eligible for this deduction.
Please check with your tax advisor in case from time to time there are changes to the amount of
deduction under 80E and the types of education loans permitted.
The deduction can be taken by any individual, HUF (Hindu Undivided Family), firm or
company. Please note that donations made in kind are ineligible for the deduction.
The deduction available is 100% of the amount contributed to the charity, or in some cases 50%
of the amount, which may further be with or without restriction. This calculation can get a little
complicated, so its best if you ask your tax advisor on the total amount that you will be eligible
for. Also, different charities get treated differently, so best to seek professional advice on this
matter depending upon the charity of your choice.
What are the eligible charities and charitable institutions where my donations are eligible
for the deduction?
Common charities that are eligible for this deduction are the Prime Minister’s National Relief
Fund, Prime Minister’s Drought Relief Fund. Before making a donation, please check with the
charity if it is recognized and has been registered with the appropriate authorities.
If you make a donation to a notified temple, mosque, gurudwara or church, it might also be
eligible but please confirm that this place of worship has been registered with the authorities. As
mentioned above, donations made in kind are ineligible for the deduction, so make sure that you
pay by cheque or bank draft and keep record of the transaction.
Please check with your tax advisor in case from time to time there are newer charitable
institutions that become available or there are changes to the amount of deduction under 80G.
If you earn it, they will tax it! So, lets go through what are the different items that are taxable.
Any income arising out of an employee – employer relationship is taxed under the head Salary.
Your Salary is taxed either on receipt or on due basis, whichever comes earlier.
What are the different incomes taxed under the head "Salaries"?
There are three different incomes taxable under the head Salaries:
1. Salary Due: Any income due from an employer to an employee, whether paid or not.
This is also true if the income is due from a former employer.
2. Advance Salary: Any salary paid by an employer to an employee even though it was not
due or was paid before the due date. This is also true if the advance salary had been paid
by a former employer.
3. Arrears of Salary: Any arrears of salary paid to an employee by an employer, for which
income tax had not been previously deducted. This is also true in case the arrears are paid
by a former employee.
4. How can I calculate my Salary Income?
5. These calculations are best left to your internal human resource or accounts department.
Nevertheless, here is a quick table that can guide you to getting an understanding of how
to calculate your salary income. But some of you might find the terms and words used a
little technical, so don’t say we didn’t warn you….for simplification purposes, we have
used round numbers for the table.
Example
Item
Amount (in Rs.)
Provident Fund Scheme is a welfare scheme where both the employee and employer make a
monthly contribution. The interest earned on these regular contributions is also credited to the
fund. The balance keeps on accumulating year after year and on retirement or resignation the
accumulated balance is given to the employee.
As mentioned above, both the employer and employee contribute towards Provident Fund. The
contribution made by employees is out of their own income and therefore no question of taxation
arises as the entire amount has already been taxed. The contribution by the employer is over and
above salary of employee and therefore is seen as income of employee and taxed. The interest
earned on the Provident Fund balance is on both employer as well as employee contributions,
and this interest is also an income of employee and therefore taxed.
The detailed tax treatment of different kinds of provident funds is little technical. There are rules
that govern whether a certain fund will be taxable or not, the technical details of which are
shown here.
The table below shows the tax treatment of different kinds of provident funds:
Fund During Continuity of Job Upon Retiremen
Employer's Contribution
and interest there on:
Taxable as Salary Income.
Employee's own
Contribution : It is not
taxable.
Interest on employee's
contribution: Taxable as
income from other
sources.
Yes, you can transfer your old Provident Fund account to your new employer. The process to do
this is very simple. Upon your change in employment, file a Form 13 with the new employer.
Thereafter, the labour consultant or human resources department of your new employer shall
follow up on the transfer process with the Provident Fund authorities. (Download Form 13 here)
Yes, you can take a withdrawal/advance from your Provident Fund account. Here is the process:
• Upon resignation or retirement from an establishment you can apply for PF withdrawal
using Form 19. Withdrawal is allowed under two options: (Download form 19)
1. If the member has attained 55 years of age; or
2. ii. The member should not work in any covered establishment for a period of 2
months from the exit date.
Additionally, you also have an option to withdraw funds from your Employee Pension
Scheme. If you choose to do so, you will need to file an application using Form 10C.
(10C)
• You can also take an advances from your Provident Fund account, but only for certain
specified purposes. The application for an advance is made using Form 31.
Tax Filing
Filing your tax returns is an annual activity that most of us have to take care of so that we operate
within the law.
You will need to file an annual tax return if you fall into one of the following categories:
1. 1. If you are an individual whose annual income, before tax deductions, is above any of
the following cases
o Rs.150,000 for all resident Indians, other than the two cases mentioned below
o Rs.180,000 for resident women
o Rs.225,000 for resident senior citizens
2. If you need to file for a tax refund for tax deducted at source
3. If you get a notice from the Income Tax Department for return of income
4. If you want to claim carry forward losses from the current year in future years
As an individual taxpayer, you can file your tax return in two ways:
1. You can fill out the tax form and deposit the hard copy to the local income tax department
office
2. Or, you can chose to file electronically on the internet on the Income Tax Department’s
website. You will need a digital signature to be able to file electronically. If you do not
have a digital signature, you will need to file a hard copy of your online
acknowledgement manually with the Tax Department
The above procedure is true for HUFs (Hindu Undivided Family) as well.
Yes! And if you do not meet these deadlines you might have to pay interest or penalties or even
face a tax inquiry.
Tax audit results in an audit of accounts if the turnover of a business exceeds Rs. 40 lakhs or in
case of specified professionals the professional receipts exceeds Rs. 10 lakhs. Salaried
employees do not need to worry about tax audits.
I have heard about some people paying Advance Tax - what is this?
Advance Tax is paying some part of your annual taxes in advance of the annual deadline.
If you are a salaried employee, you do not need to pay Advance Tax. However, if you are a self-
employed professional or a businessperson, you will have to pay Advance Tax.
Advance Tax is paid using Tax Payment Challan and can be deposited at banks empanelled with
the income tax department, for example at designated branches of ICICI, HDFC, SBI etc. Please
note that not all branches will accept the Challan, so please make yourself aware of which of
your local branches will accept it.
1st Payment of up to
15 June Not applicable
25%
How can I calculate my taxes? What are the income tax slabs?
Calculating your income taxes is very easy. All you need to know is which tax slab will be
applicable to you. But, before we get to tax slabs, lets understand in 3 quick steps how to
calculate taxes.
Step 1: Identify and tabulate all sources of income – salary, business income, interest, rental,
capital gains
Step 2: Identify which deductions and tax savings are applicable to you – 80C deductions,
interest repayment
Step 3: Apply the relevant tax slab depending upon your sex and age, after taking the deductions
and savings
In addition to the tax payable on income, you will also have to pay a Surcharge (if your income
exceeds Rs.10 lakhs in case of individuals) and an Education Cess levied by the Government on
all tax payers. If you are a salaried employee, chances are that your employer has already
deducted these in your monthly pay.
The tax slab will help you identify how much of your income will be available to you tax free
and thereafter what tax rate will be charged to the remaining income.
If you are a woman or a senior citizen, you will be entitled to a larger tax-free amount. The
following tables will help you identify which tax slabs are relevant for you:
• Resident Individual below 65 years of age or HUF (tax free income up to the first Rs.1.50
lakhs)
• Resident Woman below 65 years of age (tax free income up to the first Rs.1.80 lakhs)
• Resident Senior Citizens – 65 years of age or above (tax free income up to the first
Rs.2.25 lakhs)
As shown below, after the initial tax-free amount, different slabs of your income will be charged
at different rates.
Rs.2,05,000 + 30% of
Above Rs. 10% of 3% of income tax
income above
10,00,000 income tax and surcharge
Rs.10,00,000
For Resident Senior Citizens ( 65 years of age and above, including those who
turn 65 at any time during the Financial Year 2008-09)
I am not sure about which form I should use to file my tax return.
Its simple. The form you need to fill out depends upon the nature of your income. Please note
that you only need to fill out just one form.
If you are a salaried employee with no additional sources of income apart from your salary, you
will need the simple ITR1 form. However, if you have any additional sources of income such as
interest income, rental income, or capital gains from sale of assets, then you will need to use ITR
2 form.
The details of the most commonly used forms for individuals are shown below.
Form
Applicability
No.
If you are an Individual and only have income from salary, pension, family
pension or interest.
ITR 1
For example: Amit earns salary income from his job at Infosys, but has no
other sources of income. He must file his tax return using ITR1 form.
If you are an Individual or a HUF and have other sources of income such
as rental income, capital gains from sale of assets, dividend income.
ITR 2
For example: Aruna earns salary income from her job at Infosys, but also
has interest income from her savings account and FDs, and earns rental
income from her apartment. She must file her return using ITR2 form.
ITR 4 If you are an Individual or a HUF and have income from a proprietary
business or profession.
For example: Devika is a doctor and only works at her clinic at home. She
must file her return using ITR4 form.
The above forms are the most commonly used forms for individual taxpayers. However, if you
are a company and need to file returns, you can find more details for other forms here.
Form
Applicability
No.
ITR 6 11
The income tax which is charged to you is based on the tax slabs declared by the Government in
its annual budget every year. The following table encapsulates the tax slabs applicable this year.
(Financial Year 2008-2009 )
Please note that the taxable income is arrived at after adding all your different sources of income
and subtracting the deductions that you have taken advantage of under Section 80.
Lets take a few examples to illustrate how you can calculate taxes based on these slabs.
Example 1:
Sarla is a salaried employee, her annual income is Rs. 2,40,000. She has made no tax savings
investments during the year.
Let us calculate her income tax liability.
Heads Amounts
Gross Total Income Rs. 240,000
Deductions Nil
Taxable Income Rs. 240,000
Income Tax Calculations Tax
Tax on Income upto Rs 180,000 0% Zero
Tax on the remaining Rs 60,000 10% Rs.6,000
Total Income Tax Due Rs. 6,000
Educational Cess @ 3% Rs. 180
Total Tax Payable Rs. 6,180
Example 2:
Vinod is a salaried employee. His annual income is Rs. 3,25,000.His home loan interest payment
is Rs 1,20,000 and his home loan principal repayment is Rs. 80,000.He has made an investment
of Rs. 50,000 in NSC.
Let us calculate Vinod's interest liability.
Heads Amounts
Income from Salary Rs. 325,000
Income from House Property
(Section 24 Deduction for Home loan Rs.120,000
interest repayment)
Gross Total Income Rs. 205,000
Section 80 C Deductions Rs.100,000
NSC Investment Rs. 50,000
Home Loan Principal
Rs.80,000
Repayment
Total Rs. 130,000
Taxable Income 105,000
Total Tax Due Rs. 0
Example 3:
Ram is a salaried employee who earned Rs.12,00,000. He has bought a health insurance policy
for himself worth Rs 10,000. Ram has also bought ELSS funds for Rs. 80,000 and has also paid a
LIC premium of Rs. 20,000.He has also donated Rs. 20,000 to the Prime Minister's Relief Fund.
Let us calculate Ram's tax liability.
Heads Amounts
Rs.
Gross Total Income
1,200,000
Section 80 C Deductions Rs.100,000
Rs.
LIC Premium
20,000
Home Loan Principal Rs.
Repayment 80,000
Rs.
Total
100,000
Other Donations Rs. 30,000
Section 80D Health Insuance Rs.
Premium 10,000
Section 80G Donation To A Rs.
Charity 20,000
Total Taxable Income 1,070,000
Income Tax Calculations Tax
Tax on Income upto Rs 0% Zero
150,000
Tax on the next Rs 1,50,000
10% Rs.15,000
(Slab 150,001 to 3,00,000)
Tax on the next Rs 2,00,000
(Slab Rs. 3,00,001 to Rs. 20% Rs.40,000
500,000)
Tax on the Tax on next Rs.
570,000 30% Rs. 1,71,000
(above 500,001)
Income Tax Due Rs. 2,26,000
Surcharge on total tax
(Surcharge is applicable if the
10% Rs. 22,600
taxable income
is above Rs.1,000,000)
Income Tax Due Rs. 2,48,600
Educational Cess @ 3% Rs.7,458
Total Tax Payable Rs.2,56,058
Misconception 1:
Misconception 2:
• Filing tax returns is a complex and cumbersome process. I need a
Chartered Accountant to help me file my tax returns. Contrary to
popular belief preparing and filing a tax return is actually quite simple. In fact
if you have a digital signature you can accomplish the entire process sitting
at home on your computer thanks to the e-filing facility available on the tax
department website (www.incometaxindiaefiling.gov.in). Alternatively, you
can submit the returns online, print a one-page receipt, sign it and drop it off
at the income tax office within fifteen days of submitting the returns. No
documents are required to be submitted with the receipt. If you so desire, you
can fill out the forms on your own. However, if you want professional help
there are many third party service providers who offer tax preparation and
filing services for as low as Rs.200.
Misconception 3:
Misconception 4:
• I receive tax exemption on the actual rent I pay for my rented home.
his is not entirely accurate. Section 13 A of the Income Tax Act states that the
maximum amount that is exempt from tax is the lower of the following
amounts: (i) the House Rent Allowance given by the employer, (ii) 50% of
your basic salary if you live in a metro, (iii) or, actual rent paid minus 10% of
your basic salary. Thus if actual rent paid is lower than 10% of your basic
salary you receive no exemption. The other key point is that you cannot claim
any exemption under this section if you live in your own home or if you are
not paying rent to anyone.
Misconception 5:
• Section 80C benefits are available only on making an investment or
saving or paying a premium on insurance. You can claim a deduction for
the school or university tuition fees you pay for your children (maximum of
two) as long as they are enrolled in a full time program at any institute in
India. In addition you can claim a deduction for the repayment of principal on
any home loan that you may have taken. Both these deductions have to of
course be within the overall annual Section 80C cap of Rs.1lakh.
Misconception 6:
Misconception 7:
Misconception 8:
Misconception 10:
• I received cash as a gift from a close friend. I do not have to pay any
tax. You are right as long as the amount was less than Rs.50,000 during the
financial year. The applicable rules for gift tax state that any cash gifts,
without any upper limit, received from specified relatives are exempt from
income tax. However, if you receive a cash gift from a friend, which exceeds
Rs.50,000 in one financial year, you are liable to pay income tax on the
entire amount. However, the good news is that cash gifts received during
your marriage, of any amount, and from anyone are totally free from income
tax.