SMART SELECTION OF TAX SAVING PRODUCTS

Shinde Popat Krishna Department of Commerce SVPMs College of Commerce, Science & Computer Education, Malegaon (Bk), Tal Baramati, Dist Pune. email : sumit.pks@gmail.com Phone : 9860229040

EXEMPTIONS AND REBATES AVAILABLE FOR INDIVIDUALS UNDER THE IT ACT:

Income Tax Act has provided certain sections for us to make use of in order to lower down our taxable income if not to zero! DEDUCTIONS reduce your taxable income (i.e. income assessable to tax) whereas EXEMPTIONS and Rebate reduces your overall tax liability (tax outgo). Premium paid on a life/medical insurance policy, investments in tax saving products are allowed a deduction (from taxable income), whereas, House Rent Allowance received by an employee is exempted to a certain extent. Another example of exemption is free perks received by employees.

INCOME TAX DEDUCTIONS:(ANNEXURE)

Various deductions are available as per Chapter VI of IT Act. from Sec. 80C to 80U

CERTAIN POPULAR INCOME TAX EXEMPTIONS/REBATES: (ANNEXURE) 1. INCOME FROM SALARY: 2. INCOME FROM HOUSE PROPERTY: 3. CAPITAL GAINS: 4. INCOME FROM OTHER SOURCES:

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The above income earned by the assessee is exempted up to a certain extent and the balance is included in his/her taxable income for income tax computation.

MAKING THE BEST OF TAX SAVING OPTIONS: TAX SAVING STRATEGIES FOR SALARIED INDIVIDUALS:
At the end of every financial year, many tax payers frantically make investments to minimize taxes, without adequate knowledge of the various available options. The Income Tax Act offers many more incentives and allowances, apart from the popular 80C, which could reduce tax liability substantially for the salaried individuals. Here are seven smart tips to help you save more and reduce taxes.

1. SALARY RESTRUCTURING:
Restructuring your salary may not always be possible. But if your company permits, or if you are on good terms with your HR department, restructuring a few components could reduce your tax liability. Opt for food coupons instead of lunch allowances, as they are exempt from tax up to Rs. 60,000/- p.a. Include medical allowance, transport allowance, education allowance, uniform expenses (if any), and telephone expenses as part of salary. Produce bills of actual expenses incurred for these allowances to reduce tax. Opt for the company car instead of using your own car, to reduce high prerequisite taxation.

2. UTILIZING SECTION 80C:

Section 80C offers a maximum deduction of up to Rs. 1,00,000/-. Utilize this section to the fullest by investing in any of the available investment options. A few of the options are as follows. Public Provident Fund Life Insurance Premium National Savings Certificate Equity Linked Savings Scheme

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5 year fixed deposits with banks and post office. Tuition fees paid for childrens education, up to a maximum of 2 children.

3. OPTIONS BEYOND 80C:

If you have exhausted your limit of one lakh under section 80C, here are a few more options. Section 80D Deduction of Rs. 15,000/- for medical insurance of self, spouse and dependent children and Rs. 20,000/- for medical insurance of parents above 65 years. For medical or health insurance-popularly known as medi-claim policy-premia paid on the health of yourself, spouse and dependent children. Additionally, (from 1st April, 2008) a further deduction is allowed of Rs. 15,000/- for buying health insurance policy for your parents Rs. 20,000/- if either of your parents is a senior citizen. Section 80CCF- Deduction of Rs. 20,000/- in addition to the Rs 1 lakh under 80C, for investments in notified infrastructure bonds. Section 80G- Donations to specified funds or charitable institutions.

4. HOUSE RENT ALLOWANCE:

Are you paying rent, yet not receiving any HRA from your company? The least of the following could be claimed under Section 80GG. 25% of the total income or, Rs 2,000 per month or, Excess of rent paid over 10% of total income This deduction will however not be allowed, if you, your spouse or minor child owns a residential accommodation in the location where you reside or perform office duties. If HRA forms part of your salary, then the minimum of the following three is available as exemption. The actual HRA received from your employer. The actual rent paid by you for the house, minus 10% of your salary (this includes basic + dearness allowance, if any). 50% of your basic salary (for a metro) or 40% of your basic salary (for nonmetro).
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5. TAX SAVING FROM HOME LOANS:

Use your home loan efficiently to save more tax. The principal component of your loan, is included under Section 80C, offering a deduction up to Rs. 1,00,000/-. The interest portion offers a deduction up to Rs. 1,50,000/- separately under Section 24(b).

6. LEAVE TRAVEL ALLOWANCE:

Use your Leave Travel Allowance for your holidays, which is available twice in a block of four years. In case you have been unable to claim the benefit in a particular 4 year block, you could now carry forward one journey to the succeeding block and claim it in the first calendar year of that block. Thus, you may be eligible for three exemptions in that block.

7. TAX ON BONUS:
A bonus from your employer is fully taxable in the year in which you receive it. However request your employer for the following. If you expect tax rates to be reduced or slabs to be modified in the subsequent year, see if you could push the bonus payment to the subsequent year. Produce your tax investment details well before, to prevent your employer from deducting tax on bonus before handing it over.

CHECK YOUR TAX LIABILITY FIRST THING:

First, do a review of your tax liability, to ascertain what and how much. You actually need to save as much tax as legally possible. It may be quite possible that the life insurance premiums that you are paying along with the PF deductions may be enough to take care of tax saving!
TAX SAVING OPTIONS:

Very simply there are 3 basic sections under which you can save on tax: Section 80C, inclusive of Section 80 CCC Section 80D Section 24(b) Section 80C - Investments in the following up to a limit of Rs.100,000 are deductible from Taxable Income:
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Life insurance premium payments Contributions to Employees Provident Fund Public Provident Fund (maximum Rs 70,000 in a year) National Saving Certificates [NSC] Unit Linked Insurance Plan (ULIP) Repayment of Housing Loan (Principal) Equity Linked Mutual Fund Scheme (ELSS) Tuition Fees including admission fees or college fees paid for Full-time education of any two children of the assessee (Any Development fees or donation or payment of similar nature shall not be eligible for deduction). Infrastructure Bonds issued by Institutions/ Banks such as IDBI, ICICI, REC, PFC etc. Tax-saving Fixed Deposits (FDs) of scheduled banks with tenure of 5 years are also entitled for section 80C deduction (investments in a 5-Yr Post Office Time Deposit (POTD) scheme are included) Senior Citizen Savings Scheme 2004 (SCSS) Section 80D - You can claim a deduction of Rs.15,000/- (Rs.20,000/- in case of senior citizens). For medical or health insurance--popularly known as medi-claim policy-premia paid on the health of you, spouse and dependent children. Additionally, (from 1st April, 2008) youre also allowed a further deduction of Rs 15,000/- for buying health insurance policy for your parents (Rs 20,000/- if either of your parents is a senior citizen. Section 24(b) - The interest component of your home loan is allowed as a deduction under the head 'income from house property' under Section 24(b) up to a limit of Rs 1.5 lakhs a year in case of a self-occupied house. The claim can be made even on loans taken for repair, renewal or reconstruction of an existing property. With the help of a little planning, one can choose the right deductions and tax saving products in order to reduce overall tax outgo and fulfill future needs too.

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FIGURE OUT NEEDS OR REQUIREMENTS BY:

Identify own life cycle stages; Choose the deductions and products that best fit with those requirements. To figure out your requirements, identify your life cycle stage Breaking it down to simpler steps, the difference between todays financial position and tomorrow expected financial position.

I.

YOUNG AND UNMARRIED:

You may want to provide funds for dependents (such as parents) in case of an

unfortunate event, such as the passing of one of them or yourself if you are the earner and taking care of them. You will require life insurance for such. You will need to have adequate funds for yourself in the case of accident, disease, disability or illness. For this you need an emergency fund which could be in a liquid short term fund. You will want to accumulate funds for short/medium term needs (such as buying a house, car, marriage etc). This could be in short term liquid funds, savings accounts, FDs, or mutual funds (if the event when the money is needed at least 3-5 years from now). Accumulating funds for long term needs (such as retirement) is important whenever you start to earn. For this you will want a combination of Pension Plans, Provident Fund, and Mutual funds of equity and debt. Equity Linked Saving Scheme (ELSS) are a good idea as they provide tax benefits and make good long term investments.

II.

YOUNG AND MARRIED:

In this stage you will want to provide protection for numerous dependents who could

include your parents and now your children and spouse as well, in case something happened to you, the earner, on which these people depend. This stage of life is your highest need for life insurance. Your short/medium term goals will be changing over time from cars, your marriage and holiday to childrens education, childrens marriage and house purchase, if not already done. You may need: Protection for Parents Emergency fund Short/Medium term goals saving Long term/retirement savings
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III.

MARRIED (NOT SO YOUNG ANYMORE) WITH OLDER CHILDREN:

At this stage, all of the above still apply, but retirement planning begins to take

priority. As hard as it may be for parents to understand, at this stage, if you have not properly prepared for your retirement, you should prioritize this over childrens education and marriage, encouraging children to help out more in this area by saving themselves and taking loans. Here also you still may need: Protection for Parents Emergency fund Short/Medium term goals saving Long term/retirement savings

IV.

PRE-RETIREMENT:
Children should have started working by now. Life insurance becomes less of a

priority except for ones spouse who may require protection if he/she does not work. Retirement funds are a top priority. Now you need to get your ducks in a row and prepare for a new stage of life. Financial planning is critical to make sure you are ready. You still may need: Emergency fund. Short/Medium term goals saving Long term/retirement savings Focus on income-producing investment products.

V.

RETIREMENT:
In retirement, income products become ultra-important, such as dividend paying

shares or mutual funds, pension plans and Post Office Schemes. Pensions and Provident funds may be providing payout at this point. Some long term growth investments must be retained as people are living long lives these days and inflation must be overcome. Protection of capital is key. For those widowed or divorced, the same needs will likely apply. The asset allocation should be reviewed whenever there is a change in the life cycle stage. There may be overlapping of life cycle stage. For example, a person who is young and

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unmarried may opt to purchase a home loan and therefore can avail of the benefits under sec 80C. The individual has to carefully choose the investment that best suits his financial as well as liquidity needs and savings is inflation protected. For a working couple, an efficient tax plan could be achieved, by jointly making use of, their dual income to invest, and the income tax rules to their advantage. Here are six smart tips to help couples save more and maximize wealth.

1) USING INVESTMENTS EFFICIENTLY:

If spouses fall in different tax brackets, it is advantageous for the spouse in the higher tax bracket to claim deductions from the tax saving investments, which the couple has invested in, together. For example, let us consider the case where both spouses make investments for a tax deduction of up to Rs.1,00,000/- respectively. In case one of the spouses has insufficient investments to fully meet his limit of Rs.1,00,000/- then the investments made should be used for a claim by the spouse earning more.

2) JOINT HOME LOANS:

When seeking a home loan, it is advantageous for couples to opt for joint loans. By this, spouses could individually claim a maximum deduction of Rs. 1 lakh on the principal repayment and Rs 1.5 lakhs on interest payment, for the same home loan. Thus, together the couple gets to claim Rs. 2 lakhs principal repayment and Rs. 3 lakhs interest repayment. The income tax benefits are applicable in proportion to the ownership structure.

3) THE HRA ASPECT:

It is advantages to make use of ones house rent allowance (HRA) as it is partially exempt from tax, provided rent is actually paid. If, one of the spouses owns the house, the other spouse could pay rent to him/her, to claim HRA, thereby reducing his taxable income. If the couple resides in a rented house, the HRA exemption for the rent paid could be shared by the couple.

4) USING LTA BENEFITS:

As per the current rules, LTA benefits could be claimed twice in a block of four calendar years. While claiming LTA (Leave Travel Allowance), spouses should claim exemption alternatively each year. This way, together they could claim an LTA exemption of

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four journeys in a block of four years. There is no need for them to take the precaution of not travelling twice during the same year.

5) HUF BENEFITS:
Have you and your spouse received gifts that are considered taxable? Then starting an HUF could prove to be quite a saving. Any income received by an individual as a member of a HUF (Hindu Undivided Family) is taxable only in the hands of the HUF and not in individual capacity. The HUF income has the same slabs and exemptions as for an individual. Thus, through an HUF, couples could get, a separate exemption of Rs 160,000, additionally.

6) TAX SAVING THROUGH A TRUST:

Spouses could get additional exemptions by creating a trust as per section 164 of Income Tax Act. A private trust could be created for unborn son or daughter, or for the future spouse of existing son or daughter, by allocating fund to the trust through transfer of property, rent of which shall be income of the trust.

CONCLUSION:
The Income Tax department gives us various avenues to help save tax. Optimally using these avenues and structuring finances sure does provide a great deal of monetary gain.

TO AVOID THE HASSLES OF LAST MINUTE TAX PLANNING, ALWAYS

Give your employer details loans and tax saving investments before hand, to prevent any excess deduction. Check the Form 16 received at the end of each year from your employer thoroughly. It is important to start your tax planning well before 31st March, and to file your returns before the 31st of July each year.

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ANNEXURE: LIST OF INCOME TAX DEDUCTIONS:

Sec 80C Sec 80CCC Sec 80CCF Sec 80CCD Maximum benefit of Rs 1 lakh p.a. available through various options; Investment in pension funds and pension plans; Investment in tax saving long-term Infrastructure bonds; Contribution to Government pension scheme (only for government employees); Payment of Medical Insurance premium paid for policy taken in the name of self, spouse (dependent or not), dependent children and dependent parents; Deduction with respect to treatment of a disabled dependent; Deduction with respect to medical treatment of specified diseases and ailments (mentioned under rule 3A) of self, dependent spouse, children, parents, brothers and sisters; Interest paid on loan taken for higher education (all the studies after Class 12 - either vocational or Fulltime but should be from a school/institute/university recognized by the government.) by the individual; Donations made Subject to conditions; Deduction with respect to the rent paid by assessee if he (or his spouse or children) does not own any residential property and also not in receipt of HRA and RFA; Deduction available to disabled assessee.

Sec 80D

Sec 80DD Sec 80DDB

Sec 80E

Sec 80G Sec 80GG

Sec 80U

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EXEMPTIONS AND REBATES: EXEMPTIONS AND REBATES AVAILABLE FOR INDIVIDUALS UNDER THE IT ACT:
Deductions reduce your taxable income (i.e. income assessable to tax) whereas Exemptions and Rebate reduces your overall tax liability (tax outgo). Premium paid on a life/medical insurance policy, investment in tax saving products are allowed a deduction (from taxable income), whereas, House Rent Allowance received by an employee is exempted to a certain extent. Another example of exemption is free perks received by employees.

CERTAIN POPULAR INCOME TAX EXEMPTIONS/DEDUCTIONS: 1. INCOME FROM SALARY:

House Rent Allowance (HRA) exempted up to a certain limit Entertainment Allowance exemption available only for government employees Childrens Education Allowance Childrens Hostel Allowance Transport Allowance Conveyance Allowance Medical Reimbursement

2. INCOME FROM HOUSE PROPERTY:

Municipal taxes - actually paid by the owner during the relevant financial year only. Standard Deduction of 30% of Net Asset Value (NAV). Interest paid towards payment/borrowed home loan subject to certain conditions.

3. CAPITAL GAINS:
Short-term Capital Gains arising out of sale of physical assets [within 3 years of purchase] are exempted (to a certain extent) under section 54 and 54B.

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Long-term Capital Gains arising out of sale of physical assets [after 3 years of purchase] are exempted (to a certain extent) under section 54, 54B, 54EC and 54F.

4. INCOME FROM OTHER SOURCES:

Family pension (received by the legal heirs of a deceased person) is exempted to an extent. Dividends received by way of investment in mutual fund schemes is fully tax exempted. The above income earned by the assessee is exempted up to a certain extent and the balance is included in his/her taxable income for income tax computation.

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