Plan your Income tax: It’s Right Time for Salaried Assesses

It’s Right Time:

It's just a few months to the end of the current financial year 2014-15. Now, it's time to plan and start investing in instruments that qualify for a rebate in Income Tax. There are certain investments and expenses that are exempt from income tax under the Income Tax Act 1961. Assesses should plan their investment strategies carefully in order to get a good deal in terms savings on income tax and returns from the investments. Before briefing available options for rebate in tax, below are the broad changes which are applicable from Assessment year 2015-16:

Changes at a glance:

1.     Taxable Income eligible for full exemption from income tax is increased from Rs. 2 Lacs to Rs. 2.5 Lacs

2.     Additional deduction of Rs. 50,000 under Section 80 C, CCC, CCD(1):

3.     Income Tax exemption on Interest paid on housing loan under Section 24 of the Income Tax Act increased from Rs. 1.5 Lacs to Rs. 2 Lacs

Now, below are some options to help you to reduce your tax liability:

Utilize Section 80C:

This section of the Income Tax Act allows income tax exemptions for individuals on specified instruments. Section 80C offers a maximum deduction of up to Rs. 1.50 Lacs. Investors can invest up to Rs 1.50 Lacs in one or more of the specified instruments to avail a tax rebate under Section 80C. Utilize this section to the fullest by investing in any of the available investment options. A few of the popular options are as follows:

•     Public Provident Fund
•     Life Insurance Premium
•     National Savings Certificate
•     Equity Linked Savings Scheme
•     5 year fixed deposits with banks and post office
•     Tuition fees paid for children's education, up to a maximum of 2 children

Options beyond 80C:

If you have exhausted your limit of Rs. 1.50 Lacs under section 80C, here are a few more options:

1.   Section 80D: Medi-claim Deduction

You can claim tax benefits on a medical insurance scheme as well. This rebate comes under Section 80D and enables you to claim a rebate on the money paid to buy a medi-claim policy by any mode other than by cash. Deduction of Rs. 15,000 for medical insurance of self, spouse and dependent children and Rs. 20,000 for medical insurance of parents above 60 years is eligible for a tax exemption. Further, From AY 2013-14, within the existing limit a deduction of up to Rs. 5,000 for preventive health check-up is available.

 

2.   Section 80E: Deduction in respect of Interest on Loan for Higher Studies

Deduction in respect of interest on loan taken for pursuing higher education is also available. The deduction is also available for the purpose of higher education of a relative.

 

3.   Section 80G: Deduction in respect of Various Donations

The various donations specified in Sec. 80G are eligible for deduction upto either 100% or 50% as provided in Sec. 80G

 

4.   Section 80GG: Deduction in respect of House Rent Paid

Are you paying rent, yet not receiving any HRA from your company? In this case, the least of the following could be claimed under Section 80GG:

Deduction available is the least of:

1. Rent paid less 10% of total income
2. Rs. 2000/- per month i.e. Maximum Deduction available is 24,000/-
3. 25% 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.

5.   Section 80 TTA: Interest on saving account:

Deduction from gross total income in respect of any Income by way of Interest on Savings account is available under this section. Deduction from gross total income of an individual or HUF, up to a maximum of Rs. 10,000/-, in respect of interest on deposits in savings account ( not time deposits ) with a bank, co-operative society or post office, is allowable w.e.f. 01.04.2012 (Assessment Year 2013-14).

Other Available Exemptions on Allowances:

1. House Rent Allowance: (Section 10(13A)

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 per cent of your salary (this includes basic  Plus dearness allowance, if any)
• 50 per cent of your basic salary (for a metro) or 40 per cent of your basic salary (for non-metro).

2. Tax Saving from Home Loans: (Section 24)

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. 1.50 Lacs. The interest portion offers a deduction up to Rs. 2 Lacs (limit amended from A.Y 2015-16) separately under Section 24.

3.  Medical Reimbursement: Clause (v) of the Proviso to Section 17 (2)

Salaried individuals can available a deduction of up to Rs 15,000 per year against medical reimbursement. This deduction can be claimed if the employer pays medical reimbursement as a component of salary.

Please note that Medical Expense Reimbursement of Rs. 15,000 is over and above the deduction under Section 80D of the Income Tax Act available for Medical / Health Insurance Premium – Mediclaim Premium and this deduction is allowed subject to providing proof of medical expenses.

4. Leave Travel Allowance: Sec. 10(5)

Salaried persons can avail an income tax deduction on travel expenses (family travel expenses can also be covered if the family travels along with the taxpayer).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 four- 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.

Points to be remembered:

 

1.     Invest Some Quality Time

Before investing your money, you need to invest your time. You need to take some quality time to understand the various tax saving options and compare their benefits and limitations. Therefore, it is important to start your tax planning well before 31st March, and to file your returns before the 31st of July each year.

 

2.     Check for Future Commitments

Some tax saving options like NSC or ELSS need only onetime investment. Some other tax saving options like PPF, ULIPs need periodical investments year after year. You need to be careful in choosing a tax saving scheme where you need to commit for periodical future payments. You need to check on a few things like; do you need such a future commitment? Will you be able to meet the future commitments at ease? The law may change and you may not get any tax exemption for your future payments. Would you consider the scheme irrespective of tax benefit for the future payments?

3.     Prevent Excess deduction & Documentation

Give your employer details of loans and tax saving investments beforehand, to prevent any excess deduction. Further, we should check the Form 16 received at the end of each year from your employer thoroughly.

 

4.     Changed Your Job? It’s time to Redo Your Tax Plan

Did you switch your job in the middle of the financial year? Then you need to redo your tax plan with consolidating the income from both the companies. It is advisable to inform the new company about the income during the particular financial year from the old company. So that your new company will deduct the right amount of TDS.

A Final Word:

Keep in mind the above points, to avoid the hassles of last minute tax planning. With proper tax planning you can reduce your tax liability, save more, invest better and become wealthier.

Disclaimer:

The information contained in this write up is to provide a general guidance to the intended user. The information should not be used as a substitute for specific consultations. Authors recommend that professional advice is sought before taking any action on specific issues.

Author of this article is Harsha Ramnani. She is practicing Chartered Accountant. She can be reached at harsha.ramnani01@gmail.com

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