Objectives of Tax Planning

Tax planning is a focal part of financial planning. It ensures savings on taxes while simultaneously conforming to the legal obligations and requirements of the Income Tax Act, 1961. The primary concept of tax planning is to save money and mitigate one’s tax burden. However, this is not its sole objective.

Advantages of tax planning

• To minimise litigation : To litigate is to resolve tax disputes with local, federal, state, or foreign tax authorities. There is often friction between tax collectors and taxpayers as the former attempts to extract the maximum amount possible while the latter desires to keep their tax liability to a minimum. Minimising litigation saves the taxpayer from legal liabilities.
• To reduce tax liabilities : Every taxpayer wishes to reduce their tax burden and save money for their future. You can reduce your payable tax by arranging your investments within the various benefits offered under the Income Tax Act, 1961. The Act offers many tax planning investment schemes that can significantly reduce your tax liability.
• To ensure economic stability : Taxpayers’ money is devoted to the betterment of the country. Effective tax planning and management provide a healthy inflow of white money that result in the sound progress of the economy. This benefits both the citizens and the economy.
• To leverage productivity : One of the core tax planning objectives is channelising funds from taxable sources to different income-generating plans. This ensures optimal utilisation of funds for productive causes.

Holding periods

The duration for which you hold on to your mutual fund investment is called the holding period. Short-term investments attract a tax rate different from long-term investments.

Short-term taxation

Investment in any equity-oriented mutual fund for less than 12 months is considered short-term and attracts a short-term capital gains tax of 15 per cent.

For debt funds, a holding period of fewer than 36 months is considered a short-term investment. Short-term capital gains on debt funds are taxed according to your individual income slab.

Long-term taxation

Gains from equity mutual funds held for more than 12 months attract long-term capital gains tax at 10 per cent if the total long term capital gains amount from equity oriented mutual funds/ equity shares exceed ₹1,00,000 in a year. Returns below that threshold are tax-free.

Gains from debt funds, on the other hand, are taxed at 20 per cent after indexation benefit, if held for over 36 months. Indexation refers to gains adjusted for inflation. Without indexation, the tax on debt funds would be higher.

The table below lists the best Tax Saving options (Investment) under section 80C:

ELSS (Equity Linked Saving Scheme) Mutual Fund

Under Mutual fund investments the popular tax saving is ELSS.Investment amount in ELSS is exempted from tax up to a maximum amount of Rs 1.5Lakhs under section 80C of the income tax act and has a lock-in period of 3 years.

The investor can choose from a dividend or growth option in an ELSS as per their choice. It is an ideal investment for individuals who have a high-risk appetite. Since it offers a very high return on investment.

It is not only transparent but also an easy, simple, and hassle-free way of investment. You can easily track the investment made online. Though ELSS (Equity linked saving scheme) offers good return, which varies as per the market performance. You can invest in any of the tax-saving schemes mentioned depending on your risk appetite. The Lock-in period and return should be considered as one of the prime points to be considered before making a sound investment-related decision. Achieving your long-term financial goal should be the aim of these investments.

NPS (National Pension Scheme)

National Pension scheme provides the following tax-saving benefits. The investor can claim up to a maximum of Rs 1.5 lakhs under section 80C of the Income-tax act.

One can get an additional deduction up to Rs 50000/- under section 80CCD (1b).

If the employer of the individual contributes 10% of his basic salary in the National Pension scheme then he is eligible for tax exemption on the same amount also.

These benefits have now increased the popularity of NPS among the youths. However, an investor should also note that only 60% of the total amount is exempted. In NPS it is mandatory to invest 40% corpus in an annuity plan to earn income monthly. The amount paid annually to the investors after retirement is considered as income and is taxable as per law.

An individual is not allowed to make withdrawals in NPS before retirement with few specific situations. 75% is the maximum amount that can be invested in equity. Since it has a combination of equity and bonds, an investor can earn a good return over a while. An investor can start with a minimum investment of Rs 500/- and can grow their income eventually.

PPF (Public Provident Fund)

One of the most popular tax saving schemes is PPF. It helps individuals to create a cushion of finance for their post-retirement. The interest earned on the PPF balance is revised every quarter. The PPF (Public provident fund) scheme is tax exempted which means the contribution made toward the scheme along with maturity proceeds are exempted. The maturity period of PPF is 15 years, you can also extend it by 5 years.

An individual can only make one withdrawal in a financial year, that too after 5 years from the date of account opening. Partial withdrawal is also allowed but the amount should not exceed more than 50%. Since it is also a government-initiated scheme one can initiate with a minimum amount of Rs 500/- and go up to Rs 1.5 lakhs every year.

ULIP (Unit-linked Insurance plan) / Endowment plan / Term Plan

Tax-saving investment option for investors who are not only looking to get tax exemption but also earn good returns on investments. The newly launched ULIPs come with zero premium allocation and administration charges. The benefit of investing in ULIP , Endowment & Term plans are one gets exemption on the premium paid u/s 80C. The returns from the investment are also tax-exempted u/s 10(10D) of the Income-tax act. The lock-in period of the investment is 5 years.

Buying an endowment or saving plan is beneficial if you have long-term financial goals such as funding your child’s education, buying a new house, or spending a carefree retirement life.

In Term plan you pay premium as fee for a year to get insured. All premiums you paid is also one gets exemption on the premium paid u/s 80C

Sukaanya Samridhi yojana

Do you have a girl child? If yes then this is the perfect investment option for you. This scheme is specifically designed for girls as part of theThe investments under the SSY scheme are eligible for tax exemption of Rs1.5 lakhs under section 80C of the Income-tax act.The interest gets compounded annually and is eligible for tax exemption.

The maturity proceeds and withdrawal amounts are also exempted from tax.You can initiate the SSY scheme till your girl child turns 10 years of age. The scheme will remain operative for 21 years from the date of opening the account or till the girl gets married. It provides ease of investment by making it more affordable. You can start as low as Rs 250 and can go up to a maximum of Rs 1.5 lakhs. The scheme also provides an interest rate of 7.6% annually. As a tax saving option, it not only saves tax but also secures the future of your girl child.

Bank Fixed Deposit

Bank fixed deposit is convenient ways to save taxes. These are secured deposits similar to various other guaranteed investment options. The only way it differentiates from others is in the tenure of the investment. The tenure for investment in bank FD is 5 years. Since it is a tax saving plan bank offers tax-free income to its holders. This is an ideal investment for investors whose risk appetite is low. You should note that banks don’t permit premature withdrawal in this scenario. Also, the interest rate stays the same for the entire investment period i.e 5 years. To sum up, you can claim a maximum amount of Rs 1.5lakhs u/s 80c on your Bank FD investment.

Senior citizen saving scheme

A Senior Citizens’ Saving Scheme (SCSS) is a government-backed retirement benefits program. Senior citizens resident in India can invest a lump sum in the scheme, individually or jointly, and get access to regular income along with tax benefits.

designed to provide financial security to senior citizens. Individuals above 60 years are considered to fall in the bracket of senior citizens. Under this scheme one can make a one-time deposit, a minimum of Rs 1000/- and the maximum can be 15 Lakhs. The lock-in period for SCSS is 5 years and interest due is paid every quarter. This tax-saving scheme allows a deduction of a maximum of Rs. 1.5 lakhs but is applicable for TDS under section 80C of the act. The scheme offers a high rate of interest and also the flexibility of premature withdrawal.

National Saving Certificate

It is also a government scheme primarily focusing on mid-income investors. This scheme is designed to facilitate investors to make safe investments along with the benefits of taxable income. NSC is similar to FD, PPF which is considered to be a low-risk investment option for tax saving. NSC offers a guaranteed return. You can claim the following benefits once you avail of them Maximum Tax exemption of Rs 1.5 lakhs under section 80C of the act. The Interest received on the NSC can be added back to the initial amount and can be considered for tax exemption.

In the second year, the investor can claim both the investment and interest which is earned on it. This is because interest earned is added to the investment and is compounded annually. On maturity, the investor will receive the entire amount. Since No TDS or NSC pay-outs are applicable, the individual will pay the applicable tax on it.

Plan well in advance your taxation

Tax time, unfortunately, can involve a mountain of paperwork. So it is always advisable that plan your taxes based on your financial goals at the beginning of the Financial Year itself. Plan your taxes from April month itself, instead of waiting until late December (or) January.

Make sure you have all your important documents ready before you begin filing, so you can avoid mistakes and take advantage of every deduction you’re entitled to. Documents and information you may need to include:

• Forms16 and other tax forms showing income earned
• Records of charitable contributions if does
• Tax savings investments ,Insurance & health plan receipts , acknowledgements or statements
• Yearly bank statements
• Previous-year tax returns
• Records of Loan interest and property taxes paid
• Any medical costs

Work with your tax professional to help you determine the specific documents you’ll need to complete your taxes

Section 80CCC

Contribution to annuity plan of LIC (Life Insurance Corporation of India) or any other Life Insurance Company for receiving pension from the fund is considered for tax benefit. The maximum \ allowable Tax deduction under this section is Rs 1.5 Lakh

Section 80CCD

Employee can contribute to Government notified Pension Schemes (like National Pension Scheme – NPS). The contributions can be upto 10% of the salary (salaried individuals) and Rs 50,000 additional tax benefit u/s 80CCD

As per the previous Budget 2017-18, the self-employed (individual other than the salaried class) can contribute up to 20% of their gross income and the same can be deducted from the taxable income under Section 80CCD (1) of the Income Tax Act, 1961, as against current 10%.

To claim this deduction, the employee has to contribute to Govt recognized Pension schemes like NPS. The 10% of salary limit is applicable for salaried individuals only and Gross income is applicable for non-salaried. The definition of Salary is only ‘Dearness Allowance.’ If your employer also contributes to Pension Scheme, the whole contribution amount (10% of salary) can be claimed as tax deduction under Section 80CCD (2).

Kindly note that the Total Deduction under section 80C, 80CCC and 80CCD(1) together cannot exceed Rs 1,50,000 for the financial year 2018-19. The additional tax deduction of Rs 50,000 u/s 80CCD (1b) is over and above this Rs 1.5 Lakh limit.

Contributions to ‘Atal Pension Yojana‘ are eligible for Tax Deduction under section 80CCD.

Section 80D

In the union budget 2018, the government of India has proposed the below changes with respect to deductions available on Health Insurance and/or towards Medical treatment ;

Health Insurance & Senior Citizens

In Budget 2018, it has been proposed to raise the maximum tax deduction limit for senior citizens under Section 80D of the Indian Income Tax Act 1961. The current limit of tax deduction allowed for FY 2017-18 for senior citizens is Rs. 30,000 which will be increased to Rs 50,000, from FY 2018-19 (AY 2019-20) onwards.

• Under Section 80D an assessee, being an individual or a Hindu undivided family, can claim a deduction in respect of payments towards annual premium on health insurance policy, preventive health check-up or medical expenditure in respect of senior citizen (above 60 years of age).
• For Very Senior Citizens (who are above 80 years of age), can claim a deduction of up to Rs 30,000 incurred towards medical expenditure, in case they don’t have health insurance. The Budget 2018 has increased this to Rs 50,000 and also allowed the same flexibility to senior citizens. Even individuals who pay premiums for their dependent senior citizens parents can claim the additional deduction on health insurance premium (or) medical expenditure.

Single premium Health Insurance policy / Multi-year Mediclaim policy

In case of single premium health insurance policies having cover of more than one year, it is proposed that the deduction shall be allowed on proportionate basis for the number of years for which health insurance cover is provided, subject to the specified monetary limit.

Preventive health checkup (Medical checkups) expenses to the extent of Rs 5,000/- per family can be claimed as tax deductions. Remember, this is not over and above the individual limits as explained above. (Family includes: Self, spouse, parents and dependent children).

Section 80DD

You can claim up to Rs 75,000 for spending on medical treatments of your dependents (spouse, parents, kids or siblings) who have 40% disability. The tax deduction limit of upto Rs 1.25 lakh in case of severe disability can be availed.

To claim this deduction, you have to submit Form 10 –IA

Section 80DDB

An individual (less than 60 years of age) can claim upto Rs 40,000 for the treatment of specified critical ailments. This can also be claimed on behalf of the dependents. The tax deduction limit under this section for Senior Citizens and very Senior Citizens (above 80 years) has been revised to Rs 1,00,000.

To claim Tax deductions under Section 80DDB, it is mandatory for an individual to obtain ‘Doctor Certificate’ or ‘Prescription’ from a specialist working in a Govt or Private hospital.

For the purposes of section 80DDB, the following shall be the eligible diseases or ailments:

Neurological Diseases where the disability level has been certified to be of 40% and above;

• Dementia
• Dystonia Musculorum Deformans
• Motor Neuron Disease
• Ataxia
• Chorea
• Hemiballismus
• Aphasia
• Parkinson’s Disease

• Malignant Cancers
• Full Blown Acquired Immuno-Deficiency Syndrome (AIDS) ;
• Chronic Renal failure
• Hematological disorders
  • Hemophilia
  • Thalassaemia

Section 80CCG

Tax Benefits of Rajiv Gandhi Equity Savings Scheme (RGESS) under section 80CCG has been withdrawn. However, if an investor has invested in the RGESS scheme

Section 24 (B) (Loss under the head Income from House Property)

• The Tax benefit on loan repayment of second house is restricted to Rs 2 lakh per annum only (even if you have multiple houses the limit is still going to be Rs 2 Lakh only and the ceiling limit is not per house property).
• The unclaimed loss if any will be carried forward to be set off against house property income of subsequent 8 years. In most of the cases, this can be treated as ‘dead loss‘.
• I believe that this is a major blow to the investors who have bought multiple houses on home loan(s) with an intention to save taxes alone.
• Until FY 2016-17, interest paid on your housing loan is eligible for the following tax benefits ;
  • Municipal taxes paid, 30% of the net annual income (standard deduction) and interest paid on the loan taken for that house are allowed as deductions.
  • After these deductions, your rental income can be NIL or NEGATIVE and is called ‘loss from house property’ in the latter case.• After these deductions, your rental income can be NIL or NEGATIVE and is called ‘loss from house property’ in the latter case.
  • Such loss is currently allowed to be set off against other heads of income like Income from Salary or Business etc. which helps you to lower you tax liability substantially.

Section 80E

If you take any loan for higher studies (after completing Senior Secondary Exam), tax deduction can be claimed under Section 80E for interest that you pay towards your Education Loan. This loan should have been taken for higher education for you, your spouse or your children or for a student for whom you are a legal guardian. Principal Repayment on educational loan cannot be claimed as tax deduction.

There is no limit on the amount of interest you can claim as deduction under section 80E. The deduction is available for a maximum of 8 years or till the interest is paid, whichever is earlier.

Section 80EE

First time Home Buyers can claim an additional Tax deduction of up to Rs 50,000 on home loan interest payments u/s 80EE. The below criteria has to be met for claiming tax deduction under section 80EE.

• The home loan should have been sanctioned during FY 2016-17.
• Loan amount should be less than Rs 35 Lakh.
• The value of the house should not be more than Rs 50 Lakh &
• The home buyer should not have any other existing residential house in his name.
• Such eligible home buyers can claim exemption of Rs. 50,000/- for interest on home loan under section 80EE from assessment year beginning from 1 st April 2017 and subsequent years.

Section 80G

Contributions made to certain relief funds and charitable institutions can be claimed as a deduction under Section 80G of the Income Tax Act. This deduction can only be claimed when the contribution has been made via cheque or draft or in cash. In-kind contributions such as food material, clothes, medicines etc do not qualify for deduction under section 80G.

The donations made to any Political party can be claimed under section 80GGC. The limit of deduction under section 80G / 80GGC for donations made in cash is reduced from current Rs 10,000 to Rs 2,000 only.

If you want to donate some fund to a political party of your choice, you can do so in cash of up to Rs 2,000. Beyond that you can not donate the amount in cash mode. It can be done through Electoral Bonds

Section 80GG

The Tax Deduction amount under 80GG is Rs 60,000 per annum. Section 80GG is applicable for all those individuals who do not own a residential house & do not receive HRA (House Rent Allowance).

The extent of tax deduction will be limited to the least amount of the following;

• Rent paid minus 10 percent the adjusted total income.
• Rs 5,000 per month.
• 25 % of the total income.

(If you are claiming HRA (House Rent Allowance) of more than Rs 50,000 per month (or) paying rent which is more than Rs 50,000 then the tenant has to deduct TDS @ 5%. It has been proposed that the tax could be deducted at the time of credit of rent for the last month of the tax year or last month of tenancy, as applicable.)

Rebate under Section 87A

Tax rebate of Rs 2,500 for individuals with income of up to Rs 3.5 Lakh has been proposed in Budget 2017-18 and the same will be continued as well.

• Only Individual Assesses earning net income up to Rs 3.5 lakhs are eligible to enjoy tax rebate u/s 87A.
• For Example : Suppose your yearly pay comes to Rs 4,50,000 and you claim Rs 1,50,000 u/s 80C. The total net income in your case comes to Rs 3,00,000 which makes you eligible to claim tax rebate of Rs 2,500.
• The amount of tax rebate u/s 87A is restricted to maximum of Rs 2,500. In case the computed tax payable is less than Rs 2,500, say Rs 2,000 the tax rebate shall be limited to that lower amount i.e. Rs 2,000 only.
• The Tax Assesse is first required to add all incomes i.e. salary, house income, capital gains, business or profession income and income from other sources and then deduct the eligible tax deduction amounts u/s 80C to 80U and under section 24(b) (Home Loan Interest) to come up with the net taxable income.
• If the above net taxable income happens to be less than Rs 3.5 lakhs then the tax rebate of Rs 2,500 comes in to the picture and should be deducted from the calculated total income tax payable.

Section 80 TTA & new Section 80TTB

For Senior Citizens, the Interest income earned on Fixed Deposits & Recurring Deposits (Banks / Post office schemes) will be exempt till Rs 50,000 (limit is up to Rs 10,000). This deduction can be claimed under new Section 80TTB. However, no deductions under existing 80TTA can be claimed if 80TTB tax benefit has been claimed (the limit u/s 80TTA is Rs 10,000).

Section 80TTA of Income Tax Act offers deductions on interest income earned from savings bank deposit of up to Rs 10,000. From FY 2018-19, this benefit will not be available for late Income Tax filers.

Interest income from deposits held with companies will not benefit under this section. This means, senior citizens will not get this benefit for interest income from corporate fixed deposits us/ 80TTB.

Section 80U

This is similar to Section 80DD. Tax deduction is allowed for the tax assessee who is physically and mentally challenged.

Standard Deduction of Rs 40,000 in-lieu of Medical Allowance

For the medical allowance of up to Rs 15,000 is exempted income from your Gross salary. To claim this, you need to submit medical bills to your employer and get the allowance benefit. The medical reimbursement allowance is exempted under Section 10 of the Income Tax Act.

If you have submitted medical bills (to your employer) towards medical allowance and also paid premium towards your mediclaim (health insurance) then both of them will be listed in your Form-16 under different sections as shown below (click on the images to open them in new browser window).

A standard deduction of Rs 40,000 in lieu of travel, medical expense reimbursement and other allowances has been proposed for salaried employees and pensioners. To claim this standard deduction, there is no need to submit medical bills to your employer.

As per this new proposal, irrespective of amount of taxable salary the assessee will be entitled to get a deduction of Rs.40,000 or taxable salary, whichever is less. Thus suppose if a person has worked for few days (or) months and his salary was just Rs 40,000 for a previous year, then he will be entitled to deduction equal to salary being the same amount. If his salary is less, say Rs 30,000 the deduction shall be restricted to Rs 30,000. If salary exceeds amount of Rs 40,000, the deduction shall be restricted to Rs 40,000.

Plan well in advance your taxation

Tax time, unfortunately, can involve a mountain of paperwork. So it is always advisable that plan your taxes based on your financial goals at the beginning of the Financial Year itself. Plan your taxes from April month itself, instead of waiting until late December (or) January.

Make sure you have all your important documents ready before you begin filing, so you can avoid mistakes and take advantage of every deduction you’re entitled to. Documents and information you may need to include:

• Forms16 and other tax forms showing income earned
• Records of charitable contributions if does
• Tax savings investments ,Insurance & health plan receipts , acknowledgements or statements
• Yearly bank statements
• Previous-year tax returns
• Records of Loan interest and property taxes paid
• Any medical costs

Work with your tax professional to help you determine the specific documents you’ll need to complete your taxes.