Efficient tax planning enables you to reduce tax liability to the minimum. This is done by legitimately taking advantage of all tax exemptions, deductions & rebates. Tax Planning is NOT tax evasion which is illegal under laws. It involves planning of income & investments. Tax Planning can be practiced easily. Often staff gives estimated declaration at Fin.Year starting to minimize tax liabilities but could not save till Fin. Year end; and faces burden in last months. Better start investing from the beginning of Fin. Year to get interest & appreciation from April.
Tax deduction on monthly basis (employer's corner): Normally employer estimates total income of employee & calculates I-Tax, estimated tax is to be divided by 12 months & avg tax from monthly salary is to be deducted. Hence raise saving plans in advance considering the pay hike & send the correct proofs to payroll. Ensure the document delivery within the pay roll's time frame.
If employee resigns: An employee resigns or otherwise leaves the service, only the salary due and payable up to the date on which he leaves service shall be considered and tax shall not be deducted from the future salary.
Notes on tax exemptions:
Tax deduction on monthly basis (employer's corner): Normally employer estimates total income of employee & calculates I-Tax, estimated tax is to be divided by 12 months & avg tax from monthly salary is to be deducted. Hence raise saving plans in advance considering the pay hike & send the correct proofs to payroll. Ensure the document delivery within the pay roll's time frame.
If employee resigns: An employee resigns or otherwise leaves the service, only the salary due and payable up to the date on which he leaves service shall be considered and tax shall not be deducted from the future salary.
Notes on tax exemptions:
HRA-House Rent Allowance: exempt u/s 10 (13A):If you are occupying a rented residential accommodation, the amount of HRA exempted to the lowest of:
- Actual HRA
- Rent paid minus 10% of basic salary
- 40 % of basic salary (50 % for Mumbai, Kolkata, Delhi & Chennai)
Normally employer considers exemptions on original rent receipts. Receipts should be signed by the owner with name & address of the property. Receipt should be of the current FY. Generally receipts should be for the current employer & exemptions for the period not with current employer may not be considered. Rent agreement alone does not constitute proof of payment. Cir No.8/2013/10.10.2013 issued by CBDT says that it is mandatory for the employee to report PAN of the landlord to the employer if rent payment exceeds Rs One lakh per year.
Paying rent to parents or relatives: If you want to pay rent to parents or any relatives whom you are staying with. You will need to treat them as landlords. Request the owner (which will be your parent/relative) to declare it in their tax return.
If property is self occupied, employee cannot claim both i.e. HRA exemption & loss from house property where the property is in same city."
Uniform Allowance: exempt u/s 10(14) ii: To meet the expenditure incurred on purchase or maintenance of uniform to be worn during performance of duty.
Transport Allowance: exempt u/s 10(14) ii:
Paying rent to parents or relatives: If you want to pay rent to parents or any relatives whom you are staying with. You will need to treat them as landlords. Request the owner (which will be your parent/relative) to declare it in their tax return.
If property is self occupied, employee cannot claim both i.e. HRA exemption & loss from house property where the property is in same city."
Uniform Allowance: exempt u/s 10(14) ii: To meet the expenditure incurred on purchase or maintenance of uniform to be worn during performance of duty.
Transport Allowance: exempt u/s 10(14) ii:
- Rs 800 monthly granted to an employee to meet his expenditure for commuting between the place of residence & duty.
- Rs.1600 monthly granted to physically disabled employee for purpose of commuting between place of residence & duty."
Children Education Allowance: exempt u/s 10(14) ii:
- Children education allowance: Rs.100 per month per child up to two children.
- Allowance granted to meet hostel expenses on employee’s child: Rs.300 per month per child up to two children."
Reimbursement of Medical Bills u/s 17(2): Exempted for self & dependent family up to Rs 15000 per annum against original medical bills. Bills of cosmetics & toiletries not allowed. Receipt should be for the period with the current employer only & exemptions for the period not with current employer may not be considered. Authenticity of the bills will be employee's responsibility. If you are paid a medical allowance instead of reimbursement i.e. without bills, then same is taxable.
Leave Travel Allowance-LTA: exempt u/s 10(5):
Exempted economy class train/ air / recognized public transport fare of family to any destination in India, by shortest route. LTA can be claimed twice in block of 4 years. The current block is 1-1-2014 to 31-12-2017. For claim, it is must to provide originals tickets & boarding passes. Employee should be on paid leave during travel period. LTA can be carry forwarded if it has not used, it can be brought forward & claimed in 1st year of next block.
GRATUITY: exempt u/s 10(10):
Leave Travel Allowance-LTA: exempt u/s 10(5):
Exempted economy class train/ air / recognized public transport fare of family to any destination in India, by shortest route. LTA can be claimed twice in block of 4 years. The current block is 1-1-2014 to 31-12-2017. For claim, it is must to provide originals tickets & boarding passes. Employee should be on paid leave during travel period. LTA can be carry forwarded if it has not used, it can be brought forward & claimed in 1st year of next block.
GRATUITY: exempt u/s 10(10):
- Any Death-cum-Retirement gratuity to Govt. employees; wholly exempt.
- Any gratuity received by the employees covered under Payment of Gratuity Act, 1972. Least of the following is exempt:-
- 15 days salary (7 days in case of seasonal employment) for each completed year of service or part in excess of 6 months.
- Rs. 10 Lakh Or iii) Amount of gratuity actually received.
- Any other gratuity, (not covered under (a) or (b)) least of the followings is exempt:-
- Rs 10 Lakh
- Half month’s salary for each completed year of service Or iii) Amount of gratuity actually received."
Leave Encashment: u/s 10 (10AA) :Leave Encashment during service is fully taxable in all cases. Leave Encashment on Retirement is exempted from tax;
- Govt. Employees; fully exempt
- Non-government employees; the exemption is to be limited to a maximum of 10 months of leave encashment, based on last 10 months average salary subject to a limit of Rs 3 lakhs.
Retrenchment Compensation: u/s 10 (10B) : The retrenchment compensation received by a workman is exempted; provided that it does not exceed the sum calculated on the basis provided in Sec.25F(b) of Industrial Disputes Act, 1947 or any such amount as is specified by the Central Govt. by a Notification, whichever is less.
- Compensation calculated @ 15 days average pay for every completed year of continuous service or part there of in excess of 6 months.
- The maximum exemption is Rs 5 lakhs where retrenchment is on or after 1-1-97
Voluntary Retirement Scheme-VRS: u/s 10 (10C):
Any amount received at the time of voluntary retirement is exempt to the extent such amount does not exceed Rs. 5 lakhs, provided the scheme of such voluntary retirement is in accordance with the guidelines prescribed under rule 2BA of Income Tax Rules 1962. If an exemption has been allowed under this section for any assessment year, no exemption there under is allowable in relation to any other assessment year.
Saving Bank Interest:
Any amount received at the time of voluntary retirement is exempt to the extent such amount does not exceed Rs. 5 lakhs, provided the scheme of such voluntary retirement is in accordance with the guidelines prescribed under rule 2BA of Income Tax Rules 1962. If an exemption has been allowed under this section for any assessment year, no exemption there under is allowable in relation to any other assessment year.
Saving Bank Interest:
From the year 2012-2013 interest up to Rs 10,000 is allowed as deduction.
Taxable Perquisites:
Such as rent free accommodation, company provided car, concessional education, employee stock option plan, free club membership, company provided credit card, gift vouchers, meal coupons, hotel stay beyond 15days are taxable.
PF amount is withdrawn before five years of continuous service; it may be taxable in the hands of the individual.
Tax on employment:
Professional Tax deduction u/s 16iii - Professional tax paid by employee is to deducted from the income. Professional tax firstly include in gross salary then allowable as deduction limited to 2500/- u/s 16(iii) as deduction from salary.
Interest on housing loan for self occupied residence u/s 24:
If loan taken before Apr 1, 1999 exemption limited to Rs 30,000 per year. If the loan taken after Apr 1, 1999 exemption limit to Rs 200,000 per year ( If loan taken first time then interest exemption limit extended up to 2.5 lakh fin bill 2013 ). There is no limit if the house is rented out. This exemption is available on accrual basis, which means if interest has accrued, you can claim exemption, irrespective of whether paid it or not. In case of self occupied property, employee cannot claim both i.e. HRA exemption as well as loss from house property where the property is in the same city. Require provisional certificate from the bank with specifying the Interest, Principal & pre-EMI interest separately.
If you rented out your house, enter the income / loss from the house after deducting property tax & maintenance expenses.
More about deductions under chapter VI A:
Max limit u/s 80C Rs 1.5 lakh
Provident Fund (PF) & Voluntary Provident Fund (VPF): PF is deducted from your salary, employee’s contribution is covered as investment u/s 80C. Additional contributions can be made through VPF. Interest earned treated as tax free.
Life Insurance Premiums (LIC): Any amount paid towards LIC or any other Insurance company for yourself, spouse or children can also be included in section 80C deduction. Premium paid for ULIP will also be treated as premium paid for life insurance policies.
Public Provident Fund (PPF): Among all the assured returns small saving schemes, PPF is one of the best. Current rate of interest is 8.7% tax-free and the normal maturity period is 15 years. Minimum contribution is Rs 500 and maximum is Rs 1.5 Lakh.
National Savings Certificate (NSC): Is a 5 year small savings instrument. Interest is compounded half-yearly. Interest accrued every year is liable to tax hence to be included as income but the interest is also deemed to be reinvested & thus eligible u/s 80C deduction.
Home Loan Principal Repayment, Stamp Duty and Registration Charges for a home Loan: The Equated Monthly Installment (EMI) consists of two components i.e. Principal & Interest. The principal component is deductible u/s 80C. The interest component comes u/s 24. Amount of stamp duty & registration when buying a house can be claimed as deduction u/s 80C in the year of house purchase.
Tuition fees for 2 children: Children’s tuition fee can be claimed as deductions u/s 80C. Expenses, such as transport, library, hostel, development fees or donation, are not covered. The deduction can be claimed only for full-time courses including pre-nursery & playschool. Part-time, distance learning, private tuitions & coaching classes are not covered. Each parent can claim deduction for the tuition fees paid for up to 2 children each. This deduction can be availed of on the basis of actual payment, irrespective of the period fee may pertain.
Unit Linked Insurance Plan (ULIP): It covers life insurance with benefits of equity investments. Amount received at maturity, survival benefits, withdrawal in insurance policies are tax free and fully exempted u/s 10 (10D).
Equity Linked Savings Scheme (ELSS): There are some mutual fund schemes specially created for offering you tax savings, and these are ELSS. The investments that you make in ELSS are eligible for deduction u/s 80C.
5-Year bank fixed deposits (FDs): Declared Tax-saving fixed deposits of scheduled banks with tenure of 5 years eligible for deduction.
5-Year post office time deposit (POTD): Similar to bank fixed deposits. Available for various duration of 1 to 5 year, only 5year POTD qualifies for tax saving u/s 80C. The interest rate is compounded quarterly but paid annually. Interest is entirely taxable.
Pension Funds or Pension Policies u/s 80CCC: Investment in pension funds up to Rs 1.5 lakh can be claimed as deduction u/s 80CCC. However the total deduction u/s 80C and 80CCC can not exceed Rs 1.5 lakh.
Infrastructure Bonds: These are also called Infra Bonds. These are issued by infrastructure companies, and not the government. The amount that you invest in these bonds can also be included in u/s 80C deductions.
NABARD bonds: Investment in notified bonds issued by National Bank for Agriculture and Rural Development (NABARD)
Senior Citizen Savings Scheme 2004 (SCSS): Is the good scheme among all small savings schemes but only for Sr. citizens. Current interest rate is 9% per annum payable quarterly. Please note that the interest is payable quarterly instead of compounded quarterly. Thus, unclaimed interest on the deposits won’t earn any further interest. Interest is chargeable to tax.
80CCD: Notified Pension Scheme (NPS): Contributing a part of your income towards the new pension scheme. From the AY 2012-13, the employer’s contribution are not included in overall limit of Rs 1.5 lakh provided contribution does not exceed 10 % of salary.
80CCE: Maximum exemption up to 1.5 lakh: Investments in PF, VPF, PPF, Employee contribution in NPS, Insurance premium, Housing loan principal repayment, NSC, ELSS, Long term bank fixed deposit, Post office term deposit, etc. are deductible from the taxable income. There is no limit on individual items, for example all 1.5 lakh can be invested either in NSC or PPF etc.
More about deductions under chapter VI-A
80D: Medical insurance premium & health insurance plans: Premium is exempt up to Rs 15,000 for self, spouse and children and Rs 15,000 for parents. If the premium of a dependent who is Sr. citizen an extra Rs 5,000 can be claimed.
Taxable Perquisites:
Such as rent free accommodation, company provided car, concessional education, employee stock option plan, free club membership, company provided credit card, gift vouchers, meal coupons, hotel stay beyond 15days are taxable.
PF amount is withdrawn before five years of continuous service; it may be taxable in the hands of the individual.
Tax on employment:
Professional Tax deduction u/s 16iii - Professional tax paid by employee is to deducted from the income. Professional tax firstly include in gross salary then allowable as deduction limited to 2500/- u/s 16(iii) as deduction from salary.
Interest on housing loan for self occupied residence u/s 24:
If loan taken before Apr 1, 1999 exemption limited to Rs 30,000 per year. If the loan taken after Apr 1, 1999 exemption limit to Rs 200,000 per year ( If loan taken first time then interest exemption limit extended up to 2.5 lakh fin bill 2013 ). There is no limit if the house is rented out. This exemption is available on accrual basis, which means if interest has accrued, you can claim exemption, irrespective of whether paid it or not. In case of self occupied property, employee cannot claim both i.e. HRA exemption as well as loss from house property where the property is in the same city. Require provisional certificate from the bank with specifying the Interest, Principal & pre-EMI interest separately.
If you rented out your house, enter the income / loss from the house after deducting property tax & maintenance expenses.
More about deductions under chapter VI A:
Max limit u/s 80C Rs 1.5 lakh
Provident Fund (PF) & Voluntary Provident Fund (VPF): PF is deducted from your salary, employee’s contribution is covered as investment u/s 80C. Additional contributions can be made through VPF. Interest earned treated as tax free.
Life Insurance Premiums (LIC): Any amount paid towards LIC or any other Insurance company for yourself, spouse or children can also be included in section 80C deduction. Premium paid for ULIP will also be treated as premium paid for life insurance policies.
Public Provident Fund (PPF): Among all the assured returns small saving schemes, PPF is one of the best. Current rate of interest is 8.7% tax-free and the normal maturity period is 15 years. Minimum contribution is Rs 500 and maximum is Rs 1.5 Lakh.
National Savings Certificate (NSC): Is a 5 year small savings instrument. Interest is compounded half-yearly. Interest accrued every year is liable to tax hence to be included as income but the interest is also deemed to be reinvested & thus eligible u/s 80C deduction.
Home Loan Principal Repayment, Stamp Duty and Registration Charges for a home Loan: The Equated Monthly Installment (EMI) consists of two components i.e. Principal & Interest. The principal component is deductible u/s 80C. The interest component comes u/s 24. Amount of stamp duty & registration when buying a house can be claimed as deduction u/s 80C in the year of house purchase.
Tuition fees for 2 children: Children’s tuition fee can be claimed as deductions u/s 80C. Expenses, such as transport, library, hostel, development fees or donation, are not covered. The deduction can be claimed only for full-time courses including pre-nursery & playschool. Part-time, distance learning, private tuitions & coaching classes are not covered. Each parent can claim deduction for the tuition fees paid for up to 2 children each. This deduction can be availed of on the basis of actual payment, irrespective of the period fee may pertain.
Unit Linked Insurance Plan (ULIP): It covers life insurance with benefits of equity investments. Amount received at maturity, survival benefits, withdrawal in insurance policies are tax free and fully exempted u/s 10 (10D).
Equity Linked Savings Scheme (ELSS): There are some mutual fund schemes specially created for offering you tax savings, and these are ELSS. The investments that you make in ELSS are eligible for deduction u/s 80C.
5-Year bank fixed deposits (FDs): Declared Tax-saving fixed deposits of scheduled banks with tenure of 5 years eligible for deduction.
5-Year post office time deposit (POTD): Similar to bank fixed deposits. Available for various duration of 1 to 5 year, only 5year POTD qualifies for tax saving u/s 80C. The interest rate is compounded quarterly but paid annually. Interest is entirely taxable.
Pension Funds or Pension Policies u/s 80CCC: Investment in pension funds up to Rs 1.5 lakh can be claimed as deduction u/s 80CCC. However the total deduction u/s 80C and 80CCC can not exceed Rs 1.5 lakh.
Infrastructure Bonds: These are also called Infra Bonds. These are issued by infrastructure companies, and not the government. The amount that you invest in these bonds can also be included in u/s 80C deductions.
NABARD bonds: Investment in notified bonds issued by National Bank for Agriculture and Rural Development (NABARD)
Senior Citizen Savings Scheme 2004 (SCSS): Is the good scheme among all small savings schemes but only for Sr. citizens. Current interest rate is 9% per annum payable quarterly. Please note that the interest is payable quarterly instead of compounded quarterly. Thus, unclaimed interest on the deposits won’t earn any further interest. Interest is chargeable to tax.
80CCD: Notified Pension Scheme (NPS): Contributing a part of your income towards the new pension scheme. From the AY 2012-13, the employer’s contribution are not included in overall limit of Rs 1.5 lakh provided contribution does not exceed 10 % of salary.
80CCE: Maximum exemption up to 1.5 lakh: Investments in PF, VPF, PPF, Employee contribution in NPS, Insurance premium, Housing loan principal repayment, NSC, ELSS, Long term bank fixed deposit, Post office term deposit, etc. are deductible from the taxable income. There is no limit on individual items, for example all 1.5 lakh can be invested either in NSC or PPF etc.
More about deductions under chapter VI-A
80D: Medical insurance premium & health insurance plans: Premium is exempt up to Rs 15,000 for self, spouse and children and Rs 15,000 for parents. If the premium of a dependent who is Sr. citizen an extra Rs 5,000 can be claimed.
80DD: Deduction of medical treatment of handicapped dependents limited to Rs 50,000; if disability above 80% then Rs 1 lakh.
80DDB: Deduction of medical treatment for specified ailments or diseases for the assessee or dependent can be claimed up to Rs 40,000 per year. If the person being treated is a sr.citizen, the exemption up to Rs 60,000. But any amount received under Medical Insurance will be reduced from the amount of deduction allowed. The diseases & ailments specified under rule 11DD:-
- Neurological diseases being Dementia, Dystonia, Musculorum deformans, Motor neuron disease, Ataxia, Chorea, Hemiballisumu, Aphasia & Parkinsons disease
- Cancer
- AIDS
- Chronic renal failure
- Hematological disorders: i. Hemophilia & ii. Thalassaemia.
80E: Interest repayment on education loan taken for higher education for self & dependents is completely tax exempted. Deductions on education loan can only be claimed if the loan has been taken in your own name. If your parents, spouse or sibling has taken the loan for your studies, then you are not entitled to get tax benefit. To claim, certificate or proof from the bank specifying the said loan is an Educational Loan and interest paid in the current year by you, i.e. the loan borrower. Interest repayment is tax exempt from the 1st year of repayment up to a maximum of 8 years. There is no exemption for principal repayment.
80G: Donations to certain charities are tax exempted: Some NGO, trusts are exempt up to 50%, whereas govt funds are 100%.
80GG: If you are not receiving HRA but living in rented house, an exemption is available. This will be calculated as minimum of (25% of total income or rent paid less 10% of total income or Rs 24000 per year) provided you/your spouse/children do not own any residential property either at the place of your work or residence, or if your spouse/children own a residential property at any other place (but not the assessee), then you can claim deduction for the rent paid as per sec 80GG under Income Tax Act, 1961.
80U: Permanent Physical Disability: Including blindness, an exemption Rs 50000 per year, however, if the assessee suffers from severe disability, the deduction shall be Rs 1 Lakh. ‘Severe disability’ means disability of 80% or more.
80CCG: Rajiv Gandhi Equity Savings Scheme (RGESS): The exemption available for investment in stock markets i.e. direct equity. Available only to those with gross income less than 12 lakhs & only for first time investors in stock market. Exemption limited to 50% of investment subject to maximum of Rs 50,000 invested. Such investments are locked-in for 3 years.
87A: A person whose income is up to Rs 5 lakhs will get a tax credit of Rs 2000/-. The person will get a rebate of Rs 2000/- under newly inserted section 87A of the act. Means, tax payers in Rs 2 to 5 lakh slab will get the rebate and will claim this rebate while filling the returns & will reduce their tax liability from FY 2013-14.
Common incorrect practices during return filling:
- All the communication by the tax department is now done via email and mobile. Many individuals make a mistake of providing email IDs which are either not in use or discontinued due to inactivity or change of jobs. Hence make sure that a valid & functional email ID and mobile, which you regularly access is to be provided in the return.
- You must provide correct bank a/c number along with IFSC/MICR code on your return form. This helps tax department in processing the refund. Not providing the correct information may treated the return as defective."
