The 2008 tax guide
While finance minister P. Chidambaram has not offered exciting benefits to taxpayers in Budget 2007-08, you still have plenty of options to save taxes. If you haven't already started, now is the time to make your tax moves. "Ideally, start tax planning at the beginning of a financial year. It's the time when you get your pay hike and have an idea of the savings potential," says Vikas Vasal, Director (Personal Finance), KPMG India. "It's important to make an early start in providing for your planned investments."
Begin with the basics. "The objective of tax planning is to minimise your tax liabilities without breaking the law and to maximise returns from your income by taking advantage of certain provisions of the law, such as Section 80C of the Income Tax Act," says R.N. Lakhotia, a New Delhi-based tax consultant.Six avenues that cut taxes and build assets |
| Systematic Investment Plan (SIP): Opt for monthly or quarterly investment which can be directly debited from your bank account in equity-linked savings schemes. |
| PPF: Instead of making one large lumpsum deposit, earmark monthly amounts for PPF, say, Rs 5,000 p.m. |
| Insurance: Don't wait till February/March to make your premium payments. Try finishing all your premium payments by December, say, in quarterly or six-monthly payments. |
| Home loan: Though interest rates are going up, home loan continues to be a great tax-saving and asset-building investment avenue. If you already have a house of your own, you may like to go for a larger house. |
| Equities: Making direct investments in stocks has become easier with the advent of DEMAT trading. Even though you don't get any tax deductions, there's an exemption from capital gains tax if you hold your investment for 12 months or more. |
| Gold funds: Instead of buying coins or jewellery, you may like to go in for gold funds, particularly through the MF route. Again, there is capital gains tax exemption if you hold your investment for 12 months or more. |
Under Section 24B of the I-T Act, for example, you enjoy I-T exemption on amount up to Rs 1.5 lakh a year paid as interest on your home loan principal. This provision not only encourages you to reduce your tax liability, but enables you to borrow and build an important asset-your house.
Assess the Income
Know where your income is expected to come from. "The I-T Act defines income under the five heads of salary, house property, capital gains, business/profession, and other sources. You start by aggregating your expected annual income from all sources," says Deepak Jain, CEO, Etaxesindia.com, an online tax planner.
After deducting 'exempted items' allowed under the I-T Act, you are left with your 'taxable income', a large chunk of which invites zero tax and the rest is taxable (see The Basics of Tax Computation). "Tax planning ends at this point, but a savvy taxpayer would have minimised his taxable income by taking advantage of as many provisions for exempted income as one can," says Jain.
Make the most of investing under section 80C. "Section 80C of the I-T Act, which allows deduction of up to Rs 1 lakh, is the roomiest part of your tax planning. It's where you can make productive investments while minimising your tax liabilities," says Sulabh Lohia, a Delhi-based chartered accountant. Investments allowed under 80C include life insurance (also unit-linked plans), public provident fund (PPF), retirement fund, national savings certificates (NSCs), infrastructure bonds, school fees for up to two children, payment/repayment for purposes of purchase/construction of a house, equity-linked savings scheme or ELSS (essentially mutual funds, but with three-year lock-in), fixed deposits (lock-in of five years), etc.
"Take a home loan if you haven't already done that, and claim deduction for the same. Also, insurance, particularly equity-linked plans, has become a great way of reducing tax liability, hedging against risk and making money in the process," says Vasal.
Plan the Investments
Four must-use tax-savers |
| Benefits from 80C or chapter VI A: Investments of up to Rs 1 lakh in instruments like equity-linked savings schemes, PPF and insurance are exempt from income tax. Make use of the entire limit under this section. |
| Reimbursements could be better: Employer reimbursements that don't constitute the part of salary are tax-efficient with the fringe benefit tax. Some perquisites attract 6.798 per cent of FBT on an average, which your employer pays. |
| Avail HRA and benefits of housing loan: Home loans interest repayments up to Rs 1.5 lakh are exempt from IT. Further, rent paid by you is also eligible for deduction from the house rent allowance you receive. |
| Stocks and MFs are conditionally tax-free: If held for more than a year, investments in stocks and mutual funds do not invite capital gains tax. For less than a year, there's a 10 per cent tax. Dividends from stocks are also tax-free. |
Other sections can be advantageous to you if you are eligible for them. Under Section 80D, for example, deduction of medical insurance premium has been enhanced this year by Rs 5,000 to Rs 15,000 (to Rs 20,000 for senior citizens).
Under section 80DD, a taxpayer, who has a dependent with some form of disability, can claim deduction in respect of the latter's medical treatment up to Rs 50,000. Likewise, a deduction is allowed on interest paid on a loan for higher education.
Another important element of tax planning is to maintain vouchers and other documents that track your transactions. "If you purchased a property for Rs 25 lakh, but only had Rs 5 lakh in your bank account, you will have a legal obligation to show where you got Rs 20 lakh from," says Lakhotia. In cases where a person financially helps one of his relatives, the documentary proof could be as simple as a signed statement on a plain paper.
