Tax planning is an integral part of financial planning. Ideally, it should be taken care at the start of the financial year. However, most taxpayers tend to procrastinate their investments and wake up between December and March in a rush to save tax. This leads to minimal tax saving benefits.
Did you know that an average taxpayer in India pays 30 – 35% more tax in comparison to a taxpayer who plans his tax liability? If you fall in this category or want to avoid the pitfall, it is advisable to start planning your taxes right at the start of the financial year, i.e., April or maybe even earlier.
Here are few of the pointers that you can keep in your mind to optimize your taxes:
Restructuring your salary:
Not many companies give you the option of restructuring your salary. But, if your company allows you to do so, then you should consider these points:
- Get maximum permissible deductions under LTA, HRA, telephone allowance, medical allowance, etc. Keep the expense receipts safe, so that the actual expenses incurred can be claimed for deduction.
- Food coupons like Sodexo and Ticket Restaruant are exempt from tax. So, opt for them instead of lunch allowance.
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Understanding HRA:
If HRA is not part of the salary, then the minimum of the following is a permissible deduction u/s 80GG:
- 25% of total income or
- Rs 2,000 per month or
- Excess of rent paid over 10% of total income
But, if HRA is part of salary, then the minimum of the following can be claimed as a deduction from salary:
- The actual HRA received or
- Actual rent paid in excess of 10% of basic pay including dearness allowance or
- 50% of basic salary in metros or 40% of basic salary in case of other cities
Please note that you need rent agreement and rent payment receipts to claim deduction for HRA or 80GG.
Leasing the company car:
If you use your own car for office as well personal purpose, the value of taxable perquisite shall be Rs 6,700 per month where Rs 10,000 per month is reimbursed by the company.
- But, if it is company leased car and all the expenses are reimbursed by the company, the taxable perquisite shall be Rs 3,300 per month. So, it is better to use the company car to save tax.
- Also, if your company offers car buying allowances then you should opt for it for tax savings. In this case, the company pays for the EMI and you save money from post-tax returns that you need to pay for EMI. You just need to pay less money on the taxable value of the perk.
Taking full benefits of Section 80C:
You can claim a maximum of Rs. 1,50,000 as deduction u/s 80C. Apart from the provident fund already deducted from your salary, you can make additional investment in PPF, life insurance, tax saving fixed deposits, tuition fees paid for children, equity linked saving schemes etc. You can invest in any of these options based on your risk appetite and earlier you start investing, more returns can be yielded.
Investing in National Pension Scheme (NPS):
You can ask your employer to invest some money in NPS on your behalf. Section 80CCD (2) allows up to 10% of basic salary invested in NPS by the employer as a deduction from total income.
Also, under new provisions of section 80CCD (1b), you can claim an additional deduction of Rs 50,000 on the amount invested in NPS on your own. If you are in the 30 % tax bracket, this section could help you save taxes of Rs 15,000.
Claiming deduction u/s 80D:
In addition to section 80 C benefits, you can even claim exemption on the premium paid on the insurance policy of self, family and parents as under:
| For Self, Spouse & Children | Deduction Amount (Rs) | Dependent Parents | Deduction Amount (Rs) | Deduction Amount (Rs) for Health Check Up (subject to maximum limit of deduction amount) | Total Deduction Amount (Rs) |
| Self + spouse + children | 25,000 | unclaimed | unclaimed | 5,000 | 25,000 |
| Self + spouse + children | 25,000 | Parents (not senior citizens) | 25,000 | 5,000 | 50,000 |
| Self + spouse + children | 25,000 | Senior citizen parents | 30,000 | 5,000 | 55,000 |
| Self (Senior citizen) + spouse + children | 30,000 | Senior citizen parents | 30,000 | 5,000 | 60,000 |
Understanding a home loan:
Section 80 (C) of Income Tax Act covers deduction for repayment of the principal amount of the loan up to Rs1,50,000.
- The interest on a home loan can be claimed as deduction u/s 24 up to Rs 2,00,000. So, if your house is jointly owned and financed by a joint loan, then both the owners can claim a deduction of Rs 2,00,000 individually if the house is self-occupied.
- An additional exemption of Rs. 50,000 under section 80EE is allowed to the first-time home buyers for loan availed up to 35 lakhs and if the cost of the home is not more than 50 lakhs for a loan sanctioned between 1st April’2016 and 31st March’2017.
- A maximum of Rs. 30,000 can be claimed as a deduction on the loan if availed for repairs and renovation.
Apart from above mentioned pointers, while making investments, you should avoid investments where returns from such investment will increase your tax liability. You should take your investment decision after considering the post-tax returns. For e.g., long term capital gains on equity is tax free. So, it is preferred to hold equity for a minimum period of one year to avoid taxes. Also, you should plan your taxes in a manner that will help you achieve your overall financial goals like child’s education, buying a house, saving for retirement etc.
TaxSpanner can assist you in understanding your salary and income structure from the tax point of view and maximizing your tax outgo. Get in touch with us today by writing to us at tax.optimizer@taxspanner.com.
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