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CA Ayush Agrawal (Let's Start)
Tips to save Income tax for Salaried
& Individuals
Tips to save Income tax for Salaried Person
Often, investment for most individuals begins and ends with tax planning. Although it is pertinent
to avail tax breaks, this should not be the sole focus. Start by jotting down your key financial
objectives, the tentative time of money requirement and the corpus needed to achieve those goals.
One can use tax saving investments effectively, to achieve financial goals. For example, one can take
a childrens plan that also provides tax benefit. Consider the impact of inflation on your needs. After
your first few working years, as income goes up, it is wise to invest beyond ones taxsaving
investments to achieve your goals. Also, evaluate the life cover requirement, while planning for your
taxes.
As you begin your career, you may not have visibility on your needs. In this case, set a target of
corpus achievement. For example, how quickly you can hit a corpus of Rs 1 crore from tax savings
investments. You can accelerate this by increasing your contribution yearly, keeping in mind salary
hikes and inflation.
Having a goal makes the exercise of investing more interesting and there is always the corpus to
look forward to. Having clarity will also help you keep track.
There are a range of avenues with different levels of risk, return and liquidity. Choose an
appropriate mix of investments to maintain an appropriate asset allocation and to help achieve your
financial objectives. Past returns data may be misleading. Example, when markets are at a high and
about to fall, equities will give you the best track record. Today, when markets are down, it could be
a better time to invest with a three year horizon. The maturity should suit the needs you are
planning for. Keep in mind the tax you need to pay on the returns.
Maximising your tax saving
1. Exemptions/reimbursements Identify the reimbursements available from the company and
take maximum advantage of the same. Normal expenses that one incurs could help save tax.
Example- Telephone/fuel reimbursements, meal vouchers and company car. A person in lower tax
slabs can reduce his tax liability to nil with exemptions alone.

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Similarly, salaried employees staying in rented apartments can claim exemption under Section 10(5)
of the Act in respect of house rent allowance by making the HRA a component of there salary.
Some of The Popularly Known Exemptions/Reimbursements
House Rent Allowance
Minimum of -
1. Actual HRA
2. Rent Paid 10% of Basic
3. 40a% of Basic (Non-Metros) or 50% of Basic (Metros)
Conveyance Allowance
Rs 800 / Month
Leave Travel Allowance
Two trips in a block of 4 Yrs Amount not exceeding Air Economy or Rail AC I Fare shall be for
shortest distance and for a single destination
Medical Reimbursement
Rs 15,000 / Annum
2. Deductions
Section 80C allows a maximum limit of Rs 1 lakh across investments ranging from provident
fund, PPF, infrastructure bonds, fixed deposits (5 years or more), NSC, insurance/pension plans,
unit linked insurance, equity linked savings scheme etc. It also includes tuition fees of your
children and the repayment of principal on your housing loan.
The interest component on your home loan has a separate limit of Rs 1.5 lakh.
Medical premia upto a maximum of Rs 15,000 qualifies for deduction, with an additional Rs
15,000 for parents. Additional deduction of 20,000 could be availed in case of a senior citizen.You
can claim a separate deduction for medical premium of your parents.
A person with disability or those who have spent money on the maintenance (including medical
treatment) of dependant persons with disability, could avail deductions under section 80U and
80DD of the Act, respectively.
Individuals paying interest on education loan should obtain the interest payment certificate
undersection 80E of the Act.
Lesser Known Tax Saving Tips / Deductions
For most of the people tax savings brings to mind life insurance, PPF, NSC, and equity-linked
savings scheme, among others, that qualify for tax deduction under Section 80 C of the Income-Tax
Act. An individual can claim tax deductions of up to Rs 1 lakh under 80C. However, there are other
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lesser known avenues that offer additional tax breaks to individuals. They are not widely discussed
as they involve special situations in life such as having a special dependant, paying rent to parents,
owning a house in another city, and so on. Here is a small list you could explore.
Paying rent to your parents
Do you live in your parents house? You can pay them rent to claim House Rent Allowance
exemption. This is possible only if the property is registered in the name of your parent. The owner
will be taxed for the rental income after a 30% deduction. So, if you pay your father a rent of Rs 3
lakh a year (Rs 25,000 a month), he will be taxed for only Rs 2.1 lakh. If your parents are retired and
do not derive any significant taxable income, the amount of rent would be tax free in their hands. It
is advisable that you enter into an agreement with them and actually make the payment every
month, preferably by cheque.
It gets better if the property is jointly owned by both parents. Then you can divide the rent two-
ways so that the tax liability gets split between the two parents. If their income exceeds the basic
exemption limit, you can help them save tax by investing in their name under Section
80C optionssuch as the Senior Citizens Saving Scheme, five-year bank fixed deposits or tax-saving
equity mutual funds.
Take a look at the example to see the tax implications. Let us assume your monthly basic salary is
Rs 40,000 and HRA is Rs 16,000. Your monthly rent is also Rs 16,000. In this case, of the total
monthly HRA, Rs 12,000 will be tax exempt. Assuming you are in the 20% tax bracket, your annual
tax saving would be Rs 29,664.
Please note that you will have to submit copies of rent receipts or rent agreement, depending on
what your organisation stipulates. However, avoid claiming tax benefits on rent payments made to
the spouse as the arrangement can be characterised as a sham transaction, say experts.
Renting and Home loan in two different locations
Individuals today are constantly on the move for better job prospects. This could result in a person
living in a rented place in the city he is working while repaying the loan for a home bought in his
native city or any other city. In such a scenario, the rent that an individual pays is eligible for HRA
exemption. Further, a deduction can be claimed on the interest paid for the housing loan used to
purchase the property at the native place/any other city.
Let us assume your monthly basic salary is Rs 40,000 and HRA is Rs 16,000. Your monthly rent is
Rs 16,000 and annual interest payment on your housing loan is Rs 1.45 lakh. In this case, of the total
monthly HRA, Rs 12,000 will be tax exempt in your hands. Further, you can claim deduction under
section 24(b) of the Income-Tax Act, 1961, on the interest payable on your housing loan.
For claiming HRA exemption, you need to submit copy of the lease agreement or rent receipts. For
claiming deduction on housing loan interest, you need to submit a copy of the tax certificate issued
by the housing finance company.
Set off of Capital Loss Against Capital Gain
While most of us know that we need to pay taxes on short term or long term capital gains, not
many are aware of the fact that capital losses, if any, can be balanced off against gains. So, for
instance, if you have made a long-term capital gain of Rs 15 lakh by selling off your property and
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long-term capital loss of Rs 3 lakh by selling stocks which are either not listed or are sold off market
, the total taxable amount would Rs 12 lakh.
Please note Capital Gain on Sale of Shares sold through Stock Exchange can not be set off against
other capital gain as profit from sale of shares of listed companies through stock exchange in
exempt.
It is important to note that short term losses can be balanced off against both short term as well as
long term capital gains. However, long term capital losses can only be balanced off against long
term capital gains.
Charity to noble causes count
Charitable contributions are deductible up to 10% of your income under Section 80G. Depending
upon the institution to which the donation is being made, the deduction can be either 100% or 50%
of the amount donated. You must Ensure that you obtain a receipt from the institution and a copy
of their income-tax exemption certificate. Instead of giving the money directly to the needy and not
getting any deduction, you can make a charitable contribution to an NGO that provides assistance
to the needy. The individual is then able to get a tax deduction while still contributing to a noble
cause.
Contributions to a political party
If you have contributed any amount to a recognised political party, you are eligible to claim a tax
deduction ranging from 50 percent to 100 percent of the amount under Section 80GGC for
individuals and Section GGB for corporate organisations. One can contribute up to 10 percent of
ones gross total income to a political party.
Home loan and joint home loan
The principal repayment of the home loan qualifies for deduction under section 80C; the interest
payable on the home loan is allowed as deduction under section 24 of the Act. The deduction in
respect of the interest is available in full for properties that are treated as let out, but in case of a
property treated as self-occupied, the amount cannot exceed Rs 1.5 lakh per financial year, subject
to certain conditions.
However, you cannot claim interest deduction when the flat is under construction. The interest paid
during the per-construction period can be claimed as deduction in five equal installments starting
from the financial year in which the construction is completed. Where the property is jointly owned,
with the share of each owner being definite, the net taxable annual value of the property is
apportioned to each of the joint owners in the ratio of their share in the property. And, as the shares
are definite, each holder is eligible to claim a separate deduction in case the property is jointly
owned.
Educational expenses of Children
It is well-known that the deduction under section 80C is available to an individual in respect of
thetuition fees of his/her children with an overall limit of Rs 1 lakh. The deduction, however, is not
available for capitation fees/donation collected by the school or college. There is another section in
the Act (section 80E) which provides for deduction in respect of interest on loan taken for higher
education.
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The educational loan can be taken for any course pursued by the individual or the spouse or
children of the individual post the senior secondary course or its equivalent. This deduction is also
available for supporting the education of a relative provided the individual is his/her legal guardian.
It is allowed for a maximum of eight years starting from the year in which the interest is first repaid.
Health Insurance
A deduction of up to Rs 15,000 can be claimed in respect of the health insurance premium which
one pays for covering oneself and or the wife and dependent children. You can claim an exemption
of Rs 15,000 on premium payments made for parents and a higher deduction of up to Rs 20,000 if
one of your parents is a senior citizen. However, in case of company insurance, only the
organisation can seek tax relief and not the employee.
Have an ill dependent to look after? Pay lower taxes
The income tax department understands that chronic illness of a dependent can empty your life
savings, and paying full taxes in such cases is burdensome for any taxpayer. Hence, it allows a
deduction of Rs 40,000 (Rs 60,000 if the dependent is a senior citizen) per year, under Section
80DDB. Dependants include siblings, children, parents and spouses.
This deduction is available for specific diseases, which include many neurological diseases like
dystonia musculorum deformans, aphasia and Parkinsons disease, hemiballismus, ataxia, motor
neuron disease, chorea, haematological disorders, chronic kidney failure, and a few more.
In order to claim this deduction, it is important that the patient should be dependant on the
taxpayer, and should not have filed for such a deduction separately.
Deduction for medical expenses incurred on disability of Special dependants - section
80DD
In case any of your dependants suffer from a physical or mental disability, you can claim a
deduction under section 80DD for an amount of Rs 50,000 (if the disability is less than 80%) or Rs 1
lakh (if the disability is 80% or more).
Dependants for this purpose can include spouse, children, parents, brothers and sisters, or any of
them. To be eligible to claim the deduction, you must obtain a certificate in Form 10IA from a
doctor with the prescribed qualification and working in a government hospital.
You will have to submit the copy of the certificate in Form 10IA to the payroll department of your
organisation.
Scope of Deduction Deduction can be claimed for dependent parents, spouse, children and siblings.
Dependents must not have claimed any deduction for their disability.
Deductions are permissible in either of the following cases.
a) Costs incurred for medical treatment, training or rehabilitation of a disabled dependent, including
amount spent for nursing.
b) Amount paid towards an insurance scheme for the maintenance of your disabled dependent in
case of your untimely death.
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Meaning of Disability- Disability means a person suffering from 40% or more of any of the below
disabilities. A severe disability condition is 80% or more of the disabilities.
a) Blindness and Vision problems
b) Leprosy-cured
c) Hearing impairment
d) Locomotor disability
e) Mental retardation or illness
Please Note -
a) Individuals would need to produce a copy of the disability certificate as issued by the central or
state government medical board to claim deduction.
b) Insurance policy obtained must be in your name and should be a policy for life. It could pay
either an annuity or a lump sum amount for the benefit of the dependent on your death.
c) If the disabled dependent predeceases you, the policy amount is returned to you, and treated as
income for the year in which you receive it, thus fully taxable in your hands.
Medical expenses for specified diseases like AIDS, Cancer (Section 80 DDB )
The actual expenditure incurred on treatment of specified disease such as AIDS, cancer, neurological
diseases, etc., is deductable to the extent of 40,000 or the actual expense whichever is lower. The limit
is increased to 60,000 in case of expense incurred for a senior citizen.
Scope of Deduction Deduction is applicable for treatment of self, spouse, children, siblings, and
parents, wholly dependent on you.
Diseases covered
a) Neurological Diseases (where the disability level has been certified as 40% or more).
b) Parkinsons Disease
c) Malignant Cancers
d) Acquired Immune Deficiency Syndrome (AIDS)
e) Chronic Renal failure
f) Hemophilia
g) Thalassaemia
Point to Note-
1. If you are already receiving any reimbursement for the treatment from your insurance company
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1. If you are already receiving any reimbursement for the treatment from your insurance company
or employer, deductions cannot be claimed. If you are receiving partial reimbursement, the balance
amount can be used for a deduction.
2. A certificate would be required from a specialist working in a government hospital, as proof for
the specified ailment.
Deduction for rent paid if you are not availing HRA
You can claim a deduction for rent paid to the extent of 2,000 per month even if you dont receive
HRA from your employer or you are self-employed. This deduction, available under Section 80GG,
is subject to some conditions.
To Claim the deduction Neither the taxpayer nor the spouse should own a house at the place of
employment. They cannot be self employed, which includes businessmen or professionals. Lastly,
the tax payer should not self-occupy his/her house at any other place.
Amount paid under National Pension System
The contributions made by an employee to the NPS qualify for a deduction under 80CCD and the
upper limit of 1,00,000 under Section 80C of the Act. However, effective April 2011, employer
contributions to NPS up to 10% of the employees salary would qualify for an additional deduction.
Foreign taxes
Many individuals take up overseas assignments and as a result earn income both in India and
abroad. In the event they face taxation in both countries, they may avail credit of taxes paid
overseas while filing their tax returns in India. The Indian tax laws as well as tax treaties signed by
India with other countries prescribe provisions for claiming credit of foreign taxes.
Repairs and maintenance of house property
You will never forget to claim deduction of interest on repayment of your home loan, but not many
people know that any interest paid on home loan for reconstruction or repair of the house
property qualifies for deduction of up to 30,000, subject to the overall limit of 1,50,000.
Exemption from capital gains
If you have made any capital gains on the sale of residential house property, such capital gains shall
be exempt from tax, provided you purchase a new residential house one year before or within two
years after the date of transfer; or you incur expenditure on construction of house property within
three years from the date of transfer. Alternatively, to avail exemption, a tax payer may also invest
the gains in REC / NHAI bonds, subject to specified conditions.
With most companies closing investment declaration by january end, you still have some
time to widen your tax relief. Think, execute and file your investment declaration and seek
optimal tax benefits. These deductions, along with the common ones like medical benefits,
HRA, home loan EMIs, etc. can help you save a considerable amount of tax every year.
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Litle Known Schemes u/s 80C of Income Tax Act
(http://taxguru.in/income-tax/little-known-schemes-
under-section-80c-of-the-income-tax-act-1961.html)
If an individual falls in the 30% tax bracket and has exhausted the maximum limit of Sec 80C, one
can save Rs 30,900 in taxes. We runs you through the provisions of Section 80C. However, we
highlight those schemes that are little known and which many investors avail of sparingly.
Stamp duty and registration charges
The first and foremost provision that many taxpayers are not aware of isstamp duty and
registration charges. According to the law, the amount paid towards stamp duty, registration fees
and other expenses for the purpose of transfer of house property to the owner also qualifies for tax
exemption. This is over and above the principal payment that qualifies under Section 80C. But
deduction u/s. 80C for total amount including Principal Loan Repayment and stamp duty and
registration charges can not exceed Rs. One Lakh.
Exemption for interest payment towards home loan is permissible under another section hence the
above limit of Rs 1 lakh does not apply to it.
Let us take an example, Mr A purchases a house property of Rs 32 lakh and takes a home loan of Rs
25 lakh at 10%. His stamp duty and registration charges on this work out to approximately Rs 1.75
lakh. The interest for the first year comes to Rs 2.48 lakh and principal payment comes to Rs 41,376.
Thus, Mr A can claim maximum tax exemption of Rs 1.5 lakh on his interest payment under Sec 24.
The entire principal payment (not more than Rs 1 lakh) of Rs 41,376 can be claimed under Sec 80C.
Nonetheless, it still leaves Rs 58,624 to be invested in other tax-saving instruments to reduce overall
tax liability. In reality, buying a house is quite often an expensive affair, leaving little cash with the
homebuyer. On top of it, if one has to make additional investment to save on tax, it becomes
difficult.
But with the inclusion of registration and stamp duty fees under Section 80C, it not only reduces tax
liability but also saves the property buyer from further cash outgo.
Fixed-deposit with HUDCO or any housing board
Another provision that would be eligible for exemption under Section 80C is any sum paid towards
fixed-deposit schemes of HUDCO or to any housing board, which is constituted in India for the
purpose of planning, development or improvement of cities or towns.
Typically, these schemes are promoted by state housing boards to promote long-term social sector
objectives, or for infrastructure development of city. In fact, principal payment towards home loans
taken from Housing and Urban Development Corporation (HUDCO) also qualifies for exemption
under Sec 80C.
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Even subscription to a home loan account scheme of the National Housing Bank (NHB) or
contribution to any notified pension fund set up by the NHB also meet the requirements. Hence, if
these two offer home loans at competitive rates, one can avail loan from them as well.
Contribution to a non-commutable deferred annuity plan
Further, contribution to a non-commutable deferred annuity plan is also an option to avail tax
exemption. In normal parlance, this is nothing but a standard pension plan eligible for tax
exemption under Section 80C.
This includes schemes such as Jeevan Suraksha by LIC or Pension Plus plan by HDFC Standard
Life. Contribution to an approved superannuation fund is also a way to claim tax benefit.
Typically, large organisations maintain superannuation funds and contribute to them. In case
employees want to make a higher contribution; they can do so to the extent of 15% of basic plus
dearness allowance. Besides these lesser-known options, the other commonly used options are
contribution to employee provident fund, life insurance premium, or payment of tuition fees. Five-
year tax saving fixed deposits issued by banks can also be bought.
With a 6-7 .75% quarterly compounding interest rate, these FDs have an edge over NSC with a
one-year lesser lock-in period. However, the NSC has an edge because of the fact that interest
accrued is also eligible for 80 C limit for the first five years that is not the case with FDs.
Equity-linked savings scheme MF or Ulips
Besides, these low risk options, one can go for high-risk return schemes such as equity-linked
savings scheme MF or even Ulips. ELSS usually provides a higher return in the long run than small
savings schemes and carries a lower lock-in period of three years.
Small savings schemes offer a lower return of around 8 to 8.5%. Further, there is a relatively long
lock-in period -15 years for the PPF and six years for NSC. The advantage with these schemes is
that they offer a guaranteed return unlike equity-based products where there is no guaranteed
return and one can lose money like when the markets tumbled in 2008.
Risk profile and investment strategy are the key determinants for allocating funds to any scheme.
Also, one must consider inflation-adjusted returns before taking a decision.
January 21, 2013 CA Ayush Agrawal
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