Tax planning: A path less travelled

Written by Saikat Neogi | Updated: Feb 4 2014, 19:54pm hrs
TaxesSection 80C of the Income-Tax Act, 1961, carries an investment limit of Rs 1 lakh.
If you are a salaried person and havent finalised your tax plan yet, its time to do so with just two months left for the financial year to end. In this last-minute rush to save tax, one must guard against falling for an unsuitable financial product that may not be beneficial in the long run.

Section 80C of the Income-Tax Act, 1961, carries an investment limit of Rs 1 lakh and includes investments in Public Provident Fund (PPF), life insurance, national savings certificate of post offices, employee's contribution to provident fund, tax-saving mutual funds and five-year bank or post office fixed deposits. Even tuition fee paid for two children will be deducted from your income under Section 80C; this deduction will be on the actual payment of the fee and not on books, bus fare, private tuition, development fee, etc.

Before you go for a new financial product, it is always prudent to look at the deductions you can get under various heads. Analyse your total income by adding up salary income, business income, capital gains, interest income, rent from house property and income from other sources.

Some of your expenses, for example, health insurance premium payments (under Section 80D) and home loan interest payments (up to Rs 1.5 lakh), will reduce your taxable income. If you have a health insurance, pay your premium by cheque and that too from your own account to avail the tax benefit.

While most taxpayers look at exemptions under Section 80C, there are some other sections where one can get exemption and save tax. These sections are 80CCG, 80D, 80U, 80G, 80GG, 80E and 80DDB, which can significantly lower your tax burden.

Rajiv Gandhi Equity Savings Scheme

Under Section 80CCG, a new retail investor can invest in Rajiv Gandhi Equity Savings Scheme (RGESS). Under the scheme, one can invest in one or more financial years in a block of three consecutive financial years beginning with the initial year in which the deduction has to be claimed. This tax exemption is available to an individual over and above the exemption available under Section 80C of Rs 1 lakh. Under the scheme, the investor has the choice to invest in shares of BSE 100 or CNX 100, stocks of public sector enterprises, units of exchange-traded funds and mutual funds.

A new retail investor with gross total income of up to Rs 12 lakh can avail benefits under this scheme, with a permissible investment of Rs 50,000 and the exemption is available for Rs 25,000, i.e., 50% of the invested amount.

Donations to charitable institutions

If you are making donations to any charitable institution, trusts and societies and claim tax benefits, make sure that you do not pay over Rs 10,000 in cash because it would make you ineligible for tax deduction. For donations made for scientific research or rural development to research associations, universities, colleges or other associations under Section 80GGA, the deduction will be available on any sum that is over Rs 10,000 provided it is made in any mode other than cash.

Depending on the purpose of donation, the quantum of deduction could be 100% or 50% of the amount. For example, donations eligible for 100% deduction are Prime Ministers National Relief Fund, National Defence fund, etc.

Donation eligible for 50% deduction are Prime Ministers Drought Relief Fund, National Childrens Fund, donation to charitable trusts and societies notified by the tax department. In case of donations to private trusts, the actual amount of donation would be 50% of the qualifying amount. However, the deduction under Section 80G cannot exceed one's total taxable income.

Medical insurance premium, health check-up

Under Section 80D, medical insurance premium amount qualifies for deduction up to Rs 15,000 per annum; an additional amount of Rs 20,000 per annum is available for senior citizens. This year one can also claim deduction of up to Rs 5,000 for preventive health check-ups of self, spouse, dependent children or parents. For the purpose of deduction under Section 80D, payment can be made by any mode, including cash, in respect of any sum paid on account of preventive health check-up and by any other mode other than cash in all other cases.

Under Section 80DD, treatment of handicapped dependents qualifies for deduction. To claim deduction, one has to furnish a certificate from a government hospital practitioner in the prescribed format. A further deduction of Rs 15,000 is allowed for buying a health insurance policy for parents.

A salaried taxpayer should look into these options to save taxes, while factoring in short-term, medium-term and long-term needs and financial goals.