Tax Saving Tips for F.Y. 2011-12

Come March, people will start scrambling to look for options to start their investment options for this Financial Year 2011-2012.  Although it is not always advisable for anyone to look for the tax saving options or instruments at the last moment, i.e., during 31st March, if still you have not done your tax saving investments yet, you can do it even now.  There are various instruments available in the market which can cater to this need of tax planning or investment planning dedicated to tax exemptions.

National Savings Certificate (NSC)

What is it: This tax saving scheme falls under the Section 80 C of theIncome Tax Act of India. Annual interest earned is deemed to be reinvested and qualifies for tax rebate for first 5 years.

Average returns: 8% compounded half yearly

Maturity period: Usually 5-10 years.

Available at: Banks, post office or any broker.

Income Taxable: Interest income is taxable but no TDS.

Public Provident Fund (PPF)

What is it: It is a long-term, statutory scheme of the government. This tax saving option falls within the Section 80 C of the Income Tax Act in India.

Average returns: 8.6% compounded annually

Maturity period: 15 years

Available at: State Bank of India or some of the nationalised banks or at designated post office branches.

Income Taxable?: No

Limitations: This long-term scheme is for 15 years; hence if your investment horizon is short-term in nature, PPF is not meant for you as it locks your liquidity for a relatively long period of time.

Employees Provident Fund (EPF)

What is it: This scheme offers a total yearly exemption of INR. 100, 000 as mentioned in the Income Tax Act Section 80 C. In this fund, 10 % to 12 % of a person’s basic salary gets deducted and the other 12 % is contributed by the employer.

Average returns: 9.5%

Maturity period: One can withdraw the entire amount in instances of leaving job, retirement after 58 years of age or taking VRS. Partial withdrawal can be done for home, medical or marriage related expenses though.

Equity Linked Savings Schemes (ELSS)

What is it:  ELSS is mutual funds that help you save taxes under Section 80C as well as generate decent long-term returns from the equity markets. ELSS is not much different in composition from a typical equity MF scheme. It has the potential to deliver good returns and at the same time save tax.

Average returns: As per market situation

Maturity period: Lock in period of only three years but one can remain invested for long.

Available at: Any MF house, broker or through demat account.

Unit-linked Insurance Plans (ULIPs)

What is it: Covered by the Income Tax Act’s Section 80 C, it is a unique blend of investment and insurance. The premium, which is being paid by a customer, gets deducted with initial charges while the rest of the amount is invested. 

It may be of these mixture:
*Aggressive ULIPs where one can invest 80 % to 100 % in equities. The rest can be        invested in debt instruments though.
*Balanced ULIPs where an individual can invest 40 % to 60 % in equities
*Conservative ULIPs, which allows one to invest up to 20 % in equities

Average returns: As per market situation

Lock-in period: 5 years

Tax Saving 5 year-Bank Fixed Deposit scheme

What is it: Investment up to Rs 1 lakh in these special tax saving bank fixed deposits also entails an investor tax deduction under Section 80C. This scheme neither allows the encashment of the money prior to completion of the 5 years term nor can this be used as the security against any loan.

Average returns: 9-9.5% annually. Rate of interest varies from one bank or post office to another.

Available at: Bank or post office.

Lock-in period: 5 years

Income Taxable: Interest income taxability upon maturity.

Infrastructure Bonds

What is it: Over and above the deduction allowed by the Section 80 C, one can save income tax on a maximum amount of Rs 20, 000, by investing in different infrastructure bonds. Covered by the Section 80 CCF of the Indian I-T Act, this bond has become very popular with schemes like L&T, REC, IDFC among others.

Maximum deduction: Rs 20,000

Average returns: The rate of interest  varies from 8 % to 8.7%.

Maturity period: 5 to 10 years.

Available at: Company, broker, demat account.

Life Insurance Premium

What is it: Any premium payable by an investor to provide cover to his life is eligible for deduction under Section 80C.

Average returns: 6-7% annual. Apart from that, this helps one plan for the unforeseen events in his or her life.

Maturity period: Depends upon length of policy.

Income taxable? Tax benefit for the premium is restricted to 20 % of the initial amount of the capitalinvested.

Health Insurance Premiums

Popular as Mediclaim Policies, which are a form of health insurance, comes within the Section 80 D of the country’s Income Tax Act. Applicable even on the proprietor firm’s cheques, these policies offers a maximum deduction of Rs 35, 000. This deduction is calculated in addition to any other tax saving done as per the Section 80 C.

Post Office Saving Options

Under the Section 80 C of the Income Tax Act of India, one can invest in any of the different tax saving options provided by the post offices.

Average returns: Interest rate as well as the tenure of the investment varies from one scheme to another.

Maximum deduction: Rs 100, 000.

 Tax Saving Strategies for Salaried Individuals 

At the end of every financial year, many tax payers frantically make investments to minimize taxes, without adequate knowledge of the various available options. The Income Tax Act offers many more incentives and allowances, apart from the popular 80C, which could reduce tax liability substantially for the salaried individuals. Here are seven smart tips to help you save more and reduce taxes.

           

Salary Restructuring

Restructuring your salary may not always be possible. But if your company permits, or if you are on good terms with your HR department, restructuring a few components could reduce your tax liability.

Opt for food coupons instead of lunch allowances, as they are exempt from tax up to Rs 60,000 p.a.

Include medical allowance, transport allowance, education allowance, uniform expenses (if any), and telephone expenses as part of salary. Produce bills of actual expenses incurred for these allowances to reduce tax.

Opt for the company car instead of using your own car, to reduce high prerequisite taxation.

  

Options beyond 80C

If you have exhausted your limit of one lakh under section 80C, here are a few more options.

Section 80D – Deduction of Rs. 15,000 for medical insurance of self, spouse and dependent children and Rs. 20,000 for medical insurance of parents above 65 years.

Section 80G- Donations to specified funds or charitable institutions.

  

House Rent Allowance

Are you paying rent, yet not receiving any HRA from your company? The least of the following could be claimed under Section 80GG.

25% of the total income or,

Rs 2,000 per month or,

Excess of rent paid over 10% of total income

This deduction will however not be allowed, if you, your spouse or minor child owns a residential accommodation in the location where you reside or perform office duties.

If HRA forms part of your salary, then the minimum of the following three is available as exemption.

The actual HRA received from your employer

The actual rent paid by you for the house, minus 10% of your salary (this includes basic + dearness allowance, if any)

50% of your basic salary (for a metro) or 40% of your basic salary (for non-metro).

Tax Saving from Home Loans

Use your home loan efficiently to save more tax. The principal component of your loan, is included under Section 80c, offering a deduction up to Rs. 1, 00,000. The interest portion offers a deduction up to Rs. 1, 50,000 separately under Section 24.

Leave Travel Allowance

Use your Leave Travel Allowance for your holidays, which is available twice in a block of four years. In case you have been unable to claim the benefit in a particular 4 year block, you could now carry forward one journey to the succeeding block and claim it in the first calendar year of that block. Thus, you may be eligible for three exemptions in that block.

Tax on Bonus

A bonus from your employer is fully taxable in the year in which you receive it. However request your employer for the following.

If you anticipate tax rates to be reduced or slabs to be modified in the subsequent year, see if you could push the bonus payment to the subsequent year.

Produce your tax investment details well before, to prevent your employer from deducting tax on bonus before handing it over.

Benefits for Spouses

1) Using LTA Benefits

As per the current rules, LTA benefits could be claimed twice in a block of four calendar years. While claiming LTA (Leave Travel Allowance), spouses should claim exemption alternatively each year. This way, together they could claim an LTA exemption of four journeys in a block of four years. There is no need for them to take the precaution of not travelling twice during the same year.

2) HUF Benefits

Have you and your spouse received gifts that are considered taxable? Then starting an HUF could prove to be quite a saving. Any income received by an individual as a member of a HUF (Hindu Undivided Family) is taxable only in the hands of the HUF and not in individual capacity. The HUF income has the same slabs and exemptions as for an individual. Thus, through an HUF, couples could get, a separate exemption of Rs 160,000, additionally.

3) Tax Saving Through a Trust

Spouses could get additional exemptions by creating a trust as per section 164 of Income Tax Act. A private trust could be created for unborn son or daughter, or for the future spouse of existing son or daughter, by allocating fund to the trust through transfer of property, rent of which shall be income of the trust.

To Conclude….

The Income Tax department gives us various avenues to help save tax. Optimally using these avenues and structuring finances sure does provide a great deal of monetary gain.