Tax Planning Simplified – Part 2

We have learned about tax planning for Section 80C from previous post, where we can avail a maximum exemption of Rs 1,00,000 from the taxable income. Now let us explore the avenues beyond section 80C to avail the maximum tax benefit. For salaried individuals whose gross total income exceeds Rs 2,60,000 per annum, deductions under Section 80C may not be sufficient to reduce the overall tax liability. In such cases they can consider the following options:

Health Insurance Premium (Under section 80D)
An individual can claim a deduction of Rs 15,000 (Rs 20,000 in case of senior citizens) for medical or health insurance. These are also known as mediclaim policies. Premium paid on the health insurance of self, spouse and dependent children falls into this exemption basket. Apart from that a further deduction of Rs 15,000 is allowed for buying a similar policy for your parents (Rs 20,000 if either of your parent is a senior citizen) irrespective of whether they’re dependent on you or not. That means, if neither you nor your parents are senior citizens, you’re allowed a maximum deduction of Rs 30,000. On the other hand, if both you and your parents are senior citizens, then the maximum limit allowed under section 80D increases to Rs 40,000 (I know most of us don’t fall into this category yet, but better to know things :) ).

Also, it may be noted that part payment of premium is eligible for deduction under 80D. As an example, suppose your parents buy a health insurance policy having an annual premium of Rs 14,000. Of the full premium, if your parents pay only Rs 5,000 and the balance of Rs 9,000 is paid by you, you’ll be allowed a tax deduction of Rs 9,000 under section 80D while your parents will be allowed a deduction of Rs 5,000.

I am stressing much on this because it is always better to have a medical insurance for the entire family apart from some of the mediclaim insurance that your employer provides. Think of the unforeseen situations when you are in the middle of a job switch or willing to risk yourself with a start up who might not be providing such a medical insurance. Think about it for a while, you will understand the need for it.

Educational Loan (under section 80E)
An individual is allowed a deduction for only the interest component of a loan taken towards higher studies from any bank, financial institution, or approved charitable institution. Such a loan for pursuing higher education is enlarged to cover all fields of study including vocational studies after passing senior secondary examinations as well as full time studies including graduation of specified courses such as management, engineering and medicine for self or any of family members (children, spouse). Remember, there is no deduction allowed for principal repayment of an education loan.

Home Loan (under section 24)
Individuals who have bought/constructed a house can seek deductions on interest payments on home loans upto Rs 150,000. Principal component can be tax exempted under section 80C. If your home loan amount is a substantial sum, then the interest and principal repayment in the form of EMIs may exceed the stated limit. To ensure the tax benefit is optimally utilised, an individual can consider opting for a joint loan with his spouse or parent or sibling. This will ensure that both the co-owners can claim tax deductions in the proportion of their holding in the loan. The co-owner falling in the higher tax bracket should hold a higher proportion of home loan to ensure that the tax benefits are maximised. If this is not thought well, taxman will take away much money from a family.

Salary Restructuring
Usually this is taken care by your employer to make sure you get to take home the most. Just revisit your flexible basket to ensure that you are making the best out of these options (For some/all of these, there might be a change in FBT being levied on employer right now, might fall into the basket of employee starting this year):
* Consider opting for food coupons like Sodexo/Ticket Restaurant. They are exempt from tax up to Rs 60,000 per year.
* Individuals living in a rented accommodation should have House Rent Allowance (HRA) as part of their salary.
* Leave Travel Allowance (LTA), upto Rs 50,000/- can be claimed twice in a block of four years for domestic travel.
* Medical expenses (medical bills/diagnostics etc.,) which are reimbursed by the employer are exempt up to Rs 15,000 per year. Provide bills and claim this exception.
* Transport allowance is exempt upto Rs 800 per month.

Apart from those mentioned above there are provisions for exemptions on donations towards various approved charities, relief funds, NGOs, etc., Also, such deductions are allowed on treatment of severe illness, special exemptions for physically challenged individuals and many more. I have tried to cover only the prominent ones that a regular salary class employees can think of. Most of these sections will be valid till the new tax code implementation which is expected to be in place from FY 2011-12 onwards, more info on that here. Feel free to share if you are aware of any other substantial sections to claim deductions from taxable income.