Tax Planning Guide 2014 Edition

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Preface
All of us engage in some economic activity and work hard to make a living. But as you start
doing so you tend to attract the attention of the Income Tax Department, as they too are doing
their task of taxing your income, as you earn. And thus as we work hard to make a living, it
becomes imperative for us to work a little more harder and smarter to save our taxes (the legal
way) too, so that it can help us make our dreams come true - A dream of buying a better car,
bigger house etc.
But, remember in the quest of attaining the same, if you keep your tax planning exercise
pending till the eleventh hour, then it would be merely a tax saving exercise leading to suboptimal gains.
The last union budget which was expected to be stricter on austerity, turned out to be a
populous one. Instead of expenditure cuts, the government emphasised on raising revenues.
Due to this, there were fewer new tax benefits provided to taxpayers. So this requires you to be
even more particular about tax planning.
This guide on Tax Planning has been written with the purpose of helping you plan your taxes
smartly. If one incorporates the financial planning aspects such as your age, income, ability to
take risk and financial goals to tax planning exercise, then one can wisely complement tax
planning to investment planning as well.
Also, realisation will dawn on you that theres more to tax planning than the mere Rs 1 lakh
limit under Section 80C, of the Income Tax Act, 1961. There are many other provisions that can
provide you tax benefits. A simple thing like taking a loan for buying a house can make you
eligible to get tax benefits.
So, read on and wish you all VERY HAPPY TAX PLANNING!!
Team Personal FN
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Index
Section I: Introduction
Tax Saving Vs. Tax Planning
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Section II: Mistakes which you have been doing while saving tax
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Section III: Your small steps (to Tax Planning) can take you leaps
Steps to tax planning
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Parameters for prudent tax planning
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Section IV: Optimal tax planning with section 80C
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Tax planning with market-linked instruments
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Tax planning the assured return way
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Section V: Thinking beyond section 80C
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Section VI: Your home loan and tax planning
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Section VII: House Property and taxes
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Section VIII: Save tax on your hard earned salary
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Section IX: Conclusion
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I - Introduction
All men make mistakes, but only wise men learn from their mistakes.- Sir Winston Churchill.
The above proverb is very much relevant to our daily lives - be it handling finances or even in
any other facets of life.
Moreover the famous author John C. Maxwell has also quoted A man must be big enough to
admit his mistakes, smart enough to profit from them, and strong enough to correct them. But
again this is conveniently forgotten by most, which often leads to failure to learn from
mistakes, the arrogance to admit it and which thus leads you to repeat the same mistakes
again.
While undertaking your tax planning exercise too, you tend to repeat the same mistake of
waiting till the eleventh hour and are arrogant enough to admit it.
As the financial year draws to a close, we all start feeling the heat and realise that yes, now we
have to invest in order to save tax. But have you ever wondered whether it is the prudent way
for tax planning?
Remember, waiting till the eleventh hour to undertake your tax planning exercise will often
drive it towards mere tax saving rather than tax planning; which in our opinion is a suboptimal way to undertake a tax planning exercise.
Unlike tax saving which is generally done through investments in tax saving
instruments/products, under tax planning we take into consideration ones larger financial
plan after accounting for ones age, financial goals, ability to take risk and investment horizon
(including nearness to financial goals). And by adapting to such a method of tax planning, you
not only ensure long-term wealth creation but also protection of capital.
Hence, please remember to commence your tax planning exercise well in advance by
complementing it with your overall investment planning exercise.
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II - Mistakes which you have been doing while saving tax

We recognise the fact that many of you are too busy throughout the year, in your economic
activities intended to make a living. But if you show the same dedication in your tax planning
exercise, the same will enable you to save more and fulfil all your dreams in life. Our experience
reveals following 4 mistakes which individuals do while saving taxes.
1. Doing your tax planning at the last moment:

The root of all mistakes in tax planning lies in waiting till the last minute to save taxes, which
eventually leads to mere tax saving, rather than tax planning. And this in return is a sub-optimal
way of saving taxes, caused by the sheer attitude of delay. Your last moment hurry, will often
lead you to forgetting or ignoring the facets of financial planning such as your age, income,
ability to take risk and financial goals (explained further in this guide) thus guiding you to not
complement your tax planning exercise with investment planning.
Remember waiting till the eleventh hour, is just going to lead you to a path of sub-optimal tax planning
exercise, which would destroy the essence of holistic tax planning.
2. Unnecessarily Buying Endowment and Unit Linked Insurance Plans:

At the end of the financial year, many of you might have attended telephone calls of insurance
agents pestering you to buy an investment cum insurance plan typically market linked i.e.
Unit Linked Insurance Plans (ULIPs) or some kind of Endowment plans. And many of you
realising the need to save your taxes, even entertain these calls and eventually tear a cheque
for buying one. But do you ever wonder whether you have done the right thing?
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The answer in our opinion is a sheer No. And thats because of the ignorance and / or
arrogance (of not admitting your mistakes) which you have, while doing your tax saving
investments.
Remember when you think of insuring yourself, it should purely mean protecting your life against any
contingent events; and thus given that you should be ideally buying only pure term life insurance plans,
which gives due importance to your human life value. It is noteworthy that ULIPs are investment-cuminsurance plans where for the premium paid, the insurance cover offered under these plans is far less
(usually 10 times of your annual premium) when compared to pure term life insurance plans; where for a
lesser premium amount you get a greater life cover which precisely what a life insurance plan is
intended for.
3. Ignoring power of compounding through tax saving mutual funds:

Many of you despite the fact that age, income, ability to take risk along with financial goals
support you to take risk, you absolutely rule out the concept of power of compounding to your
portfolio. It is noteworthy that if you want to meet and / or elevate your standard of living
going forward, you need to beat the rate of inflation. And thus, role of equity as an asset class
cannot be ignored in ones tax saving portfolio too. While some do consider the tax saving
mutual funds in their tax saving portfolio the ideal composition (depending on your age, income
ability to take risk and financial goals) is not maintained, which leads the tax saving portfolio to
give sub-optimal returns.
It is noteworthy that being risk averse is well appreciated by us. But if your age, income, ability to take
risk and financial goals, permit you to take equity exposure one should not ignore the same.
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4. Not optimizing all options for tax saving:

For many tax planning starts as well as ends with Section 80C - which enunciates investment
instruments for tax saving. But investing only in these investment instruments would not lead
to optimal reduction of your tax liability.
To bring to your notice our Income Tax Act, 1961 also considers humane side of our life and also gives
deduction for contributions you make on such developments. So, in case if you pay your medical
insurance premium, incur expenditure on the medical treatment of a dependant handicapped, donate
to specified funds for specified causes, contribute in monetary form to political parties or electoral trusts,
take a loan for pursuing higher education or if you are an individual suffering from specified diseases,
then all this too can help you effectively plan your tax obligations, thus optimally reducing your tax
liability. Moreover, taking into account the urge to buy your dream home by taking a loan, the Act also
extends tax saving benefits to you.
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III - Your small steps can take you forward by leaps

There is an old Chinese proverb which says, It is better to take many small steps in the right
direction than to make a great leap forward only to stumble backward. which in our opinion
applies even to your tax planning exercise.
Remember, it is vital for you to step-by-step ascertain where you stand, in terms of your Gross
Total Income and Net Taxable Income, so that you effectively undertake your tax planning
exercise which in turn would deliver you the objective of long-term wealth creation along with
capital protection.
In the past if you have taken your tax planning decisions at the last moment, never mind. But,
please learn from them and dont repeat the same mistakes again. Adopt the prudent steps
while doing your tax planning.
Steps to tax planning:

Step 1: Compute the Gross Total Income
The process of tax planning begins with computation of your Gross Total Income (GTI). This step
enables you to ascertain the total income earned by you during a financial year, from various
under-mentioned sources of income, and helps you to judge where you stand.
Income from salary
Income from house property
Profits and gains from business & profession
Capital gains (short term and long term) and
Income from other sources.
Hence, GTI is the total income earned by one before availing any deductions under the Income
Tax Act, 1961. And it is vital to know the same, in order for you to undertake your tax planning
effectively, so that you can plan within the sources of income (by using the relevant provisions
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of the Income Tax Act applicable to the aforementioned sources of income), as well as by
availing deductions to GTI.
Now, one may ask how do I undertake this activity if Im a novice?
Well, the answer is pretty simple! You can either get it done at your company (many
organisation do offer this facility), ask your CA / tax consultant to do it, or use the convenience
of the new and updated tax portals that have emerged in more recent times. But, along with all
this please do not forget to do your self-study to carry out effective tax planning exercise. One
must note that it is vital to know at least those provisions of the Income Tax Act, which directly
have an impact on your finances.
Step 2: Compute the Net Taxable Income
After having done with computation of GTI by using the relevant provisions of the Income Tax
Act for each source of income, the next step is to compute your Net Taxable Income (NTI).
Under NTI from the GTI, the various deductions allowed under the Income Tax Act, should be
accounted for (i.e. subtracted from your GTI), which would thus reduce your taxable income.
These deductions enable you to enjoy reduction in tax liability, as it covers Sections under the
Income Tax Act for:
Investing in tax saving instruments (your most loved and sought after Section 80C, along
with the recently introduced RGESS - Rajiv Gandhi Equity Savings Scheme)
Donations
Expenditure on handicapped dependent
Premium payment for your medical insurance
Interest paid on loan taken for higher education
Rent paid for residential accommodation
Expenditure incurred on a specified diseases suffered by you
Remember, if you use the respective provisions effectively to do tax planning, it will enable you
to achieve the long-term objective of wealth creation.
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Step 3: Calculate the tax payable

After having effectively saved tax in the prudent way mentioned above, the next step is to
compute your tax liability based on the present income tax slabs, and thereafter file your tax
returns.
The income tax rates for Individuals and HUFs for FY 2013-14 are as follows:
Net Taxable Income (in Rs)
Upto Rs 2,00,000 (for general tax payers male and female)
Upto Rs 2,50,000 (for senior citizens)
Upto Rs 5,00,000 (for very senior citizens aged 80 and above)
Rs 2,00,001 to Rs 5,00,000 #
Rs 5,00,001 to Rs 10,00,000
Above Rs 10,00,000
Rate
Nil
10%
20%
30%
A Tax Credit or Special Rebate of Rs 2,000 is allowed for individuals whose Taxable
Income is below Rs 5 lakhs
Source: Finance Act 2013, Personal FN Research)
# For senior citizens (aged above 60 but below 80), with NTI falling between Rs 2,50,001 to Rs
5,00,000 will be taxable @ 10%. For very senior citizens (individuals who have completed 80
years of age), the base exemption limit is extended upto first Rs 5 lakh of their income.
Moreover you would also have to pay an education cess @ 3% on your computed tax liability.
Also note that an additional surcharge @ 10% would be levied if your total income in the
financial year exceeds Rs 1 crore. The levy of this one time surcharge was announced in the
Union Budget in order to generate more tax revenue by increasing the tax liability of the rich.
This one-time surcharge, which is applicable only for the assessment year 2014-2015, will be in
addition to the education cess of 3% that is paid on total income-tax.
While the union Budget 2013 introduced a New Section 87A (which allows a Tax Credit or
Special Rebate of Rs 2,000 to individuals whose NTI is below Rs 5 lakhs), the rebate will be
limited to the extent of your tax liability or Rs 2,000 whichever is less.
So if your tax liability is say Rs 1,500, you will get a tax credit of only Rs 1,500 under section 87A
and no tax will be payable.
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Now let us see how you can compute your income tax liability:
Say if your net taxable income after availing for all deductions available is Rs 12 Lac in the
current financial year, then your tax liability will be computed as under:
Computation of Tax Liability (2013-14)
Taxable Income (in Rs)
12,00,000
Upto 2,00,000
Nil
Rs 2,00,001 to Rs 500,000
10%
30,000
Rs 500,001 to Rs 10,00,000
20%
1,00,000
Rs 10,00,001 & above
30%
60,000
Tax payable (in Rs)
1,90,000
Education Cess
3%
5,700
Total Tax (in Rs)
1,95,700
(Source: Personal FN Research)
Parameters for prudent tax planning:

A Prudent exercise of tax planning also extends to appropriate investment planning, which also
takes into account your ideal asset allocation by considering the under-mentioned factors.
Hence after you have utilised the tax provisions within each head / source of income for
effective reduction in GTI, you must also consider the following parameters as these will enable
you to optimally reduce your tax liability.
Age
Your age and the tenure of your investment play a vital role in your asset allocation. The
younger you are more risk you can take and vice-a-versa. Hence, for prudent tax planning
too, if you are young, you should allocate more towards market-linked tax saving
instruments such as Equity Linked Saving Schemes (ELSS), Unit Linked Insurance Plans
(ULIPs) and National Pension System (NPS), as at a young age the willingness to take risk is
high. One may also consider taking a home loan at a younger age, as the number of years
of repayment is more along with your willingness to take risk being high.
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Also a noteworthy point is the earlier you start with your investments, the greater is the
tenure you get while investing in an investment avenue, which can enable you to make
more aggressive investments and create wealth over the long-term to meet your financial
goals.
Lets understand this much better with the help of an illustration.
An early bird gets a bigger pie
Particulars
Suresh
Mahesh
Present age (years)
25
30
35
Retirement age (years)
60
60
60
Investment tenure (years)
35
30
25
Monthly investment (Rs)
7,000
7,000
7,000
Returns per annum
10%
10%
10%
Sum accumulated (Rs)
2,65,76,466
1,58,23,415
Rajesh
92,87,834

Note: The names and returns mentioned above are an assumption and used for illustration purpose only
The above table reveals that, Suresh starts at age 25, and invests Rs 7,000 per month in an
ELSS scheme through SIPs (Systematic Investment Plans) until retirement (age 60). His
corpus at retirement is approximately Rs 2.65 crore. Mahesh starts at age 30, a mere 5
years after Suresh, and invests the same amount in ELSS scheme (through SIPs) until
retirement (also at age 60). His corpus builds up to approximately Rs 1.58 crore, note the
difference between the 2 corpuses here. And lastly, we have Rajesh, the late bloomer of the
lot. He begins investing at age 35, the same amount monthly in an ELSS Scheme as Suresh
and Mahesh, and invests up to his retirement (also at age 60). His corpus is, in comparison,
a meagre Rs 92 lakh.
The following graph clearly indicates the gap between accumulated corpuses for similar level of
investment per month.
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For some of you young people, pursuing higher education may be a priority. But there may
be a case you do not have enough corpus (funds) garnered by you. However, you need not
worry, as there are several banks willing to offer higher education loan; and if you avail the
same, the interest paid by you on such loan taken will be eligible for tax benefit (under
section 80E of the Income Tax Act which is discussed ahead in this guide).
Income
Similarly, if your income is high, your willingness to take risk is high. This thus can work in
your favour, as you have sufficient annual GTI which allows you to park more money
towards market-linked tax saving investment instruments, for generating higher returns and
creating a good corpus for your financial goal(s). Also, on account of the higher GTI your
eligibility to take a home loan also increases, which can also help you to optimally reduce
your tax liability.
Yes, one may say if I have a high income, then why I need a home loan. I can straight away
go ahead and buy!
Sure, you can do so but, the Income Tax Act provides you the tax benefit for repayment of
principal amount along with the interest of loan taken, which you will miss.
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Also given that you are financially strong, you can also consider donating some of your
money towards a noble cause, as doing so will make you eligible for a tax benefit (under
section 80G of the Income Tax Act which is discussed ahead in this guide).
Similarly, if your income is not high enough (i.e. it is low), and you do not want to put your
money to risk; you can invest in tax saving instruments which provide you assured returns.
These instruments can be Public Provident Fund (PPF), National Savings Certificates (NSCs),
5 Yr Bank Fixed Deposits, 5 Yr Post Office Time Deposits and Senior Citizen Savings Scheme
(provided you are a senior citizen).
Financial goals
The financial goals which one sets in life, also influences the tax planning exercise. So, say
for example your goal is retiring from work 5 years from now, then your tax saving
investment portfolio will be also less skewed towards market-linked tax saving instruments,
as you are quite near to your goal and your regular income will stop.
Likewise if you are many years away from the financial goal, you should ideally allocate
maximum allocation to market linked tax saving instruments and less towards those tax
saving instruments which provide you low assured returns.
Risk Appetite
Your willingness to take risk which is a function of your age, income, expenses, nearness to
goal, will be an important determinant while doing your tax planning exercise. So, if your
willingness to take risk is high (aggressive), you can skew your tax saving investment
portfolio more towards the market-linked instruments. Similarly, if your willingness to take
risk is relatively low (conservative), your tax saving investment portfolio can be skewed
towards instruments which offer you assured returns, and if you are a moderate risk taker
you can take a mix of 60:40 into market-linked tax saving instruments and assured return
tax saving instruments respectively.
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Yes, we reckon the fact that prudent tax planning exercise can be time consuming and
complex. But please note the fact that its an annual activity which every tax payer has to
go through and if you start early and plan properly, the task becomes easier.
Remember, delay will only ensure that you invest at the last moment but not in line with
the parameters discussed above. If you are hard pressed for time, consider hiring a
competent tax consultant along with an investment advisor.
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IV - Optimal tax planning with section 80C

Section 80C of the Income Tax Act enables you to effectively invest in tax saving instruments, in
order to optimally reduce your tax liability; and this is seen as one of the most sought after
sections when it comes to tax planning. It offers a host of popular investment instruments
mentioned below which qualify you for a deduction from your Gross Total Income (GTI):
Life Insurance Premium
Public Provident Fund (PPF)
Employees Provident Fund (EPF)
National Saving Certificate (NSC) , including accrued interest
5-Year fixed deposits with banks and Post Office
Senior Citizens Savings Scheme (SCSS)
National Pension System (NPS)
Unit-Linked Insurance Plans (ULIPs)
Equity Linked Savings Schemes (ELSS)
Tuition fees paid for childrens education (maximum 2 children)
Principal repayment on Housing Loan
Hence, if you invest in any or all of the aforementioned instruments; you would qualify for
deduction under this section subject to the maximum of Rs 1,00,000 p.a. But we think rather
than just merely investing in any of the above tax saving instruments, you can also use these tax
saving instruments for prudent tax planning by recognising your age, income, financial goals
and risk appetite.
Now you may ask how?
Well, its simple! In the aforementioned list you can classify the tax saving instruments into
those offering variable returns (i.e. market-linked instruments) and those offering fixed returns
(i.e. assured return instruments). By doing so you would be able to ascertain which suits you
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best (taking into account the factors mentioned above) and would extend your tax planning
exercise to investment planning too.
Lets discuss in detail the classification into market-linked tax saving instruments and assured
return tax saving instruments.
Tax Planning with market-linked instrument:

If you are young, income is high, and therefore willingness to take risk is high along with your
financial goals being far away, then this category would be suitable for you. Under this category
you can invest in the capital markets, giving you variable returns. Following tax saving
instruments are available for investment.
1.
Equity Linked Savings Schemes (ELSS):
These are mutual fund schemes, which are 100% diversified equity funds providing tax saving
benefits. And these are popularly known as Tax Saving Mutual Funds. A distinguishing feature
about them is that they are subject to a compulsory lock-in period of three years, but the
minimum application amount in most of them is as little as Rs 500, with no upper limit. You can
either make lump sum investments or investments through the Systematic Investment Plan
(SIP).
It is noteworthy that, in the long-term if you intend to create wealth by hedging the inflation
risk, then this tax saving instrument can give you luring returns.
Yes, you may say but there is risk involved. Well, no doubt about that, but in order to even
out the shocks of volatility in the equity markets you can adopt the SIP route of investing here
which will provide you the advantage of compounding along with rupee-cost averaging.
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SIPs provide cushion against market volatility
(Source: ACE MF, Personal FN Research)
Get wealthy Sip by Sip
(Source:ACE MF, Personal FN Research)
While SIPs in ELSS can help you tackle volatility and may help you gradually create wealth in the
long run, a noteworthy point in SIP investing in ELSS is that your every SIP installment (which
can be monthly, quarterly or half yearly) should complete the minimum lock-in period of 3
years.
Deduction: The maximum tax benefit which you can enjoy under section 80C is Rs 1,00,000 p.a.
Moreover, if you make any long term gains at the time of exit, any time after the end of the
lock-in period; then you would not have to pay any Long Term Capital Gains Tax (LTCG) too.
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2.
Unit-Linked Insurance Plans (ULIPs):
These are typically insurance-cum-investment plans which enable you to invest in equity and /
or debt instruments depending on what suits you as per your age, income, risk profile and
financial goals. All you simply need to do is, select the allocation option as provided by the
insurance company offering such a plan. Generally they are classified as aggressive (which
invests in equity), moderate or balanced (which invests in debt as well as equity) and
conservative (which invests purely in debt instruments).
Hence apart from the insurance cover (which is 10 times your annual premium) offered under
these plans, the returns which you would get would be completely market-linked as your
premium amount (after accounting for allocation and other charges) is invested in equity and
debt securities.
And in order for you to track such plans the NAV is declared on a regular basis. These policies
have a minimum 5 year lock-in period, and also have a minimum premium paying term of 5
years. The overall term of the policy would vary from product to product.
In case of any eventuality the beneficiaries would be paid the sum assured or fund value,
whichever is higher.
But a noteworthy point is, while some well selected ULIPs may add value to your portfolio in the
long-term; your insurance and investment needs should be dealt separately, thus enabling you
to have the optimum insurance coverage and the right investment instruments for long-term
wealth creation.
Deduction: The premium which you pay for your ULIP would be eligible for tax benefit, subject
to the maximum eligible amount of Rs 1,00,000 p.a. as available under Section 80C. Moreover,
a positive point is that at maturity the amount which you or your beneficiary would receive is
tax free (exempt) as per the provisions of Section 10(10D) of the Income Tax Act.
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3. National Pension System (NPS):
National Pension System which was earlier available only for Government employees was later
on May 1, 2009 also introduced for people in the unorganised (private) sector, as need for
deeper participation in the pension contribution (through this product) was felt.
For NPS, if you (eligibility age: from 18 years to 60 years) belong to the unorganised sector (i.e.
private sector); the contributions done by you towards the scheme would be voluntary, and
you can invest in any of the two under-mentioned accounts:
Tier-I Account:
In this account your minimum investment amount is Rs 500 per contribution and Rs 6,000
per year, and you are required to make minimum 4 contributions per year. Under this
account, premature withdrawals upto a maximum of 20% of the total investment is not
permitted before attainment of 60 years, however the balance 80% of the pension wealth
has to be utilised by you to buy a life annuity.
Tier-II Account:
For opening this account you will have to make a minimum contribution of Rs 1,000 per
annum. The minimum number of contributions is 4, subject to a minimum contribution of
Rs 250. However, if you open an account in the last quarter of the financial year, you will
have to contribute only once in that financial year. You will be required to maintain a
minimum balance of Rs 2,000 at the end of the financial year. In case you dont maintain
the minimum balance in this account and do not comply with the number of contributions
in a year, a penalty of Rs 100 will be levied. Moreover, in order to have Tier-II account, you
first need to have a Tier-I account. Tier-II account is a voluntary account and withdrawals
will be permitted under this account, without any limits.
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Even if you hold both the above accounts under NPS, only the Tier-I account will be eligible for
tax benefits.
While investing money in NPS, you have two investment choices i.e. Active or Auto choice.
Under the Active choice asset class, your money will be invested in various asset classes viz. E
(Equity), C (Credit risk bearing fixed income instruments other than Government Securities) and
G (Central Government and State Government bonds); where you will have an option to decide
your asset allocation into these asset classes. In case of Auto Choice, your money will be
invested in the aforesaid asset classes in accordance with predetermined asset allocation.
But remember, the return on your investment is not guaranteed as it is market-linked. At your
age of 60 years, you can exit the scheme; but you are required to invest a minimum 40% of the
fund value to purchase a life annuity. And the remaining 60% of the money can be withdrawn in
lump sum or in a phased manner upto your age of 70 years.
In our opinion this product is not very appealing for creating a substantial corpus to meet your
retirement need. Rather, if you chalk-out a prudent financial plan with the help of a financial
planner, and invest wisely as per the plan laid out (which would mostly recommend you equity
allocation at younger age, and then as your age progresses balance the asset allocation
between equity and debt instruments), then the corpus which you would be able to create will
be substantial enough to meet your retirements needs. Also the money withdrawn under this
scheme, even at the age of 60 is taxable.
Deduction: Those who are salaried employees may claim deduction under section 80C upto Rs
1 lac for their own contributions towards NPS account. In addition to this, they are entitled to
claim deductions under section 80 CCD if there is any contribution made by their employer but
only upto 10% of their salary (for this purpose salary construes as Basic Salary plus Dearness
Allowance). It is noteworthy that the deduction under section 80CCD can be claimed over and
above the permissible deductions under section 80C.
So if an Individual contributes alone from his income towards NPS, it will be considered within
the limits of 1 Lakh p.a. under sec 80C.
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It is only if the Employer contributes to employee for NPS sec 80 CCD is applicable.
So to avail this extra tax exemption limit, the employees need to convince their employers to
start contributing to NPS.
However, those who are self-employed can avail deduction under section 80CCD upto 10% of
their gross total income (which is comprised of income computed under different heads before
reducing it by all other deductions available under section 80). In addition to deductions under
section 80CCD, self-employed people are also entitled to deductions under section 80C for
other instruments eligible therein.
Tax Planning the assured return way:

Unlike the case presented above (i.e. tax planning with market-linked instruments), if your age,
income, risk profile and financial goals do not permit you to invest in market-linked instruments
(for your tax planning) along with the fact that your risk taking ability is low; then you should
plan investing in tax saving instruments which offer you assured returns. Under these
instruments there is zero risk of erosion to your capital. Following are the tax saving
instruments available under this category:
1. Non-Unit Linked Life Insurance Plans:
Life Insurance plans can be broadly classified as pure term life insurance plans and
investment-cum-life insurance plans.
Pure term life insurance plans are authentic in nature, as they cater to the need of only
protection and not investment. Hence such plans offer a high life insurance coverage at low
premiums. Generally the term insurance plans offer a policy term of 10, 15, 20, 25 or 30 years.
Investment-cum-life insurance plans on the other hand, as the name suggest offer you an
investment option along with insurance option. But here your insurance coverage is far lesser,
than the one provided under pure term insurance plans. So, you pay a high premium which gets
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invested, but insurance coverage on the other hand is meagre. Such insurance plans can be
offered in various forms such as ULIPs (as discussed above), endowment plans, money back
plan, pension plans etc.
We think that while you are considering your insurance needs, you should ideally look at only
pure term life insurance plans, thus keeping your insurance needs separate from investment
needs.
Deduction: Over here too the premium which you pay for your such non-ULIP life insurance
plans would be eligible for tax benefit, subject to the maximum eligible amount of Rs 1,00,000
p.a. as available under Section 80C. Moreover, a positive point is that at maturity the amount
which you or your beneficiary would receive is exempt (tax free) as per the provisions of
Section 10(10D) of the Income Tax Act.
2.
Public Provident Fund (PPF):
The PPF scheme is a statutory scheme of the Central Government of India.

In order to invest in PPF, you are required to open a PPF account (which is irrespective of your
age) at your nearest post office or public sector (nationalized) bank providing this facility. You
can open the account in your name, and also in the name of your wife as well as children. If you
do not wish to open a separate account in the name of your wife as well as children, you can
nominate them; but joint application is not permissible.
The account so opened will have an expiry term of 15 years from the end of the year in which
the initial investment (subscription) to the account is made. You can invest in the account
ranging from a minimum of Rs 500 to a maximum of Rs 100,000 in a financial year in order to
enjoy the tax saving benefit under Section 80C, and the amount to the credit of your account
will be entitled to a tax-free interest at 8.8% p.a. Your each deposit in the PPF account should at
least be Rs 500, and one has the convenience of depositing in either lump sum or in
installments not exceeding 12 such installments. However, a noteworthy point is that it is not
necessary to deposit every month and the amount too can be any amount subject to the
minimum (Rs 500) and maximum (Rs 1,00,000) amount.
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The interest to the account will be calculated on the lowest balance to the credit of the account
between the close of the 5th day and the end of the month, and will be credited to account on
31st of March, each year.
As regards withdrawal from the account is concerned; it is permitted any time after the expiry
of 5 years from the end of the year in which initial investment (subscription) to the account is
made. However, your withdrawal will be restricted to 50% of the amount which stood to the
credit of your account in the immediate 4th year immediately preceding the year of withdrawal
or at the end of the preceding year, whichever is lower. And in case if your term of 15 year is
over, you can withdraw the entire amount together with the interest accrued till the last day of
the month, preceding the month in which application for withdrawal is made.
After your term of 15 years is over if you wish to renew your account, you can do so for a
period of another 5 years at the rate of interest prevailing then, without having the compulsion
of putting any further deposits in case of extension. The withdrawal in case of extended
accounts is permissible once in every financial year. But the total withdrawal should not exceed
60% of the balance accumulated to the account at the commencement of the extension period
(of 5 years).
It is noteworthy that if you are risk averse, then this product is best in its class for tax planning.
Moreover, it also offers you an appealing tax-free return of around 8% p.a. (compounded
annually).
Deduction: The contributions which you make to the accounts mentioned above, would be
eligible for tax benefit but subject to the maximum eligible amount of Rs 1,00,000 p.a. as
available under Section 80C.
3. National Savings Certificate (NSC):
The NSC is also a scheme floated by the Government of India, and one can invest in the same
through your nearest post offices, as the scheme is available only with the India Post. The
certificates can be made in your own name, jointly by two adults, or even by a minor (through
the guardian), and has a tenure of 5 years or 10 years.
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The minimum amount which you can invest is Rs 100, with no maximum limit to the same. NSC
maturing in 5 years offers interest @ 8.5% p.a. compounded half-yearly whereas NSC maturing
in 10 years offers interest @ 8.8% p.a. compounded half-yearly, thus giving you an effective
interest rate of 8.68% p.a. and 8.99% p.a. The interest income accrues annually and is
reinvested further in the scheme till maturity (i.e. 5 or 10 years) or until the date of premature
withdrawals.
Premature withdrawals are permitted only in specific circumstances such as death of the
holder.
Deduction: Your investment in NSC is eligible for a deduction of upto Rs 1,00,000 p.a. under
Section 80C. Furthermore, the accrued interest which is deemed to be reinvested qualifies for
deduction under Section 80C. However, the interest income is chargeable to tax in the year in
which it accrues. But in case if you have no other income apart from interest income, then in
order to avoid Tax Deduction at Source (TDS), you can submit a declaration in Form 15-H (for
general) or Form 15-G (for senior citizens) as applicable.
4. Bank Deposits and Post Office Time Deposits:
The 5-Yr tax saving bank fixed deposits available with your bank is also eligible for a deduction
under Section 80C and comes with a lock in period of 5 years. The minimum amount that you
can invest is Rs 100 with an upper limit of Rs 1,00,000 in a financial year. The interest rates
offered by some of the popular banks are as follows:
Interest Rate(s) (%)
Bank Name
General
Senior Citizens
Axis Bank Ltd.
9.00
9.75
HDFC Bank Ltd.
8.75
9.25
ICICI Bank Ltd.
8.75
9.50
IDBI Bank Ltd.
9.00
9.50
State Bank of India
9.00
9.25
Rates as available on October 23, 2013

(Source: Respective banks website, Personal FN Research)
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However, the interest earned here would be subject to tax deduction at source, making it
detrimental for your tax planning, but again you can submit a declaration in Form 15-H (for
general) or Form 15-G (for senior citizens) as applicable for not deducting tax at source.
Similarly 5 Yr Post Office Time Deposits (POTDs) also offer you a tax benefit under Section 80C.
The account can be opened by you either in single name or jointly or even by a minor (through
a guardian) who has attained the age of 10.
The minimum investment amount is Rs 200, and there isnt any upper limit. However, the
investment amount over Rs 1,00,000 will not be eligible for any tax benefit.
A 5-Yr POTD earns a return of 8.4% p.a. (compounded quarterly), but paid annually. Hence, say
if you deposit an amount of Rs 10,000, the interest income which you will fetch would
approximately be Rs 867 p.a. As regards premature withdrawals are concerned, they are
permitted only after 1 year from the date of deposit and interest on such deposits shall be
calculated at the rate, which shall be 1% less than the rate specified for a period of 5-Year
deposit.
Deduction: Your investment in both these schemes are eligible for a deduction of upto Rs
1,00,000 p.a. under Section 80C. But as mentioned above, the interest earned on your
investments will be subject to tax deduction at source. However, in case if you have no other
income apart from interest income, then in order to avoid Tax Deduction at Source (TDS), you
can submit a declaration in Form 15-H (for general) or Form 15-G (for senior citizens) as
applicable.
5. Senior Citizens Savings Scheme (SCSS):
Well, the SCSS is an effort made by the Government of India for the empowerment and
financial security of senior citizens. So, in case if you are over 60 years old, you are eligible to
invest in this scheme. Moreover, if you have attained 55 years of age and have retired under a
voluntary retirement scheme; then too you are eligible to enjoy the benefits of this scheme.
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In order to avail the benefits of this scheme, you are required to open a SCSS account (either in
a single name, or jointly along with your spouse) at your nearest post office or any nationalised
bank. You can do a onetime deposit under this scheme subject to the minimum investment
amount of Rs 1,000 and a maximum of Rs 15,00,000. The maturity period provided for this
scheme is 5 years offering a rate of interest of 9.20% p.a. payable on a quarterly basis (i.e. on
March 31, June 30, September 30 and December 31) every year from the date of deposit.
Premature withdrawals are permitted only after one year from the date of opening the
account. If you withdraw between 1 and 2 years, 1.5% of the initial amount invested will be
deducted. And in case if you withdraw after 2 years, 1.0% of the balance amount is deducted.
Deduction: Your investments upto Rs 1,00,000 in SCSS are entitled for a deduction under
Section 80C. However, the interest earned by you would be subject to tax deduction at source.
But in case if you have no other income apart from interest income, then in order to avoid Tax
Deduction at Source (TDS), you can submit a declaration in Form 15-H (for general) or Form 15G (for senior citizens) as applicable.
Options Galore - Snapshot of section 80C
Schemes
Type
Interest Rate
Term
Min Max Investment
Tax planning with market-linked instruments

Term: Ongoing
Market-Linked Returns
Rs 500 - No upper Limit
Lock-in-period: 3 years
Premature
Withdrawal
Section No.
No
80C
Tax Saving Funds/ ELSS
Growth
Unit Linked Insurance Plans

(ULIPs)
Growth
Term: 10 - 20 years;
Lock-in-period: 5 years
Premium varies from scheme to

scheme
Yes
80C & 10(10D)
National Pension System
Growth
30-35 years
Rs 6,000
Yes
80C
Recurring
8.8% p.a.
Rs 500 - Rs 100,000
Yes
80C
National Savings Certificate

5 Yr
Deposit
8.5% (compounded
half-yearly)
5 years
No
80C
National Savings Certificate

10 Yr
Deposit
8.8% (compounded
half-yearly)
10 years
No
80C
Bank Deposits
Fixed
Deposit
8.25% to 9.75% p.a.
5 years
No upper Limit
No
80C
Post Office Time Deposit
Fixed
Deposit
5-YR: 8.4%;
(compounded
quarterly & paid
annually
5 years
Yes
80C
Senior Citizens Savings

Schemes
Deposit
9.20% p.a. (payable

quarterly)
5 years
Rs 1,000 - Rs 15,00,000
Yes
80C
Sum Assured Only

(i.e. Insurance Cover)
5-40 years
Premium depends upon the

insurance cover
Varies from
policy to policy
80C & 10(10D)
Public Provident Fund
Non-ULIP Insurance Plans
Tax planning the "assured return" way

15 years
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6. Tuition fees paid for childrens education (maximum 2 children):
The tuition fees that you pay to any university, college, school or other educational institution
situated within India for your childrens education is also eligible for deduction under section
80C. However the fees paid towards any coaching center or private tuition may not be eligible.
Also you need to note that this deduction is available only to Individual Assesse and not for
HUF, and is limited to Rs. 1,00,000 and a maximum 2 children. If someone has four children,
then husband and wife both can enjoy a separate limit of two children each, so they can
separately claim deduction (upto Rs 1,00,000) for 2 children each, subject to the amount they
have actually paid.
7. Principal repayment on Housing Loan:
You always wanted to have your dream home and now you have been able to get it with the
help of housing loan from a bank or a financial institution. But after you have got your home
through this loan, you have the obligation to repay the principal amount of the loan on time.
The repayment of principal amount, makes you eligible to claim a deduction upto a sum of Rs
1,00,000 under section 80C; and that benefit is available with you immaterial of the fact
whether you stay in the same property (Self Occupied Property - SOP), or have let it out on rent
(Let Out Property LOP). You can also claim tax benefit on the interest you pay on your housing
loan, but under a separate section (Section 24 which is covered in detail at the later stage in the
guide)
In case you have taken a second home loan for another property, then the principal amount
repaid (up to Rs 1 lakh) for the home loan taken only on your self-occupied property qualifies
for deduction under Section 80C. However you cannot claim deduction for the principal
repayment made against the home loan on the other property.
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V - Thinking beyond Section 80C

Well, most people think that tax planning ends with Section 80C; but please note that theres
more to tax planning than just investment instruments specified under Section 80C. Our Income
Tax Act, 1961 also considers the humane side of our life and also gives deduction for such
expenditure. So, in case if you pay your medical insurance premium, incur expenditure on the
medical treatment of a dependant handicapped, donate to specified funds for specified
causes, contribute in monetary form to political parties or electoral trusts, take a loan for
pursuing higher education or if you are an individual suffering from specified diseases, then
all this too can help you effectively plan your tax obligations, thus optimally reducing your tax
liability.
So, lets understand how each of the above expenses for a cause or an investment, can help you
in effective tax planning. Herein below is the list of some major ones.
1.
Premium paid for medical insurance (Section 80D):
The premium paid by you on medical insurance policy (commonly referred to as a mediclaim
policy) to cover your spouse and you, dependent children and parents against any unexpected
medical expenses, qualifies for a deduction under Section 80D.
The maximum amount allowed annually as a deduction (from your GTI) is Rs 15,000, in case if
you pay for yourself, spouse and dependent children. And if you are a senior citizen, the
maximum deduction gets extended to Rs 20,000.
Further, if you pay medical insurance premium for your parents (irrespective of whether they
are dependent on you or not), you can claim an additional deduction of upto Rs 20,000 in case
parents are senior citizens or Rs 15,000 in other cases under this section. So, for example, if you
pay a premium of Rs 15,000 for yourself and Rs 17,000 for your parents, you will be eligible for
a total deduction of Rs 30,000 only, assuming your parents are not senior citizens.
However, while paying the premium you need to ensure that the payment is made in any mode
other than cash.
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2.
Maintenance including medical treatment of a handicapped dependent (Section 80DD):
If you have incurred any expenditure in the form medical treatment (including nursing), training
and rehabilitation for a handicapped dependent suffering from disability, then the
expenditure so incurred by you qualifies for deduction under Section 80DD of the Income Tax
Act. Similarly, if you have deposited a sum of money under any scheme framed in this behalf by
LIC (Life Insurance Corporation of India) or any other insurer or administrator or a specified
company (approved by the Board), for maintenance of the dependent being a person with
disability; also qualifies for a deduction under Section 80DD.
The quantum of deduction here depends upon the severity of the disability suffered by the
dependent. Hence, if the dependent is suffering from 40% of any disability [Specified under
section 2(i) of the Person with Disability (Equal Opportunities, Protection of Rights and Full
Participation) Act, 1955], then you would be entitle to a deduction of a fixed sum of Rs 50,000
p.a. from your GTI irrespective of the expenditure incurred or amount deposited. Similarly, if
the dependent is suffering from severe disability (i.e. 80% of any disability), then you claim a
higher deduction of fixed sum of Rs 100,000, from your GTI irrespective of the expenditure
incurred or amount deposited.
It is noteworthy that over here the term dependent being a person with disability means your
spouse, children, parents, brothers and sisters.
Moreover, in order to claim the deduction you need to submit a medical certificate issued by a
medical authority along with your return of income. Also if you are claiming a deduction in your
tax returns for such an expenditure incurred or amount deposited, your dependent cannot
claim a deduction under Section 80U in case hes (handicapped dependent) filing his tax returns
separately.
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3.
Expenditure incurred on your medical treatment (Section 80DDB):
If you have incurred expenditure on your medical treatment or for your dependents, then too
the expenditure so incurred, makes you eligible for deduction under Section 80DDB of the
Income Tax Act.
The deduction from your GTI, which you are entitled to, is Rs 40,000 or the amount actually
paid, whichever is lower. And if you are a senior citizen, then you are eligible for a deduction of
Rs 60,000 or the amount actually paid, whichever is lower.
It is noteworthy that over here the term dependent means your wholly or mainly dependent
spouse, children, parents, brothers and sisters. Also, in order to claim a deduction under this
section, you are required to submit a medical certificate from a doctor (neurologist, oncologist,
urologist, haematologist, immunologist, or any other specialist) working in a Government
hospital.
4.
Repayment of loan taken for pursuing higher education (Section 80E):
While pursuing a personal goal of enrolling for higher education in order to be competitive
enough to meet your financial goals; the Income Tax Act offers you deduction (from your GTI),
when you take a loan to fulfil such dreams.
Sure, you can also take an education loan for your wifes or childrens education or for any
person (minor) for whom you are the legal guardian. But that makes you eligible for deduction
under Section 80E of the Income Tax Act, to the extent of the interest paid on such a loan
taken.
The deduction is available for a maximum of 8 years or till the interest is paid, whichever is
earlier. So, to simplify it further, the deduction is available from the year in which you start
paying the interest on the loan, and the seven immediately succeeding financial years or until
the interest is paid in full, whichever is earlier.
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It is noteworthy that, here the term higher education means full-time studies for any
graduate or post-graduate course in engineering (including technology / architecture) ,
medicine, management or for post-graduate courses in applied science or pure science
including mathematics and statistics. But from the Finance Act of 2011 its scope is extended to
cover all fields of studies (including vocational studies) pursued after passing the Senior
Secondary Examination or its equivalent from any school, board or university recognised by the
Central or the State Government or local authority or any other authority authorised by the
Central or the State Government or local authority to do so. However, no deduction is available
for part-time courses
5.
Donations to certain funds and charitable institutions (Section 80G):
As mentioned earlier that our Income Tax Act considers the humane side of our life, and so if on
humanitarian grounds you donate to certain specified funds, charitable institutions, approved
educational institutions etc, the donation amount qualifies for deduction under this section.
The deductions allowed can be 50% or 100% of the donation, subject to the stated limits as
provided under this section. For example, donations to National Defence Fund set up by the
Central Government are allowed 100% deduction, while for Prime Minister Drought Relief
Fund are allowed at 50%. If you make donations to any of the host of notified funds and / or
charitable institutions, you are eligible for deduction under Section 80G.
Funds / Charitable Institutions
Amount Deductible
National Defence Fund
100%
Prime Ministers National Relief Fund
100%
Prime Ministers Armenia Earthquake Relief Fund
100%
Africa (Public Contributions India) Fund
100%
National Foundation for Communal Harmony
100%
Any approved university or educational institution
100%
Maharashtra Chief Ministers Relief Fund and Chief Ministers Earthquake Relief Fund
100%
Any fund set up by Gujarat State Government for providing relief to earthquake victims
100%
National Childrens Fund
100%
Jawaharlal Nehru Memorial Fund
50%
Prime Ministers Drought Relief Fund
50%
Indira Gandhi Memorial Trust
50%
Rajiv Gandhi Foundation
50%
Note: There are also other funds and charitable institutions that are eligible for deduction under Section 80G.
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While there are 3.3 million registered NGOs and scores of causes, selecting a genuine charity is
a challenge. HelpYourNGO has set up an initiative which can help you make an informed
donation decision. The organisation promotes philanthropy through transparency, by providing
easy access to financials of over 240 NGOs and allows comparison of data and ratios across
multiple parameters.
Visit www.HelpYourNGO.com to Evaluate and then Donate to the right cause.

In order to claim deduction under this section, you are required to attach a proof of payment
along with your return of income.
6.
Rent paid in respect to property occupied for residential use (Section 80GG):
If you are a self-employed or a salaried individual who is not in receipt of any House Rent
Allowance (HRA), and is paying a rent for an accommodation (irrespective of whether furnished
or unfurnished) occupied for residential use, then you can claim a deduction under this section.
But as a pre-condition for availing deduction under this section,
-
You must pay rent for the house you live in, and should not get HRA for even a part of
the year
You should not own and occupy any other house anywhere
You or your spouse or your minor child or Hindu Undivided Family (if you are part of
one) must not own any residential accommodation in the city you reside or work in.
And the deduction which will be available to you under this section is the least of:
25% of your total income or,
Rs 2,000 per month or,
Rent paid in excess of 10% of your total income
To claim deduction under section 80GG, you need to file a declaration in Form No. 10BA
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7.
Contributions made to any political parties or electoral trust (Section 80GGC):
Say, if you have some nepotism for any political party or electoral trust as you appreciate the
work done by them; and therefore decide to make a monetary contribution to the party or
electoral trust, then the amount so contributed would be eligible for a deduction under this
section.
8.
Specified disability(s) (Section 80U):
As said earlier, that our Income Tax Act, 1961 considers the humane side of life; so if you as an
individual resident in India is suffering from any specified disability i.e. you suffering 40% or
more than 40% of any of the below specified diseases, then you would be eligible for deduction
under this section.
Specified disabilities:
Blindness
Low vision
Leprosy-cured
Hearing impairment
Locomotor disability
Mental retardation
Mental illness
The deduction available under this section is flat (i.e. fixed) Rs 50,000, immaterial of the
expenditure incurred. But if the disability is severe in nature (i.e. 80% or above), then one is
entitled to flat (i.e. fixed) deduction of Rs 1,00,000.
However in order to avail of the deduction, you need to be an individual resident in India during
the financial year for which you are claiming the deduction. Also you need to file the copy of
certificates issued by the medical authority, at the time of filing returns.
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9.
Rajiv Gandhi Equity Savings Scheme (RGESS):
The Finance Act 2012 introduced a new section 80CCG on Deduction in respect of investment
made under an equity savings scheme to give 50% tax break to new investors who can invest
up to Rs. 50,000 and whose gross total annual income is less than or equal to Rs. 10 lakhs. Later
in the union budget 2013-14, the limit was increased to Rs 12 lakh. Since the scheme was
introduced for novice investors only i.e. for those who are entering the market for the first
time, the benefit u/s 80CCG was to be claimed only in the first year. However, in the budget
2013-14, it was extended to first-three successive years.
The objective of the scheme is to encourage flow of savings in the financial instruments and
improve the depth of the domestic capital market. In order to device safety measures for new
investors investing in direct equity through the RGESS, the stocks of Maharatna, Navaratna and
Miniratna, besides the top 100 stocks (BSE 100 or CNX 100) listed on the stock exchanges are
considered under RGESS. The argument for proposing investments only from the large caps and
PSU domain is, not only to provide security but also to ensure liquidity.
The first time investors can take benefit of RGESS, by investing in eligible stocks, RGESS eligible
close-ended Mutual Fund schemes and RGESS eligible Exchange Traded Funds. To make it
convenient to identify the eligible stocks and mutual funds, the stock exchanges shall furnish
list of RGESS eligible stocks / ETFs / MF schemes on their website. Further, the list shall also be
forwarded to the depositories at monthly intervals and whenever there is any change in the
said list. For this purpose, mutual fund houses shall communicate the list of RGESS eligible MF
schemes / ETFs to the stock exchanges.
The money invested under RGESS is subject to an overall lock-in period of 3 years, though one
can sell / pledge / hypothecate their securities after the expiry of the mandatory lock-in period
of 1 year, but he cannot withdraw the money before 3 years. i.e. Investors may be allowed to
churn their portfolio after completion of fixed lock in period of 1 year, but his account will be
converted into an ordinary demat account only on completion of 3 years.
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Options Galore - Snapshot of deduction under other 80s
Section
37
Quick Description of Deduction
Limit
80D
Premium paid for medical insurance
Maximum upto Rs 15,000 or Rs 20,000 in case of

senior citizen. Additional deduction of upto Rs 20,000
is available on premium paid for parents. The
maximum amount of exemption that can be availed
by an individual is Rs 40,000
80DD
Maintenance including medical treatment of a

handicapped dependent who is a person with disability
Rs 50,000, irrespective of the amount incurred or

deposited. However in case of disability of more than
80% a higher deduction of flat Rs 1,00,000 shall be
allowed.
80DDB
Expenditure incurred in respect of medical treatment
Actual incurred, with a ceiling of up to Rs 40,000 or Rs

60,000 in case of senior citizen, whichever is lower
80E
Repayment of loan taken for pursuing higher education
Maximum deduction for interest paid for a maximum

of 8 years or till such interest is paid, whichever is
earlier
80G
Donations to certain funds and charitable institutions
Maximum deductions allowed can be 50% or 100% of

the donation, subject to the stated limits as provided
under this section
80GG
Rent paid in respect of property occupied for residential

use
Maximum deduction allowed is least of the following:

Rs 2,000 per month; 25% of total income; Excess of
rent paid over 10% of total income
80GGC
Contribution made to any political parties or electoral

trust
Amount donated to political party is fully exempt
80U
Person suffering from specified disability(s)
Rs 50,000, irrespective of the amount incurred or

deposited. However in case of disability of more than
80% a higher deduction of flat Rs 100,000 is allowed.
80CCG
Rajiv Gandhi Equity Savings Scheme (RGESS)
Maximum deduction allowed is 50% of investment

upto Rs 50,000, only for first time investors having
total income of less than or equal to Rs 12 Lakhs.
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VI - Your home loan and tax planning

While all of us have a dream of buying a dream home or constructing or reconstructing or
repairing our homes, its also important to consider the tax angle when we decide to do any of
these activities. For some of us, the amount of wealth we have created allows buying or
constructing or reconstructing or repairing or renewing homes from our own funds - i.e.
without opting for a home loan; but again doing so precludes you to avail of the tax benefit,
which are attached if one takes a home loan for such activities.
But again just to reiterate please dont rule out the financial planning aspect of number of years
left with you for repayment of your home loan.
Yes, our Income Tax Act, 1961 too considers our desire to buy or construct or reconstruct or
repair or renew our dream home and gets a little benevolent, if one avails of a loan to fulfill
these desires for ones dream home. The Act encourages you to buy, to do the aforementioned
activities (for your home) with a loan, as it provides you with tax benefits (that come along with
it). Both, repayment of principal amount and payment of interest are eligible for tax
benefit.
As we know that the repayment of principal amount, makes you eligible to claim a deduction
upto a sum of Rs 1,00,000 under section 80C; and that benefit is available with you immaterial
of the fact whether you stay in the same property (Self Occupied Property - SOP), or have let it
out on rent (Let Out Property LOP).
As far as the payment of interest amount (for the loan amount availed) is concerned, its
available for deduction under section 24(b). So, if you buy or acquire a house and decide to stay
in the same (SOP) then the maximum sum of Rs 1,50,000 p.a. can be availed by you as a
deduction for interest. However, if you have let out the property on rent (LOP), then the actual
interest payable is eligible for deduction, thus not being subject to any maximum limit. This
applies even in the case where you have two home loans for two different properties, where
one is self-occupied and the other is let out on rent.
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Similarly, if you have taken a loan for the purpose of reconstructing, repairing or renewing the
property, the amount of deduction under section 24(b) which youll be eligible for will be
restricted to Rs 30,000, irrespective whether you want to stay in it or let it out on rent.
Lets understand with an example how home loan taken for buying your dream home to stay
in it (SOP) can reduce the total tax payable by you.
Lets assume you earn Rs 6,50,000 p.a. by way of salary and have taken a home loan of Rs
40,00,000 for buying your dream home and you have decided to stay in it. The home loan is for
a tenure of 20 years and the rate of interest is 9.0% p.a., the Equated Monthly Installments
(EMI) you need to pay is Rs 35,989.
Tax savings on account of home loan
Gross Annual Salary (Rs)
Loan Amount (Rs)
650,000
4,000,000
Tenure (yrs)
20
Rate of Interest p.a.( % )
9.0
EMI (Rs)
35,989
Annual Interest Paid (Rs)
356,960
Principal paid in the 1st year (Rs)
74,908
Contributions towards tax-efficient instruments (Rs)
1,00,000
Tax paid without availing home loan benefits (Rs)
41,200*
Tax paid after availing home loan benefits (Rs)
20,600*
Tax Savings (Rs)
20,600*
(*tax calculated after giving effect for education cess)

The above table clearly shows the benefit of availing a housing loan if you are contemplating
buying a house. The total tax payable on your income without a home loan works out to Rs
41,200. The same with a home loan works out to Rs 20,600, thus saving you Rs 20,600.
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Maximise your tax benefits

Now, lets delve deeper into the benefits available. Say your interest amount in the first year is
Rs 3,56,960 which is much more than the maximum amount of Rs 1,50,000 allowed as a
deduction. Your principal repayment amount of Rs 74,908 is within the Rs 1,00,000 limit
allowed under Section 80C. However, it takes away a big chunk of the amount eligible under
Section 80C and leaves you with little (i.e. Rs 25,092) to claim towards other tax saving
instruments such as PPF, NSC, Life Insurance, ELSS, POTDs.
And now consider, you have invested in the following manner under Section 80C.
Particulars
Principal Repayment
Life Insurance
PPF
EPF
NSC
Total
Claim deductions
under Section 80 C
Contributed but can't
claim tax benefit
Amt ( Rs)
74,908
10,000
20,000
10,000
20,000
134,908
100,000
34,908
The amount eligible is more than what you can claim. Yes, you have an option of not investing
in PPF, POTDs or NSC but these are assured return schemes with attractive returns. And as said
earlier your portfolio should always comprise of a mix of assured return and market-linked
return instruments, in a composition which is in accordance to your financial goals and
willingness to take risk. Hence, ignoring these investment avenues may not be prudent from
financial planning perspective.
So, now the next question is how do you claim maximum available deductions to minimise your
tax liability? The answer lies in taking a joint home loan. A joint home loan can be taken with
your spouse or relative.
Lets understand with an example how a joint home loan with your spouse can help reduce
your tax liability.
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Assume your spouse and you decide to take a joint home loan of the same amount as
mentioned above and share the loan in ratio of 50:50.
Particulars
Gross Salary (Rs)
Home Loan Amount (Rs)
Tenure (yrs)
Rate of Interest p.a.
EMI (Rs)
Annual Interest Paid (Rs)
Principal paid in the 1st year (Rs)
Life Insurance (Rs)
You
Your Spouse
650,000
650,000
4,000,000
20
9.0%
35,989
178,480
178,480
37,454
37,454
10,000
10,000
Other contributions towards tax-efficient instruments (Rs)
50,000
50,000
Total amount contributed under section 80C & 24(b) (Rs)
247,454
247,454
28,480
28,480
49,440
20,600
20,862
49,440
49,440
20,862
Amount which cannot be claimed to reduce tax liability (Rs)

Tax Paid when: (Rs)
1. No home loan benefit availed
2. Single home loan benefit availed
3. Joint home loan benefit availed
Total Household Tax Savings (Single Home Loan) (Rs)
28,840
Total Household Tax Savings (Joint Home Loan) (Rs)
57,156
Note: * calculations are done assuming that home loan and the EMI paid by the assessee and the spouse are in the ratio 50:50
Now since your spouse is a co-owner and has contributed towards repayment of the loan she
too would be eligible for the tax benefit (both principal and interest component).
So, as indicated in the table above, if the principal and interest amount is shared equally
between your spouse and you, the contribution per person comes to Rs 37,454 for principal
repayment and Rs 178,480 for interest payment. The principal amount is now half of what was
earlier which allows you to claim deductions towards other contributions. At the same time it
reduces the tax liability to a significant extent and leads to a household saving of upto Rs
57,156. As compared to a Single home loan, a Joint home loan leads to a household saving of Rs
28,316.
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From the tax planning point of view, it is vital to ensure that the higher earning member pays
higher portion of the home loan EMI. This is because the tax benefit accrues in proportion to
your contribution towards loan repayment.
So, remember if you plan to buy a house, it makes sense to include your spouse as a co-owner;
especially if your spouses income is taxable. This will result in higher tax saving in addition to
boosting your loan eligibility.
Additional benefit to first-time home buyers (Under Section 80EE)

In the union budget 2013-14, the finance minister introduced a new benefit for first time home
buyers looking for affordable houses. So individuals who have borrowed between April 01,
2013 and March 31, 2013 are entitled to get extra benefit in tax breaks. Besides, standard
deduction of upto Rs 1,50,000, such borrowers are now allowed to claim an additional
deduction of upto Rs 1,00,000 (U/S 80EE) for the interest payable on loan of less than Rs
25,00,000. Although this is a one-time benefit and it can be claimed over two Financial Years
(FYs) in piecemeal manner; i.e. one may claim benefit spreading it over FY 2013-14 and FY
2014-15.
Who is eligible?
Only individual assessees can claim the benefit and that too only if they do not own any
residential property before buying the one for which the tax benefits would be claimed.
Other conditions to avail benefit under section 80EE
-
The assessee should be a first time home buyer, he does not own any other house on
the date of sanction and this house should be used for self-occupancy
The value of residential house shouldnt exceed Rs 40, 00,000
Loan amount sanctioned shouldnt exceed Rs 25,00,000 and is sanctioned in the FY

2013-14
The loan must be obtained from a bank or a public listed company which has a main
objective for providing long term housing finance.
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VII - House Property and taxes

After showing benevolent side by providing you with the tax benefit, for availing a home loan
(to buy or construct or reconstruct or repair or renew), the Income Tax Act then eyes the
*house property owned by you for taxing the same. And this applies especially when you have
an income from let out property, or in case where you have more than one property which
arent let out on rent, but which are vacant (known as Deemed to be Let Out Property DLOP).
*Owning a farm house, which forms a part of your agriculture income, is not brought under the tax net.
Now you may ask How can the income tax authority tax me, if I have not let out my property
on rent?
Well, thats because annual value of your property after providing for deduction available
under Section 24(b) is taxed under the head Income from House Property. A noteworthy
point is, term house property includes building(s) or land appurtenant (i.e. attached) thereto
also.
And now the next question which may be popping on your mind is What is annual value of
the property and which deductions are available?
Annual Value:
To understand that better let us take a case where you have let out the property (LOP) and
then DLOP.
Let Out Property (LOP)
In cases where you are enjoying a regular income from the property in the form of rent, then
the annual value of your property would be calculated by adopting the following steps:
a) Find out the reasonable expected rent of the property (which is municipal rent or fair
rent, whichever is higher)
b) *Consider the rent actually received / receivable
c) Take whichever is higher from a) and b)
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d) Calculate loss due to vacancy (i.e. in case if the property is vacant for period(s) during
the financial year)
e) The difference between step c) and step d), will be your annual value which is here
referred to as the Gross Annual Value (GAV)
Now when we go one step further and minus the municipal taxes paid by you (on the property)
from step e) youll arrive at the Net Annual Value of your property. But to avail the
deduction for municipal taxes; they have to be paid by the landlord only.
*Note: Rent earned by you from the property is calculated after subtracting any unrealised rent from the tenant
(i.e. in case if he defaults to pay)
Deemed to be Let Out Property (DLOP)
In case you own more than one house, and the other house(s) apart from the one where you
are staying are vacant throughout the month, then the other house property(s) would be
considered as a Deemed to be Let Out Property(s) - DLOPs. Moreover, you would be liable to
pay tax on such property(s) after having calculated the Gross Annual Value (GAV), which will be
calculated in the same way as for LOP. But the only difference being that, here rent would be
the standard rent calculated as per the municipal laws.
Thereafter, if you as the landlord are paying any municipal taxes towards these properties, then
those would be subtracted to obtain the Net Annual Value (NAV).
Remember, over here in case you have multiple DLOPs, then you have an option to consider
one of property as a SOP and the rest would be considered as DLOPs under the present Income
Tax law. So, say you have 4 such DLOPs then you should ideally select the property with the
highest GAV as a SOP property, as this optimises your tax planning exercise, as the remaining
properties available with you will have a lower GAV.
Self-Occupied Property
You need not worry here if you are occupying the property, throughout the financial year for
your stay (i.e. residential use) and thus the NAV of the property will be considered as Nil.
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But if you are occupying the property for some part of the year, and the rest of the year you
have earned an income by letting it out, then proportionately for the rest of the year when the
property was let out, the calculation of annual value would be applicable as that of LOP.
Deductions:
After having calculated the Net Annual Value (NAV) as seen above, you are eligible to claim
deductions under Section 24(b), which further reduces your taxability under this head of
income. You broadly get the following deductions:
Standard Deduction [Section 24(a)]
Owning a home and maintaining the same costs you money. But irrespective of the fact
whether you have incurred any expenditure or not to do so, you will be eligible to claim a flat
deduction of 30% calculated on the NAV of the property. And this deduction is of specific use if
ones property is LOP and / or DLOP. In case if the property is SOP, then you are not eligible to
claim any deduction as the NAV of your SOP is Nil.
Interest on borrowed capital [Section 24(b)]
As reiterated above too (in the home loan section), if one wisely takes a home loan for buying a
house property then the interest so paid on the borrowed capital will make you eligible for
deduction under Section 24(b), irrespective whether the house property is SOP, LOP or DLOP.
In case of SOP the income from house property will be negative income, (if interest is paid on
capital borrowed by you to buy or construct or reconstruct or renew or repair the house),
which will enable you to reduce your overall Gross Total Income (GTI). In case of other
properties i.e., LOP and DLOP the income from house property will be positive, but would be
reduced to the extent of standard deduction and interest paid.
The quantum of deduction depends upon the purpose for which you take a loan i.e. purchase,
construction, reconstruction, repair or renewals, and also the type of property i.e. SOP, LOP
or DLOP.
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Hence, in case you have taken a loan for the purpose of purchase or acquisition of the house
which is an SOP, then you will be eligible for a maximum deduction of a sum of Rs 1,50,000. But
if the loan is taken for the purpose of repair, renewal, or reconstruction, then the eligible
deduction is restricted to Rs 30,000.
Now if the property is LOP or DLOP, then you do not have any maximum restriction for claiming
interest so it can be above the otherwise limit of Rs 1,50,000, irrespective of the usage i.e
whether for the purpose of purchase, construction, reconstruction, repair or renewals.
Remember, while everyone buys house property(s), it is important to avail the benefits available under
the Income Tax Act, wisely as this would enable in optimally saving your tax liability, and off course enjoy
the fruits of your investment made too and / or enjoy the comfort of your dream house too.
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VIII - Save tax on your hard earned salary

While many of you in employment take enormous efforts to earn a salary, it is also equally
important in our opinion that you restructure your salary well, in order to save tax on your hard
earned salary. And mind you if you do so youll have a greater Net Take Home (NTH) pay,
which will allow you to streamline your finances well and also help you buy physical assets such
as your dream house and a dream car.
Many of you today get a big fat pay cheque, but it is important that one restructures the vital
components of salary well in order to be saved from being taxed.
The vital component of salary, where restructuring can be required is as under:
Basic Salary:
While this is the base of your head of income income from salary, it is important that you
have your basic salary set right. This is because the basic salary constitutes 30% 40% of your
Cost-to-Company (CTC). So, having a very high basic component may lead to having a high tax
liability in absolute Indian rupee terms. But similarly if you reduce your basic salary
considerably, then you would lose out on the other benefits such as Leave Travel Allowance
(LTA), House Rent Allowance (HRA) and superannuation benefits associated with your basic.
House Rent Allowance (HRA):
If you are paying rent for an accommodation, and if your organisation extends you HRA
benefits, then this is another vital component which can help you to reduce your tax liability.
But it should be noted that you cannot pay rent for the house which you own and if you are
residing in it.
Hence, now on the other side if you are staying in a rented house and you are the one paying
the rent, then HRA exemption [under Section 10(13A)] can be availed for the period during
which you occupy the rented house during the financial year.
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However in order to obtain an exemption, you are required to submit appropriate and
adequate proof of payment of rent for the entire period for which you want to claim
exemption. But, if you as an employee are getting an HRA of less than Rs 3,000 per month, you
are not required to provide a rent receipt to your employer.
Also you need to note an important change in HRA rules introduced in this year. As per the
circular issued by the Central Board of Direct Taxes (CBDT) in October 2013, if you are paying an
annual rent of more than Rs 1 Lakh or Rs 8,333 per month, then you will have to report the
Permanent Account Number (PAN) of your landlord to the employer (Earlier you had to furnish
a copy of the PAN card of your landlord only if your annual rent exceeded Rs 1.80 lakh, or Rs
15,000 per month). If your landlord does not have a PAN then you need to file a declaration to
this effect from your landlord along with the name and address of the landlord.
The maximum exemption which you can enjoy for HRA is as under:
In Chennai/ Delhi/ Kolkata/ Mumbai
In other cities
Least of:
Least of:
Actual HRA
Actual HRA
Rent paid in excess of 10% of salary*
Rent paid in excess of 10% of salary*
50% of salary*
40% of salary*
*Salary for this purpose includes basic salary + dearness allowance (if in terms of service)
Here a noteworthy points is, if your rent is very high and if you are not fully covered by the HRA
limit, then it would be wise to pick a company leased accommodation (if the company in which
you work in offers so), as this company leased accommodation would constitute to be the perk
value and would be taxed @ 15% of your gross income. Sure, the perk value is taxable but it still
works out to be more effective for tax planning, than opting for a HRA than doesnt fully cover
your rent.
Leave Travel Concession (LTC):
While you may be fond of opting for a leave and travel with your family for a holiday, dont
forget to assess what tax benefits are extended to you for doing so. The Income Tax Act
provides you tax concession if you have actually incurred expenditure on your travel fare
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anywhere in India either alone or along with your family members (i.e. your spouse, children,
parents, brothers and sisters who are mainly or wholly dependent on you). But such exemption
is limited to the extent of actual expenses incurred i.e. you can claim exemption on the LTA
amount OR the actual amount incurred, whichever is lower.
Also the exemption extended to you under the Act is for two journeys performed in a block of
four calendar years. And the current block of four calendar years is from 2010 to 2013 (i.e. from
January 1, 2010 to December 31, 2013); the next block will be from 2014 to 2017 (i.e. from
January 1, 2014 to December 31, 2017).
As per the present Income Tax Rule, the exemption would be available to you in the following
manner:
Particulars
Where the journey is performed by air
Where the journey is performed by rail

Where the places of origin of journey and destination are connected
by rail and journey is performed by any mode of transport other
than air.
Where the place of origin of journey and destination (or part
thereof) are not connected by rail
Amount exempt
Amount of "economy class" airfare of the national carrier by the
shortest route to the place of destination or amount actually
spent, whichever is less.
Amount of air-conditioned first class rail fare by the shortest
route to the place of destination or amount actually spent,
whichever is less.
Air-conditioned first class rail fare by the shortest route to the
place of destination or amount actually spent, whichever is less.
First class or deluxe class fare by the shortest route or the

amount spent, whichever is less.
Air-conditioned first class rail fare by the shortest route (as if
> Where no recognised public transport system exists
the journey is performed by rail) or the amount actually spent,
whichever is less.
> Where a recognised public transport exists
In case you have not availed of a LTC or have travelled just once in the four calendar year of the
block period (2010-2013), then you are allowed to carry-over the concession to the first
calendar year (2014) of the next block 2014-2017, but for only one journey. In addition to this,
you will be eligible to travel two more times in the next block.
It is vital that you utilise your leaves wisely and travel to any of your loved holiday destination in
India, as this will not only de-stress you, but also help you in reducing tax liability. After you
have returned from your journey, in an excitement please do not tear your travel tickets /
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boarding pass (for air travel) as you need to submit them to your employer so that your tax
liability can be reduced.
Education allowance:
If you are married with kids, and if your employer is providing with education allowance, then
do not refrain from availing it, as this can again help you in reduction of your tax liability. The
exemption extended to you under the Income Tax Act is Rs 100 per month for a maximum of
two children (i.e. in other words Rs 2,400 p.a. totally). Similarly, if your children are staying in a
hostel then a maximum of Rs 300 per month per child but subject to a maximum of two
children will be available to you as an exemption (i.e. Rs 7,200 per month).
Meal Allowance through Food Coupons / Food Cards:
While you may be tempted to increase your NTH (in the cash form) you should not ignore to
avail the food coupon / food card benefit, if your employer provides one. This is because
effective utilization of the same will enable you to effectively reduce your tax liability along with
getting the feeling of being pampered by your employer.
The exemption amount which you can enjoy is Rs 50 per meal available only in respect of meals
during office hours. However, the exemption is also available in case your employer provides
you food vouchers / cards of value of which can be used at eating joints. The exemption limit in
this case is restricted to Rs 2,500 per month for a food voucher / card value.
So remember, if your employer is providing you food coupon / card dont refrain from availing
the same for a maximum voucher value of Rs 2,500 every month.
Medical reimbursement:
During the year if you and / or family members have visited a doctor or bought medicines from
a chemist, then all the expenditure incurred by you and / or your family members during the
year for medical purpose too, would help you in reducing your tax liability.
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As per the Income Tax Act, the maximum amount of deduction available with you is Rs 15,000
for every financial year, and to claim the same you are required to submit, to your employer,
the medical bills for the financial year stating the amount in total which you intend to claim.
Similarly, it is noteworthy that if your medical insurance premium is paid by the employer or
reimbursed, then that too will not be subject to tax. Also if your employer is providing medical
facility in hospital or clinic owned by him, local authority, Central Government or State
Government then medical expenditure incurred under such a hospital too, would not be
subject to any tax.
So, next time when you get your pay cheques in hand please evaluate the aforementioned
points, and assess whether every component in your salary is structured well and to do so you
can certainly talk to your Human Resource department, as they too may help you on this.
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IX - Conclusion
In the previous pages of this guide we have seen that your extra step towards the tax planning
way would enable you to wisely reduce your tax liability. Remember waiting till the eleventh
hour to do your tax planning exercise, is not going to help in a big way. It would just lead to tax
saving and not tax planning. Just to reiterate, while you have host of tax-saving investment
options available under Section 80C, following an asset allocation model (for your tax planning
exercise), in accordance to your age, ability to take risk and investment horizon is going to make
your tax saving portfolio look more prudent even from a financial planning perspective.
Model Asset Allocation
Life insurance Premium (Rs) only term plans
EPF/PPF/5-Yr Bank
FDs
ELSS (Rs)
Total (Rs)
< 30
20,000
25,000
55,000
100,000
30 - 40
20,000
35,000
45,000
100,000
41 - 50
20,000
45,000
35,000
100,000
51 - 55
20,000
60,000
20,000
100,000
Age
Also one needs to look beyond the ambit of section 80C, as you may exhaust the limit of Rs
1,00,000 and still find it insufficient to reduce your tax liability. So, you should access the other
deductions available under section 80 (as mentioned above) and the exemptions too.
Moreover, while you are working hard with an organisation to make a living; remember to
effectively know and structure each component of your salary income in order to effectively
save more tax, which in a way will help you in buying all the comforts and luxuries in life.
We think that while you must take help of your tax consultant while filing your returns and seek
opinion from him, we also think that a self-study approach on your tax planning exercise is
quite necessary as one should be well versed with at least those tax provisions which affect us
directly. And with that note we wish you all Happy Tax Planning!!
General Disclaimer: This communication is for general information purposes only and should not be construed as a
prospectus, offer document, offer or solicitation for an investment or investment advice.
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Your Next Step Towards Achieving Your Life Goals!

Have You Planned for Your Life Goals?
If not, do it now!
PersonalFN can help you do this through its Personalised Financial Planning
Services.
Click Here to get in touch with our Investment Consultants!
Contact us
Head Office
Mumbai
101, Raheja Chambers ,
213, Free Press Journal Marg,
Nariman Point,
Mumbai - 400 021.
Tel: +91-22-6136 1200
Email: info@personalfn.com
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An Invitation to Join 'Money Simplified' Course

Parameters for prudent tax planning

Section IV: Optimal tax planning with section 80C

Tax planning with market-linked instruments

Tax planning the assured return way

Section V: Thinking beyond section 80C

Section VI: Your home loan and tax planning

Section VII: House Property and taxes

Section VIII: Save tax on your hard earned salary

Section IX: Conclusion

II - Mistakes which you have been doing while saving tax

1. Doing your tax planning at the last moment:

2. Unnecessarily Buying Endowment and Unit Linked Insurance Plans:

3. Ignoring power of compounding through tax saving mutual funds:

4. Not optimizing all options for tax saving:

III - Your small steps can take you forward by leaps

Steps to tax planning:

Step 3: Calculate the tax payable

Parameters for prudent tax planning:

Present age (years)

Retirement age (years)

Investment tenure (years)

Monthly investment (Rs)

Returns per annum

Sum accumulated (Rs)

(Source: Personal FN Research)

(Source: Personal FN Research)

IV - Optimal tax planning with section 80C

Tax Planning with market-linked instrument:

Equity Linked Savings Schemes (ELSS):

SIPs provide cushion against market volatility

(Source: ACE MF, Personal FN Research)

Get wealthy Sip by Sip

(Source:ACE MF, Personal FN Research)

Unit-Linked Insurance Plans (ULIPs):

3. National Pension System (NPS):

Tax Planning the assured return way:

Public Provident Fund (PPF):

The PPF scheme is a statutory scheme of the Central Government of India.

Axis Bank Ltd.

HDFC Bank Ltd.

ICICI Bank Ltd.

IDBI Bank Ltd.

State Bank of India

Rates as available on October 23, 2013

Min Max Investment

Tax planning with market-linked instruments

Tax Saving Funds/ ELSS

Unit Linked Insurance Plans

Premium varies from scheme to

80C & 10(10D)

National Pension System

National Savings Certificate

Rs 100 - No upper Limit

National Savings Certificate

Rs 100 - No upper Limit

8.25% to 9.75% p.a.

Post Office Time Deposit

Rs 200 - No upper Limit

Senior Citizens Savings

9.20% p.a. (payable

Sum Assured Only

Premium depends upon the