Personal Tax Planning & Investment Planning

FY 2015-16/AY 2016-17
Recollect one of the key principles of personal finance “Taxes Affect Personal Finance Decisions”.
Remember, it is vital for every body to step-by-step ascertain where you stand, in terms of your
Gross Total Income (GTI) and Net Taxable Income (NTI), 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.

There are three steps to tax planning:

Step #1. Compute the Gross Total Income (GTI): Compute your Gross Total Income (GTI) for
the financial year [from April 1 to March 31] from all sources as under:
1. Income from salary
2. Income from house property
3. Profits and gains from business & profession
4. Capital gains (short term and long term) and
5. Income from other sources.

Hence, GTI is the total income earned by an individual 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 of the Income Tax Act applicable to the above sources of income), as well as by availing
deductions to GTI.

Step #2. Compute the Net Taxable Income (NTI): Calculate your net taxable income by
reducing from the gross total income, the various deductions allowed under the Income Tax Act.
These deductions enable you to enjoy reduction in tax liability, as it covers Sections under the
Income Tax Act for:

 House rent paid for residential accommodation

 Investing in tax saving instruments and some eligible expenses u/s 80C
 Premium payment for health insurance or medi-claim insurance u/s 80D
 Expenditure on handicapped dependent u/s 80DD
 Interest paid on loan taken for higher education u/s 80E
 Expenditure incurred on a specified diseases suffered by you
 Donations u/s 80G
 Interest paid on home loan u/s 24b

Step #3. Calculate the tax payable: Calculate your tax liability on annual taxable income using a
simple tax rate table, given below.

Step #4. Prudent Tax Planning: After you have computed the amount your tax liability, you
have two options to choose from:
 a) Pay your tax (no tax planning is required)
b) Minimise your tax liability through prudent tax planning
Rates of Income Tax For FY 2015-16/AY 2016-2017

(i) For Resident Individuals below 60 years of age (born on or after April 1, 1956) and
HUFs

Net Taxable Income Range Income Tax Rates

Up to Rs.2,50,000/- Nil

Rs.2,50,001 to Rs.5,00,000/- 10% of the income above Rs.2,50,000/-

Rs.5,00,001 to Rs.10,00,000/- Rs.25,000/- + 20% of the income above

Rs.5,00,000/-
Above Rs.10,00,000/- Rs.1,25,000/- + 20% of the income above
Rs.10,00,000/-

(ii) For a Resident Senior Citizens (who is 60 years or more at any time during the current
FY 2015-16 but not more than 80 years on 31 st March 2016 (born Individuals below 60
years of age (born on or after April 1, 1936 and before April 1, 1956)

Net Taxable Income Range Income Tax Rates

Up to Rs.3,00,000/- Nil

Rs.3,00,001 to Rs.5,00,000/- 10% of the income above Rs.3,00,000/-

Rs.5,00,001 to Rs.10,00,000/- Rs.20,000/- + 20% of the income above

Rs.5,00,000/-
Above Rs.10,00,000/- Rs.1,20,000/- + 30% of the income above
Rs.10,00,000/-

(iii) For a Resident Super Senior Citizens (who is 80 years or more at any time during the
current FY 2015-16 (born before April 1, 1936)

Net Taxable Income Range Income Tax Rates

Up to Rs.5,00,000/- Nil

Rs.5,00,001 to Rs.10,00,000/- 20% of the income above Rs.5,00,000/-

Above Rs.10,00,000/- Rs.1,00,000/- + 30% of the income above

Rs.10,00,000/-
Surcharge: If your net taxable income in the financial year exceeds Rs. 1 crore, an additional
surcharge @ 12% would be levied on the tax payable. For the FY 2014-15, surcharge was 10%.

Education Cess: An education cess @ of 3% is payable by all the tax payers on the tax payable plus
surcharge.

Total Tax Liability: Thus the total tax liability for an individual will be the sum of [tax payable
plus surcharge @ 10% on tax payable (where applicable) plus education cess @ 3% on tax payable
plus surcharge].

Thus the highest gross tax rate (with surcharge) is 34.608% (33.99% for FY 2014-15) and the
highest gross tax rate (without surcharge) is 30.90%. The lowest gross tax rate 10.30% and the
middle gross tax rate 20.60%.

Rebate u/s 87A: A resident individual (whose NTI does not exceed Rs.5 L) can avail tax rebate
(tax credit) u/s 87A. It is deductible from income tax payable before loading education cess. The
amount of rebate is 100% of income tax or Rs.2,000/-, which ever is less. Thus we can say that tax
payable in 10% slab will be maximum Rs.23,000/- (taking into account Rs.2,000/- tax credit), but
for people who fall in the income range of above Rs.5 L, the tax will be Rs.25,000/- plus 20% tax on
income above Rs.5 L.

An Example of Computation of Tax Liability: Now let us see how you can compute your income tax
liability. If your net taxable income after availing all deductions available is Rs 12 lakh in the
current FY 2015-16, then the tax liability for a resident individual below 60 years of age will be
computed as under:

Computation of Tax Liability (2015-16)

Net Taxable Income Rs.12,00,000/-
Up to Rs.2,50,000/- Nil
Rs. 2,50,001/- to Rs 500,000/- 10% Rs.25,000/-
Rs.500,001/- to Rs.10,00,000/- 20% Rs.1,00,000/-
Rs.10,00,001/- & above 30% Rs.60,000/-
Tax payable Rs.1,85,000/-
Education Cess 3% Rs.5,550/-
Total Tax Payable Rs.1,90,550/-

Assessment Year [Sec 2(9)]: The period in which the income is assessed for tax and taxes are
paid in respect of income earned in the prior year. It is a period of 12 months and begins on 1 st of
April.

Previous Year [Sec 3 and Sec 2(34)]: Previous year means the Financial year immediately
preceding the Assessment year. It is the period of 12 months in which the income is earned.
Previous year ends on 31st of March.
Filing of Income Tax Return:
#1. Filing of IT return is compulsory for all individuals whose NTI exceeds the maximum amount
which is not chargeable to tax (basic tax exemption limit) after claiming all deductions of chapter –
VI-A, ie, Rs.3 L for Resident Senior Citizens, Rs.5 L for Resident Super Senior Citizens and Rs.2.5 L
for other resident individuals and HUFs.
#2. The last date of filing IT return for individuals is Aug. 31 (July 31 for AY 2014-15), with one
exception covered in point 3 below.
#3. When the accounts of the assessee are required to be audited u/r any law, the last date for
filing the return is Sept. 30.
#4. If return is filed after the AY, a penalty of Rs.5 K will be levied. [And there are other
drawbacks like no set-off of losses etc.?? verify]
#5. E-filing of IT return is compulsory for people having NTI above Rs.5 L.???

Tax Free Incomes: The following incomes are completely exempt from tax without any upper
limit.

1. Interest on PF/PPF/GPF/EPF.
2. Interest on GOI/other approved tax free bonds.
3. Dividends on Shares and Mutual Funds.
4. Any sum received u/r a life insurance policy including bonus either on death of the insured
or on maturity of the policy. However, for LI policies issued after March 31, 2004,
exemption on maturity payment u/s 10(10D) is available if the premium paid in any year
does not exceed 20% of the sum assured [10% of SA for policies issued after March 31,
2012].
5. Long term capital gains tax on sale of equity shares and equity mutual funds [held for more
than 1 year] if the security transaction tax paid/imposed on such transactions.
6. Dividend Incomes: Dividend income from companies/equity-oriented MFs is completely
exempt in the hands of investors. Dividend is also tax-free in the hands of investors in
case of debt-oriented mutual funds schemes.

Computation of Gross Total Income (GTI): As per IT act, income of a person is computed u/r
the following 5 heads:

1. Income from Salaries

2. Income from House Properties
3. Profits & Gains from Business/Profession
4. Capital Gains
5. Income from Other Sources

1. Salary or Pension Income: Salaried employees are issued a certificate of tax deducted at
source (TDS) from salary income by their employers in Form # 16. It also gives the taxable
salary figure.
2. Income from House Property: If the property is self-occupied (SOP), then the income
from the house property is treated as NIL. If any loan is taken for the purchase/
 construction of the property then the amount paid towards interest up to a maximum of
Rs.2 L is deducted from taxable income [u/s 24(b)].

In case the property is given on rent, ie, let out (LOP), then we’ve to find out the
a) Annual rental income
b) From this deduct property tax/municipal tax if any paid by the owner
c) From balance amount – deduct 30% towards repairs and maintenance
d) From the residual figure – deduct the amount of interest paid on loan taken for the
purchase/construction of the property.
e) The resultant figure is the income from house property.

3. Profits & Gains from Business/Profession: Income is arrived on the basis of net profit or
net loss from the P&L account.

4. Income from Other Sources: Interest income from the following sources is also required
to be included in the gross taxable income.

1) Interest on company FDs

2) Interest on SB A/c/FDs with Banks
3) Interest on Post Office SB A/c/Time Deposits/MIS/NSC etc.
4) Interest on debentures/bonds
5) Interest on government securities
6) Interest on private loans given to relatives, friends or any other entity

Tax Deduction at Source (TDS):

a) Int. payment by Companies on FDs: TDS is deducted @ 10% if the int. paid in a FY
exceeds Rs.5 K.
b) Int. payment by Banks/FIs on FDs: TDS is deducted @ 10% if the int. paid in a FY
exceeds Rs.10 K.
c) Int. payment by Post Offices on notified deposit schemes like Senior Citizen Saving
Schemes (SCSS), 2004: TDS is deducted @ 10% if the int. paid in a FY exceeds Rs.10 K.
d) Int. payment by housing finance companies (HFCs) on FDs: TDS is deducted @ 10% if
the int. paid in a FY exceeds Rs.10 K.
Note:

#1. TDS rate is 10% [No surcharge, no edu. Cess etc.]. If the recipient does Not furnish his PAN
to the deductor, TDS rate will be 20%.

#2. TDS can be avoided by filing Form 15G in duplicate (Form 15H for senior citizens). However,
such forms can be submitted by individuals whose total income (NTI) in the FY ix expected to be
below the maximum amount not chargeable to tax.
 5. Capital Gains: Capital gain arises when certain assets (investments) like property [plot or
built up commercial/residential unit] or shares/mutual fund units/bonds etc. are sold for a
profit. That is, capital gain arises when the sale price of an asset exceeds the purchaser
price or acquisition cost. The treatment of capital gains (CG) is slightly different from
other sources of income as listed above. It mainly depends upon whether the capital gain
(profit on sale) is short term or long term.

5A. Short Term Capital Gain (STCG): STCG arises if a capital asset is sold/transferred by an
assessee after holding it for Not more than 36 months and in some cases for Not more than 12
months.

STCG for assets with holding period of Not
more than 36 months
Unlisted equity or preference shares
Units of debt-oriented mutual funds
STCG for assets with holding period of Not
more than 12 months
Listed equity or preference shares in recognised
stock exchanges in India
Securities like debentures, bonds, govt.
securities, derivatives etc. listed in recognised
stock exchanges in India
Units of equity-oriented mutual funds

Taxation of STCG: STCG is included in the gross taxable income like other sources of income and
normal rates of tax apply as per the tax slabs/marginal tax rates of the investor, which depend on
the gross taxable income from all sources including STCG. W.e.f. October 1, 2004, the only
exception is STCG from the sale of equity shares or units of equity-MFs. In this case, the STCGs
are taxed at a flat rate of 15% plus education cess, irrespective of the tax slab on other sources of
income, provided securities transaction tax (STT) is paid on such sale.

5B. Long Term Capital Gain (LTCG): LTCG arises if a capital asset is sold/transferred by an
assessee after holding it for more than 36 months and in some cases for more than 12 months.

LTCG for assets with holding period of more
than 36 months
Unlisted equity or preference shares
Units of debt-oriented mutual funds
LTCG for assets with holding period of more
than 12 months
Listed equity or preference shares in recognised
stock exchanges in India
Securities like debentures, bonds, govt.
securities, derivatives etc. listed in recognised
stock exchanges in India
Units of equity-oriented mutual funds

Taxation of LTCG: Some LTCGs are totally tax-exempt and some are taxed @ a flat rate of 20%.

#1. No LTCG Tax: W.e.f. October 1, 2004, LTCG from the sale/transfer of listed shares or units
of equity-MFs has been exempted from tax, provided securities transaction tax (STT) is paid on
such sale.
#2. LTCG Tax @ flat 20% plus edu. cess: LTCG from the sale/transfer of other than listed
shares or units of equity-MFs is subject to a flat tax rate 20% with indexation benefit. In other
words, LTCG from the sale/transfer of unlisted equity or preference shares (after holding for
more than 3 years), units of debt-oriented mutual funds (after holding for more than 3 years) and
securities like debentures, bonds, govt. securities, derivatives etc. listed in recognised stock
exchanges in India (after holding for more than 1 year) are subject to a flat tax rate 20% and the
amount of gain has to be adjusted for Cost Inflation Index (CII). This inflation adjustment is
known as indexation benefit. Every year GOI announces the CII for the purpose of LTCG tax
calculation. The original purchase price/acquisition cost is adjusted for cost inflation index (CII) to
find out the indexed cost of acquisition (inflated cost) by dividing the CII in the year of sale with
the CII in the year of purchase. Then this indexed cost of acquisition is deducted from the net sale
price [sale price less expenses, if any] to find out the LTCG with indexation benefit and this
resultant figure is subjected to a flat tax rate of 20% plus edu. Cess regardless of the tax bracket
of the investor. This indexation benefit reduces the LTCG and thereby the LTCG tax.

Example: Mr. Kumar invested Rs.2,00,000/- in a bond fund (debt-oriented MF) on June 2011. He
redeemed his investment in Sept. 2014 and received redemption proceeds of Rs,2,85,000/-.
Calculate his capital gain. Is it LTCG or STCG? Compute his tax liability for this.

[It’s LTCG. Indexed cost of acquisition = 200,000 x [CII of 2014-15]/[CII of 2011-12]

(1024/785) = Rs.260,892/-. LTCG = SP – ICA = 285,000 - 260,892 = 24,108/- on which he
is required to pay LTCG tax of Rs.4,822/- @ 20% plus edu. Cess @ 3% totaling to Rs. ]

Take prudent steps to minimise tax liability [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. Between step 1 and 2, i.e. before you start calculating
your tax liability and decide where to invest your money to save tax, it is important for you to know
the parameters on which you should select the tax saving instruments. The most important ones
include your: [Age, Income, Financial goals/Investment horizon and Risk appetite].

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 (equity heavy) 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. 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.
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/equity-heavy 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 that if I have a high income, - why do I need a home loan. I can straight away go
ahead and buy the property! Sure, you can do so, but the Income Tax Act provides you the tax
benefit for repayment of principal amount along with the interest on loan taken, which you will miss.

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 or if you do not want to put your money at risk; you can
invest in debt-heavy 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/Investment horizon: 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 also be less skewed towards market-linked/
equity heavy tax saving instruments and maximum towards debt-heavy assured return products, as
you are quite near to your goal and your regular income would stop. Likewise if you are many years
away from your financial goal, you should ideally allocate maximum investment to market-
linked/equity-heavy 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/equity-heavy instruments. Similarly, if your willingness to take risk is
relatively low (conservative), your tax saving investment portfolio can be skewed towards debt-
heavy instruments which offer you assured returns, and if you are a moderate risk taker you can
take a mix of 60:40 into equity-linked tax saving instruments and debt-oriented assured return tax
saving instruments respectively.

Thus, based on the above parameters, work out your asset allocation (for the tax saving
investments). If you are young, then allocate more money to higher risk instruments like Equity
Linked Savings Schemes (ELSS) and a smaller portion to safer instruments like PPF/EPF/Tax-Saving
Bank FDs etc. As you grow older and near to retirement, keep increasing your allocation to debt-
heavy assured returns (fixed income) instruments like EPF/PPF/Tax-Saving Bank FDs etc. and
reducing the same to risky equity-heavy ELSS.
It should be noted that tax planning also enables you to create wealth for retirement planning, as
every year you contribute to the retirement corpus. Starting early will help you in two ways:

 Reduce pressure on finances at a later stage and

 Enable you to aim for an ideal retirement scenario and not a compromise

Deductions from Taxable Income [u/s 80C – 80U]:

#1. Deductions u/s 80C/80CCC/80CCD(1)/1B/80CCD(2)/80CCE for Contributions towards

various investments and some expenses:

All you need to know about Section 80C

Section 80C of the Income Tax Act provides a maximum deduction up to Rs 150,000 p.a. for
individuals and HUFs. The investments and contributions under Section 80C can be broadly
classified into three categories – life insurance plans, assured (fixed) return schemes and
market-linked (variable return) schemes. By doing so you would be able to ascertain which
investment instrument suits you best and would extend your tax planning exercise to investment
planning too. It is important to reiterate that the aggregate of all investments under Section 80C,
subject to any sub limits, cannot exceed Rs 150,000 p.a.

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 tax-saving fixed deposits with banks and Post Office
 Senior Citizens Savings Scheme (SCSS)
 National Pension Scheme (NPS)
 Unit-Linked Insurance Plans (ULIPs)
 Equity Linked Savings Schemes (ELSS)
 Tuition fees paid for children’s education (maximum 2 children)
 Principal component of home loan repayment

(The above list of investments/contributions is not exhaustive.)

Life insurance: Forget the tax benefits

Tax saving and life insurance are synonymous in the Indian context. Think of life insurance and the
first point that comes to mind is tax saving. This is because premium paid on any life insurance plan
can be claimed as deduction under Section 80C of the Income Tax Act. In fact, tax saving and life
insurance have become so closely associated with each other, that life insurance for many
individuals is reduced to just a tax saving avenue. While the truth is, regardless of the tax
benefits, life insurance is a potent tool that every individual must have in his financial portfolio –
not as a tax planning instrument but as an insurance against an eventuality.

The blame for equating life insurance with tax benefits must be shared equally by both insurance
companies and life insurance agents. Most insurance companies focus on the tax saving aspect of
life insurance more than any other feature. Insurance agents heighten their efforts to sell
insurance in the latter half of the financial year (September – March) because they understand
that, that is the time individuals (particularly salaried employees) tie up their tax planning.

Not that we at do not have any complaints against tax benefits being offered on life insurance. But
the tax benefits have served as a distraction and have detracted from the real benefit of taking
life insurance i.e. providing financial security to the individual’s dependents. The prudent approach
to taking life insurance involves putting the primary reason (securing the dependents) ahead of the
secondary reason (tax benefit). Look at it this way, if you have not taken life insurance for an
amount that accurately provides for your family in your absence, you are hurting your own family’s
cause. That is why it’s more important to take life insurance according to your needs rather than to
maximize tax benefits.

How to buy life insurance

First, you must determine the tenure over which you wish to take life insurance. For married
individuals, this should be the estimated remaining lifespan of your spouse. Then you must
determine your liabilities (like home loan, education loan) and expenses (like household expenses,
medical expenses) that your dependents will have to service in your absence. Next, you will also
have to factor in inflation to arrive at an estimated sum that is commonly referred to as your
‘Human Life Value’ (HLV). Finally, you must opt for a suitable insurance plan to provide for your HLV.
There are primarily 3 types of plans that you can choose from.

1. Term Plans

Taking a term plan is the most cost-effective way of buying life insurance. Term plans only provide
an insurance cover and do not offer a return. If the policy holder survives the policy tenure, he will
not receive any maturity benefit.

On the other hand, if he meets with an eventuality (i.e. death) during the policy tenure, then his
dependents get the sum assured. Term plans allow individuals to opt for a larger sum assured at a
relatively lower premium. For individuals with high HLVs, often term plans are the only option
because other plans like endowment plans and unit-linked insurance plans (ULIPs) are either too
expensive or not feasible at all.

2. Endowment Plans

The differentiating point between endowment plans and term plans is the maturity benefit. Term
plans don’t pay the policy holder the sum assured if he survives the policy term, while endowment
plans pay out the sum assured (along with profits, if any) under both scenarios – death and survival.
Naturally, most individuals find the idea of receiving the sum assured (along with profits) on death
and survival appealing. But this comes at a cost. Since endowment plans pay out the maturity
benefit, regardless of whether the policy holder survives the policy term or not, the insurance
company builds this into the cost of the insurance plan i.e. the premium. This makes endowment
plans more expensive than term plans.

3. Unit-Linked Insurance Plans (ULIPs)

ULIPs are a combination of insurance and investments. They can invest in stock/debt markets;
investors have the option to choose the debt-equity allocation. Returns from ULIPs are market-
linked and hence can be affected by the day to day fluctuations in these markets. The premiums
which you pay for ULIPs are converted into units and the Net Asset Value (NAV) is declared
regularly. Generally, ULIPs are for a term of 10-20 years with an initial lock-in period and minimum
premium payment term of 5 years. The term of the policy and premium payment vary from scheme
to scheme.

Like endowment plans, ULIPs can be very expensive. However, if selected well, ULIPs can add value
to your portfolio over the long-term. Before buying any ULIP, you must understand the various
charges associated with it as these can have a significant impact on the overall returns.

In case of an eventuality, the beneficiary is paid either the sum assured (which generally is 5 times
the annual premium) or the fund value, whichever is higher.

Tax planning: The “assured return” way

1. Public Provident Fund (PPF)

Investments in PPF are for a 15-Yr period and they provide regular savings by encouraging that
contributions are made every year. You can deposit a minimum of Rs 500 and a maximum of Rs
1,50,000 in a financial year, in lump sum or in twelve installments of any amount in multiple of rupees
five. Any deposits in excess of Rs 1,50,000 in a financial year will be refunded without interest and
this amount cannot be considered for income tax rebate. You can open a PPF A/c not only in your
name but also in the name of your spouse and children. However, please note that aggregate
deposits of up to Rs 1,50,000 p.a. are eligible for tax benefits under Section 80C.

Currently, PPF investments earn a return of 8.7% p.a. compounded annually. However, you should
note that although the stated returns are assured, they are not fixed. The rate of interest is
subject to change from time to time. Furthermore, withdrawals can be made only from the seventh
financial year onwards. PPF being an assured return product is a safe investment avenue for you, if
you are risk averse.

Deduction

Apart from a deduction of up to Rs 150,000 p.a. on deposits in PPF account under Section 80C,
interest income from PPF account is exempt from tax under Section 10(a)(i) of the Income Tax Act.
2. National Savings Certificate (NSC)

NSC is a time-tested tax saving instrument with a maturity period of Five and Ten Years.
Presently, the interest is paid @ 8.50% p.a. on 5 year NSC and 8.80 % Per Annum on 10 year
NSC. Interest is Compounded Half Yearly. While the minimum investment amount is Rs 100, there
is no maximum amount. Premature withdrawals are permitted only in specific circumstances such as
death of the holder.

Deduction

Investments in NSC are eligible for a deduction of up to Rs 150,000 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.

3. Bank Deposits and Post Office Time Deposits

5-Yr bank fixed deposits are eligible for a deduction under Section 80G. The minimum amount that
you can invest is Rs 100 with an upper limit of Rs 150,000 in a financial year. Currently these
deposits earn an interest in the range of 8.00% - 9.50% p.a.

Post Office Time Deposits (POTDs) are fixed deposits from the small savings segment. The
minimum amount to be invested is Rs 200 while there is no upper limit (only Rs 150,000 will be
eligible for deduction). Although you can opt for deposit of 1-Yr, 2-Yrs, 3-Yrs and 5-Yrs, only
deposits with maturity of 5-Yrs are eligible for tax benefits under Section 80C. A 5-Yr POTD earns
a return of 8.5% p.a.; the interest is calculated quarterly and paid annually. Premature withdrawals
are permitted after 6 months from the date of deposit with a penalty in the form of loss of
interest.

Deduction

The amount deposited in the 5-Yr bank deposits and POTD are eligible for deduction under Section
80C; however interest income on bank deposits and POTDs are chargeable to tax.

4. Senior Citizens Savings Scheme (SCSS)

The SCSS is an effort made by the Government of India for the empowerment and financial
security of senior citizens. So, if you are over 60 years old, you are eligible to invest in this scheme;
while if you have attained 55 years of age and have retired under a voluntary retirement scheme,
you are also eligible to enjoy the benefits of this scheme subject to certain conditions being
fulfilled.

The minimum investment in this scheme is Rs 1,000 while the maximum amount has been restricted
to Rs 15,00,000. Again, the deduction is limited to Rs 150,000. Investments in SCSS have tenure of
5 years and earn a return of 9.20% p.a. The interest payouts are made on a quarterly basis every
year. After one year from the date of opening the account, premature withdrawals are permitted.
If you withdraw between 1 and 2 years, 1.5% of the initial amount invested will be deducted. In case
if you withdraw after 2 years, 1.0% of the initial amount is deducted.

Deduction

Investments up to Rs 150,000 in SCSS are entitled for a deduction under Section 80C. The
interest income is charged to tax, which is deducted at source. If you have no tax liability on the
estimated income for the financial year, you can avoid the Tax Deduction at Source (TDS) by
providing a declaration in Form 15-H or Form 15-G as applicable.

Tax planning with “market-linked” instruments

1. National Pension Scheme (NPS)

NPS, introduced on May 1, 2009, is the new addition to the family of investments that qualify for
deduction under Section 80C. It is basically an investment avenue to plan for your retirement.
Contributions to this scheme are voluntary and available to individuals in the age bracket of 18-60
years.

There are two types of accounts:

Tier-I account: In case of the Tier-I account, the 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 up to a maximum of 20% of the total investment is
permitted before attainment of 60 years, however the balance 80% of the pension wealth has to be
utilised to buy a life annuity.

Tier-II account: While opening this account you will have to make a minimum contribution of Rs
1,000. 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 don’t 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. In order to
have this account, you first need to have a Tier-I account. This account is a voluntary account and
withdrawals will be permitted under this account, without any limits.

While investing money, you have two investment choices in NPS i.e. Active or Auto choice. Under
the Active 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.
The return on your investment is not guaranteed; rather it is market-linked. At the 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. The remaining 60% of the money can be withdrawn in lump sum or in a
phased manner up to the age of 70 years.

Deduction

Investments in NPS are eligible for deduction up to a maximum of Rs 150,000 p.a. (part of the total
80C deduction). Additional deduction of Rs 50,000 for NPS under section 80CCD [1(B)], with aim of
moving from pensionless to a pensioned society has been introduced since the budget of 2015,
effective from FY 2015-16. This is over & above the limit of Rs.1.5 L u/s 80C+80CCC+80CCD. So
total deductions now raised to Rs.2 L. However, withdrawals will be subject to tax as the scheme
has the Exempt-Exempt-Tax (EET) status.

2. Equity Linked Savings Schemes (ELSS)

ELSS are 100% diversified equity funds with tax benefits. A distinguishing feature of ELSS is that
unlike regular equity funds, investments in tax saving funds are subject to a compulsory lock-in
period of three years. The minimum application amount is Rs 500, with no upper limit. You can either
make lump sum investments or investments through the Systematic Investment Plan (SIP).

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”.

While SIPs in ELSS can help you tackle volatility and may help you gradually create wealth in the
long run, a noteworthy point about SIP investments 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

Investments in ELSS are eligible for a deduction up to Rs 150,000 p.a. under Section 80C for an
Individual or HUF. 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).

Deduction Available under Other Sections i.e. Section 80D, 80DD, 80E, 80G, 80GG, 80U

When it comes to tax savings, Section 80C lies at the top of the recall list. Every income-tax payer
is familiar with the provisions of Section 80C and the investment avenues available under it.
However, what many do not know is that there are other deductions under Section 80 which can be
used to one’s advantage to further reduce your tax liability. These deductions are related to
medical insurance premium, education loan, expenses on medical treatment, donations to various
organizations and funds, house rent paid, among others. We give below, a brief synopsis of some of
the major ones.
#2. Deductions u/s 80D for health or medi-claim insurance premium:

The premium paid 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 is
Rs 25,000 in respect of premium covering self, spouse and dependent children. Further, if you pay
medical insurance premium for your parents, you can claim an additional deduction of up to Rs
25,000 under this section. If any of the insured is a senior citizen (60 years or more), the maximum
deduction allowed is Rs 30,000. Super seniors (80 years or more) can claim deduction for medical
expenses up to Rs 30,000. This 80D limit of Rs 25,000 (30,000) as the case may be includes Rs
5,000 incurred towards preventive health check-up of the insured persons.

For example, if you pay a premium of Rs 25,000 for yourself and Rs 25,000 for your parents, you
will be eligible for a total deduction of Rs 50,000. If one or both of your Parents are Senior
Citizens then deduction amount can be of up to Rs. 55,000/-. And if you and your parents are all
senior citizen then deduction amount can be of up to Rs. 60,000/-.

It should be noted that in order to claim the deduction, you are required to pay the premium by
any mode other than cash. However, payment on account of preventive health check-up can be made
by any mode including cash.

#3A. Deductions u/s 80DD [for medical treatment of handicapped dependent]:

If you have incurred any expenditure on the medical treatment of a handicapped ‘dependent’ with
disability, the same qualifies for deduction under Section 80DD of the Income Tax Act. The
deduction is a fixed sum of Rs 75,000 p.a. if the handicapped dependent is suffering from 40% or
more of any disability. If the disability is severe (i.e. 80% of any disability), then a higher deduction
of Rs 125,000 can be claimed.

The term ‘dependent’ here means your spouse, children, parents, brothers and sisters. However, it
is important to note that the dependent person with disability should not claim any deduction under
Section 80U (please refer below).

In order to claim the deduction you will have to submit a medical certificate issued by a medical
authority along with the return of income.

#3B. Deductions u/s 80DDB [for medical treatment of Self or dependent relatives for
specified diseases]:

A deduction of up to Rs 40,000 (Rs 60,000 for senior citizens) for expenditure actually incurred by
resident assessees on himself or dependent relatives for medical treatment of specified illnesses
or diseases such as malignant cancer, chronic renal failure, Parkinson's disease and other listed
diseases. The diseases have been specified u/r rule 11DD. A certificate has to be furnished by the
assessee from any registered doctor.
#4. Deductions u/s 80E [Interest paid on full-time educational loan for self, spouse or
relative]:

This section definitely comes as a boon to all of you who intend taking a loan to pursue higher
education such as full time graduation and post graduation. The loan can be taken either by you for
your education or for your relative’s education. The term ‘relative’ here includes spouse, any child or
of the student of whom individual is legal Guardian.

The entire amount of interest which you pay on the loan during the financial year is eligible for
deduction under this section. You should avail of a loan from an approved charitable institution or a
notified financial institution. The deduction is available for a maximum of 8 years or till the interest
is fully paid off, whichever is earlier.

#5. Deductions u/s 80G [for donations]:

If you have given donations 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 electoral trusts are allowed 100% deduction. In order to claim
deduction under this section, you must attach a proof of payment along with your return of income.

#6. Deductions u/s 80GG [house rent exemption when not receiving HRA]:

If you have paid rent for any furnished or unfurnished accommodation occupied for the purpose of
your own residence, you can claim deduction under this section. This benefit is available to both,
self employed and salaried individuals who are not in receipt of any House Rent Allowance (HRA). In
order to be eligible for this deduction, you, your spouse or minor child should not own any
residential accommodation in India or abroad.

The deduction available under this section is the least of:

 25% of the total income or,

 Rs 2,000 per month or,
 Excess of rent paid over 10% of total income

#7. Deductions u/s 80U [for physically handicapped persons]:

Individuals suffering from specified disability qualify for deduction under Section 80U of the
Income Tax Act. A fixed deduction of Rs 75,000 is allowed if the person is suffering from 40% or
more of any disability. If an individual suffers from a severe disability (i.e. 80% or more of any
disability), then a higher deduction of Rs 1,25,000 is allowed.
 The individual does not have to submit any proof of medical expenses. However, he has to submit a
medical certificate issued by a medical authority along with the return of income. An individual with
disabilities such as blindness, hearing impairment, low vision, mental retardation, etc, qualifies for
deduction under this section. If you have claimed a deduction under this section, deduction under
Section 80DD cannot be claimed.

#8. Deductions u/s 80TTA [Interest on SB A/Cs with Banks/POs]:

Deduction from GTI of an individual or HUF, up to a maximum of Rs.10,000/-, in respect of of any

income by way of interest on SB accounts with Banks/Co-operative Societies/Post Offices is
allowed w.e.f. April 01, 2012 (AY 2013-14).

#9. Deductions u/s 80CCG [Rajiv Gandhi Equity Saving Schemes (RGESS) for new retail
resident individual investors]:

The amount of deduction is 50% of amount invested in notified equity shares or listed units, with a
cap of Rs.25,000/-, from the FY 2013-14/AY 2014-15, subject to certain conditions u/r the
scheme. This benefit is available for 3 consecutive assessment years, beginning with the AY
relevant to the PY in which the notified equity shares or listed units are first acquired.

#10. Deductions u/s 80EE [for low cost housing loans eff. From FY 2013-14]:

#11. Deductions u/s 24(b) [Interest on Housing Loans]:

Where a housing property has been acquired / constructed / repaired / renewed with
borrowed capital, the amount of interest payable yearly on such capital is allowed as
deduction under Section 24 of Income Tax Act, subject to the limits stated below. Penal
interest on housing loan is not eligible for deduction. If a fresh loan has been raised to repay
the original loan and the new loan has been used only for the purpose of repaying the
original loan then, the interest accrued on such fresh loan is allowed for deduction.
1. If the property is acquired or constructed with the capital borrowed on or after 01-04-1999
and such acquisition or construction is completed within 3 years of the end of the financial
year in which capital was borrowed then the actual interest payable is allowed as
deduction subject to a maximum Rs. 2,00,000/-.
2. In other case interest up to maximum Rs. 30,000/- is deductible.
3. The ceiling of Rs.2,00,000/- or Rs. 30,000/- is only in case the property is self occupied.
There is no limit on deduction of interest if the property is let out.
#12. House Rent Exemption (HRE) u/s 10(13A) RULE 2A:

The individual assessee should be staying in a rented house and drawing HRA. HR receipt is to be
produced. Least of the three as under is the house rent exemption allowed.

a) Actual Amount of HRA received

b) Rent paid Less 10% of Salary
c) 50% of Salary for Metros and 40% for other places.
Salary = BASIC +DA(FP) + COMMISSION.

#13. Transport Allowance Exemption: Rs.1,600/- pm maximum for transport allowance for coming
to office without production of any bills.

#14. Medical Expenses Reimbursement Exemption incurred for self and family: Rs.15,000/-
maximum pa subject to production of medical bills.