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Plan Your Taxes The Smart Way

Author: Rupesh Choudhary/Tuesday, February 23, 2010/Categories: Tax

Plan Your Taxes The Smart Way

Are we paying the right amount of taxes to the national exchequer? Are we really planning our taxes?
With rapidly changing tax laws, abolition of fringe benefit tax (FBT), new perquisite valuation rules being prescribed and a new Direct tax code bill in the pipe line, we need to be act with tact and plan our taxes the smart way to meet the changing environment. Every month, tax is deducted from your salary and, unless you revise the pay structure to one which is more tax friendly, you shall continue to carry a lighter wallet every month.
So what do we do now? Is there a way to offset this additional burden? Certainly there is; all you need to do is plan your taxes now, claim you tax deductions now, submit all your investment proofs to your employer now. This will help you avoid undue tax deductions over the next three months.


Section 80C Deductions That  You Can Claim
The financial year is approaching the end and by now, most of us plans to invest in tax saving products and investments while others would have already invested some amount. But are we really investing wisely?  
Before we start, let’s see who all can claim deduction under section 80C: Under section 80C an individual or HUF can claim deduction.
What is the limit of deduction? Under Section 80C, the maximum deduction that can be claimed is Rs 1 lakh but, this cap is not only limited to Section 80C but also extends to section 80CCC and 80CCD, i.e. the combined deduction under section 80C, 80CCC and 80CCD cannot exceed Rs. 1 Lakh. 
Though we are familiar with the deductions available, from our experience it has been observed that many of us fail to either fully claim or wisely claim the available deductions and end up paying higher taxes. Let’s revisit the widely used deductions:
►Life insurance premium on the life of the individual, spouse and any child of such individuals or any member of an HUF. 
►Contribution to Public Provident Fund to an account standing in name of the individual, his spouse and any child or any member of an HUF. 
►Employee’s contribution to statutory/recognized provident fund.
►Subscription to National Savings Certificates, along with the initial investment, the interest accrued on the NSC shall be deemed to have been re-invested and shall also qualify for deduction under this section but only for first 5 years.
►Contribution for participation in the Unit-Linked insurance plan (ULIP)
►Subscription towards notified units of
mutual fund.
►Contribution to the Notified Pension Fund.
►Payment of Tuition fees at the time of admission or otherwise to School, College, University or any other Educational Institution in India for full time education, not being development fees, donation or payments of similar nature. 
►Payment in respect of purchase or construction of residential house property by way of:
►Repayment of loan taken from Government, Bank, co-operative bank, LIC, National housing bank, assessee’s employer, where the employer is a public company/public sector company/university/college/co-operative society
► Stamp duty, registration fee and other expenses for purchase of house.
►Term Deposit for a fixed period of five years or more with a scheduled bank

What are the precautions one should take before investing? 
Before investing, one should first ascertain the shortfall in exhausting Rs 1 lakh limit as some amount may be covered by forced investment/expense like employee’s contribution to the Provident Fund or children’s tuition fee.
The shortfall amount may be invested in any of the above mentioned products after considering following points:
►Your life insurance needs.
►Your Risk Profile. 
►Liquidity and lock in period of Investments.
►Taxability on withdrawal and maturity. 

Other Deductions Beyond 80C That You Can Avail
So what are the other deductions that we can gain from? What are the conditions and caps attached to these deductions? Let’s identify them one by one:

Time to submit Investment proofs with the employer
Most of us are again busy submitting investment proofs with our employers. But why are we required to do so? Why is the payroll department after us to timely submit investment proofs?""""

Let’s find logic to this futile exercise from following steps:
►Employers are required to deduct tax (TDS) from employee’s taxable income. To do so, they need to take into account all the deductions and exemptions available to an employee.
►To start with, in the beginning of the year, the employer takes a declaration from the employee stating the deductions and exemption which he is entitled e.g. House Rent Allowance (HRA), Section 80C deduction etc. 
►Based on the declarations so received, the employer calculates the employee’s tax liability which now will definitely happen to be on the lower side. The tax so calculated by the employer is deducted by way of monthly installments down the year.
►At the end of the year, to substantiate the claims made by the employees, the employers require documentary evidence for the expenditure incurred or investments done.
►The tax liability is adjusted to account for any deviation in actual expenditure incurred or investments done as compared to the original declaration.
►In case investments are done on the higher side, tax liability would go down and will result in a lower tax deduction at the year end but, if investments happen to be on the lower side, an additional tax outflow could occur at the year end. 
The exercise is not really futile but listing the proofs that can be submitted can help.
Let’s broadly discuss the eligible deductions and exemptions that we can claim which will directly impact our taxability.
►Rent Receipts: Rent receipts are required to claim HRA deduction
►Travel receipts for LTA (Leave Travel Allowance) claims
►Home loan repayment certificate from the bank: Both principal and interest repayment  
►Section 80C deduction proofs 
►For other deductions like health insurance premium, education loan, donations etc 

Can we along with the deductions disclose certain other incomes that we have generated?
Certainly yes, along with the investment declaration you can also disclose other incomes like interest, rental, capital gains on shares etc. By doing so, the employer while calculating your tax liability will account for the above income as well and will deduct tax accordingly and hence, at the time of filing your tax return, you will virtually have no tax liability.
Should we also disclose the salary received and tax deducted from the previous employer as well, in case there has been a change in employment during the year:
As discussed, whenever the employer deducts tax (TDS) from salary payments, the employer takes into account available deductions (e.g., 80C) and income tax slabs that you fall under. 
Now, when you change employment, the new employer also deducts TDS after taking into account available deductions and tax slabs. This has the effect of allowing you tax deductions and slab benefits twice and could result in additional tax liability at the time of filing your tax return.

Like income, can we disclose losses as well?
Except the loss on account of interest paid on home loans, you cannot disclose any other loss to your employer.

Home Loan Tax Deduction
Every Individual/couple has a dream of owning a house/property but, considering rising real estate prices for some, owning a house remains a dream for others where the monthly budget permits a fixed burden of home loan installment banks and various housing finance companies comes as an aid to convert dreams to reality.
 Though every installment payment poses a financial burden, there are certain tax benefits associated as well. Every home loan installment you pay back to your lender consists of two components; principal and Interest payments. Both the principal and interest payments entitle you to Income Tax deductions.

Let’s analyze the above two components in detail:
Principal Repayment: The deduction for principal repayment is allowed under Section 80C, to which there is a cap of Rs 1 lakh. Thus, the principal repayment will be allowed as a deduction along with other eligible section 80C deductions.
Interest Payment: The deduction for interest payments is allowed under Section 24(b). Deduction for interest payments is allowed from the year in which the property is purchased or the year in which the construction is complete.

But what about the period for which property was under construction?
The interest paid for the period for which the property was under construction or till the property is actually purchased is also allowed as a deduction but only after possession of the property. The entire interest paid during this period will be allowed a deduction of 1/5th amount in each of the next five years.
I’ve heard that there is a cap of Rs 1.5 Lakh on deduction for interest repayment in case of self occupied property. Is this true?
Yes, this is absolutely true. There is a cap of Rs 1.50 lakhs on interest repayment for self occupied property for any particular year including 1/5th interest of construction period. The chart below will help you understand the entire concept.
Further ensure that the property is purchased or construction is completed within three years or else the deduction will be restricted to Rs 30,000 instead of Rs 1.50 lakhs.

And what if I let out my property? 
If you let-out your property, the interest deduction shall be allowed in full, i.e. whatever interest you’ve paid in the current financial year plus 1/5th of the interest paid during construction period shall be allowed in full, without any cap of Rs 1.50 lakhs.

Can I claim two houses as Self Occupied?
Certainly you can have more than two self occupied properties but for taxation purposes you shall have to claim either of them as self-occupied, and the other one shall be deemed to be let-out. 
For the self-occupied property, the interest deduction is restricted to a maximum of Rs 1.50 lakhs. However, for the deemed let-out property, a notional rent that the property is expected to generate shall be taken as the rental income of this property from which interest deduction shall be allowed, just like in the case of actual let-out property, the entire interest deduction shall be allowed without the cap.

Am I entitled to deduction in case loan I take a loan for substantial repairs of my house?
Yes, you will be entitled to the deduction but, the amount shall be limited to Rs 30,000, provided the loan is taken for substantial alteration to the property for e.g. construction of a new floor.

HRA Exemption
How does your employer compute HRA exemption, on the basis of rent receipts submitted by you? The computation of HRA is very simple; it is basically least of following three limits:
►Rent paid minus 10% of Salary
►40% of Salary (50% if rented premises situated in Delhi /Mumbai /Chennai or Kolkata)
►Actual HRA received from 
the employer.

Okay, but what do you mean by Salary? Is it the total monetary payment or Taxable salary? Actually it’s none of the above two. Salary for the purpose of HRA calculations mean:
►Basic Salary 
►Dearness Allowance (DA), if terms of employment so provide. 
►Commission if given as a fixed percentage of turnover achieved by the employee

Is this all I need to know about HRA?  No, make a note of following interesting facts.

1) HRA exemption is based on following four elements, namely :
►Rent of the premises.
►Location of the premises
►Salary received
►HRA received
As and when there is a change in any of the elements HRA computation changes. Hence it is advisable to compute HRA exemption separately of each period when there is a change in any of the above element.

2) Staying in a property belonging to your Parents/wife? You can still claim HRA. See, HRA exemption is allowed on following grounds:
►You are offered HRA as a part of Salary package and
►You are paying rent for a house that does not belong to you.
Now, if you are living in a house owned by your Parents and are paying rent to them, then you can certainly claim HRA. It must however be remembered that such rental income must be shown by your parents as income in their Tax return to avoid future litigation. 

3) Want to claim HRA along with Home loan benefits, is it possible? Of course it is.
Getting back to basics HRA exemption is allowed if: 
►You are offered HRA as a part of Salary package and
►You are paying rent for a house that does not belong to you.
While Home loan benefits i.e deduction on loan repayment is allowed on repayment of home loan.
Now, if due to employment at some other place, you cannot occupy your house and at the same time are living in a rented accommodation, you can certainly claim both the benefits.

Yet to submit your travel bills for LTA claims? Watch out for following:
Leave Travel Allowance is granted to employees to meet cost of travel on leave to any place in India. It is allowed twice in a block of four calendar years. The current block is 2010-13 thus, during the period 2010-13 you can claim this exemption for any two years.

What if I am not able to claim exemption in a particular block?
Well, the good news is that if in a particular block you are not able to claim LTA exemption for both journeys or for one journey then one journey can be carried forward and claimed in the first calendar year of the succeeding block. Thereafter, you can claim the remaining two journeys of that particular block.
I’m feeling more confused now. This block system is not very clear, can you elaborate with the help of an example:
Suppose Varun was not able to travel in the previous block i.e. 2006-09. He can carry forward one journey to the current block i.e. 2010-13 and claim it in the first calendar year i.e. 2010 thereafter he can also claim the remaining two journeys of the block 2010-13. In a way, Varun shall be able to avail three exemptions in the block 2010-13.

To claim LTA, is it mandatory for me to submit travel bills with the employer?
The Supreme Court pronounced that employers are under no statutory obligation to collect travel bills from the employees to allow LTA exemption however, to be on the safe side, most  employers still follow the traditional method of collecting travel bills to allow LTA exemption.
Okay this is fine, but how is the exemption calculated? Is the entire holiday cost covered?
No, the entire holiday cost is not covered. Only the cost of to and fro travel is eligible, expenses incurred towards boarding and lodging or on local conveyance to and from station/airport shall not qualify for exemption.

Further take note of following facts:
►You’ve taken leave from the office.
►The travel is performed to any place in India

Who all can accompany me on this travel?
Any one you like to take along but travel exemption shall be available only in respect of following:
►Your spouse and two children.
►Parents, brothers and sisters mainly dependent on you.

How is the exemption amount calculated is there any cap attached?
Travel concession received by employee shall be exempt to the extent amount spent on travel or following specified limits which ever is less: 

Is only domestic travel allowed exemption or can we claim international travel as well:
According to the rules, LTA is allowed to meet travel expenses of an employee on leave to any place in India. Therefore, international travels are not covered.
However, certain travel companies are offering packages to cover two Indian destinations on the travel route abroad and therefore, the claim is submitted for the two Indian destinations on route which shall be allowed according to the air fare charged by the national carrier by the shortest route between two Indian destinations. 

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