It’s a well-known saying that Rome was not built in a day. The same can be said for tax-planning. Timely, regular and effective tax planning can help in saving significant amount of money. Additionally, it makes the annual process of filing taxes easy and simple.
Contrary to popular belief, tax planning is not rocket science. It is simply about understanding the income tax regulations and knowing where to invest or spend your money. Sometimes, people are surprised to know that the places they have been putting their hard-earned money actually entitles them for tax deductions. Ignorance is not always bliss. So, in case you want to make the most out of your hard-earned money, read on.
- Home Sweet Home
- The home loan that you have taken helps you in more ways than you think. In addition to financing the house of your dreams, it also helps you save tax. The Income Tax Act, 1961 allows an individual to claim for the principal loan amount and the interest thereon for tax planning purposes. The Section 80C of the Act offers a deduction up to the value of Rs. 1.5 Lakhs towards principal amount. Section 24 of the IT Act deals with the interest on such home loans. The maximum amount under this section is Rs. 2 Lakhs.
- Additionally, one can also claim a deduction for loan taken for reconstruction (including repairs) of house property. The maximum amount towards such repairs that qualify for deduction is Rs. 30,000. This is a part of the Rs. 2 Lakhs limit for inclusion of interest on home loans.
- Health is Wealth
- Effective tax planning helps you save money and also keeps you in the pink of health. The premium that you pay for your Mediclaim policy can help you get tax exemption. As per Section 80D of the Income Tax Act, health insurance premium up to Rs. 25,000 can be claimed for income tax exemption. The individual can pay the premium for self, spouse, parents and children. In case of senior citizens, the limit is Rs. 50,000 in the Assessment Year 2019-20
- Learning with earning
- Education in today’s day and age needs a good amount of financial resources. Many individuals prefer to take an education loan to fund their higher studies. Similar to a housing loan, an education loan has dual benefits. In addition to financing the educational courses, it helps in tax planning. As per Section 80E, the interest paid on such loans can be claimed for tax deduction. Some important points to note are:
- One can take the loan for self, spouse or child’s education. Hence, the tax benefit is also available to parents who take loans for their children.
- The benefit is available only for full-time courses.
- The loan should be taken from a financial or a charitable institution. Loans from friends, relatives or money lenders are not included for deduction.
Also, if an individual is paying for school tuition fees for their child, they can claim tax deduction on the same. As per Section 80C, one can get exemption up to the overall limit of Rs 1.5 Lakhs. This limit is inclusive of all the deductions permitted as per Section 80C such as insurance, pension, PF, etc. Some points to note are:
- The tax benefit is limited to the actual amount of tuition fees paid.
- Each parent can claim the benefit for a maximum of two dependent children.
- The benefit is available only for full-time courses.
- This provision applies to all kinds of educational institutions including crèches and playschools.
- The scope of this provision is extended to adopted children as well.
- The beauty of tax planning is that most of the instruments have dual purpose. Life insurance not only secures the future of your dependents but also helps you save taxes. It falls under the ambit of Section 80C and the premium paid can be claimed for deductions up to the value of Rs 1.5 Lakhs.
- Re-entry of Standard Deduction
- For many years, we have comfortably used conveyance allowance and medical allowance for claiming tax deductions. However, with the changes introduced in the income tax regulations (wef AY 19-20), these two deductions have been removed. The government has re-introduced the concept of standard deduction (Rs. 40,000) in lieu of these two expenses. If you are a pensioner or a non-salaried individual, you stand to benefit considerably from this change.
- Charity begins at home
- There is a popular saying “neki kar dariya mein daal” which translates to – do good and then forget about it. But, for tax planning purposes, we would recommend otherwise. Always keep a good record of all the donations that you give throughout the year. Section 80G of the IT Act helps you claim deduction for donations made to certain institutions and charitable groups. One can claim either 50% or 100% of the donation as deduction, based on the classification of the receiver.
- The maximum deduction that one can claim under this section is limited to 10% of the donor’s gross total income.
- Tenants rejoice
- Paying the monthly rent to the landlord brings a small tear to each tenant. But the chances are that you will feel better when we tell you about the tax savings that you can make. If you receive House Rent Allowance (HRA) as part of your actual salary paid, then you can claim income tax deduction on the same. It is calculated as the minimum of these three options:
- Actual House Rent Allowance given by the employer as part of the salary.
- The original/real rent paid less 10% of the salary.
- 50% of Salary (those residing in Metro cities) or 40% of salary (those residing in non-metro cities).
- Salary for this purpose includes Basic Salary, DA (Dearness Allowance) and turnover linked commission
Some important points to note:
- One can claim HRA exemption along with the deductions applicable on paying back home loan. This is applicable for cases where:
- the individual resides in a different city than his or her house (on which there is a loan).
- The individual has rented out the house (on which there is a loan) and is staying in another rented place. In this case, it is important to disclose the rental earnings in the tax calculations.
- Individual needs to submit the rent receipts along with the PAN details of the landlord. In case the landlord does not have the PAN Card, then a declaration to that effect needs to be shared with the employer.
So, now that you know how you can save your taxes, make sure you don’t end up waiting for the entire year to end to do your tax planning. Remember, the early bird gets the worm!