Personal Finance: Income Tax Planning

“Ideally, governments should collect taxes like a honeybee, which sucks just the right amount of honey from the flower, so that both can survive.”        Chanakya in Arthashastra

Chanakya’s words of wisdom pertain to an ideal situation. But modern day societies are far from ideal. Governments face many challenges that require them to spend increasing amounts of money. Public expenditure on law and order, defence, education, health care, infrastructure development and welfare is steadily increasing. This necessitates higher tax revenues too. Therefore, citizens should, ideally, look at taxation as a moral responsibility. At the same time they can explore all avenues of tax planning and minimization of tax burden.

How can we minimize our tax burden?

In India personal income tax is imposed on gross income. Gross income is the total income earned by a person in a year. It falls under 5 heads:

Income from salary
Income from property (residential/commercial)
Income from business/profession (profits and gains from business/profession)
Income from capital gains
Income from other sources (other than the four mentioned above)

Personal Income Tax: slabs and rates (FY 2018-19)

For senior citizens (60 years and above) the exemption limit is Rs 3 lakhs and for very senior citizens (80 years and above), the exemption limit is Rs 5 lakhs. For those with an income of Rs 3.5 lakhs or below, income tax rebate of Rs 2500 (section 87A) is available. Interest income from savings bank deposits is exempt upto Rs 10000.

Apart from the tax, 10% surcharge is applicable on income tax if income exceeds Rs 50 lakhs but upto Rs 1 crore. If income exceeds 1 crore, surcharge is 15%. There is a cess of 4 percent on income tax. For the salaried sections, standard deduction of Rs 40000 is available. For senior citizens, interest income upto Rs 50000 a year from banks and post office deposits is exempted from tax.

Changes introduced by the Interim Budget 2019

The interim budget presented in February 2019 raised the tax rebate to Rs 12500 for those with a taxable income of Rs 5 lakhs and standard deduction was raised to Rs 50000.

Claim your deductions

Taxpayers can claim deductions under different heads to reduce their tax liability. Lets look at the various deductions available.

Section 80C

Section 80C provides deductions for investment up to Rs 1.5 lakhs. The various financial products that qualify for deduction u/s 80C are:

Life Insurance premium payment
Home loan principal repaid
Employees Provident Fund (EPF)
Tuition fees for up to two children
Contributions to the Public Provident Fund (PPF)
Investments in the senior citizens savings scheme
FDs in scheduled banks with a lock-in period of five years
National Savings Certificates
Investments in tax planning mutual funds: Equity-Linked Savings Scheme (ELSS)
Investments in pension plans
Investment in Sukanya Samriddhi Yojana

Apart from the Rs1.5 lakh deduction allowed under 80C, an additional Rs 50000 deduction is available on investment in National Pension System (NPS).

Other Deductions

Section 80D: Premium payments towards medical insurance for self, spouse, children and parents are eligible for deduction.

Section 24: Interest on home loan (maximum deduction of Rs 2 lakh a year)

Section 80G: Donations to funds and charities from 50 or 100 per cent of the donated amount, depending on the charity.

There are other deduction eligibilities too, like Section 80 DD, which allows deduction for medical treatment of a person with disability and Section 80 DDB, which allows deduction for treatment of certain specified illness.

Timely tax planning utilizing the various deductions available will help in minimizing the tax burden.