The 5th Season

Some Manickam, who I barely remember, is very much concerned about my life style, my savings, my future and my family. He sent me a mail to think about the adversaries in life and plan properly considering what will happen to my family when I am not around – to be precise, dead.

Later that day, got a call from my bank’s wealth manager, whom I was not aware till that moment, said he will advise me free on financial products considering my net worth. The hoarding near Tambaram, that used to hold Chennai Silks, is now showing Sundaram Tax Saver.

Well, Tax Season has arrived!

It’s time to find various avenues, ways and methods to cut down on tax - the inevitable evil, unavoidable expense, a worthless charity. In my previous blog, I was talking to you on why we need to pay tax. Considering that, is it not good to pay as much tax as warranted, as that is good for the country? Well, yes and no.

This article will talk about legal ways to cut down on tax, as per the government prescription and not any means of tax avoidance. Tax benefits or rebates are for a purpose, like the one on insurance which I described in another blog. Moreover, in a country where there is no accountability or transparency on the book keeping of tax payer’s money, which often finds way into the pockets of politicians or government authorities and their kith and kin, let us at least try to reduce the resulting frustration. Yes, I am talking about tax and methods to reduce it in my homeland – India.

Income

Income Tax is slashed on income – obvious. What is considered as income? Any money that finds you

• as a wage for your services – salary
• as a profit you made on your investments – sale of equity/property
• as interest earned on your bank accounts/deposits/bonds
• as rent/lease amount for your property
• as wins in lottery, gambling or lucky draw
• as monetary gifts and any other unclassified income.
• as a profit from business or profession
• as a Pension

So a sum of all the above, applicable to you, are taxable. I am restricting this article to the savings on income tax for a salaried professional as that is what I know better. :-)

Exemptions

When it comes to business, only the profit is taxed. So, what about salaried tax payers? To be fair with the salaried class, the government makes sure that some of the income is exempted from tax as this would be used against certain mandatory expenses. The net taxable income is arrived at by subtracting the exemptions from the total gross income.

Let’s list down some of the expenses that we incur and see whether they are exempted

First, the very basic - food, shelter and clothing

Food Yes, exempted up to Rs. 100 per day with a ceiling of Rs.2500 per month. Proof of bills necessary, if not paid through food coupons or food cards.

Clothing Unfortunately, no exemptions

Housing Yes, minimum of the following, if staying in a rental house. · Actual HRA received · 50% of Basic (if you live in a metro city, else 40%) · Rent paid over and above 10% of Basic

Besides these basics, there are other mandatory expenses that are exempted as given below.

Office commute	Exempted up to Rs. 9600 p.a.
Educating kids	Up to a maximum of Rs. 100 per kid per month. Proof of bills necessary.
Medical expenses	Up to a maximum of Rs. 15000 per year. Proof of bills necessary.
Tour expenses	The rules are a bit tricky. Only travel cost is exempted and applicable for 2 travel/tours performed in a block of 4 years.

For all of the above, there should be an appropriate allowance towards them for those expenses become eligible for tax exemption.

Besides the above expenses, amount paid as professional tax is also exempted as taxing that amount would be a ‘tax on tax.’

There is also a specific benefit for people who had bought a house with the help of a housing loan. The interest payment towards the loan is exempted to specific limits depending upon the use of the house purchased as given below.

• If the house is purchased for own use, then up to a maximum of 1.5 lakhs out of the interest paid is exempted from tax.
• If the house is purchased for letting out on rent, then the interest is treated much like a business expense – the whole interest amount is exempted as rental income would have been considered as income and added to other incomes to arrive at the gross total income.

Tips Always keep all the receipts/bills for expenses incurred. You may find that the expense is exempted at a later date! Understand your company allowance structure and align it to your expense pattern so that maximum exemptions can be availed Interest on housing loan is treated similar to a business income – you bought a property on loan and the property yields revenue, say rental income, against which the housing loan interest is set off as an expense. If you are occupying the house and there is no rental income, then the interest is a loss for you and hence the income from property is considered negative, which is set off against your gross total income. If you are not occupying the house, as you work from a different place, then for tax purposes, it is treated as a self-occupied house. In all other cases, it will be considered as a property that has a notional yield, which is the annual letable value as fixed by the local body and that will be taxed. However in this case, the interest on housing loan is completely exempted without the Rs. 1.5 lakh ceiling!

Deductions

Once the exemptions are applied to arrive at the total taxable income, further deductions are provided to reduce the tax burden. Most of the time, income tax deductions are synonymous with section 80C. However there are other sections as well. We will start with 80C.

ELSS

The best avenue to invest, avail tax benefits and reap profits as well, is Equity Linked Tax Saving Scheme (ELSS). This provides returns from the markets which normally are higher enough to beat the inflation, if timed appropriately and also provides tax benefits on amount invested and the profits made on its sale. However there is always a lock-in period of a minimum of 3 years on this scheme, which is actually good as equities normally need hibernate longer to produce significant benefits.

State sponsored schemes

National Pension Scheme (NPS) is a recent addition but a worthy investment avenue for those golden years. The significance of PPF cannot be stressed much. NSC is a known and long trusted investment vehicle sold by the humble post office that provides steady and guaranteed returns.

Insurance

Insurance premium that is paid towards life and pension insurance schemes – pure risk, endowment, money back, ULIPs etc. is another eligible deduction, though one has to bear in mind that this is only an additional benefit on insurance and insurance as such, is neither an investment vehicle nor a tax saving avenue. ULIP is my least favorable financial instrument; leave alone the tax saving part. They just charge heavily and the benefits can be reaped only after a decade!

Housing Loan Repayment and other benefits

If you have a housing loan on the house you bought, then the interest component is exempted from tax as detailed in the exemptions section. The principal amount repaid is a deductible under section 80C. Besides the loan related deduction, the stamp duty and registration charges are also eligible for deductions.

Besides the above investments and insurance costs, expenses such as tuition fees for your kids are also eligible deductions. Below is the list of all the eligible deductions under Section 80C.

· Life Insurance premium	· Senior Citizens savings plans
· National Pension scheme contributions	· Principal repayment towards Housing Loan
· ULIPs	· House purchase/repair charges - stamp duty, registration fee and other expenses for the purpose of transfer of such house property
· Mutual Find ELSS
· PPF
· NSC	· Post office Time deposit
· Tax Saving Fixed deposits from any nationalized bank	· Superannuation schemes
	· Tuition fees

Tips The maximum deductible amount is Rs. 100,000 under 80C, which means the total of all the above even if it exceeds Rs. 1 lakh, the allowed deduction is only for Rs. 1 lakh. This is an important limitation as PF amount deducted from your salary is considered under 80C already. If there are any superannuation schemes provided by the employer then that too would be considered under this. Hence first do your math before nodding yes to that insurance agent who claims you can save up to Rs. 1 lakh by insuring through his scheme.

Apart from 80C, there are still more deductions available under other sections pertaining to various other investments and expenses. They are explained below.

Recently added is 80CCF which exempts investments in Infrastructure bonds up until Rs. 20,000. Medical Insurance premium is another obvious one. To be more kind to its population, expenses towards managing disability of a disabled tax payer and his dependents are also exempted from tax. Literate population aid to economy growth and hence repayment of loans towards higher education is exempted. To encourage philanthropy, any contribution towards notified charitable institutions is classified as a deductible. Finally, a funny one, but may aid heart burn of serious tax payers. Contribution towards political parties is exempted from tax without any ceiling on the maximum amount. Besides looting the tax payer money, this helps politicians to evade tax as well.

The below table summarizes the deductions under various sections apart from 80C.

Money Outgo	Ceiling	Income Tax section
Infrastructure bonds	Rs. 20,000	80CCF
Premium paid towards Medical Insurance	Rs. 15,000	80D
Expenses incurred towards maintaining and medical treatment of a disabled dependent	Rs. 50,000. For a disability of more than 80%, Rs. 75,000	80DD
Expenses incurred towards medical treatment for you or your dependent for specific diseases quoted here	Rs. 40,000. For senior citizens, Rs. 60,000	80DDB
Repayment of Loan towards higher education	Interest amount for a period of 8 years	80E
Donations towards charity	50% or 100% as per the charity institution	80G
Contribution made to any political party	100% (no surprises J)	80GGC
Disabled person	Rs. 50,000. For a disability of more than 80%, Rs. 1,00,000	80U

Finally

Is that all? Besides all of these, the government is kind enough to make sure that a minimum amount is parked towards essential expenses. This is the lower limit beyond which taxation kicks in. Currently, this is Rs. 160,000 for a male tax payer. So the government thinks an Indian citizen can make a decent living with around Rs. 13K per month!

Well, now we have seen where we can cut tax and how. Now what are you waiting for? Go ahead, plan for your tax cuts at least for the next year, if it is too late for the current.