As the year 2020 comes to an end, we are trying to move ahead with hope, positivity, and goodwill. The pandemic brought about a lot of variation and changes including the really long extension in filing the income tax returns. Though this year saw a bit of leniency in the filing of returns, the coming year would be different. Along with planning the investments and finances, individuals must also focus on tax planning, right from the start of the financial year.
What is Tax Planning?
Tax Planning refers to analyzing a situation considering the tax perspective. The aim of tax planning is to ensure that the financial plan works in a manner to give maximum tax efficiency. The crucial points for the success of tax planning ensuring the ability to make contributions to the retirement plans in addition to minimizing tax liability. During the process of tax planning, a lot of aspects like size of income, the timing of purchases and income, etc., in addition to ensuring the investments and retirement plans are in sync with the tax deductions and filing status.
There are a few terms that we must be aware of when we get into tax planning. Some of the important terms are listed below:
It is a section under the Income Tax Act that allows in the reduction of the taxable income of an individual. U/s 80C an individual, as well as HUF, can claim deductions up to Rs.1.5 lakhs by investing in PPF, LIC, Mediclaim, etc.
These are tax saving mutual funds that offer benefits u/s Section 80C of the Income Tax Act. Amongst the various investment options u/s 80C, these have the potential of offering the highest returns. In this scheme, the investments are made in equity and equity-linked securities. Additionally, they have a lock-in period of just 3 years.
(iii) GTI – Gross Taxable Income
It refers to the total income that an individual earns prior to availing any deductions under the Income Tax Act, which consists of income from salary, income from house property, profits/gains from business and profession, income from other sources, and long and short term capital gains.
(iv) NTI – Net Taxable Income
The NTI is calculated by accounting for the various deductions u/s 80 of the Income Tax Act, (i.e. the deductions are subtracted from the GTI), and this reduces the taxable income. Some of the deductions that help in reducing tax liability are investing in tax-saving instruments, medical insurance premiums, expenses on a handicapped dependent, interest paid on higher education loans, donations, etc.
80TTA is a another section under the Income Tax Act wherein an individual or a HUF can claim a maximum deduction of Rs 10,000 against interest income from a savings account with either a bank, post office, co-operative society. Note that this deduction isn’t available on the interest income earned from fixed or recurring deposits, or interest income from corporate bonds.
According to the Income Tax Act, under section 80GG, deduction is available to all individuals for rent paid when they do not receive HRA. However, the taxpayer, spouse, or minor child must not be owning any residential accommodation at their employment place. Also, the taxpayer should not be having any self-occupied residential property located anywhere else, and he/she must be residing in a place on rent and must pay rent.
An individual can claim deduction under this section of the Income Tax Act for any amount that is deposited or paid in any annuity plan (LIC or other insurers), which has to be to receive a pension from a fund that is referred to in Section 10(23AAB). The pension that is obtained from the annuity or the amount that is received on surrendering the annuity, inclusive of interest or bonus accrued on the annuity, will be taxable in the year in which is it is received.
Under section 80E of the Income Tax Act, any individual can claim deduction for the interest on loans taken to pursue higher education. The loan might be taken for either the taxpayer, the spouse or children or for any student whose legal guardian is the taxpayer. The maximum tenure for this deduction is 8 years, starting right from the time of repayment of interest or till the total interest is paid off, whichever comes earlier.
(ix) Leave Travel Concession (LTC):
When you make use of the leave and travel facility to holiday with your family, make sure you assess the tax benefits that are offered on the same. The tax concession is provided by the Income-tax on the expenditure you have actually incurred on your travel fare to any location in India, either alone or with family (i.e. spouse, parents, children, brothers, sisters, who are wholly dependent on you). The exemption can be claimed either on the LTC amount or the amount actually incurred, whichever is the least.
A deduction of Rs. 25,000 can be claimed under section 80D of the income tax act for the premium installments of medical insurance. Note, the premium must be for the taxpayer, the spouse, or dependent children. In case the taxpayer or their spouse is a senior citizen, i.e. above 60 years of age, the limit is extended to Rs. 50,000.
This section of income tax act allows to any resident individual or a HUF to claim deductions on the expenses incurred on medical treatment inclusive of nursing, training as well as rehabilitation of a handicapped dependent relative; or deposit made to any specific scheme for the maintenance of the handicapped dependent relative; or when the disability is around 40% or more but is lesser than 80% where a fixed deduction is provided of Rs 75,000; or in case of severe disability (80% or more), a fixed deduction of Rs 1,25,000 is provided.
There are numerous donations specified u/s 80G section of the Income tax act that are eligible for either a 50% or 100% deduction with or without any restriction. The payments have to be made via cheque, draft, or cash. However, the cash payment for such donations above Rs. 2000 should be made in any other mode and not by way of cash. Some of the donations eligible for 100% deduction are National Defence Fund set up by the Central Government, the Prime Minister’s National Relief Fund, the National Foundation for Communal Harmony, approved university/educational institution of National eminence, National Illness Assistance Fund, National Sports Fund, National Cultural Fund, etc. Some of the donations eligible for 50% deduction without qualifying limit are Jawaharlal Nehru Memorial Fund, Prime Minister’s Drought Relief Fund, Indira Gandhi Memorial Trust, and Rajiv Gandhi Foundation.