Simple steps to save taxes

Rebates, deductions, exemptions. While the chartered accountants jump nimbly from one to the other, these words give nightmares to most peop...

Rebates, deductions, exemptions. While the chartered accountants jump nimbly from one to the other, these words give nightmares to most people. Already, the annual exercise when you have to grapple with these animals, is on. This year, understand what these mean before you choose products to save on taxes. Like any economic decision, if you know what you are buying, your choice becomes more rational.

Define your income
Your income is the total inflow of money from different sources. Income tax rules classify individual income under six heads:
8226; Salary income. The income you get each month for working as an employee.
8226; Income from property. Rental income you get from ownership of a property.
8226; Income from business or professional income. Income paid to yourself as a business owner or income you earn as a professional, like a doctor, a lawyer or an architect.
8226; Securities income. Divided and interest income from financial instruments like shares, mutual funds and bonds.
8226; Capital gain. Income or loss from the difference between the purchase price and the sale price of a capital asset like property or shares.
8226; Other income. Income from a windfall like a lottery.

Add all of these to arrive at your total annual income.

Reduce exempt income
However, there are some categories of income that you need not include in this computation. Called exempt income, some inflows of money are not counted by the taxman as income that attracts taxes. This includes:
8226; Agriculture income
8226; Capital receipts, that is, one time payments like life insurance payouts or gratuity upto a certain limit are exempt from taxes
8226; Interest on provident fund and public provident fund
8226; Interest on tax free GOI Savings RBI bonds
8226; Dividend on equity mutual funds
8226; Commuted pension: This list is not exhaustive, but includes the larger categories. All income, excluding the exempt income, is called assessable income. This is the income that will attract income tax. The government gives two concessions on this 8211; a deduction and a rebate.

Use the deduction knife to slice assessable income
A deduction is a reduction from assessable income, you are reducing the size on which tax will be levied. Before computing the tax, you are allowed to reduce the amount of assessable income under certain conditions. These are:
8226; Standard deduction for salaried employees. The limits of standard deduction vary according to your income slab. There is a special benefit if you are a woman or a senior citizen. It is best to work with your chartered accountant to figure out where you stand.
8226; Under Section 80 L. You are allowed a maximum deduction of Rs 15,000 on interest income. Of this, Rs 12,000 income can come from post office deposits, the National Saving Certificates, bonds of financial institutions and bank deposits. Another Rs 3,000 interest from Central or State Government securities can be deducted.
8226; Under Section 80 CCC 1. A maximum premium of Rs 10,000 a year can be deducted from assessable income, if the policy is a notified pension product. These include Jeevan Suraksha from the Life Insurance Corporation, Forever Life of ICICI Prudential Life and HDFC8217;s Personal Pension Plan amongst others.
8226; Under Section 80 D. Deduction of Rs 10,000 Rs 15,000 for senior citizens can be deducted if paid as premium in a medical or health insurance policy.
8226; The house rent allowance paid by the employer can be deduced according to a formula, as can the interest on home loans upto Rs 1.5 lakh a year.
8226; Medical reimbursements upto Rs 15,000 per year can also be claimed back from the employer and are not part of the taxable income.
8226; Conveyance allowance of Rs 800 per month, if given by the employer, can be deducted.

Use the rebate scissor to cut tax liability
The income left after these deductions is the income on which tax will be levied according to the formula that is operative for each financial year. Once the tax liability is worked out, another concession allowed is the rebate. A rebate, then, is a reduction from the tax liability. On investing a maximum of Rs 1 lakh, an individual can get a part of his tax liability reduced. Those earning upto Rs 1 lakh get a rebate of 30 per cent, upto Rs 1.5 lakh, a rebate of 20 per cent, between Rs 1.5 lakh and 5 lakh, 15 per cent and nil for those earning above Rs 5 lakh per annum income.

You can choose from amongst the following investment options to get the rebates under Section 88:
8226; Life insurance premium
8226; Deposits in the NSC
8226; Contributions made to PPF, GPF, EPF
8226; Investments in special vehicles called the Equity Linked Savings Schemes ELSS. You can get a tax rebate as well as market linked returns from investing in these. Most mutual fund houses offer this kind of a scheme.
8226; From last year, school fees for two children have come under Section 88 as well.
8226; In addition to Rs 70,000 in the above instruments, you can put Rs 30,00 in infrastructure bonds.

A smart strategy for tax planning involves maximising income and exempt income, minimising assessable income, maximising deductions and maximising rebates. Whatever mix of products you choose to save taxes, remember that understanding how the system works will make you be able to choose better.