Tax planning,the right way…

Many people still have this notion that tax planning is wrong and responsible citizens should pay their taxes and not cheat. Tax planning is not tax evasion or tax avoidance. Tax evasion or tax avoidance is illegal where the letter and spirit of the law are broken. Tax planning is done well within the framework of the law and the government actually encourages you to plan your taxes by seeking investment in tax saving bonds,giving benefits under various sections etc.

Another misconception about tax planning is that it is all about investing in 80C.

People ask which is better,PPF or ELSS for tax planning? Tax planning is much more than 80C investments. It requires thoughtful planning of how your income is accounted,how you spend and invest your money and a few more nitty gritties. It is also a myth that tax planning is cumbersome and quite tricky for an average person to comprehend. Of course the tax laws are complex and dynamic,but what is applicable to the normal common person is rather simple.

Tax planning has to be integrated with your overall financial plan. In everything you do,you have to find a tax efficient way of doing it. For eg: You can invest in liquid funds or short term debt funds for emergency needs. But depending on your tax bracket,the short term funds can be more advantageous than the liquid funds or vice versa.

How to save tax?

Invest your surplus savings or use your income in any of the following ways and your total taxable income will come down to that extent,subject to a maximum of Rs 1 lakh.

* Repay your home loan – the principal portion can be claimed for deduction

* Pay tuition fees for children’s education (maximum 2 children)

* Pay life insurance premium

* Invest in national saving certificate.

* Invest in public provident fund

* Invest in equity linked savings schemes (ELSS)

* Invest in banks and post office fixed deposits of five years.

You can claim tax exemption on house rent allowance received as part of your salary if you are staying in a rented house.

Home loan

If it is a self occupied property,you can claim upto R1.5 lakh paid as interest as loss on house property. That will bring down your overall taxable income. If your property is rented out,on one side you will have to add the rent with your other income and pay tax,meanwhile you can deduct all the interest amount (without any limit) from your overall income and bring down taxable income.

Education loan

The interest paid on an education loan taken for higher education of self,spouse or children can be deducted under Section 80E and thereby your total taxable income can come down.

Protect your health

If you pay premium for a medical insurance policy for self or spouse or dependent children/ parents you can claim tax rebate under Section 80D. And from the current year,a sum of R 5,000 can be claimed if you or your dependants do a preventive health check up.

Social cause

Under Section 80G donations to particular institutions/ funds get tax benefits. While it is true that tax planning is a critical activity,a financial decision to buy a house or make an investment should not be motivated by tax saving. It is the financial plan that should tell you what to do with your money,but within the options,you should choose the most tax efficient one to get the best benefits.

—Author is CEO,Freedom Financial Planners