Tax Planning for Year 2010
Following are some of the best tax saving investment options for the current assessment year [AY 2010-2011]
It is generally observed that during the last few months of a financial year people make last moment impulsive decisions to invest in tax saving instruments. In the process they may end up buying products that are actually not right for them. Tax planning is something that needs to be done a few months in advance so that one has ample time to understand & evaluate different options available to suit his/her financial situation. You can begin your tax planning now for the Assessment Year 2010-11.
Following are a few simple tips for planning your taxes for this financial year:
I. Utilize the Income Tax exemptions
Section 80C
Under this section one can claim up to Rs. 1 lakh in deductions. The options in this section include
- Employee Provident Fund (EPF),
- Public Provident Fund (PPF) - up to Rs.70, 000 per annum,
- National Savings Certificate (NSC),
- 5-year bank fixed deposits,
- Life insurance policies,
- Equity-Linked Savings Schemes (ELSS),
- Unit Linked Insurance Plans (ULIPs),
- School fees, and
- Home loan principal repayment.
In order to make investments in this section one needs to decide on the ideal debt vs. equity mix which is right based on factors like age, risk-return profile & goals.
Section 80D
One can claim deductions up to Rs 15,000 incase you have taken a medical insurance plan for yourself or your spouse or dependant parents or children (and an additional Rs.15, 000 for your parents' medical insurance) under Section 80D for premiums paid. This limit has now been enhanced to Rs 20,000 for senior citizens on the condition that the premiums are paid via cheque.
Section 80DD
Under Section 80DD, expenses related to the medical treatment of a dependent having disability qualifies for tax benefits. This section allows deductions up to Rs. 50,000 or 75, 000 to be claimed depending on the severity.
II. Interest on home loan
Interest component of a home loan is allowed as a deduction under the head ‘income from house property' U/s 24(b) up to a limit of Rs 1.5 lakhs a year for a self-occupied house. The claim can also be made on loans taken for repair, renewal or reconstruction of an existing property.
III. Shuffle and switch strategy
Shuffling is a popular strategy that is used by ELSS [Equity Linked Savings Scheme] investors. They have a mandatory lock-in period of 3 years. Incase you have been investing an amount Rs 50,000 for last few years but don't have cash to invest this year, then you can easily redeem the investments made 3 years ago and re-invest that amount this year so as to claim the benefits. You need not pay any long term capital gains as you will be redeeming after more than one year. Hence you will be enjoying tax benefits without making any fresh investments. The only risk here is the NAV that can go up or down in the shuffle process which may lead to a small profit or loss.
Some fund houses also allow switch option for tax benefits. Suppose an investor with previous ELSS investments doesn't have the money to make further investment in current financial year. In such a case, he can consider switching it to a liquid fund and then back into the ELSS fund within a short period of time like 10-15 days to avail the tax benefits.
IV. Tax smart charitable donations
You can get a tax relief if you donate to institutions that are approved U/s 80G of the Income Tax Act. The rate of deduction is either 50 or 100 %, depending upon the type of the charity fund. There is no upper limit on the amount given to a charity. However, donations should be made only to the specified trusts and only donations of up to 10 per cent of the total income qualify for such deduction. Please note that tax exemption is only an added advantage of charity and this should not be the primary reason for doing so.
V. Divide your income
Generally, if you invest either in your wife's or child's name, then the income generated from these investments will be clubbed with your income & taxed accordingly. But, if you transfer money by way of a deed to a child who is a major i.e. over 18 years of age and invest in his name, then the income generated from this investment will not be clubbed with your income. Instead, it will be clubbed with the income of your child/wife and will be taxed accordingly.
Cash gifts that are received from specified relatives are tax exempt and there is no upper limit. Also, cash gifts of any amount from anyone received during child birth, marriage or any other specified event are totally tax-exempt. But, any cash that is received from a non-relative where the value of gift is in excess of Rs 50,000 in a particular year will be considered as income and taxed accordingly.
In a nutshell remember the following:
- Combine Tax Planning with your Financial Plan for the year so that the products which you invest in will match your risk profile as well as your future goals
- There's no need to consider a home loan as a bad debt. Consider getting a loan for buying a home.
- Charity is good for both – the receiver as well as the giver. Do check on the validity and the receipts before claiming deduction u/s 80G
- Take advantage of the tax benefits under sections 80C, 80D and 80DD
- Insurance policies provide tax benefits on the premiums paid as well as on the returns received.
- By way of medical insurance, you not only take care of your family against medical expenses, but also receive a tax deduction u/s 80D
- Remember to file taxes on time
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