Tax planning for beginners
Some smart planning can help you save thousands of rupees. Tax saving can also mean sound investments. The first step to understanding your taxes is to see what makes up your salary. Do you get HRA, LTA, transport allowance? Ask for a copy of your payslip or tax computation from your HR or payroll department. Let’s also find out the tax deductions available and how can you make the most of them. If this is your first job or first time at paying taxes, here are some quick tips to help you.
Planning your taxes: First things first, your taxes must be planned for each financial year. This is the 12 month period that begins on 1st April and ends on the 31st March of the next year. No matter when you start your job, your tax year closes on 31st March and a new tax year starts on 1st April. Plan your taxes for each financial year beginning on 1st April and ending on 31st March. So if you are doing tax planning during December, January or February of 2015, do pay the annual dues. Or else you may be only eligible to claim as deduction amounts that pertain to these 2-3 months.
Exemption on HRA: If you live on rent and get HRA from your employer, you can get tax exemption on HRA. Make sure you have a rent agreement and rent receipts from your landlord. Do submit these timely to your employer to claim exemption on HRA. LTA exemption can be claimed by you twice in a block of four years on trips within India. For claiming this exemption you’ll have to submit bills of travel.
Income Tax Deduction 80C: Tax deductions have been listed in Section 80 of the income tax act. No tax saving discussion is complete without mentioning Section 80C. A maximum of Rs. 1,50,000 can be claimed under section 80C. This means if you make the most of this section you can reduce Rs. 1,50,000 from your gross total income and pay tax on the remaining income. Several items are eligible under section 80C. First look at the deduction made by your employer towards employee provident fund (EPF) from your salary. EPF deducted from your salary can be claimed as a deduction under section 80C. This amount is 12% of your basic salary. Reduce this value from total eligible amount of Rs. 1,50,000. From the remaining balance, you can claim premium payments for life insurance policy and investment in ULIPs. You can also opt for some of the traditional methods of investing such as PPF (Public Provident Fund) and NSCs. Nowadays a PPF account can be opened in private banks and online access is also available. A maximum of Rs. 1,50,000 can be invested in a PPF account. You must make this investment in the financial year for which you want to claim the exemption. NSCs have to be purchased from post offices. You can also purchase an ELSS fund, although you must make sure this investment is made during the relevant financial year. If you opt for a SIP for an ELSS or make part payments to a ULIP, only the payment actually made is eligible for deduction. So plan for the whole year and if you are late in investing attempt to invest an annual amount.
Deduction under section 80D for medical insurance: Tax deduction under section 80D is available for amount paid to secure a health insurance. An amount of Rs 25,000 can be claimed for self, spouse and children (limit is Rs 30,000 if age of the person is 60 years or more) . You can also claim an additional Rs 25,000 for health insurance for your parents (limit is Rs 30,000 if age of the person is 60 years or more). Health care expenses have risen for families and this is a wise investment to make.
Deduction under section 80TTA for savings account interest: Interest earned by you from savings account and fixed deposits is taxable. However, for interest earned from savings account deduction of maximum Rs 10,000 under section 80TTA is available. Include your gross interest income in your tax return and claim this deduction. No documents or proofs are required to claim this deduction, and most e-filers allow it on their website automatically.
Most of these deductions can be directly claimed in your tax return. But your employer is liable to deduct TDS on what he pays you, therefore it helps to make all your tax saving investments timely. Otherwise a higher tax may be deducted by the employer. This higher TDS can be claimed as credit against your annual tax payable and may result in refund in your tax return.
Quite a lot of these tax saving instruments can be purchased online. Online transactions are safe and can be made quickly once you have chosen a means to invest and save tax.
You’ll find these tips helpful while tax planning for the financial year 2015-16.
This article is by ClearTax (www.cleartax.in), where Individuals and Businesses can e-File their I-T Returns online.
Tax disclaimer: Please note that the tax write-up above is for general understanding and reference. The reader will have to verify the facts, law and content with the prevailing tax statutes and seek appropriate professional advice before acting on the basis of the above information. Tax benefits/savings are subject to conditions of Section 80C, 80CCC, 80CCE, 10(10A), 10(10D) and other provisions of the Income Tax Act, 1961. Tax laws are subject to amendments from time to time. ICICI Prudential Life Insurance Company Limited expressly disclaims any liability to any person, if tax benefits stated above are denied to the customer. L/II/1416/2015-16