Wondering how to optimize your taxes???

The key lies in prudent and

effective tax planning

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 What is tax planning?

Judicious use of provisions of

the Income Tax Act to optimize
your tax liability

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 Tools of tax planning

Tax Planning

Exemptions Deductions

Rebate

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 Let us know more …

Exemptions refer to those income which are earned

but not taxable.
Exemptions
e.g. Dividend income, proceeds from an
Insurance company, LTA rules etc.

Deductions refer to those investments or

payments which will be deducted from total income.
Deductions
e.g. Contribution to ELSS, ULIPs, children’s tuition
fees paid, interest on home loan etc.

Rebate is a reduction from tax payable.

Currently there is only one rebate available i.e.
Rebate
Rebate for STT applicable only to an individual
who is involved in the business of dealing in shares

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Since exemptions are understood widely and
no other rebate is available
(apart from STT rebate for businessmen),
lets us focus more on deductions…

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 Beware.
Tax planning is not a generalised process!
It will depend on one’s profile

. . . . . to illustrate, lets look at three varied profiles

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 Case A – Mr.Shekhar

I Personal Profile
Age 40
Marital Status Married
No. of children 2 (aged 8 yrs and 3 yrs)
Type of employment Government employee
Type of accommodation Own
Annual principal repaid Rs.18,000
Home loan Annual interest payment Rs. 1,00,000
(For a loan of Rs.10 lacs)
II Salary Details
Annual salary 4,00,000
Tax rate applicable 30%
Tax payable (before considering
71,400
impact of housing loan and EPF)

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 Case A – Suggested tax planning

Amt.
Details
(Rs.)
Salary before tax planning
Less: Deductions u/s 80C
1. Annual EPF contribution
2. Children's tuition fees
3. Home loan principal amount
4. Insurance premiums
a. Traditional endowment plan/
money back plan
b. Child plan
c. Mortgage redemption plan
5. ELSS
Amt.
Explanation
(Rs.)
4,00,000 Salary after considering taxable HRA
Employee's contribution to PF can be claimed as a
15,000
deduction u/s80C
Earlier there was a limit of Rs.12,000 per child for
claiming a deduction, however from assessment year
13,000
2006-07, the limit is withdrawn. This is currently available
only for the tuition fees paid for upto 2 children
Principal portion of home loan EMIs are eligible for
18,000
deduction
Life insurance premiums are eligible for deduction.
1,00,000 This policy will meet the dual purpose of risk cover along
25,000 with ensuring a specific amount at the expiry of the term
or during the term.
A child plan where life assured is the parent would
10,000
provide for the future expenses of the children.
This plan will insure repayment of outstanding EMIs on
2,000
home loan in the event of his death
It is important for Shekhar to have some exposure to
17,000 equity markets so that his savings multiply at a higher
rate.

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 Case A – Suggested tax planning (Contd.)

Less: Deductions u/s 80D

Medical insurance premiums (towards critical illness and

1. Critical illness plan
mediclaim) are eligible for deduction u/s 80D. As
Shekhar’s employer has already given him health
10,000 10,000
insurance cover, he need not opt for mediclaim. As he is
aged 40, it is important for him to have critical illness
cover.

Less: Deduction u/s 80GG NA Not available as he is not paying any rent for his home

Less: Deduction u/s 24 1,00,000 1,00,000 This deduction is available for interest on housing loan

Taxable salary after tax planning 1,90,000 Tax slab rate applicable 10%

Tax payable after tax planning 13,260

Savings in tax 58,140 Resulting in tax savings of 82%

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 Case B – Ms. Girija

I Personal Profile
Age 25
Marital Status Single
No. of children -
Type of employment Private employee
Rented (receiving HRA)
Type of accommodation
Rent paid p.m. – Rs.5,000
Home loan N.A.
II Salary Details
Annual salary 2,40,000
Tax rate applicable 20%
Tax payable (before considering
19,890
impact of housing loan and EPF)

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 Case B – Suggested tax planning

Details Amt. (Rs.) Amt. (Rs.) Explanation

Salary before tax planning 2,40,000 Salary after considering taxable HRA

Less: Deductions u/s 80C

Employee's contribution to PF can be claimed

1. Annual EPF contribution 9,000
as a deduction u/s80C

Life insurance premiums are eligible for

2. Life insurance premiums
deduction.

By opting for term plan, she can cover her

a. Term plan 8,000
parents future expenses at a very low cost.
62,000
ULIPs will give her the dual advantage of risk
b. ULIPs 25,000 cover along with wealth creation. She should
opt for equity option under the ULIP.

Girija having more earning life has the ability

to absorb more risk. Therefore, she should
3. ELSS 20,000
allocate higher portion of savings towards
wealth creation (ELSS and ULIP).

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 Case B – Suggested tax planning (Contd.)

Less: Deductions u/s 80D

Though Girija can save higher amount of tax by

paying premium upto Rs.10,000 (giving medical
insurance cover of app. Rs.10 lakhs), she does not
1. Mediclaim 3,000 3,000 need mediclaim policy of higher cover. If she opts
to pay Rs.7,000 more towards mediclaim she may
save taxes of Rs. 1400 only, while the coverage of
Rs. 10 lakh may not prove to be utility for her.

Not available as she is not paying any rent for her

Less: Deduction u/s 80GG NA
home

Taxable salary after tax planning 1,75,000 Tax slab rate applicable 10%

Tax payable after tax planning 6,630

Savings in tax 13,260 Resulting in tax saving of 67%

It should be noted that we have not recommended Girija to utilize section 80C and 80D completely.
Tax planning does not mean the reducing the tax liability to zero, sometimes it makes sense to make
some tax payment instead of buying into tax saving products (which may not have utility for the investor).

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 Case C – Mr. Roopesh

I Personal Profile
Age 30
Marital Status Married
No. of children -
Type of employment Self employed
Rented
Type of accommodation
Rent paid p.m. – Rs.8,000
Home loan N.A.
II Salary Details
Annual salary 5,00,000
Tax rate applicable 30%
Tax payable (before considering
1,02,000
impact of housing loan and EPF)

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 Case C – Suggested tax planning
Details Amt. (Rs.) Amt. (Rs.) Explanation

Salary before tax planning 500000

Less: Deductions u/s 80C

As he is self employed, he can invest sums in PPF which

1. Annual PPF contribution 20000 will form a decent corpus for his retirement. This
contribution can be claimed as a deduction u/s 80C

4. Life insurance Life insurance premiums are eligible for deduction.

A term plan offers the advantage of a risk cover at a

a. Term plan 20000
reasonably low cost.

As Roopesh is in a position to take a reasonable amount

of risk, it makes a lot of financial sense to opt for a
b. ULIPs 20000
ULIP, which will give him a risk cover along with market
100000
linked returns.

c. Whole life plan (for Roopesh can also claim a deduction on premium paid
10000
his wife) on a policy covering his wife’s life.

ELSS serves an investment option with perfect balance

5. ELSS 30000
between equity market returns and tax benefits.

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 Case C – Suggested tax planning (Contd.)

Less: Deductions u/s 80D

Roopesh can take a mediclaim policy for himself and his

spouse. A mediclaim policy is a good option for Roopesh
1. Mediclaim policy 5000 5000
for tax planning beyond Sec.80C, along with providing
him with a health cover.

Can be availed only if paying rent for home and are not
Less: Deduction u/s 80GG (Note) 24000
in receipt of HRA

Taxable salary after tax planning 366000 Tax slab rate applicable 30%

Tax payable after tax planning 60996

Savings in tax 41004 Resulting in tax savings of 40%

Note: Computation of deduction u/s 80GG for Roopesh:

In his case deduction for rent paid can be availed to the extent of least of the following:
à Rs.2,000 p.m. = Rs.24,000
à 25% of his taxable income i.e. 25% of 3,90,000 = Rs.97,500
à Rent paid in excess of 10% of taxable income i.e. [Rs.96,000 – (10% of 3,90,000)] = Rs.57,000.
Thus he can claim a deduction of Rs.24,000 u/s 80GG

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 For more details refer
Advisor’s Guide – Tax Planning
(Jan-March 2007)
or
Contact PFP Team
(financialplanner@karvy.com)

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