It is that time of the year when we have to file our taxes for the year. It is not a task that many of us enjoy and we want to quickly get it done with. But in our eagerness to get it done with, we must make sure that we do not file the returns inefficiently as this would mean increased tax outgo and mismanagement of our money. We must make the best use of the different ways to reduce our tax liability and at the same time ensure that our financial plan is on course to achieve our goals.

The rules regarding taxation also change many times. It is important to be aware of the changes for the current financial year and plan taxes such that we do not file inaccurate returns which can lead to issues and penalties.

Let us look at the different ways to reduce tax liability –

Investments

  • You can make investments in certain products and get exemption up to ₹ 1,50,000 on the gross total income calculated. This is available under Section 80C. You can invest in the following products –
    • Public Provident Fund (PPF)
    • Employee Provident Fund (EPF)
    • Equity Linked Savings Schemes (ELSS)
    • National Saving Certificates (NSC)
    • 5 year fixed deposits with banks and post office
    • Sukanya Samariddhi Account

You should understand the risks, returns and redemption details of investing in these           products and choose as per your requirements and capability. For example, ELSS schemes         have the potential to give higher returns as compared to fixed deposits but face more             volatility and have no guaranteed returns.

Sukanya Samriddhi account is only applicable for girl children.

  • You can invest in government approved pension schemes like NPS or APY and get additional tax exemption up to ₹ 50,000 under Section 80CCD or up to ₹ 2,00,000 under Section 80CCE if it is the only contribution made. Here one has to remember that contributions only to Tier 1 NPS accounts are eligible for these tax benefits.

Deductions

You must be incurring many expenses in your day-to-day life. Some of these expenses can be deducted from the total taxable income thus reducing the tax liability. Some of these expenses are –

  • Standard deduction of ₹ 50,000 or taxable salary, whichever is less.
  • Expenses like Children’s Tuition Fees are deducted from income calculated.
  • Premium payment made for Life Insurance
  • Principal repayment of housing loan
  • Interest paid on home loan and education loan
  • Deduction on the amount donated to charity funds, relief funds specified up to a sum of ₹ 50,000
  • Deduction of the amount donated to specified research association, poverty eradication fund or fund for afforestation
  • Health Insurance Premium paid.
  • Expenditure incurred on a differently-abled dependent whom you are supporting financially. If the extent of disability is between 40% -80%, a deduction of ₹ 75,000 can be claimed. If the disability is more than 80%, the deduction limit is ₹ 1,25,000.

You must be aware of the amount that is allowed as deduction in different categories. For example, up to ₹ 25,000 is allowed for health insurance of self, spouse and dependent children and ₹ 25,000 for medical insurance of parents less than 60 years of age and ₹ 50,000 in case parents are above 60 years old.

You can claim a deduction of up to ₹ 1,50,000 for principal repayment of a home loan.

Exemptions

Some income earned is exempt from tax. So if your income consists of these items, do not consider them while calculating the taxable income. The income under the following heads are exempt from tax –

  • Agricultural income
  • Dividend income up to ₹ 1,00,000
  • Interest income up to ₹ 10,000
  • Reimbursements such as House Rent Allowance (HRA) and Leave Travel Allowance (LTA).

Do remember that there are limits and conditions to the reimbursements. For example, you can claim LTA exemption only for two journeys in a block of four years. The current applicable block is January 2018 – December 2021.

Here is an example of how to calculate the tax payable for the financial year 2018-2019 –

Shreya earns a salary of ₹ 6,80,000 annually. She is a resident Indian and NOT a senior citizen. There is no HRA or LTA in this salary. Let us see how much tax does she have to pay –

In Scenario 1, she had not invested in options like PPF nor did she have any medical insurance. She ends up paying a tax of ₹ 42,536. In Scenario 2, she has invested in PPF and also taken a medical insurance policy. She will reduce her tax liability and is liable to pay only ₹ 29,640.

As you can see, if you plan your taxes efficiently, you will reduce the tax payable legally.

Vidya Kumar

Dilzer Consultants Pvt Ltd