Tax Planning for Salaried class

Tax Planning plays a very important role in 'Financial Planning'. The additional funds saved through tax planning can be utilised for wealth creation in the long run. There is reasonably good awareness amongst salaried individuals about Section 80C of IT Act. The following investments are eligible for deduction under section 80C (The maximum exemptions allowed are Rs.1,00,000 inclusive of deductions under pension plans covered under section 80CCC):

• Life Insurance Premium
• Provident Fund/ Public Provident Fund
• National Saving Certificate, plus accrued interest on it
• Tuition fees paid for children's education (maximum 2 children)
• Principal component of home loan repayment
• Equity Linked Savings Schemes (ELSS) of Mutual Funds
• 5-Year and above fixed deposits with Banks and Post Office

Insurance should be an important constituent of Section 80C. Going for term insurance, helps you to get a higher insurance cover at a lower price. The two other attractive options are PPF and ELSS. The maximum limit for investment in PPF account is Rs.70,000 per year, but it gives a handsome effective post tax return of 16.32% for the tax payer in the highest tax bracket, because PPF is an EEE scheme (not only is the initial investment tax free, but accrued interest and principal repayment is also exempt in the hands of the investor. ELSS is still a better option for those who can take higher risk. Although returns under ELSS are not assured, the average post tax return can be higher than PPF.

There are other attractive tax saving options as well:

Section 80D: An individual who pays medical insurance premium for self or spouse/dependent children is allowed a deduction of up to Rs 15,000 pa under section 80D. An additional deduction of up to Rs 15,000 pa is allowed for premium payment made for parents. In case the parents are senior citizens, then the maximum deduction allowed is Rs 20,000 per year.

Section 80E: Interest accrued and paid on Education Loan availed for self, spouse or dependent children is exempt without limit.

Section 80G: Subject to the stated limits, donations to specified funds/institutions are eligible for tax benefits under Section 80G.

Home loan: Individuals intending to buy a house should opt for a home loan. Interest payments of up to Rs.150,000 pa are eligible for deduction under Section 24. In case of joint home loan, each individual can claim deductions up to Rs.1,50,000 pa.

Salaried individuals can claim rent paid by them for residential accommodation, if HRA doesn't form part of their salary. This deduction is available under Section 80GG and is least of the following:
25% of the total income or, Rs 2,000 per month or, excess of rent paid over 10% of total income.