Tax Planning is an integral part of financial planning as our personal finance decisions affect the money we pay to the government in some or other way. Whether we open a savings account or receive gifts in our relationships, all of them have tax implications which we should be well aware of. However, most of our decisions related to tax saving revolve around basic sections like 80C, 80D or 80CCF. One of the primary reasons for this is the easy availability of these options irrespective of your financial situations. But awareness on other avenues and understanding of tax implications of our financial decisions can help some of us in reducing our tax liability.
Take case of Ravi Shankar. He is a well settled IT professional married to a housewife and blessed with a 5 year old son. He lost his parents soon after his marriage and responsibility of his disabled brother now rest on his shoulder. Earning an income of Rs 6 lakh p.a. he is not well conversant with financial market. Although he has been investing through reading in news-papers and advice from his friends, some of the decisions he made have started affecting his savings ability.
Let’s understand Ravi situation and see if some of the provisions can really help him to reduce his tax liability. During the course of Ravi Shankar study we will identify various options available to an Indian citizen some of which are applicable in specific situations.
As per the income tax amendments following are the income tax slabs applicable for Fy 2011-2012 :
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Tax
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Man
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Women
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Senior Citizen
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Senior Citizen
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Age =>60 and < 80
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Age => 80
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||||
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Rate
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(In Rupees)
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(In Rupees)
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(In Rupees)
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(In Rupees)
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1
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0.00%
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Upto 1,80,000
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Upto 1,90,000
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Upto 2,50,000
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Upto 5,00,000
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2
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10.00%
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1,80,001 to 5,00,000
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1,90,001 to 5,00,000
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2,50,001 to 5,00,000
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3
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20.00%
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5,00,001 to 8,00,000
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5,00,001 to 8,00,000
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5,00,001 to 8,00,000
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5,00,001 to 8,00,000
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4
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30.00%
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Above 8,00,000
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Above 8,00,000
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Above 8,00,000
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Above 8,00,000
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Income Tax Slab for Financial Year 2011-12
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Assessment Year 2012-13
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Note :- 1) Surcharge is Nil and 3% Cess will be charged on Above Tax
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2) Age of Senior Citizen is = 60 Years
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Ravi Shankar falls under 20% tax slab and his tax liability comes to Rs 53560. He is already making an investment of Rs 100000 through various options which reduces his taxability to Rs 32960.
This is what he has been paying to the government up till now but he has to relook all the options and provisions in income tax as some expenses and recently made financial decisions is going to affect his earnings going forward.
He has been spending Rs 50000 annually on medical treatment & Rehabiliation of his younger brother Anuj since the time his parents died. But lack of knowledge on the tax benefit available, he has never claimed these expenses.
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80DD
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Deduction for expenses towards maintenance including medical treatment for a dependent who is person with disability.
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Rs 50000
Rs 100000 in case of severe disability
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80DDB
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Deduction towards medical treatment etc for self or dependent on some specified disease or ailment. Dependent includes spouse, children’s, brothers’, sisters’ & parents’
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Max Rs 40000
Additional Rs 20000 for senior citizens
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80U
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Deduction in the case of a person with Disability
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Rs 50000 for person with disability and Rs 100000 for person with severe disability
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Hence Ravi can easily claim Rs 50000 for the expenses. This will reduce his liability to Rs 27810.
Another important decision which Ravi took was opening a Fixed Deposit of Rs 4 lakh at 9% interest on his son’s name this year. The investment is going to fetch Rs 36000 interest annually. Uptil now he was lot confused as the interest is way above tax exemption limit , which is Rs 10000 from all sources, but it’s entirely on his sons name who is minor.
This is what income tax says about minor income;
“As per Section 64 (1A) the income of a minor child shall be clubbed in the hands of that parent whose total income (excluding income of minor) is greater. If the marriage of the parents does not subsist, the income shall be clubbed in hands of the parent who maintained the child in previous year”
Since Ravi is the only income earner the interest income of on his son’s investment will be clubbed with his income. However, there is a small deduction available to him ;
‘As per Section 10(32) of the Act, out of the income clubbed under the new provisions, deduction of income upto Rs. 1500 per child will be allowed. Thus, if the income of any minor child is less than Rs. 1500, the same will not be clubbed, but if the income is more than Rs. 1500, amount in excess of Rs. 1500 will be clubbed. “
So now the taxability of Ravi Shankar will increase to Rs 31364 from this year as the interest income is also added to his income. Since this was an investment decision, PPF or any other product would have saved him from increasing the tax outgo keeping the goal consideration intact.
Situation like these are not unique but demands a relook on the net benefit one is going to earn. Ravi Shankar was not aware of minor income otherwise he would have chosen other instruments. Similarly there are other provisions in income tax which should be looked at minutely as it will change your tax liability affecting your savings and other goals.
For simplicity I have compiled a list of certain provisions and deduction available to an individual beyond sec 80C, 80D & 80CCF. Some of the deductions available can help in reducing the tax liability while some provisions have to be looked in detail for knowing your payout to the government.
Deductions available in computing Total Income
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Sections
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Particular
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Limit
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80DD
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Deduction for expenses towards a dependent person with disability. The expenses includes medical treatment also
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Rs 50000 with disability
Rs 100000 in case of severe disability
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80DDB
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Deduction towards medical treatment etc for self or dependent on some specified disease or ailment. Dependent includes spouse, children’s, brothers’, sisters’ & parents’
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Max Rs 40000 with disability
Additional Rs 20000 for senior citizens
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80G
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Donations made to certain charitable institutions, fund etc.
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100% or 50% of eligible donations
Options
a) With qualifying limit of 10% of GTI
b) Without any qualifying limit
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80U
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Deduction available to person with disability
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Rs 50000 with disability
Rs 100000 with severe disability
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80E
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Deduction for interest paid on a loan taken for higher education
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Entire interest paid during previous year is allowed as deduction from total income
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Taxability of income in some cases
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Particular
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Section
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Taxability
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Exemption
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Minor Income
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64 (1A)
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Income to be clubbed in hands of parent with higher income.
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Income is exempted up to Rs 1500 per child
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Gifts
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56 (2)
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Gift received for more than Rs 50000 in value is added to your income and taxable as per income tax slab.
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Gifts received from relatives on the occasion of marriage, from parents and grand parents, by a daughter-in-law from her parents-in-law, and gifts received by way of a will and inheritance are exempted. An NRI can gift to his parents in India through NRE account without any taxability.
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This article by me was published in Business Bhaskar on 13th Feb,2012
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IMPORTANT DISCLAIMER!
This and All the other Articles/Videos on this blog are for general Information and educational purposes and not to be taken as an Investment Advice. Any Action taken by Readers on their Personal finances after reading our articles or listening to our videos will be purely at his/her own risk, with no responsibility on the Writer and the Investment Adviser. Registration Granted by SEBI, membership of BASL and Certification from National Institute of Securities Markets (NISM) in no way guarantee performance of the intermediary or provide any assurance of returns to investors.
This is a very nice article. Few things that a common man never knows he can get exemption on. Excellent job.
Thanks Mans.
Yes these exemption are less known to masses and one of the primary reason is that these are not applicable to every individual. But one should be well aware of these too to take the benefit.
Dear sir,
I have sold a piece of land along with a building on 4th march,2016 at 25L to a person and took 3L from his friend as an advance on 20.2.2016 for selling the rest of the land on I have already31. 3. 2017 and put both the monies in a single Capital Gains Account already on March this year. Now Should I show both the monies in AY 2016-17 or I can show the 3L in 2017-18Ay. I have already submitted my tax return, putting both the monies in the long term capital gains, will be there any trouble? If any, can you suggest any alternative? Thanks.
Susanta Kr Ghosh, e-mail
susanta.robi.@gmail.com