Paying income tax is the primary responsibility of every responsible citizen. However, there are various means by which income tax liability of an individual can be reduced. This is referred to as tax planning. It is not the same as tax evasion.
Below are certain income tax provisions which can benefit the tax payer by reducing his income tax liability:
Deduction under section 80C, 80CCC, 80CCD, 80D
Amount invested in life insurance policies, ULIPs, endowment plans, term plans, public provident fund, NSCs, principal repayment of home loans availed, etc. can be claimed as a deduction under section 80C. Deduction under section 80CCC can be claimed for investments in pension schemes.
Such deductions can be claimed upto a limit of Rs. 150,000.
Medical insurance availed for the benefit of self, spouse, parents or dependent children can be claimed as a deduction under section 80D. Amount of deduction is limited to Rs. 25,000. In case if medical insurance is for the benefit of a senior citizen the above mentioned limit is increased to Rs. 30,000. Such medical premium must be paid in any mode other than cash.
Capital gains on certain securities
Capital gains arising on transfer of equity shares, units of an equity oriented fund or units of a business trust are exempt from tax under section 10(38). Provided, if such securities are sold within a period of less than one year from its date of acquisition then capital gain will be taxable at the rate of 15%
Deduction relating to donations
Deduction under section 80G can be availed for amount donated subject to the limits laid down. Deduction can be claimed up to Rs. 10,000 if donation is made in cash.
Deduction can also be claimed for donation to a political party or an electoral trust, provided it is made in any mode other than cash.
Tax planning for capital gains
Capital gains arise on the transfer of any capital asset. Long term capital gains are subject to tax at 20% while short term capital gains are included in the total income of the taxpayer. Exemption under 54 series can be availed to reduce the tax liability on capital gains. Various exemptions are available under section 54 depending upon the nature of capital gains and asset transferred. Exemption can be claimed if the amount of capital gain is invested as per conditions specified.
Deduction under Rajiv Gandhi Equity Savings Scheme
This deduction is available to a first time retail investor. It is subject to various restrictions. Total income of the tax payer must not exceed Rs. 12 Lacs in the previous year in which deduction is availed. Amount of deduction is limited to 50% of amount invested or Rs. 50,000, whichever is lower. Further, the lock in period of the investment made is 3 years. This scheme was introduced in order to boost investments in capital markets.
Business specific exemptions
Deduction under section 80-IA to 80RRB can be availed as per the conditions laid down. Tax holidays, deductions as a percentage of profits or losses derived from business or any amount specified as per the section can be claimed. Additionally, deduction under section 10AA is also available to those units which are set up in any Special Economic Zone.
Thus, given above are the six pillars of tax planning which must be considered while making any crucial decisions.