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Taxing Efforts
March 04, 2022 COMMENT comment
Taxing Efforts
By Niku Sidhu
In this world nothing can be said to be certain, except death and taxes, said Benjamin Franklin. While you can’t escape death, we outline ways to minimise taxes as far as possible. All financial action will have consequences of levy of tax. It is unfavourable to allow the "tax" tail to wag the financial "dog". Charity can go a long way to help reduce tax. Donations to specified institutions are eligible for tax benefits.
The act of engaging in any form of activity as a salaried employee or a business person for the purpose of receiving in turn a monetary compensation automatically translates into payment of taxes. The process of forecasting tax liability arising thereof, and finding ways to reduce it, is called Tax Planning. It implies that a person shall create circumstances that are tax efficient. Financial decisions shall be taken throughout the year with the goal of minimising tax outgo and maximising tax benefits as per income tax laws by using specific exemptions, deductions, rebates and reliefs.

Tax planning also encompasses the timing of income and purchases and other expenditures as much as the choice of investments. All financial action will have consequences of levy of tax and fiscal prudence lies in not avoiding taxes only on this basis. It is unfavourable to allow the "tax" tail to wag the financial "dog".

You first need to calculate your taxable income, that is, income from salary/business, rental from property (commercial and residential), capital gains from investments in shares and mutual funds, and income from other sources, for example from dividends.
2. Calculate tax payable on gross taxable income for the financial year (that is from April 1 to March 31) using the tax rate table given on the facing page.
3. Either pay all your taxes OR minimise tax with careful tax planning.
Income Bracket Rate
0 to Rs 2,00,000 0%
Rs 2,00,000 to Rs 5,00,000 10%
Rs 5,00,000 to Rs 10,00,000 20%
Above Rs 10,00,000 30%
The investments that qualify for Section 80C deductions are:
Public Provident Fund / Employee Provident Fund
National Saving Certificate
Accrued interest on National Saving Certificate
Life Insurance Premium
Tuition fees paid for children’s education (maximum two children)
Principal component of home loan repayment
Equity Linked Savings Schemes (ELSS)
Five-year fixed deposits with banks and post office
Pension Plans, et cetera

Public provident fund(PPF) is a favourite and recommended as a tool of long-term wealth creation. It is incredibly flexible at the time of making a deposit with an investment minimum of Rs 500 to a maximum of Rs 1,00,000 in a financial year. Depending on availability of funds, amount invested can vary each year. PPF makes an attractive case offering a return of 8.8 per cent per annum, compounded annually.

Fixed deposits over five years give a tax benefit but unlike PPF, the return from fixed deposits is taxable. In both the cases, your money is blocked for five years. Total money can be withdrawn from fixed deposits but PPF allows only partial withdrawal, slipping it in the list of long-term investments.

National Saving Certificate (NSC) is a worthwhile instrument for those who are in the highest tax bracket. A five-year NSC will generate a yield above 16 per cent at the current interest rate of 8.6 per cent.

Equity linked saving scheme (ELSS) is like any other equity mutual fund with tax benefits. It may be a lump-sum amount or a systematic investment plan (SIP). With SIP you reap the benefit of cost averaging by investing an equal sum of money each month.

Before putting money into any instrument, one must assess the economic conditions. Circumstances last year were different from this year hence your investment strategy should be adapted accordingly to maximise your wealth.

Section 80C of the Income Tax Act allows a total maximum investment of Rs 1,00,000 per financial year in a combination of products mentioned above. If a total investment of Rs 60,000 is made in life insurance, employee provident fund and PPF, the remaining Rs 40,000 can be a SIP route to invest in the equity market.

An individual with a taxable income of Rs 7,00,000 utilising only half of the available Rs 1,00,000 limit ends up paying an additional tax of Rs 15,450 as compared to a person with the same taxable income, but who has utilised the entire 80C limit.


What happens once the 80C route to tax planning is exhausted?

Answer: There is more for those with a fiscal appetite. Beyond a salary of Rs 2,00,000, the road to investment in a basic need leads to a tax break too. Home loans are eligible for deduction under Section 24 of the Income Tax Act. Repayment of the home loan equated monthly instalment (EMI) entails a principal component and an interest component. An interest up to Rs 1,50,000 is deductible from income per financial year.

A Section 80D deduction of up to Rs 15,000 per annum is allowed for self, spouse and dependent children for medical insurance.

A bit of charity can go a long way to help reduce tax. Donations to specified institutions are eligible for tax benefits under Section 80G.

A salaried individual wishing to further his or her education should avail of an education loan where the total interest is eligible for deduction under Section 80E.

It sounded like a taxing effort even to Albert Einstein when he said on filing his tax returns, "This is too difficult for a mathematician. It takes a philosopher." However, the exercise must be given the importance that it deserves.

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