Did you know that if you saved just Rs 10,000 in taxes each year, for your entire working life, and invested your savings, you would accumulate the very tidy sum of Rs 24.13 lakhs?*

*Assuming the savings are invested each year for 30 years, earning a 12% return

Interested?

Forgetting to save on tax is one of the biggest mistakes a working individual can make. At PersonalFN, we would like to help you avoid this mistake. Here are 4 quick and easy ways to make sure that you get the most out of your hard earned money.

1. Use Your 80C wisely
   
   Most of us believe that the Public Provident Fund is the best way to make use of the available 80C benefit. But think again. Do you have a 3 to 5 year investment horizon? Can you bear the risk of the equity markets? If you have answered yes to both of these questions, then consider investing in Equity Linked Savings Schemes (ELSS).
   Diversified equity mutual funds with a 3 year lock in period will most likely yield you a much higher return than your PPF account. This does not mean to say that the PPF account is not a good investment avenue – it certainly is excellent for individuals who want safe, tax free returns (both interest and maturity) and do not need liquidity(Calculate return on your PPF Investments, by using PPF Calculator). But ELSS schemes have given a return of up to 27% per annum, and as the tax laws stand today – there is no long term capital gains tax on equity investments.
   80C also includes other avenues such as repayment of home loan principal, so if you have a home loan, then check how much principal you are repaying during the year, and invest (or don’t invest) in further 80C avenues accordingly. For more information on Section 80C, see our recent article on Tax Saving Under Section 80C.
    
2. Structure your Salary to suit you
   
   There are certain benefits that you can avail simply by structuring your salary correctly.
   For example, if you live in a rented house, increase your HRA component. House Rent Allowance, or HRA, can be of great use to you, based on the following rules:
    
   1. Excess of rent paid over 10% of your salary
   2. 50% of your basic salary (if you live in a metro) or 40% of your basic salary (if you live in any other city)
   3. Actual HRA received
   
   The least of the above is exempt from tax. ‘Salary’ for the purpose of HRA includes your dearness allowance, if you receive any.
   If you are married and your spouse is also working, you can together make the most of your Leave Travel Allowance (LTA).
   Since each of you is entitled to two trips in four years, together, your spouse and you can take four such trips in four years. However keep in mind, your spouse has to be wholly or mainly financially dependent on you for this to be applicable.
   You must also use your other available avenues such as reimbursement of medical expenditure (up to Rs 15,000), education allowance if you have children, transport allowance and food coupons.
   A common misconception is that the best way to restructure one’s salary is to simply reduce the Basic component and increase all the other components. But keep in mind that reducing your Basic, will mean reducing other aspects such as your EPF, gratuity and Superannuation, which are all based on your Basic.
    
3. Use your home loan
   
   If you have a home loan, you have a dual benefit.
   The repayment of the principal of your home loan is eligible for benefit under Section 80C, and the payment of the interest portion of your home loan is eligible under Section 24. If you live in the home i.e. it is self occupied, then the interest deduction is capped at Rs 1,50,000 per year, but if the house is rented out (let out) then there is no cap on eligibility of interest payment for deduction.
    
4. Don’t forget the other Section 80’s
     It’s not just Section 80C that is useful to you.
   1. If you buy health insurance (which you should), the premium paid is eligible for a deduction under 80D (capped at Rs 15,000). You can avail this benefit by buying insurance for yourself and your parents as well, and avail a higher benefit (an additional deduction of Rs 15,000 for your parents, or Rs 20,000 if they are senior citizens).
   2. Section 80E will help you if you have taken an education loan for graduate or post graduate studies for either yourself, your spouse or your child.
   3. You can donate to a charitable institution, and apart from doing a good deed, also save on tax up to either the full amount of the donation, or 50% of the donation amount, depending on the institution you have donated to.
   
   Lets take an example of Mr. Karan, who wants tax planning.
   
   Karan’s salary is Rs 400,000.
   He has a home loan, on which his interest repaid during the year was Rs 1,50,000 and principal repaid was Rs 90,000. He needs health insurance so he has taken a mediclaim policy, the premium is Rs 8,000. He has also taken health insurance for his parents who are senior citizens, their insurance premium is Rs 17,000. His EPF is Rs 50,000 during the year. He wants to plan for his taxes and wants to know how much and where he should invest to save tax.
   
   Let’s see what Karan should do.
   Salary Income: Rs 400,000




 

Add Comments

Comments
rcdesai2001@gmail.com Dec 29, 2010 What about Infrastructure bonds?
anantaprasad.panda@gmail.com Dec 29, 2010 Very lucidly explained.Excellent. Thanks
yogeshvij7@gmail.com Dec 30, 2010 An Excellent read
warriersobha@gmail.com Dec 31, 2010 pls tell me which infrastructure bonds can i invest now. I have to show proofs by Jan 5th
gali@galigordon.com Feb 25, 2012 Max Hoopla That you will pay an arm and a leg to get your money about two weeks sooner than you would if you just had direct deposit to your bank account.September 5, 2011 | 11:57 pm

 1 2