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Today's provisions and tomorrow's DTC: Plan your taxes
December, 14th 2011

When it comes to planning our taxes, most of us make impulse decisions because of the last minute planning and in the process we may end up buying products which are not right for us. Efficient planning of your taxes is crucial for your long term financial health.

Tax planning should be done a few months in advance so that you have ample time to understand and evaluate different options that are specific to your financial situation. Instead of waiting for the March month to arrive when your insurance agent or neighbourhood advisor will coax you into products you dont need, start tax planning now for assessment year 2011-12.

The tax planning investment avenues require long term commitment, for e.g., if you take up an insurance policy for the term of 10 years then you have to pay premium for 10 years. Similarly for PPF it is for 15 years. This long term investment commitment requires that we take the investment decision very carefully and diligently taking into consideration our future inflow and outflow of funds. This aspect becomes more pertinent in view of the proposed direct tax code (DTC) that will be enacted in the forthcoming financial year.

In the proposed DTC, remarkable changes have been proposed. It is important to know that some of the securities will not fetch the tax benefit in coming year which are available in the current year. Hence it is necessary to understand all the aspects of various provisions and proper befitting tax planning and keep ourselves abreast with the provisions and tax slabs.

It is important to note that in the current financial year (2011-12) the eligible age for senior citizen is 60 years instead of 65 years. Along with this a new category of Very Senior Citizen has been introduced in which a person of 80 years and above is entitled for the basic exemption of Rs 5 lacs i.e. they need not have to pay tax up to the income of Rs 5 lacs.

Tax Slab for FY 2011-12(AY 2012-13)

Male Female Senior Citizen(Male and Female 60-79 years) Very Senior Citizen (80 years and above Tax Slab
Up to  Rs 180000 Up to Rs 190000 Up to Rs 250000 Up to Rs 500000 0%
From Rs 180001 to Rs 500000 From Rs 190001 to Rs 500000 From Rs 250001 to Rs 500000   10%
From Rs 500001 to Rs 800000 From Rs 500001 to Rs 800000 From Rs 500001 to Rs 800000 From Rs 500001 to Rs 800000 20%
 Rs 800001 or above Rs 800001 or above Rs 800001 or above Rs 800001 or above 30%

The various provisions of IT act pertaining to investments (the tax savings exemptions)  during the current financial year 2011-12 (AY 2012-13) available to individual and HUF  and from the FY 2012-13 after the enactment of DTC are outlined below:

Under section 80C, 80CCC and 80CCD one can claim deduction up to Rs 1 lac.  The various investment options in these sections are - 

Section Investment/contribution/payment Eligible Tax Payer Proposed DTC Provision
  Life Insurance Premium Individual & HUF  Should not exceed 5% of sum assured maximum of Rs. 50000 (including Tut ion fee, Mediclaim premium)
  Tution Fee for Children Individual Same as above
  PPF- Public Provident Fund Individual Maximum of Rs. one lac in approved funds ( EPF,PPF New Pension Funds)
  EPF- Employees Provident Fund Individual
  NSC- National Saving Certificate Individual  
  ELSS- Equity Linked Mutual Fund  Individual & HUF  
  Housing Loan Principal Repayment Individual & HUF No Provisions for Tax Exemptions
  Registration and Stamp fee on House Property  Individual & HUF  
  Tax Savings Fixed Deposit (PO/Bank) Individual & HUF  
80C Senior Citizen Saving Scheme Sr. Citizen  
80CCC Contribution in Pension Fund Individual Maximum of Rs. one lac in approved funds ( EPF,PPF New Pension Funds)
80CCD Contribution in New Pension Scheme Individual

While selecting the options under these sections one should keep in mind their need, goals, time horizon and risk profile. 
Infrastructure Bonds (Section 80 CCF)

Current Provision - In budget 2011-12 finance minister announced to continue the additional deduction of Rs 20,000 for individual and HUF in respect of long term infrastructure bonds under section 80CCF. This deduction is in addition to the deduction of Rs 1 lac allowed under sections 80C, 80CCC and 80CCD of the Income tax act.

Proposed DTC - This deduction is not proposed in DTC.

Health Insurance Premium (Section 80 D)

Current Provision - If you have taken a medical insurance plan for yourself, your spouse and/or children then you can claim deductions up to Rs 15,000 and an additional Rs 15,000 can be claimed for your dependent  parents under Section 80D for the premiums paid via cheque. In case of senior citizen one can claim deductions up to Rs 20,000.

Proposed DTC - The DTC provides the deduction up to Rs 50,000 for the premium paid for life insurance premium (restricted up to 5% of sum assured), mediclaim insurance premium and children tution fee.

Disabled Dependents (Section 80 DD)
Current Provision Under section 80DD, deduction is available for expenditure for the medical treatment, training and rehabilitation of a dependant, being a person with disability; or paid or deposited any amount, under any scheme framed by the LIC or any other insurer or UTI and which is approved by the CBDT. The deduction of Rs 50,000 is available from gross total income, irrespective of the actual expenditure incurred/ amount deposited. Where such dependant is a person with severe disability deduction of Rs 1lac is available instead of Rs 50,000. This exemption is available to both individual and HUF tax payers.

Proposed DTC -This deduction is available in the proposed DTC.

Medical Expenditure on prescribed aliments (Section 80 DDB)

Current Provision Under section 80DDB, deduction is available in respect of any expenditure incurred for the medical treatment of the individual or a dependant or for any member of the HUF in case of HUF. The deduction is available of Rs 40,000 or amount actually paid, whichever is less. However if the person for whom such expenditure is incurred happens to be a senior citizen, the maximum deduction shall be allowed for a sum of Rs 60,000 instead of Rs 40,000.
Proposed DTC -This deduction is available in the proposed DTC.

Education Loan (Section 80 E)

Current Provision -Under section 80 E, deduction is available for payment of interest on a loan taken for higher education for self, spouse or children from any financial institution or an approved charitable institution. The loan should be taken for higher education in specified fields of study to be extended to cover all fields of study, including vocational studies, pursed after completion of schooling.

Proposed DTC -This deduction is available in the proposed DTC.

Donation (Section 80 G)

Current Provision Under section 80G, deduction is available on account of any donation made by the assessee to specified funds or institutions. The rate of deduction is either 50 or 100 per cent, depending on the choice of the charity fund. There is no restriction on the amount given to charity. However, donations must be made only to specify trusts and also donation up to 10 per cent of gross total income qualify for such deduction. Remember to get receipts whenever you make any charitable donation. Note that tax exemption is only an added advantage of charity and it should not be the primary reason for doing so.

Proposed DTC -This deduction is available in the proposed DTC.

House Rent (Section 80 GG)

Current Provision Under Section 80GG, maximum deduction of Rs 2000 is allowed to an individual who pay rent for his residential accommodation and individual is neither entitled to any house rent allowance nor a rent-free- accommodation.

Proposed DTC -This deduction is available in the proposed DTC.

Person with Disability (Section 80 U)

Current Provision Under section 80U, deduction of Rs 50,000 is available in case individual tax payer is a person with disability and deduction of Rs 1 lac is available in case of a person with severe disability.

Proposed DTC -This deduction is available in the proposed DTC.

Interest on home loan (Section 24 B)

Current Provision -The interest component of home loan is allowed as a deduction under the head income from house property as per Section 24 up to the limit of Rs 1.5 lacs in case of a self-occupied house. The claim can be made up to Rs 30,000 even on loan taken for repair, renewal or reconstruction of an existing property.

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