Tax Saving as Per Income Tax Slabs

Example-1: Anil, a 28 year old single, works as a Business Analyst for Wipro, in Bangalore. His salaried taxable income for the FY or financial year 2010-11 is Rs 4.5 lakhs. He has no dependants.

Analysis– Anil is lucky. He has time on his side and negligible responsibilities! His current tax liability comes to Rs 29,000. By making use of the many tax saving deductions, Anil should be able to bring down his tax liability to Rs 17,000, an annual saving of Rs 12,000.

Given his age and the fact that currently, he has no dependants, Anil should consider investing a majority of his tax-deductible amount, Rs 84,000, in Equity-linked mutual fund schemes or ELSS, as it will maximize returns that add to his wealth, and will provide to his portfolio the required hedge against the inflation monster. Investing the balance, Rs 36,000, in a mix of Fixed Income products like bank 5-year tax-saving fixed deposits, PPF, NSC or New Pension Scheme and Infrastructure bonds will provide safety, stable returns, and savings for retirement.

Anil should also consider purchasing a health or medical insurance policy in his name. This acts as a financial shield in case any unexpected incident happens to him. Anil can also divert funds towards investments in bank 5-year tax-saving fixed deposits, National Savings Certificates or NSC to accumulate funds for short or medium term needs, such as marriage, buying a car or house, giving to charity, etc.

Example-2: Sneha, 35, has been working for a MNC call center for the past 7 years. She is married, has 2 kids, Abhay and Anoop. Her taxable income for the FY 2010-11 is coming to Rs 7 lakhs, which brings her current tax liability to Rs 71,000. Looking at her childrens future requirements, and her retirement needs, there are many ways in which Sneha can smartly bring down her tax liability, to as much as Rs 47,000. Here is how:

Analysis– First, given her age, income and number of dependants, Sneha must have a life insurance policy of at least Rs 65 lakhs. The premium for the same works out to be Rs 10,000 p.a. Sneha should also consider a health and or medical insurance policy for her family, a family floater would be ideal. The premium for the same works out to be Rs 13,000 p.a.

An investment of 55 percent of the balance tax deductible amount, Rs 55,000, in Equity-linked mutual fund schemes or ELSS will provide superior returns necessary for growth of Snehas investment. This is required for her childrens higher education needs and her retirement, and will provide to her portfolio the required hedge against the inflation monster. Investing the balance amount, Rs 42,000, in a mix of Fixed Income products like bank 5-year tax-saving fixed deposits, NSC and Infrastructure bonds will provide safety, and stable returns to meet her dependants increasing expenses, such as tuition, education, clothing, medicines, etc. If she has not already, Sneha can also consider investment in Real Estate, as owning a house offers multiple benefits of security, regular income, in the form of rents, capital appreciation in the long term, and tax benefits in the form of deduction of principal and interest amount repaid for each financial year.

Example-3: Mr Sridhar, aged 45, was recently promoted to senior manager at Voltas, India. His net taxable income from salary comes to Rs 10 lakhs this FY 2010-11. He is married, has a 14-year old daughter, who dreams of pursuing Robotics at IIT, Chennai, in 5 years time, and his mother is dependent on him for her living. Due to Mr Sridhars promotion, his salary has increase to Rs 230,000 p.a., which he intends to put to good use. Mr Sridhar is a philanthropist.

Analysis – Mr Sridhars taxable income for the FY 2010-11 comes to Rs 10 lakhs, which brings his current tax liability to Rs 154,000. Considering his daughters higher studies and future dreams, his retirement needs, and the fact that he believes in social causes, Mr Sridhar can plan and save maximum tax, Rs 112,000, in the following manner.

If he has adequate life and health cover, Mr Sridhar should consider an investment of 55-60 pecent of the tax-deductible amount, Rs 65,000, in Equity-linked mutual fund schemes or ELSS for the purpose of his retirement, which is 15 years away. Investing the balance, Rs 55,000, in Fixed Income products like bank 5-year tax-saving fixed deposits, 6-year NSC will offer maximum safety for his hard earned money and stable returns to meet your dependants increasing expenses, such as education, tuition, clothing, medicines etc. He can consider purchasing a senior citizen medical insurance policy for his dependent mother. This will take care of her burgeoning medical bills, and in the process, claim the premium paid through tax deduction, under section 80D, up to Rs 20,000 p.a.

Mr Sridhar can further bring down his tax liability and also contribute towards social causes by making donations to approved projects or institutions through section 80G. The best part is that there is no upper limit on the amount of donations he can make, which means, if he wishes, Mr Sridhar can make donation of the full increment he received, by way of his promotion, and at the same time bring down his tax liability.

Tax Planning

By using a Tax Plan, you can choose the right deductions and tax saving products in order to reduce your overall tax outgo and fulfil your future needs too. Below is an easy 2-step procedure:

Know your requirements -

1. To figure out your requirements, identify your life cycle stage.

2. Choose the deductions and products that best fits your needs.

Use InvestmentYogis quick tax calculator to get an estimate of your tax payable. Here is a ready reference for income tax slab in this financial year.

Courtesy InvestmentYogi which is an online financial planning and income tax e-filing company.