Tax planning involves the selection of the right tax saving instruments and making proper investments.

The amount of the tax to be paid is calculated on the nature of investments made, income earned, and the quantum of other incomes like salary, rent from property, interest etc. There are many deductions and exemptions applicable on the net taxable amount, depending upon the source of income. To take advantage of these facilities tax planning is necessary. Moreover, the annual budget of the government should be taken into consideration before planning as tax plans are often changed.

Steps in Tax Planning :

There are three steps in Tax Planning which would aid a person in making prudent tax plans to reduce their income tax liability and ensure a better tomorrow by making compulsory savings by investing in safe government schemes. These three steps in tax planning are:

1. Figuring out you taxable income.

2. Calculating tax payable on gross taxable income for the entire financial year.

3. To either pay the tax without tax planning or minimize tax through planning.

Deductions from Taxable Income:

Smart tax payers avail of various tax incentives offered by the government. Their tax planning takes into consideration various deductions / exemptions available. These include :

Deduction under Section 80C - This section has been introduced from the FY 2005-06, under which a deduction of up to Rs. 1,00,000 is allowed from taxable income by investing in some specified schemes. Ideally, individuals whose gross total income is equal to or more than Rs 250,000 should utilise the entire Rs 100,000 limit.

• Public Provident Fund

• National Saving Certificate

• Accrued interest on National Saving Certificate

• Life Insurance Premium

• Tuition fees paid for children's education (maximum 2 children)

• Principal component of home loan repayment

• Equity Linked Savings Schemes (ELSS)

• 5-Year fixed deposits with banks and Post Office

The above list of investment/contributions is not exhaustive. For a complete list, please consult a tax- advisor.

It must be noted that the benefits under this section are capped. For example, despite making investments of Rs 70,000 in Public Provident Fund and Rs 50,000 in ELSS, the amount eligible for deduction is only Rs 100,000.

Deduction under Section 80 CCC(1) - This section allows a deduction of up to Rs. 10,000 to an individual for making contribution to pension schemes.

Deduction under Section 80D (Medical insurance) : An individual who pays medical insurance premium for self or spouse/dependent children is allowed a deduction of upto Rs 15,000 pa under section 80D. An additional deduction of up to Rs 15,000 pa is allowed for premium payment made for parents. In case the parents are senior citizens, then the maximum deduction allowed is Rs 20,000 per year.

Individuals who plan to pursue higher education should avail of an education loan as the entire interest is eligible for deduction under Section 80E. The loan can be for self, spouse or child from an approved charitable institution or a notified financial institution.

Home loan: Individuals intending to buy a house should consider opting for a home loan. The principal repayment on a home loan is eligible for a deduction of up to Rs 100,000 pa and the interest paid is eligible for a deduction of up to Rs 150,000 per year under Section 24.

Donations: Subject to the stated limits, donations to specified funds/institutions are eligible for tax benefits under Section 80G.

Restructuring the salary

Restructuring the salary and including certain components can go a long way in reducing the tax liability. Unlike eligible investments which lead to an additional cash outflow, restructuring the salary is a more 'efficient' means of claiming tax benefits. The following can form a part of one's salary structure:

• Food coupons like Sodexo and Ticket Restaurant; they are exempt from tax up to Rs 60,000 per year.

• Medical expenses which are reimbursed by the employer are exempt up to Rs 15,000 per year.

• Individuals living in a rented accommodation should have House Rent Allowance (HRA) as part of their salary.

• Transport allowance is exempt upto Rs 800 per month.

• Leave Travel Allowance (LTA) can be claimed twice in a block of four years for domestic travel.

Claim tax benefits on house rent paid

Salaried individuals can claim rent paid by them for residential accommodation, if HRA doesn't form part of their salary. This deduction is available under Section 80GG and is least of the following:

• 25% of the total income or,

• Rs 2,000 per month or,

• Excess of rent paid over 10% of total income

The above deduction will be denied if the taxpayer or his spouse or minor child owns a residential accommodation in the location where the taxpayer resides or performs his office duties.

Opt for a joint home loan

In cases where the home loan is for a substantial sum, it is not uncommon for the interest and principal repayment to exceed the stated limit. To ensure that the tax benefit is optimally utilised, an individual can consider opting for a joint loan with his spouse or parent or sibling.

This will ensure that both the co-owners can claim tax deductions in the proportion of their holding in the loan. The co-owner falling in the higher tax bracket should hold a higher proportion of home loan to ensure that the tax benefits are maximised.