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Tax cuts for salaried middle-class: Here's how to claim benefits by investing in assets, payments to health insurance and education

Sumeet Mehta
Standard deduction for the salaried class in its new avatar is one-size-fits-all — it is the same for both the CEO of a company and his lowly minion at the bottom of the heap.

Finance Minister Piyush Goyal presented Narendra Modi government's last Budget before the general elections later this year in which it doled out tax cuts to the salaried middle-class families.

One of the key tax proposals is enhancing tax rebate under Section 87A from previous limit of Rs 3,500 to Rs 12,500. This has been done by enhancing the income eligible for rebate under Section 87A from Rs 3.5 lakh to Rs 5 lakh. This move effectively makes income up to Rs 5 lakh exempt from taxes.

This is where the principles of tax planning can be used along with study of provisions of income tax proposed in the Budget to reduce tax liability.

One of the most important and easiest principles of tax planning is claiming benefits from tax deductions. Tax payers get benefits of various deductions from income and thereby reduction in tax, which we have discussed earlier. This would require investments in various assets or even certain payments like payments for health insurance and education. This must be used to the optimal for claiming tax deductions and in turn plan tax liability.

This is possible due to various provisions announced in the interim Budget 2019. Provisions announced are as under:

Standard deduction limit raised to Rs 50,000: Union Budget 2018 introduced a standard deduction of Rs 40,000 for salaried employees. Interim Budget 2019 has increased this limit to Rs 50,000. This is the first step for salaried people to automatically reduce their taxable income, though this benefit is not available to self-employed tax payers.

Mediclaim premium limits hiked to Rs 50,000: Previous limits of Rs 30,000 have now been enhanced to Rs 50,000. This is by including amounts paid on behalf of parents for their medical insurance.

Investment in National Pension Scheme (NPS) up to a maximum amount of Rs 50,000: This provision remains the same as per the previous Budget and the limit is not changed. NPS remains a good investment avenue and a few fund houses have delivered good returns on investments. This also doubles up as a retirement planning along with a tax planning tool.

Investment in various avenues under Section 80C to save up to Rs 1.5 lakh: This is one of the most popular investment tool for many investors and offers a wide range of 19 investment avenues for tax payers. They are:

Investment in PPF, employee's share of PF contribution, National Saving Certificates, life insurance premium payment,  children's tuition fee, principal repayment of home loan, investment in Sukanya Samridhi account, unit linked insurance plans (ULIPS), equity linked saving scheme (ELSS), sum paid to purchase deferred annuity, five-year deposit scheme, senior citizens' savings scheme, subscription to notified securities/notified deposits scheme, contribution to notified pension fund set up by mutual fund or UTI, subscription to home loan account scheme of the National Housing Bank, subscription to deposit scheme of a public sector or company engaged in providing housing finance, xvii) contribution to notified annuity plan of LIC, subscription to equity shares/debentures of an approved eligible issue and subscription to notified bonds of NABARD.

Description Without Home Loan Interest Payment With Home Loan Interest Payment
Salaried Self Employed Salaried Self Employed
8 Lakh 7.5 Lakh 10 Lakh 9.5 Lakh
Total Income 800,000 750,000 1,000,000 950,000
Less: Standard deduction for salaried people 50,000 0 50,000 0
Less: Interest on home loans u/s 24 0 0 200,000 200,000
Gross Total Income 750,000 750,000 750,000 750,000
Less: Deduction under Chapter VI-A
Mediclaim premium u/s 80D 50,000 50,000 50,000 50,000
Investment in life insurance, bank FDs, etc u/s 80C 150,000 150,000 150,000 150,000
Investment in NPS u/s 80CCD 50,000 50,000 50,000 50,000
Total Deduction under Chapter VI-A 250,000 250,000 250,000 250,000
Net Taxable (Returned) Income 500,000 500,000 500,000 500,000
Tax on returned income 12,500 12,500 12,500 12,500
Less: Rebate u/s 87A 12,500 12,500 12,500 12,500
Net Tax Payable 0 0 0 0

 

The aforementioned four options for tax planning are short-term tax planning strategy. There is a long-term tax planning strategy available to tax payers. This is called long-term tax planning strategy because you cannot decide on investment amount in January or February and invest in March to claim tax breaks.

You ought to plan in advance and you get benefits over a longer tenure. Also, you cannot avoid the liability or miss on payment of liability created to claim tax breaks.

This can be used by tax payers who have income exceeding Rs 8 lakh and have not yet purchased their first home. This can systematically help them in reducing tax liability to the extent of Rs 2 lakh.

Deduction on interest on home loan remains at Rs 2 lakh: This is of course the last available option. This calls for long-term financial and tax planning as it involves borrowing a loan for a longer tenure along with buying an asset. This is available to those who don't own a house. This benefit is allowed only on first home that a person buys. Working women living with their husband or parents can evaluate this option for investing.

(The writer is a Chartered Accountant and a finance and media professional. He tweets @sumeetnmehta)

Also See: Budget 2019: Full text of Piyush Goyal's speech in Parliament; finance minister dangles pre-poll carrot for middle class

Budget 2019 is more than lip service for middle class; 100% tax rebate for those earning up to 5 lakh is substantial

Budget 2019: No tax for income up to Rs 5 lakh; standard deduction rises to Rs 50,000

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