How individuals can plan taxes post-Budget 2011:: Business Line

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The announcement of Budget every year carries its own expectations and apprehensions.

Among other things, an individual income tax assessee expects to see more avenues to save taxes.

Every year Budget plays a crucial role in tax planning for individuals and building up wealth not only for the present but also for the future.

But it did not bring in significant relief from tax burden to individual assessees.

National Pension Scheme

There are, however, a few amendments to promote investments/savings in some of the new schemes, one of these being ‘National Pension Scheme' (NPS).

NPS was introduced by the Government as a social security measure and is a contributory pension scheme. Pension Fund Regulatory and Development Authority (PFRDA), the apex body established by the Government of India, which is responsible for regulating and developing pension sector in India also regulates NPS.

Though participation to NPS is mandatory for all the Central Government employees (except defence forces) recruited w.e.f January 1, 2004, the Government made NPS available to other citizens of India with effect from May 2009.

Prior to amendments made in Finance Act 2011, both employers and employee's contributions to NPS were allowed as deduction under section 80 CCD of the Income tax Act, 1961 (‘the Act'), however, this deduction was restricted to the overall limit of Rs 100,000.

The Finance Act 2011 made an amendment by excluding the employer's contribution to NPS from the overall limit of Rs 100,000 thereby now the employer's contributions towards NPS is allowed as an additional deduction ( in the hands of Individual concerned) subject to maximum of 10 per cent of the employee's salary.

However, the amount received at the time of withdrawal (including the amount accrued thereon) either on account of opting out or closure of the pension scheme or as pension received from the annuity plan, is deemed as an income of the individual or his/her nominee.

In case the amount so received is invested by the individual in purchasing an annuity plan in the year of receipt of such amount, then such amount would not be considered as taxable.

Secondly, Section 80 CCF of the Act provided deduction to individuals and Hindu Undivided Family (‘HUF') up to Rs20,000 in respect of investments in long term infrastructure bonds up to assessment year 2011-12.

This deduction was in addition to the deduction available under section 80 C of the Act of rupees one lakh. The Finance Act 2011 extended the benefit of such deduction in the notified infrastructure bonds with respect to the investments made in such specified long term infrastructure bonds for the financial year 2011-12 (i.e, Assessment year 2012-13).

Thirdly, there are other means of investments and savings as specified in section 80 C of the Act which were available for deduction under this section subject to a cap of Rs 1 lakh.

NSC, ULIP

Few such specified instruments eligible for deduction are payment of life Insurance Premiums, investments in National Savings Certificates (NSC), Unit Linked Insurance Plan (ULIP), tuition fees paid, contributions to employees Provident Fund, Public Provident Fund, investment in Five Year Time Deposit Scheme in post office etc. The deduction under section 80C of the Act is also available in respect to repayment of principal amount of housing loan.

In addition to deduction under section 80C, interest with respect to such loan can also be claimed as a deduction, subject to a limit of Rs 150,000 in case of a self occupied property under section 24B of the Act.

Similarly, an individual can also avail tax benefit in respect of premium paid for health insurance policies. Further, payment of premium for medical insurance (i.e., mediclaim) is eligible for tax exemption up to Rs 15,000 for self, spouse and children and additional Rs 15,000 is allowed in respect of premium paid for mediclaim policies for parents.

In case of senior citizens, the deduction for mediclaim is available up to Rs 20,000.

Lastly, donations made towards specified or prescribed charities are also eligible for deduction.

The proof of such donations made, however, must be retained to support the claim in case of questions by the tax authorities in the verification process. It is important that all such investments, payments and contributions are made out of the income chargeable to tax to avail the deductions under respective Sections.

(The author is Executive Director - Tax & Regulatory Services, PwC India.)