Be a tax expert-in eight days-day -7

Now that we have understood what are deductions, exemptions and the important conditions attached to them, let’s now learn how to make maximum use of them by way of few case studies.

Example-1: Anil, a 28 year old single, works as a Business Analyst for Wipro, in Bangalore. His salaried taxable income for the FY (financial year) 2010-11 is Rs 6 lakhs. He has no dependants.

Analysis – Anil is lucky. He has time on his side and negligible responsibilities! His current tax liability comes to around Rs 25,000. By making use of the many tax saving deductions, Anil should be able to bring down his tax liability to Rs 12,400 (an annual saving of Rs 12,600).

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 (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,NPS (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 (NSC) to accumulate funds for short/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 9 lakhs, which brings her current tax liability to Rs 75,200. Looking at her children’s 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 48,000(annual tax saving of Rs 27,400!). Here’s 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/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 around 60% of the balance tax deductible amount (Rs 55,000) in Equity-linked mutual fund schemes (ELSS) will provide superior returns necessary for growth of Sneha’s investment. This is required for her children’s higher education needs and her retirement, and will provide to her portfolio the required hedge against the inflation monster. Investing the balance amount (Rs 35,000) ) in a mix of Fixed Income products like bank 5-year tax-saving fixed deposits, NSC and PPF will provide safety, and stable returns to meet her dependants’ increasing expenses (such as tuition, education, clothing, medicines etc.) and retirement needs. 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.