The one question that is at the tip of every salary earner's tongue and which he is reminded of every time he glances at his pay-slip is - How can I legally reduce my Income Tax burden?. This question has been posed before me innumerable number of times in the past and I am sure this will continue in the future also.

In this regards, the safest way of reducing the burden is by having a clear knowledge of the latest IT provisions and claiming all the eligible exemptions and legal deductions. Let us take a look at some of the important provisions available under Income Tax for salary individuals.

House Rent Allowance

If you are in receipt of House Rent allowance from the employer, you are entitled to claim deduction on account of House Rent Allowance. If you are paying rent for your accomodation, you are entitled to a deduction equal to the least of the following:

• 50 % of Salary ( Basic Salary + Dearness Allowance)
• Rent Paid - 10% of Salary ( Basic Salary + Dearness Allowance)
• Actual House Rent Allowance recived from your employer

Important: It is advisable to make rental payments by cheque to the landlord and keep proper receipts thereof.

Conveyance Allowance

If you are receiving conveyance allowance from your employer for meeting your expenditure for commuting between office and residence, then you are entitled to a deduction of upto Rs. 800/- per month irrespective of the expenditure incurred.

Important: If the conveyance allowance is for meeting the expenditure for official purposes other than above like traveling to meet clients etc. , then only the actual amount spent for this purposes will be allowed. In order to avoid complications it is advisable that the amount being spent on conveyance for meeting clients etc. should be made by way of re-imbursement of expenses and the same is not made part of the pay package.

Leave Travel Concession

If you receive any amount as leave travel assistance for yourself and your family [spouse, children (all children born before 1.10.98 and to only 2 children born after 1.10.98.), dependent parents, brothers and sisters] from your employers for proceeding on leave to any place in India, you will be entitled to an exemption as below:

• Actual economy class air fare by the shortest route to such place or the actual amount spent. No other expenses incurred during the vacation will qualify for exemption.
• If the place is not connected by air then 1st class air-conditioned railway fare subject to actual amount spent will qualify for deduction.

This exemption is available for 2 journeys in a block of 4 Calender years . The present Block starts from 1st January 2002 ends on 31st December 2005. The previous block being 1st January 1998 to 31st December 2001. If in any block of 4 years you have not availed of this exemption, he can carry forward the exemption of one journey (only) to the 1st year in the next block of 4 years. You could effectively get an exemption of 3 journeys in the block of 4 years.

Important: It is important to keep the copy of the tickets for substantiating the claim of the employee in this connection. The concession should not take the form of a fixed allowance payable to the employees.

Research Allowance

If you receive any allowance towards pursuing academic, research and other professional achievements. The actual amount spent on such activities can be claimed as exemption. This is highly beneficial to individuals who constantly undergo professional development through participating in educational courses or regularly buy books on related topics. In such cases these expenses can be claimed as exemption provided the employee gets this allowance.

Important: All documents/bills relating to the above needs to be maintained to prove the genuineness of the expenses.

Children Education Allowance

If you are in receipt of any allowance towards your children's education, you are entitled to get exemption. The amount exempted is Rs. 100/- per month per child ( maximum of 2 children) irrespective of the amount spent.

Children Hostel Expenditure Allowance

If you are in receipt of any allowance towards hostel expenditure for his child, you may be entitled to get exemption. The amount exempted is Rs. 200/- per month per child ( maximum of 2 children) irrespective of the amount spent.

Medical Re-imbursement

If you receive any re-imbursement of medical expenses from the employer, you are entitled to an exemption on such receipts. The limit of such re-imbursements is Rs. 15000/- per annum. This should be by way of re-imbursement only and not by way of fixed allowance. Fixed Medical Allowance is fully taxable.

Standard Deduction

This is a statutory deduction available to all individual whose primary source of income is from salary. The exemption is:

Basis	Amount
If Salary Income (as calculated under the Income Tax Act, 1961) is Rs. 5 Lakhs or less	40% of gross salary or Rs. 30000/- whichever is lower
If Salary Income (as calculated under the Income Tax Act, 1961) is above Rs. 5 Lakhs	Rs. 20000/-

Deduction on account of Tax on employment ( Profession Tax)

Tax on employment or Profession Tax is allowed as a deduction from Gross Salary.

While changing jobs during the year, it has often been observed that individuals are burdened with additional tax liability while finalizing their tax returns at the end of the year. This liability also carries with it an element of interest on such tax dues. To reduce this overhead and eliminate the interest chargeable by the Income Tax Authorities we suggest :-

• Tax Deducted by your previous employer is brought to the notice of the current employer.
• Preferably a Salary Certificate obtained from your previous employer be handed over to the current employer.
• Ensure than you collect your Form-16 (Salary Tax Deduction Certificate) from your previous employer.
• Ensure that your current employer has not taken benefit of some exemptions already considered by your previous employer (especially the Standard Deduction)

Background	Advantages	Drawbacks
NSC - VIII Series
Savings certificate issued by the Government of India and made available through the local post-offices Investment period - 6 years Interest @ 8 % p.a. compounded half yearly payable on maturity only - Fixed Yield 8.16% Repayment of Principal and Interest thereon is guaranteed by the Government Available in denominations of Rs.100/-, Rs. 500/-, Rs. 1000/-, Rs. 5000 /-and Rs. 10000/- respectively Investments eligible for Rebate u/s 88 - subject to conditions laid down in that section	Other than the tax relief benefits, the assured return of 8% with no risk is a big advantage If you can continue investment for the 1st 5 years in NSC, from the 6th year onwards you need not block any additional funds for this investment, as the maturity proceeds of the 1st investment gets returned in the 6th year Annual Interest accumulations(excepting the 6th year) qualifies for rebate under section 88 subject to limit and all interest accruals are entitled to exemption u/s 80L(subject to overall limit of Rs. 12,000/-) Is generally accepted as collateral security for availing loans No Deduction of tax at source Interest rate on NSC remain fixed throughout the 6 year period , (i..e., the interest rate of 8% guaranteed cannot be changed as is done in PPF)	Money invested is blocked for 6 years. It cannot be redeemed before the expiry of 6 years. No premature redemption possible If 80L benefit is totally covered from other interest income, the interest received from NSC are taxable The administrative hassle of dealing with the local post-office
PPF - Public Provident Fund
Self-Contributory Provident Fund Account made available through specified banks Investment period - 10 or 15 years Interest @ 8 % p.a. compounded and payable yearly Repayment of Principal and Interest thereon is guaranteed by the Government Minimum Investment Is Rs. 100/- per year and Maximum Investment is Rs. 70000/- per year. Actual Deposit can be in any denominations Investments eligible for Rebate u/s 88 - subject to conditions laid down in that section	Other than the tax relief benefits, the return of 8% with no risk is a big advantage Partial withdrawals are permissible after 7 years Annual Interest accumulations are tax free Is generally accepted as collateral security for availing loans No Deduction of tax at source	Only Partial withdrawal is permissible. The rest of the amount remains blocked for 10 or 15 years Partial withdrawal is permissible only from the 7th year onwards. Hence the funds are blocked for the 1st 6 years Interest rate can vary during the tenure of the investment as per government policy. Over the last few years the Interest rate on PPF has fallen from 12% to 8%

Let us focus on getting the right strategy for Rebates u/s 88 with the assumption of general awareness about the basics of rebate u/s 88.

Why is a strategy required ?

It is not just about making some payments now to reduce your tax incidence but it is also about the returns on investment, securing and providing for the future, ability to liquidate the investments at your convenience and most importantly comparing the tax saving against investing the amount outside to get better returns.

What are the considerations for development of the strategy ?

We feel that the strategy would primarily depend on two factors :- Age and the Income of the person. As a person starts his career in a job, his prime considerations are more towards better job prospects, higher returns on the investment, with a higher appetite for risk and is not overly interested in insurance. Along with with every personal milestones, such as marriage, child birth, etc., and financial growth, priorities change and there is a perceptible change towards financial security. Insurance becomes key factor, there is a general reservation towards taking untowards risks with respect to principal investment.

What are the components involved ?

The major investment options are as follows:

• Life Insurance Policies
• NSC - VII series
• Public Provident Funds
• Bonds

Let us try to sum up the options with our suggestions towards defining a strategy for investments for Rebates u/s 88. There are two major components eligible for Rebates u/s 88.

Categories	Maximum Limit
Combined investment in Mandatory Provident Fund, Life Insurance Premiums, National Savings Certificates and Public Provident Fund	Rs. 70,000/-
Bonds	Rs. 30,000/-

Investment Considerations

Identify the amount of money deducted as part of the Mandatory Provident Fund. Substract that from Deductable amount (Rs. 70,000). Now you have the amount for which you should consider for investment purpose under category 1.

General Investment Pattern

Description	Scenario 1	Scenario 2	Scenario 3
Income	Rs. 1,50,000	Rs. 3,00,000	Rs. 4,50,000
Mandatory PF available for Tax Rebate	Rs. 18,000	Rs. 36,000	Rs. 54,000
Balance in Category 1	Rs. 52,000	Rs. 34,000	Rs. 16,000
Earmarked for Savings	Rs. 30,000	Rs. 50,000	Rs. 70,000
Life Insurance Premium	Rs. 15,000	Rs. 15,000	Rs. 15,000
Balance Available	Rs. 15,000	Rs. 35,000	Rs. 55,000
Investment for Tax Relief	Rs. 15,000	Rs. 34,000	Rs. 16,000
Other Investments	NIL	Rs. 1,000	Rs. 39,000

General Tax Relief Based Investment Pattern

Age	NSC	PPF
< 35 years	100%	0%
between 35 and 55 years	50%	50%
> 55 years	0%	100%

In the above tables the following assumptions are being made based on general survey of our customer base.

• Average percentage of saving is around 15-20%
• Insurance is still the preferred medium of investment
• With Insurance accounting for long term investment, NSC presents itself as a better short term option compared to PPF

Investment Options with Category 2(Bonds)

The following table draws comparision between Tax Saving Bonds and Other Relief Bonds. Based on the comparision, Tax Saving Bonds may not be considerable as an investment option. The following comparisions does not include other investment options such as, Post Office Monthly Income Scheme, Debt Funds, etc., where the returns are higher than the relief bonds.

Description	Tax Saving Bonds	RBI Relief Bonds
Investment	Rs. 30,000	Rs. 30,000
Nature of Risk	Low	Risk Free
Rate of Interest	5%	6.5%
Type of Interest	Taxable	Tax Free
Type of Interest	Taxable	Tax Free
One time Tax Benefit @ 15%	Rs. 4,500	NIL
Total Interest over 5 years	Rs. 7,500	Rs. 9,750
Less: Tax @ 30%	Rs. 2,250	NIL
Net Interest over 5 years	Rs. 5,250	Rs. 9,750
Total Cash Inflow	Rs. 9,750	Rs. 9,750

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