For many people, tax planning is all about how to save taxes. However, there are various sections under Income Tax Act of India in which you can claim specific expenses as deductions. To reduce taxes it is not only important to invest but it is important to properly arrange financial affairs as well. To reduce the tax burden for its citizens, Indian Government each year through the budgetary proposal introduces legitimate ways to save on tax.
It is important for every taxpayer to know which all expenses are allowed as a deduction for tax planning purpose. Let us discuss few of the common expenses that can be claimed as deductions under various sections of Income Tax Act in India.
- Children Tuition Fees :- Taxpayers are allowed to claim tuition fees paid on two children’s education in a Financial Year. Under section 80C of Income Tax Act India, you can claim up to Rs.1.5 lacs as a deduction towards actual tuition fee paid for dependent children. You can claim tuition fees paid for two dependent children. However, both husband and wife have a separate limit. Therefore, if both are working, each parent can claim benefit up to two children.
- Stamp duty and registration charges paid on the purchase of a new house :- Stamp Duty and Registration Charges are major cost component of new house purchase. It’s around 8% to 10% of your new house cost. To incentivize taxpayer, Government has included stamp duty and registration charges as an eligible deduction from the total income under the section 80C of income tax act.
- Expenses incurred on specified diseases like AIDS, Cancer or other neurological diseases :- Under section 80DDB a taxpayer can claim amount spend on medical treatment of self or dependent on specified diseases like AIDS, Cancer or other neurological diseases. Point to remember here is the condition to receive such tax benefit is that there is no medical reimbursement by any insurance company or employer for this amount. The maximum limit on tax benefit is as follows.
|The maximum limit on tax benefit||A.Y. 2019-20 onwards till date|
|Individual below < 60 Age||40000|
|Individual above > 60 Age but below < 80 Age||100000|
|Individual above > 80 Age||100000|
Amount allowed as deduction is the least of above specified amount or actual amount spent.
- Medical Expenses incurred on expenses on disable dependent :- To provide relief to a taxpayer who has disabled dependent or dependent with a severe disability can seek a tax deduction for expenses on medical treatment or amount deposited under a prescribed scheme for the maintenance of the dependent. Under section 80 DD for F.Y. 2020-21, if the disabled dependent is suffering from 40% or more disability, a maximum limit on amount can be claimed as a deduction is Rs. 75,000/- and the same for a disabled dependent who is suffering from severe disability i.e. 80% or more disability, a maximum limit on amount can be claimed as the deduction is Rs. 125,000/-.
- Deduction for rent paid by an individual :- Section 80GG can be claimed as a deduction for rent paid subject to some condition. You get the lowest of the following values as tax-free deduction
- Rs.5000 per month
- 25% of total income (total income is calculated excluding capital gains and other deductions)
- Actual rent exceeding 10% of income (income would be calculated excluding capital gains and other deductions)
Even if you are self-employed professional, businessman or salaried individual you can claim 80GG benefit. The most important condition to claim benefit under this section is you should not have received HRA benefit during the years and you must pay rent for the house you reside in. There are few more important conditions to be fulfilled to get the benefit under section 80GG. The amount is rather small but a rupee saved is rupee earned.
These were some of the important expenses which can help you save taxes.
As per income tax act a person attaining age 60 or more in a financial year even for a day becomes senior citizen. Income tax gives relief to senior citizen in the form of higher tax exemption limit. If a senior citizen is aged 60 or above but less than age 80, his income of Rs.3 Lacs p.a. is tax exempt. If a senior citizen is above age 80 then his income upto Rs.5 Lacs is exempt from tax.
If you are still paying tax on income earned above exempt limit, then you need tax planning. Government has incentivized savings and investment as deduction and exemption under various section of Income tax Act. If interest earned on bank deposit is less than Rs.10000, than bank won’t deduct TDS on the same. Incase if interest earned is more than Rs.10000, than bank deducts 10% TDS on interest earned in financial year. As a senior citizen, you can submit form 15H as a declaration that your income is less than tax exempt limit.
While investing for tax planning, for senior citizen safety of capital and regular stream of income to plan for their monthly expenses are main objective behind any investment. As age increase, expenses on health related issues also increases. Keeping this in mind, let’s discuss few of the tax savings option most suitable for Senior Citizen taxpayer.
- Invest in Senior Citizen Savings Scheme (SCSS) – In the falling interest regime, currently this is one of the best investment option with high interest and highest safety of capital. To invest in SCSS, investor can visit bank or post office and complete investment formalities. Interest rate applicable from 1st april 2020 is 7.4% p.a. and duration of the scheme is 5 years. It can be extended for 3 more years on maturity. Minimum age for investing in SCSS is 60 years. Minimum and maximum amount for investment is Rs. 1000 and Rs.15 lacs respectively. Interest is paid on a quarterly basis and directly credited to bank a/c. TDS is applicable if interest paid is above Rs. 50000 in a year. Investment in SCSS is eligible for deduction U/s. 80C upto Rs. 150000 in a financial year. It’s advisable to invest in SCSS for regular income and save taxes as well.
- 5 Year tax saving Bank FD – Tax savings FD of 5 years by banks is also eligible for deduction U/s. 80C upto Rs. 1.5 Lacs p.a. in a Financial Year. TDS is applicable on interest earned on Bank FD. An investor can select cumulative or non-cumulative option for interest payout.
- 5 Year Term deposit of Post office – Currently interest on 5 years’ time deposit is 6.7% p.a. Investment in Time deposit is eligible for deduction U/s. 80C. Investment in Post office schemes is one of the safest investment avenues in India.
- National Savings Certificate – Minimum investment in NSC is Rs. 1000 and maximum there is no limit on investment. NSCs of 5 years maturity are available in post office. To invest in National Savings Certificate investor has to visit post office and complete investment formalities. Current Interest rate applicable for 5 years duration NSC is 6.8% p.a. Interest is compounded annually but payable at maturity.
- Buy health insurance and save taxes – Mediclaim policy is must for senior citizen. As age increase medical and health related expense also increase. For senior citizen deduction eligible for Mediclaim premium payment U/s. 80D is Rs.50000 p.a.
- Claim your Medical expenses on Specified critical illness – Expenses incurred on treatment of specified ailments like AIDS, cancer and neurological diseases is eligible for deduction U/s. 80DDB up to Rs.1,00,000 p.a. for senior citizen age of 60 years or above.
It’s advisable for senior citizen to save taxes they should invest in an instrument which helps them to earn regular income or keep their capital safe. Wrong commitments for regular investment in avenues like ULIP or Pension policies to create retirement corpus is few of common mistakes / mis-selling affecting their financial portfolio as well as their retirement savings. Get in touch with our financial planners at Minty to know most suitable investment avenues for tax planning purpose.
Just started making money. First Job, first month salary. How do you feel when tax is deducted from your salary? obviously the feeling is not good. The best you can do is to start at a right note. Start tax planning in right way as per your future financial goals and aspiration. The objective of tax planning should not be only to save taxes but also to help you to create corpus or wealth for your secured financial future. Government has encouraged savings and investment through tax exemption and deduction to save for various financial aspect of individual’s life.
Lets discuss few of the best suitable strategies for salaried youngsters in early 20’s to save taxes.
One of the most common mistake youngsters make in the initial years of their career is to just invest for tax savings. Ideally investment should be done with an objective to save for specific purpose of your life like retirement planning, wealth creation for future goals etc. not just for tax savings. Getting into wrong commitment of savings and investment just to save taxes harm your financial life. Tax savings is never a primary objective of investment. Right way for tax planning is to set your investment objective first and then select an instrument which helps to achieve that objective along with tax savings. For example, a youngster wish to create wealth by investing in equity and wish to save taxes, ideally the best way to do investment and tax planning is to invest in Equity Linked Savings Scheme (ELSS) of MF.
Don’t buy insurance policies to save taxes
Insurance is a must have product in anyone’s financial portfolio. But buying insurance just to save taxes is not the right way to plan taxes or insurance. The main purpose to buy insurance is to insure life and medical risk. There are tax benefit on Life insurance premium payment u/s. 80C and Mediclaim premium payment u/s. 80D. If you need insurance and additionally if there is tax benefit then it’s bonus point. But to create wealth and for saving taxes if you invest in insurance policy without understanding it’s real benefit in your financial life, then it can have negative impact on your financial life.
Investment in NSC, Tax savings FD etc. to save taxes
Many youngsters take advice from their parents or seniors in their office. There is no harm in investing in NSC or tax saving FD. If it matches your financial objective then it is one of the best tax saving choice with guarantee and tax benefit. Youngster can take risk in their early part of their career. By investing in theses safe investment we may guarantee return of interest and capital but loose chance of making higher return on investment. For long term investors like youngsters in 20’s there are better choices with higher possible returns and tax savings. For example investing in ELSS MF scheme, Investing in RGESS, Investing in Equity pension scheme etc
Don’t follow someone blindly just to save taxes
My friends has invested in a ULIP policy to save taxes that’s why even I have purchased same ULIP policy to save taxes. One of the common tax saving & investment style is to copy someone as it is. But it’s a very big financial blunders which an investors makes. Ideally every person financial needs and goals are different. Even if your age or salary is same still your investment needs are different. It is always advisable to understand your financial objective first and accordingly investment and tax savings instrument should be identified.
Claim Expenses to save taxes
Income Tax Act allows you to claim your expenses for tax savings purpose. Not all but some specific expenses like rent paid, interest on educational loan etc. By showing rent receipt to your employer based on a calculation salaried people can claim HRA exemption to save taxes and increase in hand salary.
Increase your future tax exempt income
Tax planning is not a onetime activity but it’s a multiyear activity. We can invest and save in an instrument which will generate tax efficient income. By creating legal entity like HUF or by diverting your income to other members of your family, we can reduce tax on income earned through interest or dividend. Other way we can invest in an instrument which generate tax free income instead of taxable income. Interest earned on NSC or FD is taxable but dividend earned from ELSS scheme or interest from PPF is tax free.
Most of the people are unaware of certain basic things or factors to look out for, which are basically warnings towards incoming financial peril. If ignored these may prove to be very costly, but if identified at early stage, they may be corrected to ensure sound financial health and leads the way to efficient and effective financial planning. Let’s see the top 7 signs indicating the need for financial health check up.
Liquidity check for emergency situations
Imagine a situation where you are suddenly face job cut or meet with an accident which will disrupt your income earning capabilities. Most of the people are experiencing the job loss or pay cut currently owing to COVID-19. You can’t predict such events or developments since they are very much unpredictable. You can check your liquidity position by calculating the liquidity ratio as below.
Cash or most liquid assets (include fixed deposits and equity or ETFs)
Regular household expenses incurred or estimated per month
This ratio will give out the time period for which you have surplus funds on which you can sustain without any income during such period. This is the additional liquid funds which are actually your emergency buffer, which should ideally be not less than 3. If you have liquidity ratio of 1-1.5, then there lies times of trouble ahead.
Also, if you have equity investments done specifically for a goal like children education then do not count that amount in this calculation as you should not ideally consider this for meeting emergencies.
Loans without reciprocal asset creation
Credit card loans or EMIs for luxury (simply put unnecessary items) are just an example of unwarranted loans, which do not lead to any asset creation in the long run. So forget about that high end smartphone which will put a hole in your pocket (almost equaling a month’s grocery) and put your finances to use. You can assess your debt position with following ratio.
Total liabilities (loans)
Loans would include long term loans and short term loans like credit card loans etc. Ideally for a person in the age group of 25- 45 years, has higher ratio due to higher long term loans leading to long term asset creation. However, if you are having ratio below 1 or more than 2, then it is time to check and reorganize your borrowers position.
Check the savings ratio
Financial planning starts and ends with savings. Savings should ideally be any amount saved, invested or any surplus earned every month. Any person would be better off with higher savings ratio which can be calculated as below.
Surplus generated or disposable income
Income for every month
If you are encountering ratio below 1, then this is warning sign. It indicates that you are not saving, rather you are spending more. Even ratio more than 2 also indicates that you are borrowing and saving that money (works out only if interest payable is lesser than the interest income on the investment).
Assess where you stand
If you are the person who has already a huge burden of the debt and is responsible for paying up a fixed amount as loan repayment, should assess his liquidity and solvency position. This can be calculated as below.
Monthly predetermined Long term and short term debt repayment commitments
Income earned per month
You need not worry if your ratio is less than 1, rather it indicates effective debt management. However, those of you having ratio of more than 1, have to take a corrective action, as this ratio implies that you have borrowed way over the extent to which you can actually afford to pay off the liability.
Those of you, who have started retirement planning, may well be ahead of all others, may be able to enjoy the power of compounding. This will not only enhance the retirement corpus for you, but will also ensure that you will achieve it within your time frame, even where your cost of investment is much lower due to early entry as compared to others.
Amount contributed towards retirement planning
Total income earned
Ratio of 5-7% indicates that you are contributing to satisfy threshold for tax saving instruments only, while ratio of more than 10% indicates that you are aiming at building up the retirement corpus for early retirement. However, any ratio below 5% would need reconsideration of financial planning, which would maximize the retirement contribution to optimal levels.
Impulse purchases or exceptional spending behavior
Why is that, every time you go to a mall, you need to buy a dress which will make you regret you afterwards (in terms of cost of course!)? Why is that you can’t resist ordering pizza often which is almost equal to two weeks of grocery payment? These are sheer impulse or unnecessary items, which you buy out of sheer laziness or in the heat of the moment.
Impulse / exceptional purchases
Income earned per month
If you are below 5%, then no reason to worry, because your finances can still handle it (but you will need to prevent such impulse shopping). However, those of you landing in double digit ratio, are in deep trouble. This indicates that impulse purchases have rather become your habit and you are giving in to the temptations, which will land you in a situation, where you won’t have enough to pay for the things you need, because you have already spent on things you don’t need.
What is your worth?
Well not you, but your financial assets and investments! Ideally, positive ratio would bring out the extra-ordinary situation, which proves that your net worth is increasing and you will be achieving your financial goals well before the time frame.
Where net worth = total assets (includes short term and long term assets) – total liabilities (both short term and long term). So, this net worth may keep on changing every month, depending upon the commitments. However, if you find out that this ratio is consistently negative for more than 1-2 months, then it’s a warning bell which will suggest that, you have borrowed way more than you can afford to pay off later.
Financial planning is a discretionary and yet quite typical procedure, which is ongoing and needs to consider holistic approach. Above seven indicators will give you outline that it is not just about the saving or about investment. However, you need to evaluate, analyze and put up any corrective and preventive measures, for any aspect of the financial planning.
I still remember my childhood days, when my mother would give me pocket money only if I did the house chores. She would tell me that half of it, I could spend, while the other half, was put in to my piggy bank or should I say ‘KHAZANA’. Well of course, now we have banks for that. Yes, those were the good old days.
I think everyone knows how important it is to save and invest, given the current situations, where anything is possible. Though some people still think that, just because they save, they are investing, so the real question that needs to be asked is, ‘Are savings and Investment, the same thing?’
Savings and investment are 2 completely different meanings. Most of the times, people spend first and then save, so whatever remains from their income, they save it by keeping it in their bank accounts. Savings have to be the other way round. Look at the below 2 options:
- Income earned – your expenses = Savings
- Income earned – your savings = expenses
People always prefer the first option, sometimes no money is also left, after spending. Today everyone wants to live a lavish lifestyle and keep up with the current status, be it gadgets, clothes, accessories, etc. The logic behind the second option is, you get your income, you save it and then you can do whatever you want with the remaining money. So this way you are saving and not throwing away all of it.
Income earned –> savings made –> savings invested will give you wealth creation.
It is one thing to start saving, but what do you do with the money you save? That’s where investments come in. You can expect a 3.5% to 6% returns on your savings account, but do you think that’s enough?
Of course not!
Especially when you have goals that need to be achieved over a long period of time. When you have so many other options out there, why would you settle for such a low return. You have to invest your savings if you want your money to grow over a period of time. People have goals, it could be short or long term, they also have risk appetites which could be aggressive, conservative or even balanced, so depending on that, they have various investment options available to them, also keep in mind that savings is a type of investment. It is used to fund goals that come in the near future, we will look at some circumstances later.
So all your savings are not just meant to be kept in your account, if invested correctly, they can reduce the burden, of you worrying about reaching your future goals in time. And it also will help you create wealth. People have this very wrong idea, that financial planners can help them reach all their goals, which is not true, financial planners, help you create wealth, with the resources you have. Sometimes the resources that you have, may not be enough to fund your goals, that’s why you need to invest it, to create those funds.
Let us get a better understanding of this difference, by the help of some examples. We shall now take the examples where savings are concerned. The below points will help you understand, ‘WHEN’ it is important to save:
Buy a laptop or a phone or any gadget:
You do not need to save for 5 or 10 years, just to buy a laptop or a phone. You will obviously buy one if it falls in your budget. You may keep a certain amount of money aside every month, so you can collect enough funds within the next few months to buy that laptop or phone. That certain some of money that you’ve kept aside is known as ‘SAVINGS’.
This fund is a very important one. I would suggest that, all of you keep or maintain an emergency fund. This fund is maintained so that, people do not have to run about, asking for money or borrow or take a loan. You should ‘SAVE’ a certain amount every month (apart from your investments) and put it into your savings account, because in future, if any emergency occurs, like you met with an accident, or loose your job, or any such similar incident that could occur, you are going to need funds to help you cope with that loss. Now the main question is, why does an emergency fund need to be in a bank? This is because, when an emergency occurs, you need the money on the spot and it should be easily accessible. The emergency fund should contain at least 6 months of your monthly expenses. So a savings account is the right place for your emergency funds, as you can withdraw the money at any point of time.
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Your best friend’s birthday is coming up, what are you going to buy her?
Don’t have enough money?
Well you should have started saving up in advance to buy her/him a nice gift. This is just an example, but it is also a reality. That is why saving is equally important as investing. You never know when you might need it. It is not necessary to save for a purpose, except, in the case of an emergency fund, but having goals to save for, the better it is for you.
So now this is how you should handle your income:
Income earned – Savings – investments = Expenses
Now let us take examples of why people invest. Some people invest just to inculcate the habit of saving and some invest to reach a specific goal or invest for a specific purpose:
Buying A House
It is not easy to buy a house with one’s savings. Unless you are a millionaire or ‘Crorepati’ or a very rich man or woman, you cannot buy a house without taking a loan. Even while taking a loan, there is a down payment that you need to make. Where or how are you going to accumulate that amount. So if you are still young and want a house of your own, then start investing now, it will help build up a corpus to achieve that goal.
Let’s face the fact, education is not getting any cheaper, and I think all the parent’s of India will agree to that. They are your children after all and you will want what’s best for them, i.e. to give them the best education, but can you afford it? Of course you can! But you have to start investing now. Always remember the earlier you start, the bigger corpus you grow. So you can afford to take risks, as your goal is a long term goal, but you need to change your asset allocation, when your goals is near, i.e. shift your money more into debt, so as to keep your funds safe.
Here is another long term goal, that people don’t think about. You may feel that for reaching the retirement age, there’s a long way to go. But what about the retirement expenses?
Do you still think you have a long way to go before you start investing for your retirement corpus? Just think about this scenario, 10 years back what were your household expenses and compare it with your current household expenses. Do you see the difference? And that’s exactly why you should start investing for your retirement now.
As mentioned before, the earlier you start, the bigger your corpus will be. One has to also keep in mind, the inflation and you will not be earning any income, during your retirement period. Also ask yourself, what if you live longer? How are you going to fund those years of your life?
A lot to think about right?
That’s why the earlier you start to think about funds for your retirement, the better for you.
So, these are the differences in reasons, as to why you should ‘SAVE‘ as well as ‘INVEST‘. And for those of you, who are still searching for reasons to start saving or investing, I think you’ve got quite a few of them, that will boost you, to go ahead.
One important point to keep in mind that, for long term investments, you can invest in risky instruments, like equity funds, but remember that when you are nearing to your goal, the funds should be shifted from risky to safer investment instruments, like debt funds. For example, you want to achieve a goal in 10 years, So for the first 5 years, you can start with 80:20 in equity and debt, then shift to 60:40, then after 3 years, shift to 30:70 and in the 9th year, you can shift to 10:90. This way you are minimizing your risk, when you reach closer to your goal. So that’s how you need to plan for your investments.
For all you parents out there, instead of giving your children that hefty pocket money, save it and invest it for them or at least inculcate the saving habit in them. They may feel the pinch now or maybe too small to understand it, but will realize it and thank you later. This will also get the burden of their future off your shoulder and will also help you reach your goals in time. So save and make the savings work for you through investments. As you can see, savings and investments both are important, but knowing the difference is what matters more. So use your income wisely!
How do we define financial success. High salary or huge bank balance. High salary or huge bank balance won’t make you rich. Finally, Amount left with you after paying off your debt is an important deciding factor for financial success. To know this you need to calculate your Networth.
Networth helps us to know how much we have incase if we sell all our assets and pay off all the liabilities. Networth provides snapshot of financial position at any given point of time. If we know our networth today, it will help us to know are we on track or off track of achieving our financial goals. It will help us to know end result of income earned and money spent till now. Networth help us to evaluate our financial health and true picture of our financial life. We can view Networth as financial report card to keep a track of our financial life and take corrective action required in case we are off track.
Let’s understand how to calculate networth.
The first step to calculate Net worth is to list down all the assets we own. This may include
- Bank, Cash and Liquid Mutual Funds balance – It includes cash in hand, bank balance, short term FD (less than 90 days) and liquid mutual funds scheme. All the assets are very liquid assets.
- Financial Assets – This includes your investment in Equity shares, bonds, Non-convertible debenture, Company & Bank FD, MIS, NSC, KVP, PPF etc. All are considered at their current value.
- Real Estate – Real estate includes current market value of properties including residential house, Land, commercial properties etc.
- Personal Valuable & Assets – Includes personal use assets like Motor Vehicle, Jewellery, Painting and other valuable personal assets etc.
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Next step after listing assets is to create list of Liabilities which may include loan or debt payable to banks or money borrowed from others. This may include
1. Housing Loan – Balance outstanding in the loan to be repaid to the bank or lender
2. Car / Vehicle Loan – Balance liability payable to bank
3. Personal Loan – It includes Outstanding balance to be paid
4. Consumer Durable Loans – It includes Outstanding balance loan on consumer durable like Laptop, TV etc.
5. Credit Card Outstanding – Outstanding balance on your credit card.
6. Other Loan – It includes balance on other type of loans like mortgage loan, loan on jewelry or loan from friends / relatives
We can calculate Networth by subtracting Liabilities from Assets or as per given formula
There are three possible outcome
- A negative net worth means you have less assets and more liabilities or in other words you owe more than you own.
- A positive net worth means you have more assets and less liabilities or in other words you own more than you owe.
- Your Networth is Zero when your assets equals Liabilities
Ideally at any point of time in your life your networth should be positive. But due to possible trade off between needs and wants it may happen in the initial years of our career i.e. between 20’s and 30’s we may have negative networth. But our aim should be to create positive networth as we get closure to retirement i.e. in 50’s and it should keep increasing.
One of the important Role of financial planning is to help us keep a track of networth and take right financial decision. Our action should help us to increase networth instead of keeping constant or decreasing it. Decision taken in isolation like investment or savings without preparing or following financial plan could have negative impact on networth.
To conclude, networth helps us to know where we stand financially. This will help us to take right financial decision and we are better prepared to achieve our financial goals. Keep a track of Networth and be financially healthy.