Any person earning Income has to pay tax. So why are we waiting for the last-minute rush, tax planning and investing to save taxes should not be left for the last minute. Better to start now, this way one can get ample time to carefully plan your tax which will enable us to achieve our target of Tax saving and also helps to accumulate wealth for our future.
There are various tax savings options available under section 80 C of the Income Tax Act, 1961. Now the next step is to figure out the option which offers the highest possible returns.
Here we are going to discuss few such investments which are good tax-saving instruments and simultaneously helps to create wealth in a long term:
- Equity Linked Saving Scheme (ELSS)
Equity is the best investment option that offers a kind of wealth creation opportunity. It holds the potential to beat inflation and generate long-term wealth. However direct investment in stocks does not offer a tax-saving advantage and it is subject to a highly volatile market that needs lots of expertise to create wealth out of it. That is where Mutual Funds come because one can leverage the power of investing in equity but leave the expertise required for equity investing to the domain experts for small fees.
Equity Linked Saving Scheme (ELSS) is one of the best options in the given scenario. ELSS funds are diversified Equity Mutual Funds. One of the important advantages is it has a mere 3 years Lock-in period which is the lowest among other tax-saving instruments at the same time it gives the highest returns.
ELSS funds primarily invest in Equities and Equity Linked Instruments, across the market in terms of sectors and market cap.
Liquidity is also one of the factors of evaluation, the 3 years lock-in with ELSS funds may be a better option for most investors because your money is far more liquid than in other investments.
Due to 3 years, lock-in period Fund Managers can generate better returns because they can take long term strategic decisions as opposed to short term moves in response to investor behaviour when the market is volatile.
SIP in ELSS:
Another good option is to invest in ELSS via SIP. Here one can invest regularly as per our financial goals and it also benefits from averaging during times of volatility.
One can also gain from the power of compounding, which is one of the next best options in building wealth creation. As per the growth option in ELSS funds you stand to benefit from the power of compounding.
E.g. If we invest Rs.5000/- per month (SIP) for 15 years in ELSS then the total investment was only Rs. 9 lakhs and the returns after 15 years would have been Rs.44.5 lakhs.
- Public Provident Fund (PPF)
When people think of building a corpus for their retirement, the first thing that comes to their mind is by contributing to the Public Provident Fund. Public Provident Fund is one of the safe options of investment as it is backed by the government. It gives a fixed rate of Interest annually (7.1% per annum – at present). However, with the current changes proposed in Union Budget 2021, the interest earned will be taxable if the annual contribution is Rs.2.5 lakhs and above.
It is available in all post offices and all public or private sector banks.
The Frequency to deposit in the PPF account is also as per the tax payer’s requirement ie. One can deposit either a lump-sum amount or in instalments during the Financial Year.
E.g. With an investment of only Rs. 5000 per month at 7.1% per annum one can receive approx. Rs. 16.7 Lakhs after 15 years.
It is suitable for investors who want to avoid risk, save for long term goals like child education, marriage, etc without worrying about any capital loss.
Must Read: Portfolio Management Services in India
- Sukanya Samriddhi Yojana
Sukanya Samriddhi Yojana (SSY) is a small deposit scheme for the girl child launched as a part of the “Beti Bachao Beti Padhao” campaign. One of the reasons why this scheme has become popular is due to its tax benefit. It is again backed by the Government so it is preferred by those taxpayers who want to save tax and get good returns without capital loss.
Though this option is available only to those who have a girl child, it is a good tax-saving instrument that fetches the highest rate of interest (7.6% per annum) and also creates corpus in the long run which enables the taxpayer to achieve their financial goals like girl child marriage or for her study purpose.
A Sukanya Samriddhi Account can be opened any time after the birth of a girl child till she turns 10, where you will have to deposit a minimum of Rs.250/- and a maximum of Rs. 1.5 lakhs can be deposited during the financial year. The account remains operational for 21 years from the time it is opened or until the girl in whose name it is opened gets married, after she turns 18 years.
It comes with exempt-exempt-exempt (EEE) status as its annual deposit qualifies for Sec 80 C benefit and maturity proceeds are also non- taxable. The Interest received is also exempt from Tax.
- National Pension Scheme
As the name suggests National Pension Scheme is dedicated solely to retirement planning. It is a pension cum investment scheme launched by the Government of India for the age from 18 to 65 years. NPS is also a good option for wealth creation as your money gets invested across asset classes like equity, Government/corporate bonds, etc.
Here one can have the choice to select our asset allocation which follows an age-based asset allocation model depending on our risk appetite.
It has the dual benefit of investing for retirement and also the best tax saving instrument as it qualifies for EEE status.
Hence the National Pension Scheme can be a good option for those who are not comfortable making investment decisions on their own then such a tailor-made solution can be the best choice and will also build a corpus for their retirement.
- Fixed Deposit Scheme
Fixed Deposits are one of the safest investment options, especially when one compares them with stocks or other market-linked instruments. As the volatility is low the corpus that one set aside in Fixed Deposits serves as a great way to ensure that your capital is safe.
For the investor who is just starting with different investment options, then investing the same amount as your capital is an easy way to arbitrage your risks and receive an assured amount at maturity.
One can also start saving at an early age and multiply wealth with the power of compounding.
- United Linked Insurance Plan
United Linked Insurance Plan is a combination of savings and protection. Along with providing Life Insurance it also helps to channelize one’s savings into various market-linked assets for meeting long term goals.
A Minimum lock-in of 5 years is long term, which ensures investors generating good market-linked returns.
It is good to stay invested in these schemes for a long-term period of say about 10 years or more. Over the long term, ULIP is expected to generate returns ranging from 10% to 12%. The returns from the best ULIP are better than other market instruments like FD’s, NSC’s, PPF, etc. Best ULIP can also beat inflation in the long term.
One can also get a brisk return by exercising the option of fund switching in ULIP’s due to long term investment.
The amount received on maturity is exempt from taxation u/s 10 D of Income Tax Act, 1961. Along with this tax relief, one can also avail of tax benefits on premiums paid up to a maximum of Rs.1.5 lakhs u/s 80 C of Income Tax Act, 1961.
Thus, the objective of wealth creation over an investment horizon of 10 years can be fulfilled by investing in the best ULIP.
It is wise to think of investing beyond the traditional ways of saving tax like, investing in Fixed income tax saving instruments like FD, PPF, or endowment life insurance plans etc. Plan for other options like ELSS, ULIP, etc based on the risk appetite and other relevant factors as discussed above of an individual.
With many options available when investing for wealth creation and saving tax at the same time can be easily achieved by making the right choice at the right time and getting started with it at the earliest.
What is tax planning?
Tax planning is the analysis of an individual’s financial situation from a tax efficiency point of view so as to plan an individual’s finances in the most optimized way. It allows an individual to make the best use of various taxes. Income tax planning involves planning under various provisions of the Indian taxation laws. In India, tax planning offers provisions such as deduction, contributions, incentives, exemptions.
Advantages of tax planning:
- To reduce tax liabilities
Individuals wish to reduce their tax burden and save money for their future. With the various benefits offered under the Income Tax Act 1961, you can reduce your payable tax by arranging your investments. The Act offers many tax planning investment schemes that can reduce your tax liability.
2. Minimise litigation
Minimising litigation saves the taxpayer from legal liability. Litigate is to resolve tax disputes with
local, federal, state or foreign tax authorities.
3. Leverage productivity
The core tax planning objective is channelizing funds from taxable sources to different income-generating plans. This ensures optimal utilization of funds for productive causes.
4. Ensure economic stability
Effective tax planning and management of income provides a healthy inflow of white money that show sound progress of the economy. This benefits both the citizens and the economy. Every taxpayer’s money is devoted to the betterment of the country.
How to save taxes?
- Section 80C
Taxpayers are provided with several options to reduce their tax liabilities. There are various sections of the Indian Income Tax law that offer tax deductions and exemptions, of which, Section 80C is the most popular tax-saving instrument. Here is a quick look at how you can save tax by using various deductions allowed under the Income-tax Act.
Section 80C It is the most commonly used section where an individual can save tax by investing or spending a maximum of Rs 1.5 lakh in a financial year in/on specified avenues. Some of the commonly used investment/expenditure avenues under Section 80C are Employees Provident Fund (EPF), Public Provident Fund (PPF), Equity-linked savings scheme (ELSS) mutual funds, National Pension System (NPS), repayment of the principal amount of home loan, children school fees etc.
- Section 80CCD (1b)
You can further save tax by investing additional Rs 50,000 in NPS. Do keep in mind that this deduction is available over and above the tax benefit available under section 80C. Thus, you can save tax by investing up to Rs 2 lakh in a financial year -Rs 1.5 lakh under section 80C and Rs 50,000 under Section 80CCD(1b).
- Section 80CCD (2)
This deduction is available on the employer’s contribution to an employee’s Tier-I NPS account. A maximum contribution of 10% of the basic salary plus dearness allowance (if applicable) is allowed under this section.
- Section 80D
Premium paid for the health insurance policy of self, spouse and dependent children can be claimed as deduction under section 80D of the Income-tax act up to Rs 25,000. In addition to that, the premium paid for the health insurance of parents can offer an additional tax break up to Rs 25,000. If your parents are senior citizens (age 60 years and above), then this tax break would go up to a maximum of Rs 50,000. Therefore, health insurance premiums paid for self (including spouse and dependent children) and senior citizen parents can help you save tax up to Rs 75,000 in a financial year. If both the taxpayer and parents are senior citizens then, the maximum deduction of Rs 1 lakh can be claimed in a financial year.
If your senior citizen parents are not covered under any health insurance policy, then the medical expenses incurred for them can be claimed as a deduction under section 80D. The maximum amount that can be claimed as a deduction under section 80D for medical bills in this manner is currently Rs 50,000.
- Section 80DD and Section 80DDB
Apart from section 80D, there are two other sections that can help you save tax in case of medical expenses incurred for disabled and/or specified persons. Section 80DD offers a tax break on the medical expenses incurred for a dependent disabled person. Dependent here includes spouse, children, parents, brothers, and sisters of the individual.
The deduction allowed depends on whether the dependent is disabled or severely disabled. If the dependent is at least 40% disabled, then the maximum deduction that can be claimed is Rs 75,000. On the other hand, if the disability is 80% or more, then it is considered a severe disability and the maximum deduction that can be claimed is Rs 1.25 lakh.
Section 80DDB offers a deduction for the medical expenses incurred for the treatment of specified illnesses such as cancers, chronic kidney diseases, etc. This deduction can be claimed for the expenses incurred on self or the dependent. For individuals below 60 years of age, whether self or dependent, the maximum deduction allowed is Rs 40,000. For senior citizens aged 60 years and above, the maximum deduction that can be claimed is Rs 1 lakh. The list of diseases for which deduction can be claimed under this section is specified in the Income-tax Act.
- Section 80U
If you are an individual with a disability of 40% and above, then you can claim a tax break under section 80U. However, deductions under sections 80U and 80DD cannot be claimed simultaneously.
Deduction under section 80U is claimed by the disabled individual whereas deduction under section 80DD is claimed by the dependent who has incurred expenses for the treatment of the disabled individual. The deduction amount under Section 80U for disability and severe disability is the same as mentioned in section Section DD
- Interest on Housing Loan
Apart from the tax benefit available on home loan principal repayment under section 80C, one can also claim tax benefit on a maximum of Rs 2 lakh on the interest paid on the loan during a financial year. If you are paying interest on a home loan for an under-construction property, this benefit will be available after the possession of the house, provided it happens within five years. The interest paid during the construction period can be accumulated and claimed in five equal installments after getting possession of the house.
- Section 80EEA
If you have taken a home loan to buy a house under the affordable housing segment during FY 2020-21, then you are eligible to claim an additional tax break on interest paid up to a maximum of Rs 1.5 lakh. This deduction is available over and above section 24 (mentioned above) where you get a tax benefit of up to Rs 2 lakh. However, there are certain conditions that you must satisfy before claiming tax benefits under Section 80EEA.
- Section 80G
Contributing to charity can also help you save tax. If you donate to specified government notified funds under section 80G you can claim up to 100% of the donation as a deduction from your gross total income thereby reducing your taxable income and consequently the tax
- Section 80TTA
Interest earned on balances in savings accounts held with banks or post offices is taxable under Income from other sources. However, interest earned from these sources up to Rs 10,000 in a financial year can be claimed as a deduction from gross total income under section 80TTA.
- Section 80TTB
Senior citizens (those aged 60 years and above) can claim a maximum deduction of Rs 50,000 from gross total income under this section. The deduction can be claimed on the interest earned from specified sources such as savings account, fixed deposits, senior citizen savings account etc.
- Section 80E
Interest paid on an education loan will also get you a tax break. Only individuals can claim this deduction. HUFs are not entitled to this deduction. There is no limit on the maximum amount that one can claim as a deduction from gross total income under this section in a financial year. However, the benefit is available for a maximum of 8 years from the start date of loan repayment.
Tax Planning is not a day’s work and has to be carried out considering the financial goals, liquidity position, and taxability on returns etc. A taxpayer can save the tax as well as build wealth alongside by doing tax planning in advance.
Financial planning in 2021 – The year 2020 was one of such nightmares which many of us would definitely like to forget at all costs. Nevertheless, this year also taught us a lot about many aspects of life which we almost pay no attention to. In all, with the announcement of the vaccination drive for COVID-19, the year 2021 has rung a bell and has shown us a ray of hope in the gloomy times.
But has everyone learned the lesson for good from the year 2020 and has started acting upon it. New year resolutions have not gone stale yet and we would like to remind you as to how you can make the year 2021 the best year.
As we have steered ahead in Unlock 2.0, now slowly the finances, economy, employment markets, stock markets are beaming up. But until and unless you understand how to carry out financial planning for this new year 2021, you won’t be able to achieve much this year too.
So, let’s learn some quick tips for financial planning for 2021:
- Make financial resolutions for 2021 and stick to it
New year resolutions are really fun and motivating, but how to ensure that we stick to those? Try to mix consistency in your daily routine and reap the benefits of a loyal disciple of your own resolutions.
You could build a budget which may be designed to help you achieve some goals which may be
- Tax saving
- Retirement planning
- Vacation planning
- Emergency fund arrangements
- Wealth building for the long term
- Cutting back on unnecessary spending and shopping etc.
The list is exhaustive but it is always recommended that you should build a financial budget to ensure that at least 3 of your financial goals are achieved. Sticking to the budget is very easy and there are also some tools and apps available for your convenience.
- Tax Planning
Most people usually interpret tax planning as last-minute investments into anything which will suffice the deduction limit. However, there is much more to tax planning. Not all tax-saving instruments are made up to suit everyone’s risk appetite and investment goals. Let’s take the example of Mr. A who needs to invest in tax-saving instruments. Mr. A also wants to make most of it even where he is ready to accept moderate risk. Mr. A should invest in ELSS – Mutual Funds (blue chip or large-cap typically), which would allow him to claim deduction under section 80C. One more advantage is that Mr. A will be able to earn around 12-13% with moderate market risk.
- Investment Goals
If there is no goal, then there could be no financial planning. Ideally, financial planning would be divided into 3 types of goals
- Short Term Goals
Tax planning or contingency fund planning is usually the short-term financial goal. Short Term goals cover the time period of 1-3 years. The investments with a lock-in of 3 years period or investments with maturity for such a short period would be suited to meet certain annual cash flow or expenditure. A most suitable example of such expenditure would be insurance payments or school fees payment etc.
- Medium Term goals
A most appropriate example of a medium-term goal would be buying a house or school fees till graduation. Vacation planning can also be carried out in the medium term.
- Long Term Goals
Retirement planning would be peculiar examples of Long term financial planning. Investments having longer payment periods or with maturity/redemption expected at a much later date than 10 years would mostly be suitable. Equity investments would be also suitable for long-term financial planning.
- Medical Insurance
With COVID 19 in the background of the year 2020, the upcoming year 2021 would also be witnessing some ups and downs in the health security area. Following points to ensure that you are on the safe line.
- Revisiting the medical insurance coverage
- Check whether the current insurance cover is sufficient to cover hospital admission, room rent, etc.
- Check whether the medical insurance covers the major and terminal diseases
- Understand that it is better to pay the premium now and reduce the bigger cashflow at the time of the actual incident.
- Take care of your health
The year 2020 was a lightening effect to make us understand the benefits of good health. If you have good immunity, then you can definitely save yourself from multiple diseases and in turn much of your money too.
Subscribe to the Yoga class, take admission to Gym, take out time for a healthy jog. Break the routine of Work from Home and try to get out for fresh air. This will reduce mental stress and as well as add to the health benefits.
- Revisit the retirement plan
With COVID 19, many of us saw the actual job loss and pay cuts. This shows how critical it is to ensure that we revisit our retirement planning. While you assess the retirement plan, here are few things to check on
- Inflation factor
- Increased expected medical expenditure
- Reduced pay or no income in some cases
- Liquidity crunch etc.
- Create an Emergency fund
It is a known fact that a fund equal to six months of your income should be maintained as a liquid investment so that it could be used in the event of no active income source. Ideally, an emergency fund can be created by investing in short-term fixed deposits or recurring deposits, or mutual funds.
- Learn something
Learn something new which will help you either in getting-
- an increment in the current job or
- a new job or
- promotion etc.
This new skill may also help you add an additional income stream which you could use as an emergency fund.
- Strengthen your credit score
Try to pay off loans with the highest interest rate first. Also, avoid buying things on credit cards. Once you default on loan repayments, it hampers your credit score badly. So always make sure that you are not defaulting on repayments.
- Say no to unnecessary investments and tips
Most of the investors usually go out and make investments based on insider tips or commission agents’ advice. Try to take the help of a professional if you can not do it yourself.
These 10 Tips will help you out in building a sustainable financial plan for the year 2021. These pillars will help strengthen financial health in the coming years. Having said so, just building a plan is not enough. You will need to ensure that you stick to the Financial Resolutions to make it work for you.
‘Tax’, a word that brings stress to the taxpayers. It is a compulsory contribution, imposed by the state government on the working crowd. They are taxed according to the income they receive. It can be any income, which includes salary, income from a business, or house property. People get irritated paying tax because, they have worked really hard to earn their money, and from what they get, part of it goes to the Govt. Some people don’t even realize that their 2 to 3 month’s salary goes into paying taxes.
Now let us talk about what is the other option available to save this tax being paid. The Govt may have made this contribution compulsory, but they have also provided us with tax-saving tools. That’s another thing, most of the working crowd are still not aware of these tools, which results in frustration of paying tax.
Tax is vast and very complicated to understand. So even though they use the basic deductions, a huge chunk of their income still gets cut. This is because they are not aware of the other saving tools available. Only professionals in this field will be able to help you out. Tax planning is very important, as it allows you to take more of your hard-earned money home. Those falling under the 5% tax bracket, do not have to work much on their tax planning as they can easily bring it down to nil. Those in the 20% or 30% tax bracket need advanced tax planning since a huge amount must be getting cut.
Related article : New Tax Regime Vs Old Tax Regime -Which one should you opt for?
Let us see few tax planning tools other that of section 80C:
Hindu Undivided Family:
Famously known as HUF, is a great tool for tax planning. All the members can transfer their income except salary income to the HUF account. A HUF when created also enjoys the same exemptions and deductions as that of an individual. For married couples, if either the husband or wife has an ancestral property that generates rental income, they can transfer this income to the HUF account and it will be taxed as the income of HUF. However, it’s not the same in the case of, a person buying a property, and income generated from that, if transferred to the HUF, will be added to the person’s income and taxed accordingly, it will not be treated as income from HUF. But the rental income once transferred can be invested in tax-saving tools.
People with housing loans can take the benefit of Rs.200000/- under section 80C. For the interest amount, there are 2 situations, one is self-occupied where the person gets the deduction up to 2 lakhs and if it is taken in joint names of the husband and wife, then 4 lakhs. In the second situation, in case of a let-out property or deemed to be let out, there is no limit to the deduction. However, in one year a maximum of 2 lacs only can be claimed as a deduction. Anything over it can be carried forward to the next year for up to 8 years.
In an education loan, the interest amount available for deduction is unlimited. This deduction is allowed for seven years. It can be for any further studies after passing Senior Secondary Education. The loan is available for deduction even if taken in the spouse or children’s name. This comes under section 80E.
This comes under the deduction 80D. For an individual the limit is up to 25000/- and for senior citizens above 60 years of age, the limit is 50000/-. So an individual can claim his amount and if he takes mediclaim in his parent’s name, who are above 60, he can get a total benefit of 75000/-.
Expenses Incurred On Medical Treatment:
This deduction comes under section 80DDB. He can take the benefit for the specified diseases for himself, his spouse, children, parents, brothers, and sisters. The maximum deduction is up to Rs. 40000/- and for senior citizens, it is up to Rs. 100000/-. If you have taken a policy, worth Rs. 150000/-, and your medical bills have actually come up to 2 lakhs, then you will get the benefit on only Rs. 50000/-, i.e. (200000 – 150000 = 50000). To avail this benefit, the bills and a certificate from the specialist are required.
Any donation or charity made to any NGO, political parties and trust can be claimed under section 80G. The maximum deduction is 10% of your gross total income.
Invest In Spouse’s Name:
Any surplus income can be invested in the house property, PPF, mutual funds, and equity. To invest in house property in the spouse’s name, you can lend her the money and she can give you her jewelry in exchange. In case the individual is not married but engaged, and if his fiancé does not have any taxable income or pays tax at a lower rate, then he can transfer the surplus income to her and it won’t be taxed as his income, as in the case of a married couple.
Invest In Mom’s And Dad’s Name:
If you have surplus income, you can invest in their name. When money is transferred to parents, there is no clubbing of provisions. You can transfer any amount. There is no limit as such. So, these are the other tax-saving tools that a person can use if he/she has exhausted the deduction under section 80C. If it is too complicated to understand, then it’s better to seek help from a tax professional.
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As we are heading close to year-end, it is imperative to check if you have made the required investments to save tax. If you have not done any tax planning for FY 2020-21 yet, it’s time to make a decision as we are already entering the month of December. You should not keep these tax-saving investments till the last moment i.e. 31st March 2021. The earlier you do it, the better it is.
Mr. Gupta is one of the taxpayers who has not yet made up his mind as to where to put his money to save taxes. In order to save taxes, we all are aware of the most common section i.e. 80C. Right?
Options available to Mr. Gupta
Under section 80C of the Income Tax Act, Government gives us many options to claim tax benefits. Some of these are on expenditures incurred and some are on investments made. Mr. Gupta is not eligible to claim any expenditures under 80C as he neither has any home loan nor any tuition fees expenditure for children.
So the only option left with him to fully utilize section 80C is to make certain investments that are eligible for this deduction. You must be aware that the maximum tax benefit available under section 80C is Rs. 1,50,000. He already contributes Rs. 21,600 towards PF and has a term insurance premium of Rs. 25,000. Thus, keeping in mind his PF contribution and term insurance premium, the remaining amount of Rs. 1,03,400/- can be invested to claim 80C fully.
After going through various investments like PPF, ELSS, Sukanya Samriddhi Yojna, FD, traditional insurance policies, he decided to select either ELSS or FD. He is confused between these two.
Are you also confused between ELSS and FD to save your taxes, then read on to get clarity as to what is suggested for Mr. Gupta? Each of these two options comes with its own set of pros and cons as well as risks and returns.
Let us first understand these options in detail.
Equity Linked Saving Scheme
ELSS is a type of equity mutual fund. You must know that this is the only mutual fund that offers a tax benefit under section 80C. Equity linked saving scheme is a diversified equity mutual fund with a lock-in period of 3 years.
All the investments that are part of 80C have some or the other lock-in period. The major advantage of the ELSS fund is that it has the least lock-in period of just 3 years as compared to all the other options available.
Since budget 2018, the tax rules regarding ELSS funds have changed. The long term capital gains from ELSS funds are taxed at 10% without indexation benefit. This rate is applicable only if the gain amount exceeds 1 lac. If it doesn’t exceed 1 lac then it is totally tax-free.
As the money is invested in stock markets and fund managers know that investors can not withdraw the money for 3 years, ELSS funds provide much better returns as fund managers can take a call of investments without the fear of investors withdrawing their money which happens in other types of mutual funds. It is a market-linked investment avenue and if invested for the long term i.e. more than 3 years, it can prove to aid in creating wealth.
Another interesting point to note here is that the returns from ELSS funds are often in double digits and easily beats inflation in the long run. Thus, it can be said that it delivers superior returns if we compare it to other tax saving instruments.
Here, we are not talking about the usual bank FDs but we are focussing on Tax Saving FDs. Tax saving FDs come with a lock in period of 5 years and with an objective to offer deduction under section 80C. However, in case of emergencies, you can avail a loan against your FD.
It is important to know that the interest received on such FDs is fully taxable as per the individual’s tax slab.
Unlike ELSS, it is a traditional investment instrument and not market-linked. Although it is not exposed to market risk, there is still a default risk. All deposits of account holders of banks are insured up to a maximum limit of 5 lakhs.
What should Mr. Gupta do?
Before making any investment whether for tax saving or not, one should consider factors like age, investment horizon, and risk appetite.
Mr. Gupta is 40 years old with an investment horizon of 6 years for a goal of international vacation. Considering that this goal is not a necessity but more of a desire, Mr. Gupta can take more risk and thus have a high-risk appetite.
Keeping these things in mind, it is suggested that Mr. Gupta opts for an ELSS investment over FD. He can either invest a lump sum or do it as SIP for these remaining 4 months of the FY 20-21. It will serve him as a dual benefit of wealth accumulation as well as tax benefits.
Related Article: 5 Factors To Consider While Making Lump-Sum Mutual Fund Investment
If you, on the other hand, are a risk-averse person and capital protection is of utmost priority to you, then it is recommended that you opt for a fixed deposit over ELSS. You must be aware that because of the low-interest rate and not-so-tax-friendly option, you won’t be able to accumulate much if you solely depend on FDs as your preferred investments.
Investors approaching retirement must consider investing in safer investment i.e. tax saving FD. This is because they tend to have low risks and guaranteed returns. In a nutshell, you must always select an investment scheme based on your financial goals and risk profile.
Mr. and Mrs. Sharma, both in their early 30s, after completing 5 years of their married life decides to have a house of their own. Both husband and wife are working at good positions in corporate and are regularly paying income tax on their incomes. After sheer hard work and a lot of savings, they will finally be able to make a house of their own. Both of them are really excited to live in their own house. They have invested almost everything they had in this new house.
Mrs. Sharma has big dreams for the house. She has all the color combinations and furniture designs pre-decided. While Mr. Sharma has planned to hire the best architect for their house. But all these dreams are becoming a reality after cutting their leisure for the past 5 years. Also after saving every single penny they could in these past 5 years. Most probably this scenario will continue for a few more years as they have invested everything they had in their dream house.
Well, this case study seems to be familiar to most of the people around us. They are passionate people who work really hard to fulfill their dreams. All of us have a list of wants, actually a pretty expensive wish list to be checked in as little time as possible. But just hard work is not enough for these purchases. One needs to consider the tax-smart alternative to pay less by using tax planning.
So, before we see some ways to plan our taxes on home loan, let us first understand the concept of tax planning.
Tax planning is simply arranging your financial activities in such a way that maximum tax benefits are enjoyed. This can be done by making use of all beneficial provisions in the tax laws. It helps any person to take full advantage of all available exemptions, deductions, concessions, rebates, and reliefs within the boundaries of the law. Tax planning is important to avoid expensive tax blunders people make. It is also helpful in planning your financial transactions in a manner that you can legally reduce your taxes.
Related Article : Tax Planning For Beginners: 3 Key Principles Explained
The Income Tax Act, 1961 under various sections provides us the opportunity to plan our investment. Thus, you can claim various exemptions and deductions against the quantum of your tax liabilities. Now let us discuss a few of the most common tax planning tools with you which will assist you in optimizing your home loans.
Tax benefit on home loans
Home loans are highly advisable options for tax planning as one can claim a deduction in 3 different sections for the repayment of home loans. Thus resulting in huge tax savings. So to make it simple, let us understand this benefit by categorizing the repayment into two components. First is repayment of principal amount and second is repayment of interest on home loans.
The deduction for repayment of principal amount on home loans can be claimed under Section 80C of the Income Tax Act, 1961 up to ₹ 1,50,000. While the interest paid on home loans can be claimed under Section 24 of the Income Tax Act, 1961 up to ₹ 2,00,000. Also, an additional deduction of₹50,000 for interest on home loans can be claimed. First-time buyers can claim this additional deduction under Section 80EE of the Income Tax Act, 1961.
As Sharma’s were earning well, they could have invested their savings in some eligible funds and claim deductions thereof. Moreover, had they considered the option of a joint home loan, they both could have claimed deductions for payment of principal and interest amounts in respective sections as discussed above.
These smart choices would have given them the option to have their dream house much before, instead of making them wait for 5 years. Also, they could have even enjoyed their lives without sacrificing much in their leisure.
Tax planning is like a win-win situation for everyone. We, the taxpayers are able to plan our activities in such a manner that we attract minimum liability to tax by taking full advantage of tax laws. Our government also is at advantage as the exemptions and deductions that we get can be utilized only by making investments in various schemes initiated by the government. Finally, our nation will also prosper as the money invested by us in government schemes will help in the development of our country and those schemes will also generate employment in the nation. Thus, your simple step of tax planning is even helping our society to grow.
Tax planning is not something you do at the last moment before filing your tax return. Tax planning is much more than that last moment rush. It is a disciplined approach. One has to be smart enough from the beginning of the financial year to plan all the transactions considering the tax-smart choices so that you don’t end up paying more taxes than you have to!
‘Tax’ a most feared word. No one likes to pay tax, since it’s a compulsory contribution. People think that paying tax is a waste of their hard earned money, because money is going out in form of tax but the money is not reaching the right hands. The more you earn the higher tax bracket you fall into. But having said that, there are plenty of tax saving tools out there. Of course it’s not possible for a layman to know all the tax rules, but if the tax cut is a huge amount then tax planning is required.
What is tax planning?
Well, let’s just say, if you do tax planning, then you can take more of your hard earned money home. Tax planning is making maximum use of the tax saving tools, to take more of your earnings home. Of course everyone’s earnings, situation, assets, etc are different, so different tax rules apply to different people. People think it’s normal that their tax gets cut, because they earn that much, but what they don’t realize is that, if they put in a little efforts, they can save part or the whole tax that gets cut. If they are not sure of how to save the tax, then take help of a consultant. Here also people make a fuss that fees are expensive. What is not considered is that, the tax that is getting cut is much more than the fees of the consultant.
Now a days, people are realizing the importance of tax planning. They are actually taking it seriously and showing in interest saving their taxes. But still in our many years of experience, there are some that do not know the basic deductions. There are some who have exhausted the basic deductions and still a huge chunk is getting cut. This is because they do not know about the other tax saving tools. One of the main reasons as to why people do not know the tax rules or tools, is because some rules change every year and it is difficult to keep up for a normal person. Tax is complicated, there’s only so much one can learn about the deductions, it is not possible to learn everything. Even chartered accounts and other tax experts reach where they are after years of experience and training.
Here are some pointers to keep in mind, before you think ‘It’s okay if my tax is getting cut’:
Why Pay, When You Can Save
Even though the Govt. has made tax a compulsory contribution, tools to save the same contribution is also given. If you don’t know about the tax saving tools or you’ve not updated yourself on it or not aware of the changes in the tax rules. then take help of a consultant. So when you can save and take the award of your hard work home, why let it go.
Must read: Tax Planning demystified
Hard Earned Money
Nobody works for free, unless you are doing charity work. People work so hard and put in all their efforts just so that, their family can live a better life. But it’s such a disappointment when they realize, that their 2 to 3 months salary goes in paying annual tax. When you’ve worked so hard for it, your are completely entitled to it. So tax planning is very necessary to take more of your salary home.
Invest The Surplus
Is your salary going in paying tax and the rest to meet your monthly expenses that very little is left to invest? This is where tax planning can help. After your tax planning is done, you’ll be surprised to see how much you can save. That money saved can be invested in tax free investments. This way you can earn out of the tax saved.
Some people don’t realize that they can bring their tax down to nil if they use the tax saving tools to the maximum. Tax planning is very necessary, as the tax saved can be invested in tax free instruments and the amount gained can be used to fund a certain goal. So put some thought into saving your taxes, don’t let it just get cut.
So as you can see, that all these pointers are for your benefit only. Once you do your tax planning, you’ll be surprised at how much your gonna save. Tax planning is very important and it’s good to see that people are making efforts to save their tax. At the same time, it’s also sad to see that some people are not doing anything to save their taxes, either because they do not know the basic tax saving tools or don’t want to seek a consultant’s advice because of the high fees. Having said that, there are many ways in which people can be helped. Tax planning seminars, tax planning workshops, there are companies which provide such services. One can even update themselves on the new tax rules. So save as much as you can, after all it is your hard earned money.
Income tax is always a complicated subject. It’s difficult to understand for a layman. For a salaried person understanding complicated and confusing tax terminology is a nightmare. Through this article we will make your life simple and make you understand tax jargon in an easier manner. In today’s article we will discuss about the basic difference between Exemption, Deduction and Rebate.
Is an amount which is part of your total income but it’s exempt from tax. It means while calculating taxable income some sources of earning is exempt. For example u/s. 10(10D) maturity proceeds of Life Insurance policy is exempt from taxes. In this case while calculating taxable income we will not include life insurance maturity proceeds. In simple term, Tax exemption means tax free sources of earning. It’s advisable to include more and more of exempt sources of earning which will help us to reduce taxable income and in turn tax liability.
Few of the popular example to understand Exemption are
- From salary income based on specific calculation House Rent allowance (HRA) is exempt
- Gratuity received on retirement from employer is also exempt upto a specific amount
- Maturity proceed from PPF account is exempt
It is an amount invested or expenditure allowed under specific section to be reduced from total taxable income. For example, if we invest in 5 year tax saving Bank FD, the investment amount is allowed to be deducted from total taxable income. Amount paid towards mediclaim policies for self and dependents is allowed to be deducted from total income.
Few of the popular example to understand deduction are
- U/s. 80C – Investment or expenditure upto 1.5 lacs p.a. is allowed as deduction from total income. For e.g. Investment in ELSS Scheme of Mutual funds or expenditure towards school tuition fees for two kids are eligible expenses for 80C.
- U/s. 80D – Payments for medical insurance premium for self & dependent and for dependent parents is allowed as deduction from total income.
- U/s. 80DD – Expenditure towards medical treatment of disabled dependent is allowed as deduction from total income upto a specific amount.
It is a different concept all together. Tax Rebate is an amount which is deducted from total tax payable.Unlike deductions which are reduced from total income, Tax rebate is an amount which is deducted directly from your taxes.
An individual can claim rebate of Rs 12500 if he has taxable income less than Rs 5 Lacs. In this case Rs.12500 is reduced from total tax payable before education cess.
To conclude, All three are an important tools for tax planning. Understanding of these three tax terminology will help us to increase tax free income and know tax deductible investment / expenditure. Exemption and Deduction will reduce taxes indirectly. While tax rebate will help us to reduce tax liability directly.
Loans are a great responsibility for any person – be it any type of loan. Loans such as auto loans and home loans have a substantial tenure too that makes reimbursement a truly problematic and tedious routine task. The selection of the type of loan solely depends on the financial requirement for which you need the loan.
Hence, customers can’t choose loans on the basis of the tax benefits they offer. A loan aids you in fulfilling requirements such as financing your kid’s education or buying a house but the repayment of this loan including the interest influences your monthly as well as annual finances for other expenses.
However, one of the most important imperative sides of loans is that many of these loans give income tax benefits to clients. The government of India provides tax benefits for individuals who take loans and these benefits differ depending on the type of loan taken. The tax saving angle is an additional advantage of loans.
According to different sections of the Income Tax Act, 1961, loans can be utilized as tax saving method and offers different types of tax benefits to people who repay their loan. Loans can be definitely be used to cut back on the income tax amount that an individual or a business house pays every year to the government. The various tax benefits on different loans is described below:
- Tax Exemption On Education Loans
The government has taken different measures to promote higher education and people are becoming aware as well as ready to go out of the country for further studies. However, the expenses for education, particularly for professional courses like engineering and medicine is still very high. This is true for both domestic and overseas courses. The increasing competition for employment in the country ensures that the financial problems do not impede people from getting a higher education. This is where education loans come into the picture. Many public and private sector banks offer education Loans for higher and professional education. Public sector banks have different promotional schemes too on education loans in order to promote higher education on convenient and easy terms.
The most important aspects of tax abatement on education loans are:
- Tax benefits on education loans are provided under Section 80E of the Income Tax Act
- Tax benefits are valid only when the education loan is taken from an approved bank or financial institution.
- Higher education loans are provided for courses that any person has decided to choose after completing his/her senior secondary school level, in India or abroad
- The tax deduction is eligible only if the interest is paid towards education loan repayment.
- Tax benefits on education loan can be taken for maximum 8 years or for the full loan repayment duration, whichever is earlier.
- You can claim tax deduction on the maximum interest amount (no limits)
- Deduction on interest for education loan can be claimed for the higher education of self, spouse and children.
- Education loan could be for a full time course or part time.
- Tax Exemption On Home Loans
Home loans are one of the colossal financial obligations that customers in India avail. The amount and tenure of the home loans are massive along with the large sum of money (loan installment) that customers have to pay. However, the customers get great tax benefits on home loans.
The most important aspects of tax abatement on home loans are:
- Tax deduction is eligible for both principal and interest amount paid on home loan
- The Tax benefit on home loan principal repayment is offered under section 80C of the Income Tax Act. Maximum deduction amount allowed is Rs.1, 50, 000.
- Tax deduction for home loan are applicable only when the construction of property is complete and not during the term when the property bought under construction
- The tax rebate is not valid for customers who invest in properties that are under construction (not until the construction is completed). Such customers are, however, have to pay service tax on the loan that they have taken to purchase the property
- Not only principal, but interest paid on a home loan is also allowed as a deduction. Under Section 24, there is a maximum of 2 lacs deduction which is allowed for loans on self occupied property. Also, there is no maximum limit applicable for deduction towards the property which is let-out. However, in one financial year, you can claim maximum of 2 lacs only and remaining has to be carried forward to next year. This carry forward is allowed up to 8 years.
- There is an additional benefit of 50,000 available for claiming interest on home loan under 80EE. To claim this deduction, the amount of loan taken should be Rs 35 lakhs or less and the value of the property should not exceed Rs 50 lakhs. The loan must have been sanctioned between 1st April 2016 to 31st March 2017. And on the date of sanction of loan, individual does not own any other house.
- If you are not claiming deduction under section 80EE, then you can claim additional deduction of 150000 under section 80EEA subject to certain conditions. To claim this deduction, the stamp value of the property does not exceed Rs 45 lakhs. The loan must have been sanctioned between 1 April 2019 to 31 March 2020. And on the date of sanction of loan, individual does not own any other house. The individual should not also be eligible to claim deduction under section 80EE.
Hence, now while buying your first house on a loan will accompany you with multiple benefits. The deductions won’t only reduce your tax outgo but eventually will help you in dealing your cash flows.
- Tax Exemption on Auto/Car Loans
Cars fall under the classification of luxury items and hence no tax benefit is provided to salaried individuals who avail car or auto loan for buying of a vehicle.
The most important aspects of tax abatement on auto/car loans in India are:
- Any kind of tax benefit is not offered on Car loans availed by individual salaried class.
- For business individuals, where car is being used for business purposes, the interest pain on car loan is allowed to be treated as expense to reduce taxable profits.
- Under section 80C of the Income Tax Act, tax deduction is valid for Car loans availed by self-employed individuals for vehicles which are used for commercial purposes.
- Tax Exemption On Personal loans
Tax exemption on personal loans availed by customers is applicable only when the loan is required for business purposes. Besides this specific case, personal finance does not provide any kind of tax rebate to customers. Yes, we can say ultimately say that personal loans are one of the best options to deal the urgent requirements for funds. If use properly you can surely call it as tax saving instrument.
Along with this, businessmen can even get the advantage of deductions on personal loans too under specific conditions, as in when the loan is taken as business loan or the loan for capital investment in business. Moreover, note down that the loans that are taken wisely and in the limit would help you to never fall for never-ending debt spiral. Awesome, isn’t it?
We can help you plan your taxes by using your EMI payments whether it is for home improvement or house loan or education loan. You may get in touch with our tax experts for consultation for any of your queries.
Saving tax is always at the forefront of every taxpayer’s mind. That is why individuals look at legal avenues to lower their tax liability. Thanks to the Income Tax Act provisions, there are ways in which an individual tax-payer can lower his tax outgo. The provisions provide for tax deductions and tax exemptions from the taxable income. These deductions and exemptions reduce your tax liability.
Must read: – Difference between Tax Exemption and Tax Deduction
Moreover, the Union Budget also makes changes and modifications in the available deductions and exemptions. This year’s Union Budget 2020 also made a major change by introducing the optional new tax regime. It is therefore necessary to first check which tax regime will be best suitable to you – Old tax regime or New tax regime. You may read our previous blog on the same here where we have explained the Old vs New tax regime.
In order to get more benefits, you should ideally be opting for the old tax regime. Here are some useful tax saving tips for Financial year 2020-21 to lower your tax:-
Tax saving tips for FY 2020-21
- Utilise the deductions available under Section 80C :- Section 80C is one of the most popular tax deduction sections which allow you tax-free investments and expenses of up to Rs.1.5 lakhs. The popular instruments which qualify for Section 80C deductions include the following –
- Utilise your 80C deduction. Make eligible investments and claim for the allowed expenditure. ELSS investments and life insurance premiums are the most popular go-to instruments for availing maximum 80C deductions.
- Don’t forget to invest in a NPS scheme :- Section 80CCD (1B) allows you an additional deduction of Rs.50, 000 if you invest your income in the National Pension Scheme. Thus, investments in NPS serve you dual purposes. You can claim an additional deduction and also plan for your retirement.
- Buy Health Insurance :- Section 80D of the Income Tax Act allows the premiums paid for a health insurance policy as eligible deductions from your taxable income. So, don’t ignore a health insurance plan. The plan would come in handy in meeting the financial expenses of a medical contingency you and your family faces. Moreover, premiums paid for self and family are allowed as a deduction from tax up to a maximum of Rs.25, 000. If you also buy a health plan for your senior citizen parents, you can claim an additional deduction of Rs.50, 000 making the total available deduction Rs.75, 000.
- Invest in your dream home :- Having your own home must be your dream. Well, for home-owners, there is a tax-relief too. While the principal repayments of a home loan are deducted under Section 80C, interest paid on the home loan qualifies for deduction under Section 24 of the Income Tax Act. Thus, you can claim a tax deduction of up to Rs.2 lakhs on your home loan interest payments.
- Claim a deduction on your savings account interest earnings :- The Prime Minister’s Jan Dhan Yojana scheme has made savings accounts popular among the Indian population. Besides having a banking account, your savings account also earns you an interest. This interest earned, if limited till Rs.10,000 in a financial year, is allowed as a tax deduction under Section 80TTA. So, if you earned an interest on your saving account, claim it as a deduction.
If you follow the above-mentioned tips, here is how your gross total income of Rs.9.85 lakhs would result in zero tax outgo –
|Gross total income from all sources||Rs.9.85 lakhs|
|Less: Section 80C deductions||Rs.1.5 lakhs|
|Less: Section 80CCD (1B) deductions||Rs.50,000|
|Less: Section 80D deductions (for self and senior citizen parents)||Rs.75,000|
|Less: Deductions under Section 24||Rs.2 lakhs|
|Less: Section 80TTA deductions||Rs.10, 000|
|Net taxable income||Rs.5 lakhs|
|Tax payable @5% on the income exceeding Rs.2.5 lakhs to 5 lakhs||Rs.12500|
|Less: Rebate available under Section 87A||Rs.12500|
|Total tax payable||Nil|
If you are a salaried employee, you can claim an additional standard deduction of Rs.50,000 from your salary income for the financial year 2020-21. For senior citizens, interest earned from fixed and post office deposits, up to Rs.50, 000, are also allowed as tax-free income. Taxpayers can also make donations to a charitable cause and earn deduction under Section 80G.
So, these tax-saving tips would definitely help you in lowering your taxes in this financial year. Keep these tips handy and try to minimise your tax liability.