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 are ELSS Funds?
Equity Linked Saving Schemes (ELSS), popularly known as tax saving mutual funds, are equity-oriented mutual funds. As per the SEBI regulations, ELSS funds have to invest at least 80% of their corpus in equity or equity-related instruments.
These funds come with a lock-in period of 3 years and qualify for tax deduction under Section 80C. Investments in ELSS of up to Rs 1.5 lakh per financial year can be claimed as tax deduction under this Section.
Why invest in ELSS funds for saving tax?
ELSS schemes have superior product features than other tax saving investment options under Section 80C like PPF, ULIP, NSC and tax-saving bank FDs.
Higher returns: Even though equities as an asset class can be very volatile in the short term, they usually beat other asset classes including the fixed income asset class by a wide margin over the long term. Hence, being invested in equities, ELSS funds have the potential to generate higher returns other Section 80C instruments like Public Provident Fund (PPF), National Savings Certificate (NSC) and tax-saving bank fixed deposits over the long term.
Shortest lock-in period: The lock-in period of ELSS funds is just 3 years, the lowest among all tax saving investment options eligible for Section 80C deduction. Among other Section 80C options, NSC and tax-saving fixed deposits has a lock-in period of 5 years. The lock-in period of PPF is also 15 years whereas the lock-in period in the case of ULIPs is 5 years. Thus, ELSS funds offer the highest form of liquidity among all tax saving investment options.
As ELSS funds offer the greatest potential of creating wealth over the long term, these can be an excellent tool for achieving long term financial goals like children’s education fund and post-retirement corpus with contributions lower than its fixed-income alternatives.
The 3-year lock-in period in ELSS funds also reduces the redemption pressure for their fund managers during volatile markets. This allows their fund managers greater flexibility to take a more long-term view while dealing with market volatility with respect to other open-ended funds.
Best ELSS funds for tax saving in 2020-2021
1. Mirae Asset Tax Saver Fund
- Aims at building a diversified portfolio of strong growth companies at a reasonable price across market capitalization, themes and investment styles
- Uses a bottom-up approach for stock selection driven by value investing in growth-oriented businesses
- Investment decisions are based on broad analyses of the macroeconomy, business cycles and industry trends
- Prefers companies with high return ratios, robust business models and sustainable competitive advantages over their competitors
- Aims to invest in a large base of stocks to avoid concentration risk
- Monitors the trading volumes of identified stocks before investment to avoid liquidity risk
2. Aditya Birla Sun Life Tax Relief 96
- Uses a combination of bottom-up and top-down approach for stock selection
- The top-down approach helps in analyzing changing economic trends, key policy changes, macroeconomic factors, infrastructure spending, etc
- The bottom-up approach is used to identify companies with a strong competitive position in good businesses and stable management focused on long term fundamental growth
3. Kotak Tax Saver
- Uses a bottom-up approach for stock selection across market capitalization
- Invests in stocks priced at a material discount to their intrinsic value
- Prefers companies with strong financials, reputed management and relatively less susceptible to recession or business cycles
- Also prefers companies with strategies to build strong brands and franchises
Related article: How ELSS is better than any other Tax saving scheme?
4. Axis Long Term Equity Fund
- Invests in quality businesses with a long-term approach
- Uses a bottom-up approach for stock picking
- Can invest across market capitalization, usually in a mix of large caps (around 50-100%) and select midcaps (up to 50%)
- Quality and long-term earnings growth prospects are also used for stock selection
- Uses a research process based on fundamentals to analyze the growth potential of stocks having strong business models and sustainable competitive advantages over their competitors
5. Motilal Oswal Long Term Equity
- Follows an investment style and philosophy based on the ‘Buy Right: Sit Tight’ principle
- ‘Buy Right’ refers to buying quality stocks at a reasonable price
- ‘Sit Tight’ refers to remain invested for a longer time to realize the maximum growth potential
- Follows bottom-up approach for stock selection
- Uses a benchmark agnostic approach to build a portfolio consisting of high conviction stock ideas and low portfolio churns
- Believes inadequate diversification with a smaller number of stocks
Important points to select the best ELSS funds:
- Compare the past performance of 3-, 5- and 7-year periods while making fund-selection. While no one guarantees past performance in future, comparing their past returns can help in depicting how they coped with various market conditions.
- Don’t wait for the last quarter or month of the financial year for investing in ELSS. High valuations in the equity market at that time, if any, would cost you more for the ELSS fund units. Instead, opt for the SIP option to spread your investments across the year and benefit from cost averaging during a market correction, if any, in the interim.
- Don’t opt for the dividend option. Instead, opt for the growth option to benefit from the power of compounding. Dividends are also taxable at the hands of investors as per their tax slab.
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.
Oh. So is it possible to do so? But why?
Your salary is made of many components like basic salary, allowances (taxable and exempt), perquisites etc. While calculating taxable salary, some of these components are taxed as per Income Tax Act, whereas some stand exempt under the law or partial for some of the cases, subject to conditions. We will give you some of those items or parts of the salary structure, which would help you take more salary to your home.
HRA (House Rent Allowance)
You may be happier to go for flat provided by your employer (if you are that lucky!), rather than stay in rented house and pay the rent. However, Income Tax Act has different treatments for the housing alternatives, in case you don’t own your house or you are staying in any other town (where you don’t own your house).
However, there are few points to be noted:
- If you stay in your own house, it is better to have lower HRA in your basic salary structure if it is possible.
- If the house is owned by your parents, grandparents etc., you can still pay them rent, and claim the HRA exemption.
- If it is possible to negotiate, then keep the HRA around at the similar level of rent paid, which will exempt the allowance fully.
Related Article :- Why Tax Planning Is So Important That It Can’t Be Missed
Car purchase or perk
You may be thinking of owning of car and if yes, this pointer is for you. There could be more than one scenarios.
- If your employer lends you loan for car purchase, it can be easily accepted as the EMIs are deducted from the taxable salary and such portion of salary is tax free. However, only hindrance could be that you don’t own the car till all the EMIs are paid off as in the case of external car purchase.
- If you are amongst those very few people, to whom the employer offers car as a perquisite, then you are the luckiest of luckiest. This is because, in such a case, perquisite in the nature of car, is taxed only for Rs.1800- Rs.2400 per month if you are using it for personal purposes as well. Only drawback here could be, that you don’t own the car, but on quitting the job, you can surely buy it at approval of company.
- There could be one more situation where the you own the motor car and expenses will be reimbursed, then also Rs.1800-Rs.2400 per month is taxable as perquisite, if you use it for both professional and personal purpose.
As a salaried individual of a private sector company, you could only rely on EPF as your retirement corpus. However, if you have education loan which has interest rate @ 11-13% then, you may rethink on that loan repayment.
EPF pays interest for almost around 8.5%, so it would be better to pay off the education loan rather than investing in EPF. This will result in 2 benefits.
- Tax benefit under section 80E for repayment of interest on education loan.
Law does not put upper threshold for interest repayment in an year. So, we can draw an inference that if we repay the whole loan in a year, we are able to claim total interest that we paid in the same year under section 80E.
- Prepayment of the education loan by routing EPF investment amount to the same, will result in elimination of almost 2-4% interest payable. Best even because, EMIs are post tax commitments. This makes prepayment of education loan land a double bonanza.
There are many other allowances and perquisites which are worth mentioning here.
- Education or Training
If the employer reimburses the course expenses or training expenses or if he himself provides such course or training, then in such a case, it is exempt perquisite. So, if you want to earn and learn, your employer can sponsor you and that too without any tax consequence.
- Sodexho or Other Meal Coupons
These are part of your salary but are given out before the month starts and you can spend them wherever they are accepted. You are not required to submit proof of spending them over, so rest assured you enjoy them without worrying about tax effect.
Not an allowance, but gratuity is a long term benefit and is payable only if you complete service of 5 years in the same company. Hence, it is better to get rid of this component and adjust it under some other head, if you don’t plan to stick around much in one company for long.
This is for vacation expenditure for 2 journeys in a block of 4 years. Make sure that your salary structure has this component and be sure that you maintain appropriate evidence for claiming the exemption of the same.
While we are striving hard to make money, income tax takes part of it, (for high tax brackets, at almost 30% of the salary). So, if allowed, it is wiser to structure the salary or apply your existing structure in such a way that it will result in minimum tax effect.
Income Tax Filing/Planning Seems Confusing? Minty Ko Puchha kya?
I’m sure that, more than half of the nation, wishes that, they din’t have to pay tax. Life would be a lot easier, if we din’t have to pay. Sadly that’s not possible in India. This is because most of our Government earnings are dependent in the public through tax. It is our duty as citizens of India to pay tax, where our money goes, is a whole different thing all together. If we try to avoid taxes, we may end up paying more of it, if we get caught.
Must read: Tax Planning For Salaried Youngsters
Some may feel that, they work so hard to earn their salary, and a huge chunk goes towards taxes. Did you know that almost 3 months of your salary goes in paying tax, in a year? Surprised? well you should be. If the Government has imposed tax on the public, it has also come up with tax rules where you can save your tax. In fact, planning your taxes well, can allow you to save most of your money, which can be used to fund other goals. Some people are still not aware of the basic tax exemptions available to them. Whereas some people just make use of only the basic tax exemptions and the deductions related to their salary income.
Salary is not the only income a person has. A person can receive income from the assets held by them. One can have many assets like, cars, houses, properties, investments, etc. Some of these assets depreciate and some appreciate. For example, a house, it’s value will only appreciate and on the other hand, a car’s value will depreciate. So the income received on these assets is called capital income.
If the income from such asset is more than the cost at which it was bought, it is known as capital gain, but if the cost of the asset was more than the price at which it was sold, it brings in a capital loss. Now, we also have long term capital gain and short term capital gain.
Any capital asset, that attracts a gain or loss, if sold in less than 36 months, it will be considered as short term capital gain or loss. If the asset is held for more than 36 months and then sold, the gain or loss will be treated as long term capital gain or loss.
However, in case of property, the holding period is 24 months. This means, if a property is sold within 24 months, the gain or loss will be treated as short term capital gain or loss and vice-versa.
Only in the case of shares and securities, the time period is less than 12 months, it attracts short term capital gain and loss, and if it is more than 12 months, then long term capital gain or loss.
So, the different tax rules are made according to, how long the asset has been in ownership of the individual.
More tax can be saved on long term capital gains. The tax deducted is less from a long term capital gain, than from a short term capital gain. Let us take an example of the sale of a debt mutual fund which attracts a gain. If the sale is done within 3 years, it is obviously a short capital gain, so here the taxpayer will have to pay tax according to their tax slab. So, if any taxpayer falls in the 20% tax slab, they will have to pay 20% tax on the short tern capital gain. But if it was held for more than 36 months, they will have to pay 20% with indexation benefit.
Let us now look at the computation of how a long term capital gain is taxed.
1. Sale/consideration of the asset – (XXXXX)
2. Less: Indexed Cost of Acquisition (COA) (XXXXX)
3. Less: Indexed Cost of improvement (COI) (XXXXX)
4. Gross total LTCG (XXXXX)
5. Less: Exemption under various sections (XXXXX)
(54, 54B, 54D, etc.)
6. Net LTCG (XXXXX)
(Calculations: Indexed Cost of Asset = COA / CII of year of acquisition X CII which the assets is transferred.) (CII = Cost Inflation Index.)
There are many ways to save tax incurred on the long term capitals gains by you. Given below are the sections where you can save your tax on the capital gains:
|SECTIONS||CAPITAL ASSET||TAX EXEMPTION ON THE CAPITAL GAIN|
|54EC||Any capital asset||
|54 F||Any capital asset excluding house property.||
|54 B||Agricultural land||
|10(38)||Sale of shares and equity mutual funds covered under Securities Transaction Task (STT) .||Exempt till a gain of 1,00,000. For any gain above 1 lac, 10% of gain needs to be paid as tax.|
Please note the following points:
- Under section 54, the lower of the 2 will be exempt:
- Amount of capital gain
- Amount of investment in the new house.
- That under section 54 F, If only part of the consideration is invested, then exemption shall be considered proportionately,
i.e. Amount Exempt = Capital gain X (amount invested/ net sale consideration)
The closing of 2nd quarter of the financial year is in the vicinity and tax season for employees is about to start. Knowing the tax rules, exemptions, and a variety of ways to save tax is important to plan tax saving. In India, employers deduct tax from the salary of employees on monthly basis and deposit the same with govt every month. This requires calculating the taxable salary of each employee.
This year, with the introduction of a new tax regime, it is more important to do your calculation in advance to understand which regime will be beneficial for you – New or Old!
Now, as you know certain investments and reimbursements is deducted from the taxable income, making declaration about the investments is important to save good amount of income tax.
The process goes like this. At the beginning of the financial year, employers tell you to declare your investments, calculate your taxable income and pay salary to the employees accordingly. The tax which is deducted on monthly basis based on this calculation is called Tax Deducted at Source or TDS. This requires employees to make the declaration of the investments at the beginning of the year. In the month of December and January employers ask for actual proofs of investment in relation to the declaration made by the employees earlier. In case, the investment declaration is not made the employees cannot avail exemptions from tax on account of investments. But in case an employee forgot to make an investment declaration in time he can claim the excess tax deducted from his salary later.
Let us explain here below the most important aspects in relation to declaring and submitting investment proofs for tax saving.
Know the regulations as well as pros and cons of making investment declaration
Declaring your investment helps the employer deducting the correct and appropriate tax amount from the salary of the employees. Ascertain investments are subject to tax exemption by declaring them the employee can reduce the tax load on their income. Knowing which investments can help you save tax and to what extent is important. Besides travel reimbursement and few other expenses like house rent are also subject to tax exemption. Employers begin collecting the documents as proofs of investment from the month of December and January to validate the declaration made by the employees earlier. This takes 2 to 3 months and the process becomes complete by March every year.
What are the implications that an employee can face in case he cannot furnish that declarations of his investments in time?
Let us have a look at the possible implications.
- First of all, he is liable to pay a much higher amount of income tax on his income.
- In case the declarations are not proper and does not match with the documents he may need to pay more tax on his income.
- Often this extra amount of tax may require an amount equal to two or three months of salary.
What are the investment proofs for saving tax?
- Proof of investments under ELSS or other 80C investments
- Life insurance and health insurance premium.
- Rent receipts to claim deduction under HRA.
- For the sake of claiming your LTA you need to provide all the travel receipts including boarding passes and flight tickets.
- For getting reimbursement against a home loan you need to provide home loan certificates as proof of the same.
You can also show saving bank interest, FD interest
Do you know your regular bank savings and investments are also covered under the income tax regulations concerning tax exemption? You can also disclose your interest earned from saving bank account, yearly FD/RD interest, and the capital gains from the shares and mutual fund during the year. This helps the employers getting a complete view of the taxable income and the income tax you are liable to pay.
Don’t worry if you are late in submitting the proofs. You can claim it later!
If you just forgot to do the needful in regard to submitting your documents for the investment, we must assure you that you do not need to worry since you can claim your deductions later as well. Obviously being late and forgetting to submit your proofs of investments in time is never recommended and is not healthy for your personal finance, but in certain conditions, if you forget or just do not find time to take of these things, you do not need to worry. If employees who actually become able to invest in tax-saving financial instruments later can submit their proofs of investments at the time of filing the tax returns and can claim the deductions.
It is not mandatory to submit proofs when filing tax returns
When filing the income tax returns all that you need is to furnish all the necessary information about the investments and at this point of time the employee does not need to provide any validating documents as proofs of the information provided. These proofs are only required by the employers as they deduct the TDS and serve as the third party validating the claims made by the employees. While documents are not mandatory any employee can further be needed to provide them in case of cross checking. So, it is advisable to provide always true and exact information about the investments made by the employees.
You need to furnish proofs of investments in the month of February and March against your earlier mentioned investments
It is understandable that for premiums and investment installments that are due in March cannot always be validated with receipt or any document months ago. In case you do not have the premium receipts with you or your SIP or ELSS statement does not reflect the installments paid, you have the option of making a declaration and employers will provide you a form for this purpose. When the year-end tax filing would be done you will be given the exemptions based on the declaration made by you.
Finally, you can always get your excess taxes returned to you by furnishing the documents for the investment made. While it is always better to declare and furnish things in time, you can always furnish investment information and supporting documents later to claim your rightful deductions.
The Income Tax allows individuals a number of deductions on the gross income of an assessee after considering a number of factors. The Chapter VIA of the Income Tax Act deals with these additional deductions and must be separately distinguished from the exemptions, which are provided in the Section 10 of the Act. The one point of difference between the Section 10 and the Chapter VIA is that while the former does not form a part of the income on the whole, the latter is deducted from the gross income of an individual. Let us delve into the details of the deductions allowed by the Chapter VIA of the Income Tax Act.
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If the assessee pays a premium for annuity plan of LIC or other insurer, a deduction is available up to Rs 150000. In this case, the premium must be deposited for maintaining a contract for the annuity plan of the insurer or LIC for the receipt of pension.
If the employee has made a deposit in his or her respective pension account, which amounts to 10 per cent of the salary, he or she is entitled to deductions. The Central Government should make a contribution to the pension account, deduction of 10 per cent is allowed on the total salary. Also, if an amount is received from the pension account, this amount will be charged to tax deductions taking it to be as income of the previous year. Such a benefit has been extended to a non-Central Government Employee because of the Finance Act of 2009.
Interestingly, the ceiling for the Section 80C, 80CCC and 80CCCD(1) together is 150000.
According to the Section 80TTA, an assessee is eligible for exemption on saving bank account interest. The interest amount of upto 10,000 is allowed as deduction. Please note that fixed deposit interest is not part of this and in fact interest from fixed deposits is fully taxable as per the prevailing slab rates.
If you are a salaried individual but does not receive HRA (House Rent Allowance ) as part of your salary structure. But you stay in rented flat and is incurring the expense. You can not claim exemption from HRA as you do not receive one. However, you can still claim the tax benefits under section 80GG towards the rent that you pay.
Deduction of up to Rs 25000 for self and family is available for assessee. For senior citizens, the maximum deduction available is Rs 50000 on the medical insurance premium.
The premium can be paid in any mode other than cash. The insurance scheme is to be framed by the General Insurance Corporation of India and has been approved by the Central Government. It can be framed by any insurer and approved by the Insurance Regulatory & Development Authority.
These were some of the deductions other than 80C for a salaried individual. It is suggested to make use of these sections wherever applicable to you to plan your taxes.
For many people in India investment is all about tax saving. For them, Investment planning starts with tax savings and ends with tax planning. As the second quarter of the financial year has started, many of us will start thinking to invest to save taxes. Also, because the tax-saving deadline has been extended to 31st July 2020 for FY19-20. In this process of investment many times we may get into the wrong investment product commitment. It impacts not only your cash flow but also your future financial goals.
The primary objective of any investment is not tax saving. It’s one of the benefits which we derive by investing in specified investment instrument eligible for tax savings. Ideally, investment should be done as per your financial plan. Which helps you to achieve your personal financial goals as well as helps you to create wealth. Here we will discuss a few of the most popular investment choices along with the required objects for the same. If your investment objective matches with the product benefit then one should invest in the instrument.
National Pension Scheme (NPS)
NPS helps you to plan for retirement. It’s a kind of deferred annuity plan which helps you to create retirement corpus by saving regular amount during your working years and after retirement, it converts to immediate annuity plan. Immediate annuity plans start giving you regular monthly pension after age 60 in NPS. Contribution to NPS during your working years is eligible for tax saving u/s. 80C up to Rs.1.5 Lac. Also, there is an additional amount of Rs.50000 eligible for tax saving over-and-above 80C benefit. Ideally, if you are planning for your retirement then it makes sense to invest in NPS.
Public Provident Fund (PPF)
One of the most popular choices in India for Tax savings is PPF. It’s one of the most tax-efficient investment instruments as well. PPF is few of the product which falls in E-E-E category. It means at the time of investment you can claim benefit u/s. 80C. The interest earned is exempt from tax. And maturity proceeds are also completely tax exempt. PPF is one of the safest investment instruments in India. Duration for PPF is 15 years and can be extended in a block of 5 years on maturity multiple times. If anyone wishes to create a corpus for specific goals for 15 years or above or for retirement then it’s an ideal scheme with guaranteed returns. Please not that PPF returns keep on changing from time to time.
Equity Linked Saving Scheme (ELSS)
Mutual Funds in India offer various investment schemes. One of the schemes which is eligible for tax saving u/s. 80C is ELSS scheme. There is a lock in period of 3 years during which we are not allowed to withdraw fund value. At the time of investment, you can claim benefit u/s. 80C up to 1,50,000. If an investor wants to save taxes and wishes to invest in equity then this is the ideal and best option. For the long term, ELSS can be one of the best choices for wealth creation.
Life Insurance Policies
There are various types of life insurance policies with varied benefits. One should understand its benefits and match with your required objective. Life Insurance Policies is also one of the products which fall in E-E-E category. It means at the time of paying a premium you can claim benefit u/s. 80C. The money-back or bonus received is exempt from taxes. And maturity from the insurance policy is also completely tax exempt. Life insurance is the best choice for your tax planning if you need protection along with wealth creation and tax saving.
National Savings Scheme (NSC)
One of the traditional and most popular tax saving choice is to invest in NSC. NSC is available for 5 years. Investment in NSC is eligible for deduction u/s. 80C. Interest earned on NSC is reinvested till maturity. Interest reinvested is also eligible for tax saving u/s. 80C except for the last year of maturity. One of the important point to remember is interest earned on NSC is taxable. It gets clubbed with total income every year till maturity. For medium term financial goals i.e. for 5 year period NSC offers high tax efficient yield.
At the end, Investment helps you to create wealth. Government encourages investment in various instrument by making it eligible for tax saving. Invest to achieve your financial goals and to create wealth not just to save taxes.
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.
Savings and investment can be boosted up easily either by increasing your income or cutting down on expenses. Whether you are on the brim of retirement or a fresher who has just started with his work tenure with a big MNC, savings remains to be the ultimate goal during all stages of our life. Contrary to popular belief, even 100 INR saved today can go a long way in adding to your corpus if invested properly. Today, we are going to take you through some expert recommended tips for hiking up your savings, boosting up income, reducing debt and investing wisely.
Savings refer to that part of our monthly income which is left after paying back all expenses. But this needs to be computed the other way around. You should first keep a portion of your income aside before deciding on the things to do with the rest. For example, if you are earning Rs.40,000 then first keep aside around Rs.10,000 for investments and then manage your expenses in balance 30,000. This way you will be more disciplined towards savings. For achieving this, you can opt for automatic transfers to an investment or savings account directly.
Creating A Buffer For Rainy Days
The first priority of all individuals should be to create a fund for rainy days. This serves as the basis of creating a sound financial plan. Once you have accumulated enough to mitigate about three to six months of expenses, you can shift your focus to future savings and debt reduction.
But for benefitting the most out of the same, you need to decide on the type of expenses which can be classified as emergencies. For starters, job loss or a major illness can be considered as a true emergency. Infrequent expenses such as purchasing a new car cannot be classified under the head of an emergency although you also need to save for the same.
Save More By Spending Less
You can trim down your expenses in a variety of ways be it by cutting down on the consumption of the daily premium coffee or multiple online channel subscriptions. But while cutting back on the spending, you need to ensure that it doesn’t get spent on any other unimportant avenue. If you are not sure about investing the money, then you can make a pending payment or simply transfer the fund to your savings account.
Bid Adieu To Expensive Habits
If your day just doesn’t start without a Frappuccino from Starbucks and maybe a costly dine-out at posh restaurants on weekends, then it’s time to cut down on the same. Apart from the obvious health benefits of starting your day with a home-made black coffee and ending it by munching on house cooked food, these small steps taken can inflict great differences in your ultimate savings figure at the end of the fiscal. Once you direct this money towards other sources having higher potential, such as paying off bank debt, you can free up your money faster. This in turn can be redirected towards further investment. You can make a list of all the debts which need to be paid back and start with the ones having the smallest balances or the highest interest rates.
Unleash Your Creative Potential To Increase Earnings
You can increase your regular income by either selling off redundant things or maybe getting a part-time job for utilising the time you otherwise spend lazing around during lockdown. Taking up full time work can seem burdensome especially when you are working round the clock for the weekdays. It is thus advisable to take up short term projects which can align you towards a specific savings goal. You can also generate extra cash for savings by selling off artifacts and belongings you no longer require such as collectables, designer clothing, jewellery, musical instruments etc.
Proper Asset Allocation
While some investments rank high in the department of volatility, others are comparatively tame on the risk-reward scale. Younger people are advised to proceed with aggressive investment options whereas older people approaching their retirement age should stick to the conservative avenues. A direct correlation exists between risk and return. Thus, if a particular investment house is promising you sky-high returns with equity linked funds, then you should also be adequately prepared to suffice the bloodshed if the market crashes.
Baby Steps Towards Savings
If savings seems like a difficult challenge for you, then you should start off with smaller targets of maybe 100 or 500 INR daily. Once you have saved adequately and spent it for realising a particular aim, you can continue with further savings so that you can slowly meet all your debts. If you feel that your savings are not sufficient for meeting long-term investment and major purchases, then your standard of living is definitely higher than what it ought to be. Such a scenario makes it necessary to make major adjustments such as shifting to more affordable housing or even trading your new car for cheaper public transportation.
Sticking To An Investment Plan
Steady investors who wish to diversify their portfolio should actually shift their attention towards purchasing more shares whenever the stock market takes a dip. You need to review your investment strategy on timely intervals and remain unperturbed by newspaper headlines during the allocation of funds. The ultimate aim here should be to continue with the investment pattern irrespective of what the newspapers are hinting at.
Seeking Out Help
Investors often feel confused about which stocks to select and how to optimally balance their portfolio. In such a case, they can readily seek out the assistance of trained professionals. Contrary to popular misconception, financial advice is not earmarked against the wealthy strata of our society. It can benefit everyone who wishes to increase their savings and safeguard themselves from the uncertainties of the future.
Read More :- Financial Planning – A Need not a Choice
It is impossible to create a promising future unless you learn the means of prudent investment and judicious savings. Money has a big role to play in regulating the flow of our lives. While it serves as an essential wealth creating tool on one hand, it also acts as a transaction instrument which can satisfy our present requirements. Proper financial planning empowers individuals in meeting their ultimate goal by creating a trade-off in between current and future consumption along with other variables such as savings and investment.