As the Fiscal Year 2017-18 already started, it is time for investment to save tax and tax planning. While the government expects you to pay income tax, it also allows you to legally save on income tax.
No matter how much taxable income you earn, there are certain exemptions and deductions available to all individual and HUF taxpayers that can be used to pay less income tax.
I would like to show you a small ready reckoner of the various tax-saving schemes available in for you.
Section 80C Deductions
The most popular tax-saving options available to individuals and HUFs in India are under Section 80C of the Income Tax Act. Section 80C includes various investments and expenses that can be used to claim deductions. The Section 80C limit is Rs. 1.5 lakh in a financial year, which means that you can use this entire amount to reduce your taxable income.
Investment options under Section 80C can be broadly categorized as fixed income, market linked and insurance. The fixed income categorized includes Senior Citizen Savings Scheme (SCSS), Public Provident Fund (PPF), Employee Provident Fund (EPF), Tax-Saving Bank Fixed Deposits and National Saving Certificate (NSC). Whereas it is the most popular category, market linked instruments including tax-saving mutual funds (Equity Linked Savings Scheme), National Pension System (NPS) and unit-linked insurance plans (ULIPs) are increasingly catching up.
Senior Citizen Savings Scheme (SCSS)
Indian citizens who have attained 60 years of age or those who have attained at least 55 years of age and have opted for voluntary retirement scheme are eligible to invest in senior citizens savings scheme, which offers a fairly interest rate of 8.3% a year, payable quarterly basis. While investment in this scheme is eligible for tax deduction under Section 80C, interest earned shall be taxable in the hands of the investor.
Sukanya Samriddhi Account Scheme (SSAA)
Sukanya Samridhi Account Scheme (SSAS) can be opened for girl child (below 10 years age), if she meets all other eligibility criteria. The money in SSA can be deposited by either the parent/guardian of the girl child or by the girl herself. The opening amount for the account is Rs. 1000. Thereafter a multiple of Rs. 100 can be deposited to the account with a minimum of Rs. 1000 per year. Partial withdrawal for girl child education can be done when she has cleared 10th class or turned 18years.The maximum limit for deposit in the account is Rs. 1,50,000 per year.
Public Provident Fund (PPF)
One of the oldest investment options, PPF scores all the grounds as it is one of the very few investment options that fall under EEE (Exempt-Exempt-Exempt) tax regime. This implies that not only the investor can enjoy deduction on the amount invested in this scheme but the interest received on maturity is also exempt from tax.
PPF offers an interest rate of 7.8% compounded annually, with the maximum investment restricted to Rs. 1,50,000 a year and mandatory investment tenure of 15 years. An investment of Rs. 1,50,000 every year in PPF for 15 year will amount to a tax-free maturity sum of Rs. 20.17 lakh at the end of 15 year tenure.
National Savings Certificate (NSC)
Similar to PPF, NSC also earns interest rate of 7.8% per annum and investment up to 1.5 lakh is exempt from tax under Section 80C. However, unlike, PPF, interest received on NSC, at the time of maturity, is taxable in the hands of investor which makes it comparatively less attractive. On the positive note, however, NSC has relatively shorter lock-in period of just about 6 years and the interest here is compounded half-yearly. Thus, every 100 invested into NSC will grow to Rs. 158.26 on maturity.
Post Office Time Deposit Account (TD)
The investment under 5 Years TD qualifies for the benefit of Section 80C of the Income Tax Act, 1961 from 1.4.2007. Minimum Rs.200/- and in multiple thereof. No maximum limit. 7.6% Interest payable annually but calculated quarterly.
Tax Saving Bank Fixed Deposits
Investment up to Rs. 1.5 lakh in these special tax saving bank fixed deposits also entails an investor tax deduction under Section 80C. these fixed deposits mandate a lock-in period of five years and interest is compounded quarterly,just like any other ordinary bank fixed deposit. The drawback is taxability of interest income upon maturity. As most banks are currently offering attractive interest rates, tax saving bank interest rates as high as 7.50% to its investors.
Employee Provident Fund (EPF)
Under the current norms, 12% of employee’s salary is contributed towards EPF, which is exempt from income tax. Any contribution over and above the 12% limit by the employee towards EPF is considered as voluntary provident fund (VPF) and the same is also exempt from tax, subject to the overall 80C limit of 1.5 lakh per annum.
Like PPF, EPF, also falls under the EEE tax regime where in the interest received (on retirement from service) is tax free in the hands of the investor.
The interest payable on EPF is determined each year by Employee Provident Fund Organization (EPFO). About 4 crore subscribers of EPFO will get 8.65% interest on provident fund deposits for 2016-17.
Equity Linked Savings Scheme (ELSS)
These tax saving mutual fund schemes do carry an embedded market risk and calls for investor prudence before making an investment decision. However, their returns are equally rewarding and tax free in the hands of the investor.
An ELSS has a mandatory lock-in period of three years, they are positioned as long-term equity assets and thus returns are tax-free in the hands of the investor. And though these schemes mandate a three year lock-in period, investors are likely to be better off if they continue to stay invested for a longer-term as equities generate best returns over a longer time period.
For instance, on an average, ELSS category of funds has returned about 24% compounded (CAGR) returns per annum over the past 10 years period.
Some of the better performing schemes in this category includes Franklin India Taxshield Fund, HDFC Tax Saver Fund, ICICI Prudential Long Term Equity and Sundaram Diverfied Equity Fund for investors to choose from.
Life Insurance Premium
Any premium payable by an investor to provide cover to his life is also eligible for deduction under Section 80C, subject to a maximum of Rs. 1.5 lakh. The life insurance policy may be purchase either from LIC or from any other private player in the insurance industry. Investors should, however, make sure that premium payable is not more than 10% of the sum assured (amount of lie cover) in order to avail Section 80C deduction.
[blockquote style=”1″]“The hardest thing in the world to understand is the income tax.” –Albert Einstein[/blockquote]
My sincere and humble request is do plan your tax planning today.
Wishing you a great financial year ahead.
I am a CERTIFIED FINANCIAL PLANNERCM. For the moment, I have shared my experience growing up with you because it had a tremendous impact on how I do what I do.
If you have a question about your own financial situation please connect with me. I’d be delighted to try to be of service.
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