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Easy Last Minute Tax Saving Strategies For 2018

 

Time to read: 8 mins | January 31, 2018

“In this world nothing is certain but death and taxes” – Benjamin Franklin

We tend to forget the wisdom of these scholars and repeat the same mistakes. One such mistake is waiting till the eleventh hour to plan your tax savings and payments.

Easy-Last-Minute-Tax-Saving-Strategies-For-2018

If that’s what you did in 2017, it’s ‘Okay’... because, you can adopt some last minute tax saving strategies for 2018 and reduce your tax outgo just in time.

The first thing is to avoid the mistake of investing in products you do not understand, and in financial instruments that are unsuitable to your overall financial plan. So, all is not lost. Now is a good time to strategise your investments to make the most of these tax benefits available under various categories.

And before investing, assess whether you as an investor are risk-taker (aggressive), or risk-averse (conservative).

And your risk-taking capacity is dependent on your age, income, number of dependents, your existing assets, the liabilities you are shouldering and so on.

Weighing such factors will help you select appropriate tax saving investment avenues eligible for a deduction under Section 80C of the Income-Tax Act, 1961 from your Gross Total Income (GTI).

Now these can be divided as expenses and investments.

Some of the common tax saving instruments under Section 80C are as follows:

Public Provident Fund

The Public Provident Fund (PPF) is one of the most popular investment in India today. It is an extremely low-risk long-term investment, government-backed, small savings scheme with a lock-in period of 15 years.

So, if you are risk averse then PPF as a tax saving instrument works best for you. It ensures your corpus remains safe, earns a decent tax-free rate of return, and enjoys tax benefit.

PPF additionally offers loan against the account, which can also helpful you during occasions such as a wedding in the family, higher education of your children, etc.

Above all, while it accrues interest, you have peace of mind that your corpus is safe and exempt from tax.

Deduction: Investments into your PPF account are deductible under Section 80C of the Income Tax Act, 1961 subject to the maximum permissible limit of Rs 1,50,000 in the financial year.

Moreover, the interest earned on the investment is completely exempt from tax. So, at the current rate of interest, you earn tax-free returns of 7.60% p.a.

Likewise, at maturity, the proceeds are exempt from tax.

Thus, PPF enjoys an Exempt-Exempt-Exempt (E-E-E) status.

National Saving Certificate (NSC)

After PPF, NSC has been among the most preferred tax saving instrument especially by the conservative investors.

NSC is a scheme that’s been floated by the Government of India, and one can invest in this through his/her nearest post office. The certificates can be made in your own name, jointly by two adults, or even by a minor (through the guardian), and has a tenure of 5 years.

The 5-year NSC currently offers a 7.8% rate of interest compounded annually. However, the rate of interest of NSC is reset every three months based on the G-Sec yields of the previous quarter. The interest income accrues annually and is reinvested in the scheme till maturity or until the date of premature withdrawals.

Premature withdrawals are permitted only in specific circumstances, such as death of the holder.

Deduction: Investment in NSC is eligible for a deduction of upto Rs 1.50 lakh p.a. under Section 80C. Furthermore, the accrued interest which is deemed to be reinvested in a financial year qualifies for a deduction under Section 80C in the respective financial year.

However, the interest income is taxable from the year it accrues. Yet, in case you have no other income apart from interest income, then in order to avoid Tax Deduction at Source (TDS), you can submit a declaration in Form 15-G (for general or non-senior citizens) or Form 15-H (for senior citizens) as applicable.

5-year Tax Saving Bank Fixed Deposit and 5-Year POTD:

The 5-Year tax saving bank fixed deposit available with Axis Bank is eligible for a deduction under Section 80C. It comes with a lock in period of five years, which in fact is good to compound wealth. The minimum amount that you can invest is Rs 100 with an upper limit of Rs 1.50 lakh in a financial year. The rate of interest varies across banks.

Axis Bank is currently offering 6.25% interest (and 6.75% for senior citizens) on a 5-year tax saving fixed deposit.

Please note that this interest earned is subject to TDS; but again, you can submit a declaration in Form 15-G (for general or non-senior citizens) or Form 15-H (for senior citizens) as applicable for not deducting tax at source.

Similarly, 5-Year Post Office Time Deposits (POTDs) also offer you a tax benefit under Section 80C. You can open the account either in single name, or jointly, or even in the name of a minor (through a guardian) who has attained the age of 10.

The minimum investment amount is Rs 200, and there is no upper limit. However, similar to other tax saving instruments, the investment amount over Rs 1.50 lakh will not be eligible for any tax benefit.

A 5-Yr POTD earns a 7.6% p.a. rate of interest which is calculated quarterly but paid annually. As far as premature withdrawals are concerned, these are permitted only one year after the date of deposit. The interest on such deposits will be calculated at the rate, which will be 1% less than the rate specified for a period of 5-Year deposit.

Deduction: Your investment in both these schemes is eligible for a deduction of upto Rs 1.50 lakh p.a. under Section 80C. Remember, the interest earned on your investments is taxable.

Equity Linked Savings Schemes (ELSS):

Many are gung-ho about ELSS (also known as tax saving mutual fund schemes) as promising tax saving instruments because of the lower lock-in period of three years and the performance these funds have had in the past.

ELSS fund is a diversified equity fund following a fluid investment approach – investing across market capitalisation and sectors. A distinguishing feature is, ELSS are subject to a compulsory lock-in period of three years.

The minimum application amount for most of these is as little as Rs 500, with no upper limit.

With ELSS, you can make either a lump sum investments or invest via Systematic Investment Plan (SIP) – a mode of investing in mutual funds. In case of the latter, each instalment has a 3-year lock-in period.

It is noteworthy that, to create wealth in the long-term, tax-saving funds have the potential to earn attractive inflation-adjusted returns. You may say – “But, there is risk involved”.

Well, no doubt about that; but, in order to buffer the shocks of volatility in the equity markets, you can adopt investing through the SIP route, which will provide you the advantage of “compounding” along with “rupee-cost averaging”.

While considering an ELSS mutual fund for your market-linked tax-saving portfolio, give importance to those equity-linked savings schemes that have a consistent performance track record and with a fund house that adheres to robust investment processes & systems.

Deduction: The amount you invest is eligible for deduction under Section 80C subject to a maximum of Rs 1.50 lakh p.a.

Besides, if you receive any long-term gains at the time of exit——any time after the end of the lock-in period——as per current tax laws, you will not have to pay any Long Term Capital Gains (LTCG) Tax.

Unit-linked Insurance Plans

These are insurance-cum-investment plans that enable you to invest in equity and/or debt instruments, depending on what suits you as per your age, income, risk profile, and financial goals.

All you simply need to do is, select the allocation option as provided by the insurance company offering such a plan. Generally, they are classified as “aggressive” (which invests in equity), “moderate or balanced” (which invests in debt as well as equity), and “conservative” (which invests purely in debt instruments).

Hence, apart from the insurance cover (which is usually 10 times your annual premium) offered under these plans, the returns are completely market-linked. This is because your premium amount is invested in equity and debt securities.

These policies have a minimum 5-year lock-in period, and also have a minimum premium paying term. The overall term of the policy would vary from product to product.

In case of any eventuality, the beneficiaries would receive the sum assured or fund value, whichever is higher.

Well selected ULIPs can generate wealth in the long run and help you accomplish financial goals. accomplish your financial goals.

The premium paid for ULIPs is eligible for a deduction under Section 80C subject to the maximum amount of Rs 1.50 lakh p.a. And, at maturity the amount which you or your beneficiary receives is tax free as per the provisions of Section 10(10D) of the Income Tax Act subject to conditions specified.

National Pension System:

The National Pension System, earlier set up for government employees only, was introduced on May 1, 2009, for people in the unorganised (private) sector, as the finance ministry felt the need for higher participation in the pension contribution (through this product).

Any individual between the ages of 18 - 65 years and belongs to the unorganised sector (i.e. private sector) is eligible to invest in the NPS.

Deduction: Salaried employees may claim deduction of upto Rs 1.5 lakh under Section 80CCD(1) for their own contributions towards NPS account

Additionally, a deduction can be claimed under Section 80CCD(2), if there is any contribution made by the employer, but only upto 10% of their salary (Basic Salary + Dearness Allowance). It is noteworthy that the deduction under Section 80CCD(2) can be claimed over and above the permissible deductions under Section 80C.

But, Section 80 CCD(2) is applicable only if the employer contributes to employee for NPS.

So, to avail of this extra tax exemption limit, salaried employees can request employers to also contribute to NPS.

Self-employed individuals can avail of a deduction under Section 80CCD(1) upto 10% of their Gross Total Income (which is comprised of income computed under different heads before reducing it by all other deductions available under Section 80). In addition to deductions under Section 80CCD(1), self-employed professionals are also entitled to deductions under Section 80C for other instruments eligible therein.

Other tax-saving instruments under Section 80C are:

  • Senior Citizen Savings Scheme (SCSS) Account
  • Sukanya Samriddhi Account
  • Non-Unit Linked Life Insurance Plans
  • Mutual fund linked pension plans or Retirement Funds
  • Voluntary Provident Fund (VPF)

Hence, there are galore investment options under section 80C. Choose, as per your financial plan and risk appetite. But avoid making a hasty decision and invest your money wisely.

Apart from the investment options, you can save tax through other routes...

The premium paid for health insurance is eligible for a deduction under Section 80D (capped at Rs 15,000 p.a). You can avail for this benefit by buying insurance for yourself and your parents, and avail a higher benefit (an additional deduction of Rs 15,000 p.a. for your parents, or Rs 20,000 p.a. if they are senior citizens).

If you have a home loan, you have a dual benefit. The repayment of the principal of your home loan is eligible for benefit under Section 80C, and the payment of the interest portion of your home loan is eligible under Section 24(b). If you live in the home i.e. it is self-occupied, then the interest deduction is capped at Rs 1,50,000 per year, but if the house is rented out (let out) then there is no cap on eligibility of interest payment for deduction.

Section 80E will help you if you have taken an education loan for graduate or post graduate studies for either yourself, your spouse or your child. So, you can consider an education loan and avail a rebate on the interest paid.

Don’t forget that interest earn on the savings account is eligible for a deduction under Section 80TTA upto a sum of Rs 10,000 p.a.; so, use it legitimately and save tax!

Thinking beyond Section 80C may help you save more for your other financial goals. The options are aplenty.

Section Who can claim Nature of deduction Reason
80CCG Specified retail individuals (New retail investors) 50% of the amount invested (maximum deduction Rs 25,000) Rajiv Gandhi Equity Savings Scheme (RGESS) is available for current Assessment Year 2017-18 only. It has been repealed from the A.Y. 2018-19.
80DD Resident Individual / HUF Rs 75,000 (Rs 1,25,000 in case of severe disability) Any expenditure incurred for the medical treatment (including nursing), training and rehabilitation of a dependant, being a person with disability.
80DDB Resident Individual / HUF Maximum deduction of Rs 40,000 (Rs 60,000 in case of senior citizen and Rs 80,000 in case of very senior citizen) Expenses actually paid for medical treatment of specified diseases and ailments subject to certain conditions.
80E Individual No limit on interest on loan (maximum period: 8 years) Amount paid out of income chargeable to tax by way of payment of interest on education loan taken from financial institution/approved charitable institution for pursuing higher education.
80G All Assesses 50% of the net qualifying amount or 100% of qualifying donations, as the case may be Donations to specified institutions.
80GG Individual Rent paid in excess of 10% of total income for furnished/unfurnished residential accommodation (subject to maximum of Rs. 5,000 p.m. or 25% of total income, whichever is less) Individuals not receiving any house rent allowance (HRA).
80GGC All Assesses (other than local authority and artificial juridical person wholly or partly funded by Government) Sum contributed to any political party/electoral trust Deduction will not be allowed if sum is contributed in cash.
80DD Resident Individual / HUF Rs 75,000 (Rs 1,25,000 in case of severe disability) Any expenditure incurred for the medical treatment (including nursing), training and rehabilitation of a dependant, being a person with disability.

If you are still unsure how to go about engaging in tax planning, consult an investment counsellor or wealth manager.

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing. Axis bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.

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