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Here's What You Should Keep In Mind This Tax Saving Season

8 minsDecember 25, 2017

We all engage in some economic activity and work hard to make a living. As we earn, we also do attract the attention of the taxman –– the Income Tax Department. Thus, it becomes imperative for us to work a little harder and smarter to save taxes prudently and legitimately.

Ideally, do not keep tax planning for the eleventh hour. Engaging in prudent tax planning exercise a little earlier, whereby it can be all-inclusive, encompassing, and compliment tax planning with investment planning.

Unlike ‘tax saving’, which is generally achieved vide investments in tax saving instruments/products; ‘tax planning’ is far more sophisticated. In the latter, your larger financial plan, financial goals, risk appetite, investment horizon, among a host of other facets are taken into before investing hard-earned money in tax-efficient investments ––– intended at wealth creating creation and saving taxes. Plus, under tax planning the other provisions of the Income Tax Act, 1961 are exploited besides Section 80C.

Here are 4 mistakes you should clearly avoid while you endeavour to save tax:

  • Procrastination
    • Never put off for tomorrow, what you can do today.” – Thomas Jefferson (one of the founding fathers of the United States and the principal author of Declaration of Independence).
    • Being a pro at procrastination will result in sub-optimal tax saving. Later, at the end of the financial year, you could miss out or ignore various pertinent aspects that can aid in efficient tax saving.
  • Investing in unsuitable tax saving instruments
    • At the end of the financial year, many of you might receive telephone calls from insurance companies and agents pestering you to invest in a variety of tax saving instruments. But not all investment products may be best suited for you. So, consider investing and insuring as per your financial plan. There’s no point buying anything and everything.
  • Underestimating the power of compounding
    • Albert Einstein, the famous physicist, once called the power of compounding as the eighth wonder of the world. ”Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it”, he said. And indeed, as investors, you cannot dismiss the magic compounding can bring to your investment portfolio.
    • Hence, always make it a point to invest sensibly to counter inflation and earn tax-efficient returns. The role of equity as an asset class cannot be ignored in one’s tax saving portfolio too. Thus, recognise your risk profile and consider tax saving mutual funds (also known as Equity Linked Savings Schemes or ELSS).
    • Being averse to risk is well appreciated by us. But if your age, income, ability to take risk and financial goals, permit you to take equity exposure, one should not ignore the same.
  • Not exploiting relevant provisions astutely
    • You see, there’s more to tax saving and tax planning than Section 80C. To bring to your notice, our Income Tax Act, 1961 also considers the humane side of our life and also gives deductions for contributions you make on such developments.
    • So, if you pay your medical insurance premium, incur expenditure on the medical treatment of a “dependant” handicapped, donate to specified funds for specified causes, take a loan to pursue higher education, or if you are an individual suffering from “specified” diseases; then all these expenses can help you effectively plan your tax obligations, optimally reducing your tax liability.
      Moreover, recognise the urge to buy your dream home by availing a home loan; the Income Tax Act also extends tax saving benefits to you.
      Hence, think beyond Section 80C and save tax more efficiently.

A sensible approach while considering Section 80C

Section 80C offers a number of tax saving investment avenues:

  • Life Insurance
  • Public Provident Fund (PPF)
  • Employees’ Provident Fund (EPF)
  • Sukanya Samriddhi Account
  • National Saving Certificate (NSC)
  • 5-Year fixed deposits with banks, Post Office
  • Senior Citizens Savings Scheme (SCSS)
  • National Pension System (NPS)
  • Unit-Linked Insurance Plans (ULIPs)
  • Equity Linked Savings Schemes (ELSS)
  • Pension Plans

But approach these recognising your risk appetite and classifying them as “market-linked tax saving investments” and “assured return tax saving investments”.

The market-linked tax saving investments such as the following are best suited for risk-takers, i.e. if you are young, income is high, liabilities are low, investment horizon before financial goals befall is far, and ultimate objective is effective wealth creation.

  • Equity Linked Savings Schemes
  • Pension Funds (or retirement fund offered by mutual funds)
  • Unit-Linked Insurance Plans (ULIPs)
  • National Pension System

Assured return tax saving investments on the other hand, such as the following, are best suited for risk-averse investors, i.e. who are nearing retirement, or retired, have no regular source of income, are shouldering many liabilities, investment horizon is short, and are looking for assured returns (in the form of interest) from investments.

  • Non-Unit Linked Life Insurance Plans
  • Public Provident Fund
  • National Saving Certificate
  • 5-year Tax Saving Bank Fixed Deposit
  • 5-Year Post Office Time Deposit
  • Senior Citizen Savings Scheme
  • Sukanya Samriddhi Account

Besides, the tuition fees paid for children’s education (maximum 2 children) and principal repayment on Housing Loan are also eligible for a deduction under Section 80C. Therefore, use Section 80C sensibly to enjoy the maximum permissible deduction of overall Rs 1,50,000 per annum.

[Read: Half Year On, Investments You Can Do Now To Save Tax!]

Thinking beyond Section 80C

Remember, the Income Tax Act, 1961 does take into consideration the humane side of our life and allows deduction for such expenditures. One such deduction is Section 80D of the Act.

Premium paid on a medical insurance policy: Section 80D

When you pay the premiums for a medical insurance policy – commonly referred to as mediclaim (also known has a health insurance policy) to cover self, spouse, dependent children, and parents against any unexpected medical expenses, it qualifies for a deduction under Section 80D.

In addition to individual assesses, a Hindu Undivided Family (HUF) too can claim a deduction under this Section provided the premium is paid for the benefit of any member of the HUF.

The deduction is available only on ‘actual payment basis’ for mediclaim insurance premiums, but subject to a maximum permissible limit as under:

[Also Read: Latest Income Tax Slabs]

For Individuals: Currently the maximum deduction individuals are entitled is as under:

  • Upto Rs 25,000 in case of a non-senior citizen (less than 60 years of age) paying for self, spouse, and dependent children.
  • Upto Rs 30,000 in case of a senior citizen (60 years and above) paying for self, spouse, and dependent children.

Further, for mediclaim insurance premiums paid for and on behalf of parents (father, mother or both), an additional deduction permitted is as under:

  • Upto Rs 25,000 for non-senior citizens parents (less than 60 years of age) –– irrespective whether dependent or not
  • Upto Rs 30,000 for senior-citizen parents (60 years and above) –– irrespective whether dependent or not

For very senior citizens (more than 80 year old), who may not have a health insurance policy, the deduction upto Rs 30,000 per annum can be claimed towards medical check-ups and treatments. So, if your parents are super-senior citizens, don’t forget to claim this.

Thus, the maximum deduction that can be claimed as a deduction under Section 80D by individuals is Rs 60,000.

For HUFs:
  • To claim a deduction, the mediclaim insurance policy can be in the name of any member of the HUF.
  • The deduction under Section 80D for an HUF is otherwise upto Rs 25,000. However, if the family member covered by the mediclaim insurance policy is a senior citizen, the deduction under Section 80D increases to Rs 30,000.

With effect from Assessment Year 2017-18, expenditure towards preventive health check-ups can be claimed as deduction upto Rs 5,000 –– irrespective of senior or non-senior citizen, and whether in India or abroad (provided your health insurance policy permits and insurer is registered with the Insurance Regulatory and Development Authority). This means, if you are paying a premium of less than Rs 10,000; you may avail this benefit and save tax. But, this deduction is very much a part of this of maximum permissible deduction under Section 80D.

Care to take while paying medical insurance premiums:

Section 80D stipulates that the medical insurance premium should be paid in any mode other than cash –– so, preferably vide cheque, net banking, debit card, credit card, or any other acceptable mode. If you pay medical insurance premium in cash, you are not entitled to claim a deduction under Section 80D.

However, for preventive health check-ups the payment can be done in any mode, including cash.

Also, here are a few exclusions when claiming deductions under Section 80D:

  • Group health insurance policies are not eligible for tax deduction under Section 80D. However, when you pay extra premium to enhance your group cover or buy a separate/additional health insurance policy, a deduction can be claimed.
  • If children financially independent, parents can’t claim deduction for their mediclaim health insurance premium and preventive health check-ups.
  • Mediclaim insurance premium paid on behalf of in-laws—––irrespective whether dependent or not––—is not entitled for a deduction under Section 80D.
  • The tax component in the premium amount cannot be claimed; only the premium amount is allowed as deduction under Section 80D. The premiums should be paid in financial year relevant to the Assessment Year.

An education loan can help you save tax: Section 80E

While pursuing a personal goal to enrol for “higher education” in order to be competitive enough to meet your financial goals; the Income Tax Act offers you a deduction on the interest paid, when you take a loan to fulfil such dreams.

The education loan can be even taken for your spouse or children or for any person (minor) for whom you are the legal guardian. The interest paid on the loan makes you eligible for deduction under Section 80E. This deduction is not available to a HUF.

The deduction is available for a maximum of 8 years or till the interest is paid, whichever is earlier. So, to simplify it further, the deduction is available from the year you start paying the interest on the education loan, and the seven immediately succeeding financial years or until the interest is paid in full, whichever is earlier.

It is vital to note that deduction can be claimed only if the loan has been taken from a bank, approved financial institution, or an approved charitable institution.

It is vital to note that deduction can be claimed only if the education loan has been taken from a bank, approved financial institution, or an approved charitable institution.

A home loan can get you tax benefits: Sec. 24(b) and Sec. 80C:

Many aspire to buy their dream home or construct or reconstruct/repair it. For some, the amount of wealth created allows buying or constructing or reconstructing or repairing or renewing homes from own funds. But for those who haven’t made this provision, a home loan is tax efficient option. Yes, under the Income Tax Act “repayment of principal amount” and “payment of interest” are eligible for tax benefit.“Repayment of principal amount”, can be claimed as deduction upto a sum of Rs 1.50 lakh under Section 80C …and it is available irrespective whether you stay in the same property (Self Occupied Property - SOP), or have let it out on rent (Let Out Property - LOP).

In Union Budget 2016, the Government reintroduced Section 80EE (which was initially introduced effective 2013-14 and was applicable for only 2 assessment years, 2014-15 and 2015-16) for first time home buyers to avail an additional tax benefit of Rs 50,000, after satisfying certain conditions which are:

  • Value of the property is Rs 50 lakh or less
  • Loan taken for this house is Rs 35 lakh or less
  • Loan has been sanctioned by a financial institution or a housing finance company
  • Loan has been sanctioned between 01-04-2016 and 31-03-2017
  • As on the date of the sanction of the loan no other house is owned by you

But, this additional tax benefit exemption can be availed once you have exhausted the deduction limit under Section 24(b) for the interest portion. The deduction limit under Section 24(b) for interest payment of a home loan on a self-occupied property is currently Rs 2.00 lakh for Self Occupied Property, while there is no such limit for a let-out property as the actual interest payable is eligible for deduction under Section 24(b). This applies even in the case where you have two home loans for two different properties, where one is self-occupied and the other has been let out on rent.

Coming back to Section 80EE; if you are a first time home buyer and satisfy the aforementioned conditions, the maximum deduction you can avail is Rs 2.00 lakh for interest under Section 24(b) plus and additional deduction of Rs 50,000 under Section 80EE.

If the loan is taken for the purpose of reconstructing, repairing or renewing the property, the amount of deduction under Section 24(b) will be restricted to Rs 30,000, irrespective whether you want to stay in it or let it out on rent.

Consider home loans from Axis Banks at an attractive interest rate.

Donating for a cause can help: Section 80G

Donations to certain specified funds, charitable institutions, approved educational institutions, etc. qualifies for a deduction under Section 80G. The deductions allowed can be 50% or 100% of the donation, subject to the limits stated under the provision of this Section. For example, donations to “National Defence Fund” set up by the Central Government are allowed 100% deduction, while for “Prime Minister Drought Relief Fund” are allowed at 50%.

When you donate, make sure that specified funds or charitable institutions are notified. In order to claim deduction under this section, you are required to attach the proof of payment along with your return on income.

Contributions made to any political parties or electoral trust: Section 80GGC

Say, you are an ardent follower of a particular political party or electoral trust because you appreciate the work they do, and decide to make a monetary contribution to the party or electoral trust; the amount you contribute is eligible for a deduction under this Section.

Rent paid in respect to property occupied for residential use: Section 80GG

If you are a self-employed or a salaried individual who does not receive any House Rent Allowance (HRA), and pays rent for an accommodation (irrespective whether furnished or unfurnished) occupied for residential use, you can claim deduction under this Section to the extent of least of the following:

  • 25% of your total income or,
  • Rs 5,000 per month or,
  • Rent paid in excess of 10% of your total income

But there are certain pre-conditions to avail this deduction:

  • You must pay rent for the house you live in, and should not receive HRA for even a part of the year
  • You should not own and occupy any other house anywhere
  • You or your spouse or your minor child (which includes step-child and adopted child) or Hindu Undivided Family (if you are part of one) must not own any residential accommodation in the city you reside or work in.

To claim deduction under section 80GG, you need to file a declaration in Form No. 10BA.

Claim deduction for interest on savings account: Section 80TTA

This Section allows individuals and HUF to avail a deduction for interest earned on a savings account with a bank, co-operative society and post office to the extent actual interest or Rs 10,000, whichever is lower. Interest portion over a sum of Rs 10,000 though will be taxable.

Apart from the above deductions, there are many other available under Section 80, that you should prudently and legitimately utilise to maximise tax saving.

SectionQuick Description of Deduction
80C*Key investment instruments eligible for deduction under this Section include – Equity Linked Savings Scheme (ELSS), Public Provident Fund (PPF), EPF (Employee Provident Fund), NSC (National Saving Certificate), Senior Citizen Savings Scheme (SCSS), 5-year tax saving bank fixed deposits, 5-year Post Office Time Deposit (POTD) , premium paid for life insurance plans, housing loan principal repayment, etc.
80CCC* Contribution to Pension Fund of Life Insurance Corporation or any other insurer referred in section 10(23AAB).
80CCD* Contribution to Pension Scheme (National Pension Scheme) notified by Central Government. Additional deduction of up to Rs.50,000 is allowed for contribution towards NPS which is over and above the limit of Rs 1.5 lakh under section 80 CCD(1B).
80CCGRajiv Gandhi Equity Savings Scheme (RGESS)
80D Premium paid for medical insurance
80DDMaintenance including medical treatment of a handicapped dependent who is a person with disability
80DDBExpenditure incurred in respect of medical treatment
80E Interest on loan taken for pursuing higher education
80GDonations to certain funds and charitable institutions
80GGRent paid in respect of property occupied for residential use
80GGACertain donations for scientific research or rural development
80GGCContribution made to any political parties or electoral trust
80TTADeduction in respect of interest earned on savings bank deposits
80UPerson suffering from specified disability(s)

Also, remember to optimise your salary structure to save tax

Sit down and prudently assess the components of your salary that can be optimally restructured viz. basis salary, dearness allowance, house rent allowance, leave travel allowance, transport allowance, medical reimbursement, mobile/telephone reimbursement, research allowance, meal allowance, petrol allowance, etc. so as to maximise tax saving.

To conclude…

Benjamin Franklin, one of the Founding Fathers of the United States and a renowned polymath, author, political theorist once aptly said, “In this world nothing can be said to be certain, except death and taxes.”

Hence, engage in prudent tax planning right since the beginning of the year. Remember every penny legitimately saved from tax is a penny earned.

Wish you all Happy Tax Planning!

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.

Savings bonds is another investment options ot choose from.