9 minsNovember 3, 2017
When it comes to tax planning and/or tax saving, many individuals tend to wait until the eleventh hour. As the financial year draws closer, most tax payers feel the heat, and then realise that, yes, now we have to do some tax saving investments.
However, such an approach is flawed, as often, imprudent investment decisions for tax saving are taken. Most tax–saving decisions are incongruent to important factors such as, age, income, risk appetite, investment objectives, financial
goals, and investment horizon.
Ideally, try and compliment tax planning with investment planning holistically, considering the above facets, otherwise it could prove ineffective. And this can done be if you, the tax payer and investor, engage in tax planning well in advance.
We are already halfway mark this financial year, and it’s time to save tax by investing wisely. And before investing, assess whether you are a risk-taker (aggressive), or risk-averse (conservative).
Risk takers are classified as:
- Those who are young;
- Earn a high income (during the accumulation phase of life cycle);
- Own or are in the process of owning considerable assets;
- Have limited liabilities and do not have many dependent to support;
- Have financial goals with a time-horizon far ahead; and/or
- Are willing to take high risks
On the other hand, risk averse is one who is:
- In the conservation and protection phase of life (on the verge of retirement, or already retired);
- Do not have a regular source of income;
- Has not created adequate assets;
- Has sufficient asset, but now has a conservative approach;
- Has many dependant family members to support;
- Has many debt obligations;
- Has financial goals to fulfil which have a closer time-horizon; and/or
- Unwilling to take risk or whose risk appetite has diminished
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).
The list of investment avenues for deduction under Section 80C consists of both market-linked and assured-return investment instruments such as:
- 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
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.
The market-linked investment instruments are best suited for risk-takers, while tax saving instruments offering assured returns, where risk of capital erosion is almost zero, are best for risk-averse investors.
Tax Saving with Market-Linked Instruments
Tax Saving with “assured return” instruments
For those of you who are risk averse, the tax saving instruments providing assured returns are…
- 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 5 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.The interest 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 rate of interest of 7.6% p.a., (calculated quarterly) but paid annually. As far as premature withdrawals are concerned, they are permitted only after one year from the date of deposit and the interest on such deposits
shall be calculated at the rate, which shall 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 though, the interest earned on your investments is taxable.
- Non-Unit Linked Life Insurance Plans:
- Life Insurance plans can be broadly classified as “pure term life insurance plans” and “investment-cum-life insurance plans”.
- Pure term life insurance plans are authentic indemnification plans, as they cater only to the need of only protection (the death benefit) and not investment (maturity benefits). Hence, such plans offer a high life insurance coverage
at low premiums. Generally, pure term life insurance plans come with a policy term of 10, 15, 20, 25, or 30 years.
- Investment-cum-life insurance plans on the other hand, as the name suggests, offer you an investment benefit (maturity benefit) along with insurance (death benefit). The premiums for such plans are higher vis-à-vis the death
benefit. Endowment plans, money-back plans, are some example of non-unit linked life insurance plans.
- The premiums paid for insurance plans are eligible for a tax deduction under Section 80C subject to a maximum limit of Rs 1.50 lakh p.a.
- Moreover, at maturity the amount which you or your beneficiary would receive, is exempt (tax free) as per the provisions of Section 10(10D) of the Income Tax Act subject to the conditions specified.
- Public Provident Fund:
- The Public Provident Fund (PPF) is a scheme of the Central Government, framed under the PPF Act of 1968. Briefly, PPF is a Government-backed, long-term small savings scheme which was initiated to provide retirement security to self-employed
individuals and workers in the unorganized sector.
- So if you are keen on a safe corpus, earning a decent tax-free rate of return, enjoying tax benefit; then PPF is for you. The contributions (i.e. investments) made to the PPF account, will earn a tax-free interest and the maturity
proceeds are exempt from income-tax. But while you invest, have a long-term investment horizon; it can help you in retirement planning.
- The main features of a PPF account are:
- The interest rate is currently 7.8% p.a. as on July 1, 2017. This is subject to change.
|Eligibility||Applicant needs to be a Resident Indian|
|Entry Age||No age is specified
(Minor is allowed through guardian)
|Interest rate||7.80% p.a. compounded annually*
|Tenure||15 financial years (plus the first year of investment)|
On completion of 15 years, the account can be extended in a block of 5 years
|Minimum Investment||Rs 500 p.a.
|Maximum Investment||Rs 1,50,000 p.a.|
(A maximum of 12 deposits allowed in a financial year)
|Tax Benefit||Up to Rs 1,50,000 under Section 80C;
Interest earned is exempt from tax and so are the maturity proceeds
|Can be opened at||Any Post Office and some authorized branches of Banks
|Who cannot invest||Hindu Undivided Family (HUF);|
Non-resident Indians (NRIs);
and Person of Foreign Origin
|Mode of Payment||Cash / Crossed Cheque / Demand Draft / Pay Order / Online Transfer in favour of the Accounts Officer
|Nomination||Nomination facility is available
- Keep in mind, you need to be disciplined to make the most of your PPF investment, and also meet your liquidity needs elsewhere; because under this investment avenue your money is blocked for a good 15 years.
- PPF offers loans against the account which can also help you during occasions such as a wedding in the family, higher education of your children, etc..
- National Saving Certificate (NSC):
- The NSC is a scheme floated by the Government of India, and one can invest in this through his/her nearest post office, as the scheme is available only with India Post. 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. Earlier, a 10 year NSC was also available, but vide a notification by the Minister of Finance on December 1, 2015, the postal department stopped issuing
certificates for this tenure.
- The 5-year NSC currently offers a 7.8% rate of interest compounded annually. As is the case for all Small Saving Schemes (SSS), 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.
- 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
- However, the interest income is chargeable to tax in the year in which it accrues. But, in case if 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.
- Senior Citizen Savings Scheme (SCSS) Account:
- Well, the SCSS is an effort made by the Government of India for the empowerment and financial security of senior citizens. So, if you are 60 years and above, you are eligible to invest in SCSS. Moreover, if you are 55 years and have
retired under a voluntary retirement scheme, too you are eligible to enjoy the benefits of this scheme.
- In order to avail the benefits of this scheme, you are required to open a SCSS account (either in a single name, or jointly along with your spouse) at your nearest post office or any nationalised bank. You can do a one-time deposit
under this scheme subject to the minimum investment amount of Rs 1,000 and a maximum of Rs 15 lakh. The maturity period provided for SCSS is 5 years and the interest is payable on a quarterly basis (i.e. on March 31, June 30, September
30 and December 31) every year from the date of deposit.
- Currently, the SCSS offer an interest @ 8.40% p.a compounded quarterly and is reset every quarter based on previous three month G-sec yield.
- After maturity, you can extend the SCSS account for a period of 3 years, but within 1 year from the maturity, by giving application in prescribed format. In case of accounts which are extended after maturity, the accounts can be closed
any time after the expiry of one year of extension without any deduction.
- Premature withdrawals are permitted only after one year from the date of opening the account. If you withdraw between 1 and 2 years, 1.5% of the initial amount invested will be deducted. And in case if you withdraw after 2 years, 1.0%
of the balance amount is deducted.
- Your investments upto Rs 1.50 lakh p.a. in SCSS are eligible for a deduction under Section 80C.
- However, the interest you earned is subject to a tax deduction at source (TDS). And in case if you do not earn an income apart from the interest income, then in order to avoid 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.
- Sukanya Samriddhi Account:
- Launched in January 2015, theSukanya Samriddhi Account allows you to save and invest for your daughter’s education and marriage .
As parents or a legal guardian, you can open an account in the name of the girl child from her birth upto her age of 10. After she is 18 years, she can even operate the account herself.
- SSA can be opened for a maximum of two girl children following the KYC norms. The minimum deposit is Rs 1,000 while a maximum of Rs 1.50 lakh in a financial year. Currently, the rate of interest for SSA is 8.3% compounded annually.
Like other small saving schemes, this interest rate is reset every quarter based on previous three month G-sec yield.
- Deposits in SSA can be made till the completion of 14 years, from the date of opening of the account. 50% of the balance lying in the account as at the end of previous financial year can be withdrawn, when the girl child turns 18 for
the purpose of education or marriage.
- The account shall mature on completion of 21 years from the date of opening of the account, provided that where the marriage of the account holder takes place before completion of such period of 21 years, the operation of the account
shall not be permitted beyond the date of her marriage.
- Investments/deposits in SSA are eligible for a deduction under Section 80C of the Income-Tax Act, subject to maximum of Rs 1.5 lakh p.a.
Besides the above mentioned tax-saving methods, the tuition fees that you pay to any university, college, school or other educational institution situated within India for your children’s education is also eligible for deduction under Section
80C. However, the fees paid towards any coaching centre or private tuition may not be eligible. The deduction is limited to Rs 1.50 lakh for a maximum of 2 children. If there are four children, then between the husband and wife, both can enjoy
a separate limit of two children each, whereby they can separately claim deduction (up to Rs 1.50 lakh) for 2 children each, subject to the amount they have actually paid.
Similarly, “repayment of principal amount” on your home loan, is eligible for a deduction up to a sum of Rs 1.50 lakh p.a. under Section 80C. And this benefit is available irrespective, whether you stay in the property (Self Occupied
Property - SOP), or lease it out on rent (Let Out Property LOP). The interest you pay on the housing loan is eligible for a deduction as per the provisions of Section 24(b) of the Income-Tax Act, 1961.
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.”
So, remember to save tax legitimately; because every penny 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.