However, if your tax planning is right and timely, you can save thousands of your hard earned money
Every tax payer individual cringes at the sight of that tax deduction figure while filing returns every year. However, if your tax planning is right and timely, you can save thousands of your hard earned money. The saved amount can be used towards other expenses or invested further for handsome returns.
Fortunately, there are several investment
instruments, which can reduce your tax liability as well as contribute significantly in your wealth planning and creation goals.
Before we explain the best tax saving instruments for 2015, it is advisable to understand the most relevant income tax section associated with deductions and exemptions. This will give you a clear picture of which instruments can maximize tax benefits along with the best returns in the long run.
With a minimum investment limit of Rs500 and a maximum limit of Rs1,50,00, PPF earns a fixed interest of 8.7% currently. The interest income from PPF account is also exempt from tax under Section 10(a)(i). There is a lock-in period of 15 years, partial withdrawals can be made or loans can be availed from 6th
year. This is a good option for investors who are risk-averse and seek high safety as well as taxability on their investment. However, the interest rate is revised every year and may fluctuate in either direction.
Term Insurance Plans
Term Insurance is a pure form of insurance that gives life cover for a specified term. In case of death of the policyholder during such time, death benefits are paid to the nominees. Term Insurance plans offer huge life cover at low premiums because of its ‘no-frill’ features. Apart from the tax deduction on the premium paid, the entire amount of maturity proceeds received by the beneficiary is also completely exempt from income-tax without any upper limit. So, along with tax benefits, if you are looking for a complete peace of mind with respect to your family’s future security after you are not around, then a term insurance plan is a good option.
According to a report
, only 3% savings route themselves into the markets in India. A large population is not investing in financial products that give an average annual return of over 15% in a longer period time horizon of 15-20 years. A ULIP is an instrument which meets these parameters effectively.
A ULIP is a goal based, market linked investment plus insurance product. When you invest in a ULIP, a part of your investment (known as premium) is used towards providing insurance cover, while the remaining amount is invested in various equity, debt or a healthy mix of equity – debt funds. Unlike mutual funds, where your investment is completely subject to market volatility, you have a control of your investment in ULIPs. The value of investments depends on the performance of funds chosen by you. You also have the flexibility to switch funds from equity to debt or vice versa, as per your financial goals. ULIPs have performed quite well in the last few years. ULIPs with an aggressive fund allocation (50-75% of the portfolio in stocks) have risen to 28.62% from 9.73% in the last five years.
As mentioned above in the tax charge above, the investments made in ULIPs are exempt from Section 80C. The income therefrom such as capital gain, maturity benefit and death benefit is also given an exemption under Section 10(10D). In fact, high maintenance charges on these funds get offset to quite a certain extent by these tax exemptions as well as loyalty additions and wealth boosters given by the insurance provider.
from reputed private insurers like ICICI Prudential have proven performance and track record, thereby commanding a trust and respect of investors.
|Income Tax Section|
|Up to a maximum of Rs1,50,00.|
The principal amount on home loan is deductible from taxable income under Section 80C.
An additional income tax deduction of Rs50,000 for contribution to the New Pension Scheme (NPS) under Section 80CCD as announced in Budget 2015—16.
***Please refer the note to understand this.
- Public Provident Fund (PPF)
- Traditional Insurance Polices (Term and Endowment)
- Unit Linked Insurance Plans (ULIPs)
- Equity Linked Savings Scheme (ELSS)
- Home Loans
- Fixed Deposits (FD) and National Saving Certificates (NSC)
- New Pension Scheme (NPS)
- Up to a maximum of Rs2,00,000 for a self-occupied property
- No upper limit for a property that is not self-occupied
|Interest on home loans|
|Up to a maximum limit of Rs1,00,000.|
|First time home buyers|
- Up to Rs15,000 for self, spouse and dependent children
- An additional deduction up to Rs15,000 for parents below 60 years or Rs20,000 for parents above 60 years.
|Sum assured should be equal to 10 times|
|Unit Linked Insurance Plas, Terms Plans and Endowment / Moneyback|
- Maturity Benefit/ Death Benefit/ Surrender Value
- Sum allocated by way of bonus
|Subject to terms and conditions|
|Donations to charitable causes or institutions|
|Interest payable on loan|
|Educational loan for higher studies for self, spouse or children|
***Note: As per the Income Tax Act of India, the aggregate amount of deduction under sections 80C and Section 80CCD shall not exceed Rs1,50,000. However, the deduction under Section 80CCD shall not exceed Rs1,00000. New Pension Scheme (NPS) falls under Section 80CCD. Budget 2015
has announced an additional deduction of up to Rs50000 under Section 80CCD for NPS. This extra deduction of Rs50,000 on NPS will increase the total deduction allowed under Section 80C and 80CCD to Rs2,00,000.
ELSS are one of the few tax saving mutual funds that represent well diversified equity portfolios. With ELSS yielding average returns of 27% in the last 3 years, they seem an ideal investment. However, the lock-in period is here 3 years. That is, you cannot withdraw funds before this period. The only option is to exit completely after paying the exit load charges. Moreover, ELSS are highly volatile owing to market fluctuations. Hence, you don’t have control over your investment. You need to hold them for at least 7-10 years to yield better returns with respect to market adjustments.
A house of dream sits on top of the priority list for most of the Indians. With rising rentals, the trend in urban India has seen a shift from renting to buying. It has been given additional impetus owing to the tax savings available on both the components of home loan repayment- principal as well as interest. While the tax paid on the principal can be claimed as a deduction under 80C, that paid on interest can be availed under section 24. There is also an additional deduction of Rs1,00,000 for first time buyers. Now this makes housing affordable and a practical investment, but you must keep in mind that a home loan is a huge liability till it is paid off.
FDs and NSCs
The five-year bank deposits are received warmly in India as most of the people prefer bank deposits as their prime saving vehicle. Reserve Bank of India’s “handbook of statistics on the Indian economy 2014” reveals that about 57% of household savings is invested in bank deposits. NSCs are equally popular. Both these instruments are ideally recommended for people whose taxable income of less than Rs 5 lakh a year. They can be used as a collateral to avail a loan. Now, while FDs and NSCs are highly safe and flexible, given the interest rate between 8.5 to 9.1 % for 2015, the interest rate changes every year. Also, there is a 10% TDS if the interest income across total investment in FDs across all banks exceeds Rs10,000.
NPS is a government backed initiative by Pension Fund Regulatory Development Authority, which aims to provide an income to all Indian citizens in their post-retirement life. NPS is open to employees of government, private institution, organized and unorganized sector as well. The amount contributed is invested in the markets and at the time of retirement, subscribers get a lump sum amount depending on the performance of the fund. While NPS contribution has tax benefits under section 80C and 80CCD, the withdrawal of maturity amount is taxable.
Health insurance is still not a very popular investment for Indians as shown by a survey which revealed that over 70%
of Indians still pay for medical expenses out of their pockets. But, not many know that health insurance can take care of medical expenses of self and dependents, considerably. Also, if you are looking for more tax savings after section 80C investments, health insurance should be on your list. It gives you tax exemptions under section 80D for self, spouse, children and parents.
With an in-depth knowledge of tax saving investments, you as a tax payer and investor are better equipped to take a sound financial decision in this regard. All these options have features that suit certain needs and requirements. Ones you have your own goals in sight, investing in these avenues or creating a right portfolio becomes easy.