Dec 28, 2023 Value Broking 13 Mins 2.9K

Taxes! Taxes! Taxes! You keep hearing these words like a stubborn chant that won’t go away. When tax filing season approaches, people cringe at what they have to pay. The higher your income, the more taxes you pay. For many people, the thought of saving taxes sounds time-consuming. So, they just go with it’. Then there are some, who will look at their tax returns and plan how to save taxes in the next financial year. Tax saving? It sounds like tax avoiding, right? It’s not. Let’s find out how you, as a taxpayer can also be a smart tax planner.

Tax Planning

As the name suggests, tax planning doesn’t mean you avoid tax. It simply means, you plan your investment in a way that optimises all tax saving options. For any plan to become a reality, you need time. Similarly, tax planning cannot and must not happen 2 months before March. If you’re a smart tax payer, you will begin planning at the beginning of each financial year. Planning ahead helps reduce your tax liability, here are some more reasons why you should plan to save taxes:

  •  Reduce tax liability
  •  Explore all tax saving options
  •  Productive investments
  •  Financial stability
  •  Wealth growth

There are also different types of tax planning, here’s a summary:

Short-Range: Many of us are guilty of using this method to plan taxes. We wait until the last quarter of a financial year and rush into tax saving investments.

Long-Range: This method is smarter and more effective. Here, you begin to plan your investments from the beginning of a financial year.

Permissive: In this method, you use every provision legally permissible–under the Income Tax Act of India, 1961—to save taxes.

Purposive: In this method you focus on one section of income tax and plan your investments around it. For example, when you focus all your tax savings around optimising section 80C.

National Pension Scheme (NPS): This is a government-backed savings scheme. Prior to 2009, it was available only to government employees. Now, any one can open a NPS account and it becomes a source of income after retirement. You can make regular contributions to this account, during your career. The lock-in period lasts until retirement and part-withdrawal is allowed only under special circumstances.

When you plan to save tax, you usually begin with analysing all the options. These have to be within the framework of tax legislation. The next thing to do is to look for tax saving investments. When we talk about these, your choices usually begin and end with section 80C. But what if we told you, there are several options beyond 80C. Surprised? Read on

Exploring Tax Saving Options

We will be giving you a summary of all tax saving investments, some are lesser known under Section 80C, others are outside of it. Let us understand what benefits this section gives you. Section 80 of the Income Tax Act of India—1961, deals with deductions, exemptions and rebates. All, or some of these can be combined to reduce your income tax liability.

Section 80C allows you, as a taxpayer, to avail a tax exemption if you invest up to Rs. 1.5 lakh, per financial year. The most common investment avenues under this section are, PPF, Life Insurance, Bank FDs, NSC and NPS. Let us look at all these and many more:

Equity-Linked Savings Scheme (ELSS): This product appears out of place, among the more ‘robust’ investment options. However, an Equity-Linked Savings Scheme or ELSS, is one of the more lucrative tax saving options. It is a type of mutual fund which, not only gives you good returns, but also saves tax. People’s perception is, equity and tax saving can’t go hand-in-hand, but an ELSS offers just that. Any investment in this type of fund will give you a tax benefit u/s 80C. What’s more? With historic rates of returns up to 18 percent, you can also create and grow wealth.

Unit-Linked Insurance Plan (ULIP): Unlike the acronym, this product doesn’t give you the lip. It’s a hybrid mutual fund, that also provides insurance cover. The portfolio composition, is in debt- and equity-oriented underlying securities. So, you get good returns from equities (historically 5 to 11 percent), stability of debt and protection out of insurance. Moreover, you can add this investment to your list of tax saving options.

Life Insurance: Life insurance…many people are hesitant about it, especially considering the exorbitant premiums. Section 80C has a provision to add life insurance premiums, to its list of deductions. This deduction must not be confused with health insurance. We will look at health insurance tax benefits later in the article

Public Provident Fund (PPF): You may have noticed, we’re slowly moving into the territory of traditional tax saving investments under Section 80C. We saw mutual funds and insurance, now, it’s time for the tried-and-tested. A few years ago, having a PPF account was a necessity. Now, its popularity has declined. However, it is still an option you can explore, especially if you’re looking at saving income tax. You can begin and contribute to a PPF account with as little as Rs. 500. The maximum you can invest and hold in this account is Rs. 1.5 lakh, in any financial year. You cannot close this account for 15 years and part withdrawal is allowed only after regularly contributing for 6 years. The biggest advantage of a PPF account is, long-term savings. This account also qualifies you to avail a tax benefit u/s 80C.

This type of scheme comes under Small Savings Schemes offered by the Central Government. Similar schemes include, National Pension Scheme (NPS), Senior Citizens’ Savings Scheme (SCSS), NSC, and/or, Sukanya Samriddhi Yojana (SSY). All these are considered the safest, because they’re backed by the Central Government of India. They are also part of small savings because, the initial (and subsequent) contribution required is as small as Rs. 500. They’re not aimed at providing instant returns, but these qualify for tax exemption and are great for retirement planning.

Employee Provident Fund (EPF): An EPF account is available only for salaried individuals. Annually, 12 percent of your salary is contributed toward an EPF. Your employer also makes an equal contribution, but that doesn’t count as qualifiable. Your contribution qualifies for deduction u/s 80C. Your EPF account is valid only up to the time you stop getting a regular salary. So, when you change jobs, your company will proceed to transfer your EPF account to their records. You have the option to take a loan on EPF, however, make sure to check the requirements and eligibility.

Bank Fixed Deposits (FD): Some bank FDs help you claim benefits u/s 80C. These are also called tax saver FDs and the features are a bit different. Traditionally, FDs have always been considered the safest and the best way to save money. They could be held for anywhere between 6 months to 10 years. Fixed deposits which have the advantage of being tax efficient, have a lock-in period of 5 years. This means, you can’t break them before maturity. You can open one with a minimal amount of Rs. 1000. An investment in a tax saver FD, can be added to your list of qualifiable investments u/s 80C.

Home Loan Principal: This option is not conventionally an 80C investment, because of more than one component. When you apply for a loan and it is disbursed, you have to pay it off in Equated Monthly Installments (EMIs). This EMI has two components, a principal and an interest. To many people a home loan may be a liability, but you can claim a tax benefit on it. The principle component of a home loan qualifies for exemption under 80C. One important thing to note, if you cannot claim any tax benefit if you sell your property. In fact, if you do within 5 years of taking the loan, any principle paid during that time, will be included in your taxable income.

Home Loan Interest: As mentioned earlier, a home loan EMI has 2 components, the principle and interest. While the principle qualifies for benefits u/s 80C, the interest component has a rebate u/s 24B. In a financial year, you can claim a rebate on interest paid up to Rs. 2 lakh. At the end of each financial year, you can request for an income tax statement on your home loan. This statement gives you an annual break-up of your EMIs’ contribution to the principle and the interest.

There are several other tax benefits of taking a home loan, here is a table summary of all of them.

DeductionsSectionHealMaximum Deduction (Rs.)Conditions
Principle80C1.5 LakhHouse property should not be sold within 5 years of possession.
Interest24B2 LakhLoan must be taken for purchase/construction of a house and the construction must be completed within 5 years from the end of financial year in which loan was taken.
Interest80EE*50,000Amount of loan taken should be INR 35 lakhs or less and the value of the property does not exceed INR 50 lakhs.
Stamp Duty**80C1.5 LakhCan be claimed only in the year in which these expenses are incurred.

*Benefits u/s 80EE is for first-time home loan buyers. Another pre-condition is, the loan must have been sanctioned between 1st April 2016 to 31st March 2017.

**Tax benefits on stamp-duty and registration charges on a home loan are applicable for the financial year in which the charges occurred.

Now you’ve seen how you can optimise section 80C, some investments you may be familiar with, others would probably be new. One important thing to note, all your investment options should not exceed Rs. 1.5 lakh. This is the limit for availing tax benefits in this section, if your tax liability is causing a dent in your savings, you can consider re-evaluating investments in this section. If, however, you have exhausted tax saving investments under Section 80C, you may want to look at other sections. Let’s review beyond 80C, with the below options.

Tax Saving Through Health Insurance Premiums—80D

Health insurance and life insurance sound similar, but are quite different. Your regular health insurance policy covers hospitalization, health check-ups, and/or medical expenses

Opinions are divided on the tax efficiency of health insurance premiums. However, these are a great option to consider

Tax benefits on these premiums are covered under Section 80D of the Income Tax Act of India—1961. Here is a table summary of what to expect:

Medical Insurance CoverExemption Limit (Rs.)Health Check-Up Exemption (Rs.)
For self and family25,0005,000
For self and family including parents(25,000+25,000) =50,0005,000
For self and family including senior citizen parents(25,000+50,000) =75,0005,000
For self (senior citizen) and family including senior citizen parents(50,000+50,000) =100,0005,000

You can claim a deduction of up to Rs. 25,000 for the insurance of you, your spouse, and dependent children. If you’re paying a premium for your parents and they’re less than 60 years, you can claim an additional deduction of Rs. 25,000. This deduction doubles to Rs. 50,000 (after 2018 Union Budget regulations), if your parents are senior citizens. If both, the taxpayer and his/her parents, are senior citizens, the maximum deduction applicable becomes Rs. 100,000.

Let’s understand this better with an example: 45-year-old Rehan, is paying an insurance premium of Rs. 30,000 on his policy. He is also paying Rs. 35,000 for his father’s policy. Rehan’s Dad is 65 years old, what will be Rehan’s tax saving? For his policy premium, Rehan can claim a benefit up to Rs. 25,000. Since the premium amount, for his father’s policy, is less than the limit for senior citizens’ benefit (u/s 80D); the total deduction, he can claim for the financial year is Rs. 60,000.

Another important point to note, the exemption on preventive health check-up is not an add-on to the premium. This amount is part of the benefits u/s 80D. For example: Dinesh has paid a health insurance premium of Rs. 23,000 in this financial year. He also had a health check-up for Rs. 4,000 in the same financial year. From the maximum deduction limit, Dinesh can claim Rs. 25,000. Rs. 23,000 toward the premium paid, and Rs. 2,000 for the health check-up.

Finally, the criterion of financial dependency, is not relevant for your spouse or parents. Which means, you can claim benefits on insurance premiums of your spouse or parents, even if they’re employed. There are some factors under which tax benefit will not be applicable.

80D Benefits Cannot Be Claimed

  •  If the premiums are paid in cash. Premiums paid via cheque, internet banking, debit or credit cards are acceptable.
  •  For premiums paid under group health insurance policies. These include any policy given by your employer.
  •  For premiums paid for policies of employed children. If your children are financially independent, but you’re paying the premium, you cannot claim a tax benefit.

Deductions Under Section 80CCD

Earlier in the article we spoke about NPS, this investment qualifies for deduction u/s 80C. Additionally, an investment in this scheme offers you a tax deduction for the investment up to Rs. 50,000. This can be availed under subsection 80CCD (1B). This amount is over and above the deduction of Rs. 1.5 lakh that is available under sec 80C of the Income Tax Act. 1961.

Rajiv Gandhi Equity Savings Scheme—Section 80CG

This is a lesser-known scheme, which in fact, is not aggressively promoted. Under this scheme you can invest up to Rs. 50,000 in pre-approved stocks or mutual fund schemes. The benefits, however, are only for first-time investors with an annual income of up to Rs. 12 lakh.

Interest on Education Loan—Section 80E

This again is among the lesser-known tax-saving investments. When you take a loan for higher education, you need to pay it off in EMIs. The loan may be for you, your child, or, you may have applied as a legal guardian. The deduction is allowed only on the interest component, and not on the principle amount of education loan. This is over and above the 80C limit and there is no maximum limit on claiming a tax benefit u/s 80E.

House Rent Allowance—Section 80GG

If you’re a tenant and your salary does not provide for HRA, you can claim tax deduction u/s 80GG. The amount you can claim varies from one city to another. This is a major source of tax savings for individuals.

Now that you know more about tax saving investments, we recommend you begin tax planning as soon as possible. When you plan your investments early, you can evaluate and choose prudently. Ill-informed investment decisions are often detrimental to your savings. Moreover, tax planning is more than saving tax, it is also about creating wealth. Several tax saving investment options are also a great way to save and achieve investment milestones. Most financial goals would be difficult, or even impossible, without the right investment products.