When it comes to filing income tax returns, most investors jump on the tax saving bandwagon. This usually results in hasty and ill-informed decisions. To be tax efficient, you need to plan your investments from the beginning of any financial year. If you’re earning a salary, you would focus on planning investments around Section 80C of the Indian Income Tax Act. However, there are other sections which you can explore beyond Section 80C. This article is not only about various sections, but also, how much to invest to save tax, how much investment needed to save tax, and investments needed to save tax.
Under the Indian Income Tax Act of 1961, you can save tax by making use of more than one permissible option. Section 80C, covers deductions which reduce your tax liability significantly. The maximum permissible allowed under this section is Rs. 1.5 lakh, in one financial year. Individuals and HUF taxpayers are eligible to avail tax benefits under this section. Here is a summary of investment options any taxpayer can choose.
|Investment||Rate of Returns*||Lock-in Period|
|5-Year Bank Fixed Deposit||4 to 7 percent||5 years|
|Public Provident Fund (PPF)||7 to 8 percent||15 years|
|Employee Provident Fund (EPF)||8.55 percent||Till retirement|
|National Savings Certificate||7 to 8 percent||5 years|
|National Pension System (NPS)||8 to 10 percent||Till retirement|
|ELSS Funds||15 to 18 percent||3 years|
|Unit Linked Insurance Plan (ULIP)||5 to 11 percent||5 years|
*Rates of return are estimates and will vary based on market movements.
The following paragraphs are summaries of what these components are and how much to invest to save tax.
5-Year Bank FD: Some fixed deposits offered by banks, are also tax saving. They’re considered one of the oldest, and most traditional investment options. If you invest in in these, you can claim benefits under section 80C. Though there is no maximum limit to open a FD, the limit for claiming tax benefits is Rs. 1.5 lakh in any financial year.
Public Provident Fund (PPF): This type of investment falls under small savings schemes offered by the Government of India. In any financial year, taxpayers can open a PPF account and begin with as low as Rs. 500. The maximum amount which can be invested in this scheme is Rs. 1.5 lakh. You can avail of loan from this account after 3 years of continuous investment.
Part withdrawal is allowed only after 6 years of continuous investment. A PPF account is a great way to not only save tax, but also to save for retirement.
Employee Provident Fund (EPF): This option is available only for salaried individuals. Each year, 12 percent of an employee’s salary is contributed towards EPF. The employer makes an equal contribution to this account as well. The EPF falls under one of the components of Section 80C in any salary structure.
National Savings Certificate (NSC): A NSC is issued by post offices and is backed by the Government of India. There is no maximum limit when investing in an NSC. You can begin one with as low as Rs. 500, and is available in multiples of Rs. 1000, Rs. 5000 and Rs. 10,000.
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.
ELSS Funds: ELSS or Equity-Linked Savings Schemes, are a type of equity-oriented mutual fund. These are preferred over other mutual fund investments for two reasons. One, any investment in them qualifies for tax benefit under Section 80C. This is up to a limit of Rs 1.5 lakh per financial year. Two, there is a lock-in period of 3 years, before they can be redeemed.
These schemes are diversified portfolios, with a dynamic asset composition. Though they give the highest returns on investment, the returns depend entirely on market movements.
Unit-Linked Insurance Plan (ULIP): This is a hybrid mutual fund, with the added advantage of a life-insurance cover. Any investment in this scheme qualifies for tax benefits under Section 80C. The portfolios are allocated between debt- and equity-oriented securities. The minimum holding period is 5 years and there are no taxes on redemption.
We have seen how much to invest to save tax u/s 80C. You need to ask yourself, is it enough? Are there more options?
Section 80 of the Indian Income Tax Act–1961, deals with deductions on taxable income. 80C is just one part of it; it is also more well-known, because it appears in an employed individual’s Form 16. Other investments like insurance policies and first-time home loans also qualify for tax benefits. Let’s find out how:
When you, as a taxpayer, have an active medical insurance policy, the premiums and medical expenses qualify for a tax deduction. Section 80D explains who qualifies for tax benefits and the premium amount. The benefit extends to an individual, his/her dependent spouse, parents and children. This deduction is over & above to the deductions under u/s 80C.
|Medical Insurance Cover||Exemption Limit (Rs.)||Health Check-Up Exemption (Rs.)|
|For self and family||25,000||5 years|
|For self and family including parents||(25,000+25,000) =50,000||5 years|
|For self and family including senior citizen parents||(25,000+50,000) =75,000||5,000|
|For self (senior citizen) and family including senior citizen parents||(50,000+50,000) =100,000||5 years|
Family includes dependent children and spouse. Children who’re earning, are not included.
For parents who’re not senior citizens, the permissible limit is extended by Rs. 25,000.
If your policy covers premiums of senior citizen parents, your benefit is extended by Rs. 50,000.
If you’re a senior citizen, the benefit on your insurance cover doubles. Since your senior citizen parents are already covered by Rs. 50,000, your tax benefit extends to Rs. 1 lakh.
These values are allowable in one financial year. Let’s say, Akash’s annual salary is Rs. 8 lakh per year. He is liable to pay tax according to the tax bracket he comes under. He has structured his investment u/s 80C, but he’s also looking at benefits u/s 80D.
Akash pays an annual premium of Rs. 40,000 on a medical insurance policy for himself, his wife and his 3-year-old daughter. Apart from this, he is also paying a premium of Rs. 40,000, for his 80-year-old mother’s health insurance policy. Annually, he pays Rs. 80,000 in premiums, however, will he get deductions for the entire amount? For his family’s insurance policy, he can claim benefits only up to Rs. 25,000. For his senior citizen parent, he can claim the entire premium amount of Rs. 40,000. This makes his total tax deduction in one financial year—Rs.65,000.
The exemption limit of Rs. 5000 covers check-up costs for all family members including spouse, dependent children, and parents. This is an overall limit and not individual.
Now that you know how much to invest to save tax under sections 80C and 80D, let’s look at the benefits from taking a home loan. Many of us dream of owning a house one day. Most hesitate because of expensive home-loan interest rates. Let’s find out how you can maximise tax benefits from this type of loan:
A home loan must be taken for the purchase/construction of a residential property. If under construction, it must be completed within 5 years of the end of financial year it was taken in. A home loan is repaid in Equated Monthly Installments or EMIs. This EMI has two components—interest and principal. The interest portion, qualifies for deduction from your total income, up to a maximum of Rs. 2 lakh under Section 24. This deduction can be claimed from the year in which the construction of a house is completed
When you take a loan for a residential property under construction, you pay pre-construction interest or pre-EMI. You can claim tax benefits only once construction is completed. The deduction can be claimed in five equal instalments, starting from the year in which the property is acquired, or, construction is completed. This is over and above the deduction you are otherwise eligible to claim. However, the maximum eligibility remains capped at Rs 2 lakh.
One of the components of section 80C is principal on a home loan. The total permissible limit, as mentioned earlier is Rs. 1.5 lakh in a financial year. To claim this deduction, the house property must not be sold within 5 years of possession. Otherwise, in the year of sale, the deduction claimed earlier, will be added back as taxable income. Besides the principle, stamp duty and registration charges also qualify for deduction u/s 80C. This again, must be within the overall limit of Rs. 1.5 lakh. One thing to note, it can be claimed only in the year during which these expenses have been incurred.
To claim benefits on a joint home loan, all applicants must also be co-owners. Each applicant can claim a deduction for home loan interest up to Rs 2 lakh and principal repayment u/s 80C up to Rs 1.5 lakh, in their individual tax returns.
It is always better to start planning for tax saving at the beginning of any financial year. Procrastination often leads to hurried and miscalculated investment decisions. Tax planning is not only about saving taxes, but also being tax efficient and creating wealth. The options given above are not comparisons, but an awareness indicator of how you can reduce your tax liability. Smart investors don’t avoid taxes, they plan around them to create wealth for achieving long-term financial goals.
As mentioned before, if you begin tax planning at the beginning of a financial year, you can spread your investments. It gives you more choices and the convenience of evaluating your options before purchasing them. Poor investment choices have a negative impact on your taxes and also hurt your long-term savings.
Tax planning and tax avoidance are not the same. In the former, you are essentially reducing your tax liabilities in a year, within the legal framework. You’re utilising every possible exemption, deduction, rebate under sections of the Indian Income Tax Act of 1961. Let us see more about the definition of tax planning and its types.
When you analyse your annual expenses for a long-term perspective, you also factor-in the tax component. Working professionals especially, need to plan their investments to save taxes. There are several financial and investment products available, which can help in creating wealth. When you explore and utilise every permissible option under income taxes, it means you have achieved tax efficiency.
In India, there are a number of tax saving options for all taxpayers. These limit overall tax liability by allowing for a wide range of exemptions and deductions. Though most of these are available under section 80, there are several other sections too. Each year, during the Union budget speech, the finance minister (elected) presents changes, revisions and/or introductions in income tax legislations. As responsible taxpayers, we need to be aware and current with these changes. These changes are usually incorporated in the next financial year of the Union budget.
Planning taxes with a particular objective in mind.
Tax planning that is legally permissible under all options.
Long range and short-range tax planning:
Planning done at the beginning and end of a financial year respectively
The primary objectives of your tax planning should be the following:
We as taxpayers need to be tax efficient, not just when tax filing season approaches, but throughout the financial year. Whether you prefer, traditional or modern investment avenues, your aim should be tax saving and wealth creation. An evaluation and analyses of your monthly expenses, is the first place to start. Once you become aware of more tax-saving options, you also begin to optimize them. This takes you one step closer to wealth creation and tax efficiency.