JFM is a period where most of the Investor comes out with lot of confusion on what to do about Tax savings and what are the options to choose. I am writing this post with some ideas with how some one who is going to pay taxes for the first time could approach tax savings schemes.
First of all – you will have to pay tax if you earn above the taxable limit – there’s just no way around it, so stop wasting your energy in trying to devise a method which gets you to avoid this.
There are some ways in which you can reduce how much tax you’re liable for and that’s where investments come in.
There is a section in the Income Tax Act which lists down certain expenses and investments that will enable a person to reduce their taxable income and as a result of that pay less tax.
This section is called Section 80C and the below mentioned investments avenues will help you out in reducing your taxes
These Investments/Expenses Reduce your Taxable Income and give you Tax Benefit
- ELSS Mutual Fund
- Life Insurance Plans (Term Plan , Endowment Plan & ULIP Plan)
- Children's Tuition Fees
- Housing Loan Repayment - Principal Amount
- Public Provident Fund
- National Savings Certificate
- Notified Pension Funds
- Fixed Deposit
- Contribution to Provident Fund
Avenues for 80C | Category | Lock in Period |
ELSS Mutual Fund | Equity | 3 years |
Pension Fund | Fixed Income | 3 years |
Tax Saving Fixed Deposit | Fixed Income | 5 Years |
National Savings Certificate | Fixed Income | 5 Years |
Public Provident Fund | Fixed Income | 15 years |
***Lock in Period for Insurance & Ulip Varies
If you have some education loans then you can use that to save tax, but if you don’t have that then you can invest in either mutual funds, fixed deposits, post office schemes or insurance products to save tax.
Since this is the first time you’re doing this and it’s rather late in the day to understand the nuances of these schemes properly there are two things you can keep in mind to help you make a quick decision.
First is that ELSS mutual funds have the lowest lock in period of just 3 years among these schemes and also happen to be the only equity product in this list. This means they are mutual funds that invest in shares and there is absolutely no guarantee with them.
Your investment could halve after 3 years, or it could double – it depends on the market, and there are absolutely no guarantees.
The second thing to keep in mind is that if you’re not comfortable taking this risk then you can opt for a fixed income product where the returns are defined at the beginning of the term and you can expect the principal plus interest to be paid out to you regularly. Among these options – a tax saving bank fixed deposit is probably the easiest for you to set up and the yields are as high (if not higher) than the other options.
The limit under 80C is Rs.1 lakh and if you exhaust this limit then you can invest an additional Rs. 20,000 in tax saving infrastructure bonds and reduce some more of your taxable salary.
Other Options available for Tax Benefits
Section 80CCC: Deduction in respect of contribution to certain Pension funds
and Maximum amount Eligible for deduction is Rs 100000
Section 80CCF: Deduction in respect of Long Term Infrastructure Bonds and
Maximum amount Eligible for deduction is Rs 20,000
Section 80 D : Deduction in Respect of Medical Insurance (15000 (Max) for
Individual + 15000 (In case of dependent parents), Rs 20000
in case of senior citizen dependents
Section 80 DD: Deduction in Respect of Maintenance Including Medical
Treatment of a dependent who is a person with disability
(Eligible for Rs 50000 or Rs 100000 Deduction)
Section 80 DDB: Deduction in respect of Medical Treatment for self or a
dependent (Eligible for Rs 40000(Max)
Section 80 E : Deduction for Interest Paid on Loan taken for Pursuing
Higher Education (Eligible for actual amount paid as Interest)
Section 80 G : Deduction in Respect of Donations to Certain Charitable
Institutions (100% or 50% of Eligible donations, without
applying qualifying limit in certain cases)
Section 80 U : Deduction in case of person with Disability (50,000 or
1,00,000 (Depends on disability) )
Section 24 : Repayment of Interest on Housing loan (Upto 1,50,000 (Max))
I was a little wary of including returns because they can vary so much, and it is natural to compare one with the other but that’s not right since the risk profile of the instruments is different.
Please let me know if you see any mistakes, and also if you want to see any other information on this.
Please share it with friends and colleagues if you think this will be beneficial to them, and as usual I look forward to your comments!
Article by Nishith.B,Financial Doctor
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