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Year End Dilemma – How to Save Income Tax – 80CC 80D

This is the time when most agents are active and hunting to find the most gullible salaried class – to push down several products down the throat of the salaried class! Yes, the earning season of most agents is here, since this is the time when most of the corporate (as well as Government) employees rush to “make money” by “saving tax”.

Tax

First, before we continue, please understand that tax saving should be not be the criteria for investing in any product. Several ill-structured products such as ULIPs are sold in this month. We would like to caution our readers not to get carried away by any “get rich schemes by saving tax”.

For a financially happy life, Tax saving must be a part of your overall Personal Financial Plans. If you buy products only for tax savings, that is akin to having Brahmos missile on a bullock cart.

Here we go on the various ways you can save tax:

Section 80C: Rs 1.5 Lakh

This is by far the most popular and most crowded section! The number of products to buy in this section is vast and diverse. By investing in products in Section 80C arena, you can reduce your taxable income by up to Rs 1.5 lacs per financial year. For a taxpayer in the highest tax bracket, this can lead to savings of about Rs 46,300 per financial year. Please note while the limit of 80C is Rs 1.5 Lakhs per financial year, you can invest more than Rs 1.5 lacs in the 80C products per year.

1. Employee Provident Fund

Remember that in your salary you will have an EPF component in your CTC. The 12% of your basic salary goes to EPF. This is included in the 80C. If you basic is high, your contribution to your EPF will be high and hence, please remember this element before you invest more into 80C just for a tax saving point of view.

Also, Voluntary Provident Fund (VPF) is also included in 80C. This is the additional amount that you wish to contribute from your side into the EPF investment without any additional contribution from the employer.

2. Public Provident Fund

PPF works on EEE – The product is exempt from Tax when it matures. This is a 15 year (hence long term investment) and needs patience.  But this is one of the finest investment products if you are looking for your retirement, safety and “tax” saving point of view! You can invest in Public Provident Fund Account of self, spouse and children to avail benefits. Investment in PPF account of parents or siblings is not eligible for deduction.

PPF needs a minimum of Rs 500 per year and maximum of Rs 1.5 Lac a year. The account once opened has to be active for the next 15 years. Due to the flexibility of payment (500 to 1,50,000) this makes a excellent product to have. You can open PPF online these days from most Nationalised banks and large private players.

The interest rate for FY2016 is 8.7% p.a. and this can change in the future.

PPF works best when investment is made early in a financial year. (April/May of a calendar year). We say it’s a MUST to have a PPF account. We advice you to have at least Rs 25,000 per year in PPF. If you need to fill up 80C after Life insurance, then please fill-up the 80C with PPF.
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3. Equity Linked Savings Scheme (ELSS)

Although this is named as a “Savings Scheme”, this has exposure to the Stock Exchange. hence, the returns are never constant or guaranteed. There is a lock-in of 3 years on each investment you make. So if you make has to wait to a period of 36 months before you can redeem the mutual fund. Remember, if you are investing through SIP (Systematic Investment Plans), each installment of SIP shall be locked in for 3 years.  The best part about ELSS is that since it falls under “Equity”, long term capital gains (>1 year) on equity mutual funds are exempt from tax. Assuming that you will not exit before 3 years, the capital gains from ELSS are exempt from tax.

Our take -Take ELSS only if you don’t have anything else to buy. Reason – we believe Mutual funds and Tax should be kept separate – It is best to go for Mutual funds other ELSS and then make merry during a one -two year boom run or SIP through a bad rough patch (like 2011-2013) to invest.

Visit finvestor.in Interact with SEBI Registered Investment Advisers and clarify your personal financial queries.

4. Sukanya Samriddhi Scheme

The account can be opened by the natural or legal guardian in the name of a girl child from the birth of the girl child till she attains the age of 10 years. A depositor can open and operate only one account in the name of a girl child under the scheme rules. Natural or legal guardian of a girl child can be allowed to open the account for two girl children only. The third account in the name of the girl child can be opened in the event of birth of twin girls, as second birth or if the first birth itself results into three girl children.

Investment in Sukanya Samriddhi Yojana scheme is exempted from Income Tax under section 80C. The scheme offers Tax Benefit under EEE regimen ie. Principal, interest and outflow all are tax exempted.

If you meet the requirements, and given the focus of Indian Government towards empowerment of the girl child, this scheme is as good as the PPF scheme. To open an account, any nationalized bank or large private players can be contacted via their websites.

5. Term Life Insurance

A MUST have. Please buy a term insurance product as per your needs. You can visit http://finvestor.in and check our insurance calculator under Braviti module to determine how much you will need.  These days 1 crore policies are gaining popularity and the premiums vary as per age and health. (from Rs 5000 for a 25 year old to about Rs 12,000 for a 35 year old).

6. Principal Repayment on a housing loan

If you have taken a home loan, this component will usually eat up the entire 80C! But remember, this can be taken only when you have received the possession letter. If you have to wait for the possession letter, then the Principal repayment amount for the years prior to the possession year can be claimed, but not at once. Also stamp duty & registration charges are also eligible for deduction under Section 80C and will need to wait until possession time. Tax benefits on principal repayment shall be reversed if you sell the house within 5 years from the end of financial year in which you got the possession.

6. Non Term life policies – ULIP/ Money back/ LIC Jeevan Anand

The Anand (pleasure) is only for the agents in such policies. These are a BIG NO. All these products are wealth destroyers.

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7. Pension scheme

Investments made in Pension schemes are tax deduction under Section 80CCC. This may not be a good place to invest for pension, if you already have executed a good financial plan for yourself.

8. Tuition Fees for two children

Fees paid to university, college, school or other educational institution situated in India can be added into the 80C basket. Expenses towards private tuition, coaching classes or any part time course are not eligible.

9. Tax saving deposits / NSC / Post office /Bonds

5-year Bank Fixed Deposits, Post Office five-year Time Deposit, National Savings Certificate, Tax savings Bonds are a few schemes where you need to wait for five/ten year periods. These instruments need not be looked into as the withdrawals are taxed, and hence the actual returns are very limited and you may barely beat inflation.

Section 80CCD

This section is for the National Pension Scheme, where an additional amount of Rs 50,000 can be invested for additional tax deductions. With the 80CCD, the total deductions rises to Rs 2 Lacs. This is something that is shaping up currently and it is best to avoid it for now, at least for just Tax saving point of view.

Section 80D

While there are several other sections under the 80D, the 80D itself is about premiums for health insurance to be tax deductible. The amount is up to Rs 25,000 for you, your spouse and your dependent children. You can claim upto Rs 30,000 if you are a senior citizen. Also, upto Rs 5000 can be shown against a preventive health checkup.

Remember to take a health insurance policy even if you are covered by company health insurance policy. This is more important for those working in private sector. Taking a super-top-up health insurance plan is highly advisable.

Allowances Exempt from Tax

Allowances are well defined in your salary structure and you need to go through to claim these. Your company portal or HR department can clarify more on these.

Medical

The health insurance policy (the premiums for the 80D) come into picture only when you are admitted in a hospital for more than 24 hours. So what about the medical bills for cough and cold. Those can be submitted for medical allowances, and upto Rs 15,000 per financial year can be exempt.

HRA

If you stay on rent, part of the HRA is exempt from tax. The calculation of this part seems complex to many due to a minimum of a three rules. Your finance department would have already calculated this number. The HRA is also impacted if you stay in a metro or not. Metro – there are only four metros –  Delhi, Mumbai, Kolkata and Chennai. If you stay in a metro, then HRA exempted for tax is the minimum of actual rent paid or 50% of Basic Salary or Rent paid -10% of basic.

If you are not staying in a metro city, then the HRA exempted for tax is minimum of actual rent paid or 40% of Basic Salary or Rent paid -10% of basic.

Usually, it is the third rule that is often hit. Especially, if you basic is high.

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Conveyance  Allowance

This allowance is exempt up to Rs 1,600 per month.

Leave Travel Allowance

The limit will be defined in your salary structure. The travel has to be inside India and will be partly exempted from tax accompanied by spouse and dependent children. Only travel costs is covered and hotel and food expenses are not. There are several rules for this, example you just can’t fly business class and claim for tax exemption.

Summary and Action Plan:

While exemptions can be seen in your company portals and forms, you will hounded by agents to buy financial products. We suggest that if you have not executed a financial plan, please invest in PPF (or Sukyana Kanya Scheme if eligible) & ELSS; Buy Life Insurance and Health Insurance. This should be it. Don’t worry too much about pension just for tax saving. Pension is more than tax saving and needs financial planning to be executed.

If you wish to lead a financially happy life, http://finvestor.in lists several SEBI Registered Investment Advisers who can suggest customer plans for you. A financial plan will enable to take control of your financial future.

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