Optimise and not maximise tax-saving

Optimise and not maximise tax-saving

Many people invest only to save tax. They don’t check whether the investment can yield good returns. By doing this, they are merely maximising tax-saving. But the flipside is that they waste an opportunity to build their wealth.

Instead, what one should do is to optimise their tax-saving options.

This article will explain what optimisation of tax-saving means and how you can do it. But before we dive into it, let’s look at what people generally do to maximise tax-savings. This will provide a contrast for better understanding.

What people usually do

People try to maximise tax-saving by using deductions and exemptions allowed under the Income Tax Act.

• They take help of Employer’s Provident Fund, children’s tuition fees, insurance premium etc. to save tax, thanks to Section 80C of the Income Tax Act.
• They also buy a high-value health insurance plan to get tax breaks under Section 80D.
• They invest in National Pension Scheme (NPS) only because it provides an additional Rs 50,000 tax benefit.
• They give money to charities because donations are tax-exempt.
• They also claim additional tax exemption if they are repaying their home loan. This is how they get tax breaks for repaying the debt:
   a. They save tax up to Rs 1.5 lakh if they are repaying the principal component of the loan. If one is a first-time home     
   owner,the tax exemption is up to Rs 2 lakh. However, in this case, the property should be less than Rs 50 lakh and the loan
   amount should be less than Rs 35 lakh.
   b. Furthermore, they claim tax exemption for paying the interest component of the loan. The Income Tax Act allows tax
   deduction of up to Rs 2 lakh.

This is what people usually do to save tax. But this isn’t how it should be done.

If you follow a few steps, you can optimise your taxes and also invest as per your financial goals. After all, you should invest to increase your money. Saving tax should be a by-product, not the primary focus, of investment planning.

What should be done

• House rent allowance (HRA), Leave Travel Allowance (LTA), meal allowance, medical allowance, etc. are a part of your salary. These components are tax-exempt. So, use these exemptions to reduce your taxable income.
• You should choose a tax-saving investment after weighing the post-tax returns. You also need to check whether the investment is helping you achieve your financial goals. If not, you are merely frittering away your money. Remember, investments should primarily build wealth. Saving tax is secondary. This is what optimisation is all about.

Some important points to note:

• While optimising, consider the hidden aspects of taxation as well. For example, opting for the dividend option in debt mutual funds can give you tax-free dividends. But, the dividend amount will attract DDT (dividend distribution tax) of about 28.84% to be paid by the Fund. So, keeping in mind the net tax rate, it could be more beneficial for a person in the 30% tax slab. After all, the others would otherwise pay a lower income tax of 5-20%.
• The National Pension Scheme gives an extra tax deduction of Rs 50,000. But, at the time of retirement, 40% of the saved money needs to be converted into annuity (a fixed amount paid from time to time to retirees). This may not be tax-efficient because the annuity you receive will be taxed. Therefore, you should look for investments where the returns are also tax-free.

These are some of the tricks of the trade when it comes to saving taxes. If you want to learn more, you can take help of IndiaNivesh.

What we can do for you

1) IndiaNivesh Securities Ltd. is a 360-degree financial planning services. We have expertise in investing and tax-planning.
2) We have extremely scientific and well-researched processes for product selection, which are unbiased and algorithm-oriented
3) We give utmost importance to your risk profile and asset allocation


Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.


Step by Step guide to Financial Planning

Financial planning helps you be prudent with your money and achieve your life targets. Although it is a simple process, it requires proper planning over a period of time. That’s because it comprises several steps. Each step has a particular objective. One misstep and your financial plan could be in tatters. It’s just like a house of cards. You remove one card and the whole house falls apart. Therefore, to create a successful financial plan you should follow each and every step in the correct order. Are you familiar with these steps? Do you know how to prepare a financial plan? Worry not, this piece will give you a step-by-step guide in preparing your first financial plan. Step 1 – Set your goalsIdentifying your goals at the start can give you a sense of direction. Unless you know why you should save, your savings will not hold much importance. So, whether it is buying that trendy car, building your own home or setting aside money for your daughter’s wedding, identify your financial goals.Step 2 – Plan your taxesTax-planning can ensure you have more money in your bank account. So, why do you want to give away your hard-earned money in tax? There are various tax-saving investment instruments available in the market. These instruments can give you tax exemption not only on the amount invested but also on the returns generated. Step 3 – Create an emergency fundAn emergency fund can bail you out in tough times. It gives you a financial cushion in case of an emergency. So, hold at least six months’ worth of your income in an easily liquid investment option. Liquid mutual funds can be ideal. Step 4 – Think insuranceYou should also think of getting a health and a life insurance plan. While a health plan can take care of your medical emergencies, a life insurance plan will give your family financial stability in your absence. Step 5 – InvestThis is when you think of investing your money. Know the risk involved, the returns you are likely to get and its tenure before you zero in on an investment option. Step 6 – Invest for each goal separatelyChoose separate investment options for your short-, medium- and long-term goals. You should not park all your money in one investment option. Different investment vehicles serve different needs. So, do some research, learn what each option’s forte is and then invest. For example, investing in equity or equity fund is not advisable if you want to achieve a short-term goal. Instead, invest in them for the long run. That’s because equity tends to be volatile over the short-term and generally steady in the long run. Therefore, your investments and goals should not obstruct each other. Step 7 – Review your plan from time to timeYour goals are dynamic and so are your financial requirements. Hence, your financial planning should be dynamic as well. So, review your financial plan periodically and make necessary changes to suit your requirement.   So, is it difficult? No. You just need to follow a few steps to reap benefits of financial planning. It is just the lack of knowledge which makes the process seem difficult. Alternatively, you can choose to get professional help from a financial planner. IndiaNivesh’s financial planning team can always help you plan your finances and investments. What next?Financial planning. Tick. Next chapter will explain how budgeting is different from financial planning.DisclaimerInvestment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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Insurance and PPF are not the only tax-saving options

Traditional wisdom tells everyone to maximize tax-saving investments. After all, it has a two-fold benefit of tax-saving as well as building wealth for the future. So, all possible tax-saving options should be optimized, especially the investment ones. And while Public Provident Fund (PPF) and Life Insurance are the most popular income tax saving options, you may want to consider the other, myriad options available too, especially under Section 80C of the Income Tax Act. To remind you, you can invest up to Rs 1.5 lakh every year for a tax deduction under this section as one of the tax saving investment options. Let’s look at the multiple 80C investments available in detail: Investment Options U/S 80C:   Other available tax-saving deductions under Section 80C: You can also use these tax saving options in India or tax-saving deductions to reduce your net taxable income. • Children tuition fees: The fees paid towards your children for school tuition is eligible for tax-saving deductions U/S 80C• Repayment of home loans:   o The repayment of the principal amount of your Home Loans can be considered as tax deductions U/S 80C. This is subject to      a limit of Rs 1.5 lakh per annum  o The interest can be used for an additional tax deduction of Rs 2 lakh U/S 24  o An additional amount of Rs 50,000 can be deduction U/S 80EE by first-time home buyers. This is only valid if the property      has a value of less than Rs 50 lakh or the loan amount is lower than Rs 35 lakh. Other Investment Options 1. RGESS: If your income is less than Rs 12 lakh a year and you have never invested in equity before, then you can invest Rs 50,000 in Rajiv Gandhi Equity Saving Scheme or RGESS. This gets you an additional deduction of Rs 25,000. This can be done by investing in RGESS Mutual Funds or buying some specified stock options. 2. Health Insurance:     a. The premium paid towards your health insurance plan for self, spouse and dependent children is eligible for a tax         deduction of Rs 25,000 per annum U/S 80D and     b. An additional amount of Rs 25,000 per annum for premium payment towards health insurance premium for dependent         parents    c. The amounts are Rs 30,000 per annum if either you or your parents are senior citizens    d. So, the maximum amount you can deduct under this section is Rs 60,000 per annum. 3. Donations: Any donation made to any tax-saving trust or listed charitable organization qualify for a deduction U/S 80G. This is applicable only if the receipt is submitted. However, the amount of tax deduction you get on your donations varies—not all give you a 100% deduction. Donations towards some trusts like Jawaharlal Nehru Memorial Fund, National Children’s Fund, Prime Minister’s Drought Relief Fund, etc. qualify for a 50% tax deduction. 4. Savings Account: The interest accumulation in your savings account is tax free till Rs 10,000 per annum U/S 80TTA. 5. Medical costs: The amount you spend while taking care your differently-abled dependents can get you a tax deduction of up to Rs 1.25 lakh U/S 80(U). Medical treatments for such dependents can also help you lower your taxable income by Rs 1.25 lakh U/S 80DD. Conclusion: Insurance and PPF are definitely two lucrative options but they are not the only ones. There are multiple options available for tax saving. All you need to do is choose the most appropriate one according to your risk appetite and asset allocation. Disclaimer:Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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