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
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
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.
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.
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.
Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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 you1) 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 allocationDisclaimer Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
When it comes to financial planning and wealth management, most of you believe that creating savings is all that you require for fulfilling your financial plan. It is a misconception. What is personal financial planning? A personal financial planning process encompasses a wide range of activities which you need to carry out in order to achieve financial independence. It does not stop at savings. Do you know what these activities are? Many of you, sadly, don’t! As it is essential, let’s understand financial planning and what it involves –What is financial planning?Financial planning is a process wherein you make financial decisions to meet the different financial goals of your life by managing your finances. Thus, financial planning involves making sensible and practical decisions about your money for future goals, not just creating savings.What does financial planning involve?Financial planning is a six-step process wherein you can plan for your finances and achieve financial independence. Let’s look at what are the six steps in the financial planning process– 1. You should estimate your current net worth – you should analyse and find out your assets and liabilities to arrive at your net worth. Your assets are your investments and other owned belongings which give you an income. Liabilities, on the other hand, are the debts which you have to pay off. Your liabilities should be deducted from your assets to find out your current financial standing. This is called your net worth which you should know. 2. You should chalk out your goals – goals are important as they dictate how much to save and for how long. A strategic financial planning process involves planning around some common goals such as marriage, child education, asset creation, buying a home, wealth maximization and retirement. Chalk out your goals based on your life stage. If your children are independent, your goal might be to create wealth and plan for retirement. On the contrary, if you have just started a family, planning for your child’s future might be an important goal. So, list out your goals to understand your financial requirements. 3. Find out your financial requirement – your goals help you find out the amount of money you need in life. Segregate your goals into short, medium and long-term to find out your investment horizon. Then choose investments whose tenure matches the horizon of your goals. . With goal planning, you can see when you need the money and invest accordingly. Don’t forget to factor in inflation. It has a direct bearing on the amount of money required to fulfil your medium and long-term goals.4. Create a budget and stick to it – The next step is finding out your disposable income. Until and unless you know the income you can direct towards savings, you cannot create a portfolio. For maximum savings, create a budget. When spending, stick to your budget to avoid overspending. Budgeting helps you save more and meet your goals successfully. 5. Understand your risk appetite to know your investments – different investments have a different risk profile. Understanding of your risk appetite is important to find out in which assets you can invest. To understand your risk-taking ability, factor in your dependents, age, income, existing investments, etc. Once you know your risk profile you can choose equities if you are a risk taking investor or debt investments if you are risk-averse. Once you know your investment horizon and risk appetite you should pick the investment avenues. Some common and popular investment avenues include equity, debt, fixed-income, real estate, gold, etc. when picking assets, don’t stick to one asset class. Diversify. Diversification would help you spread your risk over different investments and minimize it. The returns, however, would be better. 6. Monitor and review your portfolio – financial planning is not a one-time affair. You need to monitor and review your portfolio from time to time. With time your financial requirements change. Your financial plan should be changed to factor in the change of your requirements. Conclusion Financial planning is a broad concept, an ongoing process and confusing it with only one factor of savings is wrong. Understand the entire financial planning process, follow it and achieve financial freedom.DisclaimerInvestment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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