Prudent and timely tax planning
Tax planning is an essential exercise on how we span out our investments and expenditure as per certain sections in the Income tax act that entail tax saving over the entire tax season. If done prudently, we can reduce our overall taxable income and save considerable income tax. It makes complete sense to start your tax planning exercise at the beginning of the financial year so that you identify the key sections based on which you can reduce your tax deduction. We need to declare our investments upfront to our employer so that our taxable income gets calculated accordingly over the entire tax season. Postponing our tax planning decision will only result in an increased financial burden at the end of the tax season and inevitable huge tax deductions when we are not able to submit actual proof of our investments.
Relevant and recommended sections for tax savingSection 80C: This section covers the maximum number of tax saving instruments under different investment schemes with variable returns spread across them. The limit of tax saving is capped at Rs.1,50,000 lakhs over certain expense and investment schemes, details of which are given in the table below.
Investment | Returns | Lock-in Period |
5-Year Bank Fixed Deposit | 6% to 7% | 5 years |
Public Provident Fund (PPF) | 7% to 8% | 15 years |
National Savings Certificate | 7% to 8% | 5 years |
National Pension System (NPS) | 12% to 14% | Till Retirement |
ELSS Funds | 15% to 18% | 3 years |
Unit Linked Insurance Plan (ULIP) | Varies with Plan Chosen | 5 years |
Sukanya Samriddhi Yojana (SSY) | 7.60% | N/A |
Senior Citizen Saving Scheme (SCSS) | 7.40% | 5 years |
EPF (Employee provident fund) is covered under section 80C with an attractive return of 8.1%.
ELSS (Equity linked saving schemes) are mutual funds which have a minimum lock in period and offer some of the best returns among all investment instruments.
Expenses under principal repayment in housing loan or stamp duty payment for first house purchase is also eligible for tax deduction as a part of our tax planning.
Section 80D: Health insurance premium payments are entitled to maximum tax saving of Rs.50,000(Rs.25,000 for self and spouse along with children and Rs.25,000 for dependent parents below 60 years). Maximum tax saving for health insurance premium payments is up to Rs.1,00,000 in case dependent parents happen to be senior citizens.
Section 24: Interest paid on housing loan each year is applicable for tax deduction from our taxable income. The limit for tax saving is Rs.2,00,000. This becomes more critical for individuals in the higher tax bracket and if used judiciously can aid in considerable tax saving.
Section 80EE: Over and above section 24, an individual can claim additional tax saving in interest on housing loan up to Rs. 50,000for first home purchase subject to certain caveats related to date of purchase and market value of the property. Under section 80EEA, claim on interest in housing loan is up to maximum of Rs.1,50,000 over and above section 24 under the affordable housing scheme for first home purchase.
Section 80G: Any charity money given to notified institution can be claimed as tax deduction under ambit of this section.
Section 80E: Under this section, an individual can claim tax deduction on interest paid on education loan. This is specifically useful as a tax planning instrument during the early years of loan repayment as the interest portion is on the higher side and gradually tapers down during the maturity of loan. There is no specified limit for this section.
Section 80EEB: In order to promote Electric vehicles, interest part of the loan up to a maximum of Rs.1,50,000 can be claimed for tax deduction under this section.
Section 80CCD: Over and above Rs.1,50,000 tax exemption under section 80C, there is a provision for tax planning which would result in tax saving to the tune of Rs. 50,000 if an individual invests in National Pension Scheme or Atal Pension Yojana.
HRA exemption: Exorbitant house rents can be a double whammy for individuals staying in metro cities or even in non-metro cities in case earnings cannot compensate for rising expenditures. In view of this, it becomes critical to claim tax savings under HRA. Its governed by a formula which captures the least of actual HRA, 40 % of salary for non-metro city or 50 % of salary if the rented property is in Metro city, actual rent paid less than 10% of salary.
There are other sections such as section 80TTA where tax deduction of Rs. 10,000 is allowed on interest received in savings bank account and section 54-54F where capital gain exemption is allowed.
It becomes highly imperative to design our tax planning based on our overall taxable income with a clever mix of investment instruments yielding positive inflation adjusted returns and at the same time utilizing the entire tax season to increase our overall tax savings. A considerable amount saved today in tax outgo can be reinvested in the future tax season for leveraging the magic of compounding through guaranteed returns in high performing ELSS funds, PPF, NPS and hedging our risk in times of volatility.