Tax Planning : Better to start planning well in advance

New Financial year has started from April. Many taxpayers just have come out of the hassle of investing in financial products for saving their taxes. This last time hurry of saving taxes in the moth of March can cost huge in the future. Tax planning should be done with due diligence and by allocating proper time to study the pros in cons of the financial products.

Tax planning should start from the starting month itself.. The investor should focus on understanding the different sections under which he can save his taxes. The investor should study different financial products, their characteristics of investing in those products. An investor can invest systematically month on month in the chosen product which can help him to save in smaller portion every month. So in the last month, he won’t be burdened by the huge outgo towards saving his taxes.

Never invest in Unproductive Financial products for the sake of saving tax. For example never mix Insurance and investment with each other. Buy Pure Term plan for Insurance needs and Invest in Mutual funds for wealth creation. In other words, tools for financial security should not be mixed with tools for financial freedom and tax saving should be done in approximate financial products so that investor can earn maximum return and benefits of tax deduction.

Under Section 80 C of the Income-tax, you can claim deduction up to Rs 150000 in one financial year. Section 80 C offers many options for investors.

  • ELSS fund – Equity Linked Saving Scheme is one of the best options under section 80 C to earn more return with a minimum lock-in period. This investment can generate market returns of 12 to 15 %. Lock in period is only 3 years. Returns and liquidity make this one of the preferred options.
  • PPF is one of the most favorite debt products in India. The Public Provident Fund (PPF) Scheme was started by the National Savings Organization in 1968 to promote small savings and investments. It is mainly used for long term investment. It has 15 years locking period. It gives Compounding Interest benefit. PPF enjoys EEE status. Contribution to PPF account is eligible for tax benefit under Section 80C of the Income Tax Act. Interest earned is exempt from income tax and maturity proceeds are also exempt from tax.
  • EPF– Contribution you made in your Employer Provident Fund will be considered under Section 80 C but subject to 150000 cap.
  • Bank FD of 5 yrs term – One can claim a tax deduction up to 1.5 L if he makes a bank FD for 5 yrs. This option is opted out by an investor for the safety of the interest and the principal invested.
  • Insurance premium– The premium paid on your life insurance policies can be deducted under this section.
  • Sukanya Samrudhi Yojana – A Sukanya Samriddhi Account can be opened any time after the birth of a girl till she turns 10, with a minimum deposit of Rs 1,000. A parent can open an account for a maximum of two daughters, but the combined investment in the two accounts cannot exceed Rs 1.5 lakh in a year.
  • Senior Citizen Saving Account – It’s for senior citizens who have completed 60 yrs. This is the most suitable option for senior citizen apart from 5 years of bank FD. The interest rate offered by the government is good. Tenure of this product is 5 years and one-time extension is allowed up to 3 years.
  • National Saving Certificate– It is a tax saving investment that can be purchased from any post office by an Indian Resident. Being a fixed return and low-risk Government of India-backed investment, NSC is usually preferred by risk-averse investors or those seeking to diversify their portfolio through a fixed return instrument.
  • Home loan principal repayment – Payment towards principal for the home loan is allowed as a deduction up to 1.5 lacs
  • 5-year post office time deposit- The investment under the five-year term deposit qualifies for the benefit of Section 80C of the Income Tax Act, 1961 from April 1, 2007, according to India Post.
  • NABARD rural bonds– Payment done for these bonds are also allowed here but subject to government notification for this kind of bonds.
  • Unit-linked insurance plans– Premium paid for Ulips are also allowed as a deduction under section 80C like the other traditional insurance policies.
  • Payment of tuition fees– Only tuition fees that form part of the total fees paid is allowed for deduction. Fees paid for school, college or the University of India only allowed not oversees school and universities.
  • Payment of tuition fees– Only tuition fees that form part of the total fees paid is allowed for deduction. Fees paid for school, college or the University of India only allowed not oversees school and universities.

Other Sections under which you can save your taxes:

Section 80 CCC: Insurance premium

It provides a deduction to an individual for any amount paid or deposited in any annuity plan of LIC or any other insurer. The plan must be for receiving a pension from a fund referred to in Section 10(23AAB). Pension received from the annuity or amount received upon surrender of the annuity, including interest or bonus accrued on the annuity, is taxable in the year of receipt.

Section 80 CCD : Pension contribution

Employee Contribution– is allowed to an individual who makes deposits to his/her pension account. Maximum deduction allowed is 10% of salary (in case the taxpayer is an employee) or 20% of gross total income (in case the taxpayer being self-employed) or Rs 1, 50,000, whichever is less.

Deduction for self-contribution to NPS – section 80CCD (1B) A new section 80CCD (1B) has been introduced for an additional deduction of up to Rs 50,000 for the amount deposited by a taxpayer to their NPS account. Contributions to Atal Pension Yojana are also eligible.

. Employer’s contribution to NPS – Section 80CCD (2) Additional deduction is allowed for employer’s contribution to employee’s pension account of up to 10% of the salary of the employee. There is no monetary ceiling on this deduction.

Section 80 D Medical Insurance

Deduction under this is available to an individual or a HUF. A deduction of Rs. 25,000 can be claimed for insurance of self, spouse and dependent children. An additional deduction for insurance of parents is available to the extent of Rs 25,000 if they are less than 60 years of age or Rs 50,000 (has been increased in Budget 2018 from Rs 30,000) if parents are more than 60 years old. In case, a taxpayers age and parents age is 60 years or above, the maximum deduction available under this section is to the extent of Rs. 100,000.

Example: Rohit’s age is 65 and his father’s age is 90. In this case, the maximum deduction Rohit can claim under section 80D is Rs. 100,000.

Section 80 EEE : Interest on home loan

Tax deducted under this section can be claimed by first time home buyers for the amount they pay as interest on home loan. The maximum deduction that can be claimed is Rs 50000 during a financial year. The amount can be claimed over and beyond the deduction of section 24 and section 80 C.

Above discussed sections are popular sections but there are some expenses which are otherwise eligible for tax benefits that we fail to grasp due to ignorance about them. These are the some options available for saving the tax.

  • Medical expenses of disabled dependent: For a dependent person in your family who has a disability, there is tax benefit under section 80DD. This tax deduction is a social support for disabled family member from the government, so as to ease that person’s dependence on you. This means a saving of up to Rs 1,25,000 on the taxable income.
  • Expenses for a disabled individual: Same as section 80DD deductions. A person who has disability gets benefit through section 80U. Maximum deduction is INR1,25,000.
  • Donations for scientific research or rural development:
    • Donations towards scientific research are open for deduction through section 80GGA.
    • There are some other situations too where you get to save tax.
  • Charitable donations:
    • There is another reason to rejoice when you make donations. Besides supplementing your good deeds, you also gather the right to claim another tax exemption covered under section 80G.
    • There is an upper limit on cash donations. Such donations are capped at Rs 2,000.
  • Treatment of specified diseases:
    • Treatment of diseases like cancer and AIDS is very expensive and Section 80DDB offers the much-needed financial relief to the person suffering from such ailment and his family members.

Tax planning is critical for budgetary efficiency. It helps to reduce tax liability and maximized the ability to earn more returns through proper execution.

Happy Tax saving !!!

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