Instead of running around to save on tax at the end of the year, plan your taxes at the start of the year and rest easy. We’ll tell you how.
Looking to save tax for Financial Year 2019-20? It is always advisable to start your tax planning at the beginning of the year to help you systematically grow your money while ensuring that your tax savings are met by the end of the financial year.
The most popular tax saving schemes fall under Section 80C of the Income Tax Act. Under this section, you get a tax deduction of up to Rs. 1.5 lakh. But, how can you make the most of this one? Read on.
Eligible Schemes Under Section 80C
Here are the schemes that you can invest in and claim tax deductions under Sections 80C and 80CCC:
- Life Insurance Premiums
- Contributions to Employee Provident Fund (EPF)
- Public Provident Fund
- NSC (National Savings Certificate)
- Unit Linked Insurance Plan (ULIP)
- Repayment of Home Loan (Principal)
- Equity Linked Savings Scheme (ELSS) of Mutual Funds
- Tuition fees including admission fees or college fees paid for full-time education of your children (any two).
- Infrastructure bonds issued by institutions/banks such as IDBI, ICICI, REC, PFC.
- Pension scheme of LIC of India or any other insurance company.
- Fixed Deposit with a bank having a lock-in period of 5 years.
Life Insurance Premiums
An amount up to Rs.1.5 lakh that you pay towards your Life Insurance premium for yourself, your spouse or your children can be included under Section 80C deductions. Life insurance premiums paid for your parents or your in-laws are not eligible for deduction here.
If you are paying a premium for more than one insurance policy, all these premiums can be included. The insurance policy can be from any insurance firm in India. All plans like endowment plans, money-back plans and term plans are eligible for this deduction.
Note that the premium paid should not be in excess of 10% of the sum assured. You also have to hold the insurance policy for at least 2 years. If not, the previous tax deductions will be taxed as income.
The maturity proceeds received from an insurance policy will be tax-free under Section 10 (10) D. Death benefits are also exempt from tax.
Additional Reading: 4 Slamming Insurance Products To Help You Rest In Peace
The EPF is much like a social security scheme intended to help employees from both private and non-pensionable public sectors save a fraction of their salary every month. These savings are to be used in the event that the employee retires or is temporarily unfit or no longer fit to carry on his or her work.
A member of the EPF can withdraw the full amount in their account on retirement from service after attaining the age of 55 years. Such withdrawals can also be made by a member under the following circumstances:
- A member has retired on account of permanent and total disability due to bodily or mental infirmity.
- On migration from India for permanent settlement abroad or if employed abroad.
- In the case of mass or individual retrenchment.
EPF is automatically deducted from your salary. Both you and your employer contribute to it. While your employer’s contribution is exempt from tax, your contribution (i.e. employee’s contribution) can be declared as a tax deduction under Section 80C.
You also have the option of contributing additional amounts through voluntary contributions (Voluntary Provident Fund). The current rate of interest is 8.65% per annum and the interest earned is tax-free. Also, apart from saving tax, it helps build a long-term, tax-free retirement corpus for you. Note that withdrawals made from EPF after 5 years of contribution are exempt from tax.
You can now withdraw up to 90% of your EPF balance to buy a house and to pay your loan EMIs. However, there are certain conditions. One is that you have to be a member of a co-operative or housing society that has at least 10 members and you should have contributed to your EPF for at least 3 years. Also, you and your subscriber spouse should have a minimum balance of Rs. 20,000.
Additional Reading: Proposed EPF Rules
Public Provident Fund
Public Provident Fund (PPF) is a tax saving investment and the interest earned is also tax-free. It is a scheme run by the Government of India and it is considered one of the safest investment avenues around.
The interest paid is 8% compounded annually and the minimum investment is Rs. 500, while the maximum investment is Rs. 1.5 lakh. It is a long-term investment with a maturity period of 15 years with the option to extend it for any number of 5 year periods.
This investment comes under the EEE tax status wherein the investment made, the interest earned, and the maturity proceeds are all exempt from tax. The unique feature of PPF is that in case of insolvency, it will not be attached to the assets of the insolvent.
Additional Reading: Looking To Invest In PPF? Here’s What You Need To Know
National Savings Certificate
National Savings Certificate (NSC) is a 5-year small savings instrument eligible for deductions under Section 80C and is a good medium-term investment option. The rate of interest is 8% compounded half-yearly. If you invest Rs 1,000, it becomes Rs 1,493 after 5 years.
The interest accrued every year is liable to be taxed (i.e., to be included in your taxable income) but the interest is also deemed to be reinvested and thus eligible for deduction under Section 80C.
So, the interest earned becomes tax-free except for the year in which your NSC matures. The advantage of investing in NSC is that it can be pledged as security against a loan obtained from banks or other institutions. The minimum investment starts from Rs. 100 and there is no maximum limit for this investment. Also, there is no tax deducted at source (TDS) for NSC.
Additional Reading: PPF VS NSC: Which One’s The Better Bet?
Unit-Linked Insurance Plan
Unit-Linked Insurance Plan (ULIP) is an insurance plan that gives you insurance cover along with investment options. So, you get protection against risks as well as capital appreciation. Part of the premium you pay goes towards the sum assured (the life cover) while the balance will be invested in whichever asset class you choose – equity, debt, or a mixture of both.
The investment in ULIPs is denoted in units and its value is determined using its Net Asset Value (NAV). The fund value at any time varies according to the value of the underlying assets at that time. So, NAV is used to understand the changes in underlying assets, just like you do for Mutual Funds.
The tax benefits will be similar to those that you receive for Life Insurance policies. The only point to note is that, just like other policies, for ULIPs too, the maturity benefit is tax-free only if the annual premium paid is less the 10% of the sum assured that it offers. In other words, the life cover has to be at least 10 times the premium.
Additional Reading: ULIPs Are Back With A Bang
The rest of the tax saving plans under Section 80C will be covered in the next article. Stay tuned until next week! In the meantime, why not check out some Home Loan, insurance offers, or investment options that could help you save tax while you are waiting?