Worried about how to save tax this financial year (FY 2017-18)? Don’t be! We are here to help. In the first article in the series, Start Your Tax Planning Now, we discussed a few tax-saving investment options that fall under Section 80C of the Income Tax Act. In this concluding part, we’ll look at the remaining options.
Home Loan
Got a Home Loan that you are repaying diligently? Did you know you can get tax breaks on your Home Loan repayments? Yes, the principal, as well as the interest repaid, are eligible for tax deductions. However, note that only the principal portion comes under Section 80C. You need to use Section 24 of the Income Tax Act to claim a tax deduction on the interest portion of your Home Loan repayments. As of now, under Section 80C, you can get a maximum tax deduction of Rs. 1.5 lakhs for your principal repayments.
Additional Reading: Increase Your Tax Savings With A Joint Home Loan
Equity Linked Savings Scheme (ELSS) of Mutual Funds
The advantage of investing in ELSS is that the lock-in period is only 3 years, while for investments like the National Savings Certificate (NSC) and the Public Provident Fund (PPF) it is 5 and 15 years respectively.
The top 10 ELSS funds have returned an average of 20% per year for the last 5 years, whereas, NSC and PPF offer average returns of 9%. The only limitation with ELSS is that premature withdrawal is not possible. However, that’s the same with tax-saver Fixed Deposits and with PPF, your money gets locked in for 6 years. So, ELSS is much better than other tax-saving investment options in terms of returns as well as lock-in period.
Pension Plans
Today, pension plans are available with all Life Insurance companies. They usually come without any life cover.
Pension funds are exempted under Section 80CCC. This section stipulates that an investment made in pension funds is eligible for tax deduction. However, the investment limit under Section 80CCC is clubbed with the limit for Section 80C. This means that the total deduction available for 80CCC and 80C will be Rs. 1.5 lakhs. This also means that your investment in pension funds of up to Rs. 1.5 lakhs can be claimed as a deduction under Section 80CCC.
Out of the maturity amount that you receive, only one-third can be commuted in cash as tax-free. The rest of the amount has to be used to purchase a pension plan or an annuity. You can even decide to use the full amount to buy an annuity. In case you decide to surrender the pension plan, the amount you receive will be taxed as per your tax slab.
The National Pension Scheme (NPS) will also help you save taxes. This is a pension scheme offered by the Government of India and is partially Exempt-Exempt-Exempt (EEE). The investment and the interest earned are tax-free while 40% of the amount withdrawn will be tax-free in the hands of the investor. Note that if you use the total amount you receive on maturity to buy an annuity, it will become totally tax-free.
You can claim tax deductions for NPS under Section 80CCD. Just like Section 80CCC, Section 80CCD combined with Section 80C has a maximum tax deduction limit of Rs. 1.5 lakhs. However, you can now claim an additional Rs. 50,000 invested in NPS under Section 80CCD (1B) for your contributions to NPS.
Additional Reading: Opening An NPS Account Online
5-Year Tax-Saver Fixed Deposit
A Fixed Deposit is meant for those investors who want to deposit a lump sum for a fixed period. You will get a lump sum (principal + interest) when the deposit matures.
The 5-year tax-saver Fixed Deposit gives you tax benefits under Section 80C and is, of course, limited to Rs. 1.5 lakhs. The typical interest rate is 7-8% today. Senior citizens do get an additional interest rate of 0.25% to 0.5%. The interest rate varies from one bank to another. So, you will need to check with several banks and compare across banks to get the best one. Once the deposit is made, the rate remains constant for the 5 years that you remain invested.
So, ready to invest in one of these to save taxes this year? Go ahead, but do keep your financial situation, age and risk profile in mind while choosing an investment option. If you are nearing retirement, it is best not to choose investments with long lock-in periods.
Don’t wait until the end of the year to save on those taxes!