Your Comprehensive Guide To Investing To Save Income Tax

By | January 28, 2017

Your Comprehensive Guide To Investing For Saving Income Tax

It’s that time of the year when we all collectively wonder where we need to deposit our money in order to save taxes. One of the most popular ways to save tax is to buy Life and Health Insurance to save taxes under Sections 80C and 80D.

But if you’re the discerning investor looking to go beyond buying insurance and want to know of all the ways in which you can save taxes, here’s a tax-saving guide for you.

Here’s a list of all the sections under which you can invest to save tax.

Section 80C – (Limit Rs. 1,50,000)

This is one of the most important sections of the Income Tax Act, and it is here that investors look to maximise their tax savings. You’re allowed a total deduction of Rs. 1,50,000 under 80 C. Here are your options:

1. Life Insurance: Purchase and premium payments for Life Insurance plans bought for self, spouse, and children can be claimed for deductions under 80C. If you own multiple Life Insurance policies, the sum of all premiums up to the above-mentioned limit can be claimed as deductions.

Additional Reading: Life Insurance Myth Busters

2. Equity-Linked Saving Schemes: Equity-Linked Savings Schemes are a variety of diversified Mutual Funds and come with a three-year lock-in. Through ELSS, you invest in the equity market and earn market-linked returns on investments. In the long-run, the ELSS category outperforms most small savings schemes by a wide margin. According to the CRISIL AMFI ELSS Fund Performance Index on 30th September 2016, the ELSS category as a whole had been earning 17.01% annually for the preceding five years and 12.48% for the preceding 10 years.

3. Public Provident Fund: The best small savings scheme option for the general public. You can deposit between Rs. 500 to Rs. 150,000 a year in PPF and earn 8% per annum. PPF investments enjoy triple tax exemption, meaning this is a 100% tax-free investment. It has a 15-year tenure but you can make partial withdrawals from the seventh year.

  1. Five Year Fixed Deposit: Long-term deposits at post offices and banks can be used to claim tax deductions. Banks currently offer deposit rates in the range of 6-7% per annum while a five-year post office deposit currently earns 7.8% per annum. There is no upper limit on investments under these two options. Interest income from these instruments is taxable as per your slab.
  2. National Savings Certificates: NSCs are sold in denominations between Rs. 100 and Rs. 10,000 and there’s no ceiling on the amount invested in them. You have a five-year lock-in on the NSC VIII issue while the NSC IX issue has a ten-year lock-in. NSC currently earns 8% per annum.
  3. Kisan Vikas Patra: You can invest starting Rs. 1000 in KVP which currently earns 7.7% annually over a tenure of 9 years and 2 months.
  4. Senior Citizens Savings Scheme: If you’re above the age of 60, this is the best small saving scheme for you. SCSS earns 8.5% annually for investments from Rs. 1000 up to Rs. 15 lakhs. You must invest for five years and you can remain invested for three additional years.
  5. Sukanya Samriddhi Scheme: This scheme offers annual returns of 8.5% making it a must-have investment product if you have a girl child. An account can be opened any time before the child is 10 years old. A minimum deposit of Rs. 1000 is needed, followed by payments in instalments of Rs. 1000 up to Rs. 150,000 a year. The fund matures 21 afters after its inception but needs 14 years of continuous payments for benefits to accrue. If not, Rs. 50 is charged as penalty for missed payments. The SSS also allows partial withdrawals once the child turns 18.
  6. Principal Payments on Home Loan: If you’re repaying a Home Loan, all principal amounts repaid up to Rs. 1,50,000 can be used to claim tax deductions. Additionally, the stamp duty and registration charges paid towards the buying of the property can also be claimed under Section 80C. This needs to be used in conjunction with Sections 24 B and 80 EE. More on this below.

Subsections of 80C

The following subsections fall under Section 80C:

  1. 80CCC: Allows individual tax payers to claim deductions for investments in pension funds up to the overall limit of Rs. 1,50,000 under 80C.
  2. 80CCD 1: Investments towards the National Pension Scheme up to the overall limit of Rs. 1,50,000 under 80C.
  3. 80CCD 1B: An additional contribution of Rs. 50,000 towards NPS or to Atal Pension Yojana can be claimed under this section.
  4. 80CCD 2: Employer’s contribution to employee’s pension fund up to 10% of basic salary. There’s no upper limit.
  5. 80CCF: Deductions on subscription of notified long-term infrastructure bonds up to a limit of Rs 20,000.
  6. 80CCG: Investors with an annual income less than Rs. 12 lakhs can claim the lower of Rs. 25,000 or 50% of the amount invested in the Rajiv Gandhi Equity Savings Scheme as deduction.

Section 24 – (Limit Rs. 2,00,000)

A maximum of Rs. 2,00,000 per year can be deducted towards interest paid on Home Loan for a self-occupied property, as per the various definitions of “self-occupied”. On a let-out property, there’s no limit on deductions that can be claimed as interest.

Section 80EE – (Limit Rs. 50,000)

First-time home owners can claim an additional deduction up to Rs. 50,000 towards interest paid on a Home Loan providing:

  1. The value of the property purchased is less than Rs. 50 lakhs
  2. The loan taken (from financial institutions only) is less than Rs. 35 lakhs
  3. The loan was sanctioned between 1st April 2016 and 31st March 2017

You can make use of these investment options to not just save tax but also build wealth over the long term. But there’s not a lot of time left for 31st March, so it’s advisable to get cracking on planning these investments.

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About Adhil Shetty

Adhil Shetty is the Founder and serves as the Chief Executive Officer of Adhil has a Master’s degree in International Relations with a specialization in International Finance and Business from Columbia University in the City of New York, and a Bachelor’s degree in Engineering from the College of Engineering Guindy, Anna University. Adhil is an expert in Personal Finance (Car loan/Home loan and personal loan) and he majorly consults on investment and spends rationalization for the Indian loan borrowers. His guidance is number based with real time interest rate calculations and hence useful for consumer’s real time query.

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