Are You Investing In The Right Tax-Saving Instruments?

Don’t compromise on your overall portfolio return while planning for your taxes

Are You Investing In The Right Tax-Saving Instruments?
Right tax-saving instruments
Tanvi Kanchan - 15 March 2021

A taxpayer, before looking at investing in any tax-saving instruments, needs to first be aware and understand the total tax liability applicable. Once aware of the amount payable, we can then go ahead and plan the most effective and efficient way to save taxes.

The government of India, in the recent past, has undertaken a lot of measures to build a robust online web-based application that helps users check the total tax payable by them, making it as transparent as possible. You can log in to https://www.incometaxindiaefiling.gov.in and check the total tax applicable for the financial year. Here the total income, wherever possible and obtainable, gets auto-populated and a tentative tax payable amount is computed therein.

There are countless options available that one can avail of while tax planning, but just because our objective here is to save taxes does not mean that we let go of our return objective or don’t benchmark our portfolio. While looking at tax-saving investment routes, investors should consider their risk appetite and the lock-in nature of the schemes. Investors while tax planning should look at asset classes that match the target return and beat a certain benchmark while not resulting in loss of purchasing power.

An individual can choose the current income tax regime with the existing deductions or avail for the new tax regime without having the option to claim deduction and tax exemption from FY 2020-2021

Different deductions offer investment avenues with the varied rate of return and lock-in periods. Let us look at a few options available for ensuring investors not only save taxes but do so in the most effective manner:-

Deduction under Section 8OC: Combined maximum deduction of Rs.1.5 lakh

Investment options

Interest

Minimum lock-in period

Associated risk**

ELSS

12% to 15%** (depending on market fluctuation)

3 years

High

NPS

8% to 10%

Till the investor reaches 60 years of age (retirement)

High

Senior Citizens Savings Scheme

8.60%

5 years

low

PPF

7.90%

15 years

Low

NSC

7.9%

5 years

Low

ULIP

8% to 10% (depending on market fluctuation)

5 years

Moderate

Fixed Deposit

Up to 8.40%

5 years

Low

Sukanya Samriddhi Yojana

8.50%

8 years

Low

**Expected returns and risk are based on statistical and other analysis and may differ in the future

Equity Linked Savings Scheme (ELSS): ELSS is one of the best ways to save tax under section 80C, as well as gain substantial returns by investing in Equity markets. This scheme comes with a lock-in period of three years on investment amount. Any capital gains less than Rs.1 lakh are not charged in LTCG tax. ELSS funds are more liquid as compared to other tax-saving instruments.

Public Provident Funds (PPF): PPF is a long-term saving scheme with a lock-in period of 15 years and can be extended in blocks of 5 years. The interest earned is not considered for tax calculations.

Senior Citizen Savings Scheme (SCSS): SCSS is also a tax saving option under section 80C. The lock-in period is for 5 years. The eligibility criteria for investment is –

Individuals aged 60 years and above

Individuals above the age of 55 years availing voluntary retirement

Individuals above 50 years employed in the defense sector

Life Insurance: Every individual should have a life insurance policy not just for tax exemption but for securing their family’s future. The amount offered to the beneficiary as the death benefit is not taxable under section 10(10D).

Tax Saving Fixed Deposits (FD): Fixed Deposits with a lock-in maturity period of 5 years are eligible for tax exemptions under section 80C. Premature withdrawals nullify any tax benefit from such investments. Interest earned is taxable as per tax slab.

Deduction under Section 8OCCD(1) : Max deduction of Rs 50,000

  • National Pension Scheme (NPS)

NPS is an investment policy to provide security to investors on retirement. The total principal amount of Rs 1.5 lakh is exempted under Section 80C. For self-employed individuals, the NPS tax benefit of an additional Rs 50,000 can be claimed under Section 80CCD.

Deduction under section 8OD, 80DD, 80DDB

Section

Deduction on

Allowed Limit (maximum)

80D

Medical Insurance – Self, spouse, children

Rs 25,000

Medical Insurance – Parents more than 60 years old or (from FY 2015-16) uninsured parents more than 80 years old

Rs 50,000

80DD

Medical treatment for handicapped dependent or payment to specified scheme for maintenance of a handicapped dependent

Rs 75,000

– Disability is 40% or more but less than 80%

Rs 1,25,000

– Disability is 80% or more

80DDB

Medical Expenditure on Self or Dependent Relative for diseases specified in Rule 11DD

Lower of Rs 40,000 or the amount actually paid

– For less than 60 years old

Lower of Rs 1,00,000 or the amount actually paid

– For more than 60 years old

  1. Deduction under Section 24: Home Loan

Homeowners with a home loan can claim tax deduction under Section 24 on the interest component. The maximum tax deduction a taxpayer can get on interest payment of self-occupied property is Rs 2 lakh.

First-time homeowners can claim tax deduction under Section 80EE up to Rs 50,000 which is over and above the Rs 2 lakh limit under Section 24 towards repayment of home interest. The eligibility to avail of this deduction includes the value of the house to be less than Rs. 50 lakh and the loan is for Rs 35 lakh or less. The individual must not have any other property registered under their name at the time loan is sanctioned.

Deduction under Section 80E: Education Loan

Students can claim a deduction against interest payment for higher education under section 80E. The deduction for the interest on the loan starts from the year in which you start repaying the loan. It is available only for eight years starting from the year in which you start repaying the loan or until the interest is fully repaid whichever is earlier.

Deduction under Section 80G

A deduction can be claimed under section 80G only when the contribution is made to specified funds and institutions either via cheque or cash. Effective from the assessment year 2018-19, a person can avail a maximum deduction of Rs 2,000 if the donation is made in cash. Examples – Prime Minister National Relief Fund, Swachh Bharat Kosh etc. Donations made to a political party are exempted under Section 80GGC.

Summary of Tax Saving Instruments –

Tax Saving Instrument

Tax Benefit Under Section

Lock-in Period (Years)

Tax Exemption

Equity Linked Savings Scheme

80C

3

Maximum deduction up to Rs1,50,000

Public Provident Fund

80C

15

Senior Citizen Savings Scheme

80C

5

Sukanya Samridhi Yojana

80C

21

Tax Saving FD

80C

5

Unit Linked Insurance Plan

80C

5

Up to Rs. 1.5 lakh and 10% of premium paid

National Savings Certificate

80C

5 or 10

Up to Rs 1.5 lakh

Life Insurance

80C (Premium) and 10(10D) (Death/Maturity)

Depends on Scheme

Up to Rs 1.5 lakh

National Pension Scheme

80C and 80CCD

Can be withdrawn at age of 60

Additional deduction of Rs 50,000

Health Insurance

80D

Depends on Scheme

Up to Rs 55,000

Interest on Home Loan

24 and 80EE

Depends on tenure

Up to Rs 2 lakh Section 24 and additonal Rs 50,000 Section 80EE

Interest on Education Loan

80E

Available only for 8 years or till the full interest is repaid

No limit

Donations paid

80G and 80GGC

-

10% of total income

House Rent Allowance

80GG

-

Rs 60,000

**Expected returns and risk are based on statistical and other analysis and may differ in the future

Investors can start investing in tax-saving instruments since the beginning of the financial year, doing this not only helps diversify the cash-flow but also make any changes or amendments wherever needed.

While there are multiple ways of effective tax-planning, one should select an option that provides the benefits of tax saving as well as wealth creation.

The author is Head – Corporate Strategy at Anand Rathi Shares and Stock Brokers

DISCLAIMER: Views expressed are the author's own. Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.

Read More in:

tax income tax
Advertisement*