Reducing the tax burden- Business News

Reducing the tax burden

We bring a few effective tax-saving strategies as the year draws to a close.

  • December 21, 2015  
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Tax planning can be difficult. Think of it as an exercise - it is demanding, but once it's done, you feel relaxed. If you're a taxpayer working for an organisation that asks for investment proofs, failing which it goes ahead and deducts your tax dues at source, you've got less than two months to work out your tax-saving strategy.

This year's Budget added some tax benefits for individual income tax payers. You can now avail of a separate tax deduction of Rs 50,000 for the National Pension System (NPS) over and above the Section 80C limit of 1.5 lakh. The Sukanya Samriddhi Scheme, launched last year, is also now eligible for the Section 80C deduction.

Some of the most popular tax-saving strategies include use of the Rs 1,50,000 deduction allowed under Section 80C by investing in recognised provident fund, public provident fund (PPF) and equity-linked savings schemes (ELSS). Life insurance premium, tuition fees of children and housing loan principal payments are also eligible under this. Planning taxes well, therefore, can help you save up to Rs 2,00,000. This is besides the Rs 2,00,000 deduction on housing loan interest and the additional deductions for medical insurance premiums.

Tapati Ghose, Partner, Deloitte Haskins & Sells LLP, says, "If planned suitably, the tax payer can get a total deduction of Rs 2,00,000 for investments in a year."

However, there are some things you need to consider while planning your taxes.

• Making an investment just for the sake of tax deduction may impact your financial goals. Invest with a long-term view. Investment planning and tax planning should go hand in hand.

• Every tax-saving instrument you will invest in will have specific conditions like lock-in period and reversal of tax benefits on early withdrawal. Bear these in mind before investing • Medical cover required for tax may not be adequate. Balancing insurance needs and tax benefits is a must.

• Tax at withdrawal or tax on accretions need due attention, says Ghose. "For instance, if the investment horizon is not less than three years, debt mutual fund may be a better option than bank deposits (even if the rate of return is the same). The reason is that long-term capital gains from debt mutual funds are taxable at 20 per cent (plus surcharge and cess) after indexation whereas interest on bank deposits is taxable at the applicable slab rate, which may be 30 per cent (plus surcharge and cess), and that too without the indexation benefit. Also, the tax payer has an option to pay long-term capital gains tax on debt mutual funds at 10 per cent (plus surcharge and cess) without indexation," she says.

• Apart from these factors, consider the type of income you're earning, whether it is salary or consultancy income. In the latter, you can claim a deduction on several everyday expenses. Also see if the employer provides flexibility in designing the salary structure and if passive income such as house rent can be shifted to your spouse's name if he or she falls in a lower tax bracket. And most important, do not forget your investment objective.


1. Restructuring your salary to take full benefit of all allowances and pre-requisites

2. Optimum use of options beyond Section 80C like Section 80D (medical insurance premium) and 80G (donations for charity)

3. If you're paying rent and not claiming the amount from your company, you're eligible for a deduction

4. Deduction for tuition fees for children under Section 80C (within the Rs 1,50,000 limit)

5. You can claim leave travel allowance twice in a block of four years. Claims from the first block can be carried forward to the second block (but not beyond that)

6. The bonus from the employer is fully taxable in the year you receive it. Amit Maheshwari, Managing Partner, Ashok Maheshwary & Associates, says, "See if you can push the bonus payment to the subsequent year or produce investment details well in advance to prevent your employer from deducting tax on the payment before handing it over to you."

The most popular tax-saving instruments fall under Section 80C. Given below are some of the best strategies based on five parameters - returns, safety, flexibility, liquidity and taxability.

PPF: This remains a popular option as it offers investors a lot of flexibility. Besides, the 2013/14 Budget enhanced the annual investment limit under PPF to Rs 1.5 lakh. Opening a PPF account is simple - it can be done at a post office or a bank. The minimum annual investment is Rs 500. If you fail to deposit Rs 500, a penalty of Rs 50 is imposed. The maturity period is 15 years, but the account can be extended in blocks of five years each. It is a good option for those with a low risk appetite, self-employed and those not covered by the employee provident fund. Remember to invest before the 5th of the month as highest balance, since the 5th of every month, is considered for compounding purposes.


ELSS FUNDS: The most attractive feature of ELSS funds is that it has the shortest lock-in period among all tax-saving instruments under Section 80C - just three years. But Maheshwari says that "this should not be the most important reason for investing in this avenue." ELSS funds are known to generate good returns over the long run. Besides, the minimum investment is low, the same as a PPF fund (Rs 500). Another attractive feature for the non-committal investor looking to just save taxes is that, unlike a pension plan or a Ulip or an insurance policy, you are under no compulsion to continue investing in the subsequent years. "To make the most of ELSS funds, stagger your investments over a period instead of putting a large sum at one go," says Maheshwari. This reduces risk and effects of volatility.

TAX-SAVING FIXED DEPOSITS (FDs): These are five year-plus deposits with high interest rates. For instance, while regular FDs are paying around 7.50 per cent at present, tax-saving FDs are paying around 7.75 per cent. As the interest income is fully taxable, the post-tax yield is not as high as you expect it to be.

LIFE INSURANCE: Traditional life insurance plans, in spite of being more customer-friendly now, are still the worst way to save tax, says Maheshwari. "Tax saving is only meant to reduce the cost of insurance. It is not the policy's core objective. Some plans such as endowment also give attractive returns but are an expensive way to have insurance as they provide a lower cover," he says.

NPS: It is a retirement product, regulated by the Pension Fund Regulatory and Development Authority. It was first introduced in 2004 for government employees and was made available for everyone in 2009. The Section 80 CCD allows you deduction for contribution made by you or your employer towards the NPS account. In addition to this, from this year onwards, the tax payer can get an additional deduction of Rs 50,000 over and above the limit of Rs 1,50,000 under Section 80C of the Income Tax Act, 1961.

SUKANYA SAMRIDDHI SCHEME: The scheme, launched in January this year, is part of the government's effort to help people save for girl children. Under Section 80C, a contribution of up to Rs 1,50,000 is eligible for tax deduction. The scheme offers a high interest rate of 9.2 per cent against 8.7 percent offered by PPF.

HOUSING LOAN:  If you have taken a housing loan, tax deductions are possible under three different sections. Under 80C, the component of your EMI that goes towards principal payments is eligible for tax deduction. This is subject to the overall Rs 1,50,000 limit. One can also claim a deduction on stamp & registration charges under Section 80C in the year the payments are made. Over and above this, one can avail of a deduction on interest paid under Section 24 up to Rs 2 lakh. This is available only if the house is occupied by the tax payer. For houses given on rent, there is no limit on the deduction for interest payments.

RAJIV GANDHI EQUITY SAVINGS SCHEME (RGESS): RGESS is an avenue for investors to earn returns from equity markets and also get tax benefits on their investments. It is for new investors who earn less than Rs 10 lakh a year. The investment limit is Rs 50,000 per year. This is over and above the 80C limit. The RGESS hasn't been too popular. According to depository data by NSDL, there were 19,756 demat accounts under the scheme as on October 31, 2015. CDSL, on the other hand, has around 30,000 RGESS accounts on December 31, 2014. ~