Tips to use tax-saving instruments and maximise returns
Pritam P Hans February 15, 2013If you are among those who rush to buy financial products at random to save tax before the financial year ends, without any long-term planning, you may be hurting your long-term financial health.
Tax planning should not be done in isolation. You must align the larger investment plan with tax saving instruments to maximise returns. Though this should be done at the start of the financial year, it is still not too late.
Here are some ways to claim tax deductions based on your long-term financial objectives.
Agents have for years been marketing insurance plans as tax-saving instruments. However, it is wise to buy insurance policies for saving tax only when your existing cover is inadequate.
Premiums for life insurance policies covering you, spouse and dependent children are eligible for deduction up to Rs 1 lakh under Section 80C of the Income Tax Act (I-T Act). For policies starting 1 April 2012 and later, the premium has to be less than 10 per cent sum insured if the person wants to claim tax deduction.
Under Section 80D, premiums for insuring the health of self, spouse and dependent children are eligible for up to Rs 15,000 deduction in a financial year. Paying for parents' cover makes you eligible for an additional deduction of up to Rs 15,000. If at least of one the insured is above 60 (a senior citizen for tax provisions), the deduction limit in that case is Rs 20,000.
These limits can include expenses of up to Rs 5,000 on preventive health check-ups. Cash payments for health check-ups are eligible for income tax deduction but health insurance premiums paid in cash are not.
Equity can make your wealth grow faster than most investments and also lower your tax burden.
In Union Budget 2012-13, the government introduced tax incentives to encourage people to invest in shares and equity mutual funds. Under Section 80CCG of the I-T Act, first-time equity investors who buy shares worth up to Rs 50,000 during a financial year can claim 50 per cent of the investment as deduction. However, it's only for those whose gross annual income is Rs 10 lakh or less.
Stocks in BSE 100 (of the Bombay Stock Exchange) and CNX 100 (of the National Stock Exchange) indices and shares of the government's Navratna, Maharatna and Miniratna companies are eligible for the scheme, besides exchange-traded funds and mutual funds investing in the approved securities.
The investor cannot sell the securities for one year from the date of the last investment. He can do so from the second year provided the portfolio value does not fall below the amount for which the deduction was claimed or the value of the portfolio before initiating the first sale, whichever is less, for at least 270 days in a year during the lock-in period.
If you do not qualify for the RGESS, you can claim Section 80C benefits for investments in equitybased mutual funds. The lock-in period for equity-linked savings scheme, or ELSS, investments is three years. These investments do not attract capital gains tax.
Unit-linked insurance plans, or Ulips, can be used to get insurance as well as equity exposure. Ulip investments are eligible for Rs 1 lakh deduction under Section 80C. The maturity proceeds are tax-free.
You have plenty of options even if you are risk-averse and invest with the sole aim of building a fund for your sunset years.
The Employees' Provident Fund (EPF) requires contribution from both employees and employers. Your contribution is eligible for deduction within the Rs 1 lakh Section 80C limit.
You can also invest from Rs 500 to Rs 1 lakh a year in a Public Provident Fund (PPF) account. For 2012-13, the PPF interest rate is 8.8 per cent. The rate is set at the start of each financial year based on yields on 10-year government securities.
The lock-in is 15 years but you can take loans at two percentage points more than the prevailing rate from third to fifth years. Partial withdrawals are allowed from sixthyear onwards.
Five-year and 10-year National Savings Certificates (NSCs) are offering 8.6 per cent and 8.9 per cent a year, respectively. The investments are eligible for tax deduction under Section 80C, but the interest earned is taxable. The interest rates are linked to government securities of equivalent maturity, with 10-year NSCs offering half a percentage point more. You can also invest in five-year fixed deposits that qualify for the Section 80C deduction.
Senior citizens' savings:
Senior citizens (60 and above) will get 9.3 per cent return in 2012-13 under the Senior Citizens' Savings Scheme. The maturity period is five years. The interest rate is one percentage point higher than the rate on fiveyear government bonds.
One can open multiple accounts provided the total investment does not exceed Rs 15 lakh. You cannot withdraw money before maturity but the account can be closed only after one year. The investment qualifies for Section 80C benefits. The interest earned is taxable.
National Pension System:
Pension funds such as the National Pension System (NPS), unit-linked pension plans and mutual fund pension plans can also lower your tax liability. You have to contribute at least Rs 6,000 a year in the NPS account, which is eligible for deduction under Section 80CCD (the total deduction under Section 80C, 80CCC and 80CCD is Rs 1 lakh).
If the NPS contribution is made by your employer as part of your salary, you can claim a bigger deduction. A contribution of up to 10 per cent of basic and dearness allowance can be made to the NPS account in such a case along with an equal contribution from the employer.
While your contribution is included in the Rs 1 lakh limit under Sections 80C, 80CCC and 80CCD, the employer's contribution is deductible under Section 80CCE, over this limit. This benefit is available only for Tier-I (primary) NPS accounts. At maturity, at least 40 per cent NPS funds have to be used to buy annuity.
You can also claim tax deduction for several expenses, including house rent, children's tuition fees and medical expenses.
From this financial year, you do not have to worry about paying tax on interest earned on your savings accounts, provided it does not exceed the standard deduction of Rs 10,000. This deduction is available under Section 80TTA to individuals and Hindu Undivided Families.
Your house rent is allowed as deduction, but within limits. If you are salaried, a house rent allowance (HRA) should be part of your salary. The HRA exemption limit is the least of the following: a) Actual HRA received; b) 40 per cent of basic salary (50 per cent for those living in metro cities); c) Rent paid in excess of 10 per cent of basic salary.
If you do not get HRA, you can claim a deduction of up to Rs 24,000 if you and your family (spouse and minor children) do not have a house. You should also not have a self-occupied house in any other place in such a case. In the absence of HRA, the least of the following can be claimed as deduction: Rent paid in excess of 10 per cent total income, 25 per cent of total income and Rs 2,000 per month.
When you receive rent from a property, you can claim a standard deduction of 30 per cent for maintaining the house, irrespective of the amount spent. You can deduct municipal taxes from the rent while calculating your tax liability.
You can claim deduction for both interest and principal payments towards a home loan. The principal amount paid as part of equated monthly instalments (EMIs) of a self-occupied house is eligible for deduction up to Rs 1 lakh under Section 80C. The construction should be done within three years from the end of the financial year in which the loan is taken. The deduction is reversed if you sell the property within five years of purchase.
The interest component can be used to claim up to Rs 1.5 lakh deduction under Section 24B if the house is ready and in your possession. The pre-construction interest payments can be deducted in five equal instalments within the Rs 1.5 lakh limit after the house is ready. If you have rented out the house, you can claim the entire interest as deduction from the rental income.
Tuition fees for up to two children can be claimed as deduction under Section 80C within the Rs 1 lakh limit.
The deduction is only for tuition fees for full-time courses of institutions in India. Transport, development, hostel and coaching fees do not qualify.
If you have taken a loan for own higher education or that of your spouse or children, you can claim the interest paid as deduction under Section 80E of the I-T Act, without any cap.
Expenditure on treatment of taxpayer or his/her dependants for certain diseases can be claimed as deduction up to Rs 40,000 under Section 80DDB. From 2012-13, expenses on treatment of senior citizens above 60 will be deductible up to Rs 60,000. This is for treatment of specified diseases. You cannot claim this deduction if your employer or an insurance company reimburses the expense.
Under Section 80U, individuals suffering from disabilities such as blindness, hearing impairment and mental illness can claim a deduction of Rs 50,000. If the disability is severe, one can claim a deduction of Rs 1 lakh. If a taxpayer has a disabled dependant, a deduction of Rs 50,000 is allowed. If the dependant has a severe disability, the deduction allowed is Rs 1 lakh.
You can avail of deduction up to 50-100 per cent of donations made to charitable institutions under Section 80G. Cash donations beyond Rs 10,000 do not qualify for this incentive. The total deduction for donations cannot exceed 10 per cent of your gross total income. Donations to institutions engaged in scientific research or rural development qualify for deductions under Section 80GGA. Donations to recognised political parties qualify for full deduction under Section 80GGC.