Tax Saving options
India’s taxation makes salaried people feel as if they spend on an extra family member. This woe increases if they are at 20% or above tax slab. This blog is about the various tax saving options available to an individual.
A. Tax Saving options under Income Tax Section 80 C
- ELSS Funds
Equity-linked savings scheme (ELSS) is the most attractive option under 80C. These funds have the least lock-in period of 3 years among all tax saving instruments. Apart from this ELSS falls under EEE taxation status. EEE means investment up to ₹ 1, 50,000 is not taxable, the returns from ELSS funds are not taxable and the entire sum can be withdrawn without attracting any income tax. If invested for long-term, ELSS funds can provide 12 – 15 % annualized returns.
Under EPF (Employee Provident Fund) employer and employee both contribute 12% each of employee’s basic salary. Out of this, full 12% of employee’s contribution and 3.67% of Employer’s contribution goes towards EPF. The remaining 8.33% of Employer’s contribution goes towards EPS (Employee Pension Scheme). The EPS contribution has a maximum limit of 1250 Rs.
If you would like to increase your EPF contribution you can increase up to 100% of your basic pay through VPF. Similar to ELSS this also falls under EEE taxation status. However, it has a lock-in till your retirement with some relaxations available based on employee’s needs and eligibility. Currently (as of 5th Oct 2017), the interest rate of EPF is 8.65% per annum.
PPF is another debt based savings instrument similar to EPF with certain changes as it doesn’t depend on your employment. Similar to EPF this also falls under EEE taxation status
Only one PPF account can be opened per individual. Minimum ₹500 should be deposited every year failing which account will be deactivated and the user should pay a fee of ₹50 to reactivate it. Maximum deposit that can be made in a year is ₹1, 50,000. A person can make only 12 deposits per year. There is a lock-in period of 15 years before which account cannot be closed. This account can be opened in any nationalized banks and post offices.
Government fixes the interest rate for each quarter and currently (as of 5th Oct 2017), PPF provides 7.8% interest p.a. compounded quarterly.
- Sukanya Samriddhi Scheme:
Sukanya samriddhi scheme can be used by parents who have a girl child of age less than 10 years. This is very similar to PPF except for the duration where contributions should be made for 14 years and withdrawal can be done only when the child attains 21 years. Partial withdrawals can also be made at 18 years. The interest rate for this scheme is normally 0.5% above PPF interest rate.
- Tax saving fixed deposits
Tax saving fixed deposits offered by banks and post offices are similar to normal fixed deposits except they have a lock-in period of 5 years and are tax-exempt under section 80C. The returns though guaranteed are low comparing to EPF and PPF. Also, they are under ETE tax status where an investor needs to pay income tax on interest earned on the fixed deposit.
- National savings certificate (NSC)
NSC is offered by Govt. of India through post offices. They offer similar interest rates to that of PPF. There is no maximum limit for purchase of certificates but you can’t get Tax exemption above your 80C limit. Interests on NSC are taxable as it falls under ETE tax regime. Since Interest is not paid and reinvested it qualifies for fresh investment which makes it virtually tax-free except for last year. NSCs are issued in the denomination of ₹100, ₹500, ₹1000, ₹5000, and ₹10000.
- Life insurance Premiums/ULIPs
Any premium paid towards life insurance irrespective of conventional policies/ULIPs qualifies for tax exemption under section 80C. However, tax exemption is valid under 10(10D) (during withdrawal) only when annual premium is less than 10% of sum assured.
- National pension Scheme
NPS invests in various sub-funds across all asset classes (Equity, Govt bonds, and private bonds) where investor’s money is invested as per allocation provided by the investor.
In NPS an employee’s contribution is eligible for a tax deduction of up to 10 percent of his basic salary under Section 80CCD(1) within the overall ceiling of Rs 1.5 lakh under Section 80CCE. The employer’s contribution is also eligible for a tax deduction of up to 10 percent of employee’s basic salary under Section 80CCC(2) over and above the limit of R1.5 lakh provided under Section 80CCE. Self-employed individuals are eligible for a tax deduction of up to 10 percent of gross income under Section 80CCD(1) within the overall ceiling of R1.5 lakh under Section 80CCE. It also qualifies for additional ₹50,000 tax exemption under section 80CCD apart from regular 80C limits.
NPS matures at retirement, i.e. at the age of 60 years. On maturity one needs to buy an annuity for at least 40% of the corpus which is taxable. Out of remaining 60%, 40% can be withdrawn tax-free and remaining 20% will attract tax as per your income tax slab at that time. Hence for NPS, it’s more a tax deferral than tax saving.
- Tuition Fees
Tuition fees paid for 2 children will qualify for tax exemption under the 80C limit. This can be for any school or college where the course is full-time.
- Registration Fees/ Home Loan principal
Principal repayments on home loan are eligible for tax exemption under 80C limits. This exemption is also applicable on stamp duty paid, registration fees and transfer expenses etc.
Since all these 10 exemptions fall under 80C maximum combined tax benefit that could be availed under all these exemptions is ₹1, 50,000 per year.
B. Other Exemptions
- HRA – House rent allowance
If your salary has an HRA component and you live in rented accommodation you are eligible to claim this.
The least of the following three will be taken to exempt from tax:
- HRA received from employer
- Actual rent paid minus 10% of salary
- 40% of basic salary for those living in non-metro cities
- 50% of basic salary for those living in metro cities
Anything excess received as HRA from the above will be added to your taxable salary.
Also, you can claim tax exemption under section 80GG if your employer doesn’t provide HRA. However, the least of the following three will be taken to exempt from tax:
- Rent paid in excess of 10% of total adjusted income
- 25% of adjusted total income
- 5000 rupees per month.
- Tax deduction on home loan Interest
Homeowners can claim tax exemption up to ₹2, 00,000 per annum if the house is self-occupied, vacant or rented out. However, tax exemption cannot be claimed if the property is under construction. Interest paid during construction period can be claimed in 5 installments after construction is complete.
- Medical insurance premium
An Individual can claim income tax exemption up to ₹25,000 under section 80 D for his contribution towards medical insurance premium for self, spouse, and dependent children. If the individual or spouse is above 60 years then the exemption is ₹30,000. An additional deduction of ₹25,000 is available for medical insurance premium paid for parents if they are less than 60 years. If they are above 60 years old then the exemption is ₹30,000. For uninsured super senior citizens above 80 years, any medical expenses up to ₹30,000 are exempted.
- Education loan interest
An individual can claim tax exemption under section 80E on interest paid for education loan taken on behalf of self, spouse or children from a qualified bank for any course pursued after the senior secondary examination. Please note that the principal paid on education loan doesn’t qualify for tax exemption.
C. Salary Restructuring
Employees can restructure their salaries to minimise the tax outgo. Here is a list of allowances that are exempted from tax.
- Medical reimbursement
An exemption of ₹15,000 per annum is available on submitting actual bills on medical expenses incurred. Medical expense bill for spouse, children and dependent parents are eligible to claim this amount.
- Mobile/ Telephone Reimbursement
Mobile reimbursement is paid to employees for use of mobile phones for official purpose. The reimbursement amount can be logically set by the employer based on employees’ profile.
- Food coupons/ meals pass
Employees are eligible up to ₹50 per meal and can utilize for 2 meals per day. So ideally ₹100 per day on food coupons is tax exempted.
- Leave travel allowance
Employees are eligible to claim LTA if it’s part of their salary for their travel within India. The exemption is allowed for only two travels within a block of four years. The current block is between 2014-2017. If an individual doesn’t utilize in a block it’s carried over to next block. Here are the eligibility criteria to claim tax exemption under LTA.
Travel by air– Economic airfare by the shortest route or amount spent will be exempted depending on whichever is lesser.
Travel by rail– A.C. first class fare by the shortest route or the amount spent on travel will be exempted depending on whichever is lesser.
Travel by other modes of transport – If the destination is not connected by air or rail, an amount equivalent to first-class, deluxe, or AC first-class fare, whichever is lower, can be claimed for exemption under LTA.
- Conveyance Allowance
Conveyance allowance up to ₹1600 per month is tax exempted. This allowance is paid for commute expense between home and office.
- Children education allowance
Education allowance of ₹100 is exempted from tax per month per child for up to 2 children.
- Children hostel allowance
Hostel allowance of ₹300 is exempted from tax per month per child for up to 2 children. This is paid in order to meet child’s hostel expenses.
Hope this article is useful to understand and reduce your tax outgo.
Start Investing in ELSS (Tax saving mutual funds) on WealthTrust App.
New to Mutual Funds? Learn more about basics of mutual funds here.