|
The Taxman takes money only from those who don’t know how to keep it!
It’s that time of the year when most salaried and business people are wondering how to hide their money from the government and pay as little as possible to the taxman! In keeping with the flavour of the month, this article is about tax saving schemes that apply for individuals (in India) and the pros and cons of each scheme for the financial year 2006 to 2007 – and the opportunity to save Rs. 30,000 in your taxes (assuming you are in the 30% tax bracket).
Section 80C of the Income Tax act provides for certain types of investments which allow the tax payer to deduct these investments from the total taxable income and therefore reduce the tax payable. The maximum deduction that you can take benefit of is Rs. 100,000 (1 lakh). You can invest more that 1 lakh. but your benefit will be restricted to Rs. 1 lakh.
The list of investment options available under section 80C of the Income Tax Act (of India) are:
1. Children’s Tuition Fees
2. Housing Loan Principal Repayment
3. Life Insurance Policies Premiums
4. Employee Provident Fund - EFP
5. Public Provident Fund - PPF
6. National Saving Certificates - NSC
7. Pension Funds (by Mutual Funds and Insurance Cos)
8. Infrastructure Bonds
9. Fixed Deposits by banks
10. Equity Linked Saving Schemes - ELSS
1. Children’s Tuition Fees:
If you have children and they are going to a proper school, the tax payee is allowed to deduct the school tuition fees. There is no sub-limit ( like there was in previous years) and if you pay Rs. 1 lakh as tuition fees, then you can take full advantage of this and your tax “saving” is done!
Note that you can avail this for a maximum of 2 children only and the fees are for a regular school and for tuition only. Other fees for extra-curricular activities, uniforms etc are not to be included in this. And yes, they have to be your children, not your sister’s or brother’s! TIP: Have the school include ALL fees under tuition and give a receipt for the amount, that way you get a higher benefit under this provision.
2. Housing Loan Repayment or housing purchase:
If you have a housing loan, then the principal you pay back to the bank during the Financial Year is eligible under this heading. The tax payer must get a certificate from the bank as to the amount actually paid as principal to the bank. TIP: If you have a housing loan and the principal does not amount to 1 lakh, you may look at the option of doing a (partial or full) pre-payment of the outstanding principal to take full advantage of this provision.
Note: 1. Individuals can avail of this benefit for purchase of a house from one’s own funds, even without a housing loan and claim the tax benefit under Sec 80C. 2. The tax benefit on interest under housing loan is under a different section, NOT u/s 80C.
3. Life Insurance Policy Premiums including Pension plans
Payments made for life insurance policies taken from ANY life insurance company in India can be included under this provision.
Note: 1. This includes ALL types of life insurance policies, including the pension plans. (Which earlier had a separate tax provision but are now included in Sec 80C). 2. Some policies bundle health riders (add on benefits) with the basic life insurance: the amount paid towards the health benefit can be availed of under Sec 80D which is exclusively for Medical Insurance premiums. TIP: Make sure you have adequate life insurance cover before you go on to look at other options. (How much life insurance cover an individual should have is a topic of an article in the future).
4. Employee Provident Fund (EPF)
This provision is only for salaried employees whose companies are under the EPF Rules.
Contributions to EPF are a statutory requirement where the employer deducts a certain amount from your salary and forwards it to the EPF. You can look at this as a “Saving At Source” like your TDS (Tax At Source). The employee has the option of voluntarily increasing his/her contributions to the EPF, which will show separately as VPF on your Form 16. The amount of money deducted from your salary towards EPF will show up on your Salary slip and Form 16.
Right now, the EPF pays interest at 8.5% per annum and the interest is tax free. The rate can be revised whenever the government feels it appropriate.
5. Public Provident Fund
A PPF account can be opened by anyone at any of the State Bank of India (SBI) and other associate bank branches. It’s a good way to save for the long term future since the money is locking for 15 years after you start the account. There is a facility for partial withdrawal after 7 years. The PPF account currently pays 8% interest annually which is tax free – and the government can change the rate. The maximum amount that one can invest in a PPF account is Rs. 70,000 per year. The account can be transferred to any SBI branch in India; a useful feature if you have a transferable job.
TIPS: You can invest as little as Rs. 500 per year to keep the account active and put and surplus funds you have as and when you have them which is excellent flexibility for your. If you are a conservative investor (don’t like to take risks) and want to save for a long term future goal like your retirement, children’s education and marriage etc, then consider this option. Keep in mind that a 15 year lock-in is a long time and many things can change in your life and the tax laws which may make the 15 year lock in unattractive.
6. National Savings Certificate (NSC)
NSCs are easy to buy and keep since they are sold through all post offices in India and a popular way for many to save tax. Apart from this, they don’t have much of an advantage compared to other options. Currently, the rate is 8% per annum compounded half yearly which essentially gives you 8.16% per year and this income is taxable. The lock is 6 years and one has to go back or send the certificates to the post office you bought them from to get your money back.
TIPS: If you buy NSC, then the interest you earn in one year is considered to have been reinvested the next year and you can claim that amount in the subsequent 5 years tax saving amount. E.g.: If you invest Rs. 10,000 this year, you earn, Rs. 816 and you can claim this amount in next year’s Sec 80C.
7. Pension Funds
Several folks may have taken pension plans which were sold like potatoes and tomatoes by life insurance companies till 2 years back when Pension Funds has a separate Sec 80CCC for tax saving. This tax saving section does not exist any more and the money invested in these polices can be claimed for in Sec 80C. There are pension funds that are offered by Franklin Templeton and UTI Mutual Funds also. Rules and costs vary from company to company so do check them in detail before deciding.
TIP: If you already have a pension policy and are investing Rs. 10,000 per year in it, don’t expect to have a proper pension when you are 58 years old from this investment. It will be a very small amount compared to what you will need then. It’s fine for tax saving but not for retirement planning.
8. Infrastructure Bonds
These are currently not available and only ICICI and IDBI used to offer them.
IF they do become available, they are likely to offer an interest rate around 7-8% per year, a lock in of 3-5 years and the interest is taxable.
9. Fixed Deposits (FDs) by Banks
If you like FDs and are looking at 3 and 5 year FDs, you might as well also take the tax advantage they now offer. Almost all banks offer these tax saving FDs now and just check with your local bank for further details. Interest rates should be around 8-9% year and the income from them will be taxable.
10. Equity Linked Saving Schemes (ELSS) by Mutual Funds
ELSS schemes invest in the stock market and by that nature cannot and do not guarantee any fixed rate of return on the money invested in them. They have a lock-in of 3 years form the date of investment and what you get after 3 years will entirely depend on 2 things: 1. How the Indian stock market is after 3 years and 2. How good (or bad) the mutual fund is at its job. It is possible that one may actually get less than what one invested if the markets do well.
Keep in mind that ELSS have, on an average, returned 20-30% per year every year for the last 5 years and that’s an excellent rate of return compared to other investments. A realistic expectation would be to earn around 15% per year for the next few years. Further, the profit generated is 100% tax free (as per current law). There are over 20 ELSS schemes available in the market and better performing ones are the HDFC TaxSaver and SBI Magnum Taxgain.
Issues to consider:
ALL tax saving options mentioned above under Sec 80C will generate the SAME tax benefit. Therefore, it is important to consider which amongst those available suits you best in terms of returns, risk profile, lock in periods, etc. You may invest all the Rs. 1 lakh that Sec 80C allows in just one investment or you could do this over any combination you choose – the limits which used to be there for each option earlier have been removed allowing for much greater flexibility. Ensure that you make all your payments by cheque and you have proper receipts for the same – just in case the Taxman asks for proof! Your views on what is halal and haram in for financial investing may also be kept in mind while selecting your investments.
Apart from Section 80C, there are several other sections of the Income Tax act that an individual can avail off for tax saving. However, the sections usually cannot be taken advantage of by ALL members of the public and one should consult a good tax-cum-investment advisor for further details.
A Note on Shariah
Clearly there is no problem with Children’s tuition fees and Shariah. All the options from 2 to 9 have the issue of Interest in them and one should make one’s own decision about the concept and equivalence of Riba and Interest. It is possible that Life Insurance and Pension schemes can be availed off that have absolutely no Interest in them, but there are conflicting opinions on the issue of the compatibility of life insurance and Shariah. On ELSS, these have the advantage of not being Interest based, but the mutual fund company has the final decision on which companies in the stock market to invest in: therefore, one’s money may go to bank and other such stocks that are considered to be non-Shariah compliant.
(The writer is not an expert in Islamic Finance and is not responsible for the outcome of any decisions based on this article. This article is for information purposes only and should not be seen to recommend or advise one particular type of investment. The writer is a financial educator, investment advisor and stock broker based in Bangalore and can be reached at . ivfinance@gmail.com)
|
|
