Half Year On, Investments You Can Do Now To Save Tax!

Time to read: 9 mins | November 3, 2017

When it comes to tax planning and/or tax saving, many individuals tend to wait until the eleventh hour. As the financial year draws closer, most tax payers feel the heat, and then realise that, yes, now we have to do some tax saving investments.

However, such an approach is flawed, as often, imprudent investment decisions for tax saving are taken. Most tax–saving decisions are incongruent to important factors such as, age, income, risk appetite, investment objectives, financial goals, and investment horizon.

Ideally, try and compliment tax planning with investment planning holistically, considering the above facets, otherwise it could prove ineffective. And this can done be if you, the tax payer and investor, engage in tax planning well in advance.

We are already halfway mark this financial year, and it’s time to save tax by investing wisely. And before investing, assess whether you are a risk-taker (aggressive), or risk-averse (conservative).

Risk takers are classified as:

• Those who are young;
• Earn a high income (during the accumulation phase of life cycle);
• Own or are in the process of owning considerable assets;
• Have limited liabilities and do not have many dependent to support;
• Have financial goals with a time-horizon far ahead; and/or
• Are willing to take high risks

On the other hand, risk averse is one who is:

• In the conservation and protection phase of life (on the verge of retirement, or already retired);
• Do not have a regular source of income;
• Has not created adequate assets;
• Has sufficient asset, but now has a conservative approach;
• Has many dependant family members to support;
• Has many debt obligations;
• Has financial goals to fulfil which have a closer time-horizon; and/or
• Unwilling to take risk or whose risk appetite has diminished

Weighing such factors will help you select appropriate tax saving investment avenues eligible for a deduction under Section 80C of the Income-Tax Act, 1961 from your Gross Total Income (GTI).

The list of investment avenues for deduction under Section 80C consists of both market-linked and assured-return investment instruments such as:

• Life Insurance
• Public Provident Fund (PPF)
• Employees’ Provident Fund (EPF)
• Sukanya Samriddhi Account
• National Saving Certificate (NSC)
• 5-Year fixed deposits with banks, Post Office
• Senior Citizens Savings Scheme (SCSS)
• National Pension System (NPS)
• Unit-Linked Insurance Plans (ULIPs)
• Equity Linked Savings Schemes (ELSS)
• Pension Plans

Besides, the tuition fees paid for children’s education (maximum 2 children) and principal repayment on Housing Loan are also eligible for a deduction under Section 80C.

The market-linked investment instruments are best suited for risk-takers, while tax saving instruments offering assured returns, where risk of capital erosion is almost zero, are best for risk-averse investors.

Tax Saving with Market-Linked Instruments

• Equity Linked Savings Schemes (ELSS):

  These mutual fund schemes are diversified equity funds providing tax saving benefits, popularly known as Equity Linked Savings Scheme or ELSS.

  A distinguishing feature about ELSS is that they are subject to a compulsory lock-in period of three years. The minimum application amount for most of these is as little as Rs 500, with no upper limit.

  With ELSS, you can make either a lump sum investments or invest via Systematic Investment Plan (SIP) – a mode of investing in mutual funds. In case of the latter, each instalment has a 3-year lock-in period.

  And if you ask, who can invest in ELSS? Individuals and HUFs can invest in ELSS.

  It is noteworthy that, in the long-term to create wealth, tax-saving funds have the potential to earn luring inflation-adjusted returns. You may say – “But, there is risk involved”.

  Well, no doubt about that; but in order to buffer the shocks of volatility in the equity markets, you can adopt the SIP route of investing which will provide you the advantage of “compounding” along with “rupee-cost averaging”.

  While considering an ELSS mutual fund for your market-linked tax-saving portfolio, give importance to those equity linked savings schemes that have a consistent performance track record and follow robust investment processes & systems at the fund house.

  Deduction: The amount you invest is eligible for deduction under Section 80C subject to a maximum of Rs 1.50 lakh p.a.

  Besides, if you receive any long-term gains at the time of exit——any time after the end of the lock-in period——as per current tax laws, you will not have to pay any Long Term Capital Gains (LTCG) Tax.

• Pension Funds:

  Pension funds (or retirement funds) offered by mutual funds can not only be used for tax planning, but these are also an effective instrument to plan a peaceful retired life.

  Most pension funds are hybrid in nature. At the vesting age, you can opt for regular pension by systematically redeeming the units. They are suited if you want to get two birds with one stone, namely tax planning and retirement planning.

  Some Pension Funds may be unable to maximise wealth as a dominant portion of the assets is skewed towards debt. Also, debt-oriented schemes aren’t very tax efficient due to liability of LTCG tax.

  Deduction: The amount invested in pension funds qualifies for deduction under Section 80C subject to a maximum limit of Rs 1.50 lakh p.a.

• Unit-linked Insurance Plans:

  These are insurance-cum-investment plans that enable you to invest in equity and/or debt instruments, depending on what suits you as per your age, income, risk profile, and financial goals. All you simply need to do is, select the allocation option as provided by the insurance company offering such a plan. Generally, they are classified as “aggressive” (which invests in equity), “moderate or balanced” (which invests in debt as well as equity), and “conservative” (which invests purely in debt instruments).

  Hence, apart from the insurance cover (which is usually 10 times your annual premium) offered under these plans, the returns which you would get are completely market-linked as your premium amount (after accounting for allocation and other charges) is invested in equity and debt securities.

  And to track such plans, the NAV is declared on a regular basis. These policies have a minimum 5-year lock-in period, and also have a minimum premium paying term. The overall term of the policy would vary from product to product.

  In case of any eventuality, the beneficiaries would receive the sum assured or fund value, whichever is higher.

  Deduction: The premium paid for ULIPs is eligible for a deduction under Section 80C of the Income-Tax Act, 1961 subject to the maximum amount of Rs 1.50 lakh p.a.

  Moreover, at maturity the amount which you or your beneficiary receives is tax free (exempt) as per the provisions of Section 10(10D) of the Income Tax Act subject to conditions specified.

• National Pension System:

  The National Pension System, earlier set up for government employees only, was introduced on May 1, 2009, for people in the unorganised (private) sector, as the finance ministry felt the need for higher participation in the pension contribution (through this product).

  Any individual between the ages of 18 - 65 years and belongs to the unorganised sector (i.e. private sector) is eligible to invest in the NPS. The contributions are voluntary and you can invest in any of the two under-mentioned accounts:

  • Tier-I Account –

    This account is a mandatory account and the minimum investment amount is Rs 500 per contribution and Rs 1,000 per year, plus the mandatory one contribution per year. If you don’t contribute the minimum amount required, the account will be frozen. And to unfreeze the account, you need to contribute the total sum of minimum contributions for the freeze period and a penalty of Rs 100 per year.

    This account is a mandatory account and the minimum investment amount is Rs 500 per contribution and Rs 1,000 per year, plus the mandatory one contribution per year. If you don’t contribute the minimum amount required, the account will be frozen. And to unfreeze the account, you need to contribute the total sum of minimum contributions for the freeze period and a penalty of Rs 100 per year.

  • Tier-II Account

    This account is a voluntary savings account. To have Tier-II account, you first need to have a Tier-I account.

    The tier-II account can be opened with minimum contribution is Rs 1,000. In August last year, the regulator waived off the criteria of minimum contribution of Rs 250 as well as the minimum balance of Rs 2,000 at the end of the financial year.
    From the Tier-II account, you are permitted to withdraw as and when you wish to. So, it operates like your saving bank account. However, since this account does not have a lock-in period for funds to be invested, it is unavailable for a tax benefit. Even if you hold both the accounts under NPS, only the Tier-I account will be eligible for tax benefits.
    While investing money in NPS, you have two investment choices, i.e. “Active” or “Auto” choice.

    Under the “Active” choice asset class, your money will be invested in various asset classes termed as ECG viz. E (Equity), C (Credit risk bearing fixed income instruments other than Government Securities) and G (Central Government and State Government bonds); where you will have an option to decide your asset allocation into these asset classes.

    In case of Auto Choice, which is the lifecycle fund, money will be invested automatically based on the age profile of the subscriber. And if you don’t signify the choice while investing, the Auto Choice will be the default option.

    To attract more investments from the private sector, in November last year PFRDA introduced two new investment options. The new investment options are called: 'Aggressive Life Cycle Fund' and 'Conservative Life Cycle Fund'. In the former, you can invest up to 75% in equities; while in the latter, 25% will be parked in equities. The purpose of introducing these additional investment options was to attract young investors, who can afford to take the risk and on the other hand for the risk-averse investors.

    Non-Resident Indians (NRIs) also can now actively participate in NPS.

    Exit option for NPS:

    At the age of 60, you can exit NPS. However, you are required to invest a minimum 40% of the fund value to purchase a life annuity. And the remaining 60% of the money can be withdrawn in lump sum or in a phased manner upto your age of 70 years. As per current tax laws, 40% of the money withdrawn on maturity is taxable. However, if the corpus is less than Rs 2 lakh, a withdrawal of the full amount is permitted.

    For exit from NPS before the age of 60, compulsory annuity of minimum 80% of fund value need to be purchased. The remaining 20% of the money can be withdrawn. But if the corpus is less than Rs 1 lakh, complete withdrawal is permitted.

    At the time of death of the subscriber, the entire accumulated corpus (i.e. 100%) will be paid to the nominee or legal heir. There will not be any purchase of annuity and the entire proceeds received will be tax free in the hands of the nominee/legal heir.

    Deduction: Those who are salaried employees may claim deduction under Section 80CCD(1) upto Rs 1.5 lakh for their own contributions towards NPS account (As per Section 80CCE, the aggregate amount of deduction under Sections 80C, 80CCC and 80CCD(1) cannot exceed Rs 1.5 Lakh).

    Additionally, a deduction can be claimed under Section 80CCD(2), if there is any contribution made by the employer but only upto 10% of their salary (Basic Salary + Dearness Allowance). It is noteworthy that the deduction under Section 80CCD(2) can be claimed over and above the permissible deductions under Section 80C.

    If an individual contributes from his income alone towards NPS, it will be considered within the limits of Rs 1.5 lakh p.a. under Section 80CCE (As per Section 80CCE, the aggregate amount of deduction under Section 80C, 80CCC and 80CCD(1) cannot exceed Rs 1.5 Lakh).

    It is only if the employer contributes to employee for NPS – Section 80 CCD(2) is applicable.

    So to avail this extra tax exemption limit, salaried employees please convince employers to start contributing to NPS.

    Those who are self-employed can avail deduction under Section 80CCD(1) upto 10% of their Gross Total Income (which is comprised of income computed under different heads before reducing it by all other deductions available under Section 80). In addition to deductions under Section 80CCD(1), self-employed people are also entitled to deductions under Section 80C for other instruments eligible therein.

    In the Union Budget 2015-16 Government inserted a new sub section 80CCD(1B) in section 80CCD which provides additional deduction of Rs 50,000 for contribution made by individual assessee under the NPS (On this additional contribution, the celling of Rs 1.5 lakh under section 80CCE is not applicable).

   

Tax Saving with “assured return” instruments

For those of you who are risk averse, the tax saving instruments providing assured returns are…

• 5-year Tax Saving Bank Fixed Deposit and 5-Year POTD:

  The 5-Year tax saving bank fixed deposit available with Axis Bank is eligible for a deduction under Section 80C. It comes with a lock in period of 5 years, which in fact is good to compound wealth. The minimum amount that you can invest is Rs 100 with an upper limit of Rs 1.50 lakh in a financial year. The rate of interest varies across banks.The interest is subject to TDS; but again, you can submit a declaration in Form 15-G (for general or non-senior citizens) or Form 15-H (for senior citizens) as applicable for not deducting tax at source.

  Similarly, 5-Year Post Office Time Deposits (POTDs) also offer you a tax benefit under Section 80C. You can open the account either in single name, or jointly, or even in the name of a minor (through a guardian) who has attained the age of 10.

  The minimum investment amount is Rs 200, and there is no upper limit. However, similar to other tax saving instruments, the investment amount over Rs 1.50 lakh will not be eligible for any tax benefit.

  A 5-Yr POTD earns a rate of interest of 7.6% p.a., (calculated quarterly) but paid annually. As far as premature withdrawals are concerned, they are permitted only after one year from the date of deposit and the interest on such deposits shall be calculated at the rate, which shall be 1% less than the rate specified for a period of 5-Year deposit.

  Deduction: Your investment in both these schemes is eligible for a deduction of upto Rs 1.50 lakh p.a. under Section 80C. Remember though, the interest earned on your investments is taxable.

• Non-Unit Linked Life Insurance Plans:

  Life Insurance plans can be broadly classified as “pure term life insurance plans” and “investment-cum-life insurance plans”.

  Pure term life insurance plans are authentic indemnification plans, as they cater only to the need of only protection (the death benefit) and not investment (maturity benefits). Hence, such plans offer a high life insurance coverage at low premiums. Generally, pure term life insurance plans come with a policy term of 10, 15, 20, 25, or 30 years.

  Investment-cum-life insurance plans on the other hand, as the name suggests, offer you an investment benefit (maturity benefit) along with insurance (death benefit). The premiums for such plans are higher vis-à-vis the death benefit. Endowment plans, money-back plans, are some example of non-unit linked life insurance plans.

  Deduction: The premiums paid for insurance plans are eligible for a tax deduction under Section 80C subject to a maximum limit of Rs 1.50 lakh p.a.

  Moreover, at maturity the amount which you or your beneficiary would receive, is exempt (tax free) as per the provisions of Section 10(10D) of the Income Tax Act subject to the conditions specified.

• Public Provident Fund:

  The Public Provident Fund (PPF) is a scheme of the Central Government, framed under the PPF Act of 1968. Briefly, PPF is a Government-backed, long-term small savings scheme which was initiated to provide retirement security to self-employed individuals and workers in the unorganized sector.

  So if you are keen on a safe corpus, earning a decent tax-free rate of return, enjoying tax benefit; then PPF is for you. The contributions (i.e. investments) made to the PPF account, will earn a tax-free interest and the maturity proceeds are exempt from income-tax. But while you invest, have a long-term investment horizon; it can help you in retirement planning.

  The main features of a PPF account are:

  The interest rate is currently 7.8% p.a. as on July 1, 2017. This is subject to change.

  Eligibility	Applicant needs to be a Resident Indian
  Entry Age	No age is specified (Minor is allowed through guardian)
  Interest rate	7.80% p.a. compounded annually*
  Tenure	15 financial years (plus the first year of investment) On completion of 15 years, the account can be extended in a block of 5 years
  Minimum Investment	Rs 500 p.a.
  Maximum Investment	Rs 1,50,000 p.a. (A maximum of 12 deposits allowed in a financial year)
  Tax Benefit	Up to Rs 1,50,000 under Section 80C; Interest earned is exempt from tax and so are the maturity proceeds
  Can be opened at	Any Post Office and some authorized branches of Banks
  Who cannot invest	Hindu Undivided Family (HUF); Non-resident Indians (NRIs); and Person of Foreign Origin
  Mode of Payment	Cash / Crossed Cheque / Demand Draft / Pay Order / Online Transfer in favour of the Accounts Officer
  Nomination	Nomination facility is available

  Keep in mind, you need to be disciplined to make the most of your PPF investment, and also meet your liquidity needs elsewhere; because under this investment avenue your money is blocked for a good 15 years.

  PPF offers loans against the account which can also help you during occasions such as a wedding in the family, higher education of your children, etc..

• National Saving Certificate (NSC):

  The NSC is a scheme floated by the Government of India, and one can invest in this through his/her nearest post office, as the scheme is available only with India Post. The certificates can be made in your own name, jointly by two adults, or even by a minor (through the guardian), and has a tenure of 5 years. Earlier, a 10 year NSC was also available, but vide a notification by the Minister of Finance on December 1, 2015, the postal department stopped issuing certificates for this tenure.

  The 5-year NSC currently offers a 7.8% rate of interest compounded annually. As is the case for all Small Saving Schemes (SSS), the rate of interest of NSC is reset every three months based on the G-Sec yields of the previous quarter. The interest income accrues annually and is reinvested in the scheme till maturity or until the date of premature withdrawals.

  Premature withdrawals are permitted only in specific circumstances, such as death of the holder.

  Deduction: Investment in NSC is eligible for a deduction of upto Rs 1.50 lakh p.a. under Section 80C. Furthermore, the accrued interest which is deemed to be reinvested in a financial year qualifies for a deduction under Section 80C in the respective financial year.

  However, the interest income is chargeable to tax in the year in which it accrues. But, in case if you have no other income apart from interest income, then in order to avoid Tax Deduction at Source (TDS), you can submit a declaration in Form 15-G (for general or non-senior citizens) or Form 15-H (for senior citizens) as applicable.

• Senior Citizen Savings Scheme (SCSS) Account:

  Well, the SCSS is an effort made by the Government of India for the empowerment and financial security of senior citizens. So, if you are 60 years and above, you are eligible to invest in SCSS. Moreover, if you are 55 years and have retired under a voluntary retirement scheme, too you are eligible to enjoy the benefits of this scheme.

  In order to avail the benefits of this scheme, you are required to open a SCSS account (either in a single name, or jointly along with your spouse) at your nearest post office or any nationalised bank. You can do a one-time deposit under this scheme subject to the minimum investment amount of Rs 1,000 and a maximum of Rs 15 lakh. The maturity period provided for SCSS is 5 years and the interest is payable on a quarterly basis (i.e. on March 31, June 30, September 30 and December 31) every year from the date of deposit.

  Currently, the SCSS offer an interest @ 8.40% p.a compounded quarterly and is reset every quarter based on previous three month G-sec yield.

  After maturity, you can extend the SCSS account for a period of 3 years, but within 1 year from the maturity, by giving application in prescribed format. In case of accounts which are extended after maturity, the accounts can be closed any time after the expiry of one year of extension without any deduction.

  Premature withdrawals are permitted only after one year from the date of opening the account. If you withdraw between 1 and 2 years, 1.5% of the initial amount invested will be deducted. And in case if you withdraw after 2 years, 1.0% of the balance amount is deducted.

  Deduction: Your investments upto Rs 1.50 lakh p.a. in SCSS are eligible for a deduction under Section 80C.

  However, the interest you earned is subject to a tax deduction at source (TDS). And in case if you do not earn an income apart from the interest income, then in order to avoid TDS, you can submit a declaration in Form 15-G (for general or non-senior citizens) or Form 15-H (for senior citizens) as applicable.

• Sukanya Samriddhi Account:

  Launched in January 2015, theSukanya Samriddhi Account allows you to save and invest for your daughter’s education and marriage . As parents or a legal guardian, you can open an account in the name of the girl child from her birth upto her age of 10. After she is 18 years, she can even operate the account herself.

  SSA can be opened for a maximum of two girl children following the KYC norms. The minimum deposit is Rs 1,000 while a maximum of Rs 1.50 lakh in a financial year. Currently, the rate of interest for SSA is 8.3% compounded annually. Like other small saving schemes, this interest rate is reset every quarter based on previous three month G-sec yield.

  Deposits in SSA can be made till the completion of 14 years, from the date of opening of the account. 50% of the balance lying in the account as at the end of previous financial year can be withdrawn, when the girl child turns 18 for the purpose of education or marriage.

  The account shall mature on completion of 21 years from the date of opening of the account, provided that where the marriage of the account holder takes place before completion of such period of 21 years, the operation of the account shall not be permitted beyond the date of her marriage.

  Deduction: Investments/deposits in SSA are eligible for a deduction under Section 80C of the Income-Tax Act, subject to maximum of Rs 1.5 lakh p.a.

Besides the above mentioned tax-saving methods, the tuition fees that you pay to any university, college, school or other educational institution situated within India for your children’s education is also eligible for deduction under Section 80C. However, the fees paid towards any coaching centre or private tuition may not be eligible. The deduction is limited to Rs 1.50 lakh for a maximum of 2 children. If there are four children, then between the husband and wife, both can enjoy a separate limit of two children each, whereby they can separately claim deduction (up to Rs 1.50 lakh) for 2 children each, subject to the amount they have actually paid.

Similarly, “repayment of principal amount” on your home loan, is eligible for a deduction up to a sum of Rs 1.50 lakh p.a. under Section 80C. And this benefit is available irrespective, whether you stay in the property (Self Occupied Property - SOP), or lease it out on rent (Let Out Property LOP). The interest you pay on the housing loan is eligible for a deduction as per the provisions of Section 24(b) of the Income-Tax Act, 1961.

Benjamin Franklin, one of the Founding Fathers of the United States and a renowned polymath, author, political theorist once aptly said, “In this world nothing can be said to be certain, except death and taxes.”

So, remember to save tax legitimately; because every penny is a penny earned!
Wish you all Happy Tax Planning!

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing. Axis bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.