Plan your tax before you invest
An email from his HR department reminded Sandeep that the last date for submission of investment proof is 20th December in his organisation. Sandeep working as a manager in a private firm submitted a declaration in the beginning of the financial year that he would invest Rs. 1.50 lakh in various tax saving schemes during the financial year but then never followed it. Like Sandeep, most of salaried employees submit an investment declaration to their respective employers at the beginning of the financial year stating their potential investments in tax saving schemes. HR department calculates tax on the balance income after adjusting the investment amount based on the declaration and deducts tax on monthly basis from the employee’s salary. Later, if employee doesn’t make the investment as stated in the declaration form, employer will deduct balance TDS in lump-sum before the end of financial year. Employees who invest in tax saving schemes at the last moment without any planning are trapped in wrong products most of the times. List of tax saving investment schemes is very long but all schemes are not alike. Some investment schemes have a longer maturity period and returns earned on most of other schemes are taxable. Some schemes do give you tax benefit but have limited scope of generating desired returns. Therefore, planning is important before you lock your money in a tax saving scheme.
Combine your Income from various sources
As per law income tax is calculated on income earned from various sources during a financial year. However your HR department calculates tax only on your salary or on any additional income reported by you. If any income is ignored while calculating TDS, then you will have to pay balance tax along with applicable interest before filing your income tax return. Returns on investment, rental income from house property, capital gain, gift received whether in cash or kind from someone other than the relatives as defined in income tax act, prize from a TV show etc. comes under the category of taxable income. Also U/s 64 of IT act there is provision for clubbing of income. For instance, if any investment is made in the name of minor child, interest earned over Rs. 1500 in a financial year will be added to the income of the higher earning parent and will be taxed along with other income of parent. If husband makes some investment in the name of his wife, then interest earned on that investment will be added to the husband’s income and he has to pay tax on it. Even if husband pays money to buy a house in the name of his wife, any income received from it in the form of rent or capital gain will be added to the income of husband. Hence, it is important to combine income from all sources before calculating tax.
Invest within the limit
Most of the time agent approaching you to sell some tax saving schemes, tells you the maximum investment limit for claiming deduction under the respective section of income tax as nothing has been invested till date. Since combined investment within the limit will only qualify for deduction, hence it is important to consider the existing investment before making any fresh investment in such schemes.
Investment Schemes
Deduction under section 80C is limited to Rs. 1.5 lakh for current financial year. Your investment in Employee Provident Fund, children’s tuition fees and repayment of principal amount of home loan is also covered U/s 80C of IT-act. Only the balance amount should be invested in the eligible schemes.
Health Insurance
Premium for health insurance policy qualifies for claiming deduction U/s 80D of IT-act. The prescribed limit for deduction is Rs 15,000 for the general category and Rs 20,000 for senior citizens. You can claim an additional deduction of Rs 15,000 if you pay premium for health insurance policy of your parents. If one or both of your parents are above 60 years then you can claim deduction up to Rs 20,000 towards the premium paid on their health insurance policy. Expanses up to Rs 5000 towards preventive health check-up can also be claimed within the prescribed limit.
Interest on Home Loans
Interest paid on home loan can be deducted from gross total income, under section 24b of IT-act. If it’s a self-occupied house, then the limit for deduction is Rs 2 lakh. However, if the house is given on rent, then deduction can be claimed without any upper limit. The deduction toward interest payment can be claimed only from the year in which house is fully constructed.
Other options
The total interest paid on education loan can be claimed under section 80 E and amount of donations can be claimed under Section 80 G of IT act. There is separate limit for claiming deduction for individuals who are disabled or have disabled dependents U/s 80U and 80DD of IT-act respectively.
Where to invest
Before selecting a scheme, it is important to ensure that the scheme is suitable to meet your financial goals along with tax saving. The choice of investment scheme can be determined mainly by the factors like objective of your investment, risk appetite and time horizon. List of such schemes those qualify for claiming deduction u/s 80C is quite long but two plans are worth mentioning. One is Equity Linked Savings Scheme and another one is Public Provident Fund or PPF. Returns are not guaranteed in ELSS but they have potential to outperform returns of other tax saving schemes. According to prevailing income tax law long term capital gains from equity mutual funds are exempted from tax. Units under ELSS can be redeemed any time after an initial lock-in period of three years from the date of investment. PPF account has to be maintained for minimum 15 years. A minimum of Rs 500 and maximum of Rs 1.50 lakh can be invested in PPF during one financial year. PPF offers fixed rate of interest as declared by government time to time. For current financial year, the interest rate is fixed as 8.70%. Interest earned from investment in PPF is tax free.
Investment in insurance policies should be avoided. Only term insurance plans best serve the objective of insurance. Though premium paid toward life insurance plans qualify for deduction yet your money gets stuck for long term and returns are generally poor. It is important to plan properly and invest wisely in alignment with your financial goals. Objective should not only be the tax saving by investing in such schemes but also to create wealth in long term.
