Why Tax Planning?
Tax planning is imperative because it helps you to smartly minimise the amount of income tax payable and hence have more savings. These savings can be invested further for future financial security. When each financial year comes to a close, there is a rush to find ways to minimise tax incidence for the year through approved investment options. And as action is being taken at the last minute, you might miss out on some opportunities and end up paying a higher tax than you should.
Various options for tax planning in India
Tax planning can be done by simply investing a portion of your total investment portfolio in some securities for which the government has provided tax benefits. Here is a list of available tax saving options according to the various sections of the income tax act and when should investors consider them:
1. Life Insurance: One of the most preferred avenues for investment, life insurance has long been considered as a tax saving tool. But the primary objective has been neglected and investors end up buying the wrong product.
Life insurance is the most cost effective tool when you have to provide a financial protection to your family in case of eventualities. What amount of life insurance one should have depends on many factors such as income, expenses, liabilities, goals etc. A pure life insurance i.e. Term Insurance, is the right instrument to buy high life insurance coverage. The tax benefit is the inherent advantage that comes with all products.
2. Public Provident Fund (PPF): Public Provident Benefit is a highly beneficial small savings scheme available to investors. Here, not only the investor can enjoy deduction on the amount invested in this scheme but the interest received on maturity is also exempt from tax. Investment can start from Rs.500. The flexibility in contributions as per ones requirement makes it an ideal choice for long-term investments and availing tax benefit year on year.
3. Equity Linked Savings Schemes (ELSS): The sluggish equity market for last five years has made investors jittery and ELSS, which was favoured among all avenues, is slowly losing its sheen. Also, the proposed new Direct Tax Code has not been in favour of the instrument. But for investors with high-risk appetite and a slightly longer horizon, ELSS is still a considerable choice. Do a good research before finalising your scheme.
4. Fixed Deposit: Bank Fixed deposit for five years falls under Sec 80C tax benefit. Although it is the most viable option for investors when last minute decisions have to be taken, the taxability of interest lowers the net yield. Still, it is a good option in current scenario especially for individuals in lower tax bracket.
5. NSC: The National Savings Scheme has been revived and there is a new 10-year scheme. However, interest received on NSC, is taxable in the hands of the investor. With taxability of interest and rate market linked, it does not appeal to many investors now when compared to other avenues under section 80C.
Under this section, one can avail up to Rs.15000 for self and family while additional Rs.15000 is available for parents. In addition to this, further deduction of Rs.5000/- is available in case the policy is taken on life of a senior citizen in each category as mentioned above. However, it should not be considered only for tax benefit, as the purpose of health insurance is to provide you benefits in case of emergencies. To buy the right scheme that matches your requirement, a detailed analysis should be done on benefits and exclusions.
The New Pension Scheme gives tax benefit under this section to individuals if they contribute 10% of their gross income (if in business) or 10% of the basic salary (if employed) in this scheme. However, the maximum limit clubbed with 80CCE is capped at Rs.1 lakh. Being a low cost product it is one of the good avenues for retirement planning, especially in absence of pension plans.
Section 80CCD (2)
Not many employers offer it and neither employees are aware of this additional tax benefit. Under this section, if an employer contributes 10% of an employee’s basic salary to New Pension Scheme, the amount is an additional deduction which employee can claim from his income. This provision was made in this year budget and it reduces tax liability by a good amount. So if someone is drawing a basic monthly salary of Rs.50,000 he can avail additional deduction of Rs. 60,000 annually. For an individual in highest tax bracket i.e. 30% this will result in additional tax saving of Rs. 18,000. But the decision of this provision rests with the employer and one has to negotiate to include it in the salary structure, if not there.
You can choose any or a combination for the above options according to your investment preferences for effective tax planning. Selection of right tax saving instruments is essential for reaping the desired benefits. Last minute rush can lead to mistakes and strain your finances. Take a wiser approach and distribute your investments by planning it early.
The Rajiv Gandhi Equity Savings Scheme (RGESS) is a new tax benefit scheme introduced for equity investment in select stocks, mutual funds and ETFs. Under this scheme, a first time investor with a gross annual income less than Rs.10 lakhs, can claim up to Rs.50, 000 of investments in specified securities for tax deduction under section 80-CCG.
Disclaimer: This document is for general reference purpose, please take advice of a tax advisor before taking a decision.