Every year, all of us, whether salaried or self-employed, pays tax to the government according to our income slabs and savings under section 80C. Now the amount of tax to be deducted is directly proportional to our taxable income. More is the taxable income, more is the amount of tax that we have to pay.
To reduce the taxable income, there are several investments and deductions opportunities available under various sections, from 80C to 80U.
But most of the easily available and known investment schemes are available under section 80C.
To get the maximum benefit of these tax saving investments, there are few golden rules that should be followed by every investor or tax payer.
But we all are so busy in our daily life that we take this for granted, do not prioritize this tax planning activity, and usually end up either paying higher taxes, or not able to generate enough returns that our investments are capable of.
Just like family planning, tour planning, financial planning is also very important.
In normal scenario, we do not know or want to know about various investment options throughout the year, and with the arrival of February or March month, in a hurry to save tax, we usually have only 2 or 3 options that we know about. So we invest whatever we can in those investment options, and think that we are done for that year.
I will share 1 very common example related to such investment mistakes further in this article.
Let us start with deductions under section 80C
Section 80C, the term with which every indian tax player is familiar with. Why? Because we claim almost 100% of our deductions under this section.
The maximum amount of deduction that can be claimed under section 80C is Rs 1.5 lakh for any financial year.
There are variety of investment and deductions available under this. Let us discuss them one by one
Employees’ Provident Fund (EPF) & Voluntary Provident Fund (VPF)
For a salaried employee, A part of your salary is deducted monthly as your contribution towards EPF. The total amount deducted annually can be claimed as deduction while computing your annual taxable income.
However, interest earned above the limit of 9.5 percent is taxable at employee end. Similarly, if the employer contribution is more than 12 percent of your salary, then the excess amount is taxable in employee hand.
An employee can also increase his EPF deduction share from 12 percent, to increase his deduction. But his take-home salary would be less. This is called VPF contribution, as the employee is voluntarily investing in this fund. The rate of interest under VPF contribution is revised every year. For FY 2019-20, VPF interest rate is 8.5%.
However employees earning in 20% or more tax bracket are advised to increase their VPF contribution as this will automatically increase their deduction under section 80C.
Moreover, the interest earned and the maturity amount is tax exempt, so you need not to pay any tax on this.
Currently, there are many facilities offered by EPFO to the PF account holders on their website. User can check PF balance, withdraw PF, transfer PF online and add E-nomination by registering through UAN number.
User can also check PF account balance by giving missed call on 011-22901406 from their registered mobile number.
Temporarily for 3 months, the finance ministry has reduced EPF employer as well as employee contribution from 12% to 10% per month, to increase the home take away amount of the working people, in order to increase their buying capacity amid COVID-19 lockdown.
Public Provident Fund (PPF)
PPF is provided by indian government and maximum 1,50,000 INR can be claimed as deduction under section 80C in a financial year.
The PPF account can be opened in the name of any resident individual in the nearest bank or post office.
Alternatively, one can also open PPF account online by logging into “Internet Banking” section and create a new PPF account. Some banks also offers PPF account facility in their android mobile apps.
To keep the account active, minimum deposit of Rs 500 in a financial year is necessary.
The maturity period of PPF account is 15 years and one partial withdrawal is allowed. The maturity amount is tax free. The interest in compounded quarterly. Interest rates are subjected to revision every quarter.
I would like to share one common mistake by most tax payers having PPF account.
Many of us invest in PPF account in February or March month, on a random date, to save tax.
Without understanding the fact and PPF interest calculation method.
Suppose to save tax, a person invests Rs 50,000 in PPF account in last week of February. So he will earn interest only for 1 month i.e. March. Had he invested the same amount in the beginning of financial year, he would have earned interest for the complete year.
There are many online PPF calculator tools available to help you wealth planning for future.
That is the reason tax planning is necessary. Remember to invest in the PPF account from 1st april to 5th april to fetch returns for the complete financial year.
PPF interest rate or PPF rate of interest is subjected to revision every quarter by the RBI. For FY 2020-21 1st quarter, it is very low, 7.1 per cent per annum.
Check this guide about how to manage your personal finances
LIC or Life Insurance Premiums
An investment option under section 80C, everyone is familiar with. Now a days, everyone has LIC. This life insurance premium can be claimed as investment under section 80C, subjected to maximum limit of Rs 1,50,000 in a financial year. The maturity amount is tax free.
However, the premium paid by you for your parents (father/ mother/ both) or your in-laws is not eligible for deduction under Section 80C.
There are 2 types of insurance plans available in market, term plan and maturity plan.
Usually people opt for maturity plans which have high monthly or quarterly or half yearly or yearly premiums, and maturity amount also fetch low returns, if compared to other investment options available.
The surrender value of the policy is also usually high ,so there is not benefit of surrendering a LIC.
On the other hand, term plans have low annual premiums but maturity benefit is nil. So if you survived for the whole policy term, you will not getting anything in return. But the insured amount is usually very high as compared to the maturity plans.
People should understand the purpose of buying an LIC. It is an insurance plan, not a wealth generating investment option.
Equity Linked Savings Scheme (ELSS)
Next in the list is mutual fund investment, in the category ELSS i.e. Equity Linked Saving Schemes. The maximum investment in a financial year is capped at Rs 1,50,000. Note that the investment in the fund have a lock-in period of 3 years. Usually, people rarely invest in this investment option to claim under section 80C, do not lack of knowledge, or confidence in the market. The maturity amount will be subjected to long term capital gains (LTCG) tax. Keeping the exceptionalities aside, the returns from this mutual fund category are usually in double digits, if invested for a longer term and a good performing fund.
Home Loan Principal Repayment
The home loan EMI consists of two components – Principal and Interest. The principal of the home loan can be claimed as deduction under section 80C of income tax. The interest of the home loan can be claimed under section 24 and section 80EE of the income tax.
Sukanya Samriddhi Yojana Account
In this investment option, the account can be opened on the behalf of your minor daughter till the age of 10. The SSA account has a tenure of 21 years or until the girl child marries, after turning 18 years old. The current interest rate is 7.6% per annum and is compounded annually. The minimum annual deposit is rs 250, and maximum is Rs 1,50,000 in a financial year. Interest rate are subjected to revision every quarter.
Sukanya Samridhhi account interest calculator can be found online on many sites, to estimate your girl child savings after she attains account maturity age.
National Savings Certificate (NSC)
NSC is a tax saving investment option with a maturity period of 5 years. A NSC can be purchased from the nearby post office for as low as Rs 100 to no limit on the maximum invested amount.
However, the interest is compounded annually, and it is taxable.
NSC is basically a cumulative investment scheme. In this, the annual interest is not paid to the investor but it is re-invested. Since it is deemed reinvested, it qualifies for a fresh deduction under Section 80C, making it effectively tax-free investment option. Only the final year interest does not receive tax deduction, as it is paid back the investor.
The maximum deduction that can be claimed in a financial year is Rs 1,50,000. The current interest rates are 6.8% per annum and are subject to revision quarterly.
Senior Citizen Savings Scheme (SCSS)
As the name suggests, this investment scheme is only for senior citizens, i.e. any individual in the age group of 60 years or more. SCSS account can be opened with any bank or post office.
Any investment in this account can be claimed as deduction under section 80C, with the maximum limit being capped at Rs 1,50,000 in a financial year.
In this investment option, the interest rate is 7.4% per annum. It is quarterly paid and not compounded quarterly. Moreover, the interests earned are taxable.
Currently in 1st quarter of FY 2020-21, the RBI has decreased the Senior Citizen Savings Scheme interest rate to 7.4% according to its monetary policy.
Five-year Post Office Deposits
These are similar to bank deposits, with a lock-in period of 5 years. The investment can be claimed as deduction under section 80C. the interest is compounded quarterly, but paid annually. However, the interest is taxable and is 6.8% per annum for current quarter i.e. April-2020 to June 2020.
Payment of Tuition Fees
If you are paying tuition fees for your children, it can also be claimed as deduction under section 80C. this helps you to save tax. But the fees should be paid in schools, colleges or universities in India only.
National Pension System (NPS)
If any individual opens an NPS account, his contribution can be claimed under section 80CCD (1).
Also, the combined deduction under both section 80C as well as 80CCD (1) cannot exceed Rs 1,50,000.
However, additional contribution of Rs 50,000 can be claimed under section 80CCD (1B), if invested in NPS.
Also, any contribution made to the Atal Pension Yojana (APY) is also eligible for claim deduction under section 80CCD (1).
Contribution in APY can be made through NSDL website or account can be opened through nearby post office.
Note that, the earlier you start investing APY, lower the premium you have to pay. Minimum age and Maximum age for opening the Atal Pension Yojana account is 18 years and 39 years respectively.
Below is the APY CHART that can referenced to calculate the amount per month need to be paid for monthly pension, according to you age.
Remember that, your tax and financial planning can help you in making money from your investments in a great way if chosen and invested wisely.
COVID-19 UPDATE : The PFRDA has temporarily suspended the automatic deduction of APY contribution from bank accounts till June 2020. Subscribers cannot do manual transaction also.