Every year, all of us, whether salaried or self-employed, pay taxes 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 the taxable income more is the amount of tax we have to pay.
To reduce taxable income, there are many investment and deduction 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 from these tax-saving investments, there are a few golden rules that should be followed by every investor or taxpayer.
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 being able to generate enough returns that our investments are capable of.
Just like family planning, and tour planning, financial planning is also very important.
In a 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 is the term with which every Indian tax player is familiar. 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 is a variety of investments 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 a deduction while computing your annual taxable income.
However, interest earned above the limit of 9.5 percent is taxable at the employee’s end. Similarly, if the employer contribution is more than 12 percent of your salary, then the excess amount is taxable in the employee’s 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 2022-23, the 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 pay any tax on this.
Currently, there are many facilities offered by EPFO to the PF account holders on their website. Users can check their PF balance, withdraw PF, transfer PF online, and add an E-nomination by registering through the UAN number.
Users can also check their PF account balance by giving a missed call on 011-22901406 from their registered mobile number. To use this facility, the user must have his UAN (Universal Account Number) active and linked to his mobile number.
User can also send SMS to know his PF account balance from his registered mobile number to 7738299899 in the following format
For the convenience of users, this SMS service is supported in different languages. So the user can get the details in his desired language by sending the language code in the below format to 7738299899.
EPFOHO UAN HIN
where HIN is the language code for Hindi.
Other supported language codes are :
- English – Default
- Hindi – HIN
- Bengali – BEN
- Punjabi – PUN
- Marathi – MAR
- Kannada – KAN
- Telugu – TEL
- Tamil – TAM
- Malayalam – MAL
- Gujarati -GUJ
Alternatively, users can also download UMANG (Unified Mobile Application for New-age Governance) app which is developed by MeitY and NeGD to facilitate various services such as balance inquiry, customer support, etc for its users.
Public Provident Fund (PPF)
PPF is provided by the Indian government and a maximum of 1,50,000 INR can be claimed as a 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 a PPF account online by logging into the “Internet Banking” section and creating a new PPF account. Some banks also offer PPF account facilities in their android mobile apps.
To keep the account active, a minimum deposit of Rs 500 in a financial year is necessary.
The maturity period of the PPF account is 15 years and one partial withdrawal is allowed. The maturity amount is tax-free. The interest is compounded quarterly. Interest rates are subject to revision every quarter.
I would like to share one common mistake by most taxpayers having a PPF account.
Many of us invest in PPF accounts 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 the last week of February. So he will earn interest only for 1 month i.e. March. Had he invested the same amount at the beginning of the financial year, he would have earned interest for the complete year.
There are many online PPF calculator tools available to help you with wealth planning for the 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. The current PPF interest rate is 7.1 percent 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. Nowadays, everyone has at least one LIC policy. This life insurance premium can be claimed as an investment under section 80C, subject to a maximum limit of Rs 1,50,000 in a financial year. The maturity amount is tax-free under section 10(D).
While most LIC policies have a yearly premium that needs to be paid for a specific amount of time, there are also single premium life insurance (SPLI) policies that offer the same benefits as the usual LIC policy. The usual term for the SPLI policy is 10 years after which the maturity amount is paid to the insurer and it is also tax-free under section 80C and section 10(D) respectively. But one can also exit the policy after 5 years if he wants to.
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 6 types of insurance plans available in market
- Term life plan
- Endowment plan
- Whole life plan
- ULIP plans
- Money back plans
- Annuities or pension plans
Usually, people opt for maturity plans which have high monthly or quarterly or half yearly, or yearly premiums, and maturity amount also fetches low returns, if compared to other investment options available.
The surrender value of the policy is also usually high, so there is no benefit to surrendering a LIC.
On the other hand, term plans have low annual premiums but the maturity benefit is nil. So if you survived for the whole policy term, you will not be getting anything in return. But the insured amount is usually very high compared to the maturity plans.
People should understand the purpose of buying a LIC. It is an insurance plan, not a wealth-generating investment option.
Equity Linked Savings Scheme (ELSS)
Next on 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 has a lock-in period of 3 years. Usually, people rarely invest in this investment option to claim under section 80C and do not lack 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 in a long-term and 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 a 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 (SSY) 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 the maximum is Rs 1,50,000 in a financial year. Interest rates are subject to revision every quarter.
Sukanya Samridhhi account interest calculator can be found online on many sites, to estimate your girl child’s 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. An 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 an effective tax-free investment option. Only the final year interest does not receive a tax deduction, as it is paid back to 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 a deduction under section 80C, with the maximum limit being capped at Rs 1,50,000 in a financial year.
In this investment option, the current interest rate is 7.6% per annum. It is quarterly paid and not compounded quarterly. Moreover, the interests earned are taxable.
In 1st quarter of FY 2020-21, the RBI 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 a deduction under section 80C. the interest is compounded quarterly but paid annually. However, the interest is taxable and is 6.7% per annum for the current quarter.
Payment of Tuition Fees
If you are paying tuition fees for your children, it can also be claimed as a deduction under section 80C. this helps you to save on 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, an 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 the NSDL website or an account can be opened through a nearby post office.
The scheme offers a monthly pension of a minimum of Rs 1,000 and a maximum of Rs 5,000. If the subscriber dies before maturity, the pension amount is given to the spouse.
In case both die, the nominee can claim the pension amount.
In the scheme, a continuous contribution is very critical as the account will be frozen and closed if the contribution stops.
Note that, the earlier you start investing APY, the lower the premium you have to pay. The minimum age and Maximum age for opening the Atal Pension Yojana account are 18 years and 39 years respectively.
Below is the APY CHART that can be referenced to calculate the amount per month that needs to be paid for monthly pension, according to your 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.
OLD vs NEW Tax Regime
The Finance Ministry introduced a NEW tax regime for Indian taxpayers in Budget 2020 which gave people an option to fill their income tax in any of the two options :
- Old tax regime, according to which everyone was filling their ITR till last year
- The new tax regime, has introduced many tax slabs according to income
While the new tax regime may look lucrative due to a number of slabs according to the income of an individual, there is actually a limit up to which you can save tax in this new option.
The above chart shows the comparison of taxable salaries and the tax liability under both new as well as old tax regimes.
A careful understanding of the chart will help you understand that you can save a maximum of Rs 75,000 under the new tax regime. If you are a high-salaried person, you may not be benefited from this option compared to people in lower income brackets.
The tax that high net worth individuals pay – 42.7%, still remains an unsolved problem.
Which tax regime should I opt for?
Usually, people end up making wrong choices while answering this question due to a lack of knowledge and awareness. While the new tax regime gives you various tax slabs options, you cannot avail the benefit of many investments and savings that you have made and claimed as deductions under section 80C in the past.
Let’s have a look at the most familiar ones :
- Section 80C
- Sukanya Samridhi Yojana
- Tax saving FD
- Section 80D
- Medical Insurance
- Section 80CCD
- House rent allowance
- Leave Travel Concession (LTC)
- Standard deduction of Rs 50,000
While the list is long, usually taxpayers avail the benefit of these tax saving instruments and are familiar with them. That’s why only these are listed here.
It is advised to go with the “old tax regime” if you are not comfortable with so many calculations and risks associated with them. Also, the person can switch between new or old tax regimes every year as per his understanding and choice.
Also, employers ask their employees to opt for one tax regime at the start of every financial year, according to which their salary is taxed. So if you have made a wrong choice by mistake, and end up getting more tax deducted, don’t worry! You can still claim all your deductions while filling your ITR online at the end of the financial year 2021-22 by choosing the “Old Tax Regime” option there.