You work hard to earn every penny. So, it makes perfect sense to do some smart tax planning to prevent any leakage. Income-tax laws allow many exemptions and deductions on expenses and investments that can help you save a substantial chunk of this outflow. As we move closer to the end of financial year 2019/20, most taxpayers are busy doing their bit to maximise tax savings. Here are some of the most significant options to save tax.
House Rent Allowance: If you live in a rented accommodation, you can save a good amount of tax through HRA exemption. If you receive HRA as part of the salary, you can claim this exemption under Section 10 (13A). If you live in a metro city, the maximum exemption is 50 per cent of basic salary and dearness allowance; else, it is 40 per cent. The HRA exemption that you can claim is the least of the HRA received or rent paid or excess rent paid over and above the 10 per cent basic salary and dearness allowance. In case you do not receive HRA from your employer or are self-employed, you can claim deduction up to Rs 60,000 in a financial year under Section 80GG.
Home Loan Interest and Principal: If you have taken a home loan for buying or constructing a house, you can claim deduction on both interest and principal payments. The maximum interest that you can claim as deduction in a given financial year is Rs 2 lakh under Section 24b. However, this comes down to Rs 30,000 annually if the property is not constructed within five years. This deduction is available even if the property is let-out. If you bought the property between April 1, 2016 and March 31, 2017, you can claim an additional deduction on interest payment up to Rs 50,000 a year. However, to claim this deduction, the home loan amount should not be more than Rs 35 lakh and property price should not be more than Rs 50 lakh.
You can also claim deduction on the principal payment. This comes under Section 80C, so the maximum amount remains Rs 1.5 lakh in a given financial year.
Leave Travel Allowance: This is one of the favourite expense against which you can claim exemption under Section 10(5) of the Income-tax Act, 1961. It is available to only those who receive this allowance from their employers. The deduction is lower of the LTA amount or actual expenses. “This exemption can be claimed to the extent of actual expenditure incurred on journey performed in India by the employee and his family. The exemption is allowed for a maximum of two journeys in a block of four calendar years,” says Naveen Wadhwa, DGM, Taxmann. However, if you have missed claiming it in the last block, you still have an option. “The current block is 2018 to 2021. If one does not claim the exemption in this block, it can be claimed for a journey undertaken during the first year of the next block. This is in addition to the two journeys that may be undertaken in the next block of four years,” says Kuldip Kumar, Partner and Leader, Personal Tax, PwC India.
Life Insurance Policy: You can claim deduction up to Rs 1.5 lakh under Section 80C on premium paid for a life insurance policy. However, the maximum deduction allowed is only 10 per cent sum assured. This means if the sum assured is Rs 5 lakh, the limit is Rs 50,000. So, if you pay an annual premium of Rs 60,000, the maximum deduction allowed is only Rs 50,000. However, if you purchased the policy before March 31, 2012, you are allowed a deduction of up to 20 per cent of the sum assured.
Health Insurance Policy: You can save significant tax if you have health insurance policy for your family and parents. If you are below 60 years and pay premium for a policy for self, spouse and children, the deduction allowed is Rs 25,000. If you are above 60, the deduction limit is Rs 50,000. If you pay premium for your senior citizen parents as well, you can claim additional deduction of Rs 50,000.
If the premium is lesser than the maximum deduction, you can claim up to Rs 5,000 deduction for expenses on preventive healthcare. Very senior citizens, who are 80 or above, can claim a deduction of up to Rs 50,000 on actual expenses incurred on their healthcare.
Specific Medical Expenses: Under Section 80DDB, you can claim deduction on expenditure for treatment of specified diseases of self or spouse, children, parents and brothers and sisters dependent on you. This deduction is allowed only for specified diseases. These include neurological diseases where disability level is certified as 40 per cent and above (dementia, dystonia musculorum deformans, motor neuron disease, ataxia, chorea, hemiballismus, aphasia etc.), malignant cancer, full- blown AIDS, chronic renal failure and hematological disorders. “You need to get a prescription from a neurologist, oncologist, urologist, hematologist, immunologist or any other prescribed specialist. Such prescription should have details like name and age of the patient, name of the disease or ailment, name, address, registration number and qualification of the specialist issuing the prescription and name and address of the government hospital (if treatment is in such a hospital),” says Kumar of PwC India.
The deduction is restricted to the lower of the actual amount spent or Rs 40,000 per annum. The limit goes up to Rs 1,00,000 per annum if treatment is for a senior citizen. Deduction is reduced by the amount received from your insurer/employer for the same treatment.
Education Fee: You can claim deduction on expenses incurred on children’s education. However, not all expenses are covered under this. “Section 80C(2)(xvii) of the Income-tax Act provides that an individual is eligible to claim deduction in respect of tuition fees paid during the year to any university, college, school or other educational institution situated in India for the purpose of full-time education of any two children. However, no deduction shall be available in respect of development fees or donation or payment of similar nature,” says Wadhwa of Taxmann.
Education Loan: If you have taken an education loan for self or spouse or children, you can claim deduction on interest paid under Section 80E. This deduction has no limit. The loan has to be from a financial institution or an approved charitable institution. “The deduction is allowed in respect of interest on loan availed by the individual for himself or his relative. Relative for the purpose of Section 80E refers to spouse and children of the individual or the student for whom the individual is the legal guardian,” says Homi Mistry, Partner, Deloitte India. However, there is restriction on the number of years for which you can claim this deduction. “The deduction is allowed for a period of eight years or until the interest is paid by the individual in full, whichever is earlier. Considering that the deduction commences from the year the individual starts repaying the loan, no deduction can be claimed during the moratorium period,” says Mistry of Deloitte India.
ELSS: To promote equity investment, the government allows deduction for investment in equity-linked savings schemes (ELSS) of mutual funds. “Equity funds have the potential to earn higher returns over a long period, making them a suitable product to earn returns that can beat inflation. One can invest in tax-saving mutual funds and claim a deduction of up to Rs 1.5 lakh in a financial year via Section 80C. Though the lock-in period is three years, one can remain invested and earn higher returns,” says Archit Gupta, Founder and CEO, Cleartax. Though they offer higher returns and tax benefit, the returns are taxable. “ELSS has the potential of offering double-digit returns. ELSS profits are treated as long-term capital gains and taxed at 10 per cent for gains above Rs 1 lakh,” says C.S. Sudheer, CEO and Founder, IndianMoney.com.
CPSE ETF: Central Public Sector Enterprises’ (CPSE’s) exchange-traded funds (ETFs) were introduced in Budget 2019 as a tax-saving option similar to ELSS. It is a passively managed fund with low expense ratio. Just like ELSS, it entitles an investor to Rs 1.5 lakh deduction in a given financial year under Section 80C. The lock-in period is three years. It basically invests in 10 blue-chip Maharatna, Navratna and Miniratna companies. It tracks the CPSE index, which has some top public sector firms. “It is a good investment option as contributions to this scheme are invested in a varied range of government companies operating in different core sectors of the economy. These companies, such as in electricity, power, etc., enjoy monopoly. However, they are sometimes bound by restrictions with the government not allowing them on a par with its private contemporaries with the motive of wealth maximisation,” says Gaurav Mohan, CEO, AMRG & Associates. However, many experts do not see it as a better option. “The majority of companies which are part of the CPSE ETF are from the energy and allied sector. This means concentration risk. The companies that are part of the CPSE ETF are government-run. So, ELSS is better for diversification as they hold a number of stocks across sectors,” says Sudheer of IndianMoney.com
ULIP: Unit-Linked Insurance Plans (Ulips) are offered by insurance companies. They offer a combination of investment and life insurance. Partial withdrawal or surrender is not allowed before completion of five years. “Comparing the returns that the two schemes offer, a ULIP has features of both investment and insurance and, hence, is more suitable for people looking for dual benefits from a single contribution. But returns are not as high as compared to ELSS as a part of the investment amount goes into buying the insurance cover,” says Gaurav Mohan, CEO, AMRG & Associates. “The risk exposure in case of ULIPs can be customised in accordance with the risk appetite of the investor. As ELSS is primarily an equity investment scheme, it involves higher fluctuation,” he adds. However, the entire maturity amount is tax-free under Section 10 (10D), and you can switch to different funds many times in a year internally, without any cost.
Fixed Income Products
PPF: The Public Provident Fund (PPF) Scheme is a popular long-term tax-saving investment option backed by the government. It offers a reasonable interest rate and tax-free returns. The lock-in period is 15 years. “It falls under the EEE category. This means the investor does not have to pay tax at any stage of the investment. Taxpayers can contribute up to Rs 1.5 lakh a year and build a significant corpus. Investments in PPF are eligible for tax deduction under Section 80C of up to Rs 1.5 lakh,” says Gupta of Cleartax. PPF pays a good rate; the current rate is 7.9 per cent.
SCSS: Senior citizens prefer to keep money safe and get income on a regular basis. “Senior citizens may look at investing in Senior Citizen Savings Scheme (SCSS), which is designed specifically for Indian citizens above 60 years with a few exceptions. An individual can invest up to Rs 15 lakh or the amount received as retirement benefit, whichever is lower. “They should invest in SCSS as it is very safe, reliable, offers good returns, and is tax deductible. The process to invest is simple and easy,” says Sameer Mittal, Managing Partner, Sameer Mittal & Associates.
The interest rate is one of the best among small savings schemes. It is 8.6 per cent at present. “Interest accrued/received on the SCSS account is fully taxable in hands of the investor subject to the basic exemption limit. Also, investments up to Rs 1,50,000 made by citizens are allowed as deduction from taxable income under Section 80C,” says Surana of RSM India.
SSA: The government has made it easy to save for the girl child through the Sukanya Samriddhi Account. This is a long-term product with a tenure of 21 years. You have to deposit money for the first 14 years and wait for another seven years for maturity. The account can be opened for any girl who is less than 10 years old. The minimum annual contribution is Rs 250, while the maximum is limited to the 80C limit of Rs 1.5 lakh in a given financial year. The current rate of interest is 8.4 per cent, just second to the SCSS. You can open this account for two girls. The SSA allows partial withdrawal for higher studies after the child turns 18. In case of marriage, the full amount can be withdrawn.
NSC: The National Savings Certificate has been one the most preferred last-minute income-tax saving option for many. It comes with five-year lock-in period and is currently offering a rate of 7.9 per cent. While you can claim deduction on the investment amount, the interest earned is taxable. If you invest Rs 1 lakh, you will get Rs 1.46 lakh on maturity after five years.
Tax-saver FD: You can also enjoy Section 80C deduction benefit on tax saving fixed deposits which come with a five-year lock-in period. You can invest through a bank or a post office. The current rate of interest offered by post office is 7.7 per cent. Any interest that you earn is taxable. “One should also ponder over the taxation angle as the effective rate of return will be higher for a person falling under the lower income tax slab, thereby resulting in tax savings. However, for the person falling in the higher tax slab, the effective rate of return cannot match even the inflation rate,” says Mittal of Sameer Mittal & Associates.
NPS: The National Pension System is run by the government of India and is open to general public. The NPS has assumed greater significance among tax-saving investment products as it allows investment up to Rs 2 lakh in a financial year. It allows you take equity exposure to boost returns of retirement savings. It also offers a higher income deduction benefit. “Deduction under Section 80CCD(1) falls within the maximum deduction limit of Rs 1.5 lakh available to an individual (as per Section 80CCE). On the other hand, deduction up to Rs 50,000 under Section 80CCD(1B) is over and above the limit of Rs 1.5 lakh,” says Mistry of Deloitte India.
Not only this, if your employer is also contributing to your NPS account, you may get an additional deduction. “An individual can claim deduction for contribution made by his employer as well which is added as part of his salary. Such deduction, not exceeding 10 per cent of salary (14 per cent for central government employees), can be claimed under Section 80CCD(2). This is over and above the limit of Rs 1.5 lakh and Rs 50,000,” says Mistry of Deloitte India.
APY: The Atal Pension Yojana is a regular income scheme which people can join before the age of 40 and to which they can contribute up to the age of 60, after which they start receiving regular monthly income which they have opted for. This scheme has regular income option ranging from Rs 1,000 to Rs 5,000. The contribution amount depends up- on the age at which the person joins the scheme. So, you can get deduction benefit on the contribution that you make in the APY in any given financial year.
Pension Plans: Both life insurance companies and mutual fund houses give the option of investing in retirement plans that offer either deferred or immediate annuity income after retirement. Any contribution to such plans will make you eligible to claim deduction of up to Rs 1.5 lakh in a financial year.