Investment alternatives for tax savings for salaried

employees:
Often, investment for most individuals begins and ends with tax
planning. Although it is pertinent to avail tax breaks, this should not be
the sole focus. Start by jotting down your key financial objectives, the
tentative time of money requirement and the corpus needed to achieve
those goals. One can use tax saving investments effectively, to achieve
financial goals. or example, one can take a children!s plan that also
provides tax benefit. "onsider the impact of inflation on your needs. After
your first few working years, as income goes up, it is wise to invest
beyond one!s taxsaving investments to achieve your goals. Also,
evaluate the life cover requirement, while planning for your taxes.
As you begin your career, you may not have visibility on your needs. #n
this case, set a target of corpus achievement. or example, how quickly
you can hit a corpus of $s % crore from tax savings investments. &ou
can accelerate this by increasing your contribution yearly, keeping in
mind salary hikes and inflation.
'aving a goal makes the exercise of investing more interesting and
there is always the corpus to look forward to. 'aving clarity will also help
you keep track.
(here are a range of avenues with different levels of risk, return and
liquidity. "hoose an appropriate mix of investments to maintain an
appropriate asset allocation and to help achieve your financial
objectives. )ast returns data may be misleading. *xample, when
markets are at a high and about to fall, equities will give you the best
track record. (oday, when markets are down, it could be a better time to
invest with a three year hori+on. (he maturity should suit the needs you
are planning for. ,eep in mind the tax you need to pay on the returns.
Maximising your tax saving
%. Exemptions/reimbursements #dentify the reimbursements
available from the company and take maximum advantage of the same.
-ormal expenses that one incurs could help save tax. *xample.
(elephone/fuel reimbursements, meal vouchers and company car. A
person in lower tax slabs can reduce his tax liability to nil with
exemptions alone.
Similarly, salaried employees staying in rented apartments can claim
exemption under Section %0123 of the Act in respect of house rent
allowance by making the '$A a component of there salary.
Some of The Popularly Knon Exemptions/!eimbursements
"ouse !ent #lloan$e
4inimum of .
%. Actual '$A
5. $ent )aid 6 %07 of 8asic
9. :0a7 of 8asic 1-on.4etros3 or 207 of 8asic 14etros3
%onveyan$e #lloan$e
$s ;00 / 4onth
&eave Travel #lloan$e
(wo trips in a block of : &rs Amount not exceeding Air *conomy or $ail
A" # are shall be for shortest distance and for a single destination
Medi$al !eimbursement
$s %2,000 / Annum
5. 'edu$tions
Se$tion ()% allows a maximum limit of $s % lakh across
investments ranging from provident fund, )), infrastructure
bonds, fixed deposits 12 years or more3, -S", insurance/pension
plans, unit linked insurance, equity linked savings scheme etc. #t
also includes tuition fees of your children and the repayment of
principal on your housing loan.
(he interest $omponent on your home loan has a separate limit
of $s %.2 lakh.
4edical premia upto a maximum of $s %2,000 qualifies for
deduction, with an additional $s %2,000 for parents. Additional
deduction of 50,000 could be availed in case of a senior
citi+en.&ou can claim a separate deduction for medical premium of
your parents.
A person with disability or those who have spent money on the
maintenance 1including medical treatment3 of dependant persons
with disability, could avail deductions under section ;0< and ;0==
of the Act, respectively.
#ndividuals paying interest on education loan should obtain the
interest payment certificate underse$tion ()E of the Act.
&esser Knon Tax Saving Tips / 'edu$tions
or most of the people >tax savings! brings to mind life insurance, )),
-S", and equity.linked savings scheme, among others, that qualify for
tax deduction under Section ;0 " of the #ncome.(ax Act. An individual
can claim tax deductions of up to $s % lakh under ;0". 'owever, there
are other lesser known avenues that offer additional tax breaks to
individuals. (hey are not widely discussed as they involve special
situations in life such as having a special dependant, paying rent to
parents, owning a house in another city, and so on. 'ere is a small list
you could explore.
Paying rent to your parents
=o you live in your parents! house? &ou can pay them rent to claim
'ouse $ent Allowance exemption. (his is possible only if the property is
registered in the name of your parent. (he owner will be taxed for the
rental income after a 907 deduction. So, if you pay your father a rent of
$s 9 lakh a year 1$s 52,000 a month3, he will be taxed for only $s 5.%
lakh. #f your parents are retired and do not derive any significant taxable
income, the amount of rent would be tax free in their hands. #t is
advisable that you enter into an agreement with them and actually make
the payment every month, preferably by cheque.
#t gets better if the property is jointly owned by both parents. (hen you
can divide the rent two.ways so that the tax liability gets split between
the two parents. #f their income exceeds the basic exemption limit, you
can help them save tax by investing in their name under Section
;0" optionssuch as the Senior "iti+ens! Saving Scheme, five.year bank
fixed deposits or tax.saving equity mutual funds.
(ake a look at the example to see the tax implications. @et us assume
your monthly basic salary is $s :0,000 and '$A is $s %A,000. &our
monthly rent is also $s %A,000. #n this case, of the total monthly '$A, $s
%5,000 will be tax exempt. Assuming you are in the 507 tax bracket,
your annual tax saving would be $s 5B,AA:.
)lease note that you will have to submit copies of rent receipts or rent
agreement, depending on what your organisation stipulates. 'owever,
avoid claiming tax benefits on rent payments made to the spouse as the
arrangement can be characterised as a sham transaction, say experts.
!enting and "ome loan in to different lo$ations
#ndividuals today are constantly on the move for better job prospects.
(his could result in a person living in a rented place in the city he is
working while repaying the loan for a home bought in his native city or
any other city. #n such a scenario, the rent that an individual pays is
eligible for '$A exemption. urther, a deduction can be claimed on the
interest paid for the housing loan used to purchase the property at the
native place/any other city.
@et us assume your monthly basic salary is $s :0,000 and '$A is $s
%A,000. &our monthly rent is $s %A,000 and annual interest payment on
your housing loan is $s %.:2 lakh. #n this case, of the total monthly '$A,
$s %5,000 will be tax exempt in your hands. urther, you can claim
deduction under section 5:1b3 of the #ncome.(ax Act, %BA%, on the
interest payable on your housing loan.
or claiming '$A exemption, you need to submit copy of the lease
agreement or rent receipts. or claiming deduction on housing loan
interest, you need to submit a copy of the tax certificate issued by the
housing finance company.
Set off of %apital &oss #gainst %apital *ain
Chile most of us know that we need to pay taxes on short term or long
term capital gains, not many are aware of the fact that capital losses, if
any, can be balanced off against gains. So, for instance, if you have
made a long.term capital gain of $s %2 lakh by selling off your property
and long.term capital loss of $s 9 lakh by selling stocks which are either
not listed or are sold off market , the total taxable amount would $s %5
lakh.
)lease note "apital Dain on Sale of Shares sold through Stock
*xchange can not be set off against other capital gain as profit from sale
of shares of listed companies through stock exchange in exempt.
#t is important to note that short term losses can be balanced off against
both short term as well as long term capital gains. 'owever, long term
capital losses can only be balanced off against long term capital gains.
%harity to noble $auses $ount
"haritable contributions are deductible up to %07 of your income under
Section ;0D. =epending upon the institution to which the donation is
being made, the deduction can be either %007 or 207 of the amount
donated. &ou must *nsure that you obtain a receipt from the institution
and a copy of their income.tax exemption certificate. #nstead of giving
the money directly to the needy and not getting any deduction, you can
make a charitable contribution to an -DO that provides assistance to the
needy. (he individual is then able to get a tax deduction while still
contributing to a noble cause.
%ontributions to a politi$al party
#f you have contributed any amount to a recognised political party, you
are eligible to claim a tax deduction ranging from 20 percent to %00
percent of the amount under Section ;0DD" for individuals and Section
DD8 for corporate organisations. One can contribute up to %0 percent of
one!s gross total income to a political party.
"ome loan and +oint home loan
(he principal repayment of the home loan qualifies for deduction under
section ;0"E the interest payable on the home loan is allowed as
deduction under section 5: of the Act. (he deduction in respect of the
interest is available in full for properties that are treated as let out, but in
case of a property treated as self.occupied, the amount cannot exceed
$s %.2 lakh per financial year, subject to certain conditions.
'owever, you cannot claim interest deduction when the flat is under
construction. (he interest paid during the per.construction period can be
claimed as deduction in five equal installments starting from the financial
year in which the construction is completed. Chere the property is jointly
owned, with the share of each owner being definite, the net taxable
annual value of the property is apportioned to each of the joint owners in
the ratio of their share in the property. And, as the shares are definite,
each holder is eligible to claim a separate deduction in case the property
is jointly owned.
Edu$ational expenses of %hildren
#t is well.known that the deduction under section ;0" is available to an
individual in respect of thetuition fees of his/her children with an overall
limit of $s % lakh. (he deduction, however, is not available for capitation
fees/donation collected by the school or college. (here is another
section in the Act 1section ;0*3 which provides for deduction in respect
of interest on loan taken for higher education.
(he educational loan can be taken for any course pursued by the
individual or the spouse or children of the individual post the senior
secondary course or its equivalent. (his deduction is also available for
supporting the education of a relative provided the individual is his/her
legal guardian. #t is allowed for a maximum of eight years starting from
the year in which the interest is first repaid.
"ealth Insuran$e
A deduction of up to $s %2,000 can be claimed in respect of the
health insurance premium which one pays for covering oneself and or
the wife and dependent children. &ou can claim an exemption of $s
%2,000 on premium payments made for parents and a higher deduction
of up to $s 50,000 if one of your parents is a senior citi+en. 'owever, in
case of company insurance, only the organisation can seek tax relief and
not the employee.
"ave an ill dependent to loo, after- Pay loer taxes
(he income tax department understands that chronic illness of a
dependent can empty your life savings, and paying full taxes in such
cases is burdensome for any taxpayer. 'ence, it allows a deduction of
$s :0,000 1$s A0,000 if the dependent is a senior citi+en3 per year,
under Section ;0==8. =ependants include siblings, children, parents
and spouses.
(his deduction is available for specific diseases, which include many
neurological diseases like dystonia musculorum deformans, aphasia and
)arkinson!s disease, hemiballismus, ataxia, motor neuron disease,
chorea, haematological disorders, chronic kidney failure, and a few
more.
#n order to claim this deduction, it is important that the patient should be
dependant on the taxpayer, and should not have filed for such a
deduction separately.
'edu$tion for medi$al expenses in$urred on disability of Spe$ial
dependants . se$tion ()''
#n case any of your dependants suffer from a physical or mental
disability, you can claim a deduction under section ;0== for an amount
of $s 20,000 1if the disability is less than ;073 or $s % lakh 1if the
disability is ;07 or more3.
=ependants for this purpose can include spouse, children, parents,
brothers and sisters, or any of them. (o be eligible to claim the
deduction, you must obtain a certificate in orm %0#A from a doctor with
the prescribed qualification and working in a government hospital.
&ou will have to submit the copy of the certificate in orm %0#A to the
payroll department of your organisation.
Scope of Deduction 6 =eduction can be claimed for dependent parents,
spouse, children and siblings. =ependents must not have claimed any
deduction for their disability.
=eductions are permissible in either of the following cases.
a3 "osts incurred for medical treatment, training or rehabilitation of a
disabled dependent, including amount spent for nursing.
b3 Amount paid towards an insurance scheme for the maintenance of
your disabled dependent in case of your untimely death.
Meaning of Disability- =isability means a person suffering from :07 or
more of any of the below disabilities. A severe disability condition is ;07
or more of the disabilities.
a3 8lindness and Fision problems
b3 @eprosy.cured
c3 'earing impairment
d3 @ocomotor disability
e3 4ental retardation or illness
Please Note -
a3 #ndividuals would need to produce a copy of the disability certificate
as issued by the central or state government medical board to claim
deduction.
b3 #nsurance policy obtained must be in your name and should be a
policy for life. #t could pay either an annuity or a lump sum amount for the
benefit of the dependent on your death.
c3 #f the disabled dependent predeceases you, the policy amount is
returned to you, and treated as income for the year in which you receive
it, thus fully taxable in your hands.
Medi$al expenses for spe$ified diseases li,e #I'S/ %an$er 0Se$tion
() ''1 3
(he actual expenditure incurred on treatment of specified disease such
as A#=S, cancer, neurological diseases, etc., is deductable to the extent
of :0,000 or the actual expense whichever is lower. (he limit is
increased to A0,000 in case of expense incurred for a senior citi+en.
Scope of Deduction 6 =eduction is applicable for treatment of self,
spouse, children, siblings, and parents, wholly dependent on you.
Diseases covered
a3 -eurological =iseases 1where the disability level has been certified as
:07 or more3.
b3 )arkinson!s =isease
c3 4alignant "ancers
d3 Acquired #mmune =eficiency Syndrome 1A#=S3
e3 "hronic $enal failure
f3 'emophilia
g3 (halassaemia
Point to Note-
%. #f you are already receiving any reimbursement for the treatment from
your insurance company or employer, deductions cannot be claimed. #f
you are receiving partial reimbursement, the balance amount can be
used for a deduction.
5. A certificate would be required from a specialist working in a
government hospital, as proof for the specified ailment.
'edu$tion for rent paid if you are not availing "!#
&ou can claim a deduction for rent paid to the extent of 5,000 per month
even if you don!t receive '$A from your employer or you are self.
employed. (his deduction, available under Section ;0DD, is subject to
some conditions.
(o "laim the deduction -either the taxpayer nor the spouse should own
a house at the place of employment. (hey cannot be self employed,
which includes businessmen or professionals. @astly, the tax payer
should not self.occupy his/her house at any other place.
#mount paid under 2ational Pension System
G(he contributions made by an employee to the -)S qualify for a
deduction under ;0""= and the upper limit of %,00,000 under Section
;0" of the Act. 'owever, effective April 50%%, employer contributions to
-)S up to %07 of the employee!s salary would qualify for an additional
deduction.
3oreign taxes
4any individuals take up overseas assignments and as a result earn
income both in #ndia and abroad. #n the event they face taxation in both
countries, they may avail credit of taxes paid overseas while filing their
tax returns in #ndia. (he #ndian tax laws as well as tax treaties signed by
#ndia with other countries prescribe provisions for claiming credit of
foreign taxes.
!epairs and maintenan$e of house property
&ou will never forget to claim deduction of interest on repayment of your
home loan, but not many people know that any interest paid on home
loan for reconstruction or repair of the Ghouse propertyH qualifies for
deduction of up to 90,000, subject to the overall limit of %,20,000.
Exemption from $apital gains
#f you have made any capital gains on the sale of residential house
property, such capital gains shall be exempt from tax, provided you
purchase a new residential house one year before or within two years
after the date of transferE or you incur expenditure on construction of
house property within three years from the date of transfer. Alternatively,
to avail exemption, a tax payer may also invest the gains in $*" / -'A#
bonds, subject to specified conditions.
4ith most $ompanies $losing investment de$laration by +anuary
end/ you still have some time to iden your tax relief5 Thin,/
exe$ute and file your investment de$laration and see, optimal tax
benefits5 These dedu$tions/ along ith the $ommon ones li,e
medi$al benefits/ "!#/ home loan EMIs/ et$5 $an help you save a
$onsiderable amount of tax every year5
&itle Knon S$hemes u/s ()% of In$ome Tax #$t
#f an individual falls in the 907 tax bracket and has exhausted the
maximum limit of Sec ;0", one can save $s 90,B00 in taxes. Ce runs
you through the provisions of Section ;0". 'owever, we highlight those
schemes that are little known and which many investors avail of
sparingly.
Stamp duty and registration $harges
(he first and foremost provision that many taxpayers are not aware of
isstamp duty and registration $harges. According to the law, >the
amount paid towards stamp duty, registration fees and other expenses
for the purpose of transfer of house property to the owner also qualifies
for tax exemption!. (his is over and above the principal payment that
qualifies under Section ;0". 8ut deduction u/s. ;0" for total amount
including )rincipal @oan $epayment and stamp duty and registration
$harges can not exceed $s. One @akh.
*xemption for interest payment towards home loan is permissible under
another section hence the above limit of $s % lakh does not apply to it.
@et us take an example, 4r A purchases a house property of $s 95 lakh
and takes a home loan of $s 52 lakh at %07. 'is stamp duty and
registration charges on this work out to approximately $s %.I2 lakh. (he
interest for the first year comes to $s 5.:; lakh and principal payment
comes to $s :%,9IA.
(hus, 4r A can claim maximum tax exemption of $s %.2 lakh on his
interest payment under Sec 5:. (he entire principal payment 1not more
than $s % lakh3 of $s :%,9IA can be claimed under Sec ;0".
-onetheless, it still leaves $s 2;,A5: to be invested in other tax.saving
instruments to reduce overall tax liability. #n reality, buying a house is
quite often an expensive affair, leaving little cash with the homebuyer.
On top of it, if one has to make additional investment to save on tax, it
becomes difficult.
8ut with the inclusion of registration and stamp duty fees under Section
;0", it not only reduces tax liability but also saves the property buyer
from further cash outgo.
3ixed.deposit ith "6'%7 or any housing board
Another provision that would be eligible for exemption under Section
;0" is >any sum paid towards fixed.deposit schemes of '<="O or to
any housing board, which is constituted in #ndia for the purpose of
planning, development or improvement of cities or towns!.
(ypically, these schemes are promoted by state housing boards to
promote long.term social sector objectives, or for infrastructure
development of city. #n fact, principal payment towards home loans
taken from 'ousing and <rban =evelopment "orporation 1'<="O3 also
qualifies for exemption under Sec ;0".
*ven subscription to a home loan account scheme of the -ational
'ousing 8ank 1-'83 or contribution to any notified pension fund set up
by the -'8 also meet the requirements. 'ence, if these two offer home
loans at competitive rates, one can avail loan from them as well.
%ontribution to a non.$ommutable deferred annuity plan
urther, $ontribution to a non.$ommutable deferred annuity plan is
also an option to avail tax exemption. #n normal parlance, this is nothing
but a standard pension plan eligible for tax exemption under Section
;0".
(his includes schemes such as Jeevan Suraksha by @#" or )ension
)lus plan by '=" Standard @ife. "ontribution to an approved
superannuation fund is also a way to claim tax benefit.
(ypically, large organisations maintain superannuation funds and
contribute to them. #n case employees want to make a higher
contributionE they can do so to the extent of %27 of basic plus dearness
allowance. 8esides these lesser.known options, the other commonly
used options are contribution to employee provident fund, life insurance
premium, or payment of tuition fees. ive.year tax saving fixed deposits
issued by banks can also be bought.
Cith a A.I .I27 quarterly compounding interest rate, these =!s have
an edge over -S" with a one.year lesser lock.in period. 'owever, the
-S" has an edge because of the fact that interest accrued is also
eligible for ;0 " limit for the first five years that is not the case with =s.
E8uity.lin,ed savings s$heme M3 or 6lips
8esides, these low risk options, one can go for high.risk return schemes
such as equity.linked savings scheme 4 or even <lips. *@SS usually
provides a higher return in the long run than small savings schemes and
carries a lower lock.in period of three years.
Small savings schemes offer a lower return of around ; to ;.27. urther,
there is a relatively long lock.in period .%2 years for the )) and six
years for -S". (he advantage with these schemes is that they offer a
guaranteed return unlike equity.based products where there is no
guaranteed return and one can lose money like when the markets
tumbled in 500;.
$isk profile and investment strategy are the key determinants for
allocating funds to any scheme. Also, one must consider inflation.
adjusted returns before taking a decision.