As the financial year end is approaching, everyone is worried about saving maximum tax possible. One can legitimately save tax by utilising the deductions available under the Income Tax Act, 1961 to its full. As the year end is very close, there is a good chance that you may end up picking wrong investments in a rush to avoid missing the March deadline. Here’s a quick reckoner for you to avoid such situations and make an informed smart investment decision.
Before purchasing any tax saving product, consider whether it is appropriate for you. Chose the investment option that suits your need and not just for the sake of tax saving. There is a maximum deduction cap fixed for each section under the Income Tax Act, for example, deduction for section 80C, 80CCC and 80CCD investments together cannot exceed Rs.1 lac. First and foremost, compute the deductions you are already eligible for on account for statutory deductions and other mandatory payments like employee’s contribution to PF, life insurance premium etc. Then you can arrive at the amount that you need to further invest in order to maximise your tax saving.
Keep all the investment documents handy so that you do not miss out deduction on any investment you have made. If you are planning to purchase a new life insurance policy, it’s better to purchase it before March end as the premium paid shall be eligible for deduction only if it is paid by March.
There is a whole lot of investment options available for deduction u/s 80C, some of which are listed below:
- Public Provident Fund – It can be invested for self, spouse and children. The interest on PPF is exempt from tax and lock-in period is 15 years.
- Life Insurance Premium – Premium paid for self, spouse and children is eligible for deduction. Insurance is an expense, however, plans like endowment and ULIP are a combination of insurance and investment. Do not judge life insurance policies only on the basis of return it provides. Also consider the insurance cover it offers to you in case of any mishap.
- 5-Year Fixed Deposit – A long term fixed deposit with a minimum tenure of 5 years is eligible for deduction. The interest on this FD, however, is taxable.
- National Savings Certificate (NSC) – Investment in NSC is eligible for deduction. The interest on NSC is taxable, but as the same is reinvested, it is also eligible for deduction u/s 80C.
- Pension plans – Deduction can be availed for premium paid for pension plans u/s 80CCC.
- Principal component of home loan repayment.
- Stamp duty paid on purchase of new house.
- Tuition fee paid for two children for full time education in India.
- National Pension System (NPS) (Section 80CCD) – Amount contributed by a person in NPS is eligible for tax deduction subject to maximum of:
(i) 10% of salary (Basic + Dearness Allowance) in the case of an employee;
(ii) 10% of gross total income in any other case.
This is however subject to the overall cap of Rs.1 lac. Parallel to this, the employer’s contribution to NPS upto 10% of salary (Basic + Dearness Allowance) is eligible for deduction over and above the limit of Rs.1 lac.
Apart from deductions under section 80C, there are some more avenues where you can save tax:
- Medical Insurance Premium (Section 80D) – Premium paid for medical insurance for self, spouse and children is eligible for deduction upto Rs.15,000 (Rs.20,000 for senior citizens). The same amount is eligible for deduction if premium is paid for medical insurance of parents. The amount paid for preventive health check-up upto Rs.5000 for self, spouse, children or parents can also be claimed under this section, subject to the overall cap of 15k / 20k, as applicable.
- Interest paid on education loan for self, spouse or children is eligible for deduction under section 80E.
- Interest component of home loan repayment (Section 24) – Tax deduction of upto Rs.1.5 lacs can be availed on interest you paid on home loan if the property is self-occupied. In case of let out property, there is no upper cap for this deduction.
- Rajiv Gandhi Equity Savings Scheme (Section 80CCG) – New investors having an annual income less than Rs.10 lacs can take deduction by investing in equity market under Rajiv Gandhi Equity Savings scheme. Maximum of Rs.50,000/- can be invested in this scheme and deduction can be availed of 50% of the amount invested.
- Donations to charitable organisations (Section 80G) – Donations to certain charitable institutions or organisations are eligible for deduction. The amount of deduction can be 50% or 100% of the donation amount depending on the institution you are donating to.
Now, knowing the various investment options available to you for tax saving, you can chose among them those that are best suitable for you and don’t fall prey to last minute mis-sellings. Plan before you invest as tax saving instruments are long term investments and long term decisions are never taken in a hurry.
CA. Simarpreet Singh Gulati