It is important to consider tax–efficient investing whenever possible. Investors can improve returns by applying strategies to minimize their tax burden.
Section 80C has listed out many Investment options that can not only help save on tax but also help to grow wealth.
It is necessary to understand what these investments are all about so that a person does not end up spending a huge amount of money due to tax every year. While investing, it is imperative to choose a product based on one’s financial goals and risk appetite. A financial expert can always be of help in this regard.
Tax-Saving Options that Save Tax and Grow Your Wealth
The most common tax-saving options under Section 80C are explained below:
ELSS Mutual Funds (ELSS)
Equity Linked Saving Schemes (ELSS) refer to open-ended equity linked Mutual Funds. Apart from saving tax (under Section 80C) benefit, ELSS helps in growingwealth by making investments in equity or stocks.
Advantages of ELSS
- Onecan get higher returns over the long term when compared to traditional investments such asFixed Deposits.
- ELSS has the lowest lock-in period of only 3 years (as compared to other options under section 80C).
- Income from ELSS investment is completely tax-free.
- ELSS investments allow to contribute small monthly sums rather than a lump sum amount at one time.
Public Provident Fund (PPF)
Another good option to save tax under section 80C is to investin the Public Provident Fund (PPF).
A few features of PPF are:
- The interest earned on PPF investments is tax-free.
- One can invest in a PPF either through a bank or through a post office. The PPF investment has a lock-in period of 15 years.
- This period can be extended 5 years at a time.
- Generally, PPF accounts does not allow to withdraw money. However, it does offer some liquidity under certain conditions (not less than 5 years).
5-year Bank Fixed Deposits
These are similar to regular FDs except that these come with a lock-in period of 5 years.
A few features are:
- A low-risk investment option, the 5-year Bank FDs also offer higher interest rates than normal FDs (usually 0.25% to 0.5% higher).
- However, one cannot withdraw money from this account, not even by paying a penalty.
- The interest earned every year is fully taxable.
- Though a low-risk investment, the returns from a 5-year Bank FD is lower as compared to other investment options.
National Savings Certificate (NSC)
By investing in an NSC through local post office one can claim tax benefits.
- Tax benefits up to Rs. 1,50,000 can be claimed.
- The interest rate for NSC investments is fixed every quarter and linked to Government security rates.
- This interest rate varies depending on the lock-in period of investment.
- The interest earned on NSC investments is fully taxable. However, the interest earned can be re-invested. But, if the total goes beyond Rs. 1,50,000 after adding on the interest after re-investment, then one needs to pay tax on the additional amount.
National Pension System
One can avail tax benefits by investing in the National Pension System – the pension scheme operated by the Indian Government.
NPS also serves as a good source of income after retirement. NPS offers two account options – a Tier-1 account and a Tier-2 account.
Pension Funds can be another investment option for tax savings.
Deferred Annuity Plan – One has to invest annually until retirement. After retirement, up to 40% of the accumulated amount can be withdrawn tax free. The remaining amount can be re-invested in an annuity fund which will provide a monthly pension.
Apart from these above investment options, there are some pre-determined eligible expenses listed under section 80C, which can also help to save tax. These are
- EPF or Employee’s Provident Fund,
- Life InsurancePremium,
- Children’s Tuition Fees and
- Home LoanPrincipal Repayment- principal component.
Gift Tax planning – 3 awesome tips to save income tax legally
One can always enjoy tax exemptions by the following ways:
- Investments made under parent’s name are tax free. If one plans to invest Rs. 4 lakhs under his/her name, with a 30% tax bracket at a 10% interest rate,the income on this Rs. 4 lakhs will be Rs. 40,000 with the rate of income tax being 30% one needs to pay almost Rs. 12,000 as income tax. The same amount invested in each of the person’s parent’s name (Rs. 2 lakh each) and because this is lower than the limit set of Rs 3 lakhs for senior citizens, they will not be taxed. The income earned by each of the parents will be Rs. 20, 000, and the tax will be Nil.
- If one has gifted to unemployed sister, both original interest on gift and subsequent interest will considered the sister’s income and not clubbed with the person’s income.
- Cash or asset gifted by individual to their spouse is exempt from gift tax, but any income earned from this gift in the form of interest or house rent is taxable. The spouse is charged for such earnings from gift, if they have taxable income or the income is clubbed with that of donor.
- Similarly, if a father-in-law transfers cash or asset as gift to daughter-in-law, any income earned from this gift will either be taxable in her hands or clubbed with father-in-law’s income
- One can gift an investment or give interest-free loans to children who are 18 years and older. They should ideally be still studying or earning less than the person. Any income earned from this gift will be taxed in their hands and not clubbed with the person’s income.
Tax-saving tips for buying and selling a property
To give buyers relief, the government has allowed income tax (I-T) deductions if the property is bought with a loan.
- Under Section 80C, the borrower can claim deduction of up to Rs 1.5 lakh.
- For a self-occupied property, aRs 2 lakh benefit is available under Section 24 (b) of theIncome Tax Act for interest on the home loan.
- If the property is not self-occupied, the entire interest paid to the lender can be deducted from income.
When a person sells a property, he or she needs to pay tax on the profits made.
If sold within three years of acquisition, the seller needs to pay short-term capital gains tax (STCG). In this case, the profits are combined with the income and taxed on the I-T slab rate.
If the property is held for more than three years, it attracts long-term capital gains tax (LTCG). The tax is levied at 20 per cent (plus surcharge and cess) after adjusting the gains for inflation using the cost inflation index the government issues.
A seller can save entire tax outgo if he or she uses proceeds equivalent to long-term capital gains for buying a new house located within India within one year prior to the sale date or two years from the sale date. If the property is under construction the time period permitted is three years.
If not immediately buying a house, this money needs to be kept in the Capital Gains Account Scheme (CGAS), and withdrawn within the stipulated timeframe.
Why do I have to start tax planning in the beginning of year? Lots of options are available during financial year end
Many have faced the consequences of doinglate tax planning some time or the other. That is why the best tax planning advice experts give is simple-Start Early. Timely tax planning is the key to having a secure financial future. Here are a few tips to get it right. (http://www.businesstoday.in/moneytoday/tax/tax-planning-for-safe-financial-future-few-tips/story/207652.html)
Tax efficiency tips for freelancers, the self employed and small businesses
The below points should help to ensure the above mentioned persons to claim the maximum deductions.
A freelancer can claim all expenses directly related to the business. The list includes rent, repairs, office supplies, telephone bills, internet bills, travelling expenses and entertainment or hospitality expenses connected with the business.However, these expenses must be spent fully for freelancing work and not be a capital asset or personal expenditure.
Capital expenditures include furniture and gadgets used to set-up the business or property bought to run it, where benefit of such an asset is usually expected to last more than a year.On capital expenses one is allowed to charge a small depreciation every year. The depreciation percentage and methods are laid out in the I-T Act for different type of assets.
– Debalina Roy Chowdhury