Tax-saving In The Eleventh Hour

PLANNING LAST-MINUTE INVESTMENTS TO SAVE TAXES? HERE’S WHAT ALL YOU CAN DO

Planning last-minute investments to save taxes? Here’s what all you can do

ith the current financial year nearing its close, it’s time to take stock of your tax- saving investments. In case you opt for the old tax regime, you can claim deductions of up to ` 1.5 lakh in a financial year under Section 80C. There are other sections also to help you reduce your tax outgo. Do your tax planning activity at the beginning of the financial year to avoid last-minute hiccups. But in case you are late, there’s still time to invest and save taxes. A look at the options available for last-minute investors.

Section 80C: The Most Popular

You can avail a deduction of up to ` 1.50 lakh in a financial year under Section 80C of the Income-Tax Act. A number of options are available but choose the one that suits your risk profile the best. Think long- term and do not take decisions on an ad- hoc basis.

Tax- saving mutual funds: Most financial planners swear by tax- saving mutual funds, or ELSS. An ELSS is an open- ended equity-linked scheme with a statutory lock-in period of three years and tax benefits. ELSS funds have the shortest lock-in period among tax- saving options available under Section 80C. “In the tax- saving space, ELSS is one of the preferred investment vehicles as it has one of the lowest lock-in periods and offers the maximum potential for returns. For the long- term, equity is the most- suited investment option as volatility is reduced substantially. Given the growth environment around us, it is preferable to remain invested in equities,” says Raghvendra Nath, Managing Director, Ladderup Wealth Management.

In the last one year, ELSS funds have delivered an average return of

22.30 per cent, the highest among taxsaving options. The best-performer among them ( irrespective of asset size) has been Quant Tax Fund with

55.52 per cent return in the last one year. In the last three and five years, ELSS funds have given average returns of 8.98 per cent and 14.31 per cent, respectively.

Mutual fund advisers, however, advise caution. The market remained volatile in 2020, which benefitted these schemes. “Expected returns from these schemes should be 12 -14 per cent per annum,” says Nath.

Also, no gain is without risks. If you are a risk- averse investor, don’t go for ELSS funds. They are for those who have high risk appetite and can stay invested for at least five- seven years.

Capital gains on tax- saving MFs attract 10 per cent tax on gains exceeding ` 1 lakh in a financial year. National Pension System: Another tax- saving instrument, which allows equity allocation, is the National Pension System ( NPS). The government launched this low- cost tax- saving option to help investors save for retirement. NPS restricts withdrawals till the age of 60 in Tier-I accounts. Premature withdrawals are allowed after three years in specific cases like critical illness, children's education, wedding expenses, purchasing or building a house.

NPS offers three kinds of deductions for investing in Tier- I accounts. Firstly, any individual who is a subscriber of NPS can claim tax benefit under Section 80 CCD (1) within the overall cap of ` 1.5 lakh under Section 80 CCE. Secondly, NPS allows a deduction for investments up to ` 50,000 under subsection 80CCD (1B). This is over and above the deduction of ` 1.5 lakh available under Section 80C of the I-T Act. Thirdly, a corporate subscriber may avail a deduction of up to 10 per cent of salary ( basic + DA) on employer’s contribution under Section 80CCD (2).

NPS also offers a voluntary account, Tier-II, with flexible withdrawal and exit rules. Last year, the government allowed NPS subscribers working with the Central government to avail tax benefit on their contribution to Tier-II accounts as well. Such contributions are locked in for three years.

NPS delivered double- digit returns in 2020 for both equity and debt schemes. But such high returns are not always guaranteed. “As with mutual funds, NPS schemes primarily invest in market-linked securities, which are susceptible to various economic cycles, market movements, policy decisions and other socio- economic factors. Hence, one should not expect high returns generated in the last one year to continue for the long- term. Any correction in the equity market or a prolonged bearish condition can adversely impact the returns of NPS equity schemes like in the case of equity MFs,” says Sahil Arora, Director, Paisabazaar.com.

“Similarly, a reversal in the interest rate regime or deterioration in the debt market or money market can adversely impact the returns of NPS corporate bonds and government bond schemes as well as debt mutual funds,” he adds.

NPS is suitable for investors with low- to-medium risk profile. For those with high risk- tolerance capacity, the 75 per cent cap on equity allocation is a drawback. “A major disadvantage of NPS is the 75 per cent upper cap placed on equity exposure. Those with higher risk appetite seeking higher growth for their post-retirement corpus would find ELSS more suitable,” says Arora.

However, NPS can be utilised to avail additional tax benefits. “It is recommended to use ELSS investments for deductions under 80C up to ` 1.50 lakh and utilise NPS only for additional deduction under 80CCD (1B) up to ` 50,000, as this would ensure maximum liquidity and tax efficiency,” says Nath of Ladderup Wealth Management.

Life Insurance: Life insurance as a category offers fi

nancial protection as well as tax saving. Premiums paid qualify for tax deduction under Section 80C. Also, the amount at the time of maturity is tax exempt under Section 10(10D). Except in case of ULIPs where the maturity amount is tax exempt for annual premiums of up to ` 2.5 lakh only.

The objective of buying life insurance goes beyond saving taxes though. The primary goal should be financial security for family members in case the primary earner dies. Calculate an adequate sum to take care of your expenses, liabilities and goals before going for a particular policy.

Term insurance is the cheapest and the most recommended life insurance scheme. However, industry experts believe ULIPs, which saw a major revamp in the last few years, are making a gradual comeback. The new ULIPs are low on charges. However, to buy an adequate insurance cover under an ULIP, you need to pay a heavy

premium compared to a term plan.

PPF: Public Provident Fund ( PPF) is a 15-year investment scheme, which falls under the EEE category. EEE means an investor enjoys tax exemption at the time of deposit, accrual of interest and withdrawal. It is a popular investment option to save taxes under Section 80C, but the 15-year lock-in period is a drag on liquidity. The lock-in can be extended by five years in case the investor does not need the money at the time of maturity. PPF also scores high on safety. It is a suitable tax- saving option for risk- averse investors who do not mind a long lock-in.

PPF allows one withdrawal after five years, excluding the year of account opening. The current interest rate on PPF deposit is 7.1 per cent, the lowest since 1977. Till the March quarter of FY20, PPF accounts used to attract 7.9 per cent interest.

Sukanya Samriddhi Yojana (SSY): Parents or guardians can open SSY accounts in the name of a girl child till she attains 10 years of age. A SSY account matures after 21 years or at the time of the marriage of girl child after she becomes 18. Like PPF, investments under SSY fall under EEE.

SSY accounts currently offer 7.6 per cent interest per annum, the highest among small-savings schemes. It can be prematurely closed after five years in case of death of the account holder or death of the guardian. An investor is allowed to withdraw up to 50 per cent of the deposit once the girl reaches the age of 18 or after passing Class 10. The account can be opened for a maximum of two daughters, with a combined investment of up to ` 1.5 lakh in a year. Tax- saving FDs: Tax- saving deposits by banks come with a lock-in of five years. At present, SBI 5-Year Tax Saving FD offers an interest rate of 5.40 per cent per annum. It's 6.20 per cent for senior citizens. However, the interest earned on these deposits is taxed according to the investor’s tax bracket. The bank also deducts TDS wherever applicable. Senior citizens can claim deduction of ` 50,000 on the interest earned from deposits according to Section 80TTB.

National Savings Certificate ( NSC): Anyone looking for a safe investment avenue to save taxes under Section 80C while earning a steady income can invest in NSC. It offers guaranteed interest for a term of five years. Being government- backed, it provides complete capital protection. Currently, NSC offers an interest of 6.8 per cent compounded annually, but payable at maturity. The interest is taxable when received, at the time of maturity. The interest earned on an annual basis is not paid to the investor but reinvested, which qualifies for a fresh deduction under Section 80C, thereby making it tax- free.

Senior Citizens Savings Scheme (SCSS): Senior Citizens Savings Scheme is a tax- saving investment option for those above 60 years of age. A government

backed scheme, it is a safe investment option. An individual may invest a maximum of up to ` 15 lakh in SCSS in lumpsum. It has a tenure of five years and the account can be extended for a further three years, within one year of maturity. Currently, the scheme offers an interest rate of 7.4 per cent per annum. The interest is paid quarterly, which makes it a source of regular income for investors.

One of the major drawbacks of investing in SCSS is that the interest earned is taxable if it exceeds ` 50,000 in a financial year. TDS is also deducted accordingly.

Apart from investments, several expenses qualify for tax deduction under Section 80C. In fact, you should first look at these expenses. Deduct the total amount of qualifying expenses incurred during the financial year from the ` 1.50-lakh limit under Section 80C and invest the remaining amount in a suitable option.

An amount paid towards a child's tuition fee for up to two children also qualifies for tax deduction under Section 80C. Repayment of home loan principal is also allowed as a deduction under the Section. Stamp duty and registration charges towards taking ownership of a property can be claimed as deduction under Section 80C. However, exemptions can only be claimed in the year the duties are paid.

Beyond Section 80C

The Income-Tax Act allows some more deductions apart from those under Section 80C.

Section 80D: It allows deductions on payment of premiums towards health insurance policies. You can claim deduction of up to ` 25,000 for premium paid towards insurance of self, spouse and dependent children. The section further allows a deduction of up to ` 25,000 (`50,000 if parents are senior citizens) for premium paid towards the health insurance policy of parents.

Section 80DD: If you have incurred expenses on a handicapped dependent with at least 80 per cent disability in the previous year, you may claim tax deduction on expenses of up to ` 75,000. The deduction amount increases up to ` 1.25 lakh in case of severe disabilities.

Section 80DDB: The I-T Act allows tax deduction towards treatment of specific diseases for a maximum of up to ` 40,000 under Section 80DDB. The maximum deduction in case of senior citizens is ` 1 lakh.

Section 80E: You can claim deduction on interest payment if you have taken an education loan for self, spouse or children.

Section 80EE: This section allows tax deduction for first- time home buyers on home loan interests. Maximum deduction that can be claimed under this section is ` 50,000 during a financial year.

Besides, you can also claim up to ` 2-lakh deduction on interest payments under Section 24b. In case of a let- out property, the tax benefit is only limited to the interest payment amount. You can claim an additional deduction of ` 1.5 lakh under Section 80EEA on interest repayment for affordable housing this year.

Section 80G: Charity to approved institutions can be claimed as deduction.

Section 80GG: Employees who do not get HRA, but are still paying rent, may avail a maximum deduction of up to ` 60,000 in a financial year.

Section 80GGB and 80GGC: These sections allow 100 per cent tax deduction on contributions made to a political party in any mode other than cash.

Section 80TTA: Interest earned on savings accounts up to ` 10,000 per year is allowed as deduction. The limit of ` 10,000 includes interests from all savings accounts with banks, co- operative banks, and post offices. Interest earned over ` 10,000 will be taxable as income from other sources.

Section 80TTB: Senior citizens can claim a deduction of up to ` 50,000 in a financial year on interest income from fixed deposits or savings accounts at banks, cooperative banks, and post offices.

In case you are late, there’s still time to invest and save taxes in the current fiscal. Consult a good financial planner or an expert. And from next year, plan your investments from the first month of the financial year itself to avoid last-minute chaos.