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Tax Savings Schemes
and Instruments
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For many people, the taxman’s knock
feels like a biannual bolt from the blue!
Every year you go through the rigour of filing your taxes and more
often than not, you are not sure about what tax saving option suits you
the most. This time around though, don’t just hurriedly invest in any
tax-saving instrument.
As we approach the last quarter of FY2014-15, we get you acquainted
with the different options you could consider to limit your tax outgo for
the year and decide the best ones for yourself.
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Before you answer the taxman’s knock
and start planning your taxes, you need
to know two important things:
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1: Define Long-Term
Determine your long-term financial goals in advance.
At every stage in life, your tax strategy must complement your
goals, whether it is wealth-building, adding assets (e.g. a home),
family responsibilities or retirement planning.
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2: Remember the Three Key Sections
Individual income tax for Indians is defined under different
sections of the Income Tax Act.
•While we won’t go into the details, just remember three key sections: 80C,
80CCC and 80CCD.
•The total tax deduction you claim under these three cannot exceed Rs.
1,50,000 in a year.
•However, you can claim deductions under other sections over and above
this limit.
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So what exactly are your options under
Section 80C, 80CCC and 80CCD?
Read on.
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Employee Provident Fund (80C)
What is it:
If you’re employed, a certain part of your salary mandatorily goes towards EPF, which
is matched by your employer.
Benefits:
Your entire contribution will be exempt from income tax up to the total limit of Rs. 1.5
lakh. The amount is automatically deducted every month from your salary which
makes it an easy investment.
Remember:
You can choose to increase your own contribution to your EPF.
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Public Provident Fund (80C)
What is it:
PPFs provide reasonable returns of 8-9% per annum. Investors can invest between
Rs.500 and Rs.1.5 lakh a year in PPFs; the money and interest are both tax-free.
Benefits:
PPFs are a good option for cautious investors.
Remember:
The money remains locked in for 15 years, though premature withdrawals are
allowed from the 6th year onwards.
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National Savings Certificates (80C)
What is it:
Like PPFs, NSCs invest in government securities and offer comparable returns.
Benefits:
You can save up to Rs.1.5 lakh per annum with NSCs and the interest is also non-
taxable, provided it is re-invested.
Remember:
Unlike PPFs, there is no maximum investment limit in NSCs, and you have to
choose an investment period of either 5 or 10 years.
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National Pension System (80CCD)
What is it:
A voluntary defined-contribution pension scheme by the government. You need to
invest a minimum of Rs.500/month; there is no upper limit.
Benefits:
Being a regulated entity, you can expect NPS to provide stable returns.
Remember:
The annual tax deduction is restricted to 10% of your salary (Basic + Dearness
Allowance) if you’re an employee and 10% of gross income if you’re self-employed
subject to a cap of Rs.1 lakh.
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ELSS (80C)
What is it:
Equity-linked saving schemes, a category of mutual funds, give you tax benefits
while allowing you to participate in the equity markets.
Benefits:
ELSS comes with relatively higher risk, but has the shortest lock-in period in its tax
category, i.e. only 3 years.
Remember:
The minimum investment amount is just Rs.500 per year and you have the option of
investing in monthly instalments, or SIPs.
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Life insurance & ULIPs (80C)
What is it:
Premiums paid towards life insurance policies taken from LIC or other insurers are
eligible for rebate, as long as the premium amount is under 10% of the insured
sum.
Benefits:
In addition to life cover which gives you and your family financial security, you can
also reduce your tax outgo with this instrument.
Remember:
Premiums paid towards ULIPs – instruments combining investment and insurance
features – are also eligible for tax benefits.
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Home Loans (80C)
What is it
Under 80C, home-buyers can claim exemption of up to Rs. 1.5 lakh on the principal
paid on a home loan.
Benefits:
The burden of your home loan EMIs becomes slightly more bearable thanks to this
tax benefit.
Remember:
The interest component of the loan is also currently exempt up to Rs. 2 lakh, but
under Section 24(b).
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Miscellaneous
Pension funds (80CCC), 5-year bank fixed deposits (80C), children’s
school tuition (80C), the senior citizens’ savings scheme (SCSS) (80C),
and premium paid for annuity plans (80CCC) are some of the other things
that are eligible for tax deductions.
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The other sections (which are basically
outside the Rs. 1.5 lakh limit):
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RGESS (80CCG)
What is it:
The Rajiv Gandhi Equity Savings Scheme (RGESS) is a good option for first-time equity market
investors.
Benefits:
If your annual income is below Rs. 12 lakh, you can invest up to Rs. 50,000 per annum in the
Scheme and get tax benefits of up to Rs. 25,000 (i.e., 50% deduction). This is over and above the
Rs. 1.5 lakh limit available under section 80 C. The dividend you earn from the Scheme is also
tax-exempt.
Remember:
The kicker, though, is that only first time investors are eligible for this deduction and need to open
a Demat account to invest in RGESS, which means a small extra expense.
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Health Insurance (80D)
What is it:
Unlike life insurance, health insurance premiums are tax-exempt under Section 80D.
Benefits:
The tax-payer gets benefits not only on health cover premiums paid for him/herself,
but also his/her family members.
Remember:
Premiums paid for health cover taken for oneself, parents, spouse and dependent
children can make you eligible for benefits of up to Rs.30,000-35,000 annually.
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Charitable Donations (80G)
What is it:
The Indian government gives tax relief to those who donate money towards
prescribed charitable funds and institutions.
Benefits:
It enhances the feel-good factor associated with a charitable act.
Remember:
Donations to certain notified entities are eligible for 100% deduction whereas others
are eligible for 50% deduction under section 80G, subject to a limit of 10% of gross
total income. Also, donations to foreign trusts or political parties do not qualify for
exemption.
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Miscellaneous
Deductions can be claimed to varying degrees on house rent paid [10
(13/A)], interest on loans taken for higher studies (80E), interest on deposits
in bank savings accounts (80TTA) and expenses borne for treating certain
diseases (80DDB).
This is just an indicative list; there are many other categories exempt from
tax or for which deductions are available.
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Choose your pick, carefully!
As we have seen, there is a wide variety of tax-saving options out
there. However, one must choose tax instruments according to one’s
profile, needs and risk appetite, and make occasional tweaks to keep
things on track.
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So which tax-saving instrument works for you?
•Wary beginners: EPF, PPF
•Slightly experienced investors: NSC, NPS, Life insurance
•Risk-takers: ELSS, RGESS, ULIPs
•The Maximisers: House rent, health insurance, interest on education
loans, charitable donations, etc.
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Disclaimer
The tax write up above is for the general understanding and reference. The user
needs to verify all the facts, law and contents with the text of the prevailing
statutes and seek appropriate professional advice before acting on the basis of
any information contained herein as the taxation implications may vary depending
upon the facts in each case/interpretation by tax authorities and the tax laws are
subject to change from time to time.
ICICI Bank Ltd expressly disclaims any liability to any person, in respect of
anything done or omitted to be done by any such person by placing reliance upon
the contents of this write-up.
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Thank you!