Come December, there is a rush among salaried employees to invest as they have to submit proofs to their employers. In order to get tax benefits on investments and insurance, a tax payer can invest up to Rs 1.5 lakh in Public Provident Fund, Employees’ Provident Fund, National Savings Certificate, life insurance premium, five-year deposits in banks or post office and equity-linked savings schemes.
Under section 80D of the Income Tax Act, 1961, one can take health insurance for up to Rs 25,000 for self, spouse and dependent children. One can get tax reduction of Rs 5,000 on preventive health checkups annually. Also, additionally health insurance premium paid for parents is tax deductible up to Rs 25,000. And if the taxpayer’s parents are senior citizens (60 years and above) then the maximum allowable deduction is Rs 30,000.
Under Section 80CCD, a taxpayer can also invest up to Rs 50,000 a year in National Pension System to get tax deduction. This is above the limit of Rs 1.5 lakh under Section 80C. Also, under Section 24 of the I-T Act one can get tax benefits of up to Rs 2 lakh a year on home loan interest repayment for a self-occupied house.
In order to make tax-saving investments earn higher returns in the long-run, one must look at equity-oriented financial instruments like equity-linked savings scheme (ELSS) of mutual funds and National Pension System.
Equity-linked savings scheme
With the stock markets gaining new highs, ELSS of mutual funds are increasingly finding more takers.
Data show that ELSS category has reported an annualised return of over 18% in the past five years, which is double than most of the debt-oriented tax-saving instruments. If a tax payer invests up to Rs 1.5 lakh in ELSS in a year, then he can save as much as Rs 46,350 in taxes a year in the highest 30% tax bracket.
In ELSS, an investor will not have to look at the performance of individual stocks regularly as the investment is done in diversified stocks and sectors. The funds have a lock-in period of three years, which is the lowest lock-in period as compared to other tax-saving instruments like Public Provident Fund, National Savings Certificate and 5-year bank fixed deposits.
Rupesh Patel, fund manager, Tata India Tax Savings Fund, says ELSS is a good option for an investor to take exposure to equities as it comes with an added benefit of tax savings on investments up to a specified limit. “To benefit from the compounding effect, one has be patient and remain invested during market ups and downs. Even in ELSS category, instead of investing through lumpsum, informed investors do prefer to invest through SIP route, which gets reflected in increasing proportion of SIPs in ELSS funds,” he says.
National Pension System (NPS)
It is an ideal investment tool for retirement planning. For non-government employees, up to 50% of the contribution can be invested in equities (index funds) and the rest between corporate and government debt paper. It works like a mutual fund, as one buys units of the fund at a certain NAV. There are two ways to get higher tax benefits in NPS—employer contributions to your NPS account and self-contributions.
Under Section 80CCD, a tax payer can investment up to Rs 50,000 to get tax benefit, which is over and above the benefit available on Rs 1.5 lakh under Section 80C. However, one should try to invest more to create a sizeable corpus for retirement needs.
Also, if the employer contributes to the taxpayer’s NPS account, he gets to claim tax benefits. Contributions made by employer are allowed under Section 80CCD(2). This deduction does not have a monetary restriction, but the total deduction claimed for amount contributed by the employer should not exceed 10% of your salary. Employer can make this contribution apart from contributing to EPF. However, this will reduce one’s take-home pay, but will save on tax and create a corpus for retirement needs.
At the time of maturity after the age of 60, an investor will withdraw 60% of the corpus including the returns and invest the rest for compulsory annuity. One has to pay tax on 20% of the withdrawal. Products like PPF and EPF are tax-exempt at all the three stages — investment, accumulation and withdrawal. Subscribers of NPS Tier-1 account can now make tax-free partial withdrawal of up to 25% of contributions for certain specified circumstances after 10 years of being in the scheme.