As you ring in the New Year, the financial year is coming to an end and along with it come tax-saving woes. Given that all investments and bank accounts are now supposed to be linked to Aadhaar, one cannot avoid tax anymore! The best way to save tax is to plan early and maximise opportunity to save as much as you can.
Try out these 5 ideas to save tax before filing your Income Tax Return (ITR) in 2018:
1. Take Benefit of Section 80 (C)
There are various tax-saving investment options available under Section 80(C) which can help you to get the deduction up to Rs 1.5 lakh and reduce your tax liability significantly.
Remember that any tax-saving investment instrument should be selected on the basis of liquidity, risk, return and tenure requirement. If you are ready to take moderate to high risk, then equity-oriented tax-saving schemes could give you a very good return. ELSS mutual fund is a very good option for lump sum or SIP investment and save tax within the stipulated limits under Sec 80 (C). ULIP also offers exposure in equity instrument, but the lock-in period is greater than an ELSS.
If you are looking for a safer investment option, then you can explore debt-oriented tax-saving schemes such as PPF, tax-saving FD, Sukanya Samridhi Yojna (SSY), NSC, traditional insurance policy, etc. Such investment options normally generate low return and have longer lock-in period, but they are very secure and popular amongst risk-averse investors.
2. Use Indexation Benefits To Calculate Capital Gains
Return on assets such as gold and debt fund is often lower than what you get in hand if the inflation adjusted price is not taken into consideration. Real rate of return is much lower than what you actually get in hand. For instance, if your ROI on any investment is 7% and inflation in that period is 5%, then the real rate of return would be only 2%. If you are taxed on the basis of nominal return, your real rate of return on investment may even go negative. So, the government allows you to calculate the capital gain along with indexation benefit under which inflation is taken into account as per the cost of inflation index (CII) issued by the finance ministry every year. While calculating the taxable amount, you should consider the tax on capital gain after adjustment of indexation benefit to reduce the tax liability.
3. Invest in Health Insurance
For years you may have thought that your company-provided health insurance is sufficient for your medical needs. But with escalating hospitalisation costs, its imperative that you invest in a health policy on your own. Under Sec 80 (D) of the I-T Act, if your age is less than 60 years, then you can claim a deduction of up to Rs 25,000 for the premium paid towards a health insurance policy. If you are above the age of 60 years, then the deduction allowed is up to Rs 30,000. You are also allowed to claim the tax deduction for the premium paid on a health policy for spouse, dependent children and parents. The maximum deduction allowed for the premium paid for self, spouse and the dependent children is Rs 25,000 to Rs 30,000. You can get the additional tax deduction benefit of up to Rs 25,000 to Rs 30,000 for the health insurance premium paid on behalf of your parents.
4. Invest in NPS
The National Pension Scheme (NPS) is one of those rare schemes where you can save additional tax benefit of Rs 50,000 under Sec 80 (CCD) over and above the Rs 1.5-lakh deduction benefit under Sec 80 (C). The National Pension Scheme allows you to invest for your retirement while getting the return from allocation of fund into assets like equity, debt, government securities, etc. If you have exhausted the Sec 80 (C) investment limit for tax deductions, then investing in NPS can help you save tax by additional deduction of Rs 50,000.
5. Restructure Your Salary
Salaried individuals can save tax by restructuring their salary to make it more tax efficient. For instance, a person who lives in a rented home can lower his taxes by getting a deduction by claiming the HRA. Medical reimbursement is another component for which you can claim a deduction by furnishing the necessary bill. Allowances like LTA, conveyance allowance, food allowance, etc can further help in reducing the tax liability. So, you must get your salary structure checked by a tax expert and request your company to make changes in your salary components as per the expert’s advice for reducing tax liability.
Remember whatever your investment scheme may be, always try to save the tax by using all the legitimate ways. Also, instead of getting into the last-minute rush for making tax-saving investments, try to invest consistently to earn a better return and avoid mistakes. You must consult your tax advisor well before the financial year closes to decide how and where you can make investment to save tax and take the requisite step in advance.
(Writer is CEO at Bankbazaar.com)