A person, who is not a senior citizen, but has senior citizen parents, may save up to Rs 1,50,000 u/s 80C, up to Rs 50,000 u/s 80CCD (2) and up to Rs 75,000 u/s 80D or total of Rs 2,75,000 through tax-saving investments.
As the end of the tax-saving investment season for the current year is approaching fast, especially for salaried people to save on tax deducted at source (TDS) from their salary, there is a rush to make investments before the stipulated date. However, investments need to be made from a long-term prospective, not just to save tax, and hence should not be made in a hurry. If some extra tax gets deducted due to delay in investments, you may get it back as refund after you file your Income Tax Return (ITR). So, you should focus on the propriety of investments rather than reducing your TDS.
You should first take some time to ascertain your long-term financial needs and analyse the options of tax-saving investments available to determine which one or combination of which options would meet your goal and then invest your hard-earned money accordingly.
Here are the options available before you to invest and save taxes under different sections of the Income Tax Act.
Currently, the total limit u/s 80C is Rs 1,50,000, which, apart from tax-saving investments, also include some other components like compulsory contributions to PF and NPS by employees, tuition fee for up to two children, principal repayment on home loan for self-occupied property, interest on savings accounts etc.
The tax-saving investment options under this section are:
PPF: The Public Provident Fund (PPF) is a safe and secure tax-saving investment, in which an earning person may invest for self and/or his or her child up to Rs 1,50,000 in a financial year taking together investments made in all the accounts opened by him or her. It is very attractive because not only the investment amount, but tax benefits are also there on interest earned and maturity amount as well, making it an exempt, exempt, exempt (EEE) category of investment.
SSY: The Sukanya Samriddhi Yojana (SSY) is also an EEE category of investment, but an SSY account may only be opened by guardians of a girl child before she turns 10-year old.
NSC: National Savings Certificates provide deductions u/s 80C and may be purchased from Post Office branches.
Life insurance: Life insurance products also come under the EEE category, but the primary purpose of taking insurance should be to cover risks.
ULIP: Unit-linked Insurance Plans (ULIPs) are insurance plans, premiums of which are invested in equities and other market-linked products with an intent to provide higher return on maturity. ULIPs also fall under the EEE category.
ELSS: Equity-linked Savings Scheme (ELSS) is also a market-linked product and provides good returns in the long run. Till last year ELSS was also under the EEE category, but from this year, 10 per cent long-term capital gain (LTCG) tax has been imposed on LTCG exceeding Rs 1 lakh on redemptions made in a financial year.
NPS: A very recent notification has made investments in Tier II accounts of National Pension System (NPS) eligible for benefits u/s 80C, provided the money is not withdrawn from the account before 3 years from the date of investment.
5-year FD: Fixed deposits (FDs) of a tenure of 5 years are more are also eligible for tax benefits u/s 80C, but the interests on such FDs are taxable.
Section 80CCD (2)
Under this section, up to Rs 50,000 deductions are allowed on investments in Tier-I account of NPS. Also, the entire 60 per cent commutation allowed from the retirement corpus is tax free at the time of retirement at 60 years of age. The remaining 40 per cent of the corpus has to be invested compulsorily in a pension plan of any IRDAI-regulated insurance company. Investments may be made in Tier-I accounts till the investor turns 60-year old.
Under this section, health insurance premium up to Rs 25,000 is tax deductible on policy taken for self, spouse and children. Another tax deduction up to Rs 50,000 may be availed for premium paid on policies taken for senior citizen parents. Maximum deduction of Rs 1,00,000 may be availed if both investor as well as his/her parents are senior citizens.
So, considering the investor is not a senior citizen but the parents are, up to Rs 1,50,000 u/s 80C, up to Rs 50,000 u/s 80CCD (2) and up to Rs 75,000 u/s 80D or total of Rs 2,75,000 may be saved through tax-saving investments. Thus, if you are in the 30 per cent tax bracket, you may save Rs 83,500 in tax and 4 per cent cess of Rs 3,300 or a total of Rs 85,800 from total tax payable this year.