There is more to tax planning than the exemptions available on savings made by you. With our advice, you will pay the right amount of tax and know how to tax proof your income and gains. After all, your capital is more productive in your hands and it can work wonders for you if planned properly. We guide you in Planning & managing your finances and achieving your financial goals. Basic planning starts with tax planning which can increase the take home income. These investments can also cater to a few of your needs if this is well planned. Tax planning is not restricted only to tax savings investments (Section 80C). There are several other components e.g. HRA, Home Loans, LTA, Sec 80D, Re-imbursements, etc to reduce the taxable income.
1. By careful planning, one can reduce tax liability substantially.
2. Don’t wait for last minute. Start in April and use monthly investments to reduce risk. It will be easier on your pocket as well.
3. Try and achieve tax planning and planning for your needs simultaneously.
4. Use tax efficient investment avenues. You should not be paying too much tax on their returns.
Equity-linked savings schemes are not just tax savings but also provide generous return on investments. Tax exemptions can go up to Rs.1.5 lakh. It comes with a 3-year lock-in period which provides greater savings.
ELSS are otherwise known as Equity Linked Saving Schemes. These schemes are fast becoming a popular choice for not just creating a savings but also double as a viable form of investments that provide a profitable return. ELSS are a form of open-ended mutual funds. The ELSS offers the added advantage of providing returns and offer an avenue for saving tax. The funds invested in by ELSS primarily revolve around equities and related equity products and these schemes usually come with lock-in periods of 3 years wherein the investor cannot access his funds thereby securing the savings. The tax benefits offered by Equity Linked Saving Schemes fall under the section 80C of the income tax act and offer tax exemptions of up to Rs 1.5 Lakhs
Advantages of Investing in ELSS:
There are several advantages provided by ELSS that make it a viable tax saving form of investment. Firstly, the required initial investment about is low and starts from Rs 500. This makes it more affordable than a fixed deposit which requires a huge chunk of money to make a good return. The tax exemptions provided by ELSS fall under section 80C of the Indian Income Tax Act and people who invest up to Rs 1.5 Lakhs can save up on tax. If they fall in the tax bracket of 30%, they can save up to Rs 45,000
Not only does it provide tax savings it also instils a sense of discipline when it comes to investing. Monthly investing in ELSS provides an avenue for one to step up their investment and tax planning. The monthly investments provide compounding returns that enable one to maximise their returns over a period. These also have the shortest lock in period with only 3 years before one can access their funds and provides a higher return than investments like fixed deposits. The returns are high enough to beat inflation and are usually around the range of 10% to 12%. The best part is that returns from ELSS funds comes under LTCG (Long Term Capital Gain) Tax which under the current scenario is 10% on appreciation exempt up to Rs 1,00,000/- per annum.
The National Pension System (NPS) was introduced by the Central Government on 1 January 2004. Initially, the scheme was introduced only to Central Government employees (apart from armed forces), however, from 1 May 2009, the scheme was made available to all Indian Citizens. The scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
National Securities Depository Limited (NSDL) was appointed by the PFRDA as the Central Record keeping Agency (CRA). Functions such as Customer Service, Administration, and Record Keeping of all subscribers of the NPS are handled by the CRA. A Permanent Retirement Account Number (PRAN) is issued by the CRA to all the subscribers who are present under the NPS. Any transactions relating to the PRAN and the Permanent Retirement account is maintained by the CRA as well.
NPS Withdrawal Process
- Exit rule and early withdrawal under NPS: It is vital that subscribers make investments towards the scheme until they reach 60 years of age as NPS is a pension scheme. However, under certain circumstances, subscribers can withdraw up to 25% of the invested amount if they have invested towards the account for 3 years. Given below are the different cases under which early withdrawal is allowed:
- In case the children of the subscriber are getting married
- For higher studies
- For buying or building a house
- In case of medical treatment of the subscriber or his/her family members
NPS Withdrawal is possible for a maximum of 3 times under the scheme and there must be a minimum gap of at least 5 years between withdrawals. The early withdrawal process is applicable to only Tier-I account. Under Tier-II accounts, the entire investment can be withdrawn.
- Withdrawal after attaining the age of 60: The entire investment made towards the scheme cannot be withdrawn once the subscriber reaches the age of 60 years old. It is mandatory that subscribers retain at least 40% of the investment in order to receive a pension. The pension is given to subscribers from an insurance firm that is registered under the PFRDA. The remaining 60% can be withdrawn and no tax needs to be paid on it.
Different types of NPS accounts
Tier-I and Tier-II are the two types of NPS accounts. While the Tier-I is a mandatory account, the Tier-II is a voluntary account. The differences between the two accounts are mentioned in the table below:
|Maximum contribution||No limit to the amount of contribution||No limit to the amount of contribution that is made towards the account|
|Minimum contribution||Rs.500 or Rs.1,000 in a year must be made towards the account||Rs.250 must be made towards the account|
|Tax deductions||Subscribers are eligible for a tax deduction of up to Rs.2 lakh.||Subscribers are not eligible for tax deductions under the account.|
|Withdrawals that are allowed||Subscribers cannot withdraw the investments made towards the account until they retire.||Subscribers will be able to withdraw the contributions made towards the account.|
|Status||It is a mandatory account for subscribers who register for an NPS account.||Subscribers can open the account on a voluntary basis.|
The main features of the scheme are mentioned below:
- Eligibility: Indian citizens who are between 18 years and 65 years of age and do not come under any NPS sector are eligible to invest in NPS scheme.
- Cost for registration: Initially, individuals must pay Rs.500 (exclusive of taxes) towards registering for an NPS account.
- Contribution towards NPS: The minimum contribution that must be made towards the scheme is Rs.500 (not including taxes). There is no upper limit to the maximum contribution that can be made. However, the minimum contribution that can be made in a Tier-I account is Rs.1,000 in a financial year.
- Number of contributions: Subscribers must make at least one contribution in a financial year.
- Modes of payment: Payments can be made in the form of Demand Draft (DD), cheque, Online payment and cash.
- Change of scheme and fund manager: In case subscribers are not happy with the overall performance of the scheme, they can change the fund manager or the pension scheme. Both the Tier-I and the Tier-II accounts come with these options.
Tax benefits under NPS
Under Section 80C of the Income Tax Act, subscribers under NPS are eligible for tax deductions of up to Rs.1.5 lakh. The tax deduction is inclusive of both the employer’s and the subscriber’s contribution.
- Section 80CCD (1) of the Income Tax Act covers contributions made by the subscribers. It is part of Section 80C and the maximum deduction that can be claimed under this section is 10% of the employee’s salary. However, it cannot be more than the maximum limit that is allowed. For self-employed individuals, the maximum limit of tax deduction that is allowed is 20% of the gross income.
- The employer’s contribution towards the NPS is covered under Section 80CCD(2) of the Income Tax Act. This section is not a part of Section 80C of the Income Tax Act. Self-employed subscribers cannot avail benefits under this section. The amount of tax deduction available under the scheme can either be 10% of the basic salary and dearness allowance, or the gross income, or the actual contribution that is made by the employer towards NPS, whichever is lower.
- Additionally, under Section 80CCD(1B), an additional tax deduction of up to Rs.50,000 can be claimed on any self-contribution made towards to the scheme.
Therefore, in total NPS subscribers are eligible for tax deductions of up to Rs.2 lakh.
NPS Rules of allocation
Investments are made in various schemes by the NPS. Investment is made towards equity under Scheme E of the NPS. Subscribers can contribute up to 50% of their total investments towards equities. Active choice and auto choice are the two different options of investments that are available.
- Active choice: Under active choice, the scheme and the type of split can be decided by the subscriber.
- Auto choice: Under auto choice, depending on the subscriber’s age, the option decides the risks of the investment. Therefore, less risky and more stable investments are chosen if the subscriber is older.
PPF scheme was launched in 1968 by the Finance Ministry’s National Savings Institute. The main objective of PPF scheme is to help individuals make small savings and provide returns on the savings.
The PPF scheme offers an attractive rate of interest and no tax is required to be paid on the returns that are generated from the interest rates.
Features of a PPF account
The main features of the PPF account are mentioned below:
- Duration of the account: The minimum duration of a PPF account is 15 years. However, account holders can extend the duration of the account by a block of 5 years.
- Amount required to open a PPF account: The amount that is required to open a PPF account is Rs.100. In a year, if the annual investment that is made towards the account exceeds Rs.1.5 lakh, no interest will be earned on the excess amount, and no tax deductions can be claimed as well.
- Deposit modes: PPF Payments towards the account can be made in the form of PF transfer, online, Demand Draft, cheque, or cash.
- Number of accounts that can be opened: An individual can open only one PPF account under his/her name. Under the PPF scheme, joint accounts cannot be opened.
- Minimum and maximum amount: The minimum and maximum investment that can be made in a financial year are Rs.500 and Rs.1.5 lakh, respectively. PPF Investments can be paid in a lump sum or in instalments. The maximum number of instalments that are allowed is 12.
- Frequency of deposits: Deposits must be made at least once a year for 15 years.
- Safety of opening a PPF account: A PPF account offers risk-free, guaranteed returns, and capital protection as it is backed by the Government of India. Therefore, opening a PPF account comes with minimal risks.
- Loans against a PPF account: Between the third and fifth financial year from the date of opening the PPF account, PPF loans can be availed against the account. The amount that can be availed as a loan is 25% of the investments that have been made at the end of the second financial year. Individuals can also avail a loan after the sixth financial year as well. However, the first loan must be completely paid before availing a second loan.
PPF Interest Rate
Currently, the rate of interest that is provided on a PPF account is 7.9% p.a. and it is compounded on an annual basis. The interest is paid on March 31 and the PPF interest rate is set by the Finance Ministry on a yearly basis. The calculation of interest is based on the minimum balance that is available between the close of the fifth day and the last day of the month.
PPF Tax benefits
Investments that are made under a PPF account come under the Exempt-Exempt-Exempt (EEE) category. Therefore, under Section 80C of the Income Tax Act, all deposits made towards a PPF account are tax exempt. The amount that has been saved as well as the interest that has been generated are also exempt from tax when the individual withdraws the amount from the PPF account.
Premature closure of a PPF
After completion of 5 years is it possible for individuals to opt for premature closure. However, premature closure is allowed in case of treat diseases that can cause harm to the life to the life of the PPF account holder, parents, children, or spouse. For which, documents from an accomplished medical authority must be submitted.
Premature closure is allowed in case of higher studies of the minor account holder or for the account holder as well. However, documents such as fee bill and the admission confirmation from a recognized university in India or abroad must be submitted.