How to save yourself from paying more taxes?
In order to maximise your savings, first assess your total income, existing investments, tax-deductible expenses, etc. This would help you to calculate your tax liability and the amount you need to invest to reduce the tax outgo.
This Valentine’s Day, it may be sensible to go on a date with your wealth manager, tax advisor or accountant to save taxes. Tax is mandatory but paying higher taxes when you can save tax legitimately is viewed as financial imprudence.
“Paying taxes is important but one should not be paying more than required,’’ advises Harsh Jain, co-founder & COO, Groww.
In order to maximise your savings, first assess your total income, existing investments, tax-deductible expenses, etc. This would help you to calculate your tax liability and the amount you need to invest to reduce the tax outgo.
“One must avail all the tax deductions and exemptions available under various sections of the tax law. Firstly, look at section 80C, where you can avail tax deduction up to Rs 1.50 lakh per individual assessee and HUF (Hindu Undivided Family),’’ says Amar Pandit, founder & chief happiness officer, HappynessFactory.
The options to avail deduction of up to Rs 1.50 lakh include tuition fees for children, contribution to EPF or VPF (applicable to corporate executives), life insurance or pension plan premiums (single premium policies are not eligible for 80C, principal portion of equated monthly installment (EMI) of home loan and stamp duty, registration charges if house is bought in the financial year.
If Rs 1.50 lakh limit is still not exhausted, one can choose to invest in Equity Linked Security Schemes (ELSS), Public Provident Fund (PPF), tax-saving fixed deposits (FD), Sukanya Samridhi Yojana (SSY), Senior Citizen Saving Scheme (SCSS), National Saving Scheme (NSC).
“The National Pension Scheme also qualifies for investment under section 80C. However, due to the complexity and long lock-in period, we do not recommend one to opt for it even if there is an additional benefit of investing Rs 50,000 in the same,’’ says Pandit.
Among the various tax saving options, ELSS funds provide the lowest lock-in of three years compared to the five years lock-in period for PPF or FD.
“It has been seen that the lock-in of three years is beneficial to investors as it curbs the tendency to churn and they get the benefit of staying invested for a longer period,’’ says Ashwin Patni, head, products and fund manager, Axis AMC.
In recent years, the popularity of equity as an asset class has increased greatly. “ELSS funds provide twin benefits of tax savings and growth. We have seen an increase in the number of investors who have opted for ELSS funds in last three to four years,’’ Patni adds.
Investors with a low-risk appetite can opt for PPF, tax saving FDs, SSY, NSC, and traditional life insurance policies.
“These investment options generate a relatively low return and come with a longer lock-in period but are popular among risk-averse investors due to secured returns,’’ says Adhil Shetty, CEO and co-founder, Bankbazaar.
“Ulips (unit-linked insurance plans) offer exposure to equities too with the funds parked in both insurance and the stock market. However, they come with a lock-in period relatively longer than the ELSS,’’ Shetty added.
In addition to Rs 1.50 lakh relief available for investments under section 80C, there are other deductions also that one should look at. Home loan interest deduction up to Rs 2 lakh per annum under section 24, medical insurance premium paid up to Rs 25,000 (for self, spouse and children) and additional Rs 25,000 for parents (the limit is Rs 30,000 for senior citizens) and the interest paid on education loan taken for higher education for oneself, spouse or children is fully tax-deductible under section 80E.
“Each tax-planning instrument has a different underlying objective, and risk associated with it, which needs to be understood before investing,’’ says Pandit.
Savvy investors ensure that their investments are in sync with their investment goals and also help to pare taxes. “Decide on the product (ELSS, PF, etc) you want to invest in based on the risk-return appetite you have,’’ says Jain.
However, investing alone is not enough. You also need to submit the proof of investments to your office or the chartered accountant to ensure that tax benefits are reflected at the time of filing of tax returns.
“One should not wait until the last minute to make investments as it could lead to paying extra taxes,’’ points out Jain.
Even if the tax saving investments are not factored in for any reason, fear not. “All you need to do is to highlight your investments when filing your tax returns and claim a refund for any excess tax paid,’’ Patni added.
Source: DNA Money
