The CD Blog features Guest Writer Ayush Bhargava as he grapples with the murky bylanes of Tax Planning, the smart, easy and simple way.
Most people delay their tax saving investments till they receive a reminder either from their HR or from the agent who tries to sell them unsuitable products in the last hour. This is the sad story of many tax payers. But worry no more.
Q1. What is Tax Planning?
Tax Planning is the process of managing your personal income such that you make the maximum benefits of all deduction, allowances and rebates so that your tax liability is minimized as much as possible within the legal framework.
Actually, if you are planning your investments and your tax strategies properly, it can help you choose the best tax friendly investment. It will ensure that you understand your financial position and are on a right track. This approach will help prevent the last minute pressure towards March end.
Q2. What are the different Tax Saving products available in the market?
According to a survey, 30% of the people in India invest only to save tax. There are many tax saving instruments available in our country, and each of the products is associated with the different sections of the Income tax act.
Here is a quick summary for your benefit –
1. Sec 80C:
This is the most popular section under Income Tax act and is used to the maximum by most of the people. The limit of investment under this section is Rs. 1Lakh per year irrespective of your income and tax bracket. The following products fall under this section –
a) Public Provident Fund (PPF)
b) National Saving Certificate.
c) Equity Linked Saving Scheme.
d) Bank Fixed Deposit
e) Employee Provident Fund
f) Payment on Life Insurance Policies.
g) Principal repayment on Home Loan
2. Sec 80D:
Premium paid towards health insurance for yourself, spouse, dependent children and your parents is deductible from your taxable income. The limit is Rs.20,000 for Senior Citizens and Rs.15,000 in all other cases. You can further claim Rs. 15,000 (Rs.20,000 if parents are senior citizen) for buying health insurance policy for your dependent parents.
There are other sections like Sec80DD, Sec 80DDB, Sec80G, Sec80E, Sec24b, Sec80CCG under which you can plan and save tax.
One important point which people generally ignore while investing is “Time Period”. Most of the investment products which are discussed under Sec 80C have different Lock in Period.
For eg. Public Provident Fund and some Insurance Policies comes with a Lock in Period of 15 years. National Saving Certificate and Tax Saving Bank FD’s comes with a Lock in period of 5 years and 10 years. Equity Linked Savings Scheme (ELSS) comes with a lock in period of only 3 years.
One should always try to look out for minimum Lock in period. This can be advantageous as one can move money into different products and gain more, while staying invested in a single product for longer duration would be the perfect example of loss of potential gain from other alternative.
Q3. What are some Strategies to Save Tax?
Apart from these common deduction which we have discussed above, there are many other ways through which you can plan your taxes. In the below table, you can find the summary of various tax saving methods.
The above methods are legitimate ways of reducing your tax outflow and results in Tax Saving and not Tax Evasion. For more details you can always consult you CA who can help you in making best use of the above provisions.
Q4. What is the E.E.E. Tax Strategy?
EEE stands for Exempt Exempt Exempt. Investment money goes through three stages; when contribution is made; when money earns interest; and when money is withdrawn.
EEE indicates the tax saving at these three stages. Unfortunately, very few people know about the EEE Strategy. While planning to save tax, most of the people focus only on saving tax at source. Not all of the products which help in tax saving at source qualify under this strategy. Only PPF, Insurance Policy on Maturity and ELSS are eligible. The interest earned on NSC and Fixed deposits are taxed on maturity.
Q5. How should you to Plan your Salary Structure?
This is an added advantage to the employee class. Many companies give the liberty to employees to plan their own salary structure. It is very important to understand the salary structure because if it is planned properly then the chances of getting it more in hand are higher. (Salary credited to bank)
Below is the list of components which are usually the part of salary structure and can be used to minimize tax liability –
- Medical Allowances.
- Telephone Reimbursement.
- Leave Travel Allowance (LTA).
- Food Allowance Coupons.
- House Rent Allowance (HRA).
- Perks like transport, driver, etc.
- Superannuation Scheme.
The employer may or may not offer all the above allowances to every employee. Hence it is important to discuss it with the company officials. Take a look at your salary structure and various salary components available as a part of salary package and analyze if you can leverage it in the best possible manner.
To sum it all, if planned sincerely, one can make right investment decision with the best suitable products.
“Don’t let March hit you with uneasy feeling because you have no clue where you stand, be prepared by planning well in time.”
Featured Image Source: weighyourmind.com
InFocus Guest Writer: Ayush Bhargava
A practicing CFPCM and a Postgraduate in Financial Planning, Ayush is the founder of a financial planning servicing to professionals, and currently writes financial plans and personal finance articles for the GettingYouRich.com blog.