Basic Knowledge & Smart Planning Can Reduce Your Taxes

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By Truemind Capital

The time is mid December and Rohit was busy finishing a task at work when he receives an email from his company’s HR. The HR is asking to submit investment proofs by the end of the month. This reminded him that last year, when he didn’t submit any investment proof, a significant portion of his salary was deducted in lieu of taxes. He didn’t want a repeat of the same situation as the previous year and naturally got worried. He asked his colleagues what they are doing for saving taxes. Someone suggested that one of his relatives is an insurance agent and he has been purchasing investment policies through him and he will introduce Rohit to him.

Rohit now knows the solution and without giving much thought gets busy with his work and life. When the last two days remained for the deadline to submit investment proofs, he gets in action and hurriedly contacts his colleague’s agent who helps him make an investment of Rs 1.5 lakhs in policy and gave receipts which Rohit submitted to the HR. Rohit heaves a sigh of relief, but little does he know that he had invested in a pension plan with a commitment to pay fixed annual premiums. He realises much later that he has actually signed up to pay Rs 1.5 lakhs every year for the next 10 years. After doing some research he realises that he has made a mistake by investing in a product that will give him negligible returns and early withdrawal would result in even loss of principal. Rohit is stuck.

Rohit’s case is not isolated. Many people, especially new in jobs, end up investing in the worst investment products with more benefit for the agents (high commissions that are paid out from the premium/investment amount) and negligible to no benefits for the investors. Why does this happen? This happens due to a lack of knowledge regarding different investment options and the absence of tax planning. Towards the end of the year when employees are scurrying to provide investment proofs, they are caught unaware in the nets of unscrupulous agents who could be acquaintances, friends or a bank relationship manager.

In this article, we aim to educate readers about different ways to save taxes and how one can plan to avoid chances of committing mistakes in a rush to beat deadlines.

1) Investment u/s 80C: GOI allows deduction of Rs 1.50 lakhs per financial year (1 Apr – 31 Mar) from your income if you invest in products that qualify for investments u/s 80C. The most popular products in the category are PPF (Public Provident Fund), ELSS (Equity Linked Savings Scheme), Sukanya Samridhi, 5-year Fixed Deposit and Insurance-Linked Investment Plan. National Pension Scheme (NPS) also qualifies u/s 80C. NSP features are mentioned in the 4th point.

Where should you invest?

The following table explains the features of all investment options under this section:

Investment Options

Current Expected Returns

Tax on Returns

Risk

Lock-in (in yrs)

Ideal Investment (in yrs)

Right Time for Investment

PPF

7.9%* 

No

None

15

15

Before 5th of any month

ELSS Mutual Funds

10-12%

10%

High Volatility

3

7-8

As SIP from the beginning of the year

Sukanya Samriddhi Scheme

8.5%*

No

None

21

21

Anytime in the financial year

5-year Fixed Deposits

6%

As per tax slab

None

5

5

Anytime in the financial year

Insurance Linked Schemes

3-8%

No

High Volatility

5

10

Not recommended

Pension Plans

4-6%

Yes

Low Volatility

10

10

Not recommended

(* varies quarterly with the government bond yield) | Source: Truemind Capital Research

What to keep in mind?

Never ever invest in products that are a mix of insurance and investments. Insurance is needed when you have dependents and do not have sufficient assets to take care of them in case of any mishap. One should always opt for a pure term plan (pure cost for insurance coverage) when insurance is required. For investments, one should consider pure investment options like mutual funds, PPF, FDs, etc.

The investment should ideally begin at the start of the new financial year, i.e., in April. For example, if you want to invest Rs 1.5 lakhs for the fiscal, it can be divided into simple installments (SIP) of Rs 12,500 per month. This will reduce the burden of investing a lumpsum amount towards the end of FY and reduce your chances of committing a mistake by investing in a rush to beat the proof submission deadline.

Tuition fees for your children education also qualify for deduction u/s 80C.

 

2) HRA (House Rent Allowance): HRA is one of the major components of your salary. If you are staying in rented accommodation (it can even be a house owned by your parents) you can avail the benefit for HRA deduction that will bring down your taxable income.

What to keep in mind?

Secure the PAN card number of your landowner as it is important to submit along with house rent receipts.

 

3) Health Insurance (u/s 80D): Many companies offer health insurance coverage to their employees. However, if you have taken an additional heath cover outside of your company, you can claim a deduction from your income. 

What to keep in mind?

It is better to start your health insurance as early as possible as it will establish a track record of coverage that usually results in lower premium payment in future.

 

4) NPS (u/s 80CCD(1B)): In addition to Rs 1.5 lakh u/s 80C, by investing Rs 50,000 per fiscal year in the National Pension Scheme (NPS), you can claim 100% of the investment amount as deduction from your annual income.

NPS offers you two approaches to invest in your account: Auto choice or Active choice. In Active choice, you can select the allocation percentage in assets classes. In Auto choice, funds are automatically allocated amongst asset classes in a pre-defined matrix, based on the age of the subscriber.

NPS has lower risk, expense and return potential compared to ELSS mutual funds.

At the end of the NPS tenure at the time of retirement, you receive 60% tax-free payment and 40% remaining needs to be converted to an annuity, which would be taxed as per your then prevailing income tax slab.

To read more features and benefits, please check this link: https://npscra.nsdl.co.in/features-and-benefits-of-nps.php

What to keep in mind?

NPS offers very limited liquidity. If you have been investing for at least 3 years, you may withdraw up to 25% for certain purposes. One can make a withdrawal for up to 3 times within 5 years of intervals in the entire tenure.

As explained, 40% of your investment is locked in an annuity. If you are comfortable with this idea and uncertainty of the interest rate that you will get for your annuity, you must consider investing in an NPS.

 

Knowledge of tools to save tax and smart planning is essential to reduce your tax outgo. The savings thus incurred can be invested further to witness the magic of compounding and meet financial goals like child education, buying a house or achieving financial freedom. As we all know, money saved is money earned.

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Truemind Capital

Truemind Capital

Truemind Capital Services is a fee-based investment management and advisory platform offering a customised and personalised investment experience. The firm uses asset allocation strategies to deliver higher risk-adjusted returns to their clients, while ensuring very limited downside in a market downturn. Their advisory services cover insurance, debt rationalisation, and tax planning apart from investments to ensure overall financial well-being. View Profile

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