Best Tax Saving Investments Plans/ Tax Planning for Beginners

Tax Evasion is Criminal but Tax planning is 100% legal.

At times some of us might have filed our Income tax return without making full disclosure of our Income or by making incorrect disclosures to avoid the burden of Income tax, which one would otherwise be liable to pay without understanding the repercussions of such.

The maxim ‘ignorantia juris non-excusat,’ or ‘ignorance of the law is no excuse,’ implies that the Court presumes that every party is aware of the law of the land hence cannot claim ignorance of the law as a defense to escape liability

The repercussions of filing an incorrect return are very stringent and we would certainly talk about the same in our future blogs. In this blog we intend to talk about simple ways to save tax. This would not just be limited to ways to save tax for your present income but also ways in which you can benefit from it in the form of future cash accruals as well.

While we do this we would like to assure you that these Tax Planning instruments are a 100% legal way to reduce the tax liability of a taxpayer using the exemptions, deductions, and benefits available in the Income-tax Act, unlike tax Evasion. Good tax planning can also help us achieve our future financial goals while saving tax.

Before we talk about the various tax saving options we need to understand that there are 3 stages in the life of an investment:

Before we talk about the various tax saving options we need to understand that there are 3 stages in the life of an investment:

• Initial Investment of Capital
• Growth or Interest payment (either paid out or reinvested)
• Maturity value of the investment

When we categorize our Tax planning options we try to understand which stage of the your investment is Exempt “E” in given order and which part is Taxable “T”

• EEE: Means all three transactions are tax-exempt in the instrument
• EET: Investment and accrued or paid interest is exempt, but maturity value is taxable
• ETE: Investment is eligible for an exemption, accrued or paid out interest is taxable and maturity value is exempt

Life Insurance Policy (The Most Popular Scheme of Tax Saving)

A life Insurance Policy is one of the most vital investments for the earning members of the family, as it provides for the financial protection of their family members after them.
Furthermore, Individuals can claim the deductions for the payment of a premium for

1. themselves,
2. their spouse
3. and any child of the individual. (Dependent or Independent, male or female, married or unmarried. If the female child is married, then also deduction would be allowed.

HUF can claim deduction of payment of the life insurance premium of any member of the HUF.

Exempt Initial Investments:

The deduction under section 80C can be availed for the premium paid for Life Insurance for up to ₹1.5 lakhs i.e. the maximum limit for 80C investments..However,
Deduction under Section 80C is only allowed if the premium paid is up to 10% of the sum assured for the policy.

Exempt Growth Stage: 

Growth in life insurance policy is in the form of Bonus paid

Exempt Maturity Stage:

Any amount received under a life insurance policy on maturity including bonus is exempt from tax u/s 10(D).

Proceeds on death or maturity are also exempt from tax, given the above conditions.

There is no restriction on maximum or minimum limit of investment. However, from FY 2023-24 there is upper limit of premium paid upto 5 lacs in a financial year to claim the advantage of Exempt maturity.

Our Take:While life insurance policies offer a “EEE” tax advantage, typical return expectation on the same should be between 4% to 7% post tax CAGR over a period of 20 years with an added advantage of tax saving. Off lately a lot of advisors have marketed these policies as goal based tax planning options. However, it is always advisable to separate financial investments from medical ones.

Public Provident Fund (Long-term Investing Method of Tax Saving)

Public Provident Fund (PPF) is one of the best long-term investment plans from small taxpayers as well as HNI. To invest in PPF, you need to open a PPF account at the post office or designated branches of public and private sector banks.

Exempt Initial Investments:

Initial investment in PPF is covered under the overall limit of 1.5 lacs under section 80C.

Exempt Growth Stage: 

Growth in PPF is in the form of yearly interest payments. Exempt from tax u/s 10(11)

Exempt Maturity Stage: 

Any amount received upon maturity including accrued interest / interest on interest is Exempt from tax u/s 10(11).

Minimum Investment: Rs. 500 in a year

Maximum Investment: Rs. 1.5 lacs in a year

Tenure: 15 years for the first time. Thereafter it can be renewed 3 times for 5 years each.

Our Take: Public Provident funds offer a “EEE” tax advantage. The lowest tax free interest rate on provident fund investments in recent times is post tax 7.1%. Further, PPF offers ones of the most unique advantages in form security of corpus even at the time of bankruptcy or against payment of government due. This is in addition to the guaranteed interest rate earned against the corpus available at the beginning of every year.

Investment in PPF can also be done separately in the name of Spouse or Childrens.

Sukanya Samriddhi Yogana

The Sukanya Samriddhi Yojana is a government savings scheme created with the intention to benefit girl child so as to provide for any future needs of a girl Child. Like PPF, sukanya samridhi yogana also offers “EEE” Benefit.

Exempt Initial Investments:

Initial investment in SSY is covered under the overall limit of 1.5 lacs under section 80C.

Exempt Growth Stage: 

Growth in life insurance policy is in the form of yearly interest payments. Exempt from tax u/s 10(11)

Exempt Maturity Stage: 

Any amount received upon maturity including accrued interest / interest on interest is Exempt from tax u/s 10(11).

Minimum Investment: Rs. 250 in a year in each SSY Account

Maximum Investment: Rs. 1.5 lacs in a year in each SSY Account

Tenure: Partial withdrawal permitted at the age of 18 years to meet education expenses and Full maturity at the age of 21 years or in case of marriage whichever is earlier.

Our Take: this account can only be opened till the girl child attains the age of 10 years and is limited to 2 girl child only.. The scheme offers a tax free interest rate of 7.6% on the corpus.

PPF and SSY when combined together can work as a very efficient tax planning and financial mamgament tool. If an individual invest maximum investment in both in one PPF and SSY each every year for 20 years then at the end of 20 years. He would have generated a corpus of 66 lacs in PPF and 70 Lacs in SSY.

National Savings Certificate NSC (Alternative Way of PPF for Tax Saving)

National Savings Certificates are a savings bond scheme which encourages investors to invest while saving on income tax under Section 80C. If you have a Savings account with a Bank or a Post Office, you can buy NSC certificates in e-mode, provided you have access to internet banking. NSCs can be bought by an investor for themselves, on behalf of a minor, or with another adult as a joint account. 

Exempt Initial Investments: 

Initial investment in Tax Saver is covered under the overall limit of 1.5 lacs under section 80C.

Partially Taxable in Growth Stage: 

The interest accrued each year, barring the year of maturity, is also exempt within the limit of Rs 1.5 lakh of Section 80C, as it is reinvested and paid only at Maturity

Exempt Maturity Stage: 

Principle + Accrued interest is not subject to tax again as the interest is already taxable in the year in which it accrues

Current Rate of Interest: 7% p.a. for Q4 FY 2022-23

Lockin Period: 5 Years

Minimum Investment: Rs. 1000

Loan collateral: Banks and NBFCs accept NSC as collateral or security for secured loans. To do this, the concerned postmaster should put a transfer stamp on the certificate and transfer it to the bank

Premature withdrawal: Generally, one cannot exit the scheme early. However, they accept it in exceptional cases like the death of an investor or if there is a court order for it.

Tax Saver Fixed Deposit 

One of the effortless forms of tax savings is investing in Fixed Deposits. By investing in tax Saver Fixed Deposits, one can save tax on Rs 1.5 Lakh under Section 80C. Generally, there is a lock-in period of 5 years in such FDs, and the Interest received on the same is taxable.

Exempt Initial Investments: 

Initial investment in Tax Saver is covered under the overall limit of 1.5 lacs under section 80C.

Taxable in Growth Stage:

Interest on Fixed Deposit is taxable

Exempt Maturity Stage: 

Principle + Accrued interest is not subject to tax again as the interest is already taxable in the year in which it accrues

Tax-saving mutual funds (New Trend of Tax Saving)

Investments in tax-saving mutual funds, also known as equity-linked savings schemes (ELSS), qualify for tax benefits. Mutual fund investment are subject to market risk. ELSS has the name suggest invest majority of corpus into the Equity instruments that are traded in stock market. Hence returns on mutual fund are subject to rise and fall in stock market. They are ideally suited for investors with a medium to high-risk appetite. Even though past performance does not serve as an indicator to future returns, In the past few year ELSS schemes have given superior returns as compared to traditional tax saving methods.

Exempt Initial Investments:

Initial investment in Tax Saver is covered under the overall limit of 1.5 lacs under section 80C.

Exempt in Growth Stage: 

Since the ELSS are linked to equity markets they are not subject to tax until an unless they are sold.

Partially Exempt Maturity Stage: 

Profit accumulated upto Rs. 1 lacs on ELSS liquidated during the FY is exempt. Profit in excess of Rs. 1 lacs are subject to tax at concessional rate of 10%.. Additionally an assessee can also avail the benefit of exemptions available under section 54 to reduce the tax liability in case his profits are more than 1 lac in a Financial year.

Lock-in period: 3 years.

Rate of Return: Subject to Market conditions.

Our Take: India as a nation has seen historical participation in the financial markets post covid era. This has also resulted into investor’s inclination to invest in ELSS scheme as it offers a higher rate of return based upon past performance as compared to fixed income products like FD, PPF, NSC. etc.

ELSS also provides an additional incentive in the form of tax saving if the profit on sale of ELSS are invested into House property etc. as available to other long term capital assets. Although it is not suited for someone who is very risk averse.

New Pension Scheme NPS

The NPS, or the New Pension Scheme, is regulated by the Pension Funds Regulatory and Development Authority – PFRDA. Any citizen of India between the 18 – 60 year age bracket can participate in it. It is highly cost-effective since fund management charges are low. The fund managers manage the money in three separate accounts, having distinct asset profiles viz. Equity (E), Corporate bonds (C) and G Government securities (G) gives the investors the flexibility to choose how to manage their portfolio. The returns offered by NPS are generally higher than PPF or FD.

NPS offers two types of accounts, namely Tier-I and Tier-II. Tier-I account is the pension account having restricted withdrawals. Tier-II is a voluntary account which offers liquidity of investments and withdrawals. It is allowed only when there is an active Tier-I account in the name of the subscriber. The contributions accumulate over a period of time till retirement grows with market linked returns.

On exit/retirement/superannuation, a minimum of 40% of the corpus is mandatorily utilized to procure a pension for life by purchasing an annuity from a life insurance company and the balance corpus is paid as lumpsum.

Partial withdrawal- Subscribers can withdraw up to 25% of their own contributions at any time before exit from NPS Tier-I for a maximum of three times during the entire tenure of subscription under NPS for certain purposes specified in the regulations. The partial withdrawals are allowed from NPS Tier-1 after contributing for at least ten years and there should be a gap of minimum five years between successive withdrawals.

Tax Benefits available under NPS :

a) Employee’s own Contribution towards NPS Tier-I is eligible for tax deduction under section 80 CCD (1) of the Income Tax Act within the overall ceiling of Rs. 1.50 lakh under section 80 C of the Income Tax Act. From FY 2015-16, the subscriber is also allowed tax deduction in addition to the deduction allowed under section 80CCD(1) for contribution to NPS Tier I account subject to a maximum of Rs. 50,000 under section 80CCD 1(B ).

b) Employer’s contribution towards NPS Tier-I is eligible for tax deduction under Section 80CCD (2) of the Income Tax Act (14% of salary for central government employees and 10% for others). This rebate is over and above the limit prescribed under Section 80C.

c) Interim/ Partial withdrawal up to 25% of the contributions made by the subscriber from NPS Tier-I is tax free.

d) With effect from 1.4.2019, lump sum withdrawal up to 60% of total pension wealth from NPS Tier-I at the time of superannuation is tax exempt.

e) Minimum 40% of the amount utilized for purchasing an annuity from the Annuity Service Provider, registered and regulated by the Insurance Regulatory and Development Authority (IRDA) and empanelled by PFRDA is also tax exempt.

Other instruments that are covered under the overall umbrella of 1.5 Lacs under 80C are:

Employee Provident Fund

Employee Provident Fund (EPF) is a retirement benefits scheme for salaried employees. The Employees Provident Fund Organisation (EPFO) manages this scheme. The employee’s contribution to the Employee Provident Fund up to Rs 1.5 lakh is exempt from tax under Section 80 C. 

Effective rate of interest: 8.1% tax free

Repayment principal and interest amount of Housing Loan

The principal amount of repayment of a home loan can be claimed as a deduction under Section 80C. The deduction under this section can be claimed only when the construction of the house property is completed, and there is a completion certificate for the same. The deduction can be claimed in the year of payment upto a maximum amount of Rs 1.5lakhs.

Further a deduction of Interest on housing loan can also be availed upto Rs. 2 Lacs under section 24 of the Income Tax Act in case of a self occupied property and without any upper limit in case the property is let out.

At the time of making investments for tax planning perspective most of us limit our investment upto 1.5 lacs irrespective of the combination we choose from the options available. Instead of limiting our investments to the statutory limits we can also use them as a tool to save tax on the additional income we generate over and above our main sources of income be it salaries, business or profession etc. For example- a salaried individual very often limits his investment in PPF because his limit under 80C is already met by EPF or ELSS, ignoring the fact that a PPF account gives a post tax return of 7.1% compared to post tax return in case of an FD of Rs. 4.97% and this while providing highest level of safety and security to the corpus.

All the methods of tax saving we discussed above were investment linked. However, there are some other exemptions which are also available to an individual.

Income of a Minor Child

As we are aware that any income earned otherwise through skill by a minor child is clubbed in the hand of his parent. In the case of a parent, any income includable in his total income under that sub- section, to the extent such income does not exceed one thousand five hundred rupees in respect of each minor child whose income is so includable. (U/s 10(32))

Leave Travel Allowance

Section 10 (5), or leave travel allowance exemption, is applicable for individual taxpayers. The LTA exemption applies only to the domestic travel expenses, such as airfare, train or bus fare, incurred by the employee. Other expenses, such as transportation within the destination, sightseeing, hotels, and food, are not covered. Additionally, the exemption is limited to LTA provided in your CTC by the employer.

For example, if an employee is given LTA of Rs 30,000 and incurs travel expenses of Rs 20,000, only the amount actually spent on travel would be exempt from taxes and the remaining Rs 10,000 would be included as taxable income.