Preface

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2 Preface All of us engage in some economic activity and work hard to make a living. But as you start doing so you tend to attract the attention of the Income Tax Department, as they too are doing their task of taxing your income, as you earn. And thus as we work hard to make a living, it becomes imperative for us to work a little more harder and smarter to save our taxes (the legal way) too, so that it can help us make our dreams come true - A dream of buying a better car, bigger house etc. But, remember in the quest of attaining the same, if you keep your tax planning exercise pending till the eleventh hour, then it would be merely a tax saving exercise leading to suboptimal gains. The last union budget which was expected to be stricter on austerity, turned out to be a populous one. Instead of expenditure cuts, the government emphasised on raising revenues. Due to this, there were fewer new tax benefits provided to taxpayers. So this requires you to be even more particular about tax planning. This guide on Tax Planning has been written with the purpose of helping you plan your taxes smartly. If one incorporates the financial planning aspects such as your age, income, ability to take risk and financial goals to tax planning exercise, then one can wisely complement tax planning to investment planning as well. Also, realisation will dawn on you that there s more to tax planning than the mere Rs 1 lakh limit under Section 80C, of the Income Tax Act, There are many other provisions that can provide you tax benefits. A simple thing like taking a loan for buying a house can make you eligible to get tax benefits. So, read on and wish you all VERY HAPPY TAX PLANNING!! Team Personal FN 2

3 Disclaimer Quantum Information Services Private Limited (PersonalFN) is enrolled as AMFI Registered Mutual Fund Advisor (ARMFA) under AMFI Registration No. ARN and adheres to AMFI Guidelines and Norms for Intermediaries (AGNI), and all its employees engaged in distribution of Mutual Fund products have passed the prescribed AMFI certification examination. This is a generalized Service, provided on an "As Is" basis by PersonalFN. PersonalFN and its affiliates disclaim any warranty of any kind, imputed by the laws of any jurisdiction whether in or outside India, whether express or implied, as to any matter whatsoever relating to the Service, including without limitation the implied warranties of merchantability, fitness for a particular purpose. PersonalFN will and its subsidiaries / affiliates / sponsors / trustee or their officers, employees, personnel, directors will not be responsible for any direct/indirect loss or liability incurred to the user or any other person as a consequence of his or any other person on his behalf taking any investment decisions based on the above recommendation. This is not a specific advisory service to meet the requirements of a specific client. Use of the Service is at any persons, including a Client's, own risk. The investments discussed or recommended under this service may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advisors as they believe necessary. Information herein is believed to be reliable but PersonalFN does not warrant its completeness or accuracy. The Service should not be construed to be an advertisement for solicitation for buying or selling of any securities. All intellectual property rights emerging from this guide are and shall remain with PersonalFN. This guide is for user s personal use and the user shall not resell, copy, or redistribute this guide, or use it for any commercial purpose. Please read the Terms of Use on the website An Invitation to Join 'Money Simplified' Course PersonalFN and Franklin Templeton Mutual Fund presents 'Money Simplified Your Guide to Money & Mutual Funds' course. An investor education initiative that would act as a one-stop resource for all your investment related needs......and ultimately guide you in planning your finances, so that all your life's goals can be achieved. Click Here to Sign Up Now... It's Absolutely Free! 3

4 Index Section I: Introduction Tax Saving Vs. Tax Planning 05 Section II: Mistakes which you have been doing while saving tax 06 Section III: Your small steps (to Tax Planning ) can take you leaps Steps to tax planning 09 Parameters for prudent tax planning 12 Section IV: Optimal tax planning with section 80C 17 Tax planning with market-linked instruments 18 Tax planning the assured return way 23 Section V: Thinking beyond section 80C 30 Section VI: Your home loan and tax planning 38 Section VII: House Property and taxes 43 Section VIII: Save tax on your hard earned salary 47 Section IX: Conclusion 52 4

5 I - Introduction All men make mistakes, but only wise men learn from their mistakes. - Sir Winston Churchill. The above proverb is very much relevant to our daily lives - be it handling finances or even in any other facets of life. Moreover the famous author John C. Maxwell has also quoted A man must be big enough to admit his mistakes, smart enough to profit from them, and strong enough to correct them. But again this is conveniently forgotten by most, which often leads to failure to learn from mistakes, the arrogance to admit it and which thus leads you to repeat the same mistakes again. While undertaking your tax planning exercise too, you tend to repeat the same mistake of waiting till the eleventh hour and are arrogant enough to admit it. As the financial year draws to a close, we all start feeling the heat and realise that yes, now we have to invest in order to save tax. But have you ever wondered whether it is the prudent way for tax planning? Remember, waiting till the eleventh hour to undertake your tax planning exercise will often drive it towards mere tax saving rather than tax planning ; which in our opinion is a suboptimal way to undertake a tax planning exercise. Unlike tax saving which is generally done through investments in tax saving instruments/products, under tax planning we take into consideration one s larger financial plan after accounting for one s age, financial goals, ability to take risk and investment horizon (including nearness to financial goals). And by adapting to such a method of tax planning, you not only ensure long-term wealth creation but also protection of capital. Hence, please remember to commence your tax planning exercise well in advance by complementing it with your overall investment planning exercise. 5

6 II - Mistakes which you have been doing while saving tax We recognise the fact that many of you are too busy throughout the year, in your economic activities intended to make a living. But if you show the same dedication in your tax planning exercise, the same will enable you to save more and fulfil all your dreams in life. Our experience reveals following 4 mistakes which individuals do while saving taxes. 1. Doing your tax planning at the last moment: The root of all mistakes in tax planning lies in waiting till the last minute to save taxes, which eventually leads to mere tax saving, rather than tax planning. And this in return is a sub-optimal way of saving taxes, caused by the sheer attitude of delay. Your last moment hurry, will often lead you to forgetting or ignoring the facets of financial planning such as your age, income, ability to take risk and financial goals (explained further in this guide) thus guiding you to not complement your tax planning exercise with investment planning. Remember waiting till the eleventh hour, is just going to lead you to a path of sub-optimal tax planning exercise, which would destroy the essence of holistic tax planning. 2. Unnecessarily Buying Endowment and Unit Linked Insurance Plans: At the end of the financial year, many of you might have attended telephone calls of insurance agents pestering you to buy an investment cum insurance plan typically market linked i.e. Unit Linked Insurance Plans (ULIPs) or some kind of Endowment plans. And many of you realising the need to save your taxes, even entertain these calls and eventually tear a cheque for buying one. But do you ever wonder whether you have done the right thing? 6

7 The answer in our opinion is a sheer No. And that s because of the ignorance and / or arrogance (of not admitting your mistakes) which you have, while doing your tax saving investments. Remember when you think of insuring yourself, it should purely mean protecting your life against any contingent events; and thus given that you should be ideally buying only pure term life insurance plans, which gives due importance to your human life value. It is noteworthy that ULIPs are investment-cuminsurance plans where for the premium paid, the insurance cover offered under these plans is far less (usually 10 times of your annual premium) when compared to pure term life insurance plans; where for a lesser premium amount you get a greater life cover which precisely what a life insurance plan is intended for. 3. Ignoring power of compounding through tax saving mutual funds: Many of you despite the fact that age, income, ability to take risk along with financial goals support you to take risk, you absolutely rule out the concept of power of compounding to your portfolio. It is noteworthy that if you want to meet and / or elevate your standard of living going forward, you need to beat the rate of inflation. And thus, role of equity as an asset class cannot be ignored in one s tax saving portfolio too. While some do consider the tax saving mutual funds in their tax saving portfolio the ideal composition (depending on your age, income ability to take risk and financial goals) is not maintained, which leads the tax saving portfolio to give sub-optimal returns. It is noteworthy that being risk averse is well appreciated by us. But if your age, income, ability to take risk and financial goals, permit you to take equity exposure one should not ignore the same. 7

8 4. Not optimizing all options for tax saving: For many tax planning starts as well as ends with Section 80C - which enunciates investment instruments for tax saving. But investing only in these investment instruments would not lead to optimal reduction of your tax liability. To bring to your notice our Income Tax Act, 1961 also considers humane side of our life and also gives deduction for contributions you make on such developments. So, in case if you pay your medical insurance premium, incur expenditure on the medical treatment of a dependant handicapped, donate to specified funds for specified causes, contribute in monetary form to political parties or electoral trusts, take a loan for pursuing higher education or if you are an individual suffering from specified diseases, then all this too can help you effectively plan your tax obligations, thus optimally reducing your tax liability. Moreover, taking into account the urge to buy your dream home by taking a loan, the Act also extends tax saving benefits to you. 8

9 III - Your small steps can take you forward by leaps There is an old Chinese proverb which says, It is better to take many small steps in the right direction than to make a great leap forward only to stumble backward. which in our opinion applies even to your tax planning exercise. Remember, it is vital for you to step-by-step ascertain where you stand, in terms of your Gross Total Income and Net Taxable Income, so that you effectively undertake your tax planning exercise which in turn would deliver you the objective of long-term wealth creation along with capital protection. In the past if you have taken your tax planning decisions at the last moment, never mind. But, please learn from them and don t repeat the same mistakes again. Adopt the prudent steps while doing your tax planning. Steps to tax planning : Step 1: Compute the Gross Total Income The process of tax planning begins with computation of your Gross Total Income (GTI). This step enables you to ascertain the total income earned by you during a financial year, from various under-mentioned sources of income, and helps you to judge where you stand. Income from salary Income from house property Profits and gains from business & profession Capital gains (short term and long term) and Income from other sources. Hence, GTI is the total income earned by one before availing any deductions under the Income Tax Act, And it is vital to know the same, in order for you to undertake your tax planning effectively, so that you can plan within the sources of income (by using the relevant provisions 9

10 of the Income Tax Act applicable to the aforementioned sources of income), as well as by availing deductions to GTI. Now, one may ask how do I undertake this activity if I m a novice? Well, the answer is pretty simple! You can either get it done at your company (many organisation do offer this facility), ask your CA / tax consultant to do it, or use the convenience of the new and updated tax portals that have emerged in more recent times. But, along with all this please do not forget to do your self-study to carry out effective tax planning exercise. One must note that it is vital to know at least those provisions of the Income Tax Act, which directly have an impact on your finances. Step 2: Compute the Net Taxable Income After having done with computation of GTI by using the relevant provisions of the Income Tax Act for each source of income, the next step is to compute your Net Taxable Income (NTI). Under NTI from the GTI, the various deductions allowed under the Income Tax Act, should be accounted for (i.e. subtracted from your GTI), which would thus reduce your taxable income. These deductions enable you to enjoy reduction in tax liability, as it covers Sections under the Income Tax Act for: 10 Investing in tax saving instruments (your most loved and sought after Section 80C, along with the recently introduced RGESS - Rajiv Gandhi Equity Savings Scheme) Donations Expenditure on handicapped dependent Premium payment for your medical insurance Interest paid on loan taken for higher education Rent paid for residential accommodation Expenditure incurred on a specified diseases suffered by you Remember, if you use the respective provisions effectively to do tax planning, it will enable you to achieve the long-term objective of wealth creation.

11 Step 3: Calculate the tax payable After having effectively saved tax in the prudent way mentioned above, the next step is to compute your tax liability based on the present income tax slabs, and thereafter file your tax returns. The income tax rates for Individuals and HUFs for FY are as follows: Net Taxable Income (in Rs) Upto Rs 2,00,000 (for general tax payers male and female) Upto Rs 2,50,000 (for senior citizens) Upto Rs 5,00,000 (for very senior citizens aged 80 and above) Rate Rs 2,00,001 to Rs 5,00,000 # 10% Rs 5,00,001 to Rs 10,00,000 20% Above Rs 10,00,000 30% A Tax Credit or Special Rebate of Rs 2,000 is allowed for individuals whose Taxable Income is below Rs 5 lakhs Source: Finance Act 2013, Personal FN Research) # For senior citizens (aged above 60 but below 80), with NTI falling between Rs 2,50,001 to Rs 5,00,000 will be 10%. For very senior citizens (individuals who have completed 80 years of age), the base exemption limit is extended upto first Rs 5 lakh of their income. Nil Moreover you would also have to pay an education 3% on your computed tax liability. Also note that an additional 10% would be levied if your total income in the financial year exceeds Rs 1 crore. The levy of this one time surcharge was announced in the Union Budget in order to generate more tax revenue by increasing the tax liability of the rich. This one-time surcharge, which is applicable only for the assessment year , will be in addition to the education cess of 3% that is paid on total income-tax. While the union Budget 2013 introduced a New Section 87A (which allows a Tax Credit or Special Rebate of Rs 2,000 to individuals whose NTI is below Rs 5 lakhs), the rebate will be limited to the extent of your tax liability or Rs 2,000 whichever is less. So if your tax liability is say Rs 1,500, you will get a tax credit of only Rs 1,500 under section 87A and no tax will be payable. 11

12 Now let us see how you can compute your income tax liability: Say if your net taxable income after availing for all deductions available is Rs 12 Lac in the current financial year, then your tax liability will be computed as under: Computation of Tax Liability ( ) Taxable Income (in Rs) 12,00,000 Upto 2,00,000 Nil - Rs 2,00,001 to Rs 500,000 10% 30,000 Rs 500,001 to Rs 10,00,000 20% 1,00,000 Rs 10,00,001 & above 30% 60,000 Tax payable (in Rs) 1,90,000 Education Cess 3% 5,700 Total Tax (in Rs) 1,95,700 (Source: Personal FN Research) Parameters for prudent tax planning : A Prudent exercise of tax planning also extends to appropriate investment planning, which also takes into account your ideal asset allocation by considering the under-mentioned factors. Hence after you have utilised the tax provisions within each head / source of income for effective reduction in GTI, you must also consider the following parameters as these will enable you to optimally reduce your tax liability. Age Your age and the tenure of your investment play a vital role in your asset allocation. The younger you are more risk you can take and vice-a-versa. Hence, for prudent tax planning too, if you are young, you should allocate more towards market-linked tax saving instruments such as Equity Linked Saving Schemes (ELSS), Unit Linked Insurance Plans (ULIPs) and National Pension System (NPS), as at a young age the willingness to take risk is high. One may also consider taking a home loan at a younger age, as the number of years of repayment is more along with your willingness to take risk being high. 12

13 Also a noteworthy point is the earlier you start with your investments, the greater is the tenure you get while investing in an investment avenue, which can enable you to make more aggressive investments and create wealth over the long-term to meet your financial goals. Let s understand this much better with the help of an illustration. An early bird gets a bigger pie Particulars Suresh Mahesh Rajesh Present age (years) Retirement age (years) Investment tenure (years) Monthly investment (Rs) 7,000 7,000 7,000 Returns per annum 10% 10% 10% Sum accumulated (Rs) 2,65,76,466 1,58,23,415 92,87,834 (Source: Personal FN Research) Note: The names and returns mentioned above are an assumption and used for illustration purpose only The above table reveals that, Suresh starts at age 25, and invests Rs 7,000 per month in an ELSS scheme through SIPs (Systematic Investment Plans) until retirement (age 60). His corpus at retirement is approximately Rs 2.65 crore. Mahesh starts at age 30, a mere 5 years after Suresh, and invests the same amount in ELSS scheme (through SIPs) until retirement (also at age 60). His corpus builds up to approximately Rs 1.58 crore, note the difference between the 2 corpuses here. And lastly, we have Rajesh, the late bloomer of the lot. He begins investing at age 35, the same amount monthly in an ELSS Scheme as Suresh and Mahesh, and invests up to his retirement (also at age 60). His corpus is, in comparison, a meagre Rs 92 lakh. The following graph clearly indicates the gap between accumulated corpuses for similar level of investment per month. 13

14 (Source: Personal FN Research) For some of you young people, pursuing higher education may be a priority. But there may be a case you do not have enough corpus (funds) garnered by you. However, you need not worry, as there are several banks willing to offer higher education loan; and if you avail the same, the interest paid by you on such loan taken will be eligible for tax benefit (under section 80E of the Income Tax Act which is discussed ahead in this guide). Income Similarly, if your income is high, your willingness to take risk is high. This thus can work in your favour, as you have sufficient annual GTI which allows you to park more money towards market-linked tax saving investment instruments, for generating higher returns and creating a good corpus for your financial goal(s). Also, on account of the higher GTI your eligibility to take a home loan also increases, which can also help you to optimally reduce your tax liability. Yes, one may say if I have a high income, then why I need a home loan. I can straight away go ahead and buy! Sure, you can do so but, the Income Tax Act provides you the tax benefit for repayment of principal amount along with the interest of loan taken, which you will miss. 14

15 Also given that you are financially strong, you can also consider donating some of your money towards a noble cause, as doing so will make you eligible for a tax benefit (under section 80G of the Income Tax Act which is discussed ahead in this guide). Similarly, if your income is not high enough (i.e. it is low), and you do not want to put your money to risk; you can invest in tax saving instruments which provide you assured returns. These instruments can be Public Provident Fund (PPF), National Savings Certificates (NSCs), 5 Yr Bank Fixed Deposits, 5 Yr Post Office Time Deposits and Senior Citizen Savings Scheme (provided you are a senior citizen). Financial goals The financial goals which one sets in life, also influences the tax planning exercise. So, say for example your goal is retiring from work 5 years from now, then your tax saving investment portfolio will be also less skewed towards market-linked tax saving instruments, as you are quite near to your goal and your regular income will stop. Likewise if you are many years away from the financial goal, you should ideally allocate maximum allocation to market linked tax saving instruments and less towards those tax saving instruments which provide you low assured returns. Risk Appetite Your willingness to take risk which is a function of your age, income, expenses, nearness to goal, will be an important determinant while doing your tax planning exercise. So, if your willingness to take risk is high (aggressive), you can skew your tax saving investment portfolio more towards the market-linked instruments. Similarly, if your willingness to take risk is relatively low (conservative), your tax saving investment portfolio can be skewed towards instruments which offer you assured returns, and if you are a moderate risk taker you can take a mix of 60:40 into market-linked tax saving instruments and assured return tax saving instruments respectively. 15

16 Yes, we reckon the fact that prudent tax planning exercise can be time consuming and complex. But please note the fact that it s an annual activity which every tax payer has to go through and if you start early and plan properly, the task becomes easier. Remember, delay will only ensure that you invest at the last moment but not in line with the parameters discussed above. If you are hard pressed for time, consider hiring a competent tax consultant along with an investment advisor. 16

17 IV - Optimal tax planning with section 80C Section 80C of the Income Tax Act enables you to effectively invest in tax saving instruments, in order to optimally reduce your tax liability; and this is seen as one of the most sought after sections when it comes to tax planning. It offers a host of popular investment instruments mentioned below which qualify you for a deduction from your Gross Total Income (GTI): Life Insurance Premium Public Provident Fund (PPF) Employees Provident Fund (EPF) National Saving Certificate (NSC), including accrued interest 5-Year fixed deposits with banks and Post Office Senior Citizens Savings Scheme (SCSS) National Pension System (NPS) Unit-Linked Insurance Plans (ULIPs) Equity Linked Savings Schemes (ELSS) Tuition fees paid for children s education (maximum 2 children) Principal repayment on Housing Loan Hence, if you invest in any or all of the aforementioned instruments; you would qualify for deduction under this section subject to the maximum of Rs 1,00,000 p.a. But we think rather than just merely investing in any of the above tax saving instruments, you can also use these tax saving instruments for prudent tax planning by recognising your age, income, financial goals and risk appetite. Now you may ask how? Well, it s simple! In the aforementioned list you can classify the tax saving instruments into those offering variable returns (i.e. market-linked instruments) and those offering fixed returns (i.e. assured return instruments). By doing so you would be able to ascertain which suits you 17

18 best (taking into account the factors mentioned above) and would extend your tax planning exercise to investment planning too. Let s discuss in detail the classification into market-linked tax saving instruments and assured return tax saving instruments. Tax Planning with market-linked instrument: If you are young, income is high, and therefore willingness to take risk is high along with your financial goals being far away, then this category would be suitable for you. Under this category you can invest in the capital markets, giving you variable returns. Following tax saving instruments are available for investment. 1. Equity Linked Savings Schemes (ELSS): These are mutual fund schemes, which are 100% diversified equity funds providing tax saving benefits. And these are popularly known as Tax Saving Mutual Funds. A distinguishing feature about them is that they are subject to a compulsory lock-in period of three years, but the minimum application amount in most of them is as little as Rs 500, with no upper limit. You can either make lump sum investments or investments through the Systematic Investment Plan (SIP). It is noteworthy that, in the long-term if you intend to create wealth by hedging the inflation risk, then this tax saving instrument can give you luring returns. Yes, you may say but there is risk involved. Well, no doubt about that, but in order to even out the shocks of volatility in the equity markets you can adopt the SIP route of investing here which will provide you the advantage of compounding along with rupee-cost averaging. 18

19 SIPs provide cushion against market volatility (Source: ACE MF, Personal FN Research) Get wealthy Sip by Sip (Source:ACE MF, Personal FN Research) While SIPs in ELSS can help you tackle volatility and may help you gradually create wealth in the long run, a noteworthy point in SIP investing in ELSS is that your every SIP installment (which can be monthly, quarterly or half yearly) should complete the minimum lock-in period of 3 years. Deduction: The maximum tax benefit which you can enjoy under section 80C is Rs 1,00,000 p.a. Moreover, if you make any long term gains at the time of exit, any time after the end of the lock-in period; then you would not have to pay any Long Term Capital Gains Tax (LTCG) too. 19

20 2. Unit-Linked Insurance Plans (ULIPs): These are typically insurance-cum-investment plans which enable you to invest in equity and / or debt instruments depending on what suits you as per your age, income, risk profile and financial goals. All you simply need to do is, select the allocation option as provided by the insurance company offering such a plan. Generally they are classified as aggressive (which invests in equity), moderate or balanced (which invests in debt as well as equity) and conservative (which invests purely in debt instruments). Hence apart from the insurance cover (which is 10 times your annual premium) offered under these plans, the returns which you would get would be completely market-linked as your premium amount (after accounting for allocation and other charges) is invested in equity and debt securities. And in order for you to track such plans the NAV is declared on a regular basis. These policies have a minimum 5 year lock-in period, and also have a minimum premium paying term of 5 years. The overall term of the policy would vary from product to product. In case of any eventuality the beneficiaries would be paid the sum assured or fund value, whichever is higher. But a noteworthy point is, while some well selected ULIPs may add value to your portfolio in the long-term; your insurance and investment needs should be dealt separately, thus enabling you to have the optimum insurance coverage and the right investment instruments for long-term wealth creation. Deduction: The premium which you pay for your ULIP would be eligible for tax benefit, subject to the maximum eligible amount of Rs 1,00,000 p.a. as available under Section 80C. Moreover, a positive point is that at maturity the amount which you or your beneficiary would receive is tax free (exempt) as per the provisions of Section 10(10D) of the Income Tax Act. 20

21 3. National Pension System (NPS): National Pension System which was earlier available only for Government employees was later on May 1, 2009 also introduced for people in the unorganised (private) sector, as need for deeper participation in the pension contribution (through this product) was felt. For NPS, if you (eligibility age: from 18 years to 60 years) belong to the unorganised sector (i.e. private sector); the contributions done by you towards the scheme would be voluntary, and you can invest in any of the two under-mentioned accounts: Tier-I Account: In this account your minimum investment amount is Rs 500 per contribution and Rs 6,000 per year, and you are required to make minimum 4 contributions per year. Under this account, premature withdrawals upto a maximum of 20% of the total investment is not permitted before attainment of 60 years, however the balance 80% of the pension wealth has to be utilised by you to buy a life annuity. Tier-II Account: For opening this account you will have to make a minimum contribution of Rs 1,000 per annum. The minimum number of contributions is 4, subject to a minimum contribution of Rs 250. However, if you open an account in the last quarter of the financial year, you will have to contribute only once in that financial year. You will be required to maintain a minimum balance of Rs 2,000 at the end of the financial year. In case you don t maintain the minimum balance in this account and do not comply with the number of contributions in a year, a penalty of Rs 100 will be levied. Moreover, in order to have Tier-II account, you first need to have a Tier-I account. Tier-II account is a voluntary account and withdrawals will be permitted under this account, without any limits. 21

22 Even if you hold both the above accounts under NPS, only the Tier-I account will be eligible for tax benefits. While investing money in NPS, you have two investment choices i.e. Active or Auto choice. Under the Active choice asset class, your money will be invested in various asset classes viz. E (Equity), C (Credit risk bearing fixed income instruments other than Government Securities) and G (Central Government and State Government bonds); where you will have an option to decide your asset allocation into these asset classes. In case of Auto Choice, your money will be invested in the aforesaid asset classes in accordance with predetermined asset allocation. But remember, the return on your investment is not guaranteed as it is market-linked. At your age of 60 years, you can exit the scheme; but you are required to invest a minimum 40% of the fund value to purchase a life annuity. And the remaining 60% of the money can be withdrawn in lump sum or in a phased manner upto your age of 70 years. In our opinion this product is not very appealing for creating a substantial corpus to meet your retirement need. Rather, if you chalk-out a prudent financial plan with the help of a financial planner, and invest wisely as per the plan laid out (which would mostly recommend you equity allocation at younger age, and then as your age progresses balance the asset allocation between equity and debt instruments), then the corpus which you would be able to create will be substantial enough to meet your retirements needs. Also the money withdrawn under this scheme, even at the age of 60 is taxable. Deduction: Those who are salaried employees may claim deduction under section 80C upto Rs 1 lac for their own contributions towards NPS account. In addition to this, they are entitled to claim deductions under section 80 CCD if there is any contribution made by their employer but only upto 10% of their salary (for this purpose salary construes as Basic Salary plus Dearness Allowance). It is noteworthy that the deduction under section 80CCD can be claimed over and above the permissible deductions under section 80C. So if an Individual contributes alone from his income towards NPS, it will be considered within the limits of 1 Lakh p.a. under sec 80C. 22

23 It is only if the Employer contributes to employee for NPS sec 80 CCD is applicable. So to avail this extra tax exemption limit, the employees need to convince their employers to start contributing to NPS. However, those who are self-employed can avail deduction under section 80CCD upto 10% of their gross total income (which is comprised of income computed under different heads before reducing it by all other deductions available under section 80). In addition to deductions under section 80CCD, self-employed people are also entitled to deductions under section 80C for other instruments eligible therein. Tax Planning the assured return way: Unlike the case presented above (i.e. tax planning with market-linked instruments), if your age, income, risk profile and financial goals do not permit you to invest in market-linked instruments (for your tax planning) along with the fact that your risk taking ability is low; then you should plan investing in tax saving instruments which offer you assured returns. Under these instruments there is zero risk of erosion to your capital. Following are the tax saving instruments available under this category: 1. Non-Unit Linked Life Insurance Plans: Life Insurance plans can be broadly classified as pure term life insurance plans and investment-cum-life insurance plans. Pure term life insurance plans are authentic in nature, as they cater to the need of only protection and not investment. Hence such plans offer a high life insurance coverage at low premiums. Generally the term insurance plans offer a policy term of 10, 15, 20, 25 or 30 years. Investment-cum-life insurance plans on the other hand, as the name suggest offer you an investment option along with insurance option. But here your insurance coverage is far lesser, than the one provided under pure term insurance plans. So, you pay a high premium which gets 23

24 invested, but insurance coverage on the other hand is meagre. Such insurance plans can be offered in various forms such as ULIPs (as discussed above), endowment plans, money back plan, pension plans etc. We think that while you are considering your insurance needs, you should ideally look at only pure term life insurance plans, thus keeping your insurance needs separate from investment needs. Deduction: Over here too the premium which you pay for your such non-ulip life insurance plans would be eligible for tax benefit, subject to the maximum eligible amount of Rs 1,00,000 p.a. as available under Section 80C. Moreover, a positive point is that at maturity the amount which you or your beneficiary would receive is exempt (tax free) as per the provisions of Section 10(10D) of the Income Tax Act. 2. Public Provident Fund (PPF): The PPF scheme is a statutory scheme of the Central Government of India. In order to invest in PPF, you are required to open a PPF account (which is irrespective of your age) at your nearest post office or public sector (nationalized) bank providing this facility. You can open the account in your name, and also in the name of your wife as well as children. If you do not wish to open a separate account in the name of your wife as well as children, you can nominate them; but joint application is not permissible. The account so opened will have an expiry term of 15 years from the end of the year in which the initial investment (subscription) to the account is made. You can invest in the account ranging from a minimum of Rs 500 to a maximum of Rs 100,000 in a financial year in order to enjoy the tax saving benefit under Section 80C, and the amount to the credit of your account will be entitled to a tax-free interest at 8.8% p.a. Your each deposit in the PPF account should at least be Rs 500, and one has the convenience of depositing in either lump sum or in installments not exceeding 12 such installments. However, a noteworthy point is that it is not necessary to deposit every month and the amount too can be any amount subject to the minimum (Rs 500) and maximum (Rs 1,00,000) amount. 24

25 The interest to the account will be calculated on the lowest balance to the credit of the account between the close of the 5 th day and the end of the month, and will be credited to account on 31 st of March, each year. As regards withdrawal from the account is concerned; it is permitted any time after the expiry of 5 years from the end of the year in which initial investment (subscription) to the account is made. However, your withdrawal will be restricted to 50% of the amount which stood to the credit of your account in the immediate 4 th year immediately preceding the year of withdrawal or at the end of the preceding year, whichever is lower. And in case if your term of 15 year is over, you can withdraw the entire amount together with the interest accrued till the last day of the month, preceding the month in which application for withdrawal is made. After your term of 15 years is over if you wish to renew your account, you can do so for a period of another 5 years at the rate of interest prevailing then, without having the compulsion of putting any further deposits in case of extension. The withdrawal in case of extended accounts is permissible once in every financial year. But the total withdrawal should not exceed 60% of the balance accumulated to the account at the commencement of the extension period (of 5 years). It is noteworthy that if you are risk averse, then this product is best in its class for tax planning. Moreover, it also offers you an appealing tax-free return of around 8% p.a. (compounded annually). Deduction: The contributions which you make to the accounts mentioned above, would be eligible for tax benefit but subject to the maximum eligible amount of Rs 1,00,000 p.a. as available under Section 80C. 3. National Savings Certificate (NSC): The NSC is also a scheme floated by the Government of India, and one can invest in the same through your nearest post offices, as the scheme is available only with the India Post. The certificates can be made in your own name, jointly by two adults, or even by a minor (through the guardian), and has a tenure of 5 years or 10 years. 25

26 The minimum amount which you can invest is Rs 100, with no maximum limit to the same. NSC maturing in 5 years offers 8.5% p.a. compounded half-yearly whereas NSC maturing in 10 years offers 8.8% p.a. compounded half-yearly, thus giving you an effective interest rate of 8.68% p.a. and 8.99% p.a. The interest income accrues annually and is reinvested further in the scheme till maturity (i.e. 5 or 10 years) or until the date of premature withdrawals. Premature withdrawals are permitted only in specific circumstances such as death of the holder. Deduction: Your investment in NSC is eligible for a deduction of upto Rs 1,00,000 p.a. under Section 80C. Furthermore, the accrued interest which is deemed to be reinvested qualifies for deduction under Section 80C. However, the interest income is chargeable to tax in the year in which it accrues. But in case if you have no other income apart from interest income, then in order to avoid Tax Deduction at Source (TDS), you can submit a declaration in Form 15-H (for general) or Form 15-G (for senior citizens) as applicable. 4. Bank Deposits and Post Office Time Deposits: The 5-Yr tax saving bank fixed deposits available with your bank is also eligible for a deduction under Section 80C and comes with a lock in period of 5 years. The minimum amount that you can invest is Rs 100 with an upper limit of Rs 1,00,000 in a financial year. The interest rates offered by some of the popular banks are as follows: Bank Name Interest Rate(s) (%) General Senior Citizens Axis Bank Ltd HDFC Bank Ltd ICICI Bank Ltd IDBI Bank Ltd State Bank of India Rates as available on October 23, 2013 (Source: Respective bank s website, Personal FN Research) 26

27 However, the interest earned here would be subject to tax deduction at source, making it detrimental for your tax planning, but again you can submit a declaration in Form 15-H (for general) or Form 15-G (for senior citizens) as applicable for not deducting tax at source. Similarly 5 Yr Post Office Time Deposits (POTDs) also offer you a tax benefit under Section 80C. The account can be opened by you either in single name or jointly or even by a minor (through a guardian) who has attained the age of 10. The minimum investment amount is Rs 200, and there isn t any upper limit. However, the investment amount over Rs 1,00,000 will not be eligible for any tax benefit. A 5-Yr POTD earns a return of 8.4% p.a. (compounded quarterly), but paid annually. Hence, say if you deposit an amount of Rs 10,000, the interest income which you will fetch would approximately be Rs 867 p.a. As regards premature withdrawals are concerned, they are permitted only after 1 year from the date of deposit and interest on such deposits shall be calculated at the rate, which shall be 1% less than the rate specified for a period of 5-Year deposit. Deduction: Your investment in both these schemes are eligible for a deduction of upto Rs 1,00,000 p.a. under Section 80C. But as mentioned above, the interest earned on your investments will be subject to tax deduction at source. However, in case if you have no other income apart from interest income, then in order to avoid Tax Deduction at Source (TDS), you can submit a declaration in Form 15-H (for general) or Form 15-G (for senior citizens) as applicable. 5. Senior Citizens Savings Scheme (SCSS): Well, the SCSS is an effort made by the Government of India for the empowerment and financial security of senior citizens. So, in case if you are over 60 years old, you are eligible to invest in this scheme. Moreover, if you have attained 55 years of age and have retired under a voluntary retirement scheme; then too you are eligible to enjoy the benefits of this scheme. 27

28 In order to avail the benefits of this scheme, you are required to open a SCSS account (either in a single name, or jointly along with your spouse) at your nearest post office or any nationalised bank. You can do a onetime deposit under this scheme subject to the minimum investment amount of Rs 1,000 and a maximum of Rs 15,00,000. The maturity period provided for this scheme is 5 years offering a rate of interest of 9.20% p.a. payable on a quarterly basis (i.e. on March 31, June 30, September 30 and December 31) every year from the date of deposit. Premature withdrawals are permitted only after one year from the date of opening the account. If you withdraw between 1 and 2 years, 1.5% of the initial amount invested will be deducted. And in case if you withdraw after 2 years, 1.0% of the balance amount is deducted. Deduction: Your investments upto Rs 1,00,000 in SCSS are entitled for a deduction under Section 80C. However, the interest earned by you would be subject to tax deduction at source. But in case if you have no other income apart from interest income, then in order to avoid Tax Deduction at Source (TDS), you can submit a declaration in Form 15-H (for general) or Form 15G (for senior citizens) as applicable. Options Galore - Snapshot of section 80C Schemes Type Interest Rate Term Min Max Investment Tax planning with market-linked instruments Term: Ongoing Market-Linked Returns Rs No upper Limit Lock-in-period: 3 years Premature Withdrawal Section No. No 80C Tax Saving Funds/ ELSS Growth Unit Linked Insurance Plans (ULIPs) Growth Market-Linked Returns Term: years; Lock-in-period: 5 years Premium varies from scheme to scheme Yes 80C & 10(10D) National Pension System Growth Market-Linked Returns years Rs 6,000 Yes 80C Recurring 8.8% p.a. Rs Rs 100,000 Yes 80C National Savings Certificate 5 Yr Deposit 8.5% (compounded half-yearly) 5 years Rs No upper Limit No 80C National Savings Certificate 10 Yr Deposit 8.8% (compounded half-yearly) 10 years Rs No upper Limit No 80C Bank Deposits Fixed Deposit 8.25% to 9.75% p.a. 5 years No upper Limit No 80C Post Office Time Deposit Fixed Deposit 5-YR: 8.4%; (compounded quarterly & paid annually 5 years Rs No upper Limit Yes 80C Senior Citizens Savings Schemes Deposit 9.20% p.a. (payable quarterly) 5 years Rs 1,000 - Rs 15,00,000 Yes 80C Sum Assured Only (i.e. Insurance Cover) 5-40 years Premium depends upon the insurance cover Varies from policy to policy 80C & 10(10D) Public Provident Fund Non-ULIP Insurance Plans Tax planning the "assured return" way 15 years (Source: Personal FN Research) 28

29 6. Tuition fees paid for children s education (maximum 2 children): The tuition fees that you pay to any university, college, school or other educational institution situated within India for your children s education is also eligible for deduction under section 80C. However the fees paid towards any coaching center or private tuition may not be eligible. Also you need to note that this deduction is available only to Individual Assesse and not for HUF, and is limited to Rs. 1,00,000 and a maximum 2 children. If someone has four children, then husband and wife both can enjoy a separate limit of two children each, so they can separately claim deduction (upto Rs 1,00,000) for 2 children each, subject to the amount they have actually paid. 7. Principal repayment on Housing Loan: You always wanted to have your dream home and now you have been able to get it with the help of housing loan from a bank or a financial institution. But after you have got your home through this loan, you have the obligation to repay the principal amount of the loan on time. The repayment of principal amount, makes you eligible to claim a deduction upto a sum of Rs 1,00,000 under section 80C; and that benefit is available with you immaterial of the fact whether you stay in the same property (Self Occupied Property - SOP), or have let it out on rent (Let Out Property LOP). You can also claim tax benefit on the interest you pay on your housing loan, but under a separate section (Section 24 which is covered in detail at the later stage in the guide) In case you have taken a second home loan for another property, then the principal amount repaid (up to Rs 1 lakh) for the home loan taken only on your self-occupied property qualifies for deduction under Section 80C. However you cannot claim deduction for the principal repayment made against the home loan on the other property. 29

30 V - Thinking beyond Section 80C Well, most people think that tax planning ends with Section 80C; but please note that there s more to tax planning than just investment instruments specified under Section 80C. Our Income Tax Act, 1961 also considers the humane side of our life and also gives deduction for such expenditure. So, in case if you pay your medical insurance premium, incur expenditure on the medical treatment of a dependant handicapped, donate to specified funds for specified causes, contribute in monetary form to political parties or electoral trusts, take a loan for pursuing higher education or if you are an individual suffering from specified diseases, then all this too can help you effectively plan your tax obligations, thus optimally reducing your tax liability. So, let s understand how each of the above expenses for a cause or an investment, can help you in effective tax planning. Herein below is the list of some major ones. 1. Premium paid for medical insurance (Section 80D): The premium paid by you on medical insurance policy (commonly referred to as a mediclaim policy) to cover your spouse and you, dependent children and parents against any unexpected medical expenses, qualifies for a deduction under Section 80D. The maximum amount allowed annually as a deduction (from your GTI) is Rs 15,000, in case if you pay for yourself, spouse and dependent children. And if you are a senior citizen, the maximum deduction gets extended to Rs 20,000. Further, if you pay medical insurance premium for your parents (irrespective of whether they are dependent on you or not), you can claim an additional deduction of upto Rs 20,000 in case parents are senior citizens or Rs 15,000 in other cases under this section. So, for example, if you pay a premium of Rs 15,000 for yourself and Rs 17,000 for your parents, you will be eligible for a total deduction of Rs 30,000 only, assuming your parents are not senior citizens. However, while paying the premium you need to ensure that the payment is made in any mode other than cash. 30

31 2. Maintenance including medical treatment of a handicapped dependent (Section 80DD): If you have incurred any expenditure in the form medical treatment (including nursing), training and rehabilitation for a handicapped dependent suffering from disability, then the expenditure so incurred by you qualifies for deduction under Section 80DD of the Income Tax Act. Similarly, if you have deposited a sum of money under any scheme framed in this behalf by LIC (Life Insurance Corporation of India) or any other insurer or administrator or a specified company (approved by the Board), for maintenance of the dependent being a person with disability; also qualifies for a deduction under Section 80DD. The quantum of deduction here depends upon the severity of the disability suffered by the dependent. Hence, if the dependent is suffering from 40% of any disability [Specified under section 2(i) of the Person with Disability (Equal Opportunities, Protection of Rights and Full Participation) Act, 1955], then you would be entitle to a deduction of a fixed sum of Rs 50,000 p.a. from your GTI irrespective of the expenditure incurred or amount deposited. Similarly, if the dependent is suffering from severe disability (i.e. 80% of any disability), then you claim a higher deduction of fixed sum of Rs 100,000, from your GTI irrespective of the expenditure incurred or amount deposited. It is noteworthy that over here the term dependent being a person with disability means your spouse, children, parents, brothers and sisters. Moreover, in order to claim the deduction you need to submit a medical certificate issued by a medical authority along with your return of income. Also if you are claiming a deduction in your tax returns for such an expenditure incurred or amount deposited, your dependent cannot claim a deduction under Section 80U in case he s (handicapped dependent) filing his tax returns separately. 31