Claim Tax Deductions and Save Money

Claim Tax Deductions and Save Money

19 Feb 2019

In our quest for maintaining discipline in our financial planning, it is imperative that we always ensure that all our investments are well documented.

At the start of a new financial year, salaried individuals submit an indicative list of instruments which they would be investing in during the course of the year that would give them tax benefits. Companies take these deductions into account and pay the monthly salary based on this declaration. Come January & February, and the HR department will now seek the documentary proof of such promised investments. Prepare yourself for significant salary cuts in the last quarter of financial year if you have not actually made those investments. Do not buy any product which you may not really need in haste and first, start calculating the numbers:

1. Investments you already have – You may be already investing in categories like principal prepaid on home loan, children’s tuition, contributions to Employees’ Provident Fund (EPF) and Life Insurance Premiums. Section 80C of the Income Tax Act, 1961 allows deductions on these categories. Only if there is any headroom left, (the ceiling for Section 80C deduction is Rupees 1.5 lakh) do you really need to invest more.

Tax deductions under section 80C-

Section 80C of the Income Tax Act provides provisions for tax deductions on a number of payments, with both individuals and Hindu Undivided Families eligible for these deductions. Eligible taxpayers can claim deductions to the tune of Rs 1.5 lakh per year under Section 80C, with this amount being a combination of deductions available under Sections 80 C, 80 CCC and 80 CCD. Some of the popular investments which are eligible for this tax deduction are mentioned below:-

  • Payment made towards life insurance policies (for self, spouse or children)
  • Payment made towards a superannuation / provident fund
  • Tuition fees paid to educate a maximum of two children
  • Payments made towards construction or purchase of a residential property
  • Payments issued towards a fixed deposit with a minimum tenure of 5 years

This section provides for a number of additional deductions like investments in mutual funds, senior citizens saving schemes, purchase of NABARD bonds, etc.

Sub-sections under Section 80C:

Section 80C has an exhaustive list of deductions an individual is eligible for, which has led to the creation of suitable sub-sections to provide clarity to taxpayers.

  • Section 80 CCC: Section 80 CCC of the Income Tax Act provides scope for tax deductions on investments in pension funds. These pension funds could be from any insurer and a maximum deduction of Rs 1.5 lakh can be claimed under it. This deduction can be claimed only by individual taxpayers.
  • Section 80 CCD: Section 80 CCD aims to encourage the habit of savings among individuals, providing them an incentive for investing in pension schemes which are notified by the Central Government. Contributions made by an individual and his / her employer, both are eligible for tax deduction, subject to the deduction being less than 10% of the salary of the person. Only individual taxpayers are eligible for this deduction.
  • Section 80 CCF: Open to both Hindu Undivided Families and Individuals, Section 80 CCF contains provisions for tax deductions on subscription of long-term infrastructure bonds which have been notified by the government. One can claim a maximum deduction of Rs 20,000 under this Section.
  • Section 80 CCG: Section 80 CCG of the Income Tax Act, 1961 permits a maximum deduction of Rs 25,000 per year, with specified individual residents eligible for this deduction. Investments in equity savings schemes notified by the government are permitted for deductions, subject to the limit being 50% of the amount invested.

2. Asset Allocation – Invest for tax saving in equity oriented products if your existing investments are skewed towards debt and vice versa. Salaried employees, for instance, contribute to EPF and hence their investments may have a slight tilt towards debt. A self-employed person who has begun investing in equities may, in the absence of the option to invest in EPF, find investing in the Public Provident Fund (PPF) to be an attractive proposition.

3. Health Insurance –The amount of health cover you buy should be dictated primarily by your overall healthcare needs. Also, do avail of the tax benefits available in this regard. Section 80D of the Income Tax Act, 1961 permits deductions on the amount spent by an individual towards the premium of a health insurance policy. This includes payment made on behalf of a spouse, children, parents or self towards a Central Government health plan. An amount of Rs 25,000 can be claimed as deduction when paid towards the insurance for spouse, dependent children or self, while insurance premium paid for parent / guardian (above the age of 60 years) is additionally qualified for deduction upto Rs. 25,000/-.

4. Use NPS – NPS is an innovative forced retirement saving product. An additional deduction of Rupees 50,000 is available under Section 80CCD (1B) of the Income Tax Act for investments in the National Pension System (NPS). Weigh its pros and cons before investing.

Pros of National Pension System:-

  • Additional tax-savings of Rs. 50,000 above the Section 80C limit
  • Higher equity component than other options, except ELSS
  • Flexibility to choose your own asset allocation between equity and debt
  • Option to change pension fund managers
  • Complete capital protection
  • Open to Indian citizens and NRI’s
  • No maximum limit of investment

Cons of National Pension System:-

  • Proceeds upon maturity will be taxed (annuity portion)
  • High documentation required at the time of opening
  • No guaranteed interest rate of returns
  • Minimum contribution per Financial Year - Rs. 1,000
  • Complexity in choosing pension fund manager and starting an account

So, now that we have covered all the deductions which are available to us for saving on taxes, let us put on our financial thinking caps and judiciously invest in products which not only mitigate the tax impact but are perfectly in sync with our personal financial goals and risk tolerance.

Founded in 2005 by new–age entrepreneur Abhishek Bansal, the Abans Group has evolved into a globally diversified conglomerate, providing expertise in Broking Services, Non-Banking Financial Dealings, Financial Services, Agri-Commodity Services, Warehousing, Realty & Infrastructure, Gold Dore Refinery & Manufacturing, Trading in Metal Products, Pharmaceuticals, Software Development & Wealth Management. The Group is a comprehensive financial and non-financial services and solutions provider, aiming to provide end-to-end solutions to its clients.