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Tax Savings Schemes

and Instruments

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For many people, the taxman’s knock

feels like a biannual bolt from the blue!

Every year you go through the rigour of filing your taxes and more

often than not, you are not sure about what tax saving option suits you

the most. This time around though, don’t just hurriedly invest in any

tax-saving instrument.

As we approach the last quarter of FY2014-15, we get you acquainted

with the different options you could consider to limit your tax outgo for

the year and decide the best ones for yourself.

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Before you answer the taxman’s knock

and start planning your taxes, you need

to know two important things:

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1: Define Long-Term

Determine your long-term financial goals in advance.

At every stage in life, your tax strategy must complement your

goals, whether it is wealth-building, adding assets (e.g. a home),

family responsibilities or retirement planning.

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2: Remember the Three Key Sections

Individual income tax for Indians is defined under different

sections of the Income Tax Act.

•While we won’t go into the details, just remember three key sections: 80C,

80CCC and 80CCD.

•The total tax deduction you claim under these three cannot exceed Rs.

1,50,000 in a year.

•However, you can claim deductions under other sections over and above

this limit.

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So what exactly are your options under

Section 80C, 80CCC and 80CCD?

Read on.

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Employee Provident Fund (80C)

What is it:

If you’re employed, a certain part of your salary mandatorily goes towards EPF, which

is matched by your employer.

Benefits:

Your entire contribution will be exempt from income tax up to the total limit of Rs. 1.5

lakh. The amount is automatically deducted every month from your salary which

makes it an easy investment.

Remember:

You can choose to increase your own contribution to your EPF.

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Public Provident Fund (80C)

What is it:

PPFs provide reasonable returns of 8-9% per annum. Investors can invest between

Rs.500 and Rs.1.5 lakh a year in PPFs; the money and interest are both tax-free.

Benefits:

PPFs are a good option for cautious investors.

Remember:

The money remains locked in for 15 years, though premature withdrawals are

allowed from the 6th year onwards.

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National Savings Certificates (80C)

What is it:

Like PPFs, NSCs invest in government securities and offer comparable returns.

Benefits:

You can save up to Rs.1.5 lakh per annum with NSCs and the interest is also non-

taxable, provided it is re-invested.

Remember:

Unlike PPFs, there is no maximum investment limit in NSCs, and you have to

choose an investment period of either 5 or 10 years.

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National Pension System (80CCD)

What is it:

A voluntary defined-contribution pension scheme by the government. You need to

invest a minimum of Rs.500/month; there is no upper limit.

Benefits:

Being a regulated entity, you can expect NPS to provide stable returns.

Remember:

The annual tax deduction is restricted to 10% of your salary (Basic + Dearness

Allowance) if you’re an employee and 10% of gross income if you’re self-employed

subject to a cap of Rs.1 lakh.

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ELSS (80C)

What is it:

Equity-linked saving schemes, a category of mutual funds, give you tax benefits

while allowing you to participate in the equity markets.

Benefits:

ELSS comes with relatively higher risk, but has the shortest lock-in period in its tax

category, i.e. only 3 years.

Remember:

The minimum investment amount is just Rs.500 per year and you have the option of

investing in monthly instalments, or SIPs.

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Life insurance & ULIPs (80C)

What is it:

Premiums paid towards life insurance policies taken from LIC or other insurers are

eligible for rebate, as long as the premium amount is under 10% of the insured

sum.

Benefits:

In addition to life cover which gives you and your family financial security, you can

also reduce your tax outgo with this instrument.

Remember:

Premiums paid towards ULIPs – instruments combining investment and insurance

features – are also eligible for tax benefits.

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Home Loans (80C)

What is it

Under 80C, home-buyers can claim exemption of up to Rs. 1.5 lakh on the principal

paid on a home loan.

Benefits:

The burden of your home loan EMIs becomes slightly more bearable thanks to this

tax benefit.

Remember:

The interest component of the loan is also currently exempt up to Rs. 2 lakh, but

under Section 24(b).

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Miscellaneous

Pension funds (80CCC), 5-year bank fixed deposits (80C), children’s

school tuition (80C), the senior citizens’ savings scheme (SCSS) (80C),

and premium paid for annuity plans (80CCC) are some of the other things

that are eligible for tax deductions.

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The other sections (which are basically

outside the Rs. 1.5 lakh limit):

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RGESS (80CCG)

What is it:

The Rajiv Gandhi Equity Savings Scheme (RGESS) is a good option for first-time equity market

investors.

Benefits:

If your annual income is below Rs. 12 lakh, you can invest up to Rs. 50,000 per annum in the

Scheme and get tax benefits of up to Rs. 25,000 (i.e., 50% deduction). This is over and above the

Rs. 1.5 lakh limit available under section 80 C. The dividend you earn from the Scheme is also

tax-exempt.

Remember:

The kicker, though, is that only first time investors are eligible for this deduction and need to open

a Demat account to invest in RGESS, which means a small extra expense.

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Health Insurance (80D)

What is it:

Unlike life insurance, health insurance premiums are tax-exempt under Section 80D.

Benefits:

The tax-payer gets benefits not only on health cover premiums paid for him/herself,

but also his/her family members.

Remember:

Premiums paid for health cover taken for oneself, parents, spouse and dependent

children can make you eligible for benefits of up to Rs.30,000-35,000 annually.

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Charitable Donations (80G)

What is it:

The Indian government gives tax relief to those who donate money towards

prescribed charitable funds and institutions.

Benefits:

It enhances the feel-good factor associated with a charitable act.

Remember:

Donations to certain notified entities are eligible for 100% deduction whereas others

are eligible for 50% deduction under section 80G, subject to a limit of 10% of gross

total income. Also, donations to foreign trusts or political parties do not qualify for

exemption.

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Miscellaneous

Deductions can be claimed to varying degrees on house rent paid [10

(13/A)], interest on loans taken for higher studies (80E), interest on deposits

in bank savings accounts (80TTA) and expenses borne for treating certain

diseases (80DDB).

This is just an indicative list; there are many other categories exempt from

tax or for which deductions are available.

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Choose your pick, carefully!

As we have seen, there is a wide variety of tax-saving options out

there. However, one must choose tax instruments according to one’s

profile, needs and risk appetite, and make occasional tweaks to keep

things on track.

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So which tax-saving instrument works for you?

•Wary beginners: EPF, PPF

•Slightly experienced investors: NSC, NPS, Life insurance

•Risk-takers: ELSS, RGESS, ULIPs

•The Maximisers: House rent, health insurance, interest on education

loans, charitable donations, etc.

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Disclaimer

The tax write up above is for the general understanding and reference. The user

needs to verify all the facts, law and contents with the text of the prevailing

statutes and seek appropriate professional advice before acting on the basis of

any information contained herein as the taxation implications may vary depending

upon the facts in each case/interpretation by tax authorities and the tax laws are

subject to change from time to time.

ICICI Bank Ltd expressly disclaims any liability to any person, in respect of

anything done or omitted to be done by any such person by placing reliance upon

the contents of this write-up.

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Thank you!