Tax Saving - Part 1

Read/download Tamil Tax savings-1 in magazine/pdf format
Read/download Tamil Tax savings-2 in magazine/pdf format

Read Tax savings-2 in English

All of us are paying tax either directly or indirectly.  I am sure it is a high priority headache. Some have the feeling that most of our earnings is gone by paying taxes. There is a saying, “Tax is a necessary evil”. It is clear that we cannot get rid of tax, but at the same time we can plan and save tax when our understanding about taxation is clear and when we use the tax saving options judiciously. This article helps us understand how we can save tax within the legal frame work.    

How we can save tax? It is a big question mark before us! What are the options available for us with regards to tax savings.  By investing in some of the popular tax saving investments, the tax may get reduced, but will the investments grow as desired? Continue reading to figure out solutions to these commonly asked queries. In this back drop, lets explore various type of tax savings investments and their likely returns. 

I can recall an incident which happened when I was working earlier, I remember his name to be Senthil. In the month of December, Senthil normally gets into an urgency mode to save tax and submit necessary documentation to the finance department. He chit chats with his friend Raja in the cafeteria and invests as per Raja's suggestions without giving much thought about it. Ultimate aim for him is to just save tax. Generally, he is not bothered about the developments around his investments and he will think about it only in the next December during tax saving or during other related Investments. If Raja is not available, Senthil will check with Michael and invest in the schemes suggested by Michael. One important thing Senthil often forgets is, checking with different persons and taking a call on investments does not yield expected results, and his investments will not be suitable to his needs and eventually desirable results for him are not achieved. The suggestion given by Raja and Michael maybe suitable for them in their angle, but they may not be suitable for Senthil.  

As an alternative option, instead of waiting till December every year, as soon as financial year starts, if Senthil initiates this tax saving process in April after giving ample thoughts about his investments and choose the correct one which suits his requirements and invest in them periodically, say every month like SIP for next 3 to 5 years, it will turn out to be a better option  than the earlier ad hoc option. If Senthil plans and starts SIP/Investments in April or earlier than December, there's no need of any rush or urgency in December for him. At the same time if he has taken up a decision in advance and invested in tax savings investments in earlier date,  documentation for submitting  to his company especially in the month of December for calculation of the tax is readily available and he can do it with ease. 

From this example, I hope now it is clear that tax saving has to be done in advance instead of waiting till December or March and has to be planned in a proper way. Now let us get into some details. To reduce tax, there are few options available.   

Option 1:  

As per Income Tax Act Section 80c, we can avail tax exemption up to 1.5 Lakh.  We can invest in tax saving schemes and get tax exemption. Most of us are aware about this section 80c, but not clear of various Sec 80c exemptions and  choices available for investments, which one is beneficial to them and all. Investment options available for tax exemption are    

1. NSC - National saving certificate   

2. Life Insurance  

3. Tax saving fixed deposits  

4. ELSS – “Equity linked savings scheme”  

  

For most of the Instruments mentioned above, the minimum period of investment is 5 years or more. At the same time, one tax saving option called equity linked savings scheme is available in mutual funds. It is stable and the lock in period is only 3 years. This is the instrument which has the lowest lock in period. Most of us are not aware about this Mutual Funds tax saving schemes, which have minimum period of lock in and possibility of getting higher returns.  

Option 2:  

Secondly, after you have reached Rs 1.5 lakh limit under section 80c, you can invest up to rupees Rs 50,000 in Rajiv Gandhi Equity savings scheme. As per this scheme, for first time equity investors investing in the market under direct equity and in specified securities, or purchasing securities through Demat option, can claim tax exemption for initial investment of 50000 per year for three years.  If you are afraid of the ups and down in stock markets , instead of investing in market directly, you can choose to invest in mutual funds classified under Rajiv Gandhi Equity Savings Scheme and avail the benefit of your money being managed by professional fund managers. This option is better than direct investing in specified securities. These fund purchases have to be done through your new demat accounts.  

Option 3: 

By investing under National pension scheme NPS, you can get additional benefit of Rs 50,000 tax exemption. This was introduced by our finance ministry in the budget last year.    

To sum it up, by investing in all these 3 options you can totally get personal exemption up to 2.5 lacs ( 1.5 + 0.5 +0.5 ). From the table given below  you can understand what are the options available for tax saving investments and their lock in periods and their likely returns. This table will help you to decide on tax saving options. 

Investment option	Lock in period	Return	Tax status	Remarks on return
PPF	15	8.10%	Tax Free	Varies on fixed interval
NSC	5	8.10%	Taxable	Fixed for tenure
Bank tax saving deposits	5	7.00%	Taxable	Varies from bank to bank but fixed on tenure
ELSS	3	12.37%	Tax Free	Returns are market linked

Notes

ELSS one year return is as on 21/10/2016 from value research

Sbi tax saver FD int rate ( for other banks it varies from 7 to 7.5%)

PPF and NSC data as on 30/6/2016

Return cagr per annum

Lock in period in years

Tax status represents - return tax status

Those who wish to  know more about tax savings and tax savings investments can get in touch with me. Please provide your contact details in the comments, so that i can reach out to you