Making the most of available deductions, Tax Planning, and overall Financial Planning will help you to save tax as well as create wealth.
Once again we are at that time of year when salaried individuals need to prepare their relevant documents pertaining to the tax declaration that must be made at the end of the Financial Year. Soon your Human Resources and Accounting departments will be asking you to submit various receipts and certificates as per your investment declarations.
Now is a good time to have a serious look at your tax saving investments, both that you have already made and options that are available to you. It should be understood that annual tax planning should not be an activity in isolation. It should be consistent with your risk profile, needs etc. Smart Tax Planning helps in saving more money as well as becoming part of short and long term planning. Let’s look at various investment avenues available to you as a salaried employee. Below are three examples that fall in different Tax Slabs.
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Example-1: Anil, a 28 year old single, works as a Business Analyst for Wipro, in Bangalore. His salaried taxable income for the FY (financial year) 2013-14 is Rs 4.5 lakhs. He has no dependants.
Analysis – Anil is lucky. He has time on his side and negligible responsibilities! His current tax liability comes to INR 30,900. By making use of the many tax saving deductions, Anil should be able to bring down his tax liability to INR 12,670 (an annual saving of INR 18,230!).
Given his age and the fact that currently he has no dependants, Anil should consider investing a majority of his tax-deductible amount (INR 70,000) in Equity-linked mutual fund schemes (ELSS), as it will maximize returns that add to his wealth, and will provide to his portfolio the required hedge against the inflation monster. Investing the balance (INR 30,000) in a mix of Fixed Income products like bank 5-year tax-saving fixed deposits, PPF, and NPS (New Pension Scheme) will provide safety, stable returns, and savings for retirement. Anil should also make use of the new Section 80CCG deduction w.r.t. investment in Indian shares under RGESS Scheme for capital growth as well as additional tax benefits.
Anil should also consider purchasing a health or medical insurance policy in his name. This acts as a financial shield in case any unexpected incident happens to him. Anil can also divert funds towards investments in bank 5-year tax-saving fixed deposits, National Savings Certificates (NSC) to accumulate funds for short/medium term needs (such as marriage, buying a car or house, giving to charity, etc).
Example-2: Sneha, 35, has been working for a MNC call center for the past 7 years. She is married, has 2 kids, Abhay and Anoop. Her taxable income for the FY 2013-14 is coming to INR 7 lakhs, which brings her current tax liability to INR 72,100. Looking at her children’s future requirements, and her retirement needs, there are many ways in which Sneha can smartly bring down her tax liability (to as much as INR 43,670). Here’s how:
Analysis – First, given her age, income and number of dependants, Sneha must have a life insurance cover of at least INR 70 lakhs. The premium for the same works out to be INR 18,000 p.a. Sneha should also consider a health/medical insurance policy for her family (a family floater would be ideal); the premium for the same works out to be INR 13,000 p.a.
An investment of 60% of the tax deductible amount (INR 60,000) in Equity-linked mutual fund schemes (ELSS) will provide superior returns necessary for growth of Sneha’s investment. This is required for her children’s higher education needs and her retirement, and will provide to her portfolio the required hedge against the inflation monster. Sneha should also make use of the new Section 80CCG deduction w.r.t. investment in Indian shares under RGESS Scheme for capital growth as well as additional tax benefits.
Investing the balance amount (INR 22,000) ) in a mix of Fixed Income products like bank 5-year tax-saving fixed deposits and NSC will provide safety, and stable returns to meet her dependants’ increasing expenses (such as tuition, education, clothing, medicines etc.). If she has not already, Sneha can also consider investment in Real Estate, as owning a house offers multiple benefits of security, regular income (in the form of rents), capital appreciation in the long term, and tax benefits in the form of deduction of principal and interest amount repaid for each financial year.
Example-3: Mr Sridhar, aged 45, was recently promoted to senior manager at Voltas, India. His net taxable income from salary comes to INR 12 lakhs this FY 2013-14. He is married, has a 14-year old daughter (who dreams of pursuing Robotics at IIT, Chennai, in 5 years’ time) and his mother is dependent on him for her living. Due to Mr Sridhar’s promotion, his salary has increased by INR 230,000 p.a., which he intends to put to good use. Mr Sridhar is a philanthropist.
Analysis – Mr Sridhar’s taxable income for the FY 2013-14 comes to INR 12 lakhs + INR 2.3 Lakhs=INR 14.3 Lakhs per annum, which brings his current tax liability to INR 266,770. Considering his daughter’s higher studies and future dreams, his retirement needs, and the fact that he believes in social causes, Mr Sridhar can plan and save maximum tax (INR 44,800) in the following manner.
If he has adequate life and health cover, Mr Sridhar should consider an investment of 65-70% of the tax-deductible amount (INR 70,000) in Equity-linked mutual fund schemes (ELSS) for the purpose of his retirement, which is 15 years away. He can also make use of the new Section 80CCG deduction w.r.t. investment in Indian shares under RGESS Scheme for capital growth as well as additional tax benefits.
Investing the balance (INR 30,000) in Fixed Income products like bank 5-year tax-saving fixed deposits, 6-year NSC will offer maximum safety for his hard earned money and stable returns to meet your dependants’ increasing expenses (such as education, tuition, clothing, medicines etc.). He can consider purchasing a senior citizen medical insurance policy for his dependent mother. This will take care of her burgeoning medical bills, and in the process, claim the premium paid through tax deduction (under section 80D) up to INR 20,000 p.a.
Mr Sridhar can further bring down his tax liability and also contribute towards social causes by making donations to approved projects/institutions through section 80G. The best part is that there is no upper limit on the amount of donations he can make, which means, if he wishes, Mr Sridhar can make donation of the full increment he received (by way of his promotion) and at the same time bring down his tax liability.
By using a Tax Plan, you can choose the right deductions and tax saving products in order to reduce your overall tax outgo and fulfil your future needs too. Below is an easy 2-step procedure:
Know your requirements -
1) To figure out your requirements, identify your life cycle stage;
2) Choose the deductions and products that best fits your needs.
Use InvestmentYogi’s quick tax calculator to get an estimate of your tax payable.
The author Priya Rao is a financial planner at InvestmentYogi