Taxation
Use the extended deadline for tax-saving investments smartly
Missed making a tax-saving investment before March 31, 2020? You need not worry. In the backdrop of COVID-19 global pandemic, the government has extended the deadline to file taxes and make tax-saving investments until June 30, 2020. Hence, if you haven’t utilised the deduction limit under Section 80C and Section 80D, up to the maximum limit, you can still do it.
To ensure that the investments are for the financial year 2019-20 (and not the financial year 2020-21), you can start your tax planning for the financial year 2020-21 in the second half of the financial year – after September 30, 2020. This is will help prevent confusion. Since the deadline has been extended till June, there could possibly be an additional field in the Income Tax Return Form this year, to indicate which investment is for which financial year.
When you choose between various tax-saving avenues, ideally opt for ones that are congruent with your risk profile and as far as possible complement tax planning with investment planning. What’s more, you can invest in them online without stepping out of your home.
So, what are the different tax saving avenues available?
- Market-linked tax saving options if you can take some risk
- Tax-saving options for the risk-averse
- Health insurance: A must for everyone
Market-linked tax saving options if you can take some risk
If you are young, earning a good income (in the accumulation phase of life cycle), in the pink of financial health (have sizeable assets and limited liabilities), have a longer investment time horizon (3 years or more), want to address certain long-term financial goals (buy a dream home, children’s education, their wedding expenses, retirement needs, etc.); and/or, in general, have the stomach to assume high risk; it would be prudent to go with market-linked tax-saving instruments.
1. Equity Linked Savings Scheme (ELSS)
- Equity Linked Savings Scheme or ELSS, or Tax Saving Fund, is a diversified equity mutual fund providing tax-saving benefits.
- Since the money is invested in equities, it has the potential to deliver inflation-adjusted returns.
- One can plan various long-term goals via an investment in ELSS.
- ELSS is subject to a compulsory lock-in period of 3 years, which means the money cannot be redeemed before three years from the date of investment.
- You can invest lumpsum or opt for Systematic Investment Plan (SIP) route.
2. National Pension System (NPS)
The National Pension System or NPS is an investment-cum-pension scheme initiated by Government of India to provide old age security in the form of pension to all the citizens of India in the age group of 18 to 65 years.
To invest in NPS, you have two types of accounts available:
- Tier-I Account – This account is a mandatory account and your contribution to this account is eligible for tax benefit under Section 80C. The minimum investment amount is Rs 1,000 per year. If you don’t contribute yearly your account will be frozen. The objective of this account is to build a retirement corpus and buy a life annuity.
- Tier-II Account – This account is voluntary. To have a Tier-II account, you first need to have a Tier-I account. The Tier-II account can be opened with a minimum contribution of Rs 1,000 and yearly contribution to this
account is not mandatory.
Contribution to Tier-II account by government employees is eligible for a tax exemption provided they remain invested for 3 years. However, for non-government employees, there is no tax benefit on contributions towards the Tier II NPS Account.
NPS offers two investment choices: (1) Active choice where you can decide your asset allocation into various asset classes termed as ECG (Equity, Corporate bonds and Government securities). (2) Auto Choice where the money is automatically invested based on your age profile.
If you are a corporate sector employee and your employer contributes to your NPS account up to 10% of your salary (Basic Salary + Dearness Allowance), then you can avail of a deduction under Section 80CCD(2) over and above the permissible deductions under Section 80C. Similarly, an additional deduction for investment up to Rs 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B) for the contributions made. This is over and above the deduction of Rs 1.5 lakh available under section 80C of Income Tax Act, 1961.
3. Unit-Linked Insurance Plan (ULIP)
- These are insurance-cum-investment plans offered by life insurance companies that enable you to invest in equity and/or debt instruments, and get life coverage (insurance benefit) at the same time.
- ULIPs have a minimum five-year lock-in period and a minimum premium paying term.
- To claim a tax benefit, the policy has to be active for a minimum of five years. In case of any eventuality, the beneficiaries would be paid the sum assured or fund value, whichever is higher.
Tax-saving options for the risk-averse
If you are in the protection phase of life (on the verge of retirement, or already retired); not earning a regular source of income, have many dependent family members to support; have financial goals to fulfil that are fast-approaching; and/or in general conservative do not have stomach for high risk, you could look at tax-saving instruments that offer fixed returns.
1. 5-year Tax Saver Fixed Deposit
- The Tax Saver Fixed Deposit is one of the safest avenues to invest especially for customers who lean towards low-risk investment options.
- Considering current market scenarios, tax saver fixed deposits are one of the popular instruments of investment for saving taxes.
- The Tax Saver Fixed Deposit is subject to a lock-in period of 5 years and cannot be prematurely encashed.
- You can invest in multiples of Rs 100 up to Rs 1.50 lakh in a financial year.
The rate of interest varies across banks. Check the bank’s website for the rates before investing. However, in the case of joint holdings, the Section 80C deduction benefit is available only to the first holder who must be a PAN (Permanent Account Number) holder.
2. Public Provident Fund
- Public Provident Fund or PPF is a government-backed long-term saving scheme.
- PPF enjoys a favourable tax status, i.e. Exempt-Exempt-Exempt (E-E-E). This means, contributions are eligible for tax deduction under Section 80C, the interest earned is tax-free, and maturity proceeds are exempt from tax.
- The minimum that can be invested in PPF is Rs 500, while the maximum is Rs 1.50 lakh in a financial year.
- You have a choice to invest a lump sum or in instalments.
- The lock-in period is 15 years, during which time the account earns tax-free interest.
3. Sukanya Samriddhi Yojana
- If you want to plan for your daughter’s future financial needs, for example, her education and/or wedding expenses, the Sukanya Samriddhi Yojana (SSY), a Government of India scheme, is a worthwhile proposition.
- Axis Bank is one of the authorised banks offering Sukanya Samriddhi Yojana (SSY) Accounts.
- The parent or guardian can open the SSY Account any time between the birth of a girl child and the time she attains 10 years of age.
- The minimum investment amount is Rs 250 (and in multiples of Rs 50), while the upper limit is Rs 1.50 lakh in a financial year.
- Deposits can be made till the completion of 15 years from the date of opening the account. The account matures on completion of 21 years from the date of opening the account. On completion of 18 years of age, the girl child can operate her SSY Account.
- Like PPF, SSY enjoys a favourable i.e. Exempt-Exempt-Exempt (E-E-E) tax status.
4. Non-Unit Linked Life Insurance Plans
- The premiums paid towards Term Life Insurance Plans and traditional saving-oriented plans such as Endowment plans and Money-back plans are also eligible for tax deduction.
- Since a Term Life Insurance Plan offers risk cover for life, the premiums are lower than Endowment plans that offer an investment benefit (maturity benefit) along with insurance (death benefit).
- The premium for life insurance plans is based on the tenure, the sum assured, age of the policyholder, etc. Axis Bank offers Life Insurance policies by insurers like Max Life Insurance, Bajaj Allianz Life Insurance, and LIC of India.
Health insurance: A must for everyone
- Inflation in healthcare is skyrocketing and hence it is necessary to review your health insurance cover annually.
- Health insurance premium paid for self/spouse/children/parents is eligible up to Rs 25,000 under Section 80D.
- The amount increases to Rs 50,000 if the insured is a senior citizen.
- Given the nationwide lockdown the Insurance Regulatory and Development Authority (IRDA) has asked insurers to offer policyholders the option to pay the premium, on a monthly, quarterly or half-yearly basis. These options are available for all health insurance policies due for renewal up to March 31, 2021.
- Axis Bank offers some of the best health insurance plans with partners such as Tata AIG Health Insurance and Aditya Birla Health Insurance
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
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