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Snip that tax outgo

If EPF and home loan do not exhaust the 80C limit, use ELSS and PPF

Tinesh Bhasin 

The impact of the Union Budget 2013-14 will be felt by taxpayers in the coming couple of weeks. The good news is that there will be more saving but only if you are aware of the increased benefits under different sections of the Income-Tax Act. As far as numbers go, you can save as much as Rs 30,900 if you are in the 30 per cent-plus income tax bracket. For taxpayers in the lower tax brackets of 10 per cent and 20 per cent, the saving will be Rs 10,300 and Rs 20,600, respectively.

The biggest beneficiaries will be home buyers. With an increased limit, both under Section 80C (covering principal payments) and Section 24(b) (covering interest payments), they can save a substantial amount of tax. In fact, for a couple who have bought a house through a joint home loan, the tax deduction can be as much as Rs 7 lakh (Rs 3 lakh under 80C and Rs 4 lakh under Section 24(b))..

Read our full coverage on Union Budget


But those who don't have a home loan can keep equity-linked savings scheme and Public Provident Fund as their top options, according to investment advisors.

As the financial year-end draws closer and you start evaluating instruments to save taxes, here are the changes you need to keep in mind before investing:

Have you accounted for higher deductions under Section 80C?

This is the principal area to be seen. The money that goes towards contribution to Employee Provident Fund, Public Provident Fund (PPF), principal repayment on home loan, life insurance premium, children's tuition fees, and five-year fixed deposits are all part of Section 80C.

The government had raised deductions available under this section by 50 per cent. You can now avail benefits of Rs 1.5 lakh as opposed to the earlier limit of only Rs 1 lakh.

Sushma Borade, who makes Rs 4 lakh working with a facilities management firm, invests Rs 72,000 in PPF and Rs 36,000 in an insurance policy from Life Insurance Corporation of India. If she increases her savings and exhausts the entire limit, she won't need to pay tax this year.

Have you invested adequately in PPF?

PPF is an instrument of choice for retirement planning. Financial advisors also suggest PPF because the investor gets tax benefit on investment and there's no tax on withdrawal either. This is called EEE or the exempt-exempt-exempt model of taxation. To further give a boost to this traditional savings scheme, the government has increased the amount one can invest in PPF annually. From the earlier Rs 1 lakh, individuals can now put Rs 1.5 lakh in PPF.

Are you claiming the extra deduction available on home loan interest?

When you take a home loan, the lender gives you the break-up of principal and interest it will charge you every month. These together form the equated monthly instalment (EMI). During the initial years, the interest can be over 70 per cent of your EMI. It reduces with time.

While one can claim a deduction on the principal amount under Section 80C, to claim a deduction on interest, there's Section 24(b). This can be availed for a house that is self-occupied and the interest is paid on a loan taken for the "purpose of purchase/construction/repair/renewal/reconstruction of a residential house property".

Considering the rise in real estate prices and high cost of finance, the government has raised the deduction a borrower can claim under this by Rs 50,000. A person can now claim a deduction of Rs 2 lakh on interest paid.

If the property is let out and the taxpayer is receiving a rent, the entire interest paid to the lender can be deducted from income.

Did you redeem a debt fund or gold ETF this year?

Debt funds have been a preferred choice of investment over bank fixed deposits for those in the high income tax bracket. Reason: There was an arbitrage that lowered the tax outgo. If a person held debt investments for over a year, he was subjected to long-term capital gains tax and could choose between taxation of 10 per cent (without indexation) and 20 per cent (with indexation). This also applied for gold, international equity funds and a fund of funds.

In the earlier Budget, the government tweaked the taxation on these schemes. Now, if the person sells investments in unlisted securities and mutual funds "other than equity-oriented funds" within 36 months, the gains will be added to the income and taxed in line with the individual slab rate of 10, 20 or 30 per cent. Worst affected in this case are the individuals in higher tax slabs with investments in a fixed maturity plan.

Did you sell a house or plot?
Profit made from selling a house within three years of purchase is clubbed with income of the seller. If held for over three years, the money attracts capital gains tax. This can be saved if a person uses the proceeds to buy a new residential property or invests in certain notified bonds within a stipulated time.

The Budget clarified on various aspects of such transactions. The investment to save tax can be made only in one new residential property and it has to be located within India. This can be done within one year prior to the sale date or two years from the sale date or within three years for an under-construction property.

Second, the government clarified that if a person is unable to utilise the money, it should be deposited in a separate account maintained with a nationalised bank under the Capital Gain Account Scheme. This money needs to be used within six months from the date of transfer. However, the exemption is capped at Rs 50 lakh under section 54EC.

Apart from these changes there are a few other areas that taxpayers usually miss. "Interest earned on savings bank account is ignored," said Mayur Shah, executive director, tax & regulatory services, EY. This income can be claimed as deduction under Section 80TTA. If the total income earned in one year is below Rs 10,000, it is tax-free. However, the person needs to declare it while filing the returns. Anything above this limit is taxable.

Homi Mistry, partner at Deloitte, Haskins & Sells, notes that taxpayers don't include donations. These can be deducted under Sections 80G, 80GGA or 80GGC, depending on the institution. There's also deduction on interest available if an individual takes a loan for higher education of spouse or children.

Whatever instrument you choose, don't do it hurriedly only to save tax. It should be in line with one's financial goals. So, don't buy another insurance policy only because you have to exhaust the limit.

  • EPF: Employee contribution (12 per cent of basic salary) is eligible for deduction
    Salary slip will show the contribution
  • Tuition fee: Includes fee to any university, college and school for fulltime course
    Each parent can claim the deduction for up to two children each, covering a maximum of four children
    Private tuitions and coaching classes are not covered
  • Home loan: You can claim deduction on principal paid on home loan
  • PPF: Now, deduction allowed up to Rs 1.5 lakh
  • Life insurance: Premiums paid towards life insurance of self, spouse and children are eligible
    If paying premium for more than one insurance policy, all can be included
  • ELSS: If the limit is not exhausted from above deductions, this is the next best option
    Suited for long-term wealth creation, as it is stock market-linked
  • Five-year bank fixed deposits: Tax-saving FDs of scheduled banks with tenure of 5 years are eligible
  • Post office and NSC: Investments made in name of spouse (not working) and children are eligible
    Preferred instrument for those in low tax bracket
  • Senior citizen savings scheme: Most lucrative among all the small but only for seniors
  • Property registration: If residential property bought this financial year, this fee can be claimed under Section 80C
  • Ulip: Avoid new Ulip plans and invest only if you have ongoing commitment
    Other important deductions other than LTA and HRA
  • Home loan: You can claim deduction on the interest lenders charge you, under Section 24(b)
  • Medical insurance: You can claim deduction of up to Rs 15,000 for self and family. Within this, deduction of Rs 5,000 for preventive health check-up also available
    Additional deduction of up to Rs 15,000 available for parents' mediclaim
    In case of senior citizen parents, deduction allowed is up to Rs 20,000
  • Loan for higher studies: Interest on loans taken for self or spouse or children can be claimed
  • Donations: Depending on the institution, you can either claim full money paid or 50 per cent

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First Published: Mon, February 16 2015. 00:20 IST