5 things one must consider before making fresh
Section 80C investment for FY 201617
Sunil Jan 07, 2017, 10.47 AM IST
By Dhawan , ECONOMICTIMES.COM |
READ MORE ON » Product | Premium | Inflation | Home Loan | Duration
The fag end of the financial year is when we scurry around and
grapple with bewildering alphanumeric combinations like Section 80C
and 80DD. If your taxsaving efforts are last minute the chances of
locking funds in an unsuitable investment are quite high.
Taxsaving investment should never be made on an adhoc basis or
for an illconceived goal. But with the accounts department of your
Section 80C allows deduction from organisation knocking on your door to submit proofs of actual
gross total income (before arriving at
investments, many people try to make tax saving investments at the
taxable income) of up to Rs 1.5 lakh
last minute.
per annum on one or more eligible
investments and specified expenses.
Here is how you can do lastminute tax planning to not only reduce
your tax liability, but also save towards the goals you have set at different life stages.
While choosing the right taxsaver, base your decision on these five important things, among others:
*How much deduction from gross total income can you avail
*The amount of fresh taxsaving investments you need to make
*Kind of taxsaving instrument you should invest in
*Tenure of the investment
*Taxability of income from the investment
Once you have got a fix on these, equally important is to choose a taxsaving instrument which can be
linked to a specific goal.
How much deduction can you avail
Section 80C allows deduction from gross total income (before arriving at taxable income) of up to Rs
1.5 lakh per annum on one or more eligible investments and specified expenses. The eligible
investments include life insurance, Equity Linked Savings Schemes (ELSS) mutual funds, Public
Provident Fund (PPF), National Savings Certificate (NSC), etc., while expenses and outflows can
include tuition fees, principal repayment of home loan, among others.
If you have exhausted your annual limit Sec 80C limit of Rs 1.5 lakh, you can also look at National
Pension System (NPS) to save towards retirement and, in the process, save additional tax.
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1/7/2017 5 things one must consider before making fresh Section 80C investment for FY 201617 The Economic Times
From 201516 onwards, an additional (additional to Section 80C) deduction of up to Rs 50,000 under
Section 80CCD (1b) for investment in NPS is also possible. For someone in the highest 30 per cent
income tax bracket, it's an additional annual saving of about Rs 15,000.
Further, the premium paid towards a health insurance plan for self and family members qualifies for
tax benefit under Section 80D for Rs 25,000 and Rs 30,000 for those above 60. If one has a home
loan, interest payments made towards its repayment can also be claimed under Section 24 of the
Income Tax Act. The other deductions include donations under Section 80G, interest payments under
Section 80E for education loan, etc.
Fresh investments you need to make
Before you start looking for the right tax saver, run this simple exercise to evaluate whether you
actually need to make any fresh investments for this financial year (201617).
NonSection 80C deductions: First, look at all nonSection 80C deductions like the interest paid on
home loan, health plans, educational loan.
Section 80C outflows: Then consider Section 80Crelated expenses like children's tuition fees,
principal repayment on home loan, pure term life insurance plans premiums.
Existing Section 80C commitments: Consider all the existing Section 80C commitments to invest/to
pay premium such as in Employees' Provident Fund (EPF) and endowment life insurance,
respectively
The exercise above gives you a total of existing commitments under Section 80C, 80D and other
deductions. Now, from your gross total income, reduce the amount to arrive at the taxable income.
If your net income after doing the above calculation is still above the tax exemption limit of Rs 2.5 lakh
then you need to look at further tax saving. To reduce taxable income further and provided the limit of
section 80C isn't yet exhausted, look for the right Section 80C investments.
Kind of taxsaving instrument
Within the basket of Section 80C investments, there are two options to choose from: Investments
offering "Fixed and assured returns" and those offering "marketlinked returns".
The former primarily includes debt assets, including notified bank deposits with a minimum period of
five years, endowment life insurance plans, PPF, NSC, Senior Citizens Savings Scheme (SCSC), etc.
The returns are fixed for the entire duration and generally in line with the rates prevalent in the
economy and very close to inflation figure. They suit conservative investors whose aim is to preserve
capital rather than create wealth.
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1/7/2017 5 things one must consider before making fresh Section 80C investment for FY 201617 The Economic Times
The 'marketlinked returns' category is primarily the equityasset class. Here, one can choose from
ELSS of mutual funds and UnitLinked Insurance Plan (ULIP), pension plans and the NPS. The
returns are not assured but linked to the performance of the underlying assets such as equity or debt.
They have the potential to generate higher inflation adjusted return in the long run to the extent they
are based on the equity asset class.
Tenure
All the above taxsaving instruments, by nature, are medium to long term products: From a threeyear
lockin that comes with ELSS to a 15year lockin of PPF. Some like life insurance require annual
payments to be made for a longer duration.
Taxability of income
Another important factor to consider is the posttax return of the taxsaving investment. For instance,
most fixed and assured returns products such as NSC provide you with Section 80C benefits, but the
returns, currently 8 per cent (fiveyear) annually, are taxable. This makes the effective posttax return
equal to 5.52 per cent for the highest taxpayers. Considering the annual inflation of six per cent, the
real return is almost zero!
Of all the taxsaving tools, only PPF, EPF, ELSS and insurance plans enjoy the EEE status, i.e., the
growth is taxexempt during the three stages of investing, growth and withdrawal.
Making the right choice
First, identify your medium and long term goals. A marketlinked equitybacked taxsaving instrument
is good for long term goals as equities need time to perform. And, before considering a taxable
investment, see the tax rate that applies to you and consider the posttax return. A low posttax return
after adjusting for inflation will not help you in achieving your goals in the long run. Inflation erodes the
purchasing power of money, especially over long term.
Conclusion
Tax planning should ideally begin at the start of every financial year. Remember, the risks of planning
taxsaving in a hurry later are manifold. There is, for instance, a high probability of picking up an
unsuitable product. Also, there isn't any one instrument that can help you save tax and at the same
time also provide safe, assured and highest return. Your final choice should ideally be based on a
gamut of factors rather than solely being driven by returns from the financial product.
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