It’s tax-saving season yet again. But this time, make sure you gain the most from the incentives that the taxman provides while ensuring you do not end up making costly investment mistakes. Here are five things you need to keep in mind while planning to save taxes.
Overseeing tax breaks under ‘allowances’
If you are a salary earner, chances are that you may oversee the various allowances that are allowed as exemption from your salary. One of the first tax breaks you should be scouting for is ‘exempt allowances’.
These allowances could be house rent allowance (subject to limits), transport allowance, medical allowance or food coupons to name a few. These exempt allowances, often times, are crucial to determining which tax slab you will fall under as the tax break can bring you to a lower slab. Many companies allow you to structure your salary (with food coupons etc.) with these allowances.
Also, some companies allow reimbursements on periodicals and magazines as well as telephone bills and medical reimbursements (subject to internal company limits). All these, would be cash receipts for you, not falling under taxable income. Ensure that you diligently submit the bills for all your reimbursements and get extra bucks without the tax burden.
Missing out on additional tax benefit on home loan
Besides, allowance, the next biggest deduction that most of you can claim, if you bought a house, is the interest on home loan. But don’t forget the new provision under Section 80EE introduced in the last budget that provides an additional deduction of Rs 1 lakh on interest on home loan sanctioned between April 1 2013 and March 31, 2014.
This is in addition to the Rs 1.5 lakh allowed as interest on loan for self-occupied house. But remember, the loan value should not be over Rs 25 lakh and your property value not more than Rs 40 lakh. Also, this is available only if you do not let out the house (if you let out, in any case, the full interest is deductible from the rental income. Hence, this Section will not apply).
Not going for tax-saving investments
Once, you have exhausted all the ‘exempt’ income, you can still claim deduction under Section 80C of the Income Tax Act up to Rs 1.5 lakh. This allows you deduction for certain expenses as well as investment. Payments towards your home loan principal, children’s tuition fee as well as life insurance premium are covered under this section, for the current financial year. All investments, such as savings in provident fund, NSC, tax- saving deposits and tax-saving mutual funds also enjoy tax benefit under Section 80C.
There are a couple of things you need to remember while utilizing the benefit under this section.
First, investments that enjoy tax benefit obviously come with much higher yield. A 5-year NSC with interest rate of 8.5% would actually yield you about 16% if you are in the 30% tax bracket, if you consider the tax benefit you enjoy!
Similarly, a tax-saving mutul fund that delivered an average 18% compounded annual return (5 years ending November 26) in the last 5 years, will yield you 27% if you were in the 30% tax bracket and claimed Section 80C benefit.
Hence, instead of merely saving tax by claiming your expenses, tax-saving investments provide the double benefit of saving towards your life goals with superior returns, given tax incentives.
Two, know what you are committing for and over what time frame. For instance, if you invest in a NSC certificate, the money will be locked in for either 5 or 10 years but you get deduction only in the year of investment.
Similarly, a PPF account is a long-term commitment and requires you to invest every year to keep the account active and also claim deduction. While these are all, no doubt, good long-term savings instruments, make sure that you can spare the money you invest for the long haul.
Holding too many life insurance policies
For most of you, claiming deduction under Section 80C would mean investing in an insurance policy and being done with the tax headache. But then, with a promotion or higher pay the next year, you realize that you need to invest more to lower your tax outgo and then call your agent again, only to buy one more policy.
At the end of this, you will likely have 4-5 insurance policies with varying plans and clauses, most of which would be undecipherable. And remember, many of them may not even suit your real need.
Also, it is not economical for you to be taking individual policies with limited cover in each. A single policy with enough cover would work cheap and serve the purpose.
Ensure you have a term policy to cover perhaps 5-8 times your annual income and top it up only when – your family becomes larger or you have large liabilities like home loan. Beyond this, avoid multiple life policies with mixed investment features. Use Section 80C wisely to plough the money in the tax-saving investment options we discussed above.
Missing out on health cover
While most people end up with multiple life policies, they seldom have a medical cover beyond a cover, if at all, under their company’s group medical policy. First, you need to know that such a cover is not enough as it will lapse once you quit the company. The new employer may also not provide you another cover.
Secondly, medical covers are supplementary. You can claim from multiple insurers. For instance, if you have a Rs 2 lakh cover in your office an you incur Rs 3 lakh for a surgery, you can claim the additional Rs 1 lakh separately, if you had a private policy outside.
And remember, the sooner you take this cover, the lower your premium. Taking a cover in your 50s will turn out to be an expensive affair. Its’ easier to start the policy early and enjoy many bonus, loyalty incentives that the insurer would provide.
Besides, medical insurance premium is allowed as deduction under Section 80D of the Income Tax Act. This is over and above Section 80C. You can claim premium deduction of Rs 15,000 (for individual, children and spouse) and an additional Rs 20,000 for parents who are senior citizens. That means deductions up to Rs 35,000, or tax savings of Rs 10,500 can be gained through what is an essential cover.
So what are you waiting for? Start your tax planning before your employer starts deducting it from your pay.