Tax planning: Invest only after evaluating the options

The goal of tax planning is to arrange your financial affairs in a manner that it minimizes the impact of taxes. This should also play a major role in the financial planning and investment decisions to meet the long term financial needs of an individual. In a country like India where we do not have a social security, it is also important to secure the future of the family as a part of financial planning. With intent to promote savings the government provides various tax benefit schemes on different financial planning tools. It is extremely important for an individual to understand these benefits and align their long term financial needs in a manner which maximizes the tax benefits.

How to plan for tax savings.

Tax planning needs to be “planned” and have to be done with extreme care, after a detailed research and understanding of the options on offer. However, most taxpayers tend to defer this decision to March and then rush into putting their money into anything and everything with the sole objective of saving tax for the year. As a result, the returns are likely to be not commensurate to the amount invested and might not serve financial planning needs.It is therefore of utmost importance that one must do his planning in a timely manner with focus on products that can result in good returns as well as help in saving tax . Also, the product must be chosen based on their long term merits and in such a manner that multiple life goals can be fulfilled.

Tax planning opportunities-

Pension / Retirement Plans.

Most insurance companies offer pension plans which provide option to save when you are earning and thereafter receive pension/ annuity based on your future needs. One can avail benefit of up to Rs. 1.5 lakh on the premium paid towards a pension plan under Section 80CCC. On maturity, one-third of the maturity amount withdrawn is tax-free. Based on risk appetite, one can decide either for a unit-linked or a traditional plan and opt for pension after a defined time frame.

Life Insurance.

One of the most efficient tax planning tools is life insurance which provide financial security and good returns as well as offer tax saving benefits. There are a variety of products available and one can opt for them based on individual’s needs.

Under Section 80C a deduction from taxable income in respect of life insurance premium paid is available up to a maximum of Rs. 1.5 lakh annually limited to 10% of sum assured. The deduction is available for life insurance policies, on the life of individual, his/her spouse or his/her children, while the children may be major or minor or even married or unmarried.

Further, amount received from an insurance company by the nominee in the event of an unfortunate event of death of the insured individual is exempt from income tax under Section 10(10D). Also, amount received from insurance company in case of maturity, money back etc will also be exempt from tax under Section 10(10D) if the premium in respect of such policies does not exceed 10% of the sum assured in any year.

Health Insurance.

With the rising cost of medical treatment, this option is a must to cover self and family from hospitalization and medical expenses. One can also claim deduction up to Rs. 25,000/- for covering health of self, spouse and dependent children and up to Rs 25,000/- for covering health of parents (up to Rs 30,000/- in case of senior citizen) under Section 80D in respect of health insurance premium.

Other Options.

There are other investment options available to avail the benefit of income tax deduction. Some of the investment options available under the popular Section 80C of the Income Tax Act are contribution to Public Provident Fund (PPF), post office savings schemes, contribution to your Employee Provident Fund, investments in tax saving mutual funds etc. In addition, investment in house property by availing a loan has dual tax benefit. In addition to the deduction under Section 80C of Income Tax Act towards principal repayment, deduction of interest on such loan from income from house property is also available.

One can invest in combination of products so as to meet different need, namely, tax saving, family protection, housing, optimum return, retirement planning and future cash flow at appropriate time. Most banks in India currently market these products and one can approach them to get the best suited products.

As mentioned earlier, a correct and timely tax planning helps not only to save tax in the immediate future but to optimise returns and provide financial protection to your family against any unfortunate event with you in future. Therefore, instead of waiting till the last month of the year one should start discussing, researching and investing in tax-saving avenues throughout the year. Hence, plan and invest now.

Seven ways your family can help you save taxes

Your family is always there to give you support – not just emotional, but sometimes financial as well. For instance, your family members can be of great help for saving on taxes. However, all your investments and spending for your family are not eligible for tax rebates. There are rules and some of them are pretty complex. To make things simpler, here we list 7 perfectly legal ways your family can assist you cut your tax bill.
1. Buy health insurance for the family: A medical insurance is a necessity that helps you save taxes. If you buy it only for yourself, you can save up to Rs 15,000, but if you buy it for the whole family (including your parents), you can save up to Rs 40,000.

Under Section 80D, a deduction of Rs 15,000 can be claimed for the health insurance premium and preventive healthcare check-up costs for yourself, spouse and your children. If you decide to protect your parents as well, you get an additional deduction of up to Rs 20,000, if they are senior citizens. Otherwise the regular Rs 15,000 limit is also applicable for your parents. Also, this deduction is available irrespective of whether the parents are financially dependent on the taxpayer or not. So, if your wife is an earning member as well, she can use the same strategy and reduce the taxable income of the family by buying her parents a plan as well.

2. Invest through your spouse: Exhausted your 80C limit? Gift some money to a non-earning spouse and invest that in a tax-free instrument. There is no upper limit to the amount you can give as your spouse is in the list of specified relatives whom you can gift any sum without attracting a gift tax. However, the taxman is not foolish. If you invest the gifted money, the Section 64 of the Income Tax Act, a provision for clubbing income, comes into play. Therefore, the escape route is by investing in a tax-free option such as a PPF or ELSS scheme.

Also, there is no tax on long-term gains from shares and equity mutual funds. So, if you invest in them in your spouse name and then hold for more than a year, there will be no additional tax liability. What’s more? When you re-invested these earnings from the investment, it will be considered the spouse income and you’ll have no further tax liability on that money. You can use this strategy even if your spouse is earning, but falls in a lower tax bracket.

Similarly, you can also invest in your parent’s name and the best part is the clubbing rule won’t be applicable here. Also, there is no gift tax on the money you give to your parents. So make use of their a basic tax exemption limit—Rs 2 lakh for up to 60 years, Rs 2.5 lakh for people above 60 and Rs 5 lakh if they are above 80 years of age. In case, they are exceeding the exemption limit, help them save taxes by investing in a tax-free option.

3. Loan money to spouse: Another way to avoid tax is by showing the monetary transaction as loan. So, for instance, if you buy a house in your wife’s name or transfer the second property to her, the rental income from it will not be treated as your income if she pays you a nominal interest on the loan. She can also transfer her jewellery worth the value of the property in your favour. Then also the rental income from that house would not be taxable to you.

Even your fiancee (or, fiance) can help you save taxes. “If a couple is engaged, and the one of them does not have any taxable income or pays tax at a lower rate, her fiance can transfer money to her. The income from those assets won’t be included in his income because the transaction took place before they got married,” says Sudhir Kaushik, co-founder and CFO of One can give up to Rs 2 lakh (the tax exempt limit) without putting any tax liability on the partner.

 4. Children can help as well: You must be already claiming a deduction for the education fee of your children. You can also gift your minor child some cash. But if you plan to invest that amount, the income will be clubbed with that of the parent who earns more.

To avoid clubbing of your child’s income, you may invest in tax free instruments such as PPF, mutual fund (MF) or ULIP. Open a minor PPF account in the name of your child and it won’t be taxable. However, there is a limitation to this option—the contribution to your own PPF account and that of the child cannot exceed the overall limit of Rs 1 lakh a year.

You can buy a child plan from an insurance company or invest in an MF. The premium paid (or investment made, in case of MFs) by you for your child’s future qualifies for a deduction under Section 80C of the Income Tax Act, 1961. A private trust for your child can also be created to save tax.


Section 80C investments should be guided by your needs

The last few months of the financial year are addressed towards ensuring that the tax benefits that are available are utilised effectively. One of the most widely used benefits covers the deduction under Section 80C of the Income Tax Act and while making use of this there is a need to take a careful look at the overall strategy that one is following. This will ensure that there is no wastage of funds and that the best use of the money is possible. There are a few parameters that can be followed for this purpose and here is a detailed look at what an individual investor needs to do in this regard.

Reach the limit.

One of the first things that people with a high income needs to do is to ensure that they are making the full use of the Section 80C limit available under the Income Tax Act. This is Rs 1.5 lakh per annum and if there is no full use of the limit then it would mean that some amounts that could have been taken have been allowed to lapse. This can result in a rise in the tax liability as the reduction of the amount from the taxable income is less. The overall limit that is being utilised by the existing investments should be checked and there should be a plan to ensure that the figure that is required is achieved during the year. Some of the options that are suitable for last minute investing include those like PPF, NSC and for senior citizens the Senior Citizens Savings Scheme.

Do not make excess investments.

There are times when the individual will realise that they have already crossed the limit of Rs 1.5 lakh that has been allowed and their eligible investments are already above this figure. This is a tricky situation because it could mean that there are some additional investments that are not required but are still being made and hence an effort needs to be undertaken to try and cut down the investments. This is difficult because in some cases it might not be possible to do so with an example being the payment of an insurance premium where if this is curtailed then the benefits on the policy can be terminated. This is the reason why any investment should be checked for its future impact before it is actually made rather than during this exercise after the process has been completed. An overall review of the excess investments will show whether there can be some investments that can be cut down and the money directed elsewhere.

Actual need.

For some people there might not be the need to make the full use of the Section 80 C deduction because they might not have the necessary income that can be reduced by the investments. Take for example someone who has a total income of just Rs 3.5 lakh. In this case since there is no higher inflow that is present the individual need not invest more than Rs 1 lakh in order to bring down their tax liability to zero. The basic exemption limit is Rs 2.5 lakh for those below 60 years and hence this plus the Rs 1 lakh deduction will reduce the taxable income to Nil. This means that there would be a reduced pressure on the finances of the individual in trying to make the highest use of the available limits because there might not be the need for such an effort. This can help in the overall financial planning process because it will free up the amounts that can be used effectively for some other investment that can actually yield better benefits in terms of the achievement of other goals. Or it could be that the investment can yield higher returns than what would have come had the amount just been directed towards tax saving debt investments.

Investing: Save tax, maximise returns


For salaried employees, investments for tax planning must have prudent asset allocation of debt and equity. This will ensure that such investments made every year not only save on tax outgo but also build a corpus in the long-run, which is inflation protected.

At present, one of the most important components of tax savings is Section 80 C of the Income Tax Act, 1961. An individual can invest up to R1.5 lakh in a fiscal year in financial instruments like Public Provident Fund (PPF), life insurance premiums, five-year bank or post office fixed deposits, five or 10-year National Savings Certificates of India Post, employee’s contribution to provident fund, Equity-Linked Savings Scheme (ELSS) of mutual funds and unit-linked insurance plans (Ulips) of life insurance companies. Moreover, a tax-payer can avail an additional exemption under Section 80CCD of R50,000 by investing in government’s National Pension Scheme which is a mix of equity and debt instruments.

Employees’ Provident Fund (EPF): Those working in the organised sector is covered by the Employees’ Provident Fund Organisation (EPFO), which invests mostly in debt instruments. From August this year, EPFO has been investing 5% of its incremental corpus in Nifty and Sensex-based exchange traded fund. An ETF is a basket of securities that tracks the stock prices of the companies on an underlying index, and is traded on the exchanges. It comes with a much lower expense ratio. The EPF is country’s largest defined contribution and publicly managed plan and the employee’s contribution gets tax exemption. Employees in the organised sector are required to participate in provident funds and pension plans administered by EPFO and it covers 14% of the workforce.

National Pension Scheme (NPS): The biggest benefit for tax payers in this year’s Budget came in the form of investment in NPS. One can avail tax benefit on investment of up to R50,000 in a year under Section 80CCD, which is over and above the benefit available on R1.5 lakh under Section 80C. For non-government employees, up to 50% of the contribution can be invested in equities and the rest between corporate and government debt paper. It has given a return of around 11% and is an ideal tax-saving investment with equity and debt exposure. After retirement, a subscriber can withdraw 60% of the corpus and buy annuity from the rest 40% of the accumulated corpus. Subscribers of NPS Tier 1 account can now make partial withdrawal of up to 25% of contributions for certain specified circumstances after 10 years of being in the scheme.

Equity Linked Savings Scheme (ELSS): It offers the twin-advantage of capital appreciation through investment in stock markets and tax benefit. The lock-in period of the investment is three years and there is minimum turnover in portfolio. One can invest a minimum of R500 a month in ELSS through a systematic investment plan of mutual fund and can stagger the investments, which would, in turn, bring down the risk sizeably. Money is debited automatically from the investor’s bank account through the ECS mandate and units are allocated based on net asset value applicable for the day. ELSS schemes are open-ended, that is, investors can subscribe to the fund any day.

Unit Linked Insurance Plans (Ulips): They are essentially market-linked insurance scheme that offer tax saving options under section 80C of the Income Tax Act. Ulips offer the advantage of life cover with an investment in equity and debt markets. The lock-in period is for five years. One can also opt for a debt market-linked Ulips and move to equity when the market is moving up to attain higher returns.

National Savings Certificates: These certificates are available at post offices and one can opt for a 5-year or 10-year tenor. The amount is invested in debt and deposits made by individuals qualify for tax rebate under Section 80C of I-T Act. The interest accrue annually and is deemed to be reinvested under Section 80C of I-T Act. The 5-year certificates give 8.5% interest compounded six monthly but payable at maturity. So, R100 invested grows to R151.62 after 5 years. Similarly, the 10-year certificates give return of 8.80% compounded six monthly but payable at maturity. Here R100 invested become 236.60 after 10 years. The certificates are available in denominations of R100, R500, R1,000, R5,000 and R10,000. The minimum investment is R100 and there is no maximum limit. However, one can get tax exemption by investing up to R1.5 lakh a year.

Five-year term deposits: For risk-free investors, five-year bank or post office deposits can also get them tax benefits under section 80C of I-T Act. The tax benefit can be availed in invested for the fixed tenure without premature withdrawal and one can invest up to R1.5 lakh. Bank will issue a fixed deposit receipt for claiming tax benefit and the deposit under this scheme cannot be pledged to secure a loan. An investor will have to pay tax on the interest earned on these term deposits on the basis of annual accrual or receipt, depending upon the method of accounting followed by the assessee.

Various avenues

From August this year, EPFO has been investing 5% of its incremental corpus in Nifty and Sensex-based exchange traded fund. Employees in the organised sector are required to participate in provident funds and pension plans administered by EPFO and it covers 14% of the workforce.

The biggest benefit for tax payers in this year’s Budget came in the form of investment in NPS. One can avail tax benefit on investment of up to R50,000 in a year under Section 80CCD, which is over and above the benefit available on R1.5 lakh under Section 80C.

ELSS offers the twin-advantage of capital appreciation through investment in stock markets and tax benefit. The lock-in period of the investment is three years and there is minimum turnover in portfolio.

Ulips are essentially market-linked insurance scheme that offer tax saving options under section 80C of the I-T Act.

Tax rules NRIs need to know for realty deals

Non-resident Indians (NRIs) may sell their property in India, either to seek capital appreciation on their investments, or they may want to dispose of their properties in India in order to acquire some assets in their country of residence. It is imperative that they understand the applicable tax rules and regulations with respect to such a transaction.

Any profit earned through sale of property is taxable as capital gains. In case the property is held for more than 36 months, the gains are classified as long-term capital gains (LTCG); else, they will be classified as short-term capital gains (STCG). STCG is taxable at the applicable slab rates; however, LTCG on the sale of property is taxed at a beneficial rate of 20%.

The law also allows an indexation benefit in case of LTCG. Indexation basically factors for the effect of inflation by applying the cost inflation index (CII) resulting in a higher Cost of Acquisition (CoA).

NRIs are entitled to claim certain exemptions while calculating the taxable LTCG under the Act, as below:

Investment in property: The individual taxpayer may claim exemption of LTCG arising on sale of a residential house property/ land, through purchase of another residential house in India. LTCG on sale of a residential house property can be claimed to the extent of capital gains utilised LTCG on sale of a land can be claimed to the extent of sale consideration utilised. To avail this benefit, one must ensure that the new house property should be purchased within one year before or two years after the sale; or this can be claimed if a new property is constructed in India within three years from the date of sale of property.

Investment in specified bonds: LTCG can be claimed as exempt from tax if the capital gain is invested in specified bonds (NHAI and RECL bonds), within six months from the date of sale of property, up to R50 lakh.

NRIs may further evaluate the benefits as may be available under the relevant Double Taxation Avoidance Agreement which India has with their country of residence while computing their capital gains tax liability in India. For the sale of property by NRI, the buyer is under an obligation to deduct tax at source while making the payment of sales consideration.

Tax is required to be deducted @ 20% in case of LTCG and at applicable slab rates in case of STCG. The mechanism of such tax deduction at source was introduced by the government in order to ensure the appropriate collection of tax from NRIs who are mostly based out of India.

As the above mentioned benefits and exemptions can only be claimed by the NRIs at the time of filing their India tax return, they need to apply for Tax Exemption Certificate from the I-T department if they would like Nil/ lower tax deduction on such transaction.

Under Section 197 of the Act, NRIs can obtain Tax Exemption Certificate on the basis of estimated capital gains tax computation and submission of relevant documents. After going through the information furnished by the NRI, the jurisdictional Assessing Officer/ Tax Officer may issue a certificate authorising the buyer of property to deduct tax at a lower rate or nil rate as the case may be.

What to expect from Budget 2016?

As is human nature, we place high expectations on our governments. Especially those running on a massive mandate, have too many promises to keep.

Our government though has a lot going on. Given the connected world we live in, our economy is not immune to global challenges. There are a bunch of domestic challenges too. Businesses want GST to take shape, while the common man wants more money in their pockets. Keeping 1.2 billion people happy is not an easy job. What then is a reasonable expectation from the finance minister this budget, let’s find out.

About 14% of what our government earns comes from tax collections. The gap between our collections and expenses, is referred to as the deficit. Our government’s efforts are targeted at keeping this deficit in check. This helps keep our borrowings under manageable levels. Our tax collections have been under pressure lately. Also there is a large payout in this budget towards OROP. At the same time China looks threatening to global markets. All eyes are now set on the moves Modi government is planning, to reign in growth and reform.

It seems to be the perfect time for the government to take steps to simplify our tax laws. Tax payers will benefit from revision and simplification of numerous archaic exemptions and deductions in our tax laws. TDS or tax deducted at source has been the bane of deductees and deductors alike. Thresholds beyond which TDS must be deducted have not been revised since a long time. For example, TDS has to be deducted when payment exceeds Rs 30,000 for professional technical services. TDS on interest (other than securities) has to be deducted when it exceeds Rs 5,000. This increases compliance burden on deductors. Additionally, deductees whose total income is below taxable limit or is taxable at lower rates, have to either submit forms for no or lesser TDS deductions or claim refunds. Refund processing adds another layer to this issue. Therefore, it would be worthwhile to consider Eashwar committee’s recommendations of reducing TDS rate to 5%.

Some of the tax deductions, such as 80GG, which is allowed to those pay rent and do not receiveHRA has been set at Rs 2,000. This is the maximum amount that can be claimed. While HRA is directly linked to one’s salary, those who do not get HRA cannot claim deduction beyond Rs 2,000. Similarly, exemption on a children education allowance is fixed at Rs 100 per month for max 2 children. These deductions are lost in time. They should both be shelved and merged by increasing the exemption limit or should be enhanced to match with current times.

Section 80C limit is Rs 1,50,000 since financial year 2014-15. Also, this section is crowded with a host of deductions. Allowing a higher limit for investments would do the taxpayer good and this money may be used by the government to fuel growth. First time home owners have suffered at the hands of builders when projects are delayed. Innocent buyers have to forgo tax benefits as well as pay rent and EMIs. The government must consider relief for first time home owners, extending the period of construction, where the delay is from the builder’s end.

While GST may be on our finance minister’s mind, DTC (Direct Tax Code) must also be put up for discussion. Several valuable recommendations were put through in DTC and bringing it will put tax reforms in high gear.

A lot of progress has been made, returns can be verified online, refunds are processed much faster, the tax department is embracing technology like never before. There is still a long way to go to make our tax laws world class.

Here’s hoping our finance minister has good things lined up on 29th February this year.

Tax payers can now e-verify income tax returns using bank, demat account details

“Currently an Income-Tax Return or ITR can be e-verified by using internet banking, email or an Aadhaar number- generated One Time Password (OTP).”

In a bid make e-verification of tax returns simpler, the Income-Tax Department has included bank account and demat account details among the modes that can be used to generate code to e-verify ITRs.

Currently an Income-Tax Return or ITR can be e-verified by using internet banking, email or an Aadhaar number- generated One Time Password (OTP).

To these, two more modes of bank account and share demat account have been added for generating an electronic verification code (EVC) that is used to submit annual ITRs.

The measures are intended towards ending the practice of sending paper acknowledgement of ITRs to CPC, Bengaluru.

The Central Board of Direct Taxes (CBDT) has added two additional modes for generation of electronic verification code (EVC) for e-verification of ITRs.

The efiling website of the I-T department would now provide a facility to pre-validate bank account details. The assessee will have to provide bank account number, IFSC code, email id, and mobile number and these details will be validated against the details of the tax payer registered with the bank.

“Generated EVC will be sent by e-filing portal to taxpayers’s email id and or mobile number verified from bank,” a CBDT notification said.

The list of banks which will participate in this facility would be provided on the efiling website.

As regards generation of EVC using Demat account details, the CBDT said the assess would have to provide demat account number, email id and mobile number. This details, along with Permanent Account Number (PAN), would be validated against the information with depository (CDSL/NSDL).

“Generated EVC will be sent by e-filing portal to email id and or mobile number verified from CDSL or NSDL,” CBDT said.

After the EVC is generated, it can be put in the ITR form for final submission.

“Despite of all the efforts of the government to go green and paperless, the mandate of providing Aadhaar Number at the time of filing the return of income prevented e-filing from becoming a completely paperless process for those who did not have an Aadhar Card,” Nangia & Co Executive Director Neha Malhotra said.

Last year the tax department launched its ambitious One Time Password (OTP) based e-filing verification system for taxpayers using the Aadhaar number.

According to experts, bank account detail based EVC generation is a more reasonable mode for e-verification. It would be now easier for small tax payers as mostly all of them have bank accounts, even if they do not have Aadhaar numbers.

“With Jan Dhan Yojna, even the small taxpayers have a bank account and thus can complete easily complete the return filing process,”