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You can still save money, says Samkit Maniar.
Illustration: Dominic Xavier/Rediff.com
It's that time again, when the financial year is ending and your tax deadline looms.
In order to pay your taxes without feeling stressed, a bit of planning is essential.
For those of you who tend to leave things to the last minute, don't worry.
Here's a list of the tax exemptions that can help reduce your income tax liability.
Do remember, however, that your tax exemption is restricted to Rs 1,50,000 (plus some more... read on).
For the Rs 1,50,000 exemption, you could choose to save money by investing. Here are your options.
Public Provident Fund, also known as PPF
It is the simplest way to save tax and earn an 8 per cent tax-exempt interest per annum.
The procedure to open a PPF account is similar to that of opening a savings bank account.
It is advisable to open a PPF account in a bank in which you already have a savings account. This will provide you with administrative/operational flexibility (for example, if your savings account is KYC-verified, some banks do away with the KYC documentation at the time of opening of the PPF account).
You have to stay invested in your PFF account for 15 years. It can be extended for five more years, if you so wish.
The minimum investment you have to make every year is Rs 500.
It is better to invest a substantial amount in your PPF account at the beginning of the financial year, so that you can maximise the interest you earn.
EPF, or Employee Provident Fund
Lots of benefits here too.
1. The amount your company invests in EPF is tax-free.
2. The amount you contribute is tax-exempt.
3. After five years, any amount you withdraw is tax-exempt.
Equity Linked Savings Scheme, or ELSS
The aim behind ELSS is to encourage people to save.
ELSS is a mutual fund scheme that invests in the stock market. It has a minimum lock-in of three years.
In case of an emergency, you can withdraw the funds after paying the exit charge. Unfortunately, the exemption granted to you will also be withdrawn.
Once you invest in an ELSS scheme, you will be allotted units at a particular rate (this rate changes based on the performance of the scheme).
The best way to invest in such a scheme is through the Systematic Investment Plan, or SIP. This means, a certain sum (which you would have decided on before investing) will be deducted from your account every month and invested in the scheme.
It reduces your burden of making a large payment at one go. It also reduces your investment risk.
You will see the benefit of investing in such a scheme if you remain invested for a few years.
Earlier, you could only invest in ELSS through mutual fund distributors or banks.
Now, you can also log into the mutual fund's website and make your investment.
Tax Saving Fixed Deposits
This type of investment is less risky than ELSS and you have to stay invested for five years.
Also, the interest you earn is taxable.
While the returns you get is less compared to an investment in PPF/ELSS, it also has the least amount of risk.
You can invest in these deposits through any public or private sector bank (though not in a rural and cooperative bank). The minimum amount varies from bank to bank.
Life Insurance
Again, you have two benefits.
You ensure your family's security after your demise and get a tax exemption for the same.
Earlier, you had to approach an Life Insurance Corporation agent or visit an LIC branch. Now, you can invest online.
Since LIC is a public sector undertaking backed by the government of India, it is a safe investment.
There are many private players in the market now, so you can invest with them too.
Your expenses and repayments can also help you save money (this is also part of the Rs 1,50,000 exemption we were talking about earlier). Here's how:
Tuition fee
Did you know that the fees you pay for your children's education can help you save tax?
If you have more than two children, however, you can avail of this benefit for two children only.
The tuition fees must be paid to any school, college, university or educational institution in India and must be for full-time education.
Housing loan repayments
The principal repayments on housing loan are tax deductible.
If this amount is less than Rs 1,50,000, the exemption will be limited to the amount you are paying. If the amount is more than Rs 1,50,000, it will still be limited to Rs 1,50,000.
You can also avail of an additional tax exemption of Rs 2,00,000 on the interest component of your housing loan repayment (this is over and above the Rs 1,50,000 limit).
More ways in which you can save tax, OVER AND ABOVE the Rs 1,50,000 exemption limit:
Mediclaim
You get tax exemption on the premium you pay for Mediclaim.
This exemption varies, depending on the age of the individual.
If you are under 60 years of age, you are eligible for an exemption of Rs 25,000.
If you are over 60 years old, the exemption increases to Rs 30,000.
You can also pay the Mediclaim premium for your spouse, parents and dependent children. Do remember, however, that you can avail of only one exemption of Rs 25,000 even if you are paying the premiums for your spouse and children.
You can also avail of an additional exemption of Rs 25,000 if you are paying the premium for your parent/s (Rs 30,000 if one of your parents is older than 60 years).
Interest from savings accounts
This interest you earn on your savings bank account is exempt from tax.
For this purpose, all your savings bank accounts will be considered in totality. For example, if Mr A has five different savings bank accounts, the interest all five accounts earn will be considered together.
Though the exemption limit here is Rs 10,000, it is the actual interest that you earn that will be considered. For example, if Mr A earns Rs 9,600 interest from all his savings accounts, he is eligible for an exemption of Rs 9,600 only.
If the interest you earn is more than Rs 10,000, the exemption is still limited to Rs 10,000. Any amount above this is taxable.
National Pension Scheme, or NPS
If you invest in the government's NPS, you can claim an additional deduction of up to Rs 50,000. But do keep the following facts in mind:
1. If you are salaried, you can claim a tax deduction of up to 10 per cent of your salary per annum.
2. If you are not salaried, you can claim a tax deduction of up to 20 per cent of the total income you have earned in the financial year.
For example, if Mr A earns a salary of Rs 10, 00,000 per annum and invests Rs 50,000 in NPS, he can claim a deduction of Rs 1,00,000 (10 per cent of his salary per annum) or Rs 50,000, whichever is lower. This means, he can claim Rs 50,000.
If this amount is less than Rs 50,000 -- say it is Rs 45,000 -- then that is the amount that can be claimed.
So go ahead. Make your investments and end your financial year on a stress-free note.
Samkit Maniar is a tax consultant and can be contacted at samkit.maniar@yahoo.com.