How to plan tax and tax planning for the next financial year are some of the most frequently searched topics. With three months of FY24 elapsed, if you are yet to start your tax planning activity for this year, then you are already late. So let’s not waste more time and swing into action right away.
As you must be aware, the new tax regime offers fewer tax deductions. We have already written an article to compare old vs. new tax regime and discussed deductions available under these regimes.
Now assuming that you are opting for the old tax system, let’s consider various tax deductions available.
Deductions u/s 80C
The list of permissible investments for availing a deduction u/s 80C is quite long and comprehensive. You can invest in one or more instruments/investment avenues but the combined/aggregate deduction limit is Rs 1.5 lakh.
You may invest Rs 1.5 lakh in Equity-Linked Savings Scheme (ELSS)
May invest Rs 75,000 in ELSS and Rs 75,000 in Public Provident Fund
May invest Rs 50,000 each in ELSS, PPF and Sukanya Samriddhi Scheme amongst others
Now let’s look at some prominent avenues in detail.
Equity-Linked-Savings Scheme (ELSS): If you aspire to get a tax deduction u/s 80C and your risk appetite permits you to invest in equity assets, then ELSS is surely a place to be. At a young age, your equity exposure can be high, say 75%-80% (as a rule of thumb, 100 minus your age).
Investing in ELSS not only will help you save taxes but may also help you build wealth over long term. Some consistently performing tax-savings scheme includes the likes of Kotak Taxsaver Fund, Canara Robeco Equity Tax Saver Fund and Quant Tax Plan amongst others have generated high double-digit returns in the long run. That said, the past performance offers no clue about the future returns.
ELSS funds have a mandatory lock-in of 3 years.
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Public Provident Fund: Public Provident Fund or PPF is one of the very few investment avenues that falls under EEE (Exempt-Exempt-Exempt) category. Meaning, when you invest in them they offer you tax deductions. Moreover, income generated on them (by way of interest), as well as their maturity proceeds are exempt too. PPF scheme offers compounded annualised returns which are linked to the performance of 10-year g-sec yields. The interest rate is adjusted on a quarterly basis.
To get the interest for the full year, you should ideally make your annual PPF contributions before the 5th of April every financial year. In case you are investing on a monthly basis, you should invest before the 5th of every month. So if you are yet to make your first PPF contribution for the year, hurry up!
It’s noteworthy that PPF account matures after 15 years but you can avail extension for a block of 5 years. There is no limit on how many times the account can be extended.
Sukanya Samriddhi Scheme: If you have a daughter who’s below 10 year of age, you can open a Sukanya Samriddhi account in her name as a guardian. Aggregate contributions up to Rs 1.5 lakh in a year for maximum of two daughters can offer you a tax deduction u/s 80C. Interest earned is tax free, so are maturity proceeds. If you open an account make sure you make contributions on or before the 5th of every month.
Tax Savings Fixed Deposit with banks: This isn’t an attractive option as compared to PPF because the interest component is taxable here. However, it comes with a shorter lock-in period of 5 years. This option ideally suits senior citizens or younger investors with no risk appetite. Similarly, investors with zero risk-appetite can also think of investing in National Savings Certificates.
Life Insurance premium: Your life insurance premium can help you claim a tax deduction up to Rs 1.5 lakh every financial year. However, the capital gains on insurance policies which were totally exempt u/s 10(10D) until recently are now subject to tax, wherein, the aggregate annual premium on traditional insurance-cum-investment policies exceeds Rs 5 lakh (Rs 2.5 lakh in the case of ULIPs). That said, death claims continue to be tax-free.
Deductions u/s 80 CCD
National Pension System (NPS)
NPS is a Pension Fund Regulatory and Development Authority (PFRDA)-regulated scheme which is one of the most cost efficient retirement savings options available in India. It is a market-linked retirement savings scheme and hence doesn’t pay you any guaranteed returns.
However, it helps you claim tax deductions in the following manner:
According to section 80CCD (1B), NPS offers you an additional tax deduction of Rs 50,000 on your contributions, over and above the deduction of Rs 1.5 lakh that you can claim u/s 80C.
Taxpayers opting for corporate NPS scheme can get a deduction up to 10% of their salary (Basic + DA) u/s 80CCD (2), wherein the upper limit of such deduction is Rs 7.5 lakh. This is the employer’s contribution paid as part of overall compensation to the employee.
Self-employed individuals can’t opt for the Corporate NPS scheme. It’s noteworthy that this is a permissible deduction even under the new tax regime.
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Deductions u/s 80D
Buying health insurance isn’t a luxury anymore. With skyrocketing healthcare costs, it’s become a necessity. And premiums on Health Insurance policies are a permissible deduction. You can buy a cover for yourself, your spouse, dependable children, and dependable parents to claim deduction u/s 80D.
As you can see in Table 1, you can claim a deduction of up to Rs 1 lakh u/s 80D, in case, you as well as your spouse are above 60 and your dependable parents too are above 60.
If you, your spouse, and dependable children are below 60 and your parents are senior citizens then the maximum permissible deduction amount will be restricted upto to Rs 75,000
Nonetheless, if all—you, your spouse, dependable children, and parents—are below 60 then the maximum amount of deduction will be restricted to Rs 50,000
Some more deductions that you may claim on a case-to-case basis:
You can make voluntary charitable contributions to notified entities and avail deductions u/s 80G. Similarly, interest paid on an Education Loan can be claimed as a deduction u/s 80E. Interest paid on the self-occupied house property is exempt up to Rs 2 lakh u/s 24(b) while that on rented properties is exempt on an actual basis.
If you are opting for the old tax regime, you can choose from a range of tax savings options to claim tax deductions. Thus, waste no more time and act quickly!
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