April is the month when your employer asks for the declaration of your tax saving investments plan for the current financial year. After all, TDS deduction is employer’s responsibility and this declaration helps them to plan.
Filling of this declaration sheet also provides you, enough opportunity to do necessary tax planning for financial year. This declaration and plan behind it can serve a necessary path for you to move ahead in your tax saving investments. Even if you have already submitted your declaration, still there’s no harm in doing some tax planning now.
Tax planning in the beginning of the financial year is as important for businesses and business persons as for employees. It helps you avoid haphazard investments at the end of year and also syncs your tax plan with your overall financial plan. Its always better to save tax the financial planning way. Below I am covering few tax planning tips which will help you plan better
10 tax planning tips for FY 2015-16
As per the new provisions and products as announced in Budget 2015.
1. EPF Vs. NPS:
In Budget 2015 speech, Hon’ble Finance minister Mr Arun Jaitley proposed to provide choice to the employees of organized sector to select between Employee Provident Fund (EPF) or New Pension Scheme (NPS). Currently EPF is the default retirement vehicle for many employees. Though yet not notified but soon employers will start asking from you as to which option you would like to go with. ( Read more on New pension scheme)
To decide between these 2 you have to understand the basic features of these products, your medium to long term goals and your overall asset allocation. Operations structures of both these products are different and it is still not sure if government will announce some changes in NPS operational structure to suit the decision.
Some of the basic comparison features between NPS (as per current design)and EPF are as below:
Tax Planning tips#1 –
Ignoring the asset allocation part, I feel EPF still scores over NPS due to tax free returns, equal employer contribution, full and partial liquidity. After the launch of UAN (Unique Account number) it is also easy to manage.
For long term savings, equity allocation is required but that can be taken care through other products also which are tax free and much more liquid like equity Mutual funds.
2. NPS investment up to Rs 50000 – additional tax benefit u/s 80ccd(1b)
This is another new provision announced in Budget 2015 where section 80ccd(1b) was introduced and window of further savings upto Rs 50000 in new pension scheme was opened. This saving will be counted over and above section 80C of tax savings.
As this is an additional tax saving option, where no other choice is available, from tax planning perspective it is advisable to be used if income permits, but only after completing the savings u/s 80C.
Tax planning tips#2
NPS may not look that attractive as compared to other tax-saving options, but still for high-income bracket people, saving for additional tax benefit is no harm.
This product can be used to create an additional income stream to supplement the retirement income.
3. Sukanya Samriddhi Yojana or Public Provident Fund
This debate is going on since the announcement of tax free maturity benefit in Sukanya Samriddhi yojana. Public Provident fund is age old product, benefits and working of which many of you must be aware of . Still you can know more about PPF here.
Sukanya Samriddhi yojana was announced in Dec’2014 and is a special deposit scheme launched under campaign “beti bachao beti padhao”. It is a fixed return product where interest rates will be announced every year and are linked to the Government securities rates, just like PPF. It will always offer 0.50% more than the PPF. Both PPF and Sukanya Yojana generate tax free returns.
This scheme has a specific purpose, to encourage savings for girl child so the same can support the education and marriage expenditure of the child. (Know more about Sukanya Samriddhi yojana here)
Now from Interest rates perspective, no doubt this scheme is looking attractive then PPF, but structure wise it is quite different. It’s lock in period, withdrawal restrictions and specific condition of “only for girl child” makes this product less appealing than PPF which is far more flexible in its operation, at least in comparison with SSY.
Tax planning tips#3
Thus in my view go with SSY only when you could be able to map the child’s education or marriage goal with the savings, and also keeping fair amount of liquidity for other requirements. Otherwise stick with PPF.
SSY can be a good product for general savings, in case your asset allocation permits for more debt allocation.
4. 5-year bank FD Vs. Senior citizen saving scheme (SCSS):
Generally retired senior citizens people look out for safe options with less lock in period. Their other requirement could be the generation of regular income. In both the cases Senior citizen saving scheme offered through post offices can be a good option. With a recent revision of its interest rates to 9.30% it is among the highest interest paying instruments, which offers tax saving benefits too.
Tax planning tips#4
As all the banking deposits are coming down on interest rates, it actually surprised me when government raised the rates of SCSS. So for this year, SCSS is looking much better option as compared to 5 year bank fixed deposit.
Interest rates in both the products are taxable. But safety wise SCSS scores over FD as it is backed by government of India. SCSS can also be used as a good tool to create regular income stream post retirement.
5. Insurances :
Life and health insurance are must have covers from financial planning point of view, if bought thoughtfully this will help in considerable tax saving too.
Life insurance policy premium comes under section 80C, only if the insurance cover is at least 10 times of Premium paid. Even if you have multiple policies, the total premium being paid by you (for self, spouse or children) will be covered u/s section 80C upto total limit of 1.50 lakh.
You should also have Health Insurance policy cover which takes care of hospital expenses in case of medical emergency. Having adequate health insurance cover restrains your from using your credit cards or withdrawing your savings for medical issues. The premium paid for health insurance comes under section 80D with total limit of Rs 25000 if paid for self (plus spouse and children) and Rs 30000 if paid for senior citizens parents. So in total you can claim upto Rs 55000 deduction benefit u/s 80D.
Section 80D also includes payment towards preventive health checkup up to Rs 5000.
Tax planning tips#5
So go ahead keep check on your health, get yourself and your parents insured and enjoy the tax benefits. You should have adequate health cover even if your employer sponsored mediclaim cover with you.
Image source: hindubusinessline.com
6. Equity Linked saving scheme ( ELSS):
Equity Linked saving scheme or ELSS, is one of the most popular tax saving vehicle u/s 80C. This is an Equity Mutual fund and thus investing in this provides necessary exposure to the growth assets in your tax planning portfolio.
These funds have 3 years lockin period but its better if you keep it for longer term as in short term it may bother you with its volatility. Longer the investment term, volatility be absorbed and good wealth can be built.
(Read : Best elss tax saving funds to invest in)
Tax planning tips#6
If tax saving investments is your only investments in a year, then you should definitely take some exposure to ELSS funds.But if you are in that income group where your EPF contribution is enough for tax savings, then to get equity exposure you can buy other open ended equity funds with a structural financial planning.
7. National savings Certificate:
This is a fixed return instrument with a fixed maturity period. NSCs come in 2 avatars with different Terms- 5 years and 10 year. NSC’s interest is taxable. But the Interesting part in NSC is that its interest accumulation also gets counted for tax saving. The rate of interest for fy 2015-16 has been announced and is same as last year. 5 year NSC rate is 8.50% p.a. and 10 year NSC rate is 8.80% p.a. with half yearly compounding.
For e.g On April 1, you invested Rs 1 lakh in NSC @8.50%, during the year interest of R 8680 (due to half yearly compounding) get accumulated in the scheme, now for that financial year Rs 108680 will be taken for tax saving.
Tax planning tips#7
This product is much suitable to self- employed business people who have recently started their venture and don’t want to part with the liquidity but also need tax saving. Banks offer overdraft against NSC certificates. So investing in NSCs will save tax and taking OD against this will rebuild liquidity.
8. Housing Loan tax benefits:
Banks and Financial institutions are bringing down their housing loan rates. Going forward more rate cuts is expected. Thus if you are planning to buy or construct a house on loan then “ache and saste din” are on their way.
Housing loan offers 2 types of tax benefits – one under section 80C on principal re payment (upto Rs 1.50 lakh)and other under section 24 ( upto Rs 2 lakh)on Interest repayment. Loan can be taken on joint name with your spouse and also tax benefits can be enjoyed by both if certain conditions are fulfilled.
You can also enjoy section 24 benefit if you have taken loan from relative, friend or family member.
Tax planning tips#8
With the rising real estate prices, it has become quite difficult to think about buying house without loan. and if you have any plan towards this then FY 2015-16 will provide you enough opportunities to get into the same, with lowering interest costs.
9. Rolling over Non- equity mutual funds:
Last year in Budget 2014, Mr Arun Jaitley announced the changes in the taxability of debt mutual funds, which are applicable on all gains booked after 10 July 2014.
Now the holding period required for non -equity mutual funds to come under long term capital gain tax has been increased to 3 years. Before 3 years the gain would be short term capital gain and will be added into the total income of that year, and after 3 years long term capital gain would be taxed @20% after indexation.
Tax planning tips#9
If you have some fixed maturity plans or debt funds in your name which has not crossed the holding period of 3 years yet, then it’s advisable to postpone the redemption or rolling over the FMPs.
10. Save tax on spending towards medical treatment:
If you are spending towards medical treatment on self or any dependent that is disabled or suffering from chronic illness, then you can claim the spending as tax deduction up to specified limits u/s 80DD, 80DDB, 80U.( Read more on saving tax on spendings)
Tax planning is not only limited to making investments. If done properly then you can create different tax files with in family and take advantage of all possible tax deductions and tax exemptions in each tax file and thus reduce the considerable tax outflow.
Read the 4 articles on tax planning tips for different life stages as below to have detailed understanding on how to create and use different tax files:
Tax planning tips for young unmarried
Tax Planning Tips for a couple
Tax planning tips for family with kids
Tax planning tips for retired people
Hope you find this article on 10 tax planning tips for 2015-16 useful. If you have any query , then feel free to ask in comments section below.
tax planning tips
Fro senior Citizens, in 10% bracket do not find most of 80C and other sections.
While, other tax payers do benefit from the deductions/ exemptions, Sr.Citizens do not find such beneficial sections/ exemptions.
I would like to have your comments/ suggestions.
2. Sr. Citizens look for Safe, assured monthly income for a duration of 15-20 years, say up to the age of 75-80.
Bank FDs @9% interest is available for a maximum period of 10 years.
Are there, avenues, other than Annuities, which need to be subscribed long before superannuation, for getting safe assured return after 10 years, from 70 to 80 years.
In a general view senior citizen after retirement look out for safe investment instrument which can also supplement their regular pension or other monthly income. To answer that section 80C tax saving instruments have Senior citizen saving scheme and 5 year bank Fixed deposit.
Now the benefit depends on your expectation too. section 80C is so vast that you can invest in safe instruments with medium term tenure, moderately and high risk instruments for long term like NPS, PPF or MF ELSS. Selecting of product depends on investor’s requirement. One may not get best of both worlds like growth and safety simultaneously.
If you ignore section 80C investments, then you can create structure with mutual funds for your regular income need. You may go with balanced mutual funds for 10 years and start with SWP to get regular monthly income. Though it is not written as assured anywhere but back testing has proven that this strategy works best to generate regular income. Still you have to keep close watch and monitor the portfolio regularly.