7 important tax saving investments questions answered

Income tax questions

Tax savings investments season is on. Though I regularly advise through different articles and newspaper columns that tax planning should always be done in the start of financial year to avoid misbuying but Old habits die hard. These days I am recieving lot of queries on different tax saving investments options, some are general ones related to tax planning, so I have compiled few of those for the benefit of readers. Hope you also may find some of your answers here.

Tax Saving Investments Question #1

I want to buy a Single Premium Insurance Plan for tax saving u/s 80C. Kindly suggest a good product for FY 2013-14.

Answer :  You need to understand that to claim tax saving u/s 80C on insurance premiums, your insurance sum assured should be atleast 10 times of your annual premium paid. This condition is also necessary to make the insurance policy proceeds tax free u/s 10 (10)d. In single premium policies you don’t get this feature.  The maximum coverage they offer is way less than the minimum required to claim tax benefit. So its better to avoid single premium insurance plans for Tax saving u/s 80C.

Tax Saving Investments Question #2

I am depositing Rs 5000 per month in my Child’s PPF account and also paying for his school fees which comes to around Rs 40000/- per annum. Do both these investments/ expenses suffice my tax saving investments requirement u/s 80C?

Answer: You can claim tax benefit on contributing in your child’s PPF account and even payment towards school fees u/s 80C. The main point here to be aware about is the in children school fees only the tuition fees portion is eligible for tax benefit. So if you paying towards computer fees or extra-curricular fees or something like that, that portion should be excluded from the savings shown u/s 80C.

Tax saving Investments question #3

I have taken a joint housing loan with my wife as co borrower when my wife was working. Ownership of house is also equally divided among both of us, but now my wife has let the job and EMIs are being paid by me only from my personal bank account. Who can claim the tax benefit and upto what limit?

Answer: Housing loan emis enjoys tax benefits in 2 parts – On principal payment u/s 80C upto  a limit of Rs 1 lakh and On Interest payment u/s 24 upto a limit of Rs 1.50 lakh. Housing Loan EMIs comprises of both these portions.  These tax benefits can be claimed in the ratio of proportion of loan taken. As your share of loan is 50% against your 50% of ownership so in this particular case you are eligible for 50% of tax benefits. 50% of total principal payment and 50% of total interest paid can be claimed by you upto a limit of Rs 1 lakh and 1.5 lakh respectively. If this loan is taken in Fy 2013-14 ,for a property of Rs 40 lakh and total loan sanctioned was 25 lakh or below, than additional Rs 1 lakh can also be claimed u/s 80EEE (only for AY 2014-15). (Read : Housing loan tax benefits)

(Also read : Income tax benefits on Joint home loan)

Tax saving investments question #4

We have 3 PPF accounts in family. One in my name which is going to mature on 31st march 2014, other in my spouse’s name which will mature after 4 years and third one in my elder son’s name which is recently opened. I would like to know that can I get the tax benefit u/s 80C if I make investment in any of these account or do I have to extend my account only?

Answer:  From tax saving perspective  you don’t need to extend your PPF account as you can claim the tax benefit even by depositing money in your spouse’s or son’s account. But please note that the maximum benefit available u/s 80C would be Rs 1 lakh only. From savings and investment perspective, it is advisable to extend your personal PPF account for another 5 years (with/without contribution), if you require some liquidity too you may make partial withdrawals

(Read : All you wanted to know about PPF)

Tax saving investments question #5

This month due to some bonus amount my taxable salary has got increased. As I come under 30% tax bracket and my son comes under 10% tax bracket, so I would like to know if I pay his health and life insurance premium then can I claim the tax benefit?

Answer: To claim the tax benefit u/s 80C you can pay your Son’s Life insurance premium, but you will not get any benefit u/s 80D if you pay your son’s health insurance premium.  Section 80D benefit is available for medical insurance premium paid to cover self, spouse, parents or dependent children. As your Son is not dependent on you so your payment of premium will not make you eligible towards section 80D benefit.

Tax saving investments question #6

I am getting HRA allowance as 10000 per month , and the rent which I am paying is Rs 12000 per month. Now since the amount paid as Rent is more than what I get as allowance, so does that mean the complete HRA allowance is tax free

Answer : No its not like that. There’s a specific calculation to find out the exemption amount out of HRA allowance. The calculation goes like this:

  1. Actual HRA received
  2. 40% of basic salary (50% in case of metros)
  3. Actual Rent paid minus 10% of Basic

The minimum of above will be taken as exempted amount and rest will be taxable.

Also do note that from FY 2013-14, if you are paying annual rent of more than Rs 1 lakh, then to claim tax exemption you have to show Pan no. of your landlord along with rent reciepts  . (read : All you wanted to know about HRA)

Tax saving investments question #7

I am 27 years old and started earning from this financial year only. How do you advise me to plan my tax saving investments? Should I go with any Insurance policy, pension plan or bank fixed deposit?

Answer: The tax saving investments u/s 80c has been designed in such a way that if arranged properly you can get all the financial planning benefits in the complete allocation of Rs 1 lakh. For a tax free long term debt investments you have PPF, for tax free equity investments you have ELSS. All types of life and health insurance policies are part of tax saving of course with some condition on minimum sum assured. You can save for your long term pension through New pension scheme or insurance pension plans. So keeping in mind all your goals you can allocate your savings among different tax saving investments options. Start with insurances, if you have financial dependents then go with life insurance policy. Better to buy a term insurance plan with sum assured of atleast 15-20 times of your annual income.  Get you and your family including parents’ health insured by buying a suitable health insurance plan. Open a PPF account and start contributing towards long term. Also invest some amount in ELSS Mutual funds for having equity exposure. Avoid investing in instruments like 5 years bank Fixed deposit , National savings certificate , or even pension plans as they generates taxable returns.

Hope the Q&A above on tax saving investments are helpful. If you have some other query do ask in the comments section.



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