Salaried employees get several benefits under Sections 80C, 80D, 80G and others.
Sanjay Kumar Singh and Priya Nair tell you how to invest wisely.
Illustration: Dominic Xavier/Rediff.com
For many salaried employees, this is the time of the year they dread. And, for good reason.
When the human resource department, at the start of the financial year, ask them about investments that will be made under Section 80C and other tax benefits they intend to take, many have the tendency to just put some numbers there without bothering to have a proper plan for the investment.
This is the time of the year when those numbers come back to haunt them.
Unless they provide evidence of the investments, they can expect little or no salary or in a worst case scenario, might have to even pay the employer to reconcile the numbers.
Before you start worrying about the tax, do some basic calculation.
80C benefits
Salaried employees get several benefits under Sections 80C, 80D, 80G and others.
While the Section 80C exemption of Rs 1.5 lakh focuses on provident fund and other investments and insurance policies, the other sections provide benefits such as house rent allowance, leave travel allowance, conveyance, medical and others.
Experts say employees, typically, trip on the 80C portion.
"A lot of salaried tax payers make the mistake of not counting their Employees Provident Fund (EPF) contributions under the Section 80C benefit. Also, look at insurance needs and home loan deductions before investing afresh in buying other products," says Deepesh Raghaw, founder, PersonalFinancePlan.in.
If you are an investor in the National Pension System, you can declare another Rs 50,000 for exemption under Section CCD.
Health benefits
This is another area where you can fall short.
Besides the medical reimbursement, tax-free up to Rs 15,000, there are health insurance benefits under Section 80D.
Under this, you can claim Rs 25,000 exemption on premium for self, spouse, child and parents.
If the parents are above 60 years, there is an additional exemption limit of Rs 35,000.
In total, you can save up to Rs 60,000 if you have bought policies.
Loan repayment
There are twin benefits -- principal repayment can be claimed under Section 80C and an additional Rs 2 lakh under Section 24B.
For a couple, who are joint owners of a property, the interest benefit can be a good Rs 5 lakh annually.
If you have an educational loan, the entire interest repayment is available for deduction under Section 80E, but there is no benefit of repayment on the principal amount.
These are the major benefits you can get from the income-tax department.
Submitting proper documents to the HR department will save you significant amounts of money.
If you are able to take advantage of all these exemptions, you will get tax benefits up to Rs 7 lakh.
This will include the basic exemption limit of Rs 2.5 lakh.
If you are giving documentation of house rent allowance, leave travel allowance and others, the benefits could be substantially more.
How to decide on investments
Usually, many investors fall short on the 80C requirements.
Financial planning comes into play in which goals and investments have to be matched.
Up to five years: If you require funds within five years, the National Savings Certificate (NSC) or a five-year Post Office Time Deposits are good options.
NSC currently offers 8% annually, while a Post Office Time Deposit offers 7.8%.
Bank FDs of five years also offer tax exemption under Section 80C.
As these are fixed income investments, those who have a surplus only for tax-saving investments can look at them.
More than five years: Those whose have an investment time frame of more than five years and have other investments can look at an equity-linked savings scheme (ELSS).
These funds have a three-year lock-in period.
"Since there is evidence that ELSS funds do not give good returns after merely three years, it is advisable to remain invested for longer. It is also suitable for people who can weather volatility," says Deepali Sen, founder, Srujan Financial Advisors.
But, be aware that the lock-in period of ELSS takes away the flexibility of withdrawing from equities if the market is not performing well, adds Vaibhav Sankla, director, H&R Block India.
Ten years or more: For long-term investments, Public Provident Fund (PPF), which currently offers 8% annually, is a good option, but it has a lock-in of 15 years.
The biggest advantage of PPF is it is EEE (Exempt-Exempt-Exempt). However, the rate is subject to change every quarter.
Another option is systematic investment plans in equities, which have given good returns over longer periods.
It is advisable to avoid traditional insurance plans like endowment and money-back policies and unit-linked insurance plans, even though they offer tax exemption because of the high cost.
