Divya Baweja and
Divya Grover
With the last quarter of the financial year fast closing, taxpayers typically start evaluating various tax saving instruments that can help save taxes and also provide assured returns. It is that time of the year when a taxpayer starts receiving phone calls from various investment advisors for investing in policies/ instruments for saving taxes.
However, before making a choice among various available instruments, it is worthwhile to assess the purpose of investment, deductions available under the Income Tax Act, 1961 (the Act) and the taxability of returns available in future years.
While return from an investment is an important consideration for making an investment, tax benefits form equally important criteria for the taxpayer to select a sound investment. From a tax perspective, investment avenues could be in the form of pension, insurance or instruments that qualify for deduction under section (u/s) 80C of the Act.
Some of the key instruments where one can invest for claiming deduction u/s 80C of the Act, up to Rs 1.5 lakh could be in Public Provident Fund (PPF), Life Insurance Corporation (LIC) Premium, National Savings Certificate (NSC), Sukanya Samriddhi Yojana (SSY), Unit Linked Insurance Plans, Equity Linked Savings Scheme (ELSS), Senior Citizen Saving Scheme (SCSS) and 5-year fixed deposits with banks (FD) can help taxpayers claim deduction under section 80C of the Act.
While investment in the above instruments would qualify for deduction up to Rs 1.5 lakh, the income/ maturity proceeds from most of the above investments are exempt except in following cases:
National Pension Scheme (NPS)
NPS is a “defined contribution”-based pension system, was launched by the government of India with the intent to create a pensionable society. Under NPS, a taxpayer can invest money in pension account with the option of taking part of the corpus as lump-sum and the remaining in form of fixed monthly income.
-Tax deduction/exemption available under the Act: Employer contribution is exempt subject to a limit of 10 percent of salary (Basic + Dearness Allowance). Deduction in respect of employee’s contribution is allowed up to 10 percent of Salary (Basic + DA) subject to an overall cap of Rs 1.5 lakh.
For self-employed, taxpayers are eligible for tax deduction up to 20 percent of gross income within the overall ceiling of Rs 1.5 lakh.
An additional deduction is allowed for an additional contribution in the NPS account subject to a maximum investment of Rs 50,000 for both employee and self-employed contribution.
-Taxability at the time withdrawal: Upon attaining the age of 60 years, subscribers are allowed to withdraw 60 percent of the corpus out of which presently 40 percent is tax exempt.
However, the government has proposed to make the entire 60 percent to be exempt. The said amendment is likely to come into effect from the tax year 2019-20. Remaining 40 percent is compulsorily required to be invested in monthly pension annuity plan.
Health insurance plans
By investing in medical insurance of self, spouse and dependent children, a taxpayer can claim a deduction of Rs 25,000 and Rs 50,000 for medical insurance of parents above 60 years u/s 80D of the Act. The overall cap on the deduction for an individual assesse who is not a senior citizen and whose parents are senior citizens would be Rs 75,000.
It is important to note that planning for tax saving should not be looked at in isolation. A taxpayer must align his larger investment plan with tax saving instruments to optimise returns. Though this should be done at the start of the financial year, it is still not too late to start now so as to avail the benefit before the year-end.
Authors, Divya Baweja is Partner, Deloitte India; and Divya Grover is Manager with Deloitte Haskins and Sells LLP.
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