Ask Tax Saving Questions & Get their Answers

Let’s accept Taxation is the most confusing topic in personal finance – there are a couple of reasons for the same: many taxes laws are ambiguous in India, new sections are introduced every year & the biggest is a blurred line between tax saving, vs tax avoidance vs tax evasion.   We keep getting questions on Tax Saving – especially at the end of the financial year. That’s the reason we are adding this post. Go through the most common questions that we get & feel free to add your questions in the comment section – we will try to answer with the best of our knowledge.

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  How can one align tax savings with financial goals?
• What should be the approach to taxes savings?
• How can one save taxes by combining home loan with spouse (example or illustration)  
• Where does health insurance sit with respect to tax planning?
• What is your view on NPS and the additional tax benefits that one can gain from it?
• Advice to 10%/20%/30% tax payers on optimum tax savings
• What is the maximum sum that one can save by way of tax planning for each tax bracket?

A few of my tax quotes were also got published in Outlook Money’s Taxes Saver 2016-17  cover story…

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Financial Planning Questions

1) How can one align tax savings with financial goals?

Always remember your tax saving should be the result of your investment planning & not vice versa. This means first we make our goals, make a plan for it, then choose an investment strategy and after that, we see that can any tax-saving instrument can become part of the overall strategy or not.

Tax Planning and Setting Financial Goals should be an integral part of financial planning. When one is investing in products to save taxes, he/she should keep the financial goals in mind. A lot of tax gets saved by EPF contribution and home loan amount. One should then think of financial goals, asset allocation, current life situation and risk profile. For short-term goals, one can invest in 5 years FDs. For long-term goals, like children’s higher education, one can invest in PPF. Invest in ELSS if you have the risk appetite for equity investments. Do not buy insurance just for saving taxes. If you have dependents, buy a term insurance policy and medical insurance else look at other avenues of saving taxes. Ensure that you plan your finances at the beginning of the financial year and your investment decisions are in place. Do not make investments when the due date for filing tax returns is just around the corner.

Read – ELSS – best tax saving instrument?

2) What should be the approach to tax savings?

You should think about saving taxes at the beginning of the financial year. You cannot act in a haste and buy a few random products to fulfill the 80C deductions. Your financial plan will be a mess and not help you reach your financial goals.

You should consider the various options available and select the ones that suit your current financial status with short-term and long-term goals in mind. Use default deductions like EPF, Tuition Fees, LTA, Medical Allowance. Use the housing loan deductions wisely. Invest in products that will give you a balanced exposure to equity and debt based on your risk profile & asset allocation. Purchase insurance such that suits your current life. For example, you need not buy term insurance if you are single without any dependents even if the sales person says that the premium is really low. You might be better off buying medical insurance for yourself.

You should educate yourself on personal finance and if needed, take the help of a professional financial adviser and plan your taxes in a disciplined manner.

Check – 7 reasons you can get an Income Tax Notice

3) How can one save taxes by combining a home loan with a spouse (example or illustration)

You can get a bigger loan amount if you borrow jointly with your spouse. A joint home loan also helps in getting more benefits under the Income Tax act.

Here is an example.

Mr. Jain and his wife take a joint loan of Rs. 50,00,000 with a 50% share each. Let us assume that both are in the highest income tax slab. (Tenure 20 Years & Rate 9.25%)

Details	Amount
Home Loan Amount	Rs. 50,00,000
EMI Principal+Interest payable (Rs. 2,32,185 + Rs. 3,17,335)	Rs. 5,49,520 per annum
Amount payable by each	Rs. 2,74,760
Total Taxes Deduction for the Jains under Section 80C in the first year (Maximum benefit in case of individual 1.5 Lakh).	Rs. 2,32,185 or Rs. 1,16,092 each
Taxes Deduction for the Jains under Section 24 in the first year (Maximum benefit in case of individual 2 Lakh).	Rs. 3,17,335 or Rs. 1,58,667 each
Total Tax Deduction	Rs.  5,49,520

If Mr. Jain had taken the loan only under his name, he would have got an exemption of only  Rs. 3,50,000 (Rs. 1,50,000 80C + Rs. 2,00,000 Sec 24) as that is the maximum exemption for individual but due to Joint loan they will get additional benefit of Rs  1,95,520

Related Article – Understanding clubbing of Income & blunders people make

4) Where does health insurance sit with respect to tax planning?

Health is wealth. Getting health insurance will ensure your health is protected and at the same time, some amount of taxes can be saved which can be added to your financial wealth.

You can get a total deduction of Rs. 25,000 under Section 80D for health insurance policy taken for self, spouse or dependent children. If you are a senior citizen, you can claim a deduction up to Rs. 30,000. We can add the money saved in taxes to this wealth too.

You can buy health insurance for your parents and claim a deduction up to Rs. 25,000 as premium. If you are 60 years or older and manage to buy premium for your parents, you can claim Rs. 30,000 as a tax deduction

Health insurance is an important tool for tax planning. Health insurance protects your life and also saves taxes for you.

Mutual Fund Taxation in India

5) What is your view on NPS and the additional tax benefits that one can gain from it?

Investment in the National Pension Scheme (NPS) allows for an income tax deduction of Rs 50,000  under Section 80CCD. This is over and above the income tax deduction allowed under Section 80C. The amount in NPS is then invested in various asset classes.

60% of the NPS corpus can be withdrawn when one is 60 years old. The remaining 40% will have to be put into an annuity for a monthly pension. When the corpus is withdrawn, it is taxable. The annuity income earned by the remaining 40% is also taxable. So you are not really saving tax but only deferring it.

If you are in the 30% tax bracket, the total amount of taxes saved if you invest Rs. 50,000 in NPS is Rs. 15,450.

If you do not invest in NPS, you can invest Rs. 22,550(50000-15450) in equity mutual funds and in the long term, the returns will beat the NPS returns as NPS investment is a combination of equity, corporate debt and government.

If you are in the 10% or 20% tax bracket, you have many other options to save tax and invest the surplus amount in equity mutual funds.

Unless there is a scenario where the lump sum amount was withdrawn becomes tax-free or the annuity income becomes tax-free or NPS allows investors to choose to invest 100% of the NPS contribution in equity, NPS is not very suitable as a tax saving option.

In case, the long term capital gains become taxable or the returns on NPS significantly improve, NPS may become a better option as a tax-saving instrument.

Read – How to save capital gain tax on Property Sale

6) Advice to 10%/20%/30% tax payers on optimum tax savings

Income	Tax Rate	Tax Payable
Up to Rs. 2,50,000	0%	0
Rs 2,50,000 to Rs 5,00,000	10% on the difference between 5,00,000 and 2,50,000	Maximum of Rs. 25,000 + 3% cess on tax payable
Rs 5,00,000 to Rs 10,00,000	25000+ 20% on the difference between 10,00,000 and 5,00,000	Maximum of Rs. 1,25,000  + 3% cess on tax payable
Above Rs. 10,00,000	1,25,000 + 30% on the difference between total income and 10,00,000	1,25,000+ 30% on the income above Rs. 10,00,000 + 3% cess on tax payable

Note – From Financial Year 2017-18 – 10% tax slab will be changed to 5%

If you are earning above Rs. 2,50,000 per year, you are liable to pay income tax. There are many options available for reducing taxes payable. Tax evasion is an offense but you can save on tax using these smart measures –

Tax Savings via Exemptions

If you are in the lower I.T slabs, you can save taxes without investing or purchasing assets.

1. You can use the HRA component of your salary. The HRA component can be claimed as exemption. The amount of exemption is the lowest of –
2. Rent paid less 10% of basic salary or
3. 50% of basic salary where the house is situated in any of the four cities of Delhi, Mumbai, Kolkata or Chennai, and

• 40% of basic salary in other cities or (c) actual HRA received, whichever is the lowest.

2. You can also claim exemption on reimbursements such as medical expenses and telephone expenses, conveyance (up to Rs. 1600 per month) and children’s education fees.
3. You can claim exemption on car allowance by opting for company provided car.

If you are in the 20% or 30% IT slab, you can use a combination of exemptions and investments savings to reduce the taxes payable.

Must Check- How to Save Maximum Tax

Tax Savings via Investments

If you do have money to invest, you can invest in retirement benefits such as EPF and PPF to claim deduction.  If you are salaried, EPF might already be existent. The maximum limit for deductions claim under Section 80C is Rs. 1,50,000.

If you cannot invest in such retirement benefits, you can purchase life insurance and/or medical insurance not only for yourself but for family and dependent parents. Insurance is a must. This will help you satisfying insurance needs and tax-saving requirements.

If you have incurred loss on sale of housing property or shares, this can be set off against the income tax. This helps to make use of the loss and save some taxes. Check – ESOP Taxation

Tax Saving via loans

You can claim a deduction for interest paid on education loans and interest and principal paid on the home loans. The education loan will get paid off along with saving tax. The home loan will help you make a cherished asset and also exempt you from some tax.

If your income is below Rs. 10 lacs, you can take advantage of the clause of  50% of investment in direct equity as a deduction for a maximum investment of Rs. 50,000. You should have knowledge of the equity market and have a risk appetite. Money should be put in equity after taking care of EMIs and insurance. The investment will be subject to 3 years lock-in.  The benefit will be available for 3 consecutive years.

If you are in the 30% slab, it makes sense to invest in a house. As you grow older, you will need a place to stay and more investments to save taxes. You can also increase your investments in PPF and invest in ELSS. This will make sure your portfolio has debt and equity components. You will earn returns and save taxes.

For NRIs – Use DTAA as a Tax Planning Tool

7) What is the maximum sum that one can save by way of tax planning for each tax bracket?

Let us assume three people –

Mr. Rohan who is earning Rs. 5,00,000 p.a.

Ms Sindhu who is earning Rs. 10,00,000 p.a.

Mr. Paresh who is earning Rs. 20,00,000 p.a.

Income (Rs.)	Tax Payable (Rs.)
5,00,000	25750
10,00,000	1,28,750
20,00,000	4,37,750

 

Tax Payable (Rs.)	Sum saved by tax planning
25750	Claim HRA or Deduction for Interest on Home loan  – Rs. 96,000 (40% of basic salary that is assumed to be Rs. 2,40,000) and Take medical insurance for self for Rs. 20,000 and for parents for Rs. 30,000. Total Tax Liability will be nil
1,28,750	Claim basic deduction of Rs. 2,50,000 Claim deduction for Rs. 1,50,000 under Section 80C Pay medical insurance for self for Rs. 20,000 and for parents for Rs. 30,000 and claim deduction under Section 80D Claim deduction for Investment in Equity Savings Scheme for Rs. 25,000 Claim Rs. 2,00,000 for Interest payment of home loan Claim Rs. 10,000 for Interest received Your total tax liability will be Rs. 39,140.   Claim Reimbursement for Medical allowance – Rs. 15,000 and Transport Allowance – Rs. 19200 and LTA – 20,000, Fuel Reimbursement – Rs. 21600  and save 20% on that – Rs. 15160   Tax Liability will be Rs. 39,140- Rs.15,160 = Rs. 23,980
4,37,750	Claim basic deduction of Rs. 2,50,000 Claim deduction for Rs. 1,50,000 under Section 80C Claim deduction for Investment in Equity Savings Scheme for Rs. 25,000 Pay medical insurance for self for Rs. 20,000 and for parents for Rs. 30,000 and claim deduction under Section 80D Claim Rs. 2,00,000 for Interest payment of home loan Claim Rs. 10,000 for Interest received Total tax liability will be Rs. 3,11,060. Claim Reimbursement for Medical allowance – Rs. 15,000 and Transport Allowance – Rs. 19200 and LTA – 20,000, Fuel Reimbursement – Rs. 21600  and save 30% on that – Rs. 22,740 Tax liability will be Rs. 2,88,320

Add your tax saving questions in the comment section.  Also, try to participate in the conversations – I think that’s a good way to learn complex topics like TAX.