Tax planning is not something that you should keep for the last minute. It is a time-consuming process and needs to be carried out well in advance. There is a fair amount of research, studying, and scheduling involved.
As a part of your tax planning, you not only have to know about all the allowances and deductions on your pay-slip, but you also need to be well aware of the exempted and taxable portions of your salary and expenses.
How can you save tax & what are the expenses that are tax exempted?
You should know that not only your investments but also certain expenses that you incur are exempted from your taxable income. This necessitates that you record and monitor all your expenses. Thus, you will also be able to identify and eliminate unnecessary expenses and manage your finances in a better manner.
- Children Education Allowance : The first of such expense is the tuition fees for two children. These are exempted from your taxable income under Section 80C of the Income Tax Act. This comes as a relief to parents, particularly when the costs of education are rapidly rising.
- EMI: The other such expense is the equated monthly installment (EMI) of your home loan. There are two parts thereof, the principal and the interest on Pre-EMI.
If you have purchased a house that is under construction, then the builder will be paid the purchase price of the house on a piecemeal basis related directly to the completion of the construction. On the disbursed amount, the lender charges interest. In order to avoid paying this interest, you may pay pre-EMI that will be equal to the interest amount. This pre-EMI is exempt from your taxable income under Section 24 of the Income Tax Act. You may claim the exemption in five equal installments from the year in which you gain possession of the house. This exemption can only be availed if you are living in the same house and not renting it or keeping it vacant.
If you purchase a ready-to-move-in house and pay regular EMIs, the principal portion of the EMI is tax exempt under Section 80C of the Income Tax Act.
3. Life insurance premium payment: You can claim the tax deduction on premium payments made for Life Insurance policies. The premium should be up to 20% of the sum assured for policies issued prior to March, 2012 and 10% for policies issued post March, 2012.
4 Provident Fund: If there is a deduction/contribution to Employees’ Provident Fund (EPF), then you can claim the same for exemption under Section 80C. It is generally 12% of your basic salary.
A maximum of INR 1.5 lakh per annum can be exempted under Section 80C of the Income Tax Act, whether invested/spent on a single instrument or multiple avenues. However, you may not have to invest all of this in tax-saving options. Let us understand this with an example.
|Tax Deductions||Amount (INR)|
|Children’s education (for one child)||20,000|
|Balance Amount to be invested||5,000|
How to save tax by investing in mutual funds?
Having accounted for the expenses you may want to know the best investment options to save tax. A common question you may have is—how to save tax by investing in mutual funds? Before understanding this, remember what mutual funds are. Asset management companies (AMCs) collect monies from multiple investors. The entire corpus is then invested in different asset classes such as debt, equity, and money market instruments.
Having accounted for all of the above exemptions, if you are still short of claiming the entire INR 1.5 lakh under Section 80C, then Equity Linked Savings Scheme (ELSS) is one of the best investment options to save tax. The amount invested is locked-in for three years. In addition to the investment amount, the earnings on maturity are also exempted.
There are other avenues as well that may help you claim tax exemption such as Public Provident Fund (PPF), National Pension System (NPS), National Savings Certificates (NSC), and others. However, ELSS earns significantly higher returns when compared to these options.
Several ELSS funds are available for investment and choosing the right one is critical. In addition to know how to save tax by investing in mutual funds, it is equally important to know about which funds offer the best growth opportunities. Several service providers offer recommendations and comparisons to help you make informed decisions.
How can Angel Bee help you to save tax?
Angel Bee is a service provider and has recently launched a proprietary ARQ investment engine that carries out a detailed analysis of all the funds and provides recommendations that are free of human bias. ARQ runs on advanced algorithms, quants, and portfolio tracking mechanisms to provide technology-driven investment decisions.
If you are looking for tax saving options or simply seeking wealth accumulation options, you need to carry out detailed research and gain a clear understanding of your own finances and budgeting. Your search engine with the ARQ investment engine offered by Angel Bee helps you plan your investments in a systematic manner with the use of superior technology.
Download the Angel Bee app and start investing wisely.