The annual income tax planning season is here again. Thankfully the latest union budget didn’t make any changes in the income tax rules except levying a tax on cryptocurrencies and other digital assets. The proceeds from the sale of cryptocurrencies will now attract a flat 30 percent tax and there will be one percent tax deducted at source (TDS) on all payments made on the transfer of digital assets.
But besides these two changes, which are likely to affect only a handful of taxpayers, other income tax provisions remain unchanged.
We are in the last quarter of FY 2021-22 and most of us will have to start tax planning for the current fiscal year. Here are some ways to lower your tax liability and also create a corpus for your old age or meet any other long-term financial goals.
1. Employee Provident Fund (EPF): The annual contribution to the employee provident fund (EPF) is completely tax-free free under Section 80C. You can save a maximum of Rs 1.5 lakh per annum by investing in a provident fund account. With an annual interest rate of 8.5 percent, EPF is the best way to save tax and create a corpus for your retirement or child’s education in the current macroeconomic environment.
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If the annual contribution to your company’s EPF works out to be less than Rs 1.5 lakh or Rs 12,500 per month, then talk to the people in your organisation’s finance department and raise your (employee’s) share of EPF contribution.
There is no income tax on EPF withdrawal after 5 years, which makes it one of the most tax-efficient means to save and invest for the long term.
2. Public Provident Fund (PPF): If you are self-employed or work in the gig economy with no social security, then open a Public Provident Fund account with one of the top public sector banks. The State Bank of India is the preferred destination for opening a PPF account. A PPF account can also be opened in post offices. Similar to an EPF, PPF is a savings-cum-retirement instrument that aims to provide financial security to people in their old age.
With an annual interest rate of 7.1 percent, PPF is one of the best tax planning and savings instruments available right now. Just like EPF, you can save tax up to a maximum of Rs 1.5 lakh per annum through PPF. But keep in mind that investment in PPF has a lock-in of 15 years but you can avail of a bank loan against your PPF investment from the 3rd year onwards.
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3. Buy a life insurance plan: If you have not secured your life and your earnings by buying a suitable life insurance policy, then this is the right time to buy one. Start with a plain vanilla online Term Insurance Plan from one of the reputed life insurance companies. Term insurance plans provide the highest level of risk cover or mortality benefit for any given premium.
As a thumb rule, the sum assured under the term plan should be at least 10-12 times your current annual income. And if you are ambitious, the sum assured should be equivalent to 20 times your annual income.
For example, if your annual take-home pay is Rs 10 lakh then you should buy a term plan with a minimum sum assured of Rs 1 crore. But if your budget permits you can stretch the sum assured to Rs 1.5 crore.
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Most life insurance companies also offer a single premium plan where you can pay a lump sum premium amount say Rs 1 lakh or more and get a regular pension or annuity either from the second year onwards or after an interval that suits you, say 10 years. These plans are also tax-efficient vehicles to save for your children’s higher education or marriage.
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If you want even higher returns from your investments then consider buying a Unit-Linked Insurance Plan (ULIP). As the name suggests ULIPs invest in high-risk and high-return assets such as equity and bonds. This offers the opportunity to get double-digit returns over the long term, nearly double the returns from the traditional endowment and whole-life plans. But invest in ULIPs only if you can afford to lock in your money for a minimum of 10 years.
4. Invest in Equity Linked Savings Schemes (ELSS) Mutual Funds: If you are done with buying life insurance and medical insurance then consider investing in ELSS mutual funds. Unlike regular equity mutual funds, ELSS has a lock-in of three years and have a longer investment horizon than traditional diversified equity schemes.
The investment in ELSS schemes is tax-deductible under section 80C just like life insurance and PPF investments.
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ELSS give returns higher than fixed income options such as tax-free bank FDs or tax-free post office deposits. ELSS will also suit those who don’t want to wait for 10-years to earn good returns like in ULIPs.
5. Join the National Pension Scheme (NPS): The NPS is tailor-made for those who have exhausted the Rs 1.5 lakh limit of annual tax saving under section 80C that covers investment in provident fund, insurance, ELSS and principal repayment of housing loan.
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For simplicity, NPS is a market-linked retirement scheme that invests in both equity and debt markets. NPS fund managers follow a life-cycle approach which means that younger investors have greater equity exposure and as you grow older, equity exposure decreases and debt exposure increases.
But, remember, the contribution to an NPS account is locked-in until you reach the age of 60. After 60 years of age, you can withdraw a maximum of 60 percent of your corpus while the balance of 40 percent must be used to purchase an annuity scheme from insurance companies. For simplicity, annuities are like pension plans that provide you monthly income till you are alive.
Happy tax planning and investing!
(Advice: This article is for information purpose only. Readers are advised to consult a certified financial advisor before making any investment.)
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).
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