Wealth Help

Discover Tax Saving Instruments: The Terms You Need to Know for Better Financial Planning

One must admit, the period of Feb to Mar is so crucial in the Finance Calendar. Be it the Budget session in Parliament, the yearly appraisal in every office floor or the Financial year account closing for bankers and every single businessman out there, the adrenaline rush is at the peak for everyone.

In the midst of all these comes the ITR (Income tax return) filing, which gives an immense headache to every new bee at the office. They start to go for ample amounts of unsynchronized research from various handy sources and finally fall prey in the hands of several unnecessary and unsuitable tax-saving schemes.

Many also get very much confused with policies, tax slabs and what not. These all lead to finally affecting Personal finance health so badly that one starts to save less, invest in Ponzi schemes and so on.

However, you do not have to worry much as reading the following article, you can get a clear idea of taxation and will be able to make good financial decisions to save tax.

Without further ado, let's get to know a few basic terms you generally come along during the whole taxation journey.

Income Tax

Income tax is a tax charged on the annual income earned by an individual. The amount of tax to be paid depends on how much money one earns as income over a financial year. Income includes Salary, Short term capital gain, Long term capital gain and so on.

Tax saving

When you declare your investment, you are excused to pay tax for a certain amount (depending on Exemption limit) out of your income.
In the due course you manage to save a chunk of your earnings, which you had to pay as tax in the absence of those investments.

Tax exemption limit

Tax exemption rights enable an individual to have some or all of his/her income spared from taxation. The portion of your salary which can be free of tax can be defined by the exemption limits decided in the Income tax act.
This act is basically designed to inculcate a habit of saving and managing personal finance in a subtle way amongst taxpayers in India.

Income tax slab OLD/New Regime

In the 2020 Budget, the finance ministry of India introduced a new income tax payment regime. Opting for this new regime would mean that one cannot claim several exemptions and deductions, including HRA, LTA, 80C, 80D, and more.
From the financial year 2023-24, the new income tax regime will become the default option. To continue using the old regime, one must submit a form at the time of return filing. It will be possible to switch between the two regimes annually.
The previous tax regime had an abundance of over 70 deductions and exemptions, including HRA and LTA, which could potentially decrease taxable income and result in lower tax payments. Among them, Section 80C was the most favored and lucrative, allowing for a reduction of taxable income by a maximum of Rs.1.5 lakh.

Old Tax Regime

Net Taxable income	OLD Tax Regime income Slab Rates FY 2022-23
Up to Rs. 2.5 Lakh	Exempt
Rs. 2,50,001 to Rs. 5 Lakh	5%
Rs. 5,00,001 to Rs. 10 Lakh	20%
Above Rs. 10,00,000	30%

New Tax Regime

Net Taxable income	NEW Tax Regime income Slab Rates FY 2022-23
Up to Rs. 3 Lakh	Exempt
Rs. 3,00,001 to Rs. 6 Lakh (income limit for tax rebate increased to Rs. 7,00,000)	5%
Rs. 6,00,001 to Rs. 9 Lakh	10%
Rs. 9,00,001 to Rs. 12 Lakh	15%
Rs. 12,00,001 to Rs. 15 Lakh	20%
Above Rs. 15 Lakh	30%

Tax Rebate

This is basically a reduction in the tax amount to be paid by the taxpayers.
A possible revision could be: When taxpayers pay more than their owed income tax, they typically receive a refund. This money is returned at the end of the fiscal year and is referred to as a tax rebate.
Under the old tax regime, taxpayers with an income under 5 lakhs enjoy a tax rebate such that the total tax payment becomes zero after a refund.
A full tax rebate has been declared for the income limit of up to 7 lakhs under the new tax regime.

Tax Saving Instruments

The income tax act provides various tax exemptions sections like popular 80C, 80D, 80EE and so on. However broadly, all the tax saving instruments can be divided into 2 basic types i.e. Investment & Deduction.

In the following table some important tax saving instruments are enlisted based on their type, exemption limit and income tax act section.

The Income Tax Policy
Section	Schemes	Tax saving type	Allowed Limit
80C	Insurance	Deduction	1,5,000
	ELSS	Investment
	Provident Fund (EPF,VPF,PPF)	Investment
	FD(5 yrs)	Investment
	National Saving Certificate (NSC)	Investment
	Child Education (Tuition fees)	Deduction
	Sukanya Samriddhi Yojana (SSY)	Investment
	Home Loan Interest	Deduction
80EE	Home Loan	Deduction	50,000
24(b)	Home Loan	Deduction	2,00,000
80E	Education Loan	Deduction	Total Interest paid
80CCD	National Pension Scheme (NPS)	Investment	50,000
80D	Medical Insurance	Deduction	25,000 (Self) 50,000 (Parents)
16	Standard Deduction	Deduction	50,000
10(13)A	HRA	Deduction	Calculation based
10(5)	LTA	Deduction	36,000
54F, 54EC	LTCG	Investment	Check the heading LTCG below

Insurance

Insurance is a protection from financial loss, in which the insurance company compensates in the event of a certain loss, in exchange of fees paid to them at a regular interval.

There is a prevailing misconception regarding Insurance being an Investment. In fact Insurance is a deduction from your earnings to protect you from future mishappenings.Therefore term life insurance is more applicable than a life insurance earning interest for you.

ELSS

An Equity Linked Saving Scheme (ELSS) is an open-ended (no maturity period) equity mutual fund that invests primarily in equities and equity-related products.

They are a special category among mutual funds that qualify for tax deductions under Section 80C of the Income Tax Act, 1961.

The minimum investment in ELSS is as low as 500. One can also use the SIP (Systematic Investment Plan-means one can choose the investment amount and interval) to invest in ELSS.

Provident Fund

A Provident Fund, also known as a Pension Fund, is a scheme designed to provide employees with a lump sum payment upon their exit from their job. There are three types of Provident Funds, including:

EPF (Employee Provident Fund)

This retirement plan requires employees to set aside a portion of their salary every month to ensure financial stability in their golden years. It is compulsory for salaried individuals employed by organizations registered under the Employees’ Provident Fund Organization (EPFO) to contribute either 12% of their Basic + Dearness Allowance or a minimum of Rs.780 towards the EPF. Additionally, the employer must also contribute to the fund, making it a joint savings initiative.

PPF (Personal Provident Fund)

The government provides a secure fixed income investment scheme for the self-employed and individuals in the unorganized sector. This scheme is called the Public Provident Fund (PPF), which earns compounded interest on the subscription. Not only that, but the accumulated balance in the PPF account is also exempt from wealth tax.

VPF (Voluntary Provident Fund)

The Voluntary Provident Fund (VPF) scheme allows employees to contribute a percentage of their salary to their VPF account, over and above the government-mandated PF ceiling of 12%. This voluntary contribution is entirely at the discretion of the employee, and the employer is not required to contribute any amount towards the VPF.

National Saving Certificate (NSC)

A fixed income scheme that can be opened at a post office is the National Savings Certificate. The scheme is a low-risk product and is secure.

The minimum contribution to this fund is 1000 and there is no limit for maximum ceiling.

Now let’s compare all the above stated investment instruments.

Instrument	Lock in Period	Return	Tax on interest
EPF	15 yrs	8.15%	Tax free
PPF	15 yrs	7.10%	Tax free
VPF	5 yrs	8.10%	Tax free up to 2.5 lakhs
ELSS	3 yrs	Subjected to market risk	10% above 1 lakh gain
FD	5 yrs	7.10%	Taxable
NSC	5 yrs	7.70%	Taxable

Home Loans

Section 80C

One can claim a deduction on the repayment of the principal amount. This deduction includes the charges paid for registration and stamp duty on your home.

Section 24(b)

One can claim a deduction from the gross income on the interest amount paid on Home Loan. For a self-occupied home, deduction of the interest amount up to Rs 2 Lakh can be claimed.

Section 80 EE

If you are purchasing your first residential house property, you can avail a deduction of 50,000 on your interest amount in addition to the above stated deductions.

Education Loans

The interest paid on the education loan, which forms a part of the EMI, can be claimed as a deduction under Section 80E. This deduction is applicable for a maximum of 8 years or until the interest is fully repaid, whichever occurs first. Depending on who is repaying the loan, either the parent or the student can claim the tax benefit.

National Pension Scheme (NPS)

NPS is a voluntary retirement savings scheme laid out by the government of India to encourage everyone for retirement planning.
Every individual irrespective of their nature of employment (salaried, self employed, business person) can invest through NPS by making a defined contribution for securing their after retirement life.
Furthermore NPS enables taxpayers to enjoy an exemption limit up to 50,000.
NPS fund is managed by AMC to invest in the equity & debt market to generate interest according to the risk profiles of NPS account holders.
After retirement, 60% of the whole corpus is tax free and the rest 40% goes into an annuity plan which is taxable.
Before retirement only 20% of the fund can be withdrawn & the rest 80% goes to the annuity plan which accounts for taxation.

Child welfare

Each parent can get tax benefit on the tuition fee paid (Rs 1.5 lakh for maximum) of 2 children separately.

The Sukanya Samriddhi Yojana also comes under the tax saving category & is a good investment if you have a girl child of age 5yrs or less.

Standard Deduction

A standard deduction of 50,000 is available to all salaried employees for claiming as an exemption from their gross salary while computing tax liability. This deduction can be claimed without the need for any investments and is applicable to both the old and new tax regimes. It is available to all categories of salaried employees.

House Rent Allowance (HRA)

HRA is an exemption in income tax covering housing expenses. This includes house rent, utilities (Water, Electricity bills), maintenance & repair work plus furniture cost.
HRA can be calculated in 3 different ways
Actual rent paid
HRA defined in salary
50% of basic salary
The lowest amount among the above 3 qualifies for tax exemption.

Leave Travel Allowance (LTA)

The government encourages every employed individual to travel across India by allowing a deduction up to 36,000 in taxable amount in gross salary.
The travel tickets & food cost of the employee, spouse and children can be claimed in this category.
LTA can be claimed twice in 4 years time interval (the current interval 2022-2025).

Long Term Capital Gains (LTCG)

Long-term capital gains (LTCG) tax is levied on the profit earned from the sale of an asset that has been held for more than 24 months. The applicable rate of LTCG tax varies based on the type of asset being sold.
LTCG tax on mutual funds and stocks is 10% for profits more than Rs.1 lakh in the financial year.
The LTCG tax rate is 20% with an indexation advantage for other assets such as real estate, gold.

However the LTCG/Indexation benefit is removed from debt and gold mutual funds which can be understood from this article.

Saving Tax on Long-Term Capital Gain

Investing in Residential Property - Section 54F.

One can purchase new residential house property to save taxes on long-term capital gains.

Under Section 54, an individual will be exempted from paying long-term capital gains tax if they sell a built-up house and use the capital gain to purchase or construct a new residential property.

The new property has to be purchased either 1 year before or 2 years after the sale of the existing property. If the seller wishes to construct a new property, it must be completed within 3 years of selling the house.

Moreover, the entire capital gain has to be invested in buying the new property if the seller seeks an exemption from tax. Otherwise, any excess amount not utilized to purchase the property will be chargeable for long-term capital gain tax.

Investing in Bonds - Section 54EC

One can also follow Section 54EC to save on long-term capital gains tax by transferring the total amount to acquire bonds issued by NHAI and RECL.

Tax-loss Harvesting

The Short Term Capital Gains (STCG) is subject to taxation of 15%. To get rid of this tax one can offset/ reduce STCG by selling out the stocks in loss.
This practice of selling stocks with unrealised losses and saving tax is known as tax-loss harvesting.
After tax loss harvesting on the last day of the financial year, one can again buy those stocks which can give a good return in the long term.
The only risk in this practice is the price of stock skyrockets before one buys them again.

In the end, be a responsible citizen, don’t follow others in producing forged documents to save tax. There are many tax saving instruments laid out for everyone by the Finance ministry, utilize them the most in fostering your personal finance and be a part in the growth story of India.

Type	Offerings	Invest
Discount Broker	Mutual Funds, Stocks, IPOs, Bonds	Know more
Discount Broker	Mutual Funds, Stocks, IPOs, Bonds	Know more
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