Ask Tax Saving Questions & Get their Answers

Let’s accept Taxation is the most confusing topic in personal finance – there are a couple of reason for the same: many tax laws are ambiguous in India, new sections 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 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 best of our knowledge.

Tax Saving Questions

  • Tax Saving QuestionsHow can one align tax savings with financial goals?
  • What should be the approach to tax 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?

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

Ask Question on other personal finance topics (more than 500 Questions answered)

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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 overall strategy or not.

Tax Planning and Setting of Financial Goals should be an integral part of financial planning. When one is investing in products to save tax, 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 year 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 tax. If you have dependents, buy a term insurance policy and medical insurance else look at other avenues of saving tax. 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 round the corner.

ReadELSS – best tax saving instrument?

2) What should be the approach to tax savings?

You should think about saving tax at the beginning of the financial year. You cannot act in a haste and buy a few random products to fulfil 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 the 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 a 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.

Check7 reasons you can get an Income Tax Notice

3) How can one save taxes by combining home loan with 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%)

DetailsAmount
Home Loan AmountRs. 50,00,000
EMI Principal+Interest payable (Rs. 2,32,185 + Rs. 3,17,335)Rs. 5,49,520 per annum
Amount payable by eachRs. 2,74,760
Total Tax 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
Tax 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 ArticleUnderstanding clubbing of Income & blunders people make

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

Health is wealth. Getting a 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 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 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 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 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 tax 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.

ReadHow to save capital gain tax on Property Sale

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

IncomeTax RateTax Payable
Up to Rs. 2,50,0000%0
Rs 2,50,000 to Rs 5,00,00010% on the difference between 5,00,000 and 2,50,000Maximum of Rs. 25,000 + 3% cess on tax payable
Rs 5,00,000 to Rs 10,00,00025000+ 20% on the difference between 10,00,000 and 5,00,000Maximum of Rs. 1,25,000  + 3% cess on tax payable
Above Rs. 10,00,0001,25,000 + 30% on the difference between total income and 10,00,0001,25,000+ 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 tax 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 tax 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.
  1. 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.
  2. 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 tax payable.

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 tax. Check – ESOP Taxation

Tax Saving via loans

You can claim deduction for interest paid on education loan and interest and principal paid on home loan. 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 deduction for maximum investment of Rs. 50,000. You should have knowledge of the equity market and have the 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 component. 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.)
5,00,00025750
10,00,0001,28,750
20,00,0004,37,750

 

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

1,28,750Claim 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

4,37,750Claim 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

How to Save Maximum Tax

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.

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Hemant Beniwal is a CERTIFIED FINANCIAL PLANNER and his Company Ark Primary Advisors Pvt Ltd is registered as an Investment Adviser with SEBI. Hemant is also a member of the Financial Planning Association, U.S.A and registered as a life planner with Kinder Institute of Life Planning, U.S.A. He started his Financial Planning Practice & TFL Guide Blog in 2009. "The Financial Literates" is a dream & mission to make Indians Financial Literate.

17 COMMENTS

  1. Very good explanation of various tax saving instruments.
    If I invest in ELSS, will the benefit under section 80C available for 1 year or three years. For eg: if I invested 50,000 in 2016 under ELSS and I already claimed benefit in 2016. Is it possible to claim benefit under section 80C in 2017 and 2018 as well on the investment of 50,000 in 2016.

    • Hi Sourabh
      No, you can avail the benefits of the 80C deduction for only one financial year i.e. the year in which contribution is made.

    • Hi Samir
      As per Section 10(10D) of the Income Tax Act, 1961 the amount of sum assured plus any bonus (i.e. the policy proceeds) paid on maturity or surrender of policy or on the death of the insured are completely tax-free for the receiver.

  2. Kindly advise if there is a limit on Employer’s Contribution to PF being tax free or is the entire Employer’s Contribution to PF tax free?
    Read on some site that an amendment was introduced in the Finance Bill, 2016 to make any Employer’s contribution above of Rs. 1.5L taxable in the hand of employee and hence the doubt.

    • Hi Gaurav
      If an employer contributes over and above 12% of basic pay of Employees salary than it will directly be added to the Income of the Employee.

    • Hi Gourav
      Employer Contribution: 13.61 % (8.33% towards Pension, 3.67% towards PF, 1.10% towards ULDI (linked Insurance) and 0.51% towards administrative charge) of the Pay/Basic Salary.

  3. Dear Sir,
    I prematurely exited from NPS. On exit I received 80% of the remaining corpus, amounting to around RS 25,000/- (20% of which I had already withdrawn, on which I paid tax also).
    Please tell me what is my tax liability on this amount, and how to calculate tax on this amount and how and where to show this in ITR 2 form. I fall in the 10% tax bracket.
    Faithfully, yours
    Sanjay k srivastava

  4. I am 23 years old and my first job is in PSU and I am earning Rs 44000 PM and I am looking for some tax saving option and currently I am only operating one PPF account. Please advise me some other tax saving investment for long term benefit?

    • Hi Mridul
      You can invest in NPS, ELSS, NSC, Tax Saving FDs etc…for 80C deduction.
      And you must take a term Insurance(80c deduction) and Medical insurance(80D deduction).

  5. I wanted to understand the tax computation for the following scenario:
    Mutual fund folio is in my wife’s name (single holder) however the money being invested would come from my account. In this case, who will be liable to pay the tax in case of returns from the mutual fund? Will it be my wife or will it be me?

  6. Dear Sirs, Good Morning.
    Request to please do guide me on the next : I am paying tax on highest slab in India.
    How much amounts I can pay to my wife, daughter, son every year as gift ( Bank draft or transfer from my account to their account) to save tax.
    Best Regards,
    Surjeet Singh

  7. My daughter who is studying has been given gifts oh his qualifying exams amounting to rs 3 Lacs in the year 2013 which she deposit in a bank for 3 year fd.the bank on maturity has deducted 10 percent TDs as she has a Pan card.however she has not file return for any year as she has no any income except some pocket money and gift money.now my question is whether she has to file return and can she claim for a refund.

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