Plan your tax savings to get maximum benefits

We are in last quarter of FY 2022-23 / AY 2023-24 and you should complete your tax planning for the year by 31^st March 2023. Different sections of Income Tax Act of 1961 can help you reduce your tax obligation and save taxes by claiming deductions from your gross taxable income. In this blog post, we will discuss about two such sections – Section 80C and Section 80D.

Tax savings under Section 80C

Section 80C of Income Tax Act allows investors to claim deductions from their gross taxable income by investing in certain tax savings schemes eligible u/s 80C. The maximum deduction in one financial year that you can claim u/s 80C is Rs 150,000. In other words, you can save up to Rs 46,800 in taxes in a financial year by investing up to Rs 150,000 in 80C schemes. The tax savings schemes can broadly be categorized as the following:-

• Government small savings schemes eligible for 80C deduction e.g. Employee Provident (EPF), Voluntary Provident Fund (VPF), Public Provident Fund (PPF), National Savings Certificate (NSC), Senior Citizens Savings Schemes (only for senior citizens), Sukanya Samriddhi Yojana (only for parents of girl children).


• Tax saver 5 year Bank Fixed Deposits.


• Life insurance plans - traditional (e.g. endowment, money back, term plans) and unit linked plans (ULIPs).


• Tax saver mutual funds or Equity Linked Savings Schemes (ELSS). Equity Linked Savings Schemes are diversified equity mutual fund schemes with lock-in period of 3 years.
  
  You may like to read be it a tax saving exercise or a wealth building one we have ELSS as a pillar of strength

In addition to the above, the principal component of Home Loan EMIs and children’s school tuition fees also qualify to be claimed as deduction under 80C, subject to the overall cap of Rs 150,000 for a financial year.

Which 80C scheme is right for you?

You should base your investment on the following factors:-

• Your investment objective – capital appreciation or income


• Your risk appetite


• Your liquidity needs


• Tax consequences of your investment

Why invest in ELSS?

ELSS is one of the best tax saving investment options under Section 80C for investors with high risk appetite looking for wealth creation over long investment tenures. Historical data shows that equity is the best performing asset class over long investment horizons. ELSS is also the most liquid investment option under Section 80C. ELSS has lock-in period of 3 years, whereas your investment will be locked-in for minimum period of 5 years or longer in other 80C investment options. There are no penalties for ELSS redemptions after the lock-in period. ELSS is also one of the most tax efficient investment options under Section 80C. Capital gains of up to Rs 100,000 from ELSS in a financial year are tax exempt and taxed at 10% (plus applicable surcharge and cess) thereafter.

Suggested reading why ELSS works not just for tax saving but also wealth creation

Additional tax savings under Section 80 CCD (1B)

In addition to the Rs 1.5 lakh deduction that you can claim under Section 80C (as discussed above), you can claim an incremental deduction of up to Rs 50,000 from your taxable income u/s 80 CCD (1B) by making contributions to in Tier 1 account of National Pension Scheme (NPS). Tier 1 account of NPS does not allow premature withdrawal before retirement (60 years of age). You can open a Tier I NPS account, with a deposit of Rs 500. You can claim tax deductions of up to Rs 50,000 from your taxable income under Section 80CCD, over and above the deduction of Rs. 1.5 lakh available under section 80C,by investing in Tier I account of NPS. As per NPS rules, you can withdraw up to 60% in lump sum on maturity. This withdrawal is totally tax exempt, making NPS an extremely tax efficient investment option. The remaining 40% must be re-invested in purchasing annuities (annuity is a fixed monthly sum received by the investor).

Tax savings under Section 80D

Medical insurance premium for self, spouse, dependent children and parents are eligible for deduction under Section 80D of the Income Tax Act. The maximum allowable deduction is Rs 25,000 (for tax payers below 60 years of age) for self, spouse and dependent children. If the taxpayer (below 60 years of age) pays for medical insurance of parents who are senior citizens, then he or she can claim an “additional” maximum deduction of Rs 50,000. In total, the maximum deduction which tax payers under 60 with senior citizens parents can claim, if they are paying for medical insurance of self, spouse, children and parents, is Rs 75,000.

However, if your parents are not senior citizens, then a maximum of Rs 25,000 can be claimed as additional deduction for your parent’s medical insurance. In that case, the maximum deduction which tax payers with parents below 60 can claim, if they are paying for medical insurance of self, spouse, children and parents, is Rs 50,000.

If you are a senior citizen then the maximum allowable deduction u/s 80D for purchasing medical insurance is Rs 50,000. If you are a senior citizen and are paying for medical insurance for your parents, then you can claim an “additional” maximum deduction of Rs 50,000. In total, the maximum deduction which a senior citizen with surviving parents can claim, if they are paying for medical insurance of self, spouse, children and parents, is Rs 100,000.

Conclusion

Paying taxes is not just our legal obligation as citizens of this greatcountry; it is also our contribution to nation building. However, certain provisions under Income Tax Act allow us to save taxes which many taxpayers are unable to avail either due to lack of awareness or poor planning. In this blog post, we discussed the various provisions under Section 80C, 80 CCD (1B) and 80D under which you can save a considerable amount of tax. Tax savings is not the only benefit; you can also plan for your future (e.g. retirement, children’s education etc) and risk protection for your family by utilizing the provisions of tax savings under Income Tax Act.