Taking the road less travelled is a saying that one normally associates with travel to distant places. However, interestingly, this saying can also have a financial perspective – and for taxes.
We are all familiar with the high profile tax savings methods like tax saving bonds, ELSS, etc. But what about lesser famous options to save the pennies in your pocket?
“Investing (in tax savings options) is only one part of sound tax management. However, the important part that doesn’t receive due attention is how you manage your spending," says Sujit Bangar, Founder Taxbuddy.
Income tax laws allow for several deductions from your taxable income for certain expenditures that you make.
An example is the payment of children’s tuition fees, health insurance premiums, repayment of home loans, education loans, and house rent are expenses that qualify for a tax deduction.
“Unfortunately, many taxpayers are not aware or don’t put in the time to understand these aspects of tax management, and they end up paying tens of thousands of their money in taxes, which they could have saved easily," points out Bangar.
People often assume that tax saving is only about investing money in tax-saving products. It happens because much of the marketing effort goes into attracting your attention to products like ELSS, tax-saving fixed deposits, insurance policies, etc.
Coming back to the topic, rent is often a substantial portion of total expenses for many people. The income tax law allows a tax exemption for this expense under different scenarios.
One such overlooked opportunity lies in pension.
“Additional tax benefit available to NPS (National Pension Scheme) under section 80 CCD (IB) to the tune of ?50,000 seems to be underutilised," says Shaily Gang, Head – Products, Tata Asset Management.
Salaried individuals under the NPS Corporate model also get a tax benefit on account of employers' contribution to NPS up to 10% Basic + DA of the employee.
“This is quite underutilised," says Gang.
The maximum permissible benefit in case of Employers' contribution towards PF, Superannuation, and NPS is ?7.5 lakhs contribution and beyond which tax benefit is not available.
In case of contribution by the employee, interest under EPF contribution including VPF now gets taxed beyond contribution of ?2.5 lakhs in a financial year, as announced in Budget 2021.
Saving and investing in children's education should be a goal but you might still have some funding left to be done vide taking an education loan. Great to have a separate section to claim deduction on the interest rate part of the EMI paid, available for 8 years from repayment year. Many might miss the point that there is no limit to the maximum amount allowed.
Mediclaim should be initiated as a protection cost against hospital admission expenses in case of unforeseen diseases and medical ailments. Tax deductions are available under section 80D for when paid for self and for parents.
“Despite our fascination for saving taxes, there are some obvious avenues that tend to go unutilized. This primarily happens because most investors fail to look beyond Section 80C," says Mayank Bhatnagar, Chief Operating Officer Finedge. He gives us some lesser-known options.
Section 80D: With rising medical costs and lifestyle diseases, inadequate health insurance can prove costly. Just one medical emergency could potentially set your financial plan back by years! Aim for a reasonable cover and keep renewing your policy religiously even if you have a corporate Mediclaim plan in place. Your health insurance premiums are deductible under Section 80D, up to Rs. 25,000 per financial year.
Section 80CCD (1B): By investing up to Rs. 50,000 per annum in the NPS (National Pension Scheme), you can claim a deduction of the same amount over and above your 80C limits. Though it’s a definite step up from other traditional tax saving avenues such as life insurance or PPF, the NPS does have its limitations in terms of fund performance compared to similar category mutual funds, caps on equity allocation, and the forced purchase of a low yielding annuity with a large chunk of the corpus at the end. So, the NPS should not replace your annual ELSS investment but rather augment it by allowing you to claim an additional deduction beyond 80C.
Section 24: The interest part of your home loan is tax-deductible under Section 24. Given that the maximum tax deduction allowed is ?2 lakhs per annum (an interest of Rs. 16,700 per month), you can potentially reduce your tax burden by around ?62,000 per annum in taxes (if you are in the highest tax bracket). Obviously, one should not take up a home loan purely to save taxes, but if you have one running, make sure that you take advantage of the tax deductibility of the interest component.
Section 80G: Do you have a social cause that’s close to your heart, such as educating less privileged children or animal welfare? Section 80G of the Income Tax Act provides for a deduction for donations made to certain charitable institutions, of up to 100% of the amount donated. The donee institution must be a registered charitable institution for you to be able to claim the deduction.
As a taxpayer, you need to explore all such tax-saving options to determine what works best for you. “The more prepared you are with the tax laws, and the sooner you act on them, the better are your chances of minimising your tax outgo," says Bangar.
“Apart from saving taxes, two underrated benefits of planning taxes are increasing disposable cash in hand and growing wealth!," says Bangar.
While approaching tax planning, you should ascertain how much taxes have already been saved by you.
During the normal course of our daily life, we do many things and those have tax-saving implications.
For example, we pay tuition fees for kids, do health and life insurance, have regular health checkups and maybe there is a home loan. All these activities are saving taxes for us unknowingly.
After this, we can have an idea of how much of the tax saving bracket of ?150K from 80C has remained unutilised. For this remaining portion of 80C, one can look towards ELSS as an option for tax-saving investments if the age is in 20s or 30s.
“Otherwise PF is also a good option," says Bangar.
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