Tax-efficient investments for the salaried
The Financial Express
Senior Tax Professional
Ernst & Young
For a salaried individual, the Income-Tax Act, 1961, provides various tax-saving investment tools where a taxpayer can park his income, which will not only reduce his tax liability, but also create wealth for his financial needs in the future.
An investment of up to R1 lakh in various schemes, such as Public Provident Fund, fixed deposits (5 years or more), National Savings Certificate of India Post, life insurance from registered insurance companies and mutual funds, as specified under Section 80C of the Act are tax-effective. A taxpayer can save up to R 30,900 if he falls in the highest tax bracket, by investing the full amount under the Section.
Apart from Section 80C, the Act also provides deduction for incurring expenditure for specified purposes like donations, medical insurance and specified diseases. An individual may also opt to contribute a part of his salary (up to 24% of basic salary) to the Provident Fund (PF) through his employer. The employer’s contribution of 12% is not taxable in the hands of the employee and the employee’s own contribution of 12% is allowable as deduction under Section 80C (up to R1 lakh). Moreover, besides being a safe investment option with guaranteed returns, withdrawal from Provident Fund is not taxable if specified conditions are satisfied.
Further, an individual can use loan as a tool for generating wealth as well as saving tax, housing loan being the classic example. While on one hand, it helps in creating an appreciating asset, on the other, it reduces the tax liability, as the principal repayment of housing loan is allowed as deduction under Section 80C of I-T Act (up to R1 lakh) and interest is allowed as deduction while calculating the house property income. Similarly, interest paid on higher education loan is also tax deductible under Section 80E.
A salaried person can also invest in equity shares and/or equity-oriented mutual funds (where investment in equity is 65% or more) as the regular dividends one gets on these are tax exempt under Section 10(34) & 10(35). Also, gain on sale of above instruments are tax exempt, if one sells them and pays securities transaction tax (STT) after holding them for more than a year. In case of short-term holding, the tax rate is only 15% against the highest tax slab that the individual is subjected to.
Views expressed are personal