At the beginning of every financial year, two words that make every corporate employee sweat are “Investment Declarations”. Deep, almost always disturbing thoughts and questions pop up in the mind – Where do I invest? How do I save most? What receipts do I need? Well, here is an attempt to break down the basics of Tax Saving Investments:
House Rent Allowance (HRA)
HRA is the most common, and widely used, vehicle for tax savings. Tax Exemption on HRA would be the least of the following three:
a. HRA allotted to you by the company
b. 50% of (Basic + Dearness Allowance) (in case of metros – Delhi, Mumbai, Kolkata or Chennai) or 40% of (Basic + Dearness Allowance) (for all other cities)
c. Actual Rent Paid minus 10% of (Basic + Dearness Allowance)
Since most of the companies do not provide Dearness Allowance, only basic gets considered for all the above calculations. Lets try and understand HRA with an example:
Lets assume you are paying rent in Delhi of INR 15,000 per month. Your (Basic+DA) is INR 20,000 per month and HRA is INR 10,000 per month. Then the three options would be as below
a. HRA given to you by the company i.e. 10,000
b. 50% of (Basic + Dearness Allowance) i.e. INR 10,000
c. Rent paid minus 10% of (Basic + Dearness Allowance) – INR 15,000 minus 10% of 25,000, i.e. INR 12,500
Thus HRA that would be exempted for tax would be INR 10,000 per month.
If in the above you were paying rent of INR 12,000 per month in Bangalore, your exempted HRA would have been INR 8,000 (since least amount would have been 40% of your Basic and Dearness Allowance i.e. INR 8,000).
A point to note, if your company is not giving you HRA as part of the salary, then the exemption would be 0. So make sure you have these discussions before accepting any offer.
While HRA can only be used by people who live in rented accommodation, 80C section impacts almost everyone. Max 80C exemption is INR 150,000 and some of the common instruments in 80C are:
- Employee contribution to Employees’ Provident Fund – This amount gets deducted from your salary on a monthly basis, and is exempted from tax up to the limit of 80C. In case your contribution is more than the 80C limit, you really do not need to invest in any of the other instruments of 80C
- Life insurance premium – Premium paid towards life insurance for you, your spouse or your children, is tax exempt, up to the max limit of 80C
- Contribution to Public Provident Fund in your name, in your spouse’s name or in the name of any of your children
- Subscription to National Savings Certificates
- Contribution for participation in Unit-linked Insurance Plan of UTI in your name, in your spouse’s name or in the name of any of your children
- Towards Mutual Funds (Equity linked saving scheme) – Kindly note that before purchasing any of the Mutual Funds, you have read the terms and conditions, and that these terms and conditions mention 80C benefit. Also, there is a lock-in period of 3 years for any such scheme
- Term deposits for a fixed period of not less than 5 years. Make sure you check with the bank for 80C benefits before depositing the money for term deposit
- Tuition fees paid by you to any college/school within India, for full time education of your children. This amount is applicable only for 2 Children.
- Principal repayment for any home loan taken by you
- New Pension Scheme (NPS) allows an additional exemption of INR 50,000 over and above INR 150,000. While this sounds lucrative in terms of tax savings, there are withdrawal restrictions on NPS. In addition while you get tax benefit right now, the withdrawal amount is taxable based on your tax slab during the withdrawal.
In case you have taken medical insurance (over and above what is provided by your companies) for self or dependents, you can enjoy tax benefit on the same based on below deductions.
- Premium for self, spouse & dependent children up to INR 25,000. In case you, or your spouse, are more than 60 years old, the exemption is up to INR 30,000
- There is deduction of INR 25,000 (INR 30,000 in case either of the parent is more than 60 years old) available in case you have medical insurance for your parents, over and above the amounts mentioned in the table.
Thus if you are purchasing medical insurance, make sure you are able to segregate the premium paid for self, and premium paid for parents in order to have a cumulative tax benefits on INR 50,000 to INR 60,000
Note – In some companies, employees pay some portion of the insurance premium towards, either for themselves or for parents. If that applies in your case, you can avail the 80D benefit, up to the amount which you pay towards such premium.
Education Loan Interest repayment (Section 80E)
In case you are repaying education loan, the entire interest being paid is exempted from taxes under section 80E. Max period for tax benefit is 8 years, though. Needless to say that if you pre-pay the loan in 5 years, there is no benefit.
Note – the above benefit is only on interest repayment, and not on repayment of principal
Housing loan Interest Repayment (Section 24)
While repayment of Housing Loan principal gets covered under section 80C, section 24 provides exemption on the interest component. Till last year, there were separate limits for self-occupied (INR 200,000) or let-out (no limit) properties. In this union budget, both have been brought under the same limit of INR 200,000. In order to claim the benefit, you have to have the loan in your name as well as you should be the owner of property. In case of joint loan and ownership, each of the co-owners and co-borrowers can claim this exemption on the amount equivalent to their ownership proportion.
For example: If you and your spouse are co-borrowers as well as co-owners (50:50) of your property, and your overall interest paid in a year is INR 400,000, both of you can avail exemption of INR 200,000. In case overall interest is less than INR 400,000, each of you can only claim 50% of the overall amount. If your total interest is above INR 400,000, the exemption would still be maxed at INR 200,00 only
Thus in essence if you invest wisely you can save tax on at least INR 400,000 of your overall taxable income. There are other vehicles which the employer provides like Medical Reimbursements, LTA, Food Coupons, Transport allowance, which are part your salary, and end up providing tax exemptions, if relevant bills are submitted. You should look at using most, if not all, of these to ensure you reduce your tax liability. You should invest not only for saving tax but also for a brighter future.
If you have any further questions related to Tax Saving investments, comment below or write to us at firstname.lastname@example.org. We will try to get your questions answered individually!