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Your tax-saving action plan

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Your tax-saving
With the tax-saving season just around the corner, all
you need to know to make tax-saving investments
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Your tax-saving action plan
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M
ost of us now will get busy in
finalising our investments to
Tax

slabs for FY21 All resident
Very senior Senior Indians under
save taxes as we approach Total income (`) citizens citizens 60 years
the last quarter of the Up to 2.5 lakh Nil Nil Nil
financial year 2020-21. Often termed as 2.5 (3*)–5 lakh Nil 5% 5%
the tax-saving season, January to March, is 5–10 lakh 20% 20% 20%
the period when people usually resort to Above 10 lakh 30% 30% 30%
Very senior citizen: 80 years and above. Senior citizen: 60–79 years.
invest their money for saving taxes under Additional educational cess of 4% on tax payable. Rebate of up to `12,500
the Section 80C of the income-tax act. to those whose income post tax deductions is up to `5 lakh. Surcharge of
10% for income between `50 lakh and `1 crore; 15% for `1 crore to `2
Ideally, the right time to start making crore; 25% for `2 crore to `5 crore; 37% for above `5 crore. *`3 lakh for
senior citizens only.
your tax-saving investments is not at the
end of the financial year but at the
start of it. When you begin we need to invest to save income tax. If
early, you have more time to you want to know your taxable income,
pick the best tax-saving you need to first take a sum of your
investments. Rushing to income from all sources. Many of us have
make your tax-saving invest- just one source of income – salary. But oth-
ments often results in pick- ers can have multiple sources like income
ing bad investments. But, from property or business or capital gains,
unfortunately, many of us etc. Overall, there are five such categories:
see tax-planning as a year- l Salary
end activity. Worse, some of l House property,
us altogether fail to make lP  rofits and gains from business or profes-
any tax-saving investments sion
due to outright ‘busyness’. l Capital gains
Many investors are drawn to l Sources other than the four sources
tax-saving investments due to the tax mentioned above, such as interest income
they can save. But that’s just half the from bank deposits, income from lottery,
game. You cannot overlook the product in etc.
which you are making the investment. If Once you have combined income from
you select a wrong product, though you all sources, you arrive at your gross taxable
will save tax, your overall outcome could income. From the gross taxable income,
be sub-optimal. you deduct your tax-saving investments
Your tax-saving investments can play a and expenditures. These fall under many
major role in your financial plan. They can categories, as described in the tables ‘80C
be instrumental in wealth creation and tax-saving options’ and ‘Tax-saving expendi-
protection. It is indeed worthwhile tures’. What you are left with now is your
to pay attention to them. taxable income. Note that
the interest from savings
Calculating income tax bank account beyond
For most of us, it is the `10,000 is taxable as
accountant at our office per your tax slab.
who tells us how much Check the tax slabs to

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Your tax-saving action plan
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80C tax-saving options

Banking
Product Lock-in period Yearly returns Taxability of returns Minimum investment (`)

Five-year bank FD 5 years 5.40%* Taxed as per the applicable slab 1,000

*Interest rate for a deposit of below `2 crore with State Bank of India as on December 9, 2020.
Source: State Bank of India website.

Post-office schemes
Product Lock-in period Yearly returns* Taxability of returns Minimum investment (`)

Five-year post-office deposit 5 years 6.70% Taxed as per the applicable slab 1,000

* Annual rate of interest for the period October-December, 2020; Subject to revision every quarter.
Source: Website of Department of Economic Affairs, Ministry of Finance, Government of India.

Government-backed schemes
Product Lock-in period Yearly returns Taxability of returns Minimum investment (`)

Public Provident Fund 15 years; pre-mature withdrawal 7.10% Tax-free 500 per annum
is allowed at a penalty after 5 years

Sukanya 21 years; partial withdrawal allowed 7.60% Tax-free 250 per annum
Samriddhi Yojana after 5 years in certain cases

Senior Citizens 5 years; pre-mature closure is 7.40% Taxed as per the applicable slab 1,000
Savings Scheme allowed at a penalty

National Savings 5 years 6.80% Taxed as per the applicable slab 1,000
Certificate
* Annual rate of interest for the period October-December, 2020; Subject to revision every quarter.
Source: Website of Department of Economic Affairs, Ministry of Finance, Government of India.

Pension
Product Lock-in period Indicative returns Taxability of returns Minimum investment (`)

NPS^ Till 60 years of age; partial withdrawal Tier I Equity Plans*: 11.85% Tax-free withdrawal of 1,000 per annum
allowed after 3 years for specified Tier I Government Bond Plans*: 10.76% up to 60% of the corpus
expenses Tier I Corporate Debt Plans*: 9.79%

Atal Pension Till 60 years of age; premature Monthly pension varies from `1,000 Taxed as per the 116 per month at the age
Yojana withdrawal may be allowed in case of to `5,000, depending upon the applicable slab of 30 years
terminal illness chosen option

*Average annualised returns for the five year period ending December 8, 2020. Returns are indicative and would depend on the market performance.
^Section 80C exemption is available only in case of Tier I accounts.
Source: Value Research Analysis and PFRDA website.

Other investment avenues

Product Lock-in period Indicative returns Taxability of returns Minimum investment (`)

Tax-saving funds^ 3 years 10.70%* 10% on gains beyond `1 lakh in a financial year One-time: 5,000;
Recurring through
SIP: 500 per month

*Average annualised returns for the five year period ending December 8, 2020. Returns are indicative and would depend on the market performance.
^Section 80C exemption is available only in the case of Equity Linked Savings Scheme.

know how much tax you need to pay. Do Section 80C: Mainstay of your tax-
note that the Union Budget for FY21 has saving investments
introduced an alternative tax structure, When it comes to tax-planning, Section
which is in addition to the existing tax 80C of the Income Tax Act provides many
slabs. You can pick either of them, depend- avenues, as given in the table titled ‘80C
ing on which saves you more tax. tax-saving options’. You can invest up to

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Your tax-saving action plan
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Term-insurance plans
Entry age Maximum Policy term (years) Sum assured (`) Annual premium
Min Max maturity age Min Max Min Max (`1 crore)
Max Life Online Term Plan Plus 18 60 85 10 50 25 lakh 100 crore 9,417
HDFC Standard Life Click2Protect 3D Plus 18 65 85 5 85 minus 50 lakh No limit 10,648
(Life option) age at entry
ICICI Prudential Life iProtect Smart 18 65 99 5 Till age 99 Subject to No limit 12,174
minimum
premium of
`2,400 p.a.
excluding tax
*Premiums for a 30-year-old healthy non-smoker male for a 30-year policy term. Premiums are inclusive of tax. Lump-sum payouts considered.

Tax-saving funds Worth of `10,000 amount. For instance, if you have made a
10-year Worth of `10,000 mthly SIP over the
CAGR mthly SIP over the last 10 yrs with provident-fund contribution of `50,000,
returns last 10 yrs (` 10% yrly incre-
Ratings (%) lakh)* ment (` lakh)** you need to make investment of only `1
Axis Long Term Equity  16.16 29.27 40.84 lakh towards Section 80C.
Invesco India Tax Plan  12.81 25.33 36.06
BNP Paribas Long Term Equity  12.46 23.87 34.26 Life insurance
DSP Tax Saver  12.26 25.41 36.15 The premiums paid towards life insurance
Tata India Tax Savings  12.20 24.60 35.07 also come under Section 80C. Life-
IDFC Tax Advantage (ELSS)  12.02 23.96 34.29 insurance policies come in many forms.
Canara Robeco Eq Tax Saver  11.97 24.81 35.95 But the best is term insurance. Term insur-
BOI AXA Tax Advantage  11.41 25.32 36.64 ance provides you a large cover at low
ICICI Pru Long Term Equity  11.35 23.00 33.10 premiums.
Principal Tax Savings  11.32 23.99 34.25 Term insurance is different from endow-
“Data as on december 8, 2020. Funds have been sorted on the basis of trailing 10-year CAGR. ment and unit-linked policies (ULIPs).
*Total amount invested `12 lakh. **Total amount invested `19.12 lakh. “
Endowment and unit-linked policies are
`1.5 lakh in these instruments. Section 80C also savings plans and the premiums paid
consists of many avenues: tax-saving funds towards them are accumulated over time.
(discussed later), Public Provident Fund, In the case of ULIPs, the premiums are
National Savings Certificate, tax-saving FDs invested in the stock market. On the other
and so on. The Sukanya Samriddhi Yojana hand, while term insurance provides a
is meant specially for the girl child. large cover, you don’t get your premiums
Investments made towards the National back. This makes many investors think that
Pension System (NPS) also come under endowment policies and ULIPs are better
this section. Note that you can also make than term plans. That’s not the case, how-
an additional investment of `50,000 in the ever.
NPS, under Section 80CCD(1B), beyond The primary function of insurance is to
`1.5 lakh. provide protection. The insurance prod-
Most of us also have provident-fund ucts that double up as investments fail to
deductions. These deductions (not the provide both – the insurance cover is inad-
employer’s contribution) are also included equate and the investment returns are dis-
in Section 80C. Do take them into account appointing. Therefore, as a general rule,
when you calculate your investment don’t mix insurance and investment. For

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Your tax-saving action plan
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Tax-saving expenditures
Expense Amount Section

School or college fees paid for up to 2 children Up to `1.5 lakh 80C

Interest paid on education loan for yourself or spouse or children No limit 80E
Medical-insurance premium paid for self, spouse & dependant children `25,000 (`50,000 if policy includes senior citizens) 80D
Medical insurance for parents `25,000 (`50,000 if policy includes senior citizens) 80D
Preventive health check-up (included in `25,000 above) `5000 80D
Expenses incurred on the medical treatment of self or dependants (specified dis- `40,000 80DDB
eases only) (`1 lakh for 60 yrs & above)
Medical expenses for a disabled dependant `75,000 (`1,25,000 if severe disability) 80DD
Interest on loan for acquiring the first residential house property `1,50,000 80EEA
Interest on loan for acquiring electric vehicle `1,50,000 80EEB
Donations towards social causes No limit 80G
House rent Lowest of the following: Up to `5,000/mth; actual rent paid 80GG
minus 10% of the total income; 25% of the total income

should buy it in their name.

Health insurance
While life insurance isn’t meant for
everyone, there is one type of insur-
ance which we all must buy: health
insurance. Medical emergencies can
severely impact our financial health.
Section 80D of the Income Tax Act
investments, buy pure investment products. allows deduction of health insur-
For protection, buy pure insurance prod- ance premium of up to `50,000 for senior
ucts. citizens and up to `25,000 for insurance of
The table titled ‘Term-insurance plans’ self, spouse and dependent children.
lists three good term-insurance plans, along Additionally, a deduction of up to `50,000
with their features. is available for buying health insurance
Life insurance isn’t meant for everyone. cover for parents.
It is meant only for those who have finan- In today’s highly stressful and fast-paced
cial dependents. Non-earning members life, health-insurance has taken many
don’t need life insurance. Many parents independent forms, which were earlier
buy life insurance in the name of their little offered as riders. These are indeed
children. While buying life insurance in the important and you must consider them as
name of your kids is emotionally appealing, well. A couple of such insurance
it doesn’t have any financial logic. Since are personal-accidental insurance,
parents are not financially dependent on cancer protection and critical-illness
their children, they should not buy insur- insurance. A personal-accidental cover
ance in children’s name. Rather, they provides compensation in case of a

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disability and accidental death. A critical-
illness cover is meant for serious diseases
which result in very high expenditures and
which are not covered in normal health
insurance. Even if they are, the sum
assured is likely to fall short of the
expenditure incurred.
Tax-saving funds
Tax-saving equity mutual funds, also called
equity-linked savings schemes (ELSS), are
a good tax-saving option as they provide
equity advantage and hence better returns
than most other 80C options. ELSS has a
lock-in period of three years. For most
other tax-saving options, the lock-in period
is five years. For the PPF, it is 15 years.
ELSS is one of the few 80C options
which provide equity exposure. The other
options are ULIPs and the NPS. The EPFO
has also started investing in equity, so a
part of your provident fund gets invested
in equity through exchange-traded funds
(ETFs).
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ULIPs have an opaque structure and
high costs. On the other hand, ELSS has a
transparent structure and is professionally
managed. Fund houses must regularly file
disclosures of their activities. The NPS
allows you to invest in equities but the best
equity exposure you can get is 75 per cent
(in the Aggressive Life Cycle Fund or
through the Active choice). This also keeps
coming down as a person gets older. Also,
being a retirement tool, the NPS is illiquid.
An Indian individual normally already
has debt component in his portfolio in the
form of provident fund and FDs. This
makes ELSS all the more important to gen-
erate inflation-beating returns and to prop-
erly allocate assets between equity and
debt.
By linking your tax-saving investments to
a long-term goal such as retirement or chil-
dren’s higher education, you can also
accumulate corpus for it. The table ‘Tax-
saving funds’ lists some top-performing
tax-saving funds over the last 10 years.