Short answers is
"NO". Please
read on.
Since most companies
would soon ask employees to submit their tax receipts, I thought it would be a
good idea to start with an article on the same. I have touched upon various tax
saving options and their pros & cons and also there is some advice for
quick action.
Salary, taxes and deduction
I don't think salary
requires any explanation. All of us know how hard is it to earn.
Government imposes
taxes on people earning income and
employers are liable to deduct taxes and submit it to IT department before giving salary every month (it's called TDS or tax deducted at source). However at the
same time government encourages people to invest some of the income in certain
avenues to get tax breaks. Currently there are deductions permissible for rent
paid, medical expenditure upto Rs 15000/-, LTA, interest paid on home loan,
educational loan, health insurance and various options under 80C for upto Rs 1
lakh.
Every year, in the
beginning of the financial year, i.e. April, companies ask employees to declare
what investments people are going to make and based on that they determine the
monthly TDS. Then in January or February they will ask employees to submit the
proof that they actually made those investments. Throughout the year, company deduct less TDS
based on the declaration and if you fail to submit the proof by due date than
they need to deduct the balance tax in just last month resulting very little salary for that month.
When I filled the declaration in the beginning, I
wasn't very careful. What's the way out?
It doesn't matter
what you declared as long as you make up for the same amount while doing the
actual investment. For example say you declared that you would buy an ULIP or
LIC for Rs 80000/-. Now you figured that better thing is to invest that money
in PPF or Tax saving mutual funds (ELSS). You can still invest Rs 80000/- in
PPF or ELSS and submit the proofs. It will be gladly accepted by your company
and the IT department.
I haven't made any investment so far. What do I do
now?
For HRA (house
rent), medical allowance and LTA, we don't have much leeway. Submit whatever
actual receipts you have got. For rest
of the avenues under section 80C:
- PF: This is the best form of
debt investment available in my opinion. It gets deducted automatically.
You get about 8.5% percent interest guaranteed by Govt and all of that is
tax free. In case you change employer, you can withdraw this amount or get
it transferred. By default it's about 12% of your basic salary and there
is an option to get it increased.
Some people opt out of PF which is a very bad thing in my opinion. Please don’t do that. - PPF: Similar to PF, return on PPF is also tax free. It's offered by SBI and ICICI. This is also quite good option in my opinion and it can be done online. This is also for long term and you are not allowed to withdraw for 15 years.
- Insurance
(LIC or ULIP or term insurance): most people end up buying LIC or ULIP when the deadline
is near. This is NOT the best thing to do as returns on LIC are hardly
about 5-6% and ULIPs have very high charges (10-14% or higher) compared to mutual funds
(about 2-3%) with very little insurance cover. Also information available about fund management of ULIP is
much limited compared to mutual funds. In short ULIP is design to be very
expensive and confusing with very little benefits and tradition insurance
offers way too insurance coverage as well as very low return on investments.
Term insurance make sense. In case you don't have any insurance, you can go for an online term plan which costs really less (as low as 7000-8000/- for insurance of Rs 1 crore). The only disadvantage is that in case you survive the tenure, you don't get anything. That's why other insurance plans are much popular in India as people fail to notice the very high cost associated with them.More on insurance v/s investment later. For now please take my word that term insurance is the best insurance. - Deposits: I don't like these avenues at all because complete interest is taxable. So people who are in highest tax bracket, will end up paying 30% tax on interest that they receive. This includes 5 years bank FD & post office deposits etc. Please ignore them and go for PPF or ELSS.
- Tax saving
mutual funds (ELSS): This is my favorite avenue. As in the example I described in my previous article, long term returns in equity
are quite substantial compared to other avenues (average considered to be about 12-15% over 10
years in general, however it's not guaranteed and actual returns could be lower or higher. See disclaimer for more
info on this). Also returns for over one year are tax free which makes
equity extremely attractive.
Since the best way to invest in equity is through SIP over the whole year, this is not advisable now as you hardly have only 2-3 months. However you could still invest some small amount in multiple chunks like say Rs 10000/- in December, January and February. You will get statement within 3-4 days after making the investment so you can still submit that as a proof. Also if you could go for longer tenure, i.e. you need not withdraw this money say for next 10-15 years, you can still invest larger amount.
How to select which tax saving mutual fund? Check out value research online and invest in 1 or 2, 5-star funds: http://tinyurl.com/o7k2bqq . More on understanding and selecting mutual funds later.
How to invest in equity mutual funds? You could visit any banks which would charge about 3-5% fee. However I would recommend that the best way is through fundsindia. I am using it for last 5 years and I found it safe and extremely convenient. They can help you open your account for free and let you invest online for free in a matter of few days. Alternatively you can directly go to fund house office or their registrar CAMS or Karvy (address available in value research online page of mutual fund under investment details tab) and avail direct option which has 0.25% lesser charges which otherwise would have gone to fundsindia. However it could be a big hassle if you are not KYC complaint.
Apart from 80C, you
can claim deduction on health insurance premium payment for upto Rs 35000/- for
your family and parents. Taking
additional health insurance is a good thing. More on why health insurance
required and choosing a good one later. Also you can claim deduction on
interest paid on educational loan, if any.
Another good avenue
is buying a house but it's not advisable
to buy one now for this financial year due to lack of enough time.
However this is something that can be planned for next financial year. You
would get tax benefit upto Rs 150000/- on interest paid and principal can be
claimed for the limit of Rs 1 Lakh under 80C.
Bottom line, for section 80C that has Rs 1 Lakh limit, please opt for PF, take term insurance and invest balance amount in PPF or ELSS.
In case I fail to submit the receipts by the
deadlines, is there anything I can do about it?
If you fail to submit receipts by the deadline
set by your company, you can still make the investment before March 31st.
However your company would have deducted the TDS and submitted it to IT department. Hence while filing for tax return during next July, you can
ask for tax refund.
Also be aware
that tax refunds could be delayed substantially. I know friends who didn't get
refund even in 3 years. Hence resort to this option only if absolutely
necessary.
I hope this is useful information and you would be able to make an informed decision about
investments for tax planning. I would like to add here is financial plan for
tax saving investments must be inline with overall financial plan and most
probably it would if you follow the above advice. More on financial planning
in subsequent articles. Please do share if you have any questions, comments or
feedback. Also needless to say please share this article with as many people as possible.
The views shared
here are based on my own knowledge and research. Whatever advice I am offering
here is best based on my own knowledge & abilities. I would like to
reiterate that equity investments are risky and there are no guarantees.
However avoiding equity completely is riskier. The risk associated with them
can be managed and that's what I am trying to put it across in simplest
possible terms. More on this here.
In case you act on my advice, I am not going to
get any commissions from any mutual fund etc. Also I
don't take any legal responsibility for any losses that you might incur (at the
same time not asking you to share your gains with me :P).
I am recommending fundsindia
because I am using it for last 5 years and I found it really good and
convenient. I am just another user for them and I would NOT be getting any commissions on any investments that you are
going to make. If you use the link above to register, I might be getting a Rs
200/- coupon one time in case join them. However that is not my primary
motivation and I have made my family & close friends join fundsindia
even before they started any such campaign.
Good one Anirudh, would be certainly helpful for many. Just wanted to point out that whole tax planning game changes once you take one or two home loans :-) that too overdraft one!
ReplyDeleteYeah Harsh. You are quite right. Home loan takes care of tax planning for the most part...
DeleteNice post buddy!
ReplyDeleteHowever on the house loan thing- you will not be able to claim HRA - right? which kind of compensates for the 1,50,000 benefit that you get. Isn't it?
Thanks Sandeep. Well actually if the property is not in the same city where you are working, you can claim both. I know friends who bought property in their native places where their parents reside and they still live in rented house. In that case they claim both tax benefit on home loan as well as HRA.
Delete