Are you investing for tax saving keeping in mind the deduction limits
Are you investing within or over these limits?
Tax saving is one of the most attractive reasons to induce investments. However, it only helps up to a limit. Although many tax saving instruments allow investors to invest beyond the limits, it is advisable to use these instruments as per your need only. Excessive use of tax saving instruments can affect your wealth management results.
Here is a list of sections which allow tax deductions and the limits under each of these sections:
Investments Under Section 80C
Section 80C is one of the largest deduction sections in Indian Income Tax Act. Most tax saving investments are a part of this section. It covers:
- Life Insurance Products (Term Insurance, Saving Plans and ULIPs)
- Pension Plans (PPF, NPS and from Life Insurers)
- ELSS investments
- Tax Saver Fixed Deposits
- Senior Citizen Saving Schemes
- KVP and NSC investments
Out of all only PPF and Senior Citizen, Saving Schemes have an upper limit on investments. However, all these investments combined offer you tax benefit only up to Rs. 150,000 for A.Y. 2018-19.
Why Not Invest Beyond Limit U/S 80C?
All the tax saving options have certain caveats attached to them. Nothing comes for free after all. While investing in these schemes, you will encounter multiple tradeoffs and must choose carefully as per your goals. Some prominent ones are as follows:
- All these investments have lock-in periods starting from a minimum of 3 years
- Some of these investments are more expensive than their taxable peers; e.g. ELSS
- Investments like NPS and pension plans are best for retirement goals (or any financial goals after 50 years of age)
- You can only invest in Senior Citizen Saving Scheme if you are beyond 55 years of age
Investment Under Section 80D
Section 80D applies to the health insurance policies. Where, health insurance policies will include all the insurance policies which cover an individual’s health issues, be it hospitalisation or life-threatening diseases. So, this section will cover:
- Mediclaim policies
- Critical illness policies
- Cancer and Heart insurance policies
The limits under this section go up to Rs. 55,000, depending on the following conditions:
- If you bought health insurance for self, spouse and kids, maximum deduction available is Rs. 25,000
- If you also bought health cover for your parents, you can avail an additional Rs. 25,000 (Rs. 30,000 if parents are senior citizen)
Since health insurance is once of the essential covers, it is recommended that you have your fill not based on the limits but based on your needs.
Thus, the limits of 80D apply in reverse. There is no need to stay within limits but go for the maximum cover and benefits.
Other Sections to Maximize Your Tax Savings
There are multiple other sections to maximise your tax savings. However, once again caveats are attached. Here are three other sections to claim additional tax deduction:
This section is perhaps only available until this financial year. This section allows an additional tax deduction of up to Rs. 25,000 over and above 80C, provided:
- You are a first-time equity investor earning less than Rs. 12 lakh p.a.
- You invest Rs. 50,000 in RGESS (Rajiv Gandhi Equity Savings Scheme)
Due to lack of popularity of this scheme, this is being phased out in 2018.
80E provides exemption rules for the interest paid on an education loan. You may apply for education loan for yourself or your kids when they go for higher education. The principle of the loan is not deductible, but the interest payment can be claimed as a deduction from the annual taxable income.
There is no maximum limit for the claim. This deduction is available only to individual taxpayers, HUFs and Trusts cannot avail deduction u/s 80E.
Section 24B is another deduction for loan repayment. This is available to people who buy house property with a home loan. You can claim a deduction on the interest paid on the home loan in the financial year.
The principal repaid on a home loan can form a part of your 80C deductions. The conditions and limits applicable to section 24B deductions are as follows:
- The construction of the property is complete
- Maximum total deduction applicable is Rs. 200,000 which will also include the pre-construction period interest
Wealth Management Beyond Tax Saving
Tax saving options are bonus facility offered by the taxman. Tax saving investments cannot be expected to help you achieve your financial goals unless chosen accordingly. So, keep in mind the caveats of these instruments before investing. As wealth management companies may advise, you invest according to your goals and not just for tax saving.
Also, best wealth plans are executed in small pieces month over month. So that, investors do not feel the burden of saving at one point in the year. Why not apply the same logic for saving tax as well?