The interim budget has maintained the existing tax rates while extending income tax benefits by a year in three significant areas: startups, Indian branches of foreign banks located in GIFT City (Gandhinagar, Gujarat), and sovereign funds as well as foreign pension funds.
Startups
The tax exemption under Section 80-IAC has been extended until March 31, 2025, with a one-year extension.
Startups that have had a turnover of less than ₹100 crore in any of the preceding financial years qualify for a three-year tax holiday at any point within the initial ten years of their establishment. To be eligible, the startup must be registered as a private limited company or a partnership firm, or a limited liability partnership. Additionally, it should be actively engaged in innovation, development, or enhancement of products, processes, or services. Alternatively, it should demonstrate a scalable business model with significant potential for employment generation or wealth creation. Importantly, the startup should not have been formed by dividing or reconstructing an existing business.
Startups that were established on or before March 31, 2023, were entitled to a three-year tax holiday under Section 80-IAC of the Income Tax Act, 1961. The deadline for incorporation has now been extended by one year. Consequently, startups incorporated on or before March 31, 2025, are now eligible for this benefit. This extension creates a one-year opportunity for recently formed startups to take advantage of the tax relief, potentially fostering additional entrepreneurship and business development within the specified timeframe.
IFSCs
Tax exemption for International Financial Services Centre units under Sections 10(4D) and 10(4F) has been prolonged by one year, now applicable until March 31, 2025.
The role of the International Financial Services Centres Authority (IFSCA) is pivotal in the advancement of GIFT City as a prominent global financial hub. Established in 2020, IFSCA serves as the consolidated regulator for financial entities operating within GIFT City in Gandhinagar, Gujarat. Noteworthy tax benefits are extended to entities within the IFSC, including:
Derivative contracts issued by Foreign Portfolio Investors (FPIs) within GIFT City and overseen by the IFSCA are officially acknowledged as valid legal contracts. This legalization essentially permits the use of specific financial instruments, such as Participatory Notes (P-notes), allowing foreign investors to indirectly access Indian securities. The Indian branches of foreign banks situated in GIFT City are now authorized to utilize these Offshore Derivative Contracts (ODCs) for investments in the Indian stock market.
Entities in GIFT City qualify for a ten-year tax exemption out of a total of fifteen consecutive years. In the previous year’s budget, the period allowed for transferring funds from other countries into GIFT City was prolonged by two years. This time, it has been extended even further.
An equivalent one-year extension has been granted to airline leasing finance companies intending to relocate their base to GIFT City.
Sovereign wealth funds and pension funds
Tax exemption for Sovereign Wealth Funds and Pension Funds under Section 10(23FE) has been prolonged by one year, now applicable until March 31, 2025.
Sovereign wealth funds and pension funds (specified funds) are eligible for a tax exemption on the interests, profits, and dividends earned by their units in GIFT City from investments made between April 2020 and March 2024.
The tax exemption offered to sovereign wealth funds and pension funds in GIFT City serves as a compelling incentive to attract foreign investment. This tax relief has the potential to enhance GIFT City’s appeal to these funds, fostering greater foreign investment in India. This, in turn, can contribute to the growth of GIFT City as a global financial hub, positively impacting the Indian economy by promoting job creation and infrastructure development.
Despite 2023 being such a good year for equities and equity mutual funds, Equity-Linked Tax Savings Schemes (ELSS), or tax-saving mutual funds, got minuscule inflows. The Nifty Midcap index returned nearly 40 percent. The Nifty 100 Index returned nearly 18 percent. Mid-cap funds got a net inflow (more money came in than went out) of Rs 21,520 crore. Small-cap funds got net inflows of Rs 37,178 crore.
But ELSS got a net inflow of just Rs 3,773 crore in 2023. Presumably, the culprit is the 3-year lock-in that comes mandatory with all ELSS funds.
Curiously, many investors who dip their toes into equity markets come across acquaintances who sagely convey some variant of the following beliefs…
“Equities will only benefit you in case you hold them for several years”
“Time in the market trumps timing the market”
“Do not be perturbed by short-term stock market fluctuations… as these smoothen out over time”
“While investing, beware of greed and fear”.
Warren Buffett, that doyen of investing, has also alluded to the virtues of long-term investing when he quipped: “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years”.
It may also be an apt moment to recall Blaise Pascal, who remarked, “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.”
So why are we suddenly recounting all these lessons?
Many of these investors say they ardently believe in long-term investing. However, they seem to be averse to walking the talk.
It seems that investors understand that needless activity in their portfolios is undesirable, and yet hesitate to invest in an option which helps them avoid such needless activity.
There are others, who are open to investing, but only up to the amount of income tax benefit available u/s 80C of the Income Tax Act, 1961, which currently is Rs 1.50 lakh. A distaste for ‘lock-in’ may result in investors under-investing in a scheme which may actually be suitable as well as beneficial to them.
This could result in a missed opportunity, especially if the ELSS in question has been performing well over the long term.
Viewing ELSS through the lens of its wealth creation potential (akin to that of any other non-ELSS equity scheme) may motivate us to think beyond the immediate income tax benefit which they confer.
I have noticed that these same investors unhesitatingly choose options with longer lock-ins so long as they are ‘safe’. This includes tax-saving Bank Fixed Deposits, Government Small Savings Schemes, etc. Many of these entail lock-ins of five or more years. Besides, the upside is fixed – as they usually offer a fixed rate of interest. Hence, the scope for wealth creation is limited.
Is too much transparency killing ELSS?
I have been dwelling on this paradox and I think that sometimes the transparency offered by markets and mutual funds may work against the tendency to remain inactive. Constant stimulus in the form of real-time prices, publication of Net Asset Values (NAVs) on a daily basis, talking heads on TV, social media influencers, etc, perpetuate the desire ‘to do something’.
Why lock-in helps
The Law of the Farm states that we cannot sow something today and reap it tomorrow. A realisation that all good things take time is the first step towards wealth creation.
The concept of investing broadly involves sacrificing spending today in order to accumulate wealth tomorrow.
Wealth accumulation involves two aspects
1) Consistent addition to the corpus
2) A continuous compounding of this corpus.
Compounding is interrupted if we constantly tinker with the process.
Lock-ins help ensure that we are constrained from doing so.
My suggestion is do not get repelled by the mandatory lock-in of three years, in an ELSS. “Lock In Accha Hai”.
Budget news: India’s indirect tax landscape stands at a critical juncture, calling for sweeping policy changes that can propel economic growth and foster a more business-friendly environment. The Goods and Services Tax (GST) has been pivotal in India’s tax reform journey, while ever-evolving, it requires further refinement and adaptation to address the evolving needs of businesses. One key area of concern is the complexity of the current GST structure, which often leads to confusion and compliance challenges for businesses.
To begin with, a significant change that the industry is eagerly anticipating is the inclusion of petroleum products and real estate under the GST ambit. As of now, these sectors remain outside the purview of GST, leading to a fragmented tax system. Bringing them into the GST fold would not only simplify the tax structure but also promote transparency and reduce the cascading effect of taxes.
Tax rationalisation
The issue of tax rate rationalisation is yet another area that demands attention. While GST was envisioned as a single tax rate regime, the current structure comprises multiple tax slabs. Simplifying and rationalising these rates can reduce classification disputes, improve compliance, and enhance the ease of doing business. A comprehensive review of the existing rates, considering the revenue implications and industry feedback, is essential for creating a more harmonised tax structure. This move aligns with the government’s vision of ‘One Nation, One Tax,’ providing a more cohesive and integrated tax framework.
Another crucial aspect of GST that demands attention is the inverted duty structure. Certain sectors face a scenario where the input tax credit exceeds the output tax liability, resulting in accumulated credits and financial stress for businesses. Rectifying this anomaly by revising rates or providing alternative mechanisms for credit utilisation can enhance the efficiency of the GST system.
Additionally, the implementation of an e-invoicing system has been a significant step towards digitisation and automation in the GST regime. Expanding the scope of e-invoicing to include all businesses may further streamline the tax administration process, reduce errors, and enhance data accuracy. It also aligns with the broader digital transformation agenda, promoting a technologically advanced tax ecosystem.
GST compliance
In the realm of GST compliance, the introduction of a simplified return filing system has been a positive development. However, there is room for further improvement. Businesses often grapple with the complexity of return filing, and a user-friendly, intuitive interface can go a long way in easing the compliance burden. Moreover, incorporating advanced data analytics and artificial intelligence in the GST network can help tax authorities identify potential tax evasion and streamline the audit process.
The Production-Linked Incentive (PLI) scheme has been a flagship initiative to boost manufacturing in India but aligning it with indirect tax policies is essential for its effectiveness. Integrating the PLI scheme with GST can help businesses seamlessly claim incentives and foster a conducive environment for manufacturing growth. Clarity on the tax treatment of incentives received under PLI would provide certainty to businesses and encourage investments in strategic sectors. Furthermore, extension of existing schemes as well as inclusion of new sectors would certainly help in promoting Government’s ‘make in India’ initiative.
Foreign trade policy plays a pivotal role in India’s economic landscape. Aligning indirect tax policies with the foreign trade policy can enhance export competitiveness and attract foreign investments. Simplifying export procedures, providing quicker GST refunds, and ensuring a hassle-free movement of goods across borders are essential elements to strengthen India’s position in the global market.
One of the key demands from the industry is the implementation of the ‘faceless assessment’ mechanism in indirect tax administration. This initiative, which has been successfully introduced in direct taxes, aims to reduce interface between taxpayers and tax authorities, minimising the scope for discretion and corruption. Extending this concept to indirect taxes can further enhance transparency, reduce compliance costs, and instill confidence in businesses.
On the international front, aligning India’s indirect tax laws with global standards is imperative. With the rise of digital transactions and e-commerce, revisiting the taxation of digital goods and services becomes essential. Adopting measures such as the Equalisation Levy on digital transactions is a step in the right direction, but a comprehensive and internationally aligned approach is necessary to address the complexities of the digital economy. Furthermore, the inclusion of environmental considerations in indirect tax policies can promote sustainable practices. Introducing green taxes or incentives for eco-friendly practices, benefits for sectors promoting same, can align with global efforts towards environmental conservation while encouraging businesses to adopt environmentally responsible practices.
In conclusion, the indirect tax landscape in India may require a holistic tweaking to meet the evolving needs of businesses and promote economic growth. From further refining GST framework to aligning with the PLI scheme, foreign trade policy, and embracing digital transformation, the path ahead is multifaceted. A collaborative approach involving industry stakeholders, tax experts, and policymakers in crafting tax policy may not only fosters economic growth but also showcase the government’s intent at creating a fair, transparent structure.
The time is ripe for India to embrace these policy changes and position itself as a dynamic and competitive player in the global economic arena.
BUDGET FAQs
What is indirect tax?
Indirect tax is a tax imposed on the consumption of goods and services, not directly on an individual’s income but added to the price of the goods or services purchased.
What is GST
The Goods and Services Tax is abbreviated as GST. In India, it is an indirect tax that has taken the place of numerous other indirect taxes, including services tax, VAT, and excise duty.
When will the Budget be announced?
FM Nirmala Sitharaman will announce the Union Budget on February 1, 2024
The reintroduction of long-term capital gains tax of 10 per cent on stocks and equity funds prompted investors to look for ways to reduce their tax liability. So, we show you four methods to reduce tax on your long-term gains made from equity and equity-oriented investments.
Use the Rs 1 lakh exemption wisely
Investors are allowed a basic exemption of Rs 1 lakh every year on long-term capital gains (LTCG) from the sale of equity shares or equity-oriented fund units.
So, if you don’t need to withdraw all your investments at once, consider spreading out your withdrawals over multiple financial years. This way, you can reduce your tax liability.
For example: Let’s say you have Rs 2 lakh long-term gains from equity shares. You can cash out Rs 1 lakh in a given year to reduce your tax liability. Try to wait until the next financial year to redeem the remaining Rs 1 lakh to avoid tax on it. If you cash out all at once, you’ll owe Rs 10,000 in taxes [(2 lakh – 1 lakh)*10 per cent].
Consider loss realisation
Long-term capital gains can be used to set off both short-term and long-term capital losses . If your long-term capital gains, after applying the basic exemption, exceed Rs 1 lakh, consider setting off some losses at the end of the year. This will effectively reduce your tax liability.
For instance, imagine you have long-term capital gains of Rs 1.4 lakh and capital losses of Rs 40,000. In such a case, you have to pay taxes on LTCG, as shown in the below table. But if you choose to set off the losses against the gains, you won’t owe any taxes. See the table below.
Choose the right investment products
To reduce capital gains tax, your investment choices matter. For a debt-heavy portfolio, opt for products with debt-like features, like equity savings funds , which are taxed favourably like equities. Avoid investing directly in debt or debt-oriented funds, as they incur higher taxes (especially burdensome if you’re in a tax bracket over 20 per cent).
For a mixed portfolio of debt and equity, both face different tax treatments. Consider switching to equity-oriented hybrid funds, which offer exposure to both asset classes with tax treatment similar to equities. For a 60 per cent equity and 40 per cent debt portfolio, equity hybrid funds with over 65 per cent allocation to equity can help you maintain a lower 10 per cent tax rate on your gains.
Section 54F (for house purchase)
While not applicable to everyone, if you happen to be planning to build a new house or invest in a house property, then Section 54F can assist in minimising your capital gains tax. Here’s how:
Step 1: Sell a non-property asset (can be anything like stock investment or gold sale)
Step 2: Use the long-term capital gains to:
Buy a home (ensure you purchase it a year before or within two years after you have sold that non-property asset)
Construct a home (ensure you build the home within three years of selling the non-property asset)
Please note that starting from April 1, 2023, the maximum exemption limit under this section is capped at Rs 10 crore.
These are some smart ways to efficiently reduce your tax burden on long-term capital gains. Choose the option that suits your needs to ensure you don’t pay unnecessary high taxes. Remember, money you save is money you earn!
The law says that if you earn income, you must pay income tax. But if you do not fall in the tax bracket or have paid excess tax, the Government will refund you, but that will come later; after you have paid income tax.
One mechanism that the Government has in place to ensure tax payment and curb evasion is TDS or Tax Deducted at Source. It is a basic form of income-tax collection; you may have seen such deductions reflected in your salary slip. TDS is also applicable on a range of income types, including interests earned and commissions received.
The Income-Tax Act, 1961 has specific sections to address the issue of TDS for different types of earnings – Salary (Section 192), Securities (Section 193), Dividends (Section 194), interest other than interest on Securities (Section 194A), lottery wins (Section 194B) and even prize money on horse racing (Section 194BB).
And then there is Section 195.
The NRI Tax
Section 195 spells out the tax rates and deductions on payments made to Non-Resident Indians (NRIs), who are required to file tax returns in India for income received or accruing or arising in India or deemed to accrue or arise in India. But this can be a tricky area. For example, TDS does not come into play when a Mutual Debt Fund pays up the proceeds of redemption to a Resident Indian, but it does not mean an NRI is exempted. This is where Section 195 comes into play – it identifies the key areas pertaining to tax for NRIs.
As is done with Resident Indians, the deduction is to be made at the time of crediting or making a payment, whichever event occurs earlier; this includes crediting in Suspense Accounts or any other account where the payment is credited.
While, Section 195 does not prescribe any threshold limit, and the TDS amount has to be computed on the entire amount payable. The onus of making the deduction falls on the payer – i.e. anyone making the payment to an NRI, irrespective of whether the entity is an individual or a company/organisation.
TDS Rates
What this means is that the payer needs to be aware of TDS rates under Section 195:
Income from investments: 20%
Long-term capital gains in Section 115E: 10%
Income by way of long-term capital gains: 10%
Short-term capital gains (as per Section 111A): 15%
Any other income by way of long-term capital gains: 20%
Interest payable on money borrowed in foreign currency: 20%
Royalty from Government/Indian concern: 10%
Other royalties received: 10%
Fees for technical services from Government/Indian concern: 10%
Any other income (e.g. rent on property owned): 30%
Surcharge and education cess, which must be statutorily added at the prescribed rate, can be ignored if payment is made as per the Double Tax Avoidance Agreement (DTAA).
NRI Exemptions
As stated earlier, computing TDS for NRIs can be tricky; for instance, Section 195 does not mention salary paid to an NRI in India; this is instead covered under Section 192. Sometimes, an NRI may have to be reimbursed by cheque payment for out-of-pocket expenses; this is not covered under Section 195 as there is no income element in the process.
Also, under Section195 (3) and Rule 29B, an NRI can apply for a nil-deduction certificate, provided the following conditions are fulfilled:
The NRI concerned is up-to-date on tax payments and tax returns
He/She has not defaulted in payment of tax, interest or penalties
He/She has been carrying on business in India for at least five years without a break, and the value of his/her fixed assets in India exceeds Rs 50 lakh.
Such certificates are valid until their expiry or cancellation by the assessment officer.
Also, if as an NRI, you are looking for tax breaks, you could look at the account categories that ensure that. Let us say you have an NRE Account with ICICI Bank; funds lying in such accounts will not attract any tax.
However, if you have an NRO Account, the interest earned on it would be taxable at the rate of 30%, in addition to the applicable cess and surcharge.
TDS Procedure: To deduct TDS under Section 195, the payer should first obtain Tax Deduction Account Number (TAN) under Section 203A, by filling Form 49B, available online.
PAN is a must for both the payer and the NRI concerned, who must be told of the deduction and the TDS rate. Also, the deducted amount has to be deposited by the 7th of the following month through authorised banks or the income-tax department.
Following this, TDS return can be filed electronically by submitting Form 27Q; this has to be done on specific dates: on Jul 31 (for the first quarter; Oct 31 (for the second quarter); Jan 31 (for the third) and May 31 (for the fourth).
The TDS certificate in a specified format i.e. Form 16A (Certificate of Deduction of Tax) can be issued to the NRI within 15 days of due date of filing TDS Returns, as given above.
Income Tax: As the new financial year is about to start from April 1, there are major changes in the income tax that will come into effect. From changes in the income tax slab to the latest rule of no Long-Term Capital Gain (LTCG) benefit on debt mutual funds, here are 10 big changes that will come into force from April 1.
1. No LTCG benefit on debt mutual fund
The government recently scrapped LTCG—tax applied on long-term gains benefit on debt mutual funds which will be applied to investors who invest in debt mutual funds after March 31.
2. Default Tax regime
The New Tax Regime will become the default income tax regime from the beginning of the new financial year. However, taxpayers will still have a choice to toggle and select between the old tax regime and the new tax regime.
3. Tax rebate limit extended
The government extended the tax rebate limit from Rs 5 lakh to Rs 7 lakh in Budget 2023. A tax rebate is a refund that taxpayers are eligible for if the taxes paid by them exceed their tax liability. Simply put, taxpayers with an income of up to Rs 7 lakh in a financial year need not invest anything to claim exemptions and the entire income would be tax-free irrespective of the quantum of investment made by such an individual.
4. Standard deduction
Under the new tax regime, a salary exceeding Rs 15.5 lakh will get a standard deduction– a flat deduction from the gross salary, of Rs 52,500. For pensioners, the finance minister has announced the extension of the benefit of the standard deduction in the new tax regime.
5. Tax slab changes
In Budget 2023, Finance Minister Nirmala Sitharaman announced a new break up for tax slabs under the New Tax Regime:
0-3 lakh – nil
3-6 lakh – 5%
6-9 lakh- 10%
9-12 lakh – 15%
6. LTA
The government has hiked the tax exemption on leave encashment on the retirement of non-government salaried employees to Rs 25 lakh from Rs 3 lakh.
7. Market-linked debentures (MLD)
Market-linked debentures will be taxed under short-term capital gains – a tax levied on capital gains from the sale of an asset held for a short period.
8. Life insurance policies
Maturity proceeds from life insurance premium which exceeds Rs 5 lakh will be taxable from April 1. This new income tax rule will not be applied to ULIP (Unit Linked Insurance Plan) – an insurance plan that offers the dual benefit of investment to fulfill your long-term goals, and a life cover for financial protection.
9. Gold to e-gold receipt conversion
Physical gold conversion to e-gold receipt will not attract capital gains tax.
10. Advantages to Senior Citizen
The maximum deposit limit for the senior citizen savings scheme will be increased to Rs 30 lakh from Rs 15 lakh.
The maximum deposit limit for the monthly income scheme will be increased to Rs 9 lakh from 4.5 lakh for single accounts and Rs 15 lakh from Rs 7.5 lakh for joint accounts.
An individual taxpayer planning to opt for the old tax regime for current FY 2022-23 must complete their tax-saving exercise on or before March 31, 2023. If an individual has not made any investments allowed under section 80C of the Income-tax Act, 1961 then he/she must not wait until last minute.
Section 80C allows an individual to claim maximum deduction of Rs 1.5 lakh from their taxable income. By claiming this deduction, an individual’s taxable income reduces which leads to reduction in income tax liability. An individual whose total income is taxed at 30% tax rate and 4% cess, will pay Rs 46,200 as additional tax if maximum deduction is not claimed. Had the maximum deduction being claimed, then tax outgo will reduce by Rs 46,200 (including cess).
Here are some of the common options available under Section 80C, 80CCC and 80CCD (1) for saving income tax. Do note the total investments made under Section 80C, 80CCC and 80CCD (1) together must not exceed Rs 1.5 lakh in a financial year.
Equity-linked Savings Scheme (ELSS): ELSS mutual funds are one of the common investment options used under Section 80C to save income tax. The maximum deduction that can be claimed is of Rs 1.5 lakh. ELSS mutual funds invest in equity and the returns earned are market-linked, making them one of the most risky investment options in the 80C basket.
ELSS mutual fund schemes have a lock-in period of three years. Thus, once invested, an individual investor cannot withdraw the money before the completion of three years from the date of investment. ELSS has the shortest lock-in period among all the other options available under Section 80C. There is no limit to the maximum amount that can be invested under ELSS mutual funds. The minimum amount varies between mutual fund houses.
The return earned in ELSS mutual fund will be taxable if the redemption is done. The capital gains will be taxable if the total equity capital gains in a financial year exceeds Rs 1 lakh.
Public Provident Fund (PPF): PPF is one of the most popular small savings schemes. This is because PPF has EEE tax status. This means that investment made in PPF is exempted from tax, the interest earned from PPF is exempted from tax and maturity amount is also exempted from tax.
PPF is a debt investment, hence, they are not as risky as ELSS mutual funds. PPF is a government scheme, hence, it comes with sovereign guarantee. The interest on PPF is announced by the government in every quarter. For January – March 2023 quarter, the PPF is offering 7.1% annually. The government will review the PPF interest rate on March 31, 2023 for the April- June 2023 quarter.
PPF comes with a lock-in period of 15 years, where the lock-in period starts after the completion financial year in which initial investment is made. For instance, if an individual makes the first investment in PPF in August 2022, then lock-in period of 15 years will be calculated from April 1, 2023. Though PPF has a lock-in period of 15 years, it offers loan and partial withdrawal facilities.
The minimum and maximum investment amount in PPF is Rs 500 and Rs 1.5 lakh. An individual can open the PPF account either with a bank or a post office.
Do note that once PPF account is opened, then minimum investment must be made in the PPF account every financial year. If minimum investment in PPF account is not made in a single financial year, then PPF account will become a discontinued account.
National Pension System (NPS): Investment made in NPS is eligible for deduction under Section 80CCD (1) of the Income-tax Act. The scheme offers pension to the investor from his/her retirement age. The returns under the NPS are market-linked.
The amount of deduction that can be claimed for NPS investment under Section 80CCD(1) is 10% of salary (basic salary plus dearness allowance). The maximum deduction that can be claimed is of Rs 1.5 lakh. Hence, an individual having basic salary of Rs 10 lakh is eligible to claim deduction of Rs 1 lakh under Section 80CCD (1). To fully-utilise the benefit of Rs 1.5 lakh, he/she will have to explore other tax-saving investment options.
NPS has a lock-in period of till the age of 60 years. For example, if an individual started investing in NPS at the age of 25 years, then he/she will have a lock-in period of 35 years. NPS offers partial withdrawal facility, however, such withdrawal is allowed under specified circumstances. On maturity, an individual can withdraw maximum 60% of the corpus as lump-sum. This lump-sum will be exempted from tax. The balance 40% must be mandatorily used to buy annuity plan. The annuity/pension received will be taxable in the hands of individual.
The minimum per NPS contribution is Rs 500 but there is no maximum amount that can be invested in NPS. An individual opening NPS account must ensure that they have made minimum contribution of Rs 1,000 in a financial year to avoid making the NPS account discontinued.
Employees Provident Fund (EPF): EPF is one of the most popular tax-saving instruments for salaried individuals. If the organisation is covered under the EPF law, then a salaried individual will be making contribution to the EPF account. An individual is required to contribute 12% of basic salary to the EPF account and employer will make a matching contribution as well.
The interest rate on EPF account is announced by the government. The EPF account also has a lock-in period till retirement. However, partial withdrawal from EPF account is permitted for specific situations. Further, if an individual after quitting their job, does not find another job in two months, then he/she can completely withdraw the money from their EPF account and close the account.
The amount that can be invested in the EPF account depends on the salary of an individual. However, if an individual wishes to make additional contribution to the EPF account, then same can be done via Voluntary Provident Fund (VPF). The rules of EPF and VPF accounts are same.
Do note that if the total contribution to the EPF and VPF account exceeds Rs 2.5 lakh in a financial year, then the interest earned on excess contributions will be taxable in the hands of an individual. The maturity amount received from EPF account is exempted from tax.
Tax-saving fixed deposits: A 5-year tax saving fixed deposit is another option available to individuals to save income tax in the current financial year. An individual can invest in tax-saving fixed deposit at a bank or a post office.
The interest rate on tax-saving fixed deposit varies between banks. For post office tax saving fixed deposit, interest rate is announced by the government. The interest received from tax-saving fixed deposit is taxable in the hands of the individual.
Tax-saving fixed deposit has a lock-in period of 5 years. Hence, once invested, the money cannot be withdrawn before the completion of 5 years from the date of investment.
The minimum investment amount for tax-saving fixed deposit varies between banks. The minimum investment amount for post office 5 year term deposit is Rs 500. There is no limit to the maximum amount that can be invested. However, the maximum tax benefit of Rs 1.5 lakh can be claimed.
National Savings Certificate (NSC): An individual can invest in NSC as well to save income tax. The investment in NSC can be made by visiting the nearest post office. The interest rate on the NSC is announced by the government every quarter. However, once the investment is done, the interest rate remains fixed till maturity. Currently, NSC is offering interest rate of 7% per annum.
NSC has a lock-in of 5 years. Thus, once an individual makes an investment, the money cannot be withdrawn before the completion of 5 years. The minimum amount in NSC is Rs 1000 with no limit on the maximum amount. The tax benefit is, however, restricted to Rs 1.5 lakh under Section 80C. The interest earned on NSC is re-invested and is paid at maturity. The interest earned from NSC is taxable in the hands of an individual. However, as the interest is re-invested, this makes it eligible for deduction under Section 80C.
Sukanya Samriddhi Yojana (SSY): This a savings scheme for the girl child. A parent of a girl child can invest in Sukanya Samriddhi Yojana and save tax on it. Every quarter, the government announces the interest rate for Sukanya Samriddhi Yojana. Currently, the scheme is offering interest rate of 7.6%.
An individual can open the Sukanya Samriddhi account either via bank or post office. The Sukanya Samriddhi account will mature after 21 years of opening of the account. However, the deposits are required to be made for 15 years from the date of opening of account.
The Sukanya Samriddhi account can be opened by a guardian for a girl child below the age of 10 years. Only one account can be opened in the name of a girl child either in bank or post office. This account can be opened for maximum of two girls in a family.
The minimum and maximum deposit that can be made in Sukanya Samriddhi account is Rs 250 and Rs 1.5 lakh, respectively, in a financial year. If the minimum deposit is not made in a financial year, then the account will become a defaulted account.
Sukanya Samriddhi Yojana also comes with the EEE tax status like PPF.
Senior Citizens Savings Scheme (SCSS): Only senior citizens can invest in this scheme to save income tax. The interest rate on Senior Citizens Savings Scheme is announced by the government in every quarter. Currently, the scheme is offering an interest rate 8%. Once the investment is done, the interest rate remains fixed for the tenure of the scheme. The interest is paid every quarter to the senior citizen.
The scheme has a lock-in period of 5 years. However, the scheme allows premature closure of the account. The premature closure of account invites penalty as well.
The scheme allows minimum deposit of Rs 1000 and maximum deposit of Rs 15 lakh. The Budget 2023 has proposed to hike the maximum deposit limit to Rs 30 lakh from Rs 15 lakh currently.
The interest received from scheme is taxable. However, a senior citizen can claim deduction under section 80TTB for the interest earned.
Unit-linked insurance plans (ULIP): An individual can make investment in ULIP to save tax. It is an insurance product that offers both life insurance coverage and benefit of investing equity. The returns earned from ULIP products are market-linked.
The ULIP has a lock-in period of 5 years. Once the lock-in period expires, the individual can withdraw the money.
The amount that can be invested in ULIP depends on various factors such as age of individual, sum insured, policy term. The maturity proceeds from ULIP will be taxable if premium paid for all ULIPs in a financial year exceed Rs 2.5 lakh.
Benjamin Franklin famously said, ‘There are only two things certain in life, death and taxes.’ Despite death not being in our hands, we often worry about it but when it comes to taxes which are very much controllable, we tend to put in only last minute efforts. Every year, in the month of March, many of us hastily invest in various tax-saving schemes that offer 80C deduction without proper consideration, resulting in poor financial decisions. However, are 80C investments the only option for tax savings? Many taxpayers are unaware of options such as 80D, 80E, and others. By treating these investments as tools for building long-term wealth, taxpayers can benefit even more.
Here are some handy last-minute tax-saving investment tips that can help you reduce your tax liability. By taking advantage of these tips, you can simplify the investment process and potentially save yourself some money come tax season.
Using Section 80C for last minute investment planning
Section 80C of the Income Tax Act is one of the most popular widely explored options for tax saving investments. With a host of financial investments options ranging from PPF, EPF, ELSS, Life Insurance Policy premiums, Bank FDs, Post Office Schemes etc. There is some or the other investment option available for all types of investors. Investments up to Rs 1.5 lakh in one or more of these are exempt from tax. Here is a quick review of some of the best last minute investment options in Section 80C.
PPF: If you unsure about where to invest and don’t want to take risks for your investments, invest in PPF. PPF investments are backed by government and offer fixed interest rate each year. If you do not have a PPF account, you can open one online and if you have an account then you can just invest the remaining amount to utilize your 80C limit. However, the current rate of interest is low at 7.6% p.a.
ELSS: ELSS is one of the best investment options in the list of financial products as it provides you the opportunity to invest in markets and enjoy tax deductions for the same. If you are a salaried employee, a sizeable amount of your investments go into your EPF account and you can look at investing in ELSS to diversify your portfolio into equities. Even for non-salaried taxpayers, ELSS is the ideal option for equity investment as most of the investments in 80C are debt investments. Another advantage of ELSS is that it has the shortest lock-in period of 3 years. Among all investment options, ELSS mutual funds offer the lowest lock-in with almost the highest returns.
Life insurance policy: Having a life insurance policy is extremely essential and if you do not have insurance policy with adequate coverage then you should look at buying a good term insurance policy. One should have term insurance policy in the portfolio to protect family for uncertainties.
NPS: You should start your retirement planning as soon as you can and NPS can be a great investment avenue for the same. Your investments in NPS enjoy additional deduction of Rs 50,000 under Section 80 CCD(1b) thus taking the total limit of tax deductible u/s 80C income to Rs 2,00,000 for the financial year.
Unit Linked Insurance Plan (ULIP): A Unit Linked Insurance Plan (ULIP) is a financial product that combines both investment and insurance in one package. ULIPs offer the opportunity to build wealth while also providing life insurance coverage.
With a ULIP, a portion of the invested amount is allocated towards life insurance, while the remaining amount is invested in a mix of equities, debt, or a combination of both. This type of investment is suitable for long-term financial goals such as saving for your child’s college education, retirement, or other significant financial milestones.
ULIP premiums are eligible for a tax deduction under Section 80C of the Income Tax Act, up to a maximum of Rs. 1.5 lakh per year. Additionally, the returns earned on a ULIP policy are exempt from income tax under Section 10(10D) upon maturity.
Deduction on your Housing Loans: You can claim repayment of principal amount of your home under Section 80C upto Rs 1.5 lakh. Apart from this, you can also claim additional deduction of Rs. 2 lakhs on the interest component of your home loan for fully constructed self-occupied property under Section 24(b).
Sukanya Samriddhi Yojana (SSY): This is a savings scheme initiated by the government to promote the development of the girl child. Parents can open an account with a minimum investment of Rs. 250 and a maximum of Rs. 1.5 lakh per financial year. The government announces the interest rate every quarter. The scheme offers tax benefits, including a tax exemption of up to Rs. 1.5 lakh per year under Section 80C, exemption from tax on interest earned, and tax exemption on the total amount at maturity. It is an EEE (Exempt-Exempt-Exempt) scheme, which means the investment, interest earned, and maturity amount are all tax-exempt.
National Savings Certificate (NSC): This is a savings scheme supported by the Indian Government. You can open an account at any post office in India, and the investment is locked for five years. After five years, you get the full amount. You can invest up to Rs. 1.5 lakh per year, and you can also avail tax deductions on investments under Section 80C. The NSC can be a good option for those who want guaranteed returns and save tax at the same time.
Tax-saving FDs: These are similar to regular FDs, but offer a tax break on investments up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. They have a lock-in period of 5 years, and cannot be redeemed before maturity without penalty. Any Indian resident can open a tax-saving FD with a minimum investment of Rs. 1,000. This is a low-risk investment option suitable for long-term investment with guaranteed returns. The interest earned on tax-saving FDs is taxable.
Tax saving beyond Section 80C
Section 80C is not the only option available for tax saving in India. There are other sections under the Income Tax Act that provide tax benefits and can be used for tax-saving purposes. Some of the popular tax-saving options apart from Section 80C are:
Medical policy premiums: With healthcare costs on the rise, having a medical insurance policy is crucial. You can claim a tax deduction on the premium paid for such policies for yourself, your spouse, children, or parents under Section 80D.
Interest on education loan: If you have taken an education loan for higher studies for yourself, your spouse or children, you can claim a tax deduction on the interest paid on such loans each year under Section 80E.
Donations made to funds and charitable organizations: Donations made to charitable trusts, organizations, or relief funds can be claimed as tax deductions under Section 80G.
Interest earned on your savings account: You can claim a tax deduction of up to Rs. 10,000 for interest earned on your savings account under Section 80TTA. For senior citizens, the limit is Rs. 50,000 per year.
Practical guide for effective tax-saving investments
Many people wait until the last quarter of the financial year to start thinking about their taxes. But this can lead to poor investment decisions. The best strategy is to start planning at the beginning of the financial year. This gives you more time to make informed investment choices and stay invested for a longer period, which can help you reach your financial goals quickly.
Here are some practical steps to help you plan your tax-saving investments:
1- Check if any of your investments or expenses during the year are eligible for tax deductions. For example, contributions to EPF, home loan repayments, and school fees can be tax-deductible.
2- Identify your investment goals and your risk profile to help you select the best investment options.
3- Invest the appropriate amount to reach your financial goals while also taking advantage of tax-saving opportunities.
Conclusion
In conclusion, many taxpayers tend to make hasty investment decisions by only relying on 80C tax-saving options, resulting in poor financial decisions. However, by exploring other options such as 80D, 80E, and others, taxpayers can benefit from long-term wealth creation. The article highlights some of the last-minute tax-saving investment tips that can help individuals reduce their tax liability. Taxpayers can take advantage of options such as PPF, ELSS, NPS, ULIPs, housing loan deductions, Sukanya Samriddhi Yojana, National Savings Certificate, and tax-saving FDs. By utilizing these investment options, individuals can simplify the investment process and potentially save money during tax season. Therefore, taxpayers must carefully evaluate their financial needs and goals before making any investment decisions.
Tax saving is a prime tool for many investors, to prevent the erosion of the total income generated. There are various investments that provide this benefit, thereby, significantly increasing the effective investment portfolio in this country as all individuals want to avail this advantage. In this article, let us discuss the best tax-saving investments options that can reduce your tax outgo. Read on!
Equity Linked Savings Scheme (ELSS)
Equity-linked savings scheme is one of the most popular market investment tools among investors with the primary aim of tax saving. It is one of the best ways to save tax under section 80C, as well as earn substantial returns by gaining market advantage.
Tax saving ELSS funds invest at least 80% of the total portfolio on equity securities, thereby, yielding the highest return amongst any other similar instruments available in the market. This scheme comes with a mandatory lock-in period of three years on an investment amount. Under section 80C, the following provisions are made to ensure substantial tax reduction on funds related to the ELSS scheme.
• The total principal amount invested in ELSS is exempt from taxation, provided the amount is under Rs. 1.5 Lakh.
• Any capital gains less than Rs. 1 Lakh is not charged with long term capital gains tax.
Tax saving ELSS funds are relatively liquid instruments when compared to other securities available under the same umbrella.
Public Provident Funds (PPF)
Public provident fund is one of the best tax-saving instruments u/s 80C, sponsored by the Government of India. However, PPF comes with a mandatory lock-in period of 15 years. This might harm the liquidity requirements of an investor.
The PPF interest rate earned on this tax saving instrument is announced by the government every quarter and remains fixed for the given period. PPF forms a fixed return instrument, as it provides assured interest declared by the central government.
A maximum of Rs. 1.5 Lakh can be invested in a PPF account in one financial year, through a lump sum or monthly investments. The entire amount can be exempted from taxation, thereby, making it one of the best tax-saving investments under Section 80C. Any interest earned on an investment amount is also not considered for tax calculations.
Senior Citizen Savings Scheme (SCSS)
Senior Citizens Savings Scheme is also one of the best tax-saving investments u/s 80C, as it enables you to enjoy SCSS tax deduction of up to Rs. 1.5 Lakh on an investment amount. However, the eligibility criteria of this scheme are more rigid than other instruments. Only people satisfying the following criteria can avail of this investment tool:
• Individuals aged 60 years and above
• Individuals above the age of 55 years availing voluntary retirement
• Any individual above the age of 50 years employed in the defense sector of India
The total amount that can be invested in an SCSS policy is Rs. 15 Lakh. The interest rate payable on an investment amount is determined by the Central Government of India, and therefore, poses as a stable return on investment.
Sukanya Samriddhi Yojna (SSY)
Sukanya Samriddhi Yojna poses as one of the best ways to save tax under section 80C of the Income Tax Act. The SSY tax benefits amount up to Rs. 1.5 Lakh per annum. However, an account under the Suaknya Samriddhi Yojna can only be opened by a person having a daughter who is less than ten years old.
As a part of the ‘Beti Bachao Beti Padhao’ policy, the interest rate provided by the government on this amount is higher than other government-mandated instruments such as Public Provident Fund. Any investment which is higher than Rs. 1.5 Lakh in a year is not considered for SSY tax benefits.
Tax Saver Fixed Deposit (FD)
Fixed deposits with a lock-in maturity period of five years are eligible for tax exemptions under Section 80C. It is one of the popular investment tools among risk-averse individuals, as it assures guaranteed returns at a fixed interest rate.
However, it should be kept in mind that any premature withdrawals made nullify any tax benefit on such investments. Interest earned under this scheme is taxable.
National Pension Scheme (NPS)
National Pension Scheme is a systematic investment policy aiming to provide financial security to investors on retirement. It is one of the best tax-saving investments under Section 80C, with a claim deduction of up to Rs. 1.5 Lakh on the total principal amount. The national pension scheme accepts funds from both employers and employees in the case of salaried individuals.
Under Section 80CCD (1), a tax-free investment can be made by an employee up to 10% of his/her salary. For self-employed individuals, NPS tax benefits of an additional Rs. 50,000 can be claimed under Section 80CCD (1B).
Funds invested in an NPS account can be partially reinvested in equity schemes, subject to the discretion of an investor.
National Savings Certificates (NSC)
National savings certificate aim to provide secure investment to individuals wary of stock market fluctuations. The tax-saving benefits under this policy are immense, with exemptions of up to Rs. 1.5 Lakh on the principal amount and the reinvested interest amount. The maturity period on this investment remains fixed at five years and ten years and is up to an investor to choose between any of the two periods.
Unit Linked Insurance Plans (ULIP)
Unit-linked insurance plans are also one of the best tax-saving investments under Section 80C available in the market, with exemptions on both investment and premium amounts payable.
The portion of money dedicated towards the investment part under this scheme is entitled to tax redemption of Rs. 1.5 Lakh, along with 10% of the total premium (provided the value is less than Rs. 1.5 Lakh).
Life Insurance
Under section 80C, a premium paid on a life insurance policy is deductible under the income tax calculations. The total amount allocated towards premium payments should not exceed Rs. 1.5 Lakh to avail this tax exemption benefit
All these tools aim to provide tax exemptions to investors. However, the returns remain fixed under all instruments except the ELSS plan, as it is market-oriented. Tax saving ELSS funds offer the highest returns as its portfolio primarily comprises equity-oriented schemes. It comes in with a mandatory lock-in period of three years, giving it enough exposure to the stock market to realize substantial profits.
Conclusion
While there are multiple ways you can save tax, it is wise to select an option that offers you dual benefits of tax saving as well as wealth creation. Remember to plan your taxes in advance, seek the best way to optimize your taxes, and utilize the tax exemption limit completely.
New Year’s resolutions are often made with good intentions, but many go unfulfilled. Tax-related promises, however, should not be neglected. The tax authorities are strict with deadlines and harsh with those who fail to pay their taxes. To ensure peace of mind and long-term financial stability, consider making the following tax-related resolutions.
Utilise All Available Deductions
■ Returns filed by taxpayers show many people don’t fully utilise the deduction limit under Sec 80. This leads to unnecessary outgo of tax on hard earned income.
Plan out investments so that you can claim the full benefit of tax-saving options to reduce your taxable income by up to Rs 5 lakh-6 lakh as follows: Section 80C (max Rs 1. 5 lakh), Section 80CCD(1b) (max Rs 50,000), Section 80D (max Rs 75,000-1,00,000) and Section 24 (max Rs 2 lakh).
Harvest Long-Term Gains By March 31
■ Stock markets have done very well after the Covid scare. If your stocks and equity funds have gained during the year, harvest up to Rs 1 lakh of long term capital gains to lower your future tax. Long-term capital gains up to Rs 1 lakh from stocks and equity-oriented funds are tax-free in a financial year, but you need to book profits before March 31 to pocket the tax-free returns. The same stocks and equity funds can be bought back again, but their price of acquisition for tax computation will get reset at a higher level. The same strategy can be used for equity funds. Ask your mutual fund house or CAMS or Karvy for a capital gains statement to know how much of capital gains needs to be harvested.
Pay Advance Tax
■ Many taxpayers don’t report their interest or dividend income because they are under the misconception that if TDS has been deducted, no more tax is due. But TDS is only 10%, while both interest and dividends are taxed at the normal rate applicable to you. If you have invested in bonds, NSCs or bank deposits, or have received dividends, make sure you pay the tax on these incomes by the due date. All these incomes will show up in your annual information statement (AIS), so there is just no way you can escape the liability. Also, keep in mind that unpaid tax attracts a penalty of 1% per month of delay.
Check AIS When Filing Returns
■ The annual information statement (AIS) has details of all your financial transactions during the financial year. It will have details of income (salary, profession, rent, interest and capital gains) as well as expenses(foreign exchange, purchase of gold above Rs 50,000 in cash and Rs 2 lakh by card) and investments (mutual funds, stocks, bonds). It also has details of the tax paid on your behalf by your employer and the TDS deducted by others. Be sure to check your AIS and verify that the details of your financial transactions are correct.
Verify TDS Details In Form 26AS
■ Form 26AS is your tax credit statement and has details of the TDS deducted on your behalf, and the tax collected at source (TCS) paid by you. Access your Form 26AS through the income tax department portal or your netbanking account and check if the TDS and TCS deductions are correctly mentioned in it. If some TDS or TCS has not been credited to you, you must contact the deductor immediately. A periodic check of Form 26AS will ensure you are not running around at the time of tax filing.
Don’t Ignore Foreign Assets, Earnings
■ Tax compliance becomes a little complicated if you have foreign assets. All foreign bank accounts, financial interests, immovable property, accounts in which an individual has signing authority, and any other capital asset held by the individual outside India, must be reported in the tax return, irrespective of the total income of the individual. Many taxpayers omit this, but this is not recommended. Not disclosing foreign assets can invite serious charges under the Black Money (Undisclosed Foreign Income And Assets) and Imposition of Tax Act, 2015. Even if a return for a previous year has been processed, cases can be opened up to 16 years later and penalties levied.
