Friday, March 5, 2021

There is a double benefit on investing in the post, a good return and tax exemption



There is a double benefit on investing in the post, a good return and tax exemption


The tax saving season is on and both the salaried and non-salaried taxpayers would have started comparing tax saving investment options. As an investor, one should look for investment options that not only helps you save tax but also generate tax-free income.



ગુજરાતી ન્યુઝ રિપોર્ટ અહિંથી વાંચો


This year, you have to keep one more thing in mind -- the income tax regime you have opted for. From FY 2020-21, an individual can continue with the old/existing tax regime by availing of existing deductions and tax exemptions. He/she also has the option to opt for the new, concessional tax regime without claiming any deductions and tax exemptions. The tax benefits one forgoes by opting for the new tax regime include deductions under: section 80C for a maximum of Rs 1.5 lakh claimed by investing in specified financial products, section 80D for health insurance premium paid, 80TTA for deduction on savings account interest earned from a bank or post office etc. (New vs existing tax regime: All you need to know)


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Choosing the right tax saver
While choosing the right tax saver, among several other factors such as safety, liquidity and returns, make sure you understand how the returns would be taxed. If the income earned is taxable, the scope to make money over the long run gets constrained as taxes will eat into your returns.


ADVERTISEMENTIn tax-saving financial products like the National Savings Certificate (NSC), Senior Citizens' Savings Scheme (SCSS), 5-year time deposits with banks and post offices, the interest amount gets added to your income and therefore is liable to be entirely taxed.



So, even though they help you save tax for the current year, the interest income becomes a tax liability each year till the end of the tenure. "One must note that (taxable tax savers) instruments will help in saving the tax to an eligible limit both on investments and on maturity. Since they come with tax benefits, the returns on them are likely to be below the market returns," said Anil Rego, cheif executive officer and founder of Right Horizons.


The post-tax return in a taxable instrument comes down after factoring in tax. For someone who pays 30 percent tax, the post-tax return on a 5-year bank fixed deposit of 7 per cent is 4.9 per cent per annum, excluding the surcharge.


They can still be tax-exempt income if even after adding the interest income, the individual's total income remains within the exemption limit as provided by income tax rules. This tax rebate is available in both tax regimes.


ADVERTISEMENTWith effect from FY 2019-20, an individual is eligible for tax rebate under section 87A of up to Rs 12, 500 if the next taxable income does not exceed Rs 5 lakh. This would mean that the final liability is zero if the net taxable income does not exceed Rs 5 lakh.


But, for most others especially those earning a salary or having income from business or profession, choosing tax savers that come with E-E-E status helps. The investment in these get EEE benefit i.e. exempt- exempt- exempt status on the income earned. The principal invested qualifies for deduction under Section 80C of the Income Tax Act, 1961 and the income in all of them is tax exempt under Section 10.


Here are few such tax savers that not only help you save tax but also help you earn tax-free income. But, not all are the same in terms of features and asset-class, so making the right choice is essential.


1.EQUITY-LINKED SAVINGS SCHEMES
* From April 1, 2018 any LTCG made on transfer of equity MFs that have an equity exposure of 65 per cent or more including Equity-linked savings schemes (ELSS) will have to pay a 10 per cent tax on long-term gains. It is important to note that gains made above Rs 1 lakh per annum will only be subject to tax and any gains made below that limit in one FY remains tax-exempt. The LTCG made till January 31, 2018, however, remains grandfathered, i.e., those gains remains tax-exempt.


Equity-linked savings schemes (ELSS) are diversified equity mutual funds with two differentiating features - one, investment amount in them qualifies for tax benefit under Section 80C of the Income Tax Act, 1961, up to a limit of Rs 1.5 lakh a year and secondly, the amount invested has a lock-in period of 3 years. Every mutual fund (MF) house offers them and generally uses the word tax-saving in its name to distinguish them from their other mutual fund schemes. The returns in ELSS are not fixed and neither assured but is dependent on the performance of equity markets.
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