Basics of Stock Market - Beginner

Tax Savings Investment Options

Income tax is a direct tax that is imposed on individuals or institutions who meet the criteria. Investors often invest in a scattershot manner to save taxes and not serve the real purpose. To minimize tax burden and maximize return, tax planning must be done carefully.

Based on income, there are many tax brackets for individuals and institutions. These are listed below:

Tax Slab for Financial Year 2015-16, Assessment Year 16-17

Persons under 60 years oldIndividuals (Age over 60, Age below 80 Years)For an individual (age 80 and over)
Income LevelTax RateIncome LevelTax RateIncome LevelRate of tax
Rs. 2,50,000NullAs high as Rs. Up to Rs.NullAs high as Rs. Up to Rs.Null
Rs. Rs. 2,50,001 - Rs.10%Rs. 3,00,001 – Rs. 3,00,001 - Rs.10%Rs. 5,00,001 - R. 5,00,001 - Rs.20%
Rs. 500,001 - R. 500,001 - Rs.20%Rs. 500,001 - R. 500,001 - Rs.20%Above Rs. Above Rs.30%
Above Rs. Above Rs.30%Above Rs. Above Rs.30%

Before investment options, one should understand the various sections under which tax deductions/exemptions are allowed.

  • Section 80C allows a deduction from an individual's gross total income.
  • Section 80CCC: Deduction for premium paid for an Annuity Plan by LIC or another insurer
  • Section 80CCD: Deduction for Contribution to the Pension Account
  • The total deduction under section 80C(1), 80CCC, and 80CCD(1) cannot exceed Rs 1,50,000

It is important to understand the tax deductions and investment limits.

Employee Provident Funds, (EPF)

EPF returns are exempt from tax under the 80C. Salary workers must contribute 12% to EPF.

House Rent Allowance:

Section 80C provides for HRA deduction. Maximum deduction under HRA is made based on the lesser amount that is chosen, whether it is the total rent paid or the amount designated as HRA in the tax payer's income slip. This is provided that the HRA is not greater than 50% or 40% for individuals who live in metropolitan cities and other cities, respectively.

Leave Travel Allowance (LTA).

LTA is an allowance that an employer gives to employees who are on leave from work or traveling. Most employers give LTA twice every four years. The amount is exempt from tax.

Home loans

Sections 80C and 24, respectively, cover tax deductions on principal and interest.

Tuition Fee

According to Indian IT Act Section 80C tuition fees for schools, colleges, universities, and coaching institutes for up to two children are exempted by one's annual income tax.

Tax-Free Bonds

It is not taxable to invest in bonds with a credit rating of 'AA' or 'AAA', and earn interest on them.

National Pension System

National Pension System offers two types of account: Tier 1 (Non-withdrawable), and Tier 2 (Withdrawable). Tier 1 account must be opened, but Tier 2 accounts can be opened at your discretion. Only a Tier 1 account holder will be eligible to open a Tier 2 account. Contributions to Tier 1 accounts are not eligible for tax deductions as per section 80CCD. You can only withdraw up to 60% at maturity. However, you must contribute 40% towards annuity.

NPS investments are tax-deductible as per section 80CCD, up to Rs.1,50,000, and Rs.50,000 under section 8CCD (1B).

Because fund management fees are very low, it is very cost-effective. Fund managers manage money in three different accounts with distinct asset profiles, such as Equity (E), Corporate bonds(C) or Government securities (G). Investors have the option to either manage their portfolio passively or actively (active choice).

Rajiv Gandhi Equity Saving Scheme, (RGESS).

RGESS offers tax benefits as per section 80CCG up to 50% on the amount invested (maximum Rs.50,000). RGESS was created to encourage first-time investors to adopt an equity culture. This scheme is open to all investors whose total gross income is below Rs.12 lakhs. Market-linked returns are possible. Dividends are exempt from tax.

Public Provident Fund (PPF).

Interest earned and investment made are non-taxable. To receive tax benefits, the maximum amount one can invest is 1.5 lakhs. It offers tax benefits as well as the possibility of borrowing from the third to fifth years and withdrawing from the sixth year.

PPF is a long-term saving plan that pays 8.7% annually. It has a maturity period of 15 year. Maximum investment of 1.5 lakhs per annum Maximum investments of 1.5 lakhs p.a.

National Saving Certificates (NSC).

These certificates can be issued by the Post Offices for 5 or 10 years at an interest rate of 8.8% and 8.5 respectively. Life Insurance

Life Insurance

Under 80C, premiums paid are eligible for tax benefits

Mediclaim or Health Insurance

Section 80D allows for tax benefits up to Rs.15000/- when purchasing health insurance for oneself, spouse, and children, and Rs.20,000// for purchasing health insurance for parents.

Fixed Deposit at Banks

The section 80C exempts deposits made to a bank during the lock-in period, which is five years. The interest earned on deposits is however taxable.

Unit Linked Insurance Plans (ULIP)

ULIP is a combination of insurance and investment. The customer pays the premium, and the remainder of the money is invested. Investments made under ULIPs or earnings on maturity are exempted from tax under section 80C (IT Act).

Equity-Linked Savings Schemes

Equity or equity-related instruments are investments. This instrument can be used to invest in tax-paying taxpayers up to RS.1.5 lakhs.

ELSS invests only in shares and related instruments, so it offers higher returns of between 10 and 15%. It also has a shorter lock-in period than other investment options, at three years. PPF and ELSS are the only options that provide tax-free returns. Other options such as NSC, Fixed Deposit with Bank, and Deposit with Post Office all levy taxes on the returns.

These tax-saving investment options can help to reduce your tax burden. However, it is not necessary to consider all options. Only the ones that are most suitable for you/your needs. Calculating and comparing the limits is important before deciding where to invest.

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