financial services

Are your investments always exempt from income tax? Not necessarily..

An old proverb goes, “The art is not in making money but in keeping it.” A few weeks ago, you may have had to rip yourself off of your daily routine to manage doing your taxes. First time taxpayers may have found the experience especially harrowing while older people may have looked forward to it in the same way they do death.

Nonetheless, the deadline for filing your ITRs has passed and gone. Continuing in the vein of the previous blog, we hope you will have made better plans for income tax filing next year. But planning doesn’t JUST mean waking early on the last day.

How to Plan your Taxes

There are many components to planning your taxes. The part we’re all interested in is how we can pay the least possible tax so as not to attract notices from the tax authority.
Section 80 of the Income Tax Act, 1961

You may be aware that Section 80 and its various sub-clauses govern exemptions from that part of your income that is taxable by way of various savings and investment instruments. So your Provident Fund, Life insurance, Health insurance, National Savings Certificates Schemes etc. come under that head of your income tax that can be deducted from your income. The remaining part is used to calculate your tax liability.
The maximum deduction allowed in Fiscal Year 2017-2018 is Rupees 1, 50,000. This means that if your investments exceed Rupees 1, 50,000, that part would also be considered taxable income.

A computed example from an online income tax return:
Now consider what sort of investments would give you maximum returns. As an example, consider the case of an elderly citizen, aged between 60 and 80 who earns an income of Rupees 4, 80,000 per annum. The applicable tax for her is 10% of her taxable income. Upon filing her ITR, she would have to pay a tax of Rupees 4, 800. Suppose she invests Rupees 1, 50,000 of her money in a Fixed Deposit account that offers interest at the rate of 8% per annum. But interest income is also a part of amount taxed. Since 10% of 8 is 0.8, in effect, she would end up earning 8 – 0.8 or 7.2 % interest. If you are a stickler for exact figures, then that would be Rupees 10, 800 at the end of the first year instead of Rupees 12,000 at 8% interest p.a.

So, is there an investment that attracts no tax at all? Had the lady in our example been earning Rupees 4, 00,000 instead, her taxable income would fall to Rupees 2, 50,000. Since the exemption limit is Rupees 3, 00,000 per annum, she would end up having to pay no tax at all.

Exempt-Exempt-Exempt investment examples
Not all of us would find ourselves in the same circumstance though. There are, in fact a number of investment options that are completely exempt from taxes. These include Equity Linked Savings Schemes (a form of diversified mutual funds), Public Provident Funds, Employee Provident Funds and ULIPS to name a few. Note that some of these investments have upper limits on the amount you can invest and usually have minimum terms in the range of 5 to 15 years.

There may be provisions both legal and contractual, that most taxpayers might not easily comprehend. After all, even Einstein once famously said, “The hardest thing in the world to understand is Income Tax.” In such a situation, finding affordable advice from financial experts has historically been a hassle. But technology is changing all that as firms like All India ITR, known for making the efiling of income tax returns fast and convenient, continue to provide advisory services to help you get the most out of your money.

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