I’ve seen a lot of comments in the last month or so that are from people who will be paying taxes for the first time this year.
There’s a fair bit of confusion on what to do and what option to choose, so I’m writing this post with some ideas with how someone who is going to pay taxes for the first time could approach tax saving schemes.
First of all – you will have to pay tax if you earn above the taxable limit – there’s just no way around it, so stop wasting your energy in trying to devise a method which gets you to avoid this.
There are some ways in which you can reduce how much tax you’re liable for and that’s where investments come in.
There is a section in the Income Tax Act which lists down certain expenses and investments that will enable a person to reduce their taxable income and as a result of that pay less tax.
This section is called Section 80C and the graphic on this page tells you what instruments you can invest in, what is their lock in period and what returns you can expect.
If you have some education loans or housing loans then you can use that to save tax, but if you don’t have that then you can invest in either mutual funds, fixed deposits, post office schemes or insurance products to save tax.
Since this is the first time you’re doing this and it’s rather late in the day to understand the nuances of these schemes properly there are two things you can keep in mind to help you make a quick decision.
First is that ELSS mutual funds have the lowest lock in period of just 3 years among these schemes and also happen to be the only equity product in this list. This means they are mutual funds that invest in shares and there is absolutely no guarantee with them.
Your investment could halve after 3 years, or it could double – it depends on the market, and there are absolutely no guarantees.
The second thing to keep in mind is that if you’re not comfortable taking this risk then you can opt for a fixed income product where the returns are defined at the beginning of the term and you can expect the principal plus interest to be paid out to you regularly. Among these options – a tax saving bank fixed deposit is probably the easiest for you to set up and the yields are as high (if not higher) than the other options.
The limit under 80C is Rs.1 lakh and if you exhaust this limit then you can invest an additional Rs. 20,000 in tax saving infrastructure bonds and reduce some more of your taxable salary.
Finally, if you are under the 10% tax slab and expect some big expenses in the near future then it may not even make sense to block your money in these products. Just pay the tax and keep your money in the bank to meet the expenses.
Keep these things in mind while deciding where to invest to save tax, and leave a comment if you have any questions.
Me and Hemant (TFL) has written one article on Tax Planning which got published in Money mantra magazine. It might be helpful for readers
http://www.tflguide.com/wp-content/uploads/2012/02/tax-planning-customized-Money-Mantra.pdf
One may also take advantage of section 80D by purchasing Health Insurance policies for self, family and parents. Though they may be covered under employer provided coverages, but in today’s kind of uncertain job scenario it would be the wise thing to do. Moreover, going forward this decision will give very positive impact on overall finances.
I HAVE YET TO INVEST 20000 IN INFRA BONDS KINDLY SUGGEST THE RIGHT ONE AND 50000 UNDER SECTION 80 C WHERE TO INVEST AND HOW MUCH. I M AN EMPLOYEE IN PVT COACHING INSTITUTE AND SALARY OF 50K+ AND MY AGE IS 36 YRS. ALSO MY SPOUSE HAS 30K+ SALARY AND RENT A HOUSE AND MONTHLY EXPENSES OF 45K. KINDLY GUIDE ONLY ONE AND HALF MONTH LEFT.
Many many thanks for your kind reply
I always find the tax calculations tough. I have a doubt. Assume a individual’s income is around Rs. 150000/ per year. He holds a debt mutual fund and sells it with in a year. Does it attract short term capital gain tax? My doubt is that if total income is below tax limit, does he still has to pay short term capital gain taxes? Please clarify
Subhadip,
According to income tax act if your income for the year comprised any short-term capital gains taxable under Section 111A or long-term capital gains, then tax on such gains would be payable at the applicable rates even if the total taxable income for the year was less than exemption limit.
Thanks Jitendra!
Subhadip,
To clerify further in case of resident individual, where the total income (after sec 80C to 80U benefits) as reduced by short term capital gains is below the exemption limit, then such short term gains will be reduced by the amount by which total income falls short of maximum exemption amount and balance is charged at 15%.
I think first timer should also understand HRA, medical reimbursement and LTA( if possible 🙂 ), and i have seen most of first timer don’t invest full 1lakh amount even if it was possible
Those are also good points – I already have a few posts on those subjects, let me see if I can write a new one on that with beginners in mind or just link the old ones to this. Thanks for bringing it up.
What a great idea and a great post. Wish I had read it when I started my job (which now seems ages back).
Sadly though we are educated and may be holding an engineering or medical degree we are still financially uneducated. And the first thing that comes to mind on getting the job is “SPEND IT” -no asking parents for money, no justifying the expenses You feel you are the king of the world. Did a post sometime back Educated but have No Financial Education on how first time earners feel.
Tax saving if any comes in Jan end or Feb time when the finance department asks for receipts. Then you either turn to your parents who usually direct you to neighborhood uncle or your friend . Infact most of us don’t understand what basic salary is? how is it taxed?
Salary, Net Salary, Gross Salary, Cost to Company: What is the difference