Saturday, 27 January 2018

What we should not do When Investing in Tax Saving Mutual Funds !!

We have just two two months left for this financial year and many of us might already have made all the tax saving investments. But many others may be still waiting to completely utilise the tax-saving exemptions available under Section 80C.

We have many tax-saving avenues available, such as Public Provident Fund (PPF), Tax-saving Bank Deposits, National Savings Certificates (NSC) etc., many are flocking to tax-saving mutual funds also known as Equity Linked Saving Schemes (ELSSs). With the falling interest rates on fixed income products and high growth in equity mutual funds, investors are flocking to the equity market in the quest to earn higher returns.
 

PPF, which has a 15-year lock-in (with partial withdrawal after 6 financial years) and bank FDs or NSCs that have a 5-year lock-in while investments in ELSSs are locked in for three years only. This makes it more liquid than other options.

ELSS could be a prudent choice as compared to other fixed income products however as applicable to all market linked investments, there ELSS also has a risk. We should not just get carried away by the double-digit past returns but do it systematically through a well-defined process.


Here are few things which we should not do when investing in ELSS.

 
1.     Investing lump sum rather than in staggered manner:

Many of us invest suddenly wake up for tax saving when the HR of company asks for the proof and then invest full amount at one go in ELSSs. This is not the right way for equity investments as lump sum investments in equity mutual funds might expose our self to a high-volatility risk. Hence, even if we wish to invest lump sum the better way is to invest in a staggered approach is prudent.

The best approach to is to opt for Systematic Investment Plans (SIPs) which helps us to sail the tides of market volatility.  This helps us to accumulate more units when markets go down. It will be best way to start a SIP in an ELSS at the beginning of the financial year. This will help average out the cost as well as will not put all burden in the last months of the year.
   
2.     Not understanding the real risk:

We all heard about this famous tagline in every mutual fund ads “Mutual Fund Investments are subject to market Risk Pease read all scheme related documents carefully”
However still we get carried away with the past performance with the belief that it will continue. Mutual funds returns are not fixed and while investing we should always keep this in mind. Further the returns also depends upon portfolio where the scheme has invested. Therefore it is always better to understand the particular scheme and its portfolio details before making an investments just based on past performance.

3.     Not Matching financial goals with the investments:

It is very important to be clear on our financial goals and select the right investment based on the goals. Making investments without goals is like starting a journey without knowing the destinations. If we don’t know the destination we may not be able to select the right vehicle i.e. whether a car is good or train or a plane and may end up selecting a wrong vehicle which may either not take us to the destination or not within our timeline.
Similarly investment should also be made based on financial goals, investment objectives, investment horizon, and risk profile which will help us to select right investment option and make our investment journey easy and enjoy full.

4.     Not selecting the right option:
 
Mutual funds have two options; growth and dividend. Growth is for those who don’t need money now and want to grow wealth for long duration to achieve financial goals later on. While dividend is for those who need money on regular basis may be to meet their regular expenses.
We should select the right option based on our specific needs so that we get the benefits as desired. Since dividend is paid out of the investors own money, just for the sake of getting money on regular basis does not serve purpose if we actually don’t need it.


 
5.     Following the tips rather than the professionals: 


One person cannot do everything. Doctor are good for advising medicines, Lawyers are good for legal matters similarly Financial advisors are required to get the right advise for our achieve our financial goals.
Some time we just get influenced by some friends/relatives or do our own research in internet to buy financial products. It is like taking medicine by searching on google will that cure or no is a big question mark.
It’s always better to take professional advice so that we are more comfortable and sure that what we are doing is right and make our financial wellness better.

6.     Over diversification:


It’s good to diversify but if it’s too much it may actually not help. Like in food if we have 5-6 items we may enjoy it but if the items are 50-60 we may not be able to enjoy them in fact get confused or eat something which may not be good for us. Diversification is must and is the core principal for investing in mutual funds, however adding too many schemes to the portfolio, especially on the equity side, adds no value. It will lead to over diversification and reduce the potential of your portfolio to generate superior returns.

It is better to invest only in few selected consistent performers tax saving schemes which offer exposure to the entire spectrum of the markets. It is also important to review the portfolio every year and replace the bad performers.
 
7.     Investing in close-ended long term funds:

ELSS schemes have lock-in period of three years, t there are schemes which have tenure up to ten years. It is good to invest for long term however investing in long term close ended schemes reduces our flexibility to take out the funds when it is not doing well.

We should invest for the long term, but opt for an open-ended scheme. The performance of different schemes keeps on changing due to various reasons so it is always better to have control in our hand so that we can shift from one scheme to other if it is not doing well.


To Conclude


Tax saving schemes helps us to save tax and also inculcates a habit of savings for long term which is very good and required for every individuals. However last minute tax planning, that also only for the sake of saving tax can lead to lower savings and inefficient investments. It is always better plan for taxes at the start of the year, to see where we stand and make adjustments later on if required. We should know the various routes to save tax on your income and a professional’s advisor can add value in our investments. 

Saturday, 13 January 2018

Tax Benefits beyond 80C

We all know about 1.50 Lakhs tax savings under section 80C of Income tax Act. However there are many more things which a salaries employee can do to save more taxes as permissible under income tax act. Let’s discuss few of them which are important.


A-Mediclaim and Health Insurance benefits

You are allowed to claim a deduction up to Rs. 25,000 per budgetary year for medical insurance premium instalments. The premium should be for you, your spouse, and dependent children. On the other hand, if there is a chance that either you or your spouse is a senior citizen (60 years or above), the limit goes up to Rs. 30,000.
However, Medical insurance premium should be made through online banking, a cheque, draft, debit or credit cards, etc. Tax reduction is not accessible for cash instalments of the premium. In any case, instalments for preventive health checkup can be paid in cash. 

1- Deduction on Preventive Healthcare Checkups
You get tax reduction on preventive health checkups annually. Inside the aforementioned limit of Rs. 25,000 (or Rs. 30,000 all things considered) under Section 80D income tax, you can also claim expenses incurred for preventive health checkups up to Rs. 5,000 for each budgetary year.
Remember: The premiums paid for health insurance availed by your siblings are not qualified for tax benefits.

2- Deduction on Health Insurance Premium Payment for Parents
Medical insurance premium paid for guardians is additionally qualified for deduction up to Rs. 25,000 every financial year. If your father or mother, or either of them is a senior citizen, the maximum limit goes up to Rs. 30, 000 a year. This limit additionally subsumes Rs. 5,000 that can be caused towards your parents’ annual health checkups.

What if my wife and parents are not dependent on me? Can I still claim deduction if I pay premiums for their health insurance?
Yes, you can claim deduction in this case. This deduction is available to those who pay health insurance premium members of their family irrespective of whether the members are dependent on the person or not.

Can health check-up expenses be claimed separately for each dependent?
The answer is no because you can only claim Rs. 5,000 in a year for these expenses whether for a single dependent or multiple dependents. This deduction cannot be claimed per person basis but as an aggregate.
For e.g., If a person pays any amount on preventive health check-up (for himself + spouse & dependent children + parents), the gross total deduction allowed would not be more than Rs. 5,000.

3- Deduction on Health insurance premium for very senior citizens
Super-senior citizens (80 years or more) who don’t have any insurance policy can claim a deduction up to Rs. 30,000 every financial year towards medical checkups and treatments. However, this is not for own expenses.
On the other hand, if your dad is a super senior citizen and he has no insurance and mother is a senior citizen, then you are allowed to claim a tax deduction of Rs. 30,000 towards your medical treatment for guardians, medical coverage and registration of both guardians.

4- Deduction Under Section 80DDB (Treatment of Specified Illnesses)
You can get a deduction up to Rs. 1, 40,000 (Rs. 60,000 for senior citizens and Rs. 80,000 for extremely senior citizens) for medicinal expense incurred for determined ailments. For example, cancer, chronic renal failure, Parkinson infection, etc. The complete list of such diseases is given in Rule 11DD.
You have to attach an endorsement from specialist while filing income tax forms.
You can claim for self, spouse, guardians, children, and siblings.

5- Deduction Under Section 80DD (Treatment of a dependent with disability)
You can claim the benefit up to Rs. 75,000 based on the expense incurred for nursing, training, medical treatment, preservation, and rehabilitation of a dependent with disability (Rs. 1.25 lakh for an extreme and serious disability). Reliant can be any of your parents, children, your spouse, or siblings. You need to show or submit a supporting medical certificate.

6- Deduction Under Section 80U (Person with disability)
A person who is a disabled can claim benefits of Rs. 75,000 under Section 80U. In case of disability, the limit increases up to Rs. 1.25 lakh. There is no other relation to the treatment costs.

B- House Rent Allowance (HRA)

HRA stands for House Rent Allowance.
It is taxable under the IT Act subject to specified exemption limits. 
If you do one of the following then your HRA is fully taxable, not exempt if you:
       i.          Reside in your own house; or
      ii.          Do not pay rent for house occupied by you.
However, if you are living in a rented house and paying the rent, then HRA exemption can be availed for the period during which you occupy the rented house during the relevant tax year. 


Also, to claim the exemption, your employer is required to obtain appropriate and adequate proof of payment of rent for the entire period for which you want to claim exemption. 

An exception to the 'proof required' HRA rule is that, if you are a salaried employee drawing HRA up to Rs. 3,000 per month, you do not have to provide a rent receipt to your employer.

The maximum amount that can be claimed as an exemption under HRA is the least of

       i.      Actual HRA; or
      ii.      Rent paid in excess of 10% of basic salary + Dearness Allowance
             (DA) if in terms of service; or
     iii.     50% of basic salary + DA in case of Chennai, Delhi, Kolkata, Mumbai
             or  40% of salary + DA in case of other cities

Documents required to claim HRA:
To obtain HRA exemption, you are required to submit appropriate and adequate proof of payment of rent for the entire period for which you want to claim exemption.
       i.   Submit Rent Receipts or the Rent Agreement to your employer if your rent does not exceed Rs 1 lakh annually.
      ii.   If you are paying an annual rent of more than Rs 1 Lakh (i.e. Rs 8,333 per month), report the Permanent Account Number (PAN) of your landlord to the employer (Earlier you had to furnish a copy of the PAN card of your landlord only if your annual rent exceeded Rs 1.80 lakh, or Rs 15,000 per month).
if your landlord does not have a PAN, you need to file a declaration to this effect from your landlord along with the name and address of the landlord.
     iii.   As an employee, if your salary has an HRA of less than Rs 3,000 per month, you are not required to provide a rent receipt to your employer.
Even if you are not living in a rented accommodation, you still have few options to claim HRA exemption. Some common questions asked for HRA exemption are as follows:

1. Can I Pay rent to my parents/ spouse and claim for HRA exemption? 

Yes, you can pay rent to your parents and claim for HRA exemption if they own that house. However In this case, they have to claim that rental income from house property.
But, you cannot pay rent to your spouse and claim for HRA exemption if you own that house. And if you live in a house owned by your spouse, you can claim for HRA exemption.

2. Can I claim HRA if I pay rent to my relative? 

Yes, If you are living in a rented apartment owned by a relative. However it is always better to enter into an agreement and make sure that you pay rent by cheque or electronic transfer. If paying by cash, ensure that your cash transaction is traceable. Mere rent receipts won’t suffice to claim deductions.
In order, to maintain healthy relations, it is recommended to keep your money and legal relations crystal clear, so that there is no awkward situation in future. By doing so you can eliminate the potential for relationships to turn sour.

3. Can I claim both HRA and take home loan deduction benefit to save tax?
Yes, as far as the IT Act is concerned – the two sections on HRA and Rental Income are completely separate, so you can avail HRA exemption and also home loan tax benefits.

For example:
Suppose you are renting a house close to where you work, but your home is elsewhere, and you are repaying a home loan on your home property. In this case you can avail your HRA deduction, as well as take the tax benefit of the home loan. The two sections (dealing with HRA and Home Loan benefit) are completely separate in the IT Act.

Also remember, if you are renting out the property on which you have taken the home loan and are receiving rental income, your rental income is taxable, after the standard deduction of 30%.

4. Can I claim HRA if I live in a house that I own?
No, you cannot claim for HRA deduction against the house you own, because logically you do not pay rent to yourself for living in that house.

5. Can I claim HRA if I'm not currently paying any rent?
No, you can claim for HRA deductions only if you have a proof for the expense incurred. In other words, you need to have electronic/ traceable proof of the amount equal to the rent paid.


If you claim rent allowance while paying rent to your relatives/ family members it is better to fulfil below conditions:
1.     Enter into an agreement such as leave and license agreement
2.     You must incur the expense of rent and preferably pay via bank transfers     or cheque
3.     If rent is paid in cash, then it should be traceable – via bank withdrawals
4.     The said rent paid must be reasonable as per the ongoing rent in the locality
5.     Further, disclosure of rental income by the recipient is recommended to avoid scrutiny


C- Deduction for self-contribution to NPS – section 80CCD (1B) 
A new section 80CCD (1B) has been introduced for an additional deduction of up to Rs 50,000 for the amount deposited by a taxpayer to their NPS account. Contributions to Atal Pension Yojana are also eligible.
Employer’s contribution to NPS – Section 80CCD (2) Additional deduction is allowed for employer’s contribution to employee’s pension account of up to 10% of the salary of the employee. There is no monetary ceiling on this deduction.

D- Deductions on Interest on Savings Account
A deduction of maximum Rs 10,000 can be claimed against interest income from a savings bank account under Section 80TTA of Income Tax Act. Interest from savings bank account should be first included in other income and deduction can be claimed of the total interest earned or Rs 10,000, whichever is less.
This deduction is allowed to an individual or an HUF. And it can be claimed for interest on deposits in savings account with a bank, co-operative society, or post office. Section 80TTA deduction is not available on interest income from fixed deposits, recurring deposits, or interest income from corporate bonds.


E- Leave Travel Allowance (LTA)

As a salaried individual, you can claim LTA for any journey made either alone or with dependent family members in India. The maximum amount you can claim is the least of:
The amount actually incurred; or
The amount of LTA allowed
The exemption is extended for two journeys performed in a block of four calendar years. The current block is 2014-2017. The exempted amount is restricted only to expenses incurred on travelling to the destination. It does not include expenses such as hotel bills, food, etc.

F- Transport allowance

Expenses incurred to commute between your home and work place is also exempt from tax. The maximum amount that is exempt is Rs 1,600 per month.


G- Medical reimbursement

Expenses incurred by you or your family for medical purposes can also help in reducing the tax liability. A maximum of Rs 15,000 can be claimed every financial year for medical expenses. But to claim this, you are required to submit, to your employer, the medical bills for the financial year stating the total amount you intend to claim.

H-Deductions on Education Loan for Higher Studies

A deduction Section 80E is allowed to an individual for interest on loan taken for pursuing higher education. This loan may have been taken for the taxpayer, spouse or children or for a student for whom the taxpayer is a legal guardian. The deduction is available for a maximum of 8 years (beginning the year in which the interest starts getting repaid) or till the entire interest is repaid, whichever is earlier. There is no restriction on the amount that can be claimed.


To Conclude
Last minute tax planning can lead to lower savings and inefficient investments. It is always better that you need to plan your taxes at the start of the year, to see where you stand and make adjustments accordingly. It is important for you to know the various routes to save tax on your income the legal way so as to save tax and also invest in much better way.