What is Investment?The most common response that you might get is that it is ‘a process of spending money for earning more money’. Come to think of it - is the scope of investment limited only to money? If one could stretch their imagination, the scope of investment could be limitless….one could invest in non-monetary items like health, care, vacation, affection, love, family, time, etc, etc., while the returns on these items are limitless and tax-free!
Alarmingly though, in this age of spiraling costs and in the rat race for survival, money is taking priority. Perhaps to many, it would provide confidence or peace of mind to be financially secure, to be able to manage any uncertainty or adversity in the future. Though it is understandable under the current circumstances, care should be taken not to indulge full time in ways and means to make more money and to make that a primary goal in life. Having a prudent investment plan would be a better option to manage this priority.
As a salary-earning community, let us view some low hanging fruits to begin with, which are simpler to adopt. Be aware that income tax rules provide employees with various options on how to reduce their tax liabilities. This activity helps employees to reduce their income tax liability – which in a way itself is a form of forced savings. We must smartly take full advantage of these options before we look at any other available opportunity in an effort to optimize our personal earnings.
Year on year, the payroll department in most organisations would remind its employees to provide an investment plan at the beginning of the financial year and would subsequently ask for documented proof of such investments towards the end of the year. Here, it may seem that employees invest only to the extent of tax saving requirements and treat this as a routine official task! Care should be taken to go through the information and historical data provided by each savings instrument in order to obtain the best advantage on your money.
Let us look at the current options that an employee has, not only in order to save on taxes but to gradually build a good investment portfolio for the future.
Reduce taxable income
(a) If you are staying in a rented house and are paying monthly rent, you can opt for House Rent Allowance (HRA). You will get a tax rebate using this formula: Actual rent paid (minus) 10% of Basic pay + DA. The residual amount can be used to reduce your taxable income.
(b) If you stay in your own house and have availed a housing loan for the same, the amount repaid by you towards principal amount can be claimed as a rebate under Sec.80C, upto the overall limit of Rs.150,000 per annum.
(c) If you have availed of a housing loan for a house which you have rented out to a tenant, then the amount paid towards interest on the said loan can be offset against any income earned as rent under Sec.24 upto a limit of Rs.200,000 per annum.
(d) Additionally, in the event an employee has availed a housing loan for the first time, then an additional rebate of Rs.50,000 per annum can be claimed under Sec.80EE, but under certain specific conditions only.
- Leave Travel Allowance (LTA):
Another most popular item under tax free allowances is LTA. This can be used once in a year and twice in a block of four calendar years. The current block of four years is 2018-21. An employee can travel to any place in India on vacation with immediate family members by any mode of travel. The cost of travel (limited to ticket costs only) for all family members can be claimed as a rebate under Sec.10 (5). Generally, the maximum limit to claim LTA is determined by the C&B team of the organisation and is left to the employee to opt for the full amount upto the prescribed limits or less, depending on the employee’s capacity to provide supporting documents to make such a claim for rebate.
RELATED: Leave Travel Allowance: Through a magnifying glass
Reduce tax liability
Once the allowances are taken care of, there is another opportunity provided by the income tax department in order to reduce the tax liability – i.e., Investments under Section 80. While there are several options available under this section, the most popular ones are detailed below.
Section-80C permits an employee to invest an overall amount of upto Rs.150,000 per annum in various government-approved instruments such as Insurance premiums, Unit Linked Insurance Plan (ULIP), National Savings Certificate (NSC), Post office savings, 5-year Bank Fixed Deposit, Pubic Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), Housing loan principal amount, National Pension Scheme (NPS), etc. In addition, the value of Provident fund contribution by the employee is automatically treated as investment under this section. An employee who has opted for Voluntary provident fund (VPF) over and above the statutory PF contribution can also include it as investment under the said section.
Section 80CCD allows an additional Rs.50,000 per annum as investment in NPS in an individual capacity.
Section 80D and its various sub-sections permit employees to claim rebate for the medical insurance premium paid for self and family.
Section 80TTA allows an employee to claim rebate of upto Rs.10,000 per annum toward any interest income received on bank savings accounts.
- Standard deduction:
The government recently reintroduced standard deduction of Rs.40,000 per annum for all tax payers from FY2018-19. This amount will help to reduce the taxable income by the said amount.
In summary, if tax free allowances are claimed and investments done and standard deductions availed, there is a substantial amount that can be saved in form of taxes. This in turn means cash in hand. Additionally, the amount so invested will fetch handsome returns by way of interest. Some of the instruments carry a burden of tax exposure on interest earned at the end of their tenures, so care should be taken to invest in tax-free instruments as much as possible. These are typically called ‘EEE’ or ‘Exempt-Exempt-Exempt’ instruments. In other words, the first ‘exempt’ will provide tax exemption at the point of purchase during the current financial year. The second ‘exempt’ means any interest accrued during the year or subsequent years is also exempt from tax and the third and final ‘exempt’ means the interest actually earned at the end of the tenure or at maturity of the instrument is also exempt from taxes. Generally, these types of instruments would have a lock-in period where the principal amount or interest earned thereof cannot be withdrawn midway during the tenure of the instrument.
These instruments can be renewed for further terms upon each maturity and then gradually, these will accumulate into a good corpus for the future or as retirement funds. One must be conscious not to liquidate these instruments for non-critical or manageable expenses, which can otherwise be managed by way of short-term loans or borrowings. Borrowings from PF accumulations is a strict no-no though the government allows for such borrowings only for a very few situations such as medical emergencies, higher studies, house purchase, marriage and maternity expenses.
Most investment gurus would suggest adopting a personal habit of ‘first invest and then spend’ rather than to ‘spend first and then invest’. A good investment plan should be fitted into the normal monthly expenses, however small or affordable it could be. Not to forget, a comprehensive medical insurance coverage for entire family and a term life insurance is a must in the pool of investments, as this will provide substantial support in case of any unforeseen exigencies.
Many banks offer flexible fixed deposit schemes where any unused balance in your bank account will be converted automatically into short term fixed deposit, thereby earning higher interest. The account will be treated similar to a savings account with no penalty or requirement of documentation for withdrawal of money.
Some banks providing credit cards offer attractive schemes and/or award points for purchases made through them or services availed in lieu of cash. There is dual advantage to this as actual cash outflow is restricted to the bare minimum and may also earn some money in the form of savings bank account interest or through short term flexible fixed deposits. Secondly, the points earned can be redeemed for goods or any other services. One such bank offers ‘Turbo points’ where the points earned for using their credit card is exchanged for cost of petrol or diesel, which is proving to be a very expensive commodity now a days!
All these initiatives would form a part of smart earnings, as we strictly adhere to the popular maxim ‘every penny saved is a penny earned.’