How to Save Personal Income Tax in 2018

In India, taxpayers start planning to save tax, primarily with the announcement of Annual Budget. While you start choosing an apt tax saving scheme, among several other factors (such as liquidity, safety, and returns) make sure you also understand how the returns are going to be taxed. There are numerous tax saving options available, including National Savings Schemes, 5-year term-deposits with banks / post offices, among others, the interest earned on these gets added to your income and thus, is counted as a taxable component.

This interest income can still be tax-exempt, if planned and executed smartly. But before discussing these smart tools, here are key takeaways from the Modi government's 2018 Budget introduced under the direction of Finance Minister, Arun Jaitley:

• Income tax slabs remained unchanged and cess on income tax hiked from 3% to 4%;
• Standard deduction reintroduced at INR 40,000 (was scrapped in the 2005-2006);
• Existing annual transport allowance (INR 19,200) and medical reimbursement (INR 15,000) withdrawn, with an exception for differently-abled individuals
– Prima-facie income exempted from tax after setting off this gain and loss situation is just INR 5,800
• Long-term capital gains (LTCG) tax re-introduced at 10% on gains from the transfer of listed equity shares exceeding INR One Lac, without allowing any indexation benefit. All such gains, however, up to January 31, 2018 will be exempt;
• Women, joining the workforce for the first time, to contribute just 8% EPF (instead of 12% or 10%) for the first three years; While a provision of 12% contribution from the government for new employees, falling under the EPFO domain
• Dividend Distribution Tax (DDT) introduced on equity-oriented mutual funds at 10%, to provide a level field across growth oriented and dividend distributing schemes, a big minus for taxpayers
• The budget, however, has introduced numerous benefits for senior citizens: Deduction limit under section 80-D for them hiked to INR 50,000 from INR 30,000; Exemption on the interest income on bank and post office deposits hiked to INR 50,000 from INR 10,000; and Proposal to increase the investment limit under the pension scheme,
Pradhan Mantri Vyay Vandana Yojana (PMVVY), to INR 15 Lac from the present INR 7.5 Lac

These recent taxation alterations will surely push you to think intelligently for earning more and saving more. Let’s understand some widely adapted tax saving financial products that not just help you save tax, but let you earn a tax-free income as well:

Equity-Linked Savings Schemes (ELSS) are Equity Mutual Funds, where-in the invested amount, for up to INR 1.5 Lac, qualifies for tax benefit under Section 80C, with tax-free long-term capital gains yielding at a lock-in period of just 3 years. One may choose from dividend and / or growth options, while former suits investors who look for a regular income (though not assured), the latter suits more who wish to save for their long-term need. Further, the dividends in an equity scheme are tax-free thus, investing in ELSS capitulating tax-free income for the dividend as well as growth unit holders.

Public Provident Fund (PPF) is still the most appraised savings option for several investors, as it guarantees the principal and interest earned, with tax-free returns. PPF is a 15-year scheme (can be extended indefinitely for 5 years), with current annual rate of 7.8% (changing every three months). Minimum yearly deposit required to keep the account active is INR 500, with maximum of INR 1.5 Lac can be deposited in a financial year (FY). PPF account can be opened under own name, spouse’s name or on behalf of a minor as guardian, with deduction under Section 80C can also be claimed for savings done in the name of spouse or minors.

Employees' Provident Fund (EPF) enables salaried individual to save tax through involuntary savings and accumulate tax-free corpus. An employee mandatorily contributes 12% of basic salary every month towards his EPF account, with an equal contribution made by the employer, however, just 3.67% of that going into EPF. Only the employee's contribution, up to INR 1.5 Lac yearly, qualifies for tax benefit under Section 80C. Both, employee-employer share, however, qualifies for annual tax-free interest (presently about 8.5%).

Voluntary Provident Fund (VPF) is an extension of EPF, wherein an employee can increase own contribution up till 100% of basic and DA, while other rules remaining same. The interest yielded on EPF/VPF account is tax-exempt, if the employee continues employment for five years or more. VPF option, however, must be used judiciously, as money contributed towards it, which represents additional savings towards retirement, get locked-in for a longer period, if the employee opt-out from the scheme.

Unit Linked Insurance Plan (ULIP) is a blend of protection and saving as it provides life insurance and channelizes savings into various market-linked assets for long-term investment needs. There are about 5 to 9 fund options in ULIP, with varying options of asset allocation between equity and debt. Duration range for ULIPs is 15 or 20 years (or more), with 5 years of lock-in period. The fund value is tax-exempt on exiting the policy (allowed only after 5 years) or on maturity, while any switching between the fund's options is also tax-free, and irrespective of the holding period.

Sukanya Samriddhi Yojana (SSY) offers the highest tax-free returns, with annual contributions qualifying under Section 80C. The scheme was launched as a part of the 'Beti Bachao Beti Padhao' campaign and has guaranteed non-taxable maturity benefits. SSY presently yields an annual interest of 8.1%, and has a maximum annual deposit limit of INR 1.5 Lac. SSY account can be opened with just INR 1,000 any time after the girl’s birth till she turns 10, while it remain operative for 21 years (from opening date) or until the girl’s marriage after she turns 18. The scheme falls under the exempt-exempt-exempt (EEE) status.

There are several other tax-saving options available, like Traditional Insurance Plans, for personal tax-payers, but smart thinking purely depends on a cautious decision for ensuring more earnings and savings together.