How to save tax for Home Buyers and Investors

The tax saving season is on and both the salaried and non-salaried taxpayers have started comparing tax saving investment options for the financial year 2018-19. There are a number of investment options available to taxpayers, that can help them save tax but also generate tax-free income.

While deciding the right tax saving plan, investors should keep in mind several factors like safety, liquidity and returns, as well as understand how the returns would be taxed. If the income earned is taxable, then they will eat into your earnings.

Some financial products like Senior Citizens' Savings Scheme (SCSS), National Savings Certificate (NSC), 5-year time deposits with banks and post offices, generate an interest amount which gets added to their income and is liable for taxation. Those these financial tools help you in saving tax in the current year, the interest income generated from these becomes a tax liability each year. The amount earned in a taxable instrument comes down after factoring in tax. So, for example, if someone pays 30% tax, then the post-tax return on a 5-year bank fixed deposit of 7% comes down to 4.9% per annum, excluding the surcharge!

Some of the instruments that can help you earn tax-free income are:

1.Equity-linked savings schemes

Equity linked savings schemes (ELSS) are diversified equity mutual funds and investment amount up to Rs 1.5 lakh a year and qualifies for tax benefit under Section 80C of the Income Tax Act, 1961 for a lock-in period of 3 years. Any LTCG made on transfer of equity MFs from April 1, 2018, having an equity exposure of 65% or more including Equity-linked savings schemes (ELSS) will have to pay a 10% tax on long-term gains. Any income above Rs 1 lakh per annum will only be subject to tax and any gains made.

2. Public Provident Fund

Public Provident Fund (PPF) Scheme, 1968 is another favourite savings avenue for several investors. The principal and the interest earned have a sovereign guarantee and the returns are absolutely tax-free. Investment in PPF earns 8% per annum interest. For someone paying 31.2% tax, it accounts for 11.62% taxable return. A PPF account can be created by anyone starting from Rs 500 per month and a maximum of Rs 1.5 lakhs.

3. Employees Provident Fund

(EPF) helps a salaried individual save tax through involuntary savings and the returns earned are also tax-free. An employee contributes 12% of one's basic salary each month mandatorily towards his EPF account. Employees can earn a tax benefit under Section 80C of the Income Tax Act, 1961, up to a limit of Rs 1.5 lakh a year. The interest earned is tax-free is the employee stays in the organisation for 5 continuous years.

4. Unit linked insurance plan

Unit-linked insurance plan (Ulip) offers a combination of protection and saving, and provides life insurance as well as provide investment in market-linked assets.

5.Traditional insurance plans

Traditional insurance plans have a savings element and come with a fixed term and a fixed sum assured. The premium paid under the scheme qualifies for tax benefit under section 80C.

The new budget has also provided relief to home buyers. Home loan borrowers can claim these additional benefits to save tax.

1. Extra deduction on home loan for

The tax impact on Real Estate for first-home buyers availing home loans in 2016-17 were allowed to take additional tax benefit of up to Rs 50,000 under Section 80EE of the Income Tax Act, 1961. Home loan borrowers paying interest on the loan can claim a deduction of interest up to a maximum of Rs 2 lakh per annum under Section 24. However, this deduction is current on a self-occupied property only.

 2. Increase in time period for deducting interest

The interest payable up to Rs 2 lakh gets deducted from gross total income and is applicable when the construction of the house is completed within three years from the end of the fiscal year in which the loan was taken. However, the period has been increased to five years in the Union Budget 2016.

3. Benefit for those not getting HRA:

Section 80GG provides for a deduction of any expenditure incurred by an individual in excess of 10% of his total income towards rent payment. The maximum limit for deduction has been increased to Rs 5000 per month.

Consumers can get benefits if tax in Real Estate industry is reduced further and home buyers paying EMI’s on their home loans but not getting possession of their homes can get tax relief. These will help home buyers as well as investors save money and earn an income as well.