Equity Linked Savings Scheme (ELSS): Best for Tax-free Earnings

Millions of people in India look out for ways to save tax, and are often overwhelmed with options like insurance policies, the Public Provident Fund (PPF), and several others. Most of these schemes seem attractive to individuals who are willing to wait longer for returns. For those who wish to save tax and earn good returns within a short period of time, they can be a big turn-off. The individuals who do not want to wait for too long to earn their returns can have the best option in the form of an Equity Linked Savings Scheme (ELSS). It not only helps in getting tax benefits, but also offers them a great chance to profit from the equity markets. It qualifies under Section 80C of the Income Tax Act, 1961, for tax exemption; and at the same time, gives investors the double advantage of tax-savings and value appreciation. An ELSS also carries the following benefits:

Equity growth potential: As it is evident from its name, an Equity Linked Savings Scheme invests a major portion of the fund in equity markets and products associated with it. This increases the earning potential of the investors, as there is a corresponding increase in return with the profit that the fund makes from equity markets.

No tax on dividends: Dividends that investors receive under the ELSS are exempted from income tax. Upon choosing the option of dividends, the ELSS investors get their share of profit earned by the fund on a particular date. They can also prefer the option of dividend reinvestment, in which, the dividends declared are reinvested on the investor's behalf.

Tax exemption on long-term capital gains: If an investor chooses the growth option in ELSS, the Net Asset Value (NAV) of the fund increases with the profit that it earns. The investor does not earn any dividend during the lock-in period of the fund, but he or she can have long-term capital gains that are exempted from tax upon selling the holdings.

Lowest lock-in period: This is a major benefit of an Equity Linked Savings Scheme as compared to the other tax saving schemes. An ELSS has a lock-in period of three years, while it is fifteen years in case of Public Provident Fund (PPF) and six years in case of National Savings Certificate.

While it is true that the returns in ELSS are based on the performance of the equity markets, it also gives the flexibility of monthly investments through Systematic Investment Plan (SIP). A minimum investment specified in the scheme can be made every month on a pre-decided date, which makes it an attractive investment scheme to the small investors. Under the Income Tax Act of 1961, an individual can avail a deduction of up to one lakh rupees from the Gross Total Income for the investment made in an Equity Linked Savings Scheme. Owing to such attractive benefits, the ELSS is gradually becoming a preferred option for investment among many individuals in India, and the numbers are bound to increase in the years to come.

Section 80C: Buying a property to save tax!

We all are aware that interest on home loan is a popular deduction that many are aware of. The principal amount repayment as well as the stamp duty and registration charges are another payments that are also eligible deductions under section 80C.

Let us try to understand this better through a case study.

Amol has recently married and intends to invest in house property in Pune. The property rates in Pune are well above his budget, but he intends to bridge the gap by taking a home loan for almost 60% of the cost of his property. He has zeroed in on a property that costs Rs.65,00,000. He has savings of Rs.20,00,000 and intends to take a loan of the remaining Rs.45,00,000. The deal for the property is going to be signed in June 2015. Amol is quite happy that finally he is going to fulfil his dream of buying a home but has a few doubts about the tax implications and his future outgo of money in form of installments. Although he is aware that he will receive a huge deduction from tax for the interest repayment, he is interested in knowing whether his property deal might give some more eligible deductions. 

He visits a tax expert and gets his doubts cleared. His tax expert explains him that buying a property and taking a home loan for it has many positive tax implications. Although housing loan repayments will take away a large chunk from the monthly income, there are a lot of tax savings opportunities that a home loan offers. Real estate and property have always been costly and with the rising property costs, loan seems to be the only way out for most people to own a house. Hence the Income Tax department has offered a lot of tax relief to home loan borrowers. The first deduction that Amol will get when he signs the property deal is that of the stamp duty and registration charges. These can be claimed under section 80C of the Income Tax Act. These can be claimed by Amol in the year when these payments are made by preserving a copy of the Index II and receipts as a proof of payment. Apart from this, section 80C also offers a deduction of up to Rs.1,50,000 for principal repayment every year till the repayment is complete. These deductions will give Amol a scope to save taxes even if he has to make huge repayments for home loan in addition to the interest repayment deductions of up to Rs.2,50,000 that he can claim u/s 24. If the interest repayment deductions are also added then the total deductions available to Amol will be as follows -

Amount of home loan – Rs.45,00,000

Interest rate - 10.50%

Details	Total repayment(Rs)	Deduction available (Rs)
Interest repayment in year 1	4,69,198	2,00,000 u/s 24
Principal repayment in year 1	69,927	69,927 u/s 80C
Stamp duty and registration	4,55,000	*80,073

*Rs.1,50,000 – Rs.69,927 = Rs.80,073

The total deduction under Section 80C is Rs.150,000 hence the stamp duty can be claimed only up to Rs.80,073 after claiming Rs.69,927.

In this case the house property is assumed to be self-occupied and hence the deduction is limited to Rs.200,000 for interest. In case the house is vacant or let-out then the deduction is available without any limit of Rs.200,000. Hence if Amol lets out the property then the entire interest amount of Rs.4,69,198 is available as deduction. 

Calculating Indian Income Tax of an Individual - A Brief Review

 

For the Financial year 2015-16, Indian Finance Minister, Mr. Arun Jaitley has announced that an individual can claim exemption from income tax up to Rs 4,44,200.

The above line would mean nothing to majority of people in India. As most of them don’t know how Indian Income Tax works. Here we will explain how income tax is calculated for an individual in a most simple and easy way.

Let us understand what Income is- The Indian Income Tax Act, 1962 has segregated Income of an individual into different categories namely:-

·         Income from salaries

·         Income from house property

·         Profits and gains of business or profession

·         Capital gains

·         Income from other sources

·         Agricultural Income

A point to be noted here is that agricultural income is not subject to tax. Agricultural income includes income earned from

Ø  Rent received or derived from land situated in India used for agricultural purposes.

Ø  Income derived from the usage of land by agriculture operations including sale of agricultural produce.

The sum total of all the income from above mentioned categories except Agricultural Income will ascertain Gross Total Income of the individual.

There are certain deductions allowed by the Government under Sections80 C, Section 80 D to the tax payer. You can check all the types of deductions here.

After discounting permissible deductions from the Gross Total Income, we get our Taxable Income. Taxable Income are taxed as per tax slabs which remain unchanged from the year 2014-15

Tax slabs for the financial year 2015-16

For Individuals below the age of 60

Income Tax Slabs	Income Tax Rates
Where Total Income is less than Rs. 2,50,000	NIL
Where the Total Income is more than Rs. 2,50,000 but doesn’t exceed Rs. 5,00,000	10% of the Amount by which it exceeds Rs. 2,50,000
Where the Total Income is more than Rs. 5,00,000 but doesn’t exceed Rs. 10,00,000	20% of the Amount by which it exceeds Rs. 5,00,000
Where the Total Income is more than Rs. 10,00,000	30% of the Amount by which it exceeds Rs. 10,00,000

For Senior Citizens above 60 years to 80 years of Age

Income Tax Slabs	Income Tax Rates
Where Total Income doesn’t exceed Rs. 3,00,000	NIL
Where the Total Income is more than Rs. 3,00,000 but doesn’t exceed Rs. 5,00,000	10% of the Amount by which it exceeds Rs. 3,00,000
Where the Total Income is more than Rs. 5,00,000 but doesn’t exceed Rs. 10,00,000	20% of the Amount by which it exceeds Rs. 5,00,000
Where the Total Income is more than Rs. 10,00,000	30% of the Amount by which it exceeds Rs. 10,00,000

For all Senior Citizens above 80 Years of Age

Income Tax Slabs	Income Tax Rates
Where Total Income doesn’t exceed Rs. 5,00,000	NIL
Where the Total Income is more than Rs. 5,00,000 but doesn’t exceed Rs. 10,00,000	20% of the Amount by which it exceeds Rs. 5,00,000
Where the Total Income is more than Rs. 10,00,000	30% of the Amount by which it exceeds Rs. 10,00,000

Your taxable amount will be taxable as per the rates in which you fall. Say if you are under 60 years of age and your Taxable Income is 600,000, your tax amount would be 20% of (600,000-500,000) which is Rs 20,000/

Education Cess @ 2% and SHEC @ 1% is levied on the tax calculated using the Income Tax rates mentioned above. In other terms you can say it as tax on tax.

So in the above example, your total tax payment would be Rs.20,000 plus 2% Education Cess on Rs.20,000 plus 1% SHEC (Secondary and higher education cess) on Rs.20,000 which would be Rs.20,600.