Women, invest wisely to save tax

Even as the buzz around women empowerment gets louder by the year, data from the 2017 Global Financial Literacy Excellence Center study on gender gap in financ​ial literacy showed that only 20% of Indian women understood financial concepts compared with 28% of men. While both metrics are alarming, the situation in the case of women is more acute considering they are expected to live longer than men by six to eight years, on average, according to the World Health Organisation. This effectively means women need a larger financial reservoir than men to ensure financial security in their sunset years.

There is an urgent need for financial literacy among women. A big part of this curriculum is how to reduce tax outgo. This article provides some solutions.

Steps to holistic tax planning


​Ready Reckoner

The Income-tax Act, 1961 offers several tax saving options in India. Women can consider investing in traditional and safe (fixed returns) investments such as PPF, NSC, 5-year bank fixed deposits (FDs) or equity-based instruments such as ELSS or even ULIPs, which also offer an insurance cover. In addition, contribution towards pension plans as National Pension System (NPS), Employee Provident Fund (EPF), medical insurance and interest on home loan or principal repayment, payment of children’s tuition fees and Sukanya Samriddhi Scheme for the girl child give tax benefit.

Women can also avail standard deduction of Rs.50,000 from salary income.Women can claim tax deduction under Section 80TTA on the interest earned from savings account up to Rs.10,000 and women who are senior citizens can claim deduction of up to Rs.50,000 under section 80TTB on interest earned on deposits (including time deposits).

Tax saving options

Section Investment/ Deduction Limit Tax Saving Option
80CRs 1,50,000

i) ELSS offered by mutual funds

ii) ULIPs offered by insurance companies

iii) Traditional – PPF, NSC, five-year bank fixed deposits

iv) Premium paid on traditional life insurance plans

v) Pension plans such as NPS and EPF

iv) Sukanya Samriddhi Scheme (for girl child)

v) Payment of tuition fees for children to any school, college, university or educational institution

vi) Housing loan – repayment of home loan principal

80CCD Additional deduction of Rs.50,000

Investment in tier 1 NPS accounts are eligible

80D

Rs.50,000 (Rs.25,000 for family and parents)*

Rs.75,000 (Rs.25,000 for family and Rs.50,000 for parents) ^

* Investment in medical insurance for self, spouse, children and parents below 60 years

^ Investment in medical insurance for self, spouse, children and parents above 60 years

80EEERs.50,000Additional interest on housing loan taken between April 1, 2016 and March 31, 2017

80EEA

Rs.1,50,000

Additional interest on housing loan taken between April 1, 2019 and March 31, 2021$
80EEBRs.1,50,000

Interest on electric vehicle loan taken between April 1, 2019 and March 31, 2023 
80URs.75,000Deduction in case of being totally blind or physically handicapped
80G50% or 100% of donation50% or 100% of donation made to charities and relief funds

10(13A)

House Rent Allowance (HRA)

The exemption for HRA benefit is minimum of the below options and, hence, to avail maximum benefit one must restructure:

i) Actual HRA received
ii) 50% of salary if living in metro cities, or 40% for non-metro cities
iii) Excess of rent paid annually over 10% of annual salary

24Rs.2,00,000

Interest paid on home loan

​​

$-Amended to March 31, 2022 by Finance Bill 2021 (yet to be enacted)

Don’t get confused, invest as per your per risk-return profile

Having a plethora of options makes it difficult to choose. A simpler way is to pick products that suit your risk-return profile. For instance, younger women with risk-bearing capacity can consider investing in equity-linked instruments. Equity as an asset class has historically providedreasonable returns over longer periods. S&P BSE Sensex has returned 15%, on average, over a 15-year daily rolling return period since its inception in June 1979 till January 2021. So, why not harness the power of strong returns while saving on tax? ELSS offered by the mutual fund industry allows this. ELSS invests in a diversified portfolio of stocks and units that have to be held by investors for at least 3 years to claim tax rebate.

Building a case for ELSS

Lowest lock-in period: ELSS has a lock-in period of 3 years compared with 5 years for NSC, FDs and ULIPs; and 15 years for PPF.

Professional management: Investments in ELSS are managed by professional and experienced fund managers, whose experience helps pick the right stocks.

Diversified portfolio of stocks: Equity diversification across market capitalisation puts investors in a more advantageous position to benefit from changes in the underlying market. Large cap exposure helps limit losses in a downtrend, while small and mid-cap exposure boosts performance in an uptrend.

Flexibility to SIP: Systematic investment plans (SIPs) can help capture returns generated by equities and minimise risks of investing in a volatile asset class. SIP is an easy, hassle-free and affordable way of investing in mutual funds, as it ensures regular investments at bo​th high and low points of the market. It captures the opportunity that is otherwise difficult to forecast, averages the cost, and instils discipline. However, investors must note that they can claim tax benefits only if they hold ELSS investments for at least 3 years. For the record, every SIP instalment gets locked in for three years.

Long-term wealth creation: ELSS invest in equities and for wealth creation one needs to stay invested for a long duration. Investment beyond 3 years can build a corpus. For instance, Rs 3,000 invested through a monthly SIP on the first day of the month starting February 2006 in the weighted average index of CRISIL-ranked ELSS category funds amounting to Rs 5.40 lakh, has grown to Rs 14.11 i lakh over 15 years ended January 2021.

iSource: CRISIL Research

Summing up​

Taxes have to be paid. But their outgo can surely be reduced while generating optimum re​turns from tax-saving instruments. Before choosing, identify your risk-return profile based on age, conduct due diligence on different schemes, plan your investments systematically, and be disciplined.

Disclaimer: Any comparison/data mentioned in this material is for general information only and not intended to be relied upon a​s investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Information and content herein have been provided by CRISIL Research, a Division of CRISIL Limited, and is to be read from an investment awareness and education perspective only. Recipient are advised to seek independent professional advice before making any investments. The views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader. SBI Mutual Fund / SBI Funds Management Private Limited is not guaranteeing or promising or forecasting any returns. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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