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Tax time!

Author: admin

Financial adviser Dick Mody’s guide to intelligent tax planning

 
It is human tendency to try and retain as much of the income we generate—whether from a salary or business—rather than part with it. This becomes easy, especially if the following three conditions prevail: high proportion of cash transactions in the economy, high tax rates, and presence of easy avenues to under-report or avoid tax.

In effect, this creates a vicious circle (see diagram).

Thus, compared to other nations, India’s tax collections are among the lowest in relation to GDP (which stands for the total value of all goods and services produced by a country). And the indirect burden we as citizens have to bear for such low tax collections includes a high incidence of wealth disparity, as honest citizens who pay tax contribute to the exchequer while those who evade amass unaccounted wealth. Even more important, it leads to the underdevelopment of infrastructure and inadequate resources to meet social obligations like healthcare, education and sanitation. Before one realises it, this could cause the nation to slip back drastically on all parameters compared to its global peers.

Hence, I take this opportunity to emphasise the imperative of all citizens to honestly declare and pay taxes and contribute towards the dream of a New India in coming decades.

Savings scheme Lock-in period Taxability of returns Taxability of dividends
ELSS 3 years Tax-free Tax-free
PPF 15 years Tax-free No dividends
NSC 6 years Taxable No dividends
FD 5 years Taxable No dividends

 
Income Tax is complicated—I am not sure what I get and what I lose as a silver in India.

Albert Einstein once famously said: “The hardest thing to understand in the world is income tax.” This sentence sums it all up, especially this quarter, as the lot of us are looking for options to minimise our tax bill! As silvers, you may be aware that under the income-tax laws, you get several concessions. To start with, if you are between 60 and 80, you don’t have to pay any tax up to ₹ 3 lakh (₹ 300,000) of taxable income. Similarly, for silvers above the age of 80, this limit is ₹ 5 lakh (₹ 500,000). This reduces the tax burden for silvers who are mostly in retirement/non-working mode.

How do I plan to save tax as a silver?

There are various clauses under the present Income Tax Act that allow you to save tax under certain conditions. Interestingly, most of these conditions are cleverly drafted so that the maximum benefit accrues to you, if you were to fulfil them. Under Section 80C, if you invest in any of the following instruments, you are likely to get a tax break of up to ₹ 1.5 lakh (₹ 150,000) in each financial year:

  • Public provident fund (PPF)
  • Employers provident fund (EPF)
  • Unit-linked insurance plans or ULIPs (discussed at length in “Invest in Life”, in the December 2017 edition of this column)
  • Equity-linked savings scheme (ELSS funds)

ty of the low holding period of just three to five years for the first two compared to 15 years for the latter. Further, the returns offered by ULIPs and ELSS are much higher than EPF or PPF. So why not have the cake and eat it too?

Please help me understand ELSS funds better.

ELSS are run by mutual funds that invest in listed equity shares on your behalf. There is a lock-in period of three years but, in my opinion, that is ideal given that returns in equity funds are not predictable year on year, unlike in debt funds. It also prevents holders from selling their mutual funds every time there is a short-term fall in the market. Besides, the lock-in period is still much lower than the 15 years for PPF. ELSS funds help investors earn a respectable return over the medium to long term.

As a silver, I need to spend on medical treatment. Is there any relief for such expenditure?

Yes. Section 80D allows you to claim deduction on the amount you pay towards the premium of a health insurance policy up to ₹ 30,000 as a senior citizen. In the case of a supersenior citizen (above the age of 80), even if no amount is paid with respect to health insurance, deduction of up to ₹ 30,000 is allowable for medical expenditure. This takes into account the fact that insurance companies do not provide medical cover beyond a certain age, say 75.

Besides, Section 80DDB provides provision for deduction against the expenses incurred by silvers for themselves/their family towards medical treatment of eligible diseases of up to ₹ 60,000; for super-senior citizens, it is up to ₹ 80,000. For claiming this deduction, you must acquire a certificate of the disease from a specialist employed on a full-time basis at the hospital, with a degree validated by the Medical Council of India.

By the time you read this, the Union Budget for 2018-19 would have been presented—I hope we see more such initiatives from the Government. I would also like to inform you that while a majority of insurance companies shy away from providing medical cover for elders, we at Ethical Advisers offer special Mediclaim plans especially designed for silvers and would be privileged to offer our services to anyone who is interested.

Dick Mody, a 25-year veteran in the Indian equity markets, is the founder-CEO of Ethical Advisers. Write to us with your financial queries at contact.us@harmonyindia.org and Mody will answer them in this column. You can also reach him directly at dhm@ethicaladvisers.in or visit www.ethicaladvisers.in

Photo: 123RF.com
Featured in Harmony — Celebrate Age Magazine
February 2018