Paying taxes can be a tedious process as it requires one to be well-versed with the rules and norms.  In India, the income tax is based on a slab system on which the taxpayers have to pay tax. The slab system means that the tax rates are given to each person based on their income.

The Union Budget for 2020 brought with it a change in the tax calculation for individuals. For FY 2020-21, taxpayers could choose between two income tax regimes – the existing/old tax regime and the newt ax regime. If one continues with the old tax regime, they could continue to avail existing deductions such as section 80C, section 80D etc. of the Income-tax Act, 1961 and tax exemptions like house rent allowance, LTC cash, vouchers etc could be availed. The new, concessional tax regime offers lower tax rates compared to the old tax regime, but by opting for the new regime, the taxpayer will have to forgo most tax deductions and exemptions that are available under the old regime.

Income Tax slab for individuals below 60 years:

Income Tax Slab for individuals between 60 years and 80years:

Income Tax Slab for individuals above 80years:

Health & Educational cess @4% shall also be paid on the amount of income tax.

For taxpayers who decide to follow the new income tax regime, know that you will no longer benefit from the various deductions and exemptions offered under different sections of the Income Tax Act.

The following investments qualify for tax deductions

• Under section 80C (Up to Rs 1, 50,000): Investment in EPF, PPF, ELSS, Insurance, etc

• Under section 80D (Up to Rs 100,000): An individual can claim a deduction up to Rs 25,000 for health insurance of self, spouse, and dependent children. An additional deduction for the insurance of parents is available to the extent of Rs 25,000 if they are less than 60 years of age, or Rs 50,000 if your parents are aged above 60. If both the taxpayer and the parent whom the medical covers have been taken for are aged more than 60 years, the maximum deduction that can be availed under this section is to the extent of Rs 1,00,000.

• Under section 80CCD (1b) (Up to Rs 50,000): Contribution to National Pension Scheme (NPS) is eligible for deduction. (Even contribution to Atal Pension Yojana is eligible for deduction.)

• The old tax system looks even more lucrative if one avails deductions on interest paid on housingloan. Under section 24, up to Rs 2,00,000/- paid as interest on home loan is eligible for tax deduction.

• Under section 80EEA additional deduction of Rs 1,50,000/- isallowed on home loan sanctioned between 1st April, 2019 to 31st March, 2022. This is applicable only for 1st time home buyers. However, the stamp value of the property should not exceed Rs 45 lakhs. The property area should not exceed 60 sq meters in metropolitan cities and 90 sq meters in other cities.

Individuals need to assess their tax implications under both the regimes to identify the best option, in accordance with their financial goals.

In recent times, we have seen that many taxpayers have moved to ELSS schemes to avail tax benefits. In this article, we will discuss varied aspects of tax-saving equity-linked savings schemes of mutual funds.

ELSS funds are equity-linked funds that invest a sizable chunk of their corpus into equity or equity-related instruments. They are called tax-saving schemes since they offer tax exemption from the annual taxable income under Section 80C of the Income-Tax Act.

Features of ELSS

1. Market-linked returns

Since ELSS offers critical exposure to equity markets, they could offer a higher return than debt investments and beat inflation. Although profits are not guaranteed, ELSS schemes could perform better than other fixed-income investments in the long term.

2. Three-year lock-in period

One of the critical aspects of an ELSS scheme is the minimum lock-in period of three years. In comparison to other tax-saving plans under Section 80C,  ELSS has one of the shortest lock-in periods.

3. Tax deduction

Investments in ELSS are suitable for a tax deduction up to Rs.1,50,000 per annum under Section 80C of the Income Tax Act, 1961.

4. No maximum limit

Some tax-saving investment avenues specify the maximum amount that can be invested in a year. ELSS has no cap on the amount, although one cannot claim a tax deduction over Rs.1,50,000.

5. Flexibility

Investments in ELSS can be made in a lump sum or through the SIP route. It gives investors enough flexibility to choose the suitable method of investment.

6. Heterogeneous

Typically, ELSS are mutual funds that invest in different companies through equities. Therefore, as an investor, ELSS could give you better exposure to multiple industries than investing in pure equities or debt instruments.

Other investment options eligible for Section 80C deductions like ULIP, NSC, tax-savings FDs come with a lock-in period of 5 years. Meanwhile, PPF has a lock-in period of 15 years, whereas NPS stays locked in until retirement with very limited options for premature withdrawals. Thus, ELSS funds offer the highest liquidity among all the investment options eligible for Section 80C deductions.

Salaried individuals receive income throughout the year and not as an annual lump sum. It is therefore important that saving and investment activities also follow a similar pattern as expenses. Mutual funds offer the Systematic Investment Plan (SIP) facility with ELSS, which regularly deploy savings. With SIPs, investing a fixed amount periodically (every week, month, etc.) in ELSS based on a one-time instruction is possible. It helps to save in a disciplined manner without disrupting or putting undue strain on one’s finances. In short, SIP enables to spread the tax planning burden throughout the year rather than in a month or two.  ELSS helps deploy regular savings almost instantaneously rather than let the money lie idle in the bank savings account. Thus, the saving will fetch better returns.

While choosing an ELSS scheme, it is pertinent to compare the performances of various ELSS funds over the last three year and five year periods with their benchmark indices.

Mutual fund, is a sensible, reliable investment arena. Yet, it is also equally important understand its tax implications. For example, one can earn two types of income from a mutual fund investment- a dividend and a capital gain/loss at the time of sale. Both have different tax implications. The taxes levied also depend on the type of scheme, equity or non-equity, and the investment duration.

Income-tax rules demand that the mutual fund schemes be grouped into equity-oriented mutual funds and non equity-oriented mutual fund schemes. Equity-oriented mutual fund schemes are mutual fund schemes that buy stock for at least 65% or more of their net assets in listed equity securities of domestic companies. All other mutual fund schemes may be listed in categories other than equity-oriented mutual fund schemes, including debt funds, gold funds, etc.

The rate of tax of capital gains on mutual funds depends on the holding period and type of mutual fund. The holding period is the span for which an investor keeps the mutual fund units. In easy terms, the holding period is the time between the date of the purchase and sale of mutual fund units. The holding period of equity mutual fund can be short term or long term. Short term is less than 12 months and the long term is more than 12 months.

Short Term Capital Gain (STCG): The gains from equity mutual fund redeemed before 12 months are treated as short term capital gain and taxed at 15% + surcharge as applicable and cess.

Long Term Capital Gain (LTCG): Gains on equity mutual fund held for more than 12 months are treated as Long Term Capital Gain (LTCG). Long Term Capital Gains up to Rs.1 lakh are tax free. LTCG in excess of Rs.1 lakh is taxed at 10% + surcharge as applicable and cess.

If one invests in a mutual fund with a dividend payout option, one will get scheduled payments in the form of dividends. Dividends would be added to your income and taxed according to your income tax slab .

Mutual fund tax benefits under Section 80C: Investments in Equity Linked Savings Schemes or ELSS mutual funds qualify for deduction from the taxable income under Section 80C of the Income Tax Act 1961. The maximum investment amount qualifying for tax deduction under Section 80C, is Rs 1.5 lakhs. Investors falling under the highest tax bracket (30%) can thus hold up to Rs 46,350 in taxes (Rs 1.5 lakhs X 30.9% tax + cess) by investing in ELSS mutual fund schemes. As an investor, one should take note that, Rs 1.5 lakhs is the blanket 80C cap, including all qualifying items like employee provident fund (EPF) contribution (deducted by the employer), PPF, life insurance premiums, NSC and ELSS mutual funds etc.

Equity mutual fund taxation may sound difficult at first, but it can help reach one’s financial goals with careful planning. Holding funds for a longer period makes them more tax-efficient. Equity funds are perfect if you are looking for comparatively less risky investments that are safe from market volatilities.

Thumb rule for an Emergency Fund

Usually, you need to consider one year’s regular living expenses rounded off to the next higher Rs 1lakh. For example, if a household has an average living expense of INR 30,000 per month or yearly 3.6 lakhs. You would need to save about INR 4 lakhs as an emergency fund. You need to set aside a good emergency fund so as to not panic if your car breaks down or you lose your job, or some significant medical expenses come up.

The size of your emergency fund should indicate a realistic amount, based on how much you can afford to save. In addition, it should be an amount that allows you to feel comfortable.

Once you have saved the emergency fund, you should not leave it as cash or in your bank account, at least not entirely. Even though an emergency fund should be liquid, it is not something you should reach out to often. Therefore, invest it in a manner that you earn fair returns from it without jeopardising liquidity.

An excellent strategy for deploying Emergency Funds

• Place the funds in liquid, short-term floating rate, ultra-short bond or short-term mutual funds.
• Transfer the capital appreciation to a low-cost, diversified equity index fund.
• Your capital remains intact and is available in an emergency.
• Overall, your emergency fund can give excellent returns and grow quite adequately in a 5 – 10 year time frame.