Use NPS for deduction above Rs 1.5-lakh limit



December is the month when most salaried individuals think of buying a financial product that will give some deduction under Section 80C of the Income Tax Act. The idea is to submit the investment proof to the employer to get away with lower TDS (tax deducted at source) on their income (actual and projected).

Generally, the salaried think of taxes when they get a notice from their employer to provide proof of investments declared at the start of the year. In their last-minute rush, the majority invest in wrong financial products. They regret it when the next renewal premium for such products is due and are left with no room to act.

The only choice is to continue paying the premiums because these products come with predefined lock-ins and if the second premium is not paid, the investors stand to get nothing out of it. Moreover, if they discontinue the premiums, then the deduction they claimed in the previous year gets added to the total income of the current year and is taxed accordingly , making the tax liability higher.

January-February-March (JFM) are the months when most of the agents try to lure salaried individuals into buying financial products to avail of tax deductions. This is the time when there are many advertisements, and agents also start contacting you repeatedly to make a decision. Due to the last-minute rush, most buy these products without giving a second thought to whether they are really needed and, in turn, help the agents earn more commission.

Instead of taking a wrong decision at the last moment, one has to plan right from the beginning of the financial year and tag these kinds of tax-saving investments to particular goals so that they fulfil at least two things: Saving taxes and accumulating funds for a specific goal.

Some important points you should know about individual taxation:

 An individual whose overall income is below Rs 5 lakh gets a tax rebate of Rs 2,000. It means that the overall exemption limit for an individual whose total annual income is below Rs 5 lakh is up to Rs 2.70 lakh.

 People have a misconception about exemption available under Section 80TTA relating to interest income earned from bank deposits. Only interest income derived from savings account is exempt up to Rs 10,000 and it does not include any time deposits like FDs, etc.

 You can claim additional deduction over the Rs 1.5 lakh limit prescribed under Section 80C if your employer also contributes towards the National Pension Scheme (NPS). Employee contribution to the extent of 10% of salary can be claimed as deduction under Section 80C, and the employer's contribution to the extent of 10% of salary of the employee can be claimed as deduction under Section 80CCD(2) over and above the Rs 1.50 lakh limit under Section 80C.

 Tuition fees paid towards children's education is an eligible deduction under Section 80C with the upper limit capped at Rs 1.50 lakh.

You should remember to plan for saving taxes right from the beginning of the year so that you don't end up making a wrong investment.