Invest more, save tax :: Business Line

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The Budget offered neither big-bang exemption limit hikes nor tax slab increases — the most sought-after sops of the common man. But the middle-class did have some cause for cheer.

Tax savings

First, without raising the exemption limits, the Budget has given a breather on taxes. To illustrate, if someone with a gross total income of ₹5 lakh fully makes use of the additional ₹50,000 deduction for investment in the NPS, the enhanced 80D medical insurance premium limit of ₹25,000, besides the section 80C limit of ₹1.5 lakh, he will now have to pay only ₹515 as tax for the year 2015-16. In the earlier year, he would have had to pay ₹6,695. This represents a 92 per cent tax saving.

The saving comes down as the income levels increase. But these two additional deductions still mean that those below 60 years of age can save ₹6,180, ₹12,360, and ₹18,540 in the 10, 20 and 30 per cent tax brackets, respectively. Salaried employees can save an additional ₹1,000-3,000 from the increase in transport allowance.

The kind of instruments chosen for the sop of higher exemption limits specifically encourage social security in the form of providing for retirement and medical emergency needs. Had it been only an exemption limit increase, it would have just left investors with more money in their pockets today.

Competitive instruments

Besides providing for investors’ future, much thought has also gone into channelising savings for productive purposes while also keeping investors happy. The result? The return of tax-free infrastructure bonds, a competitive debt instrument.

For investors who can’t stomach the volatility of the stock market, fixed deposits from banks and NBFCs and non-convertible debentures are currently the predominant options. But the interest earned on these instruments are taxable, thus bringing down the effective return.

Tax-free bonds, with the interest being non-taxable, fill the gap well while putting more disposable income in your hands. It may require a longer lock-in though — of 10 years. Similarly, now that it has been clarified that the Sukanya Samriddhi Scheme will get tax breaks at all three levels — investment, interest and withdrawals — it is among the safest options available if you are looking to save for your daughter’s future. It currently offers 9.1 per cent interest and is even better than the PPF, which gives similar tax breaks at all three levels, but offers only 8.7 per cent interest. Interest rates on both these schemes are subject to change each year, though. Other child-related investment products currently available are either high-cost ULIPs or mutual fund schemes, which do not suit risk-averse investors.