L&T Mutual Fund
L&T Mutual Fund

Tax Planning with Mutual Fund

The first step is all you need. Planning will follow.
Every task can be made simple if broken down into a step-by-step plan – even your tax saving plan. Here’s how you can do that. Determine your tax bracket

It is but obvious that everyone who earns income has to pay tax. But how much – that is the questions that your tax bracket answers. Your 'taxable income' or 'Income after deduction' defines your tax bracket.

Income Slab Income tax rate
If income does not exceed Rs. 2,50,000** Nil
If income exceeds Rs. 2,50,000 but does not exceed Rs. 5,00,000 10% of the amount by which the total income exceeds Rs. 2,50,000
If income exceeds Rs. 5,00,000 but does not exceed Rs. 10,00,000 Rs. 25,000 + 20% of the amount by which the total income exceeds Rs. 5,00,000
If total income exceeds Rs. 10,00,000 and above Rs. 1,25,000 + 30% of the amount by which the total income exceeds Rs. 10,00,000

**For resident individuals whose age is 60 years or above but below 80 years, the income tax rate will be nil for total income up to Rs. 3,00,000. For resident individuals whose age is 80 years or above, the income tax rate will be nil for total income up to Rs. 5,00,000.

A 3% education cess is also applicable on income tax
A 12% surcharge is applicable if total income exceeds Rs. 1 crore; marginal relief for such person is available.

Cut your tax bill
The government provides a host of investment instruments which are ‘tax-deductible’ under Section 80C of the Income Tax Act, 1961. On an investment of Rs. 1,50,000 in one of the tax saving options or a combination of them, you could effectively reduce your taxable income and save tax.
Here’s a description of how much you could save, given your taxable income and your investments.

Annual taxable income Applicable tax before investment Amount invested under Section 80C New taxable income Applicable tax after investment Your effective savings
3,00,000 5,000 50,000 2,50,000 0 5,000
5,00,000 25,000 1,50,000 3,50,000 10,000 15,000
8,00,000 85,000 1,50,000 6,50,000 55,000 30,000
10,00,000 1,25,000 1,50,000 8,50,000 95,000 30,000
12,00,000 1,85,000 1,50,000 10,50,000 1,40,000 45,000
15,00,000 2,75,000 1,50,000 13,50,000 2,30,000 45,000

All figures above are in rupees. Please consult your investment and tax adviser before investing.
Calculations shown are for resident individuals below 60 years of age and are based on income slabs for the Financial Year 2015-16. Tax amounts indicated do not include any applicable surcharge and education cess. It is assumed that the total taxable income specified above is after considering all deductions – except deductions under Section 80C of the Income Tax Act, 1961 (Finance Act, 2015).

Determine your tax-saving instrument

While Section 80C of the Income Tax Act offers you a range of options for tax saving such as Equity Linked Saving Scheme (ELSS), Public Provident Fund (PPF) and National Savings Certificate (NSC) etc., your choice must depend on your income, risk appetite and return requirement.
Life insurance basically safeguards you against risk, except for Unit Linked Insurance Plans (ULIPs), which invest a part of the money into markets and the other part is dedicated to insurance, which does not earn any return.
Fixed rate interest bearing instruments such as PPF and NSC are better suited for risk averse investors since they are backed by the government or by established financial institutions. However, they may not be able to beat inflation in the long term.
An Equity Linked Saving Scheme, however, is the only pure equity option, which invests in the stock market and provides capital gains over the long term.

Start early

A mantra that precedes every investment plan – start early.
Most investors start the hunt for tax saving instruments during the end of the financial year, when the fear of tax hits them. Investments in tax saving instruments demand attention and research. Starting early can help you make better choices, save tax more efficiently and capitalize on the investment returns.

Get professional advice

As you may have be aware, tax planning is no child’s play. For the same reason, you could consider engaging a financial adviser who would guide you through the entire process, choosing the tax saving instrument, investing, and then monitoring the performance to make sure you do not go astray.

By composing the right mix of investments for your portfolio, you can exempt more of your income from tax and ensure that you are receiving optimal returns. Section 80C of the Income Tax Act offers a broad range of options, each suited to a different need. However, an Equity Linked Savings Scheme (ELSS) provides investors tax benefits combined with long-term wealth creation through equity exposure and comes with the shortest lock-in among all tax-saving instruments.