Want to learn about tax saving through mutual funds? Here is the Tale of Arjun’s Tax-Saving Adventure!
Arjun is a young IT professional living in Mumbai known for his easygoing attitude and tendency to procrastinate. When March rolled around, his colleagues would talk about their tax-saving investments every year, but Arjun always brushed it off. “I’ll handle it later,” he’d say. Little did he know the chaos it may create.
1. Limited Options
On March 30, Arjun finally decided to invest to save taxes under Section 80C. He opened his laptop, eager to start. However, he was shocked to find that many options—like the Public Provident Fund (PPF) and Sukanya Samriddhi Yojana—required a lengthy process to open accounts. ELSS funds, which had a higher return potential, seemed risky because he didn’t have time to research.
2. Poor Decision-Making
Frustrated, Arjun quickly opted for a tax-saving Fixed Deposit, thinking it was safe. He didn’t realise until later that the returns were low compared to other instruments and the lock-in period would restrict his access to funds for five years.
3. Cash Flow Issues
To make the investment, Arjun had to arrange ₹1.5 lakh at the last moment. This sudden requirement drained his emergency fund, leaving him stressed about upcoming expenses like rent and utility bills.
4. Higher Risk of Errors
In his haste, Arjun filled out the wrong bank account details on the FD form. This caused delays in processing, and he spent hours sorting out the mistake.
5. Missed Deadlines
As the clock struck midnight on March 31, Arjun received an email stating that his investment had been rejected due to incomplete KYC documents. He had officially missed the deadline and would now pay significantly more tax than anticipated.
6. Suboptimal Returns
Later, Arjun learnt from his friend Meera that had he started early, he could have invested monthly through SIPs in an ELSS fund. This systematic investment plan would have offered higher returns and the benefit of rupee cost averaging.
7. Overlooking Financial Goals
During his rushed investment spree, Arjun didn’t consider his long-term goals, like saving for a home or retirement. Instead, he locked up his money in an instrument that didn’t align with his financial aspirations.
8. Higher Costs
Desperate to meet the deadline, Arjun also purchased an expensive life insurance policy. Later, he realised he could have found a better plan at a lower premium had he taken the time to compare options.
9. Stress and Pressure
The entire experience left Arjun feeling drained and overwhelmed. The pressure of making critical financial decisions under a deadline made him anxious and frustrated.
10. Lack of Diversification
When Arjun reviewed his portfolio, he realised he had invested most of his money in low-yield FDs and insurance products. His portfolio lacked diversification, making it less effective in achieving long-term growth.
The following year, Arjun vowed not to repeat his mistakes. He started planning his tax-saving investments in April itself.
Let us see Arjun’s Tax-Saving Investment Journey
Arjun’s annual salary was ₹10,00,000, and he opted for the old tax regime to claim deductions and exemptions. Here’s how he structured his investments, the potential tax savings under the old tax regime, and a comparison with the new tax regime.
Old Tax Regime: Tax-Saving Investments
Under the old tax regime, Arjun utilised various sections of the Income Tax Act, 1961, to reduce his taxable income.
1. Section 80C (Maximum Deduction: ₹1,50,000)
Arjun decided to invest in the following instruments under Section 80C:
(a) Equity-Linked Savings Scheme (ELSS) through Kuvera: ₹50,000
- Fund: Motilal Oswal ELSS Tax Saver Growth Direct Plan
- Lock-in period: 3 years
(b) Public Provident Fund (PPF): ₹60,000
- Interest rate: 7.1% (tax-free).
- Lock-in period: 15 years.
- Chosen for its safety and tax-free returns
(c) Employee Provident Fund (EPF): ₹40,000
- Mandatory contribution by the employer and employee.
2. Section 80D
Arjun paid ₹25,000 as a health insurance premium for himself and his parents. This provision ensures safety and tax benefits under Section 80D.
3. Section 80CCD(1B)
He invested ₹50,000 in the National Pension System (NPS) for an additional deduction of ₹50,000 over and above 80C.
4. Home Loan Principal and Interest Payment
Arjun also claimed:
- ₹1,00,000 as principal repayment under Section 80C.
- ₹1,50,000 as interest repayment under Section 24(b).
- Total benefit from home loan: ₹2,50,000.
5. Standard Deduction (Flat ₹50,000 under old)
- Automatically available to salaried individuals under both regimes.
Tax Calculation: Old Regime
Here’s how Arjun’s taxable income was reduced under the old regime:
| Particulars | Amount (₹) |
|---|---|
| Gross Income | 10,00,000 |
| Less: Standard Deduction | 50,000 |
| Less: Section 80C (EPF, PPF, ELSS, Home) | 1,50,000 |
| Less: Section 80CCD(1B) (NPS) | 50,000 |
| Less: Section 80D (Health Insurance) | 25,000 |
| Less: Section 24(b) (Home Loan Interest) | 1,50,000 |
| Net Taxable Income | 6,75,000 |
Tax Liability Under Old Regime
- For ₹6,75,000:
- Up to ₹2,50,000: Nil.
- ₹2,50,001 to ₹5,00,000: 5% = ₹12,500.
- ₹5,00,001 to ₹6,75,000: 20% = ₹35,000.
- Total = ₹47,500.
- Less: ₹12,500 rebate under Section 87A (since taxable income is below ₹7,00,000).
- Final Tax Payable: ₹35,000.
New Tax Regime: Tax Calculation
The new tax regime does not allow deductions (like 80C, 80D, or 24b), except the standard deduction of ₹75,000.
Tax liability under the new regime for income ₹9,25,000 (after standard deduction) will be calculated as:
- Up to ₹3,00,000: Tax = ₹0
- From ₹3,00,001 to ₹7,00,000 (₹4,00,000): 5% of ₹4,00,000 = ₹20,000
- From ₹7,00,001 to ₹9,25,000 (₹2,25,000): 10% of ₹2,25,000 = ₹22,500
Total Tax Liability: ₹20,000 + ₹22,500 = ₹42,500
Comparison: Old vs. New Tax Regime
| Particulars | Old Regime (₹) | New Regime (₹) |
|---|---|---|
| Gross Income | 10,00,000 | 10,00,000 |
| Standard Deduction | 50,000 | 75,000 |
| Section 80C Deductions | 1,50,000 | Not Applicable |
| Section 80CCD(1B) (NPS) | 50,000 | Not Applicable |
| Section 80D (Health Insurance) | 25,000 | Not Applicable |
| Home Loan Interest | 1,50,000 | Not Applicable |
| Taxable Income | 6,75,000 | 9,25,000 |
| Tax Liability | ₹35,000 | ₹42,500 |
Why Arjun Chose the Old Tax Regime
- Higher Tax Savings: By leveraging deductions, his tax liability was reduced significantly.
- Investments Aligned to Goals: ELSS helped him grow wealth, PPF ensured safety, and NPS supported retirement planning.
- Home Loan Benefits: The old regime allowed him to claim both principal and interest repayment.
Wrapping Up
To wrap up, we know that as March approached, Arjun was relaxed. His well-planned investments under the old regime reduced his taxes and aligned with his financial goals. While the new regime offers simplicity, it may not be suitable for individuals with significant deductions like Arjun.
Hence, avoiding last-minute tax-saving investments not only helps you make informed decisions but also ensures better financial planning, reduced stress, and higher returns in the long run.
You need to start early with your tax planning and not wait for the last minute to invest smartly!
Interested in how we think about the markets?
Read more: Zen And The Art Of Investing
Watch here: Rebalancing for Mutual Fund Investors
