4 Investment Options that’ll Help You Reach Zero -Tax Income Level

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Tax Free

The Budget for the fiscal year 2019-20 announced on 1st February 2019, declared a full tax rebate for incomes up to Rs. 5 lakh per annum. According to statistics, it will put nearly three crore taxpayers out of the tax net in the year 2019-2020. However, finance analysts seem to think that even if you earn Rs. 8-9 lakh p.a. you can still avoid tax if you invest in specified instruments and claim deductions.

However, it is not easy to keep your net taxable income within the limit of Rs. 5 lakh. Here are certain things you can keep in mind if you want to reach zero-tax income level:

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Tax-Free Allowances

If you wish to get in the zero-tax zone, you can do so by rearranging your pay structure. In last year’s Budget the tax exemption for medical reimbursements and travel allowance had been removed; however many other tax benefits are still available such as reimbursements for fuel and car lease, and leave travel assistance are still available. This way the taxable aspects of your salary can go down.

Under Section 80CCD(2) you also have the NPS benefit in which up to 10% of the basic salary contributed by the employer on behalf of the employee is tax-exempted. 60% of the NPS corpus is now tax-free on maturity, so you can invest in low-risk pension plan and bring down your tax considerably.

Interest

Most people do not report interest income from bank deposits and Post office investments when they file tax returns. These deposits and bank accounts earn interest; and this interest is tax-free up to Rs. 10,000 p.a. under Section 80TTA under the Income Tax Act. Moreover, the TDS threshold has been raised from Rs. 10,000 to Rs. 40,000 p.a. So if you earn up to Rs. 40,000 on deposits in a year, there will be no TDS. However, that does not mean that your tax liability has ended, since the interest is still fully taxable and you will still have to pay tax on interest earned regardless of TDS.

Debt Funds

There is another way you can prevent your interest from being added into your taxable income. You can choose tax-friendly instruments such as debt ULIP funds and fixed maturity plans(FMPs) instead of paying tax on your interest each year. In these alternative instruments you are taxed only when you sell the funds and receive the gains. If the gains from the sale of non-equity funds are kept for less than three years, then they are seen as short-term capital gains, and are added to your income and taxed at a marginal rate. However if these funds are kept for more than three years, then they are seen as long-term gains and are taxed at 20% after indexation. The indexation will consider the inflation during holding period and will tweak the buying price to reduce tax liability.

Clubbing

Don’t make the mistake of clubbing. People commonly make the error of investing in the name of minor children or a non-working spouse, which can add up to their taxable income. If you invest money in fixed deposits in the name of your minor child or spouse, then the interest will be taxed as your income. You can save yourself from clubbing through mutual funds and ULIP plans. Investing in mutual funds in the name of your minor child will result in the gain being treated as his/her income, if withdrew only after he/she turns 18. And income from ULIPs is tax-free anyway so it will not affect your tax liability.

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