How to Save Tax on Profit or Return on Investments – Tax Free Investment Options

Tax is a very significant portion of our total expense. What if your profit or return on your investments can be tax free or significantly lower in tax?

Let me share with you 7 investments into where returns are tax free.

1. Withdrawal from EPF account – After 5 yrs

Any money that gets into your EPF account when withdrawn after 5 years is tax free.

If you are switching a job before 5 years, don’t withdraw the money in your EPF account and try to keep rolling it to the new job else it may be taxed as per your applicable tax slab of your income.

2. Amount received from Life Insurance Companies

Insurance investments can save tax but any money that is received from life insurance companies from maturity, claim or surrender of policy the amount is tax free provided the premium paid does not exceed 20% of the sum assured. The limit of 20% is now reduced to 10% by the Finance Act, 2012, (i.e., with effect from April 1, 2012).

As an example to qualify for a tax exemption from maturity, claim or surrender of policy an annual premium of Rs 20,000 should have a minimum sum assured of Rs 100,000 before April 1 2012 and Rs 200,000 after April 1 2012.

For disabled person or person suffering from certain ailments, the limit of sum assured is 15% effective from April 1, 2013.

3. Savings account bank interest – upto 10k per year

Any interest that you earn as savings account bank interest is tax free upto Rs 10,000 per financial year. So if your interest for a financial year is Rs 15,000, then Rs 10,000 is exempted and Rs 5,000 will be added to taxable income.

This is a huge relief for salaried people because it was a headache to find out those trivial bank interest amount being deposited into all the accounts and add them up and pay tax.

4. Long Term Equity Investments

Any profit from equity investment in either direct shares or in mutual fund in NSE and BSE (or any other exchange where we pay Security Transaction Tax or STT when executing the trade) for more than a year is tax free as it is a long term capital gain.

Note that equity investment in non listed companies is not tax free.

5. Income from Dividend

Any dividend received from stock or mutual fund is tax free. However, the company that pays the dividend, need to pay the dividend distribution tax to govt before paying out the dividend.

6. Profit sharing in a partnership firm

If a partnership firm profits are not retained in the firm but is distributed among the partners, it is tax free in the hands of the partners, because the tax is already paid by the firm on the profit. Remember the tax free income is the profit (where the tax is paid in the partnership firm) and not the salary that partners withdraw as expense in the partnership firm.

7. Profit from Residential Property Investment

If you purchased a residential property that is registered in your name and is kept with you for more than 3 years and if you sale the property at a value above the inflation index value, then amount of money receieved above the index value is only taxable.

Let me share this with a simple example.

You purchased a property in June 2004 (Fiscal 2004-2005) for Rs. 4 Lacs and after 10 years in June 2014 (Fiscal 2014-2015), sold it for Rs 10 lacs. Profit on such a transaction looks to be Rs. 6 lacs but actual profit on such calculation is based on cost inflation indexed price of the property as of sale date which is

1024/480 * 4 lacs = 8.53 lacs (For cost inflation index table see IncomeTaxIndia.gov.in)

So taxable income is 10lacs – 8.53lacs or 1.47 lacs only. The taxable income can be further be reduced if there are any other expenses done on the property.

Note that date for the calculation are the property registration dates (purchase and sale both) and not the payment date.

Final Thoughts

Remeber this is not an exhaustive list of investment options that can save your tax but it is the list that is known to me. If you know any other investment option to save tax, let me know and I will be more than happy to add it to the list.