35 – Proof of Investment

Proof of Investment: What should employers and employees know about it? 

Come Feb-Mar, most of the organizations ask the employees to furnish their investment proofs of the various financial instruments that they might have invested in the financial year for calculating the tax. There are a lot of investment opportunities which enable an individual to save tax under different headings.  

Proof of investment is a document that provides evidence of the investment contributions made by an employee or employer into a retirement or investment account. This proof of investment is important for both the employer and employee because it ensures that the contributions made have been correctly deposited into the account and can be used for future investment. 

For employers, proof of investment is important because it helps to ensure that they are meeting their obligations under retirement plans and other investment accounts. It is also important for employers to maintain accurate records of contributions made to retirement and investment accounts, which can be helpful in case of any disputes or legal issues. 

For employees, proof of investment is important because it provides them with the assurance that their contributions have been properly deposited into the account and will be available for their use in the future. This proof can also be used for tax purposes and to help employees keep track of their investments and retirement savings. 

Individuals can save tax on their annual income in a variety of ways. Several exemptions from calculating taxable income from salary are provided by the Income Tax Act. Individuals can save money on taxes by investing their money and taking advantage of tax deductions under a variety of sections of the income tax, in addition to the exemptions. A list of tax-saving investment options is provided below: 

1. Public Provident Fund (PPF): The Public Provident Fund (PPF) is a long-term government-backed savings scheme that offers tax benefits under Section 80C of the Income Tax Act. The investment tenure is 15 years, and the current interest rate is 7.1%.  

One of the key benefits of investing in PPF is that the investment amount is eligible for tax deduction up to Rs. 1.5 lakh per annum. This means that if you invest Rs. 1.5 lakh or less in PPF in a financial year, you can claim a deduction on that amount from your taxable income. This can help you reduce your tax liability and save money on taxes. 

Another advantage of PPF is that it offers guaranteed returns, which are currently higher than most other fixed-income investment options. The interest rate on PPF is reset every quarter by the government, and the returns are tax-free.  

However, it’s important to note that PPF has a long lock-in period of 15 years, which means that you cannot withdraw your money before the end of the tenure. Additionally, there are annual investment limits on PPF, which means that you can only invest up to Rs. 1.5 lakh per annum in the scheme. Overall, PPF can be a good investment option for those looking for a long-term, tax-efficient, and low-risk investment option. 

2. Equity-Linked Savings Scheme (ELSS): Equity-Linked Savings Scheme (ELSS) is a type of mutual fund that invests primarily in equities and offers tax benefits under Section 80C of the Income Tax Act. 

The investment tenure of ELSS is relatively short compared to other tax-saving investment options, such as the Public Provident Fund (PPF). ELSS funds have a lock-in period of 3 years, which means that you cannot redeem your investment before the end of the 3-year period. This lock-in period is shorter than the 15-year lock-in period of PPF. 

ELSS funds have the potential to generate higher returns compared to other fixed-income tax-saving options like the National Savings Certificate (NSC) or Tax-Saving Fixed Deposits (FDs), as they invest in equities. However, it’s important to note that equity investments are subject to market risks, and there is no guarantee of returns. 

Investments made in ELSS funds are eligible for tax deduction up to Rs. 1.5 lakh per annum under Section 80C of the Income Tax Act. This means that if you invest up to Rs. 1.5 lakh in ELSS funds in a financial year, you can claim a deduction on that amount from your taxable income. Overall, ELSS can be a good investment option for those looking for a shorter lock-in period and the potential for higher returns compared to fixed-income tax-saving options. However, it’s important to consider the risks associated with equity investments before investing in ELSS funds. 

3. National Pension System (NPS): The National Pension System (NPS) is a government-backed pension scheme that is designed to provide a regular income to investors after they retire. It is a retirement-oriented investment option that offers tax benefits under Section 80C and Section 80CCD of the Income Tax Act. 

The investment tenure of NPS is until the age of 60. However, investors can also choose to continue investing in the scheme beyond the age of 60, up to the age of 70, if they wish to do so. 

The investment amount is eligible for tax deduction up to Rs. 2 lakh per annum under Section 80C and Section 80CCD(1B) of the Income Tax Act. This means that if you invest up to Rs. 1.5 lakh in NPS in a financial year, you can claim a deduction on that amount from your taxable income under Section 80C. Additionally, if you invest an additional Rs. 50,000 in NPS under Section 80CCD(1B), you can claim an additional deduction on that amount from your taxable income. 

The NPS offers investors the flexibility to choose their investment allocation between equity, debt, and government securities. The scheme also offers the option of choosing between active and passive investment management. 

It’s important to note that the NPS has a long lock-in period, and withdrawals are allowed only after the age of 60, subject to certain conditions. However, the scheme also offers the option of partial withdrawals before the age of 60, subject to certain conditions. 

Overall, the NPS can be a good investment option for those looking to save for retirement and avail of tax benefits. However, it’s important to understand the features and limitations of the scheme before investing in it. 

4. Tax-Saving Fixed Deposits: Many banks offer tax-saving fixed deposits that offer tax benefits under Section 80C of the Income Tax Act. The investment tenure is generally 5 years, and the investment amount is eligible for tax deduction up to Rs. 1.5 lakh per annum. 

5. Sukanya Samriddhi Yojana: The Sukanya Samriddhi Yojana is a government-backed savings scheme that is meant for the benefit of the girl child. It offers tax benefits under Section 80C of the Income Tax Act. The investment tenure is 21 years or until the marriage of the girl child, whichever is earlier. The investment amount is eligible for tax deduction up to Rs. 1.5 lakh per annum. 

6. National Savings Certificate (NSC): The National Savings Certificate NSC is a government-backed savings scheme that offers tax benefits under Section 80C of the Income Tax Act. The investment tenure is generally 5 years, and the investment amount is eligible for tax deduction up to Rs. 1.5 lakh per annum. 

7. Unit-Linked Insurance Plan (ULIP): Unit-Linked Insurance Plan is an investment-cum-insurance product that offers tax benefits under Section 80C of the Income Tax Act. The investment tenure is 5 years, and the investment amount is eligible for tax deduction up to Rs. 1.5 lakh per annum. ULIPs invest in equity and debt instruments, and the returns are linked to the performance of the underlying funds. 

8. Senior Citizen Saving Scheme (SCSS): The Senior Citizen Saving Scheme is a government-backed investment savings scheme meant for senior citizens that offers tax benefits under Section 80C of the Income Tax Act. The investment tenure is generally 5 years, and the current interest rate is 7.4%. The investment amount is eligible for tax deduction up to Rs. 1.5 lakh per annum. 

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9. Health Insurance Premium: Premium paid towards health insurance policies for self, spouse, and dependent children is eligible for tax deduction under Section 80D. The maximum tax deduction allowed is up to Rs. 25,000 per annum, which can be increased up to Rs. 50,000 for senior citizens (above 60 years of age). In addition, an additional deduction of up to Rs. 25,000 is available for the premium paid towards health insurance policies for parents. This limit can be increased up to Rs. 50,000 for senior citizen parents. Therefore, taxpayers can claim a maximum deduction of up to Rs. 1 lakh in a financial year for the premium paid towards health insurance policies for themselves, their spouse, dependent children, and parents. 

10. Home Loan Principal Repayment: The principal repayment towards home loans is eligible for tax deduction under Section 80C. The maximum tax deduction allowed is up to Rs. 1.5 lakh per annum. However, this deduction is subject to the condition that the home loan should be for the purchase or construction of a residential property. 

11. Donations to Charitable Institutions: Donations made to charitable institutions registered under Section 80G of the Income Tax Act are eligible for tax deduction. The amount of deduction varies between 50% to 100% of the donation amount, depending on the nature of the institution and the scheme. Taxpayers can claim this deduction under Section 80G in addition to the deductions available under Section 80C. However, the total deduction claimed under both sections should not exceed the overall limit of Rs. 1.5 lakh per annum. 

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When it comes to proof of investment, there are a few things that employers and employees should keep in mind: 

• Keep accurate records: Both employers and employees should keep accurate records of contributions made to retirement and investment accounts. This can include pay stubs, statements from the investment firm, and other relevant documents. 
• Review statements: It is important for employees to review statements from their investment accounts to ensure that the contributions made by their employer have been properly deposited into the account. 
• Understand the investment plan: Employers and employees should have a clear understanding of the investment plan, including the contribution limits, investment options, and any fees or expenses associated with the plan. 
• Seek professional advice: Both employers and employees should consider seeking professional advice from a financial advisor or accountant to ensure that they are meeting their obligations and maximizing their investment returns. 

• Check the tax deductions: Form 16 is a certificate issued by an employer to its employees that contains details of their salary income and tax deducted at source (TDS) during the financial year. Employers are required to issue Form 16 to their employees. It is essential for employees to check their Form 16 to ensure that the tax deduction mentioned in it is correct. The Form 16 provides a summary of the TDS deducted by the employer on behalf of the employee, and it is based on the investment proof provided by the employee. 

If an employee finds any discrepancy in the tax deduction mentioned in their Form 16, they should immediately inform their employer and get it rectified. It is important to ensure that the correct amount of tax is deducted at source and reflected in the Form 16 to avoid any future tax-related issues. 

It is also advisable for employees to keep a copy of their Form 16 and use it while filing their income tax returns. The Form 16 helps in computing the total income, tax liability, and the amount of tax already paid by the employee during the financial year. 

Please note that Form 16A and Form 16B are also TDS certificates, but they are different from Form 16. Form 16A is a TDS certificate that is issued for non-salary payments such as rent, professional fees, commission, etc. This certificate is issued by the person who is responsible for deducting tax at source, such as a bank or a tenant. Form 16A contains details of the tax deducted at source, the name and PAN of the deductee, the name and PAN of the deductor, and the amount paid to the deductee. 

Form 16B, on the other hand, is a TDS certificate that is issued for TDS on the sale of property. This certificate is issued by the buyer of the property to the seller, and it contains details of the tax deducted at source, the name and PAN of the deductee, the name and PAN of the deductor, and the amount paid to the deductee. 

Both Form 16A and Form 16B are important documents that help in computing the total income, tax liability, and the amount of tax already paid by the taxpayer during the financial year. These certificates need to be filed along with the income tax returns to claim credit for the tax deducted at source. 

Takeaway: 

Proof of Investment is an important document for both employers and employees. It helps to ensure that contributions are properly deposited into retirement and investment accounts and can be used for future investment. Employers and employees should keep accurate records, review statements, understand the investment plan, and seek professional advice to ensure that they are meeting their obligations and maximizing their investment returns.