In March, the fiscal year 2022–2023 will come to an end. Only on the basis of your annual savings will you receive a tax rebate. If you have a job, firms will start requesting investment documentation in December. These will determine whether or not tax deductions are made from your paycheck.

Tax deductions will increase if you don’t save, which will lower your take-home pay. The maximum salary will be paid to you if taxes are not withheld. There’s a chance you haven’t made an investment yet. If that’s the case, do it right away. We inform you of the investment programme that will be most profitable for you.                                                                                                                                    

                                                                                                                         Subas Tiwari                                                                                                                                                                                                                                                                                               

However, it requires special planning. This is the New Year, so do your tax planning as soon as possible based on your financial goals. There are 17 ways through which you can reduce your tax liability including PPF, NSC and life insurance premium.

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  Unit Linked Insurance Plan (ULIP)

ULIP Life Insurance Plan is one of the most important investment plans in India. It ensures that one’s family is financially balanced in the case of an event of death. By purchasing a life insurance policy, the taxpayer can avail of the benefit under the income tax act.

Under section 80C of the income tax act 1961, the premium paid towards the purchase of a life insurance policy qualifies for deduction up to Rs. 1.5 lakh. Furthermore, as per section 10(10D), income on the maturity of the policy is tax free. The income is tax-free if the premium is not more than 10% of the sum assured. In the case wherein the money goes to the nominees of the person insured, the same remains as a tax exemption in the hands of the nominee.

In terms of the deduction under section 80C 1961, the taxpayer can claim 20% of tax deduction on the premium paid. The following conditions also apply:

• The taxpayer purchases a life insurance policy on or before 31st March 2012
• The policy is in his own name or in the name of their spouse or child

If the life insurance policy is purchased after 1st April 2012, then the premium paid is eligible for tax deduction up to 10% of the sum assured.

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  Equity Linked Savings Schemes (ELSS)

Equity Linked Savings Schemes are mutual fund investment schemes that invest a large percentage of their portfolio in equity. Furthermore, the fund has a mandatory lock-in period of 3 years which is the shortest amongst all the investment products.

Investment in ELSS funds qualifies for deduction under section 80C of the income tax act up to a maximum of Rs. 1.5 lakh. Both lump sum investment and the amount invested through a systematic investment plan (SIP) qualifies for the deduction. Since ELSS funds invest a large amount in equity, there is always some inherent risk.

ELSS funds provide the dual benefit of capital appreciation and tax-savings. This makes it one of the most popular tax saving schemes amongst investors.

In general, taxpayers who want to claim tax deductions of up to Rs 1.5 lakh under Section 80C provisions and are willing to take some risk should consider investing in ELSS. These mutual funds are equity-oriented, and they invest a minimum of 60% of their portfolio in equity and equity-linked instruments. This makes it crucial to be invested in the funds for a long period of time in order to reap the benefit of the returns.

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  Public Provident Fund (PPF)

The Public Provident Fund has always been a popular tax saving schemes amongst the taxpayer. One of the major reasons for this popularity is the fact that PPF falls under the category of exempt–exempt–exempt tax status. You can open your PPF accounts with a bank or post office.

Taxpayers can claim a deduction under section 80C of the income tax act for the amount invested by them during the financial year. The maximum amount eligible for deduction is Rs. 1.5 lakhs. Since PPF falls under the exempt category, the interest and maturity amount are exempt from tax.

PPF account comes with a lock-in period of 15 years and it allows the investors the below options at the end of the maturity period:

• Withdrawal of proceeds from the account
• Continue for another 5 years

(4) Sukanya Samridhi Yojana (SSY)

Sukanya Samriddhi Yojana has become one of the most important tax saving schemes. It was launched in 2015 by the government of India as a part of the Beti Bachao Beti Padhao campaign. It had a major impact on the general public. The scheme allows a fixed income investment through which the taxpayer can invest regular deposits and at the same time earn interest on it. Investing in Sukanya Samriddhi Yojana also qualifies as an eligible deduction under section 80C of the income tax act.

The government of India determines the rate of interest on the scheme on a quarterly basis and is payable on maturity. The scheme comes with a lock-in period of 21 years and will mature after the expiry of 21 years. A minimum deposit of Rs. 250 is required to be made per year for 15 years. Failure to pay the minimum amount in a year will lead to disconnection of the account. To re-activate the account, you need to pay a penalty of Rs. 50 along with the original Rs. 250 deposit.

In order to open a Sukanya Samriddhi account, below is the eligibility criteria for this tax saving option:

• Only girl children can claim the benefits of this scheme.
• The girl child cannot be more than 10 years of age. A grace period of one year is provided which allows the parent to invest with 1 year of the girl child being 10 years of age.
• The investor must submit age proof of the daughter.

(5) National Savings Certificate (NSC)

A government of India initiative, a national savings certificate is a fixed income investment scheme that aims at the small and middle-income investors to invest and earn handsome returns. It is considered a low-risk investment and as secure as the Provident Fund. The investors can invest as per their income profile and investment habits.

Investment in NSC qualifies for deduction under section 80C of the income tax act up to Rs. 1.50 lakh. Apart from providing the benefit of tax exemption, it provides the investor with complete capital protection and guaranteed interest. Some of the features of the NSC, tax saving option are as follows:

• 8% annual interest as a guaranteed return.
• You can claim a tax benefit under section 80C up to Rs. 1.5L.
• You can invest as low as Rs. 1,000 (or multiples of Rs. 100). You can increase the investment amount as per your convenience.
• On maturity, the entire maturity value will be received by the investor and the same will be taxed in the hands of the taxpayer.
• An early exit is not available. You can use the same as collateral security in case of loans from Bank or NBFC.

(6) Tax-Savings Fixed Deposit (FD)

Fixed deposits are considered one of the safest tax savings schemes. It’s safer than equity investments in terms of risk and returns. The banks decide the interest rates and it depends on several factors. Below are some of the features of a tax-saving fixed deposit:

• Investment in tax saver fixed deposit eligible for deduction under section 80C while calculating the taxable income.
• A minimum lock-in period of 5 years
• Senior citizens can get a higher interest rate on investment
• In the case of a joint account, the primary holder can avail the benefit of tax deduction while calculating the taxable income
• Tax saver fixed deposits do not allow any premature withdrawal. However, after the expiry of the 5 year lock-in period, investors get access to premature withdrawal. The terms and conditions for premature withdrawal vary from bank to bank.

(7) Senior Citizen Savings Scheme

A Senior Citizen Savings Scheme is an income tax saving schemes available to senior citizens who are residents in India. The scheme is available for investment through banks and post offices and offers one of the highest rates amongst the various savings schemes.

Depositors can make an investment with a minimum amount of Rs. 1000 and in multiples thereof. The scheme also provides the facility of investment through cash provided the investment amount is less than Rs. 1 lakh. The deposits made into the scheme matures after a period of 5 years. The depositors also have the option to further extend the maturity period by another 3 years.

Investment in the Senior Citizen Savings Scheme qualifies as a deduction under section 80C up to Rs. 1.5 lakhs from the taxable income. The interest on such deposits is fully taxable and liable for a tax deduction if the interest is above Rs. 50,000. Deposits made into a Senior Citizens Savings Scheme account are compounded and paid out annually.

(8) School Tuition Fees

The income tax act 1961 provides a deduction under section 80C of the income tax act for payment for school fees of children. This tax saving option is available under section 80C in addition to other investments like PPF, NSC, ELSS, etc. Tuition fees paid to any registered university, college, school, or educational institution qualifies for deduction up to Rs. 1.5 lakh.

Moreover, only the tuition fees qualify for deduction under the income tax act. Any other fee like donation, development fee, etc. even if paid to such an institution does not qualify for the deduction.

The income tax act allows both the parents to claim the deduction to the extent of the amount paid by them. So if the total fee paid by the parents is Rs 1 lakh, of which the father has paid Rs 40,000, while the mother has paid Rs 60,000, both can claim the amount individually as per the payment made by them.

(9) National Pension Scheme (NPS)

NPS or National Pension Scheme has become a popular income tax saving investment product. It is a tax saving option that is available to both government and private employees. It enables the depositor to build a corpus for their retirement along with a regular monthly income. The amount invested by the depositor is invested in several schemes including the equity markets.

There are two types of NPS accounts, Tier-1 & Tier-2. A tier-1 account has a lock-in period until the subscriber reaches the age of 60 years. The contributions made by the subscriber to tier-1 are tax-deductible under section 80CCD (1) and 80CCD (1B). Tier-2 accounts are voluntary in nature which allows the subscriber to withdraw the money when they like. However, contributions under tier-2 accounts are not eligible for a tax deduction.

As per the provision of section 80CCD, an individual can claim a deduction up to Rs. 1.5 lakh by investing in NPS. Additionally, a new sub-section 1B was also introduced, which offered an additional deduction of up to Rs. 50,000/-for contributions made by individual taxpayers towards the NPS.

(10) Health Insurance premium under section 80D

You can claim a tax benefit up to Rs. 25,000 in respect of the below contributions:

• Premium paid to keep in force health insurance covering self, spouse, or dependent children.
• Any contribution to Central Health Government Schemes.
• Any other scheme may be notified by the central government as eligible for deduction.

In order to take care of one’s medical emergencies, medical insurance is considered the safest investment option. This allows the taxpayer to avail of the benefits on two fronts. Firstly, being taken care of by the insurance policy in the case of a medical emergency. Secondly, the tax benefit under the income tax act for investing in an investment product.

Apart from the above, an additional deduction for the insurance of the parents is available to the extent of Rs. 25,000 if they are less than 60 years of age or Rs. 50,000 if they are more than 60 years of age. If the individual and the parent are both above 60 years of age, the maximum deduction available under this section will be Rs. 1, 00,000.

Summary of the deductions that are available under various categories:

(11) Education Loan

The income tax act provides a tax benefit on repayment of the loan as a tax deduction under section 80E of the act. You must remember that this tax saving option is available to the person who is repaying the loan. Once an educational loan is availed, the interest paid on the education loan qualifies for a tax deduction for a maximum of 8 years, or the interest is repaid, whichever is earlier.

Depending on who pays the EMI for the education loan, the parent or the child can claim the deduction. The deduction under section 80C is available only if you take the loan from a financial institution and not family members. You can claim the tax deduction starting from the year in which the repayment starts.

The income tax authorities provide a moratorium period of up to one year to the borrower from the date of completion to start repaying the loan. This allows the taxpayer sufficient time to manage their finances and claim the deduction once they start repaying the loan.

For example, if the taxpayer repays their education loan in 5 years from the date of repayment, the tax deduction would be available for this 5 year period only. As per section 80E, this benefit can be claimed for a period of 8 years so the taxpayers should avail this benefit. Borrowers should note that their repayment may exceed 8 years, but in such cases, they won’t get the tax deduction under Section 80E beyond the 8th year.

(12) Rent paid and no HRA received

Generally, you receive HRA as a part of your salary and treat HRA as a major tax saving schemes while filing income tax returns. However, there can also be a case wherein it does not form part of the salary of the employee. In such a case, standard HRA deduction cannot be claimed and the taxpayer would not be able to claim the benefit even if they are paying the rent. Further, in such cases, a taxpayer must claim a tax benefit under section 80GG.

In order to provide the taxpayer with benefit even in a case where HRA is not received, section 80GG was introduced. As per this section, a taxpayer can claim the deduction of rent paid even in a case wherein they do not receive HRA. This is subject to the below conditions:

• The individual is self-employed or salaried.
• HRA has not been received at any time during the year for which deduction is being claimed under section 80GG.
• You, your spouse, or the HUF in which you are a member does not hold any residential accommodation at a place where you currently reside.

To claim deduction under section 80GG, you must file form 10BA for payment of rent. The lower of the below will be considered as a deduction under this section:

• 5,000 per month.
• 25% of the total Income (excluding long-term capital gains, short-term capital gains under section 111A and Income under Section 115A or 115D and deductions under 80C to 80U.
• Actual rent less 10% of Income

(13) Interest paid on Home Loan

In order to claim the interest component on a housing loan as a tax deduction, you must satisfy the following conditions:

• A home loan must be taken for the purchase or construction of a house.
• Construction of the house must be completed within 5 years from the end of the financial year in which the loan was taken.
• The interest component paid as a part of the loan can be claimed as a deduction under section 24 up to Rs. 2 lakh. This is applicable in the case of a self-occupied property. In the case of a let-out property, there is no upper limit for claiming interest.
• In the case of interest being paid towards a home loan taken during a pre-construction period, the pre-construction interest paid can be claimed as a deduction. The deduction is available in five equal installments starting from the year in which the property is acquired or construction is completed. However, the maximum limit is Rs. 2 lakh.

(14) Savings bank account interest

The income tax act 1961 provides deductions with respect to interest earned from savings bank accounts. Individuals and Hindu undivided family can claim the tax deduction under section 80TTA on the interest earned. This deduction is applicable to taxpayers other than those who are senior citizens. In the case of senior citizens, section 80TTB is applicable.

The maximum deduction under section 80TTA is Rs. 10,000. The limit of Rs. 10,000 applies to the total interest earned from the savings bank account that the assesse has. Any interest over and above Rs. 10,000 is taxable under “Income from Other Sources”. The rate of tax will be as per the applicable tax slab rate. For example, the total interest earned by Amit from his savings bank account was Rs. 15,000. In this case, the total exemption allowed under section 80TTA will be Rs. 10,000 and the balance Rs. 5,000 will be taxable as “income from other sources”

On 1st April 2018, section 80TTB came into existence for senior citizens. As per section 80TTB, senior citizens can claim deduction up to Rs. 50,000 or an amount specified from the total gross income.

(15) Medical expenses towards disabled dependent

As per the provisions of section 80DD, a taxpayer can claim a deduction if they are looking after disabled dependents. This tax benefit will help in reducing the tax liability of the person who is taking care of someone disabled in the family who is dependent on them.

As per section 80DD, disabled dependents include spouses, children, parents, or siblings (brother or sister). In the case of HUF, a disabled dependent may be a member of the Hindu undivided family. In order to claim tax benefits under section 80DD, a deduction should not have been taken under section 80U. Below are a few of the disabilities:

• Blindness
• Low vision
• Hearing impairment
• Mental illness
• Autism

Medical expenses against which you can claim tax benefits are as follows:

• Any expenditure made towards medical treatment, nursing, training, rehabilitation of a dependent person with a disability.
• Any amount paid as a premium for a specific insurance policy designed for such cases as long as the policy satisfies the conditions mentioned in the law.

(16) Treatment of specified diseases u/s 80DDB

A deduction under section 80DDB is allowed to a taxpayer wherein a case they have contracted diseases such as cancer, neurological diseases such as dementia, motor neuron disease, Parkinson’s disease, AIDS, etc. All such disease entails expensive treatment costs and the expenses done can be claimed as a deduction under section 80DDB.

The deduction under section 80DDB is allowed for the medical treatment of a dependent who is suffering from a specified disease by individuals or HUF. The deduction is up to ₹ 40,000 or the amount actually paid (whichever is lower). This limit goes to ₹ 1 lakh in the case of senior citizen taxpayers or dependents.

(17) Donations made to charitable institutions

Section 80G provides a tax deduction to the taxpayer with respect to the amount paid by them to an approved charitable organization. The donations made to such organizations should be made via cheque or online transfer. Cash transfers, above Rs. 2,000 do not qualify for deduction under this section. It is very important to take the stamped receipt from the organization wherein the donation has been made in order to claim the deduction.

Depending on the type of organization where a donation has been made, the tax deduction under section 80G can be either 50% or 100% of the donation amount. However, the same is restricted to 10% of the adjusted gross total income of the taxpayer. An adjusted gross total income can be defined as:

• The gross total income (sum of income under all heads) minus
• Amount deductible under Section 80CCC to 80U (but not Section 80G), minus
• Exemption from income, long-term capital gains, minus
• Income as referred under Sections 115A, 115AB, 115AC, 115AD, and 115D, relating to non-residents and foreign companies.

There are basically four buckets in which donations can be categorized to claim the tax deduction.

• Donations with 100% deduction without any qualifying limit, such as the National Defence Fund set up by the Central Government.
• Donations with a 50% deduction without any qualifying limit such as the Jawaharlal Nehru Memorial Fund or the Prime Minister’s Drought Relief Fund
• Donations with 100% deduction subject to 10% of adjusted gross total income. The donation must be towards a Government or any approved local authority, institution, or association to be utilized for the purpose of promoting family planning
• Donations with 50% deduction subject to 10% of adjusted gross total income such as any institution which satisfies conditions mentioned in Section 80G(5).

Income Tax Rates

Income Tax Rates- Sourced from- https://www.incometaxindia.gov.in on 07^th Dec 2022

Many companies give an opportunity to their employees, especially senior staff, to buy their shares under a special procedure. This process is called Employees Stock Option Plan (ESOP). Under this process, the company in a way gives its employees the right to buy their shares. The employee can buy shares of the company by exercising the right granted under this process, though there is no compulsion.

Subas Tiwari

Why is ESOP Given?

The right acquired under ESOP is called Stock Options. Under this, the staff can get the company’s shares for free or at a concessional rate. Startup companies use ESOP more. The reason for this is that while starting a business, they do not have the money to pay more salaries to their employees. Therefore, they give stock options to their staff in the form of compensation packages. Second, the purpose of ESOP is also to keep the employees connected with the company. In such a situation, the company gives such stock option to its employees, which can be used to buy shares in the future.

What is the Process of Stock Options?

If the company gives an opportunity to the employees to buy shares in the future under the stock option, then the date on which the employee becomes entitled to buy the shares is called the vesting date. For example, suppose a company gives 1000 options to its employees on March 31, 2022. Under this, the employee exercises his right to buy shares in several stages. On completion of one year of service, he can exercise the 20% option. At the end of the second year, he can exercise the 30% option. The rest of the option can be exercised by him on completion of the third year.

How Does the Company Benefit from ESOP?

Generally, in ESOP, the company’s share price is pre-determined. This is much less than the market value of the stock. In this way, by buying shares at a lower price, the employee becomes a shareholder of the company. This maintains his loyalty to the company.

He also becomes a partner in the growth of the company. This is beneficial for the company, as the growth of a company depends on the productivity of its employees. Infosys was the first IT Company in India to issue ESOP to its employees. They gave stock options to all their employees, big or small. Many of their small employees have also become millionaires due to this.

Understanding the Vesting Date and Grant Price

Under the ESOP schemes, the stock option is free when it is given to an employee. The terms and conditions on which employee can exercise his rights are spelt in the ESOP scheme. The option given to the employee can be exercised after a certain lock in period, which is generally more than one year.

The right to exercise the option may get vested in the employee in the next future date/s. The dates on which the employee becomes entitled to exercise the right to acquire the shares is called as “vesting date.” The rights may vest fully or partially over the vesting period. For example, an employee is given 1000 options on 31st March, 2016 which can be exercised in phases like 20% on completion of one year, 30% on completion of second year and the balance on completion of the third year from the date of such grant. So, in the instant case, the vesting dates for 200 options is 1st April, 2017, for 300 shares it is 31st March 2018, and for balance 500 shares it is 31st March 2019. The plan may stipulate same or different grant price or exercise price for such vesting. The grant price or the price at which the employee can buy the share from the company is generally fixed and is generally substantially lower than the prevailing market price of the shares in case the shares are listed.

Since the employee is given just an option without any obligation attached to it, it is not mandatory for the employee to exercise the option. The employee may decide to exercise the option or may decide to let the option lapse in case the prevailing price of the shares is lower than the exercise price. The employee is given a time period during which he has to exercise the option, failing which the vested rights may lapse. The date on which the employees exercise their option to buy the shares is known as ‘exercise date’.

There are no cash outflows or taxation implications when the options are granted as well as when the options are vested in the employee.

When to Exercise Options

It is not necessary for an employee to exercise the option once it vests with him. The employee can exercise the right within the stipulated time period. When the employee should exercise the option is a very important question from the financial and taxation angle as well. Once the employee exercises the option, he has to pay for the shares at the price predetermined and thus causing cash outflow. In case the shares are not listed on a stock exchange, the same cannot be liquidated and thus the money gets locked till the shares get listed or the promoters offer you an exit option. Moreover, there is taxation implication if you delay your exercise date because the holding period for capital gain purpose will start from the exercise date. So, the decision has to be taken after having considered cash flow and taxation implications of such decision.

ESOP and its Tax Implications

Tax implications when exercising the option

The taxation of ESOP has a typical structure. It is taxed in two stages. First stage is when the employee exercises the option to buy the shares at the exercise price. The second stage is when the shares are ultimately sold.

Let us first discuss the first stage. As and when the options under the ESOPs are exercised, the difference between the exercise price and the value of the security is treated as perquisite in the hand of the employee. The employer is required to deduct tax at source on the employee exercising the option, treating the same as perquisite. The value of the shares allotted to the employee shall be the average of market price (average of highest and lowest price) on the date the option is exercised in case the shares are listed on any stock exchange in India. In case the shares are not listed, the fair market value of the same shall be as per the valuation certificate obtained from merchant banker. The certificate of valuation of shares should not be older than 180 days from the date of exercise of the option. Even if the shares are listed outside India, the company will have to obtain the certificate from the Merchant Banker as such shares are treated as unlisted shares for ESOP purposes.

Tax implications when the shares acquired under ESOP are disposed off

Now let us understand the second leg of the taxation of the ESOP shares, i.e. when the employee actually sells the shares. The incidence of sale will attract capital gains tax. The gains can be either long term or short term, depending on the period for which the employee has held the shares. The holding period requirement is different for listed shares as well as for unlisted shares. Listed shares shall become long term if held for more than one year. Unlisted shares become long term after three years. The period of three years has been proposed to be reduced to two years in the current budget.

The rate at which the short term or long term gains shall be taxed will depend on whether the shares have been traded on the platform of stock exchange on which the Security Transaction Tax has been paid. In case shares are traded through a broker, the long term capital gains are taxed under Section 112A at 10% over Rs 1 lakh of capital gains. However, such short-term capital gains shall be taxed at a flat rate of 15% under Section 111A.

However, in case the shares are not sold through the platform of the stock exchange, the long term capital gains shall be calculated after applying the indexation to the original cost of purchase. Indexed gains so calculated shall be taxed at a flat rate of 20% plus applicable surcharge and education cess. You have the option to pay tax @ 10% on capital gains without applying indexation benefits. Such short-term capital gains are be treated like any other income and added to other income and taxed at the slab rate applicable.

For the purpose of computing the capital gains, the fair market value as on the date of exercise is taken into account for the purpose of perquisites of the options. It is treated as the cost of acquisition and not the price actually paid by the employee.

The tax implications would be different in case the ESOPs are allotted to a person who is not an employee either by the holding or subsidiary company or the any non-executive director or any other eligible person. The question of it being taxed as perquisite does not arise when the option is exercised by such persons. However, the capital gains tax will have to be paid as and when such shares are sold.

Taxation of Foreign ESOPs

In case the ESOPs are granted by foreign companies to the Indian resident, the same would be taxable in India. Moreover, the taxation provisions of the country of the company which grants the option as well as the double taxation avoidance agreement shall have to be looked into for understanding the exact tax implication. Moreover, concessional tax on long term capital gains under Section 112A or concessional rate of 15% tax on short term capital gain in respect of such shares would not be available as these shares would not be sold on Indian stock exchanges as these are not likely to be listed in India.

Sourced from : Financial Express

When should you sell the Shares?

The decision to sell the shares acquired under ESOP is like any other investment decision. You need to take into account the capital gains implication as well as the need for liquidity for arriving at the decision. Moreover, whether and when to sell will also depend on the future prospects of the company. It may also happen that the shares which you have acquired under ESOP are not listed. So, in such a situation, you cannot sell the shares until the shares are listed or the promoters offer you an exit, which may not be at very attractive terms. In such a situation, it will make sense for you to wait a little till the shares are listed on a stock exchange.

Should you accept ESOPs in lieu of cash as part of salary?

An old saying goes, “One bird in hand is better than two in bush.” Common sense would demand that one should opt for cash in lieu of ESOPs, but here such a comparison may not be so easy to make because generally the projected price of shares under the ESOP plan may be significantly higher than the cash component being offered. Moreover, the option to choose cash in lieu of the ESOP may not always be available.

In this era of digital India, credit card is being used a lot. Not only in metro cities, but also in small towns and many rural areas, people use credit cards. However, many things have to be kept in mind while using a credit card. The most important thing in using a credit card is the minimum amount due, which is seen on every credit card statement. Many times people feel that if they pay at least that much money, then the work will go on. Let’s understand the full game of Minimum Amount Due.

                                                                                                                                    Subas Tiwari 

What exactly is Minimum Amount Due?

If we talk about the minimum amount due written on the credit card, then it is actually a small part of the entire credit card bill. Usually this share is only 5 per cent. Credit card companies write the total bill, minimum amount due and due date on the statement. Many a times people think of paying the minimum amount due and they think that it will not charge them anything.

So what is the benefit of paying the minimum amount due?

If a person pays the minimum due account, then he will not have to pay the late payment charge. However, after that your loan can grow rapidly, as daily finance charges are levied on unpaid bills. That is, if your bill is 50 thousand and your minimum amount due is 2500 rupees, then paying only two and a half thousand will not benefit you. Even though you may not be charged late payment, but every day huge interest will be charged on your bill, which will cause you huge loss.

And that’s how banks make big money

 Often, the question arises in the minds of people as to why credit card companies give a lot of reward points on payment of bills. After all, what is the benefit of these companies? How do these companies make money? The game of Minimum Amount Due is also a means of earning of these companies. If you are late for even one day from the due date, then you will be charged huge interest, which can be up to 48 per cent. The problem is that this interest is charged on a daily basis. That is, the longer you delay paying your bill, the more benefit the credit card companies get.

 Tips to Use Credit Card Wisely

1. Plan your repayment

Before you consider any purchase on your credit card, you need to have a detailed strategy on the repayment. It is a great idea to pay off your credit card bill before the due date. Not only does this help in improving your credit score, but it also helps in establishing a good credit profile with the lender. Such profiles are often given better deals on personal loans, discounted financial products, and a host of other benefits.

Most banks also offer you the option of paying back your credit card bills through installments. If you are going through a financial strain, such measures will help you take the load off your head and are a welcome gesture. However, in the long run, these often lead to higher interest payments, thus making it important for you to plan your repayment.

2. Use a credit card only at trusted merchants

You must be aware of the fact that the odds of a credit card fraud are higher than one with a debit card. That is why it is a great practice to use a credit card only at trusted merchants. It holds in the case of a local store as well as online shopping.

3. Borrow only what you can afford to pay back

With a host of different credit card options available, it is often seen that the credit card limit of an individual is much higher than their monthly income. It is important to track your monthly spending and use only an amount that you can be confident of repaying. It will save you unnecessary interest compounding, huge debts, and help you establish a financially sound future for yourself and your family.

4. Do not max out the limit

When you are using a credit card, the core idea is that you are spending money that you do not have yet. It might seem tempting for new users pushing them on the path of overspending. The first step here is to ensure that you do not max out your credit card limit, no matter what the situation.
Ideally, you should restrict your credit card usage to 2/3rd of the limit. For instance, if your credit card limit is ₹3 lakh per month, plan its usage in a way that you do not spend more than ₹2 lakh. It will help you maintain a good credit card score which will be of help at a later stage.

Most banks offer the facility wherein you can set a personal spending limit on the credit card. It is a great option for people who aren’t confident about their shopping habits.

5. Time your purchases

Every credit card is different, and one of the first things that you need to do is understand the billing cycle of your card. As most credit cards have a monthly billing procedure, if you can time your purchase to days immediately after the bill generation, you will have about 45 days of interest-free period for bill payment. Depending on your card, the period may be longer.

6. Keep track of your spending

The proper usage of a credit card requires one to be disciplined and understand their spending patterns. It is only when you keep a detailed account of all your spend will you be able to identify an unexpected transaction without any time wastage.

When such false transactions are brought to the immediate notice of the bank, most of the time, there is room for rectification. Understand that none of this would be possible if you do not keep track of your transactions on the card.

7. Be aware of the rewards

Almost all credit cards come with a host of benefits and rewards under its loyalty program. From special discounts on e-commerce sites to free movies or flight tickets, there is a range of benefits for credit card owners. To make the most of them, you need to look up the reward program if your credit card issuer and keep yourself updated.

8. Keep a tab on your credit report

Once you are cautious about your spending habits, the next step is identifying an improper detail associated with the card. The details may range from things like a change in your address or employer to amendments in your marital status. Sometimes, mistakes like fraudulent transactions or accounts may be linked to your card.

Unless you read your annual credit report, you will not know about these things. It is a wise practice to invest your efforts in reading and understanding your credit report. It will help you identify errors as well as plan your credit card expenditure.

9. Be wise on your credit card balance

While you need to know how to use credit cards and pay its bills on times, sometimes it is inevitable for you to carry forward a balance. In such a situation, you need to be extra cautious and ensure that you are making every monthly payment promptly. Whenever possible, pay off more than the minimum due so that the amount is paid off sooner. 

Also, remember that if you have some balance amount on your card, you need to be frugal about the credit card’s usage so that the overall monthly usage is stalled at below 30% of the credit card limit. And you must always remember that paying your credit card bills on time touching the credit card limit while having an existing balance is seen in poor light by potential lenders.

With these tips, you are now prepared to use your credit card in a way that favours your finances and ensures that you make the most of the benefits offered.