Savings are our financial cushion for tomorrow and it is a practice almost everyone follows. Sure, it is harder for some people to manage savings than others. You could want to use your savings to pay for your dream house, your dream car, or to fund the higher education of your child. Your savings play a crucial role in the growing needs of you and your family. Many people start contributing to their retirement fund from the first paycheck onwards. We sacrifice on spending today so that a portion of our salary goes into savings to make our future even better. But, ‘Tax’, is a component that takes away a prominent amount of your savings.
A lot of people often get entangled in this vicious web of tax. The tax filing season is feared by everyone. It’s the time of the year when people are in a frenzy over how much they will have to pay in tax. It can be overwhelming, especially for those who have just started earning. But, you must understand the intricacies as it is your money that is getting paid in taxes.
There are a bunch of
ways in which you can save the amount of tax you pay. These ways can be broadly
divided into two categories, namely expenses and investments. Expenses such as
tuition fees of kids, rent, repayment of home loans, medical expenses, etc. can
substantially bring down your total income which is eventually taxed. The
second category refers to specially strategised tax-saving investments in the
market which are very efficient at their job to cut your total amount paid in
tax. This article will highlight ten of the best tax saving investment plans
for you. Although they all help in saving tax, they are very different in
nature with different features, returns, time horizons, and they even work
differently.
Here is a list of the top
few investment plans you can opt for to save tax.
Life insurance is a safety net for your family which provides financial protection to them in the unfortunate event of your death. The insurance policy takes the financial burden off your shoulders towards your loved ones. You are required to pay timely premiums so that your family can be paid a death benefit. Although life insurance is not a pure form of investment for tax saving purposes, it does manage to always secure a place in the list of best tax saving investment plans available.
Section 80C of Income Tax A allows the premiums you pay towards your insurance policy to be
deducted from your total income. This in turn reduces your total taxable income
and eventually the actual tax paid. The cap for this deduction is Rs. 1.5 lakh.
Further, Section 10 (10 D) also exempts survival benefit, maturity benefit, and
death benefit from the tax.
A Public Provident Fund (PPF) is a long-term savings scheme by the Central Government. It is one of India’s most tax-efficient plans for salaried people and the contributions made towards your PPF account every year are eligible for tax deductions under section 80C of the Income Tax Act, 1961. The deduction limit for these deposits is Rs 1.5 lakh.
PPFs are a gold mine
when it comes to tax-saving investment plans. Why? Well, PPFs have an EEE or
‘exempt, exempt, exempt status which means the PPF account offers investors a
triple exemption benefit of tax-free returns, deduction on deposits, and no
wealth tax. In addition, the interest earned from PPF deposits is tax-free as
well.
A tax-saving fixed deposit is similar to any other fixed deposit where you put in a certain amount of money and you get a guaranteed fixed return every year. There is a lock-in period in which you will not be allowed to withdraw your money. A fixed deposit is usually opted for by people who need a guaranteed return every year.
Under Section 80 C, a
tax deduction of up to Rs. 1.5 lakh is permitted.
It is compulsory for employers to deduct a percentage of the employee’s salary and direct it towards the Employee Provident Fund (EPF). The employee and the employer make regular contributions towards the EPF account. The interest rate is based on the employee’s basic pay along with a component known as the dearness allowance in his/her total salary. The employee gets a lump sum amount which includes his/her own and employer’s contribution along with interest on the sum, on retirement.
The employee's
contribution towards EPF can be deducted from the total taxable income under
section 80C. The maximum limit for tax deductions with respect to EPF is up to
Rs 1.5 lakhs.
The National Pension
System (NPS) is a voluntary defined contribution pension system like PPF and
EPF enjoys the EEE (Exempt-Exempt-Exempt) status in India where the entire corpus
escapes tax at maturity and the entire pension withdrawal amount is tax-free.
Health insurance makes sure you can tackle health problems that come your way more efficiently with a financial cushion. Health is the most important aspect of life, cannot be avoided. And, when a health problem comes your way, the insurance policy will shield you financially.
Section 80D permits
you to avail of income tax exemption, based on the premiums paid for one or more
health insurance policies purchased for your family (spouse & children) and
parents. A policyholder can avail of a deduction of up to Rs. 25,000 annually against
the premium paid. This deduction can be availed on the health insurance availed
for yourself, your spouse, and your dependent children. The limit will increase up
to Rs. 50,000 in case you or your spouse are above the age of 60. If you are
paying for a health insurance plan availed for your parents you can claim an
additional amount of Rs. 25,000 and in case parents are senior citizens the
limit becomes Rs. 50,000. This limit also includes coverage of Rs. 5,000 for
expenditure on health check-ups of the family members, including parents,
spouse, and dependent children.
Term Insurance is a life insurance plan that provides financial coverage to the beneficiary of the insured person for a defined period. In the event of the death of the policyholder during the policy term, the beneficiary can claim death benefits from the insurance company. Term life insurance or term assurance provides coverage benefits as a lump sum or at a fixed rate of payments for a limited period of time. Term insurance policies offer deductions under Section 80C of the Income Tax Act along with further deductions up to an amount of Rs 1.5 lakhs. Death benefits received by the nominee are tax-free as well.
The Senior Citizens Savings Scheme (SCSS) is mainly for the senior citizens of the country above the age of 60. This long-term savings opportunity is great for senior citizens as it provides a regular income stream with tax-saving abilities.
A tax deduction of up
to Rs 1.5 lakh can be availed under Section 80C. In addition to this, there is
no tax liability on the principal amount if it is withdrawn by the legal heir
or nominee after the death of the account holder.
Unit Linked Insurance Products (ULIPs) give you an insurance cover as well as an investment bundled up in a single investment plan. A ULIP gives you the option of investing in stocks, bonds, or mutual funds.
This is how it works. When you invest in a ULIP, the company invests part of the premium in equity, debt, or other securities whereas the balance amount is utilised to provide an insurance cover.
The premium paid
towards this type of policy is eligible for a tax deduction under Section 80C.
Further, the returns out of the policy on maturity are exempted from income tax
under Section 10(10D). You could call this a dual benefit.
An equity-linked savings scheme (ELSS) is sort of an equity mutual fund that invests at least 80% of its total amount in equity and equity-related instruments. An ELSS has a mandatory lock-in period of 3 years during which you cannot withdraw any amount. An ELSS is eligible for tax exemption under section 80C of the Income Tax Act, which allows a maximum tax exemption of Rs. 1.5 lakh.