Saving money on taxes is crucial for financial planning. An effective tax-planning strategy can help people achieve their financial goals and reduce their tax burden at the same time.
Tax saving instruments and sections
1. Fixed deposit
By making investments in tax-saving fixed deposits, you can reduce your tax liability in accordance with section 80C of the Indian Income Tax Act, 1961. By making investments in tax-saver fixed deposits, you can deduct up to Rs. 1.5 lakh from your income. Such FDs have a 5-year lock-in period, and the interest received is taxable. Typically, interest rates fall between 5.5% and 7.75%.
2. PPF (Public provident fund scheme)
Public Provident Fund Scheme is a well-liked investing tool for tax reduction. A PPF account must first be opened at the post office or specific branches of public and private sector banks. It is a long-term savings and investment program. A guaranteed rate of interest is earned on contributions to the PPF account. These deposits are eligible for Section 80C deductions worth up to Rs 1.5 lakh each fiscal year.
3. ULIP (Unit linked insurance plan)
ULIPs are long-term investment solutions that let you select from a variety of equity, debt, or both funds. With ULIPs, you have the freedom to switch between funds in accordance with your financial objectives. You can reduce your tax liability under sections 80C and 10(10D) of the Income Tax Act, 1961, by investing in ULIPs.
4. National Savings Certificate
National Savings Certificates are a savings bond program that primarily encourages participants with low to moderate incomes to invest while reducing their income tax liability under Section 80C. If you have a savings account with a bank or a post office and have access to Internet banking, you can purchase NSC certificates in e-mode. An investor may purchase NSCs for their own account, on behalf of a juvenile, or in a joint account with another adult.
5. Senior Citizen Savings scheme
The Senior Citizen Savings Scheme (SCSS) is a government-sponsored savings program for anyone over 60. It provides a reliable and secure source of income for people’s post-retirement years and delivers relatively high returns.
Section 80C of the Income Tax Act of 1961 permits tax deductions for principal deposits made into SCSS accounts up to a maximum of Rs. 1.5 lakh. This exemption, however, is only valid under the current tax laws. If a person decides to file tax returns using the new approach outlined in the Union Budget 2020, it is not permitted.
However, the interest is subject to taxation according to the taxpayer’s applicable tax bracket.
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6. Life insurance
Life insurance is a crucial component of a person’s financial plan since it provides protection to the person’s family in the event of an untimely death. As a result, the primary duty to secure the family’s financial future rests with the earner.
Traditional life insurance (endowment) and market-linked life insurance (ULIP) both provide tax advantages to policyholders on the premiums paid.
Various life insurance programs exist, including:
Plans for life insurance give policyholders tax advantages regardless of their nature.
Section 80C of the Income Tax Act covers life insurance premiums up to a maximum of Rs. 1.5 lakhs. Under Section 10(D), proceeds on death or maturity are tax-free. If the policy is canceled or surrendered within five years, the claimed deductions are applied to the income and are taxed accordingly.
- Term plans
- Endowment plans
- ULIPs or unit-linked plans
- Money-back plans
7. Pension plans
An additional type of life insurance is pension plans. They are referred to as protection plans and they serve a distinct purpose than other insurance plans like term plans and endowment plans. Pension plans aim to support the individual and his family if he lives on, in contrast to protection plans, which are designed to financially safeguard the individual’s family in the event of his death.
Section 80CCC (a sub-section of Section 80C) of the Income Tax Act covers pension contributions. The total deduction allowed under all of Section 80C’s sub-sections cannot be more than Rs 1.5 lakhs.
At maturity, one-third of the accrued pension amount is tax-free, while the remaining two-thirds are considered earnings and are subject to marginal tax rates. If the beneficiary dies, the money is not subject to taxes.
8. Health insurance or Mediclaim
The costs associated with an accident or hospitalization are covered by health insurance, or Mediclaim as it is more often known. In accordance with the sum assured, Mediclaim also covers pre- and post-hospitalization costs.
Section 80D of the tax code provides benefits for health insurance. Tax benefits are available on insurance premiums up to Rs 20,000 for senior citizens and Rs 15,000 for everyone else. The policyholder can claim a tax credit of Rs 35,000 (Rs 15,000 + 20,000) if he pays Rs 15,000 for his personal policy and Rs 20,000 for his elder parent’s coverage. For amounts received under critical illness insurance policies, the maturity value is tax-free.
9. NPS
The Pension Funds Regulatory and Development Authority, or PFRDA, oversees the NPS, or New Pension Scheme. It is open to all Indian citizens between the ages of 18 and 60. Due to the minimal fund administration fees, it is quite economical. Three distinct accounts with different asset profiles, namely equity (E), corporate bonds (C), and G government securities (G), are managed by the fund managers. Investors have two options for portfolio management: actively (active choice) or automatically (auto choice).
Under Section 80CCD of the Income Tax Act, contributions made to the NPS are tax deductible. Together with Sections 80C and 80CCC, this section’s combined deduction cap cannot exceed Rs 1.5 lakhs.
Given the variety of possibilities, NPS is especially helpful for people trying to save money for retirement who have different risk appetites.
10. Tax-saving mutual funds
Tax advantages are available for investments made in equity-linked savings schemes (ELSS), often known as tax-saving mutual funds. Tax-saving mutual funds invest in stocks among other assets and are better suited for investors who are willing to take on moderate to high levels of risk. Three years are the three-year lock on investments.
Section 80C of the Income Tax Act covers investments in tax-saving mutual funds up to a total of Rs. 1.5 lakhs. Under Section 10(D), proceeds on death or maturity are tax-free.
