Taxes are an inevitable part of life. No one likes paying a large sum of money as taxes, especially when it feels like they’re taking away from our hard-earned income. It is only obvious to wonder how to save taxes. The good thing is that you don’t have to pay more taxes than necessary. That’s where tax-saving investments come in.
Tax-saving investments are a smart way to reduce your tax liability while building your investment portfolio at the same time. There are several ways to save taxes such as personal loans, government schemes and many more. In fact, some expenses, also offer tax benefits. With increased digitalisation , almost everyone is buying health insurance online. Do you know the premium that you pay for health plans also comes with tax benefits? But with so many options available, it can take time to figure out how to save tax and which instrument to invest on. Figuring out how to save taxes, required considering several factors like the lock-in period, risk, and tax benefits of various tax-saving instruments before making your investment decisions.
Here’s a comparison table of various tax-saving investments based on different factors:
|Investment||Risk versus Reward||Liquidity||Fees|
|Public Provident Fund (PPF)||Low risk, moderate reward||Low liquidity; lock-in period of 15 years||No fees|
|Equity-Linked Savings Scheme (ELSS)||High-risk, high reward||High liquidity; lock-in period of 3 years||Expense ratio and exit load fees|
|National Pension System (NPS)||Moderate to high risk, moderate to high reward||Low to moderate liquidity; partial withdrawal allowed after 3 years; mandatory annuity purchase on maturity||Account maintenance and fund management fees|
|Unit-Linked Insurance Plan (ULIP)||High-risk, high reward||Low to moderate liquidity; lock-in period of 5 years||Premium allocation, fund management, and policy administration fees|
|Sukanya Samriddhi Yojana (SSY)||Low-risk, high reward||Low liquidity; lock-in period of 21 years||No fees|
|Tax-saving fixed deposits||Low risk, low reward||High liquidity; lock-in period of 5 years||Penalty for premature withdrawal; interest earned is taxable|
Let us look more closely at the tax-saving investments under section 80C.
- Public Provident Fund (PPF): A PPF account is a tax-efficient investment option with a lock-in period of 15 years. Following Section 80C of the Income Tax Act,1961, the investment made in PPF can avail of tax deduction up to a maximum of Rs. 1.5 lacks per year. The interest earned on the fund and the maturity proceeds are also tax-free, making it a popular choice if you are looking to save on taxes.
- Equity-Linked Savings Scheme (ELSS): ELSS funds are mutual funds that invest primarily in equities and offer tax benefits up to 1.5 lacks under Section 80C. ELSS funds usually come with a lock-in period of three years and can provide potentially higher returns than traditional fixed-income tax-saving investments.
- National Pension System (NPS): The NPS is a government-backed pension scheme that allows you to build a retirement corpus while saving taxes. Under NPS, you can claim a maximum deduction of Rs 1.5 lakh per annum under Section 80CCD (1) of the Income Tax Act. But that’s not all – Section 80CCD (1B) also allows you to claim a deduction of up to Rs 50,000 per year for any voluntary contributions that you make to your NPS account. So, if you’re looking to save some money on your taxes, don’t forget to take advantage of this provision
- Unit-Linked Insurance Plans (ULIPs): ULIPs are insurance plans that also offer you investment benefits. Premiums paid towards ULIPs are eligible for saving taxes up to 1.5 lacks per annum under Section 80C, while returns on investment are tax-free.
- Sukanya Samriddhi Yojana (SSY): SSY is a government-backed scheme designed to promote the welfare of the girl child. Under Section 80C, contributions towards SSY and interest earned on the same, are eligible for a tax deduction.
- Senior Citizen Savings Scheme (SCSS): SCSS is a government-backed savings scheme for senior citizens aged 60 years or above. Contributions towards SCSS are eligible for tax deductions under Section 80C, and interest earned is taxable.
- Tax-Saving Fixed Deposits: Many banks offer tax-saving fixed deposit schemes that offer tax benefits under Section 80C. Note that fixed deposits have lock-in periods, which can range from 7 days to 10 years and offer guaranteed returns.
While Section 80C of the Income Tax Act offers several tax-saving investment options, there are additional investments to save tax that you can consider beyond Section 80C. Here are some of the most popular options:
- Health Insurance Premium: In India, premiums paid for health insurance can be tax-deductible under Section 80D of the Income Tax Act. The maximum deduction available is Rs 25,000 for health insurance premiums paid for yourself, your spouse, and your dependent children, and an additional Rs. 25,000 for premiums paid for your parents. If your parents are senior citizens, the maximum deduction is Rs. 50,000. With the option of buying health insurance online, now you can easily get the dual benefits of health and wealth by getting a good health plan.
- Interest on Home Loan: The interest paid on a home loan is tax-deductible in India, up to a maximum of Rs. 2 lacks per financial year. Additionally, if you sell your home after owning it for a certain period, you may be entitled to capital gains tax exemption, which can further reduce your tax liability.
- Donations: Donations made to charitable organizations and trusts are eligible for tax benefits under Section 80G of the Income Tax Act. The deduction amount varies based on the charity and can range from 50% to 100% of the donated amount.
In conclusion, with proper planning and execution, you can not only know how to save taxes but also grow your wealth over time. It’s important to note that each of these tax-saving investments has its own unique features and benefits, and investors should carefully evaluate their options before making a decision. Additionally, tax laws and regulations are subject to change, so it’s advisable to consult with a financial advisor or tax professional for the latest information and guidance. Take advantage of tax-saving opportunities and make the most of your investments.
Disclaimer– The above information is for illustrative purposes only. For more details, please refer to the policy wordings and prospectus before concluding the sales.