There are multiple ways for you to save taxes in India. However, the perfect tax planning is made when an individual chooses instruments that best suits his/her needs.
We are always looking for the best way to make an investment that saves us from paying taxes. Now, with the tax season just around the corner, it is the perfect time to make the tax-saving plans that helps you to achieve your financial goals. There are several instruments out there for you to invest in while also reducing your tax liability. These plans, commonly referred to as tax-saving schemes, work as a go-to option for taxpayers to save tax easily. Some of the popular ones include the National Pension Scheme, Equity Linked Savings Scheme, Public Provident Fund, etc.
In this article, we will look at five of the best tax-saving instruments that help you reduce your tax burden. The contributions that you make to each of these schemes can be claimed as tax deductions under specific sections of the Income Tax Act. However, the options that you choose should be based on your requirements and needs. For more personalized advice, you are suggested to hire and seek suggestions from a financial advisor. Without further delay, let’s dive into the best income tax saving schemes.
1. Equity-Linked Saving Schemes (ELSS)
In this investment option, your contribution is invested in equity, providing you with higher returns in the long run. You can start investing in ELLS funds with just Rs 500 and also there is no upper limit on the amount of investment. It offers the lowest lock-in period of just 3 years among all other tax-saving instruments. There are two types of ELSS funds – dividend and growth options. In growth schemes, you get a fixed amount after maturity. On the other hand, in dividend options, you get a payout whenever dividend is declared by the fund or an alternative to reinvest your amount to equity. You can invest either as a lump sum amount or through Systematic Investment Plan (SIP) in this scheme.
However, ELSS might not be suitable for everyone as their returns are based on market performance. It is covered under Section 80C of the Income Tax Act, allowing you to claim deductions of up to Rs 1.5 lakh in a financial year. Moreover, long-term capital gains from ELSS are tax-free till Rs 1 lakh, after which you are taxed at 10%.
2. Public Provident Fund (PPF)
Known by most people as PPF, it is one of the best long-term options to save tax under Section 80C. It has a minimum tenure of 15 years which can be extended by 5 years. It has gained its popularity due to attractive returns and tax benefits. You can deposit a maximum of 12 times in a fiscal and maintain a minimum deposit of Rs 500 in each financial year. The maximum amount that you can deposit is Rs 1.5 lakh to avail deductions under Section 80C of the Income Tax Act. Any amount deposited over the maximum limit will not be eligible for any interest or claim tax deductions. Both the investments and the interest amount earned from the PPF are fully exempted from income tax. PPF falls under the Exempt-Exempt-Exempt (EEE) category that means investment qualifies for deduction, interest earned on PPF is exempted and maturity amount is also exempted.
3. National Pension System (NPS)
Regulated by the Pension Fund Regulatory and Development Authority, it is another popular low-cost tax-saving option. In this scheme, you make contributions on a regular basis towards your retirement account. If you are a salaried employee, your contributions can be made by the employer. The investment corpus is invested in equity, corporate bonds, government bonds, and other assets. You can avail deductions of up to Rs 1.5 lakh under Section 80CCD (1) by investing in this scheme. An additional Rs 50,000 is exempted under Section 80CCD (1b) over and above Rs 1.5 lakh. The amount contributed in this tax-saving scheme is locked in until the investor retires at 60 years.
4. Tax-saving Fixed Deposits
Most people are familiar with this tax-saving instrument. It is best for those who are in a hurry to make tax-saving investments and do not have the time to look around for other options. To claim a deduction of up to Rs 1.5 lakh under section 80C, you need to open a fixed deposit account with a lock-in period of at least 5 years. However, the interest earned on fixed deposits is taxable depending on your tax bracket.
5. Senior Citizens’ Saving Scheme (SCSS)
For citizens of 60 years or above, it is one of the best options to save payment on taxes. You can make a lump-sum contribution with a minimum deposit of Rs 1000. However, you cannot deposit more than Rs 15 lakh in your SCSS account. It has a lock-in period of five years and interest is paid in every quarter. You are allowed to make deposits in multiples of Rs 1000 and a maximum of Rs 1.5 lakh per annum is tax-deductible under Section 80C.
There are multiple ways for you to save taxes in India. However, the perfect tax planning is made when an individual chooses instruments that best suits his/her needs. Furthermore, when picking a tax-saving option, make sure to take safety, liquidity, and returns of the scheme into consideration. Apart from saving on taxes, you should also ensure that you meet your overall financial goals.
(By Kapil Rana, Chairman and Founder, HostBooks Limited)