Savings are our financial buffer for the future, and practically everyone does it. True, some people have a more difficult time managing their savings than others. You may choose to utilise your money to purchase your ideal home, automobile, or to support your child’s further education.
Here are some of the most effective tax-saving schemes:
1. Fixed deposit
You can save taxes by investing in tax-saving Fixed Deposits that qualify for a tax deduction under Section 80C of the Indian Income Tax Act of 1961.
By investing in tax saving schemes fixed deposits, you can claim a maximum deduction of Rs.1.5 lakh. Such FDs have a 5-year lock-in term, and the interest generated is taxable. The interest rate typically varies from 5.5 per cent to 7.75 per cent.
2. PPF ( Public provident scheme )
The Public Provident Scheme is a popular tax saving schemes instrument. To get started with these long-term tax saving schemes and best tax saving plans, you must first create a PPF account at the post office or approved branches of public and private sector banks.
Contributions to the PPF account earn a fixed rate of return. On these deposits, you can claim Section 80C deductions of up to Rs 1.5 lakh in a fiscal year.
ULIPs are long-term investment products that provide you with the option of investing in equity funds, debt funds, or both. ULIPs allow you to swap between funds under your financial objectives. You can save taxes by investing in ULIPs under sections 80C and 10(10D) of the Income Tax Act of 1961.
4. National Savings Certificate
National Savings Certificates (NSCs) are a savings bond programme that encourages mostly low- to middle-income people to invest while saving income tax under Section 80C.
You can buy NSC certificates in e-mode if you have a Savings account with a bank or a Post Office and have access to online banking. NSCs can be purchased by an investor for themselves, on behalf of a juvenile, or as a joint account with another adult.
5. Senior Citizen Savings scheme
The Senior Citizen Savings Scheme (SCSS) is a government-sponsored savings mechanism for those over the age of 60 that provides a stable and safe source of income in their post-retirement phase while also offering fairly high returns.
The main amount deposited in an SCSS account is tax-deductible under Section 80C of the Income Tax Act of 1961, up to a ceiling of Rs. 1.5 Lakh. This exemption, however, is only eligible under the current tax scheme. It is not permitted if a person chooses to file tax returns using the new method announced in the Union Budget 2020.
The interest received, however, is subject to taxes under the appropriate tax slab of the taxpayer in question.
6. Life insurance
Life insurance is an essential part of an individual’s financial portfolio since it protects the individual’s family in the event of an unforeseen disaster. As a result, it is the breadwinner’s major obligation to obtain life insurance as soon as possible for the family’s protection.
Life insurance, whether traditional (endowment) or market-linked (ULIP), provides policyholders with tax breaks on premiums paid.
Life insurance products, regardless of their nature, provide tax advantages to policyholders.
Life insurance premiums are exempt from tax under Section 80C of the Income Tax Act up to a maximum of Rs 1.5 lakhs. Section 10 exempts death/maturity proceeds from taxation (D). If the policy is surrendered or cancelled within five years, the claimed deductions are added to income and taxed appropriately.
There are various best tax saving plan like:
- Term plans
- Endowment plans
- ULIPs or unit-linked plans
- Money-back plans
7. Pension plans
Pension plans are a type of life insurance. They serve a distinct purpose than the best tax saving plans, such as term and endowment policies, and are referred to as protection plans. While protection plans are designed to financially safeguard a person’s family in the event of his death, pension plans are designed to provide for the man and his family if he lives.
Contributions to a pension are tax-deductible under Section 80CCC (a sub-section of Section 80C) of the Income Tax Act. The total deduction limit under all sub-sections of Section 80C cannot exceed Rs 1.5 lakhs.
At maturity, one-third of the accrued pension amount is tax-free, while the remaining two-thirds is recognised as income and taxed at the marginal tax rate. When the recipient dies, the cash is tax-free.
8. Health insurance
Health insurance, or Mediclaim as it is more often known, pays for expenditures incurred as a result of an accident or hospitalisation. Pre- and post-hospitalization expenditures are also covered by Mediclaim, subject to the sum promised.
Section 80D of the Internal Revenue Code provides tax incentives for health insurance. Insurance premiums of up to Rs 20,000 for older persons and Rs 15,000 for others are tax-deductible. If the policyholder pays Rs 15,000 for his insurance and Rs 20,000 for his elderly father, he can claim a tax advantage of Rs 35,000 (Rs 15,000+20,000). For sums received under critical illness best tax saving plans, the maturity value is tax-free.
9. New Pension Scheme
The Pension Funds Regulatory and Development Authority – PFRDA – oversees the New Pension Scheme (NPS). It is open to all Indian citizens between the ages of 18 and 60. It is particularly cost-effective due to the minimal fund management fees.
The money is managed by the fund managers in three different accounts with diverse asset profiles: equity, corporate bonds, and government securities. Investors can manage their portfolios actively or passively.
Contributions to the NPS are exempt from income tax under Section 80CCD of the Income Tax Act. The total deduction allowed under this provision, coupled with Sections 80C and 80CCC, cannot exceed Rs 1.5 lakhs.
Given the variety of possibilities, NPS is especially beneficial for those with various risk tolerances who want to save for retirement.
10. Tax-saving mutual funds
Tax breaks are available for investments in tax saving schemes mutual funds, generally known as equity-linked savings systems (ELSS). Tax-advantaged mutual funds participate in stock markets, among other assets, and are best suited for individuals with medium to high-risk tolerance. Investments are guaranteed for three years.
Investments in tax saving schemes mutual funds are tax-deductible up to Rs 1.5 lakh under Section 80C of the Income Tax Act. Section 10 exempts death/maturity proceeds from taxation (D).
Wrapping It Up
Your savings are critical to meeting your and your family’s expanding demands. Many people begin contributing to their retirement savings with their first salary.
We cut back on our expenditures today so that a piece of our pay can be saved for a brighter future. However, ‘Tax’ is a component that depletes a significant portion of your tax saving schemes.
What did we learn?