Whenever the Union Budget is around the corner one thing that keeps people anxious is announcements related to tax reforms.
Tax reforms in our country are vital because they directly impact the income of the common man. Therefore, tax saving investments is an integral part of our earnings as they offer benefits of tax deduction under section 80C or 80CC. These tax saving benefits are enjoyed by both salaried and non-salaried taxpayers.
A smart investor always looks for tax saving investments, which helps them to save on taxes and earn tax free income. Although there are many ways to save taxes and enjoy the maximum of your savings. While choosing tax saving investments plans it is important that one should always check the following factors such as liquidity, returns and safety. Also, it is important to understand how the returns will be taxed.
Before we elaborate on the list of best tax saving methods, it is vital to understand about the section 80C. As per section 80C, the investments made by the investor are eligible for tax exemption- maximum limit of Rs.1,50,000. Such investments may include Fixed Deposit, Life Insurance, ELSS, Provident Fund, National Savings Scheme and Bonds.
Now since you know about section 80C, let’s take a look at the best tax saving investments under the aforementioned sections.
Life insurance policies are the excellent way to save on taxes. In case of life insurance policy one needs to pay premiums every year-which in return is paid back in large lump-sum amount in case of death of the insured person. The premium paid for life insurance policies are liable for tax deduction under section 80C of Income Tax Act.
With the passage of time, the popularity of health insurance has grown. After the COVID-19 pandemic the importance of health insurance is likely to grow. Looking at the accelerating cost of medical treatment, buying a health insurance policy has become a necessity. And investing in health insurance policies ensures that you have enough finances to take care of your medical expenses. Paying premiums for your health insurance helps you to save on your taxes.
ULIPs are popularly known as Unit Linked Insurance Plans which are market linked plans. Under this plan the investors are offered the benefit of both investment and protection under a single plan. Investments done under this plan help your money to grow and are also eligible for tax deduction.
Equity Linked saving schemes (ELSS) are the best way to earn tax benefits. These schemes come with a lock-in period of 3 years. The lock-in period for ELSS is less as compared to fixed deposit and PPF. One of the major benefits of ELSS is that it offers a huge return on investment.
Post office Time Deposit:
Post office time deposit is similar as fixed deposit provided that there is no limit on how much a person can invest under this scheme. The minimum amount that is required to deposit in post office is Rs.200 at an interest rate of 8.5% per annum- the locking for this kind of investment is 5 years with a tax benefit under section 80C.
Tax saving fixed deposits:
Fixed Deposit offered by different banks are great instruments to avail tax benefits. One can invest upto Rs.1lakh to 1.5lakh and can gain attractive interest along with the benefit of tax saving. The lock in period of fixed deposit is 5 years.
National Saving Certificates
National Saving Certificates come with the lock- in a period of 5 years and 10 years. One needs to invest Rs. 100 to avail the benefits of NSC. And these saving certificates can be availed from the post office.
Provident funds are generally created with a goal of long term return. Deposits made in provident funds are eligible for tax deduction under section 80C. They are also known as pension funds.
Home loans for buying house
Home loans are also an effective method to save on taxes. The principal and interest paid each year up to Rs.1,00,000 are eligible for tax benefit under section 80C and Rs. 1.5lakh for the interest under section 24 of IT Act.
Home loan for renovation
Most people know about the benefits of declaring a home loan for tax exemption, but very few people know that home loans taken for reconstruction or renovation help you to avail the tax benefits.
Some additional tips on tax saving:
- The interest paid on education loans in the country comes under the section 80E of the tax deduction.
- Under section 80RRB, the tax deduction is applicable on the income earned on royalties and patents.
- Under section 80U of IT Act, tax deduction is applicable for disable people.
We have already told you about the best tax saving investment. But it’s also important to know how to plan your tax saving investments:
As per experts the best time to start planning your tax-saving investments is at the starting of the financial year. Most taxpayers adjourn tax planning till the last quarter of the year, resulting in hassled decisions. Therefore, it is advised that if you plan at the beginning of the year, your investments can compound and help you achieve long-term goals.
You can follow the below mentioned pointers to plan your tax saving effectively for the upcoming financial year.
- Enlist the tax-saving expenses you already have in your kitty such as insurance premiums, children’s tuition fees, EPF contribution, home loan repayment etc.
- Deduct this amount from Rs 1.5 lakh to figure out your investment needs. You needn’t invest the entire amount, if expenses are covering the limit.
- Based on your financial goals and risk profiles choose tax-saving investments. Life Insurance, Health Insurance, Mutual Funds, Loans, ELSS funds, PPF, NPS and fixed deposits are some of the popular options you can consider to avail tax benefits.
- This exercise will help you to figure out how to exhaust the 80C limit. It is advisable to begin investing in the first quarter of the financial year so that you can spread the investments over the year.
- Doing this will help you at the end of the year and will also allow you to make informed investment decisions.