Six ways to save income tax planning this fiscal money tips 30stades
Tax planning is an important part of personal financial planning. It not only helps to save tax and thus increases the post-tax income but is also a good way to save and build a corpus for long-term goals such as children’s education, buying a house or retirement planning. There are many ways in which you can save taxes and invest for your future. Of course, this also means you save and invest to build a financially secure future.
We list six ways in which you can save tax and, ideally, plan now, so you can make a difference to your taxable income next year.
1. Equity Linked Saving Schemes: ELSS is a diversified mutual fund that invests about 80 percent of the funds into equity. It has a lock-in period of three years, the shortest among other tax-saving instruments. However, it is an instrument that is subject to stock market risks and hence it is advised to stay invested for the long haul.
The invested amount is exempted from tax under Section 80C of the Income Tax Act (up to Rs 1.5 lakh per annum). The attractive aspect of ELSS that is often missed is that any profits you make when you sell or redeem are tax-free up to Rs 1 lakh per annum.
2. Life Insurance & ULIPs: Life insurance is a must for everyone, and you can opt for a term plan where you pay only for life risk or an endowment plan that gives you both life protection and some guaranteed returns. A Unit Linked Insurance Plan (ULIP) gives protection or life cover but returns from the scheme are market determined. In a way, ULIPs offer a combination of life insurance and equity mutual funds.
ULIPs are long-term investment products unlike equity mutual funds and it’s advisable to stay invested for at least 10 years to make good returns.
Given this, it is advisable to invest in ULIPs when you are young. Raghuvir Gakhar, CEO, CashBean, P C Financial Services says, “In view of the pandemic, everyone must secure their lives, especially youngsters who might be the sole dependent on their family. I like ULIP more because not only does it provide insurance cover to the individual's life against unforeseen circumstances but it also provides the opportunity to make market-determined returns. This is perfect for individuals with a higher risk appetite.” There is a limit of 1.5 lakh under Section 80C for the premium paid for insurance and ULIP plan that can be availed.
3. PPF & PF: Public Provident Fund (PPF) is a long-term saving plan with guaranteed returns from the Government of India. You can choose to make voluntary contributions by opening a PPF account with any nationalised bank but remember that it has a lock-in period of 15 years.
Employee Provident Fund (EPF) is usually done through the organisation you are working for where both the employer and employee contribute. The amount you pay is visible on your salary slip. Both are eligible for deduction under Section 80C. Interest rates for both these are fixed by the Government.
4. Health Insurance or Mediclaim: The importance of health insurance has magnified post the pandemic. And it is always advisable to buy personal health insurance apart from what is given by the organization you work for. Financial Expert and CA, Niraj Bora says, "Buying health insurance offers tax benefits for any kind of income. Apart from health cover, you can also get up to a 30 percent tax deduction (based on the tax bracket of the individual) up to a maximum of Rs 20,000 per individual. The deduction is higher for senior citizens and payment of family’s health cover."
5. National Pension Scheme (NPS): The National Pension Scheme is a low-cost market-linked scheme which can be used to save for retirement. With NPS, investors can invest small amounts regularly in a disciplined manner. However, investors must choose the investment options rightly keeping in mind their risk-taking ability and time to retirement.
NPS has the dual benefit of tax deduction over and above Section 80C and is partially tax-free at maturity.
“Investors investing through their employer are allowed a tax benefit of up to 10 percent of their basic income and the exemption limit for individual NPS subscribers is Rs 50,000 per year. There are various investment options and the equity exposure will provide compounded growth over the long term. Thus, NPS provides additional tax benefits and investors can expect good returns in the long term,” says Mrin Agarwal, Founder of Finsafe.
6. Tax-saving fixed deposits: A tax-saving fixed deposit is a debt instrument and usually has a lock-in period of 5 years and a fixed interest is guaranteed. "Tax benefits on fixed deposits can be claimed up to 1.5 per year for fixed deposits made.
If you fall under the 30 percent tax bracket you effectively save 45,000 per year by utilising the entire 1.5 lakh investment in fixed deposit. The interest on those fixed deposits however is chargeable to income tax on an annual basis. If the time horizon is long enough for the investment one can also invest in PPF that gives more interest and has a tax-free interest as well," says Bora.
(Bindu Gopal Rao is a Bengaluru-based freelance writer and photographer. Passionate about the environment, her interests include bird watching and looking for local and unusual angles in any destination)
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