It is that time of the year again when salaried taxpayers start looking for avenues to invest their money to primarily save tax, while also ensuring that they save for their financial goals. But it should be the other way round. Tax-saving should be the additional perk, not the goal.
The best time to start planning your tax-saving investments is at the beginning of the new fiscal year since that gives time for your investments to compound and help you achieve long-term goals. So, in case you are a salaried employee or a professional who is looking for investment options, here’s a quick and simple guide on the popular tax-saving instruments. These instruments are covered under Section 80C of the Income Tax Act that allows you to claim a deduction of up to Rs 1.5 lakh from your total taxable income.
1. Employee/ Voluntary provident fund (EPF/VPF): Contributions made towards EPF are considered for tax deductions. An employer deducts the contributory amount from an employee’s salary. Thereby, the tax is further reduced.
2. Public Provident fund (PPF): You can open this government-backed account at any bank or post office. Every year, you need to deposit a minimum of Rs500 up to a maximum of Rs1.5 lakh in your PPF account. It is compulsory to deposit an amount at least once a year. PPF accounts have a lock-in period of 15 years. After seven years, partial withdrawals are allowed. PPF contributions are exempted from tax. Also, the total amount you get on maturity is tax-free.
3. Sukanya Samriddhi Account: Parents can open an account in their daughter’s name by the time she is 10 years old. The account remains active for 21 years or till she gets married after turning 18. When she is 18 years old, parents can withdraw 50% of the saved amount. A person can deposit up to Rs 1.5 lakh per financial year under this scheme. This amount is exempted from tax.
4. 5-years tax saving fixed deposit in banks/post offices: Banks offer tax-saving FDs. These are similar to regular FDs but with lock-in periods of five years. However, they do not give high returns as they are not equity-linked. Also, the interest earned is taxable.
5. Life Insurance premium: You can avail various kinds of life insurance premiums for yourself or your family that are eligible for tax exemptions. You can claim a maximum of Rs1.5 lakh per year towards the insurance premium.
6. National Pension Scheme (NPS): The NPS is a government initiative. It provides pensions to people working in unorganized sectors or professionals who do not have pension facilities. NPS is an essential investment that comes with tax benefits. The tax benefits related to pension funds are deducted under Section 80C, 80CCC, 80CCD(1), 80CCD(1B), or 80CCD(2).
7. Equity-linked saving scheme (ELSS): An ELSS is one of the most sought-after tax saving investment options under Section 80C. These diversified equity funds invest a big chunk of their corpus in equities and related products. ELSS funds have the lowest lock-in period of three years (in comparison to other 80C schemes). In this scheme, every installment is considered a fresh investment and has to abide by this minimum lock-in period. These types of mutual funds often deliver higher returns than traditional saving options.
8. Home loans: Availing a home loan is a smart way to get tax benefits. Both the principal amount and the interest component of the home loan EMI are eligible for deduction. A part of the deduction comes under Section 80C. You can claim the rest under Sections 80EE and 24.
9. Unit-Linked Investment Plan (ULIP): A ULIP is essentially both an insurance and investment policy. A part of the amount you give towards this plan is invested in the stock market for higher returns. You can buy a ULIP in your name or in the name of a member of your immediate family to enjoy tax benefits.
10. Tuition fees for two children: With the rising cost of education in India, quality teaching for your children has become expensive. The income tax rules have tried to bring some relief in the form of tax deductions for amounts paid as tuition fees.
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