Key Takeaways
A crucial aspect of financial management is tax planning. By making informed decisions and drawing a strategy about where to invest, you can not only save on taxes but also grow your wealth.
Here are some of the most popular tax saving investments that you should consider while making an investment strategy.
In India, several investment options not only help in wealth creation but also offer tax benefits under the Income Tax Act. Here are their features:
You can claim a deduction of up to ₹1.5 lakh on fixed deposit investments under Section 80C of the Income Tax Act. Tax-saver FDs come with a lock-in period of 5 years. While the interest earned is taxable, the rates usually range from 5.5% to 7.75%. This makes FDs a safe and reliable option for conservative investors.
PPF is a long-term savings scheme that offers a guaranteed rate of interest. You can open a PPF account at post offices or designated branches of public and private sector banks. It's a popular choice due to its safety and attractive returns.
Contributions to a PPF account are eligible for deductions of up to ₹1.5 lakh under Section 80C. The interest earned on PPF account and maturity amount is also exempt from taxes.
ULIPs offer tax benefits under Sections 80C and 10(10D) of the Income Tax Act. These long-term investment products allow you to invest in equity funds, debt funds or a combination of both.
Investments in NSCs are eligible for deductions under Section 80C. NSCs are a savings bond scheme aimed at small to mid-income investors. You can purchase NSCs at banks or post offices and they can be bought for yourself, on behalf of a minor or jointly with another adult.
The principal amount deposited in an SCSS account is eligible for tax deductions of up to ₹1.5 lakh under Section 80C. SCSS is designed for individuals above the age of 60, providing a steady and secure source of income post-retirement. The interest received is taxable, but the scheme offers substantial returns compared to other savings options.
Life insurance is a vital part of financial planning, offering security to your family in case of an eventuality. There are various types of life insurance plans, including term plans, endowment plans, ULIPs and money-back plans.
Each type offers different benefits, but all provide tax advantages. Premiums paid up to ₹1.5 lakh towards life insurance are covered under Section 80C. Proceeds on death or maturity are tax-free under Section 10(D).
Pension plans are designed to provide financial security during retirement. Contributions of up to ₹1.5 lakh towards pension plans are covered under Section 80CCC, a subsection of Section 80C.
On maturity, one-third of the accumulated pension amount is tax-free, while the remaining two-thirds are taxed as income. These plans ensure a steady income stream in your golden years.
The NPS is regulated by the Pension Funds Regulatory and Development Authority (PFRDA). It is a cost-effective retirement savings option, allowing you to choose between equity, corporate bonds and government securities.
You can manage your portfolio actively or passively, depending on your risk appetite. Contributions to the NPS are covered under Section 80CCD, with a total deduction limit of ₹1.5 lakh when combined with Sections 80C and 80CCC.
Investments in Equity-linked Savings Scheme (ELSS) qualify for deductions under Section 80C, up to ₹1.5 lakh. ELSS funds invest in the stock market and are suitable for investors with a medium to high-risk appetite.
These funds have a lock-in period of three years, offering the potential for higher returns compared to traditional savings options.
By aligning investment choices with specific life stages, you can optimise tax benefits and secure your financial future. Here are the strategies you can use:
Invest at least 20% of your annual income to market-linked investment options with EEE (Exempt-Exempt-Exempt) benefits. Also, ensure your term insurance cover is 15-20 times your annual income. Some of the most popular options are ELSS, ULIPs, PPF, and term insurance.
Allocate 20% of your income to market-linked options. You can claim children's tuition fees under Section 80C and invest in pension funds. Education loan interest for your child's higher education is also deductible under Section 80E. The best tax saving investments for you could be ULIPs, ELSS, child plans, and PPF.
Invest 20% of your income in market-linked options and buy term insurance individually. Consider investing in a property for additional tax savings on home loan interest. ELSS, ULIPs, child plans, PPF, pension funds would be some great options to consider for investment.
For retirees, investment strategies should focus on a balance between safety, liquidity, and reasonable returns. Here are some of the best schemes to invest in your post-retirement life:
For both salaried and non-salaried taxpayers, the tax-saving season officially begins on April 1st. In addition to offering tax exemptions, a good tax saving investment plan should produce revenue that is free from taxes.
It is wiser to begin investing early rather than waiting until the end of the fiscal year. This enables you to optimise returns and improve your investment planning.
Think about things like return size, liquidity, and fund safety when choosing avenues. You can assess the effects of various investments on your overall tax liability and financial objectives with the use of an income tax calculator.
Some of the investments you can opt for are:
Taxes can reduce your profits from investments. Strategically planning your investments will help you keep more of your returns, so you can reinvest and grow your wealth quickly. Some of the steps you can take are:
An Equity-Linked Savings Scheme (ELSS) is the only mutual fund where you can claim tax benefits under Section 80C. It offers a tax reduction of up to ₹1.5 lakh. Investors can save up to ₹46,800 in taxes per year by investing in ELSS.
NPS investors can get a tax deduction of up to ₹50,000 under Section 80CCD(1B). This is in addition to the ₹1.5 lakh deduction permitted under Section 80C.
The purpose of the Public Provident Fund (PPF) is an investment where an adult can open an account on behalf of a minor. The tenure and lock-in period of the investment is 15 years. You can invest up to ₹1.5 lakh per financial year. The deposit amount is deductible under section 80C.
Fixed deposit is ideal for low-risk investors as they can earn a fixed return at the end of its tenure. They can deduct up to ₹1.5 lakh per annum under section 80C. But note that it will take 5 years to get access to your original investment and gains due to the lock-in period.
Tax saving bonds are special tax benefits through which an individual can save a portion of their overall tax. You can earn interest on these bonds by purchasing them. Some of the popular bonds are:
