As said “You must gain control over your money or the lack of it will forever control you” and Tax planning is the way to do it! The more effective your tax planning the more money you have in hand to invest and better is your tax saving
Tax planning has always been on the topmost agenda especially during the financial year-end. This is the biggest mistake that most of us land up with. Tax planning needs to begin as soon as you start generating income because the sooner the better. In India Tax is divided majorly into two different parts and is governed by the Income Tax Act, of 1961 direct tax and Indirect tax.
Table Of Content
- Bank FIxed Deposit
- Senior citizen saving scheme
- National saving certificate
- Sukaanya Samridhi yojana
- PPF( Public provident fund)
- ULIP (Unit-linked Insurance plan)
- NPS (National Pension Scheme)
Direct Tax is the tax that you pay directly to the government of India. This is calculated at the end of every financial year and is paid on the income you generated in the respective financial year. Indirect Tax is the tax that is paid by you indirectly to the government, for example, Indirect tax is GST (Good services Tax). Hope you have now understood the difference between Direct & Indirect tax.
The financial year in India is considered 12 months starting from 1st April to 31st March. A taxpayer is eligible for various deductions to save money on investments during a financial year as per the Income Tax Act. As said “A penny saved is a penny earned” Tax planning follows the same mantra.
Tax Saving – A Broader approach
As per the Income Tax Act, 1961, taxpayers have several options through which they can reduce their payable tax. The most popular section that offers tax deductions is Section 80C, among others. In this article, we will discuss how you can plan your finances not only to save money but also to invest to grow your net worth. Let’s take a look and understand all the exemptions and deductions that you can claim under section 80C in order to save taxes.
Tax Saving scheme under section 80C
80 C is the most important section when it comes to the deduction. Therefore understanding this becomes the most crucial part of Tax planning.
Amount of deduction under section 80C – The maximum amount of deduction allowed under section 80C is Rs 150000/- (One lakh fifty thousand only). Let us now take a look at all investment avenues this section covers and the maximum benefit that a taxpayer can avail of from these investments.
The various investment options available under section 80C are Life insurance, Public provident fund, National saving scheme, fixed deposit, and Equity-linked saving scheme.
Now, you must be wondering, which is the best option for me? Well, the answer to this depends on each one’s risk appetite and also preferences. We have listed a brief below for each investment so that you can analyze and make a sound decision as per your financial goal. The investment should always be parallel to your financial objective both in the short and long run. Attaining financial freedom should be the result that you should focus on.
The table below lists the best Tax Saving options (Investment) under section 80C:
|Insurance||Depending on the plan you opt for||Depending on the term of policy|
|Bank FD||5.5 % to 6.5%||5 years|
|Senior citizen saving scheme||7.40%||5 years|
|National saving certificate||6.80%||5 years|
|Sukaanya Samridhi yojana||7.60%||21 years|
|PPF( Public provident fund)||7.1%||15 years|
|ELSS||Approx. 10-15% depending on the market performance||3 years|
|NPS( National pension scheme)||Based on market performance and asset allocation selected by the investor||Till retirement|
|ULIP ( Unit linked insurance plan)||Approx. 6-15% depending on the market performance and type of fund selected||5 years|
The Pandemic has made us realize that we all live in an unpredictable world and thus having insurance is of vital importance. It does not help you in saving tax but also secures your life. Along with the insurance coverage you can also claim tax deduction under section 80C and exemption under section 10(10D) of the Income Tax act. The premium paid and maturity proceeds of a life insurance policy are tax exempted. Also, the returns from endowment or money back are tax-free. You can claim up to Rs1.5 lakhs under a life insurance policy. Thus having insurance has dual benefits thereby making it a preferred choice of investment.
Bank Fixed Deposit
One of the most common and convenient ways of investment is bank fixed deposit. These are also secured deposits similar to various other guaranteed investment options. The only way it differentiates from others is in the tenure of the investment. The tenure for investment in bank FD is 5 years. Since it is a tax saving plan bank offers tax-free income to its holders. This is an ideal investment for investors whose risk appetite is low. You should note that banks don’t permit premature withdrawal in this scenario. Also, the interest rate stays the same for the entire investment period i.e 5 years. To sum up, you can claim a maximum amount of Rs 1.5lakhs u/s 80c on your Bank FD investment.
Senior citizen saving scheme
A government-backed tax saving investment scheme designed to provide financial security to senior citizens. Individuals above 60 years are considered to fall in the bracket of senior citizens. Under this scheme one can make a one-time deposit, a minimum of Rs 1000/- and the maximum can be 15 Lakhs. The lock-in period for SCSS is 5 years and interest due is paid every quarter. This tax-saving scheme allows a deduction of a maximum of Rs. 1.5 lakhs but is applicable for TDS under section 80C of the act. The scheme offers a high rate of interest and also the flexibility of premature withdrawal. Find the list of banks below that offer SCCS accounts.
- Bank of India
- Dena Bank
- Corporation Bank
- Andhra Bank
- State Bank of India
- Bank of Maharashtra
- Union Bank of India
- UCO Bank
National Saving Certificate
It is also a government scheme primarily focusing on mid-income investors. This scheme is designed to facilitate investors to make safe investments along with the benefits of taxable income. NSC is similar to FD, PPF which is considered to be a low-risk investment option for tax saving. NSC offers a guaranteed return. You can claim the following benefits once you avail of them
- Maximum Tax exemption of Rs 1.5 lakhs under section 80C of the act.
- The Interest received on the NSC can be added back to the initial amount and can be considered for tax exemption.
- In the second year, the investor can claim both the investment and interest which is earned on it. This is because interest earned is added to the investment and is compounded annually.
On maturity, the investor will receive the entire amount. Since No TDS or NSC pay-outs are applicable, the individual will pay the applicable tax on it.
Sukaanya Samridhi yojana
Do you have a girl child? If yes then this is the perfect investment option for you. This scheme is specifically designed for girls as part of the
“Beti bachao, Beti padhao” campaign. The tax benefits under the SSY scheme are-
- The investments under the SSY scheme are eligible for tax exemption of Rs1.5 lakhs under section 80C of the Income-tax act.
- The interest gets compounded annually and is eligible for tax exemption.
- The maturity proceeds and withdrawal amounts are also exempted from tax.
You can initiate the SSY scheme till your girl child turns 10 years of age. The scheme will remain operative for 21 years from the date of opening the account or till the girl gets married. It provides ease of investment by making it more affordable. You can start as low as Rs 250 and can go up to a maximum of Rs 1.5 lakhs. The scheme also provides an interest rate of 7.6% annually. As a tax saving option, it not only saves tax but also secures the future of your girl child.
PPF (Public Provident Fund)
One of the most popular tax saving schemes is PPF. It helps individuals to create a cushion of finance for their post-retirement. The interest earned on the PPF balance is revised every quarter. The PPF (Public provident fund) scheme is tax exempted which means the contribution made toward the scheme along with maturity proceeds are exempted. The maturity period of PPF is 15 years, you can also extend it by 5 years.
An individual can only make one withdrawal in a financial year, that too after 5 years from the date of account opening. Partial withdrawal is also allowed but the amount should not exceed more than 50%. Since it is also a government-initiated scheme one can initiate with a minimum amount of Rs 500/- and go up to Rs 1.5 lakhs every year.
Please make a note that you can only contribute 12 instalments yearly. Being government-backed it is also one of the safest options for investment.
ULIP (Unit-linked Insurance plan)
Another tax-saving investment option for investors who are not only looking to get tax exemption but also earn a high-interest rate. The newly launched ULIPs come with zero premium allocation and administration charges.
The benefit of investing in ULIP is one gets exemption on the premium paid u/s 80C. The returns from the investment are also tax-exempted u/s 10(10D) of the Income-tax act. The lock-in period of the investment is 5 years.
It offers ease of investment as investors can choose from a wide range of funds. The investor is also eligible to switch between funds from 3-4 times a year. Though ULIP is a lucrative investment the return will entirely depend on market performance.
NPS (National Pension Scheme)
National Pension scheme provides the following tax-saving benefits-
- The investor can claim up to a maximum of Rs 1.5 lakhs under section 80C of the Income-tax act.
- One can get an additional deduction up to Rs 50000/- under section 80CCD (1b).
- If the employer of the individual contributes 10% of his basic salary in the National Pension scheme then he is eligible for tax exemption on the same amount also.
These benefits have now increased the popularity of NPS among the youths. However, an investor should also note that only 60% of the total amount is exempted. In NPS it is mandatory to invest 40% corpus in an annuity plan to earn income monthly. The amount paid annually to the investors after retirement is considered as income and is taxable as per law.
An individual is not allowed to make withdrawals in NPS before retirement with few specific situations. 75% is the maximum amount that can be invested in equity. Since it has a combination of equity and bonds, an investor can earn a good return over a while. An investor can start with a minimum investment of Rs 500/- and can grow their income eventually.
ELSS (Equity Linked Saving Scheme) Mutual Fund
The two most peculiar features of ELSS is that the investment amount in ELSS is exempted from tax up to a maximum amount of Rs 1.5Lakhs under section 80C of the income tax act and has a lock-in period of 3 years.
The investor can choose from a dividend or growth option in an ELSS as per their choice. It is an ideal investment for individuals who have a high-risk appetite. Since it offers a very high return on investment.
It is not only transparent but also an easy, simple, and hassle-free way of investment. You can easily track the investment made online. Though ELSS (Equity linked saving scheme) offers 10% to 15% of return, it varies as per the market performance.
You can invest in any of the tax-saving schemes mentioned depending on your risk appetite. The Lock-in period and return should be considered as one of the prime points to be considered before making a sound investment-related decision. Achieving your long-term financial goal should be the aim of these investments.
Apart from all the above-mentioned investment options, you can also claim the following deductions under Section 80C;
If you have taken a home loan, you can claim a deduction under section 80C on the principal amount of your home loan. You can claim this deduction every year regardless of the occupancy of the property, i.e. for your self-occupied property as well as rented-out properties.
School or Tuition Fees For Children’s Education
If you have children who are studying, section 80C can also help you get a deduction for two children’s tuition fees paid to any school, college, university, etc.
Stamp duty and registration on purchase of property
If you have purchased a property or constructed a house, you can claim a deduction of up to Rs. 1,50,000/- under section 80C for the stamp duty and registration charges that you have paid for your new property.
Offering several deductions, section 80C is the kind of every taxpayer’s best friend that never fails to help in need. So, the next time you file your income tax returns, do not forget to check the deductions under section 80C.