Beloved Readers, Welcome to this blog where I will tell you “5 tax saving options in India.”
So, We all work hard to earn money so that we can fulfil our dreams and desires. But letting someone taking our hard-earned money no one would want, be it Government. And yeah Government also understands the people psychology, so they have introduced some exemptions in India Income Tax Act of 1961 so that we can reduce our tax liability.
Basically, the Government has made a financial plan for you so that we can secure our future and not spend all the money we earn. GOVERNMENT IS SMART 🙂
Now I shall talk about what are the various exemptions available for us so that we save Tax.
Top 5 tax saving options in India
Under Indian Income-tax there are various sections which allow citizens for ductions like Section 80C 80CCC and 80CCD(1), Section 80D, Section 80E, Section 80G Section 80TTA, etc.
But for today we shall discuss top 5 tax saving options in India under Section 80C 80CCC and 80CCD(1)
Section 80C 80CCC and 80CCD(1) let’s call it Section 80C for simplicity purpose 🙂
In the Indian Income Tax Act of 1961, there’s a Section 80C which allows the citizens of India to reduce the tax liability up to ₹1,50,000, by investing their money in various financial instruments which will give return over there capital gains over time.
Even the Government also gives her’s sovereign guarantee on various instruments to encourage individuals to save and invest towards retirement.
So, if you earn ₹7,50,000 annually then by investing in these financial instruments which allow deductions under Section 80C your net taxable income become ₹6,00,000. Now, on this ₹6,00,000, you will have to pay taxes according to your current tax slab rate.
So, The various Financial Instrument’s available for us are. Still, we shall stick with some which suit the average taxpayer, i.e., Top 5 Investment options available to save Tax in India.
Equity Linked Saving Schemes (ELSS)
We all must have heard about ad “Mutual fund Sahi hai.” Well, it seems that it is actually “Sahi hai.” and when we can save Tax, it’s cherry on top.
ELSS is a type of Mutual Fund which allows the benefit to the investors to get exposure in Equity Market and the meantime, save Tax. You can invest any amount you want in an Equity-Linked Savings Scheme. However, investments only up to Rs. 1. 5 lakh in a year are tax-exempt.
And as the saying goes” Higher the Risk Higher the Return.” ELSS invests your money in the Equity market, or you can say stock market where the risk is high. Still, the return is also high compared to other investment avenues in Section 80C. One can expect a return around 12-15% over the 10-year time horizon.
ELSS has a lock-in period of 3 Years. This lock-in period is to ensure that you don’t sell your investment in a hurry and gain from stock market gains in the long term. And this Lock-in period is also the lowest among the other investment avenues available. You can continue to invest in this scheme even after the completion of the lock-in period of 3 years.
The Long-Term Capital Gains on ELSS are tax-exempt up to Rs 1 lakh, gain above 1 lakh will be taxed at 10% and if dividend received is taxed according to the receiver’s tax slab. As per new rules applicable from FY 2020-2021.
Previously, dividend received is tax-free in the hands of investors.
5 yr Tax Saving Fixed Deposits
Well, FD is the first thing which comes to our mind when it comes to investing. And why not it’s low risk and gives good returns compared to saving account, then why not? It would be even better if we can save some Tax on it. And here it is Tax-Saving FD.
Tax saver fixed deposit (FD) is a fixed deposit, in which, you get a tax deduction of a maximum of Rs. 1. 5 lakh by investing in it.
Tax saver fixed deposit (FD) has a lock-in period of 5 years, NO Premature withdrawal is available. There’s no restriction on the amount and time to invest.
Capital is 100% safe, and the return is guaranteed, varies from bank to bank and, typically ranges from 6-8%. You can even get a loan against the FD amount for a lesser interest rate.
Interest earned is taxable. This FD can be opened single or jointly, when jointly only the first holder gets the tax benefit.
Public Provident Fund(PPF)
Public Provident Fund ( PPF ) was introduced by Government of India in 1968 to encourage saving and investment. Public Provident Fund (PPF) scheme is a long term investment option which offers good returns.
A PPF account can be opened with a Post Office or with any bank and can be held only in the name of only one individual. The account can be open with just ₹100. There is no restriction on the investment amount, but above Rs 1.5 lakh you will not earn interest neither will be eligible for tax benefit. The current interest rate is 8%, which compounds annually.
The PPF has a minimum lock-in of 15 years, which can extend in blocks of 5 years if you want. Every year deposit has to made to keep the account active. PPF has a minimum investment of Rs 500. Investments can be made in an annual or monthly 12 instalments.
Since the Indian Government backs PPF, returns and capital protection are guaranteed. So, it’s risk-free returns.
You can even get a loan against your PPF account. If you require funds and wish to withdraw before 15 years, you can make partial withdrawals from year 7.
PPF is one that falls under the Exempt-Exempt-Exempt (EEE) category. In other words, it means that all deposits made in the PPF are deductible under Section 80C. Furthermore, the returns are also exempt from Tax at the time of withdrawal. All yours 🙂
National Savings Certificate (NSC)
The National Savings Certificate is a Government of India initiative, fixed income investment scheme that you can open with any post office. The Government of India guarantees returns and capital security.
Presently, you get guaranteed returns (8% annual interest) and can enjoy a regular income. It gets compounded annually but will be payable at maturity.
There are two maturity periods – 5 years and 10 years. You can even invest as low as Rs.100 (or multiples of 100) as an initial investment, and increase the amount as you like it.
Investments of up to Rs.1.5 lakh is eligible for deduction under Section 80C. Furthermore, the interest earned on the certificates is also eligible for deduction under Section 80C.
National Pension Scheme (NPS)
National Pension Scheme is an initiative by the Government of India for employees of public, private and unorganized sectors, except for armed forces. So that they can invest in a pension account at regular intervals during their employment for their retirement.
When you invest, a portion of your investment goes to equity and rest goes to debt. There is a range of between 75% to 50% that limits the exposure to equity. You can decide the exposure limit, or you can let the manager decide.
The equity portion will decrease by 2.5% each year beginning from the year in you turns 50 years of age. Because, as the retirement approaches, protection of capital is more important.
NPS has delivered 8% to 10% annualized returns over the past decade. You can change your fund manager if you are not happy with the performance of the fund.
Deduction of up to Rs. 1.5 lakhs to be claimed for NPS – for your contribution and the contribution from your employer.
You can claim additional self contribution (up to Rs 50,000) under section 80CCD(1B) as NPS tax benefit. In this scheme, therefore, you can get a tax deduction of up to Rs 2 lakh in total.
Here comes the catch, at retirement 60 years old, you cannot withdraw the entire amount. You are compulsorily required to buy an annuity of at least 40% of the investment so that you can receive a monthly pension of that, which will be taxed. You can make a lump-sum withdrawal of 40%, which will be tax-free. Any withdrawal above 40% will be taxed.
There are many other options available for investment to get the Tax benefit apart from these top 5 tax saving options in India. Still, these investments have to be chosen accordingly to the risk appetite and investment horizon of the investor. Not every investment is made for everyone.
The critical point to be noted is that the total deduction available under 80C is 1.5 Lakhs not on the individual investment. Collectively on investment, an individual can claim a deduction of 1.5 lakhs.
The above mention data are the best of my knowledge. Mentioned investment products carry risk. Please consult with your Financial Advisor for before Investing in any of the product.
Until then Happy Investing 🙂
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