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Top Tax Saving Options

There are many ways in which you can save the amount of tax you pay. These ways can be broadly divided into two divisions, i.e expenses and investments. Expenses such as school fees of children, rent, repayment of home loans, medical expenses, etc. can really bring down your total income which is eventually taxed. The second division refers to specially strategized tax-saving investments in the market which are very efficient at their job to cut your total amount paid in tax. With numerous tax-saving options for salaried individuals, you can plan to save tax under the provisions of the Income Tax Act, 1961. These tax planning options for salaried employees provide a platform for Indian taxpayers to save tax.

Top Tax Saving Options

The government fixes the new income tax rates for every financial year. This rate is completely based on the estimated budget for the expenses that the government will have to bear for the following year. These slabs are jerked by the government in the annual budget reports. The taxpayers are needed to pay the consequent amount based on their respective income tax brackets. 

The income tax brackets have three classifications for individual payers- 

  1. Individuals (below the age of years), includes residents as well as non-residents,
  2. Resident Senior citizens- age should be above 60 years and below 80 years,
  3. Resident Super senior citizens- age above than 80 years.

This article will point ten of the best tax-saving investment plans for you. Although it also shows section-wise tax saving limits. All the sections are very different in nature with different features, time horizons, returns, and they even work differently.

List of Top Tax Saving Investments Options

Here is a list of top tax-saving investment options are:

  1. Term Life Insurance
  2. Public Provident Fund (PPF)
  3. Tax Saving Fixed Deposits (FD)
  4. National Pension Scheme (NPS)
  5. Health Insurance
  6. Senior Citizens Saving Scheme (SCSS)
  7. Unit Linked Insurance Plans (ULIPs)
  8. Equity-linked Savings Scheme (ELSS)
  9. National Savings Certificate (NSC)

Section 80 C

Some tax-saving investments under 80c are mention below:

Section 80C

  • Unit-linked Insurance Plans (ULIP)
  • Equity-linked Savings Scheme (ELSS)
  • Mutual Funds (MF)
  • Public Provident Fund (PPF)
  • National Savings Certificate (NSC)
  • Tax Saving Fixed Deposits (FD)

Let’s discuss these points one by one below.

Unit-linked Insurance Plans (ULIP)

ULIPs are a mix of insurance and investment. A part of the invested ULIPs: ULIPs (Unit Linked Insurance Policies) are insurance policies that offer you an investment option while providing the security of a life insurance cover. In ULIPs, a part of your premium is applied to your life insurance, and the rest is invested into funds of altering asset allocation to suit the policyholder. The returns on the investments depend upon the performance of the fund one chosen for. 

Equity-linked Savings Scheme (ELSS)

An equity-linked savings scheme (ELSS) is sort of an equity mutual fund that invests at least 80% of its total amount in equity and equity-related instruments. An ELSS has a compulsory lock-in period of 3 years during which you cannot withdraw any amount. An ELSS is eligible for tax exemption under section 80C of the Income Tax Act, it gives a maximum tax exemption of Rs. 1.5 lakh

Mutual Funds (MF)

Nowadays, Mutual fund investments have become very popular. These investment solutions enable investors the chance of making investments in multiple financial instruments by harnessing the skill and knowledge of trained investment managers. The best advantage of these investment tools is that offer better returns compared to other traditional modes of investment such as fixed deposits. To achieve this goal, mutual funds collect money from multiple investors and invest the amount in a balanced portfolio comprising debt securities and equity instruments. The funds also enable various choices of investment including open or close-ended schemes, specialty funds, or combinations of all of these. Investors can select any fund based on their investment objective and risk appetite. Typically, high-risk investments will give high returns, medium-risk investments will give medium returns and low-risk investments will give low returns. But, it is up to the investors to decide the fund that they think gives the best chances of achieving their objectives.

Public Provident Fund (PPF)

PPF contributions proffered every year are eligible for tax deductions under Section 80C. It is one of the important tax saver schemes. The deductions can be demanded by anyone for the same limit. The deduction limit for PPF deposits was Rs.1 lakh which has been raised to Rs.1.5 lakhs from FY 2019-20.

The maximum deposit of PPF accounts has a limit of Rs.1.5 lakhs per year. So, all deposits given to your PPF account can be claimed as deductions u/s 80C. Section 80C provides for a maximum deduction of Rs.1.5 lakhs per year inclusive of all investment instruments.

PPF accounts also offer other tax benefits. Interests gained from PPF deposits are tax-free, while wealth tax is not applicable on PPF accounts and proceeds. Hence, PPF accounts give you triple exemption benefits – deduction on deposits, tax-free returns, and no wealth tax.

National Savings Certificate (NSC)

The National Savings Certificate initiated by the Government of India which a fixed income investment scheme that you can open easily with any post office. NSC is a savings bond scheme that serves subscribers basically small to middle-income investors to invest while saving on income tax under Section 80C.

Tax Saving Fixed Deposits (FD)

Tax Saving Fixed Deposits (FD) is one of the types of deposit scheme through which you can get tax deduction under section 80C. It comes under the Indian Income Tax Act, 1961. Any investor who does an investment in tax saver FDs can claim a deduction on the investment amount up to Rs 1.5 lakh.

Also, investors can nominate or authorize those who can withdraw the deposit amount before or post maturity in the event of their demise.

Tax-saving FDs are alike to any other bank fixed deposits as the maturity amount (principal amount + FD Interest) is credited directly to your bank account. 

Section 80D

Section 80D provides tax deductions for medical expenses made for the self and the family which is upto Rs.50k. Self, parents, children, Hindu Undivided Families, and spouse can claim this. Section 80D a tax-saving option other than 80c which gives you additional tax-saving exemptions. 

Section 80D of the Income Tax Act, 1961 refers to the tax deductions on medical insurance. Section 80D enables you to get tax deductions on premiums made for medical insurance for yourself and on behalf of your family. Section 80D allows deductions over and above the exemptions obtained from the more popular Section 80C.

Deductions under Section 80D

As stated before, Section 80D will aid you in getting tax deductions on medical insurance premiums only. The deductions allowed are as follows:

For Self and Family –

  • On health insurance premium for self and family then the maximum deduction of Rs.25k per year.
  • If you are a senior citizen then the maximum deduction of Rs.50k per year.

For Parents –

  • On health insurance premium paid on behalf of parents the maximum deduction of Rs.25k per year.
  • Maximum deduction under Section 80D of Rs.50k per year on premium payments for senior citizen parents.

Additional Deduction –

  • A deduction of Rs.5k can be claimed every year on expenditure related to health check-ups. This limit covers the check-up expenses of all members of a family, including spouses, parents, and kids.

Section 10 (13A) – House Rent Allowance

House Rent Allowance (HRA) is an allowance given by an employer to its employees for covering their house rent. Such allowance is taxable for the employee. However, Income Tax Act provides a deduction of HRA under section 10(13A) subject to certain tax-saving limits. Self-employed are not permitted to take any deduction under this section.

HRA is exempt u/s 10(13A) to the range of a minimum of the following three amounts:-

  • Actual house rent allowance obtained from your employer
  • Actual house rent paid by you -10% of your basic salary
  • 50% of your basic salary if the house is located in metro cities (Delhi, Chennai, Mumbai, Calcutta) or 40% of your basic salary for any other place.

Section 80CCD (1B)

80CCD (1B) is also one of an income tax saving section. This section deals with deductions granted to individuals contributing to the NPS.  NPS tax saving scheme provides benefits to those people who invest in a pension account at regular intervals during the course of their employment. As per Section 80CCD, till the year 2015, a person was eligible to claim an income tax deduction of up to Rs. 1 lakh against contributions made to the NPS. In the budget for the year 2015, the government improved the maximum amount payable to the NPS to Rs. 1.50 lakh per annum. And, a new sub-section 1B was also proposed, which contributed an additional deduction of up to Rs. 50k for contributions made by taxpayers towards the NPS. The additional deduction of Rs. 50k under Section 80CCD(1B) is accessible to assess over and above the benefit of Rs. 1.50 Lakhs accessible as a deduction under Sec 80CCD(1). Thereby, increasing the maximum limit of exemption to Rs. 2.00 Lakhs with Section 80CCD(1) + Section 80CCD(1B).

Section 24

In Section 24, Income Tax Benefit on Interest on Loan for Purchase/Construction of Real Estate. Tax Benefit on Home Loan for payment of Interest is provided as a deduction under Section 24 of the Income Tax Act. As per Section 24, the Income from House Property shall be reduced by the amount of Interest paid on Loan where the loan has been taken for Purchase/ Construction/ Repair/ Renewal/ Reconstruction of Property.

The maximum tax deduction provided under Section 24 of a self-occupied property is subject to a maximum limit of Rs. 2 Lakhs (raised in Budget 2014 from 1.5 Lakhs to Rs. 2 Lakhs).

Section 80G

The various donations defined in section 80G are available for a deduction of up to either 100% or 50% with or without restriction, as implemented in section 80G.

Conclusion

There are various ways through which anyone can save tax, and it is smart to select an option that grants you dual benefits of tax saving as well as wealth creation. Always remember to plan your taxes in advance, solicit the best way to optimize your taxes, and utilize the tax exemption limit completely.

Frequently Asked Questions

Q1. What are tax savings?
Ans. Tax savings are the amount of money that we save in taxes by applying deductions.

Q2. Are all ELSS tax-free?
Ans. Your investment in ELSS schemes is eligible for tax deductions of up to Rs 1.5 lakh under Section 80C of the Income Tax Act and 10 % Long Term Capital Gain Tax will be fit on capital gains over Rs. 1 lakh in a single financial year.

Q3. How can I save tax?
Ans. There are many ways to save tax which can broadly be categorized under the following:

  • Tax saving expenses
  • Tax saving investments

Q4. How much should we invest in PPF to save tax?
Ans. A tax deduction of upto Rs. 1.5 lakh can be a benefit on investment in a PPF during a financial year.

Q5. Is FD tax-free?
Ans. If the interest received goes over Rs. 10k in a financial year, tax deduction at source would be applicable. But, Under Section 80 C, your investment is available for a tax deduction of upto Rs. 1.5 lakh.

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