Financial planning for self and family is a very important aspect of the modern world. One needs to identify goals and objectives in life and should start investing to achieve them. Every investment is expected to generate some income in the future. At the point that it becomes realised income, it will also be subject to taxation. However, the provisions of the Income Tax Act in India allow individuals to make various investments that can reduce their overall tax liability. Additionally, there are also various investment instruments the returns from which are tax-free.
However, in order to reduce your overall tax liability and avail the benefits of such investments, it is imperative that you start your tax-planning in a timely manner. There are different tax saving schemes available in the market which can help investors reduce taxable income. Some of these are discussed below.
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Equity Linked Tax Saving Scheme
ELSS is a mutual fund scheme which predominantly invests in equity. Investment in an ELSS mutual fund is eligible for tax deduction under section 80C on the Income Tax Act, 1961. However, only a maximum amount of Rs 1,50,000 is eligible for deduction under this section. Additionally, investments in ELSS come with a 3-year compulsory lock-in period. One can start investing in ELSS with a minimum amount of Rs 500 or can invest lump-sum. Gains on ELSS are subject to LTCG Tax (10%), introduced during 2018 budget. ELSS comes with dividend and growth option with different NAVs. To diversify risk, one should invest in more than one ELSS.
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Life Insurance
Life insurance can not only be used as a risk hedging tool but also as a tax saving instrument. Premiums paid under life insurance are eligible for tax deduction under section 80C on the Income Tax Act, 1961. The maximum limit for deduction is Rs 1,50,000. Apart from this, in case of demise, the lump-sum given to the beneficiary is not taxable under section 10(D).
New Pension Scheme
The New Pension Scheme is a flexible tax saving investment option to accumulate a retirement fund. Contributions to this scheme are available for tax deduction under Section 80C and Section 80CCD of the Income Tax Act, 1961. The total limit on the value of deductions that can be claimed in a financial year is INR 2,00,000. Investments in an NPS are subject to various withdrawal restrictions. An individual can start investing in NPS with a minimum of Rs 500 per month.
Public Provident Fund
PPF has long been a favourite tax saving investment as it provides around 8% return with sovereign guarantee. Investment in PPF is eligible for tax deduction under section 80C on the Income Tax Act, 1961. Returns after maturity is also tax-free under NPS. PPF comes with a 15-year lock-in period and one can start to invest in this scheme at any age.
When an individual starts earning and investing his/her hard earned money to achieve life’s goals, s(he) should also give equal importance to tax savings. As Benjamin Franklin famously said, “There were only two things certain in life: Death and Taxes.”
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