7 Best Investment Plans to Save Tax on Your Income
Everyone wants to save some money while filing taxes in India. Isn’t it? Well, this is why people are always seeking income tax-saving plans. If you are also one of them who are looking for some helpful information on saving money on taxes, then you are probably at the right place.
The best thing to do is of course make some clever decisions in terms of investments. Well, don’t fall into any trap. It’s not just any investments; you need to diversify your investment portfolio. Read on for more interesting details.
According to the provisions under the Income Tax Act, 1961, there are certain ways in which you can save on taxes while working in India. Through these strategic investments, you can legally save the money that you would have otherwise paid as taxes to the government. Quite clearly, if you know the exact ways, then you would surely benefit financially and that too in multiple ways.
Given below are the main ways of saving taxes under section 80C / 80CCC.
Public Provident Fund (PPF)
You must have heard about it. If you are a working professional, one of the easiest ways to save on taxes in India is by investing in the Public Provident Fund or PPF. This can be an effective way for you to save money on taxes and also save money for your retirement. You can have returns from PPF that are at par with inflation rates.
Through PPF, you get to annually contribute to a maximum amount of one lakh and fifty thousand rupees and this can be managed in a single lump-sum amount or small investments. The rate of interest associated with PPF may vary with time and is regulated by the Ministry of Finance (MOF) in India. The interest you earn through this investment scheme is completely tax-free. The lock-in period for PPF is fifteen years. You can withdraw some amount of money after five years, based on certain conditions.
Unit Linked Investment Plan (ULIP)
You can also invest in the Unit Linked Investment Plan or ULIP when you are looking for income tax-saving plans. This particular scheme works like a combination of insurance and investment. Thus, it can help in tax exemption. The returns usually range between 5 percent and 11 percent. The maturity revenues obtained from ULIP are tax-free.
5 Year Bank Fixed Deposits (FDs)
Another popular tax saving scheme, according to section 80C of the Income Tax Act, 1961 is of course 5-Year Bank Fixed Deposit. These schemes work much like a standard fixed deposit and have a 5-year lock-in period. You cannot withdraw the amount that you intend to invest in between. The scheme also gets you a higher interest rate than what you get with the regular FDs. The interest that you get after 5 years is completely taxable.
Equity Linked Saving Schemes or ELSS
The Equity Linked Saving Schemes are mutual funds that can be linked to the equity market. Investments made in the equity or share market are expected to get higher long-term returns of around 15 percent. While there are no assurances regarding such returns, however, it has been found that good returns are effectively achievable.
The scheme has a lock-in period of 3 years. You can also obtain regular returns throughout the lock-in period. These returns and all capital gains are completely tax-free. So the tax saving persons is advised to redeem their investment after 3 years. Therefore, Equity Linked Saving Schemes (ELSS) can work as excellent ways to save on taxes as well as get higher returns.
National Pension Scheme (NPS)
National Pension Scheme allows you to claim contributions as tax deductions according to section 80C. You can also avail low-cost investment options. Returns on NPS (National Pension Scheme) vary between 3 percent and 10 percent. Compared to some of the other schemes, National Pension Scheme is not an attractive scheme because of its restrictions. Withdrawals from National Pension Scheme are taxable with the maturity amount. You can access the funds only after your retirement.
Life Insurance Premium
Life Insurance is extensively considered as the default tax saving scheme. Hence, as a major tax saving scheme, it is mostly used by investors in India. The schemes that come with a life insurance policy allow a person to effectively protect oneself and his or her dependents from possible risks in the future. The tax benefit of the Life Insurance can be reversed in case anyone chooses to give up this plan before two years.
Senior Citizens Savings Scheme or SCSS
The SCSS is mainly designed for senior citizens who are looking to save taxes. People above the age of sixty years can invest in this scheme. While the interest is taxable, it is essentially covered within the taxable limit.
The maximum limit for investing in this scheme is approximately fifteen lakh rupees. The lock-in period for SCSS is five years. The government offers back up for the principal monetary amount of investment. Senior citizens can also get the benefit from quarterly interest returns. The rate of interest for these schemes gets decided by the Ministry of Finance. The tax deduction is permitted under section 80C.
Additional Investment Schemes to Save Income Tax in India
Taxes can be levied on the amount of salary that you receive for your services. There are ways in which you can save on income taxes that are levied on your salary. Here is a closer look at them.
- Get a home loan for getting the best tax benefits. This can not only help you have a new home, but also reduce your tax liability in a significant way. The total annual income that you spent towards repaying the principal amount borrowed for your home loan is eligible for tax deductions of up to Rs 1.5 lakh according to Section 80C.
- Get a health insurance policy that can help you to save on taxes. With costs for medical expenses increasing all the time in India, you must have a proper health insurance policy. The Government of India offers tax reductions for availing such health insurance policies.
- Invest in government schemes that can help you to save taxes and also get excellent returns on your investments. You can claim tax reductions for up to Rs 1.5 lakh through such investments. Some of the schemes that you can invest with are Public Provident Fund (PPF), Senior Citizen Savings Scheme (SCSS), National Pension Scheme (NPS), and Sukanya Samriddhi Yojana (SSY)).
- Investments carried out in government-mandated schemes and the capital market can help you to accumulate wealth through higher returns and tax-saving benefits. For instance, you can invest in the stock markets and ELSS schemes. These schemes offer an excellent means for tax deductions.
- You can choose to invest in life insurance plans as they can help you to save on taxes easily.
- Another great way to save on taxes is by donating to charities. Sections 80G and 80GGA under the Income Tax Act, 1961 define tax exemptions associated with charitable donations.
- Get a tax deduction on your home rent
- Get a deduction on the on the interest of your home loan
- Always keep money in your saving account
- Contribute some to charity, trust, or institution
These above mentioned investment schemes or plans are available in India to save tax for the taxpayers. However, the individual taxpayer has to choose the schemes that are most suitable for him/her.