Savings are the key to a healthy financial life. The only thing that trumps saving is investing the money that you save. This allows you to grow your wealth and develop a corpus that you can use to finance future needs. To invest wisely and keep expenditure to a minimum, it is crucial to know how you can save on taxes while investing. Choosing investments that help you do so under Section 80C of the Income Tax Act is how to ace this goal.
Here are 7 investments that can help you and your family save tax:
Public Provident Fund (PPF)
Being a long-term scheme backed by the government, PPF investments are not only beneficial for tax saving, but also guarantee returns. Despite these investments having a lock-in period of 15 years, premature withdrawals are allowed after 7 years. Both salaried and non-salaried Indian residents can apply for this scheme. Not only do you receive 7.6% interest per annum, but the interest is also tax-free. Furthermore, investing is made easy with a minimum investment of Rs. 500 and a maximum limit of Rs. 1.5 lakh.
Employee Provident Fund (EPF)
Salaried employees can invest in their retirement while saving taxes with an EPF. This investment is hassle-free as your employee automatically deducts 12% of your basic salary apart from Dearness Allowance while contributing the same amount from their end towards your provident fund account each month. Any employee earning more than Rs. 15,000 basic salary a month can open this account. Furthermore, if you quit your job and do not join another employer within the next two months, you can withdraw your PF amount.
Fixed Deposit (FD)
Investing in a fixed deposit can help you earn guaranteed returns. Not only can you claim Fixed Deposit tax exemption under Section 80C of the Income Tax Act, you can also take a loan against your Fixed Deposit when in need. In order to get the best interest rates, it is essential to consider investing in company FDs. For instance, while most banks generally offer around 4-7% interest on Fixed Deposits, the Bajaj Finance Fixed Deposit gives you one of the highest interest rates of up to 8.85% p.a.
National Pension System (NPS)
This investment was started by the government for all individuals between 18–60 years of age to plan finances for retirement. This scheme also permits partial withdrawal after 15 years in special circumstances. There is no limit on the maximum contributions towards this scheme and the employer’s contributions are tax-free. You can invest and claim tax deductions on the same on an amount up to Rs. 1.5 lakh under Section 80C.
Unit Linked Insurance Plans (ULIP)
This investment scheme is eligible for tax deductions up to Rs. 1.5 lakh under Section 80C. The investment is based on a mixed balance of insurances and investments in the stock market. You can buy ULIP for yourself, your spouse, or even your child. While there is no limit on the maximum contribution amount towards this scheme, it is important to remember the interest varies as per market conditions.
Life insurance
You can now save on taxes while investing in life insurance, under Section 80C of the Income Tax Act. Furthermore, you can do this for not only yourself but your spouse and child too. You can also claim premiums paid for any family member beyond your spouse and child if you are an HUF (Hindu Undivided Family). It is important to remember that you can claim deductions only if your premium amount is at least 10% less than the promised amount. It is also essential to check if the insurance provider is listed under IRDAI (Insurance Regulatory and Development Authority of India).
Sukanya Samriddhi Yojana
The government specially crafted this scheme to create benefits for the girl child in India. You can open this account for your daughter before she reaches 10 years of age. If you are a guardian of the girl child, you can still do the same. The maximum investment limit in a financial year is Rs. 1.5 lakh. The invested amount, along with its maturity amount and withdrawals, are all tax-exempt. In addition to this, you can withdraw up to 50% of the amount once the girl child reaches 18 years of age.
Tax saving investment plans for young unmarried tax payers and couples with single income
For individuals in their late 20s or early 30s, whether they are single or married with one income earner in the household, suitable tax-saving choices include:
- Equity Linked Savings Schemes (ELSS).
- Allocate a minimum of 20% of your yearly earnings to market-linked investment options offering EEE benefits.
- Consider Unit Linked Insurance Plans (ULIPs).
- Invest in a Public Provident Fund (PPF).
- Obtain a term insurance policy with a sum assured equivalent to 15 to 20 times your annual income.
What are the income tax saving plans for parents with single income?
For single-income households with children, it's crucial to create a tax-efficient financial plan that aligns with your family's goals. Consider the following strategies:
- Allocate a minimum of 20% of your annual income to market-linked investments with EEE benefits. Options like Unit Linked Insurance Plans (ULIPs), Equity Linked Savings Schemes (ELSS), and Child Plans are worth exploring.
- Maximise your tax savings with deductions of up to Rs 1.5 lakh under Section 80C.
- Ensure adequate financial protection by obtaining term insurance coverage equal to 15 to 20 times your annual income.
- Invest in the Public Provident Fund (PPF) to secure your financial future.
Additionally, you can claim deductions for your children's tuition fees under Section 80C, and the interest paid on an education loan for their higher studies is fully deductible under Section 80E. You can save up to Rs 1 lakh more under Section 80D.
Don't forget to plan for your retirement. Allocate a minimum of 10% of your annual income to investments in pension funds like the National Pension Scheme (NPS) and similar options.
Tax Saving Investments for Senior citizens and Retired Persons
After retirement, ensuring a consistent stream of income becomes crucial, especially when you no longer receive a monthly salary. So, what are the financial avenues available for senior citizens?
- Annuity schemes are a viable choice for seniors as they provide a steady income flow and offer tax benefits. The government's 'Senior Citizen's Saving Scheme' is one such option, open to individuals aged 60 and above, available at post offices and banks. In addition to tax advantages under Section 80C, the SCSS allows premature withdrawals.
- Unit Linked Insurance Plans (ULIPs) serve as an effective means of generating retirement funds, as they grant exemptions of up to Rs 1.5 lakh on premiums paid under Section 80C and enable tax-free withdrawals at maturity under Section 10D.
How to plan for tax-saving investments
The majority of people don't begin their tax planning until the last quarter of the fiscal year. Planning for taxes should ideally start at the start of the fiscal year. This provides you more time and enables you to stay involved for a longer period of time. You can fast attain your financial objectives by carrying out this action each year.
You may effectively plan your tax-saving investments by following these simple steps:
- Determine whether any premiums or investments made throughout the year qualify as tax deductions. For instance, tax deductions are allowed for contributions made to the EPF, opening a tax saving FD, house loan repayment, and school and tuition costs.
- To choose the best investing strategy, determine your investment objectives and risk tolerance.
- Invest the right amount to meet your financial objectives and reduce your tax liability at the same time.
So, choose your investments wisely and save tax under Section 80C.
