Investment Tips to Save Income Tax
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Investment Tips to Save Income Tax

  • Highlights

  • Life and health insurance premiums qualify for tax deductions

  • Investment in ELSS are subjected to tax breaks

  • FD investment too are subjected to tax soaps

  • Principal and interest component also eligible for tax exemption

Every year lakhs of salaried individuals file their IT returns prior to 31st July. Post-demonetisation, India has seen a substantial increase in the number of taxpayers, with the number increasing to 6.26 crore in FY 2017 as compared to 4 crore earlier. Every individual earning more than Rs.2.5 lakh in a financial year needs to pay tax to the Government. However, there are several financial instruments, investing in which reduces your tax liability. Let’s learn more about these.

Life insurance

One of the most essential financial risk mitigating tools, life insurance also provides tax benefits. The premiums paid towards your life insurance policy are eligible for tax deduction under section 80C of the Income Tax Act,1961. Under this section, you can claim a maximum deduction of Rs.1.5 lakh. However, note that you can claim deduction only in the financial year in which you’ve paid the premiums.

Health insurance

Equally important for your financial portfolio, a health insurance plan prevents out-of-pocket expenditure when hit by a medical emergency. Note that just like life insurance, the premiums paid towards your health insurance policy also qualify for tax exemption.

Under section 80D of the Income Tax Act, 1961, you can claim a maximum deduction of Rs.25,000 on health insurance premiums paid for self, spouse and children. If you are paying premiums on behalf of your senior citizen parents, this too can be claimed as exemption.

ELSS

One of the most prudent financial instruments for capital appreciation, investment made in an equity-linked saving scheme (ELSS) also qualify for tax deductions under section 80C. Among several asset classes, ELSS has the shortest lock-in period of 3 years.

Also, being equity-linked, they have the potential to generate double-digit returns in the long-run. Despite levying a 10% long-term capital gains (LTCG) tax on returns above Rs.1 lakh on ELSS funds held on for a period of more than a year, they are an ideal vehicle for building a sizeable corpus.

Fixed deposit

The de-facto investment avenue for most Indians, particularly senior citizens and retirees, investments made in the humble fixed deposit can be claimed as tax benefits. Just like premiums paid for life and health insurance, the amount contributed towards an FD qualify for tax exemption under section 80C of the Income Tax Act.

It is essential to note that the interest income earned from FDs aren’t tax-free and are added to your total income and taxed accordingly.

National Savings Certificate

Offering capital protection and assured returns, National Savings Certificate (NSC) is a prudent investment option for conservative investors. Investment made in NSC also qualify for tax exemption under section 80C of the Income Tax Act. Also, the interest earned is added to the initial investment and is eligible for tax breaks.

Apart from the above avenues, you can also claim tax soaps on interest paid on home loan EMIs, subject to certain conditions. While the interest paid, up to Rs.2 lakh, qualify for tax exemption under section 24, the principal portion of the EMI qualifies for tax breaks under section 80C.

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