Tax-Advantaged Account

Understanding Tax-Advantaged Accounts and Their Types for Maximising Your Investment Benefits
Tax-Advantaged Account
4 min
16-October-2024
Tax planning is a critical aspect of financial management. One effective way to minimise tax liabilities and maximise savings is by investing in tax-advantaged accounts. These accounts offer individuals significant tax benefits, either by deferring taxes on contributions or exempting earnings from taxes altogether. Whether you are saving for retirement, healthcare, or a child’s education, understanding tax-advantaged accounts can help you make informed financial decisions. This article will explore what tax-advantaged accounts are, their types, and how they benefit Indian investors.

What is a tax-advantaged account?

A tax-advantaged account is a financial account designed to provide certain tax benefits to encourage savings for specific purposes such as retirement, healthcare, or education. These accounts either defer taxes or provide tax exemptions on contributions or earnings. The idea behind these accounts is to give taxpayers an incentive to save for long-term goals while enjoying tax relief.

Tax-deferred vs Tax-exempt accounts

Tax-advantaged accounts generally fall into two categories: tax-deferred and tax-exempt accounts.

  1. Tax-Deferred Accounts: Contributions made to these accounts are tax-deductible, meaning you don’t pay taxes upfront. Instead, taxes are deferred until you withdraw the funds, usually during retirement. This helps lower your taxable income in the years you contribute, offering immediate tax relief.
  2. Tax-Exempt Accounts: In these accounts, contributions may or may not be tax-deductible, but the earnings or withdrawals are tax-free, provided certain conditions are met. This allows your investments to grow without being taxed on the gains, giving your savings a boost.
  3. Hybrid Accounts: Some accounts may have elements of both tax-deferral and tax-exemption. For example, you might contribute after-tax money but enjoy tax-free growth and withdrawals, such as in specific pension plans.

Tax-Advantaged Account Types

Tax-advantaged accounts come in different forms depending on their purpose, such as retirement, healthcare, or education. Let's explore the key types available.

A. Individual Retirement Accounts (IRAs)

Individual Retirement Accounts (IRAs) are designed to help individuals save for their retirement. In India, the closest equivalent to IRAs are retirement plans like the Public Provident Fund (PPF) and the National Pension System (NPS).

Public Provident Fund (PPF): Contributions to a PPF are eligible for tax deductions under Section 80C of the Income Tax Act. Additionally, the interest earned and the maturity amount are tax-free.

National Pension System (NPS): Contributions to NPS are eligible for tax deductions under Section 80C and Section 80CCD. NPS allows tax-deferred growth, with a portion of the maturity amount tax-free.

B. Health savings accounts

Health Savings Accounts (HSAs) are designed to help individuals save for medical expenses while offering tax benefits. Although India does not have an exact equivalent, some health insurance policies offer tax advantages under Section 80D of the Income Tax Act.

Health Insurance: Premiums paid for health insurance policies qualify for tax deductions under Section 80D. While not a direct savings account, this offers a tax-advantage framework for medical-related expenses.

Tips to Invest Tax-Efficiently

Investing in tax-advantaged accounts can significantly boost your financial well-being, but the key is to use these accounts wisely. Here are some tips to invest tax-efficiently.

1. Consider maximising tax-exempt accounts

Maximising your contributions to tax-exempt accounts like PPF, NPS, or Sukanya Samriddhi Yojana can give you long-term financial security while lowering your tax burden. Since these accounts offer tax-free earnings and withdrawals, they ensure that your savings grow over time without being eaten away by taxes.

2. Plan for taxes in retirement

While tax-advantaged accounts like NPS and PPF offer tax relief, it's important to remember that taxes may apply when you start withdrawing funds, especially in the case of NPS. Planning your withdrawals in a tax-efficient manner, such as staggering withdrawals over a few years, can minimise tax liabilities in retirement.

3. Be Strategic with earnings and gains

If you have investments in mutual funds, stocks, or other non-tax-advantaged accounts, it’s crucial to manage your earnings and capital gains efficiently. Investing in long-term capital gains (LTCG) instruments can help lower your tax burden as gains on equity investments held for more than one year are taxed at 10% after an exemption of Rs. 1 lakh per year.

4. Utilise health-related tax benefits

if you are not using tax-saving health insurance plans, you might be missing out on significant tax benefits. As medical expenses can be high, especially in later years, consider investing in a health insurance policy that offers tax benefits under Section 80D to secure your health and your savings.

Conclusion

Tax-advantaged accounts provide valuable opportunities for Indian investors to grow their wealth while enjoying tax relief. From retirement savings like PPF and NPS to healthcare-related tax benefits and education savings, tax-advantaged accounts can help you plan for major life goals in a tax-efficient manner.

If you are looking for safe investment option, then you can consider investing Bajaj Finance Fixed Deposit. With a top-tier AAA rating from financial agencies like CRISIL and ICRA, they offer one of the highest returns, up to 8.65% p.a.



Calculate your expected investment returns with the help of our investment calculators

Investment Calculator
FD Interest CalculatorSukanya Samriddhi Yojana CalculatorRD Calculator
Provident Fund CalculatorGratuity CalculatorPublic Provident Fund Calculator


Bajaj Finserv App for All Your Financial Needs and Goals

Trusted by 50 million+ customers in India, Bajaj Finserv App is a one-stop solution for all your financial needs and goals.

You can use the Bajaj Finserv App to:

Apply for loans online, such as Instant Personal Loan, Home Loan, Business Loan, Gold Loan, and more.

Explore and apply for co-branded credit cards online.

Invest in fixed deposits and mutual funds on the app.

Choose from multiple insurance for your health, motor and even pocket insurance, from various insurance providers.

Pay and manage your bills and recharges using the BBPS platform. Use Bajaj Pay and Bajaj Wallet for quick and simple money transfers and transactions.

Apply for Insta EMI Card and get a pre-approved limit on the app. Explore over 1 million products on the app that can be purchased from a partner store on No Cost EMIs.

Shop from over 100+ brand partners that offer a diverse range of products and services.

Use specialised tools like EMI calculators, SIP Calculators

Check your credit score, download loan statements and even get quick customer support—all on the app.

Download the Bajaj Finserv App today and experience the convenience of managing your finances on one app.

Do more with the Bajaj Finserv App!

UPI, Wallet, Loans, Investments, Cards, Shopping and more

Disclaimer

As regards deposit taking activity of Bajaj Finance Ltd (BFL), the viewers may refer to the advertisement in the Indian Express (Mumbai Edition) and Loksatta (Pune Edition) furnished in the application form for soliciting public deposits or referhttps://www.bajajfinserv.in/fixed-deposit-archivesThe company is having a valid Certificate of Registration dated March 5, 1998 issued by the Reserve Bank of India under section 45 IA of the Reserve Bank of India Act, 1934. However, the RBI does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.

For theFD calculatorthe actual returns may vary slightly if the Fixed Deposit tenure includes a leap year.

Show All Text