A universal truth is that all governments worldwide need their citizens to pay taxes, for the nation to survive as a whole. This is essential for development, infrastructure, and many responsibilities the government needs to take care of. Another universal truth is that no-one likes to pay Tax. All the public wants is to earn money and a lot of it, but not pay tax. But, because it is essential to pay taxes, a brilliant mode was devised by way of conceiving certain Tax Saving Investment Schemes.
The Income Tax Act provides for various exemptions on different Tax Saving Investments, under its numerous clauses and statements. It offers tax-saving benefits to people who invest in various plans and products on offer by the government for financial settlements and business. Whether they invest in Mutual Funds, keep money in Fixed Deposit with Banks, buy Life Insurance. Banks and other Financial Institutions have such products that offer tax exemptions, in addition to the Returns. Due to which, in recent times, Tax-Saving has been replaced with Tax-Planning.
Those products and plans, that already include some taxes, the government has exempted from further tax to be paid by the investors, to keep the cash flow going.
However, we often keep the investment & its selection pending until the end of the financial year. This makes us susceptible to:
(a) choosing without studying thoroughly,
(b) investing in those Schemes that provide Tax Benefits only.
As the saying goes, Haste makes Waste, so try to avoid leaving saving til the last moment. And keep the below factors in mind while selecting:
- Minimum Risk
- Maximum Returns
- Substantial Tax Saving
- Lowest Expense
Section 80C of the Income Tax Act
Putting your money in certain investments has been exempted under Section 80C. These include investments towards, Life Insurance, PPF (Public Provident Fund), NSC (National Saving Certificate), and ELSS Mutual Funds, etc. But all such investments have an upper limit. A total of Rs. 1,50,000 is the amount of investment that is exempt under the Section. The investment above this amount would be included in your income and taxed. Making it prudent that you select after an exhaustive study.
For now, do go through the comparisons between a few of such options, we have based on common criterion:
|Schemes||Annual Returns||Minimum Investment||Maximum Limit||Tax Benefits||Lock-in|
|ELSS||15-18%||Rs. 500-1000||No Upper Limit||u/s 80C||3-years|
|8%||Rs. 500||Rs. 1,50,000||u/s 80C||15-years|
|NPS||8-10%||Rs. 500||No Upper Limit||u/s 80C & 80CCD||3-years with limits on withdrawal|
|Senior Citizen Saving Scheme||8-9%||Rs. 1,000||Lower of Rs. 15,00,000 or Retirement Benefit||u/s 80C||5-years|
|8-9%||12% of wages||Employees with an income below Rs. 15,000 are allowed this||u/s 80C||Conditional|
|Bank FD||6-7.5%||Rs. 500||No Upper Limit||u/s 80C||5-years|
|NSC||8%||Rs. 100||No Upper Limit||u/s 80C||5-years|
|Life Insurance||6-8%||Rs. 1,00,000||No Upper Limit||u/s 80C & 10(10D)||5-years|
Let’s discuss each of these Tax Saving Investment in detail
Tax Saving under ELSS Mutual Funds has been specifically designed to attract those investors who are looking to save taxes, together with earning maximum possible returns on their money. In recent years, due to the inflationary market, ELSS has also become the Tax Saving Investment option that is most requested. This has been possible due to the High Returns that they earn, despite being High Risk.
Other than the above criterion, why it still tops the options given in the above list is because:
With SIP, the best mode of payment, you need to deposit a fixed amount of sum at regular intervals of time in your selected Mutual Funds. Summarily, a Lump Sum investment mode can be chosen if you have money in hand right now to invest and you can opt for SIP if you are expecting a regular inflow of money in the future. Investing via SIP makes the overall investment easy and affordable. Besides, it multiplies the money better than other forms of investment through the effect of averaging and the power of compounding.
This Long-Term Saving Scheme was issued by the Central Government. The upper limit of investment in these schemes is Rs. 70,000, u/s 80C. Additionally, the Annual Returns and the maturity Amount is 100% Tax-Free. Further, the Returns are guaranteed, making PPF the best Tax Saving Investment of all time. But, since tax saving is not the sole purpose of why we invest, we need to go beyond this scheme. Besides, with its 15-year Lock-in duration, it stops to attract.
With NPS (National Pension Scheme), the percentage of your basic salary (up to a maximum of 10%), that your employer contributes towards it, is Tax Deductible. But, only Rs. 1,00,000 has been set as Tax-exempt, for contributing towards NPS.
IV. Senior Citizen Saving Scheme
For investing in this effective and long-term saving option, you need to be a senior citizen, in India. That is, you must be above 60 years of age. Those retirees, who opted for the Voluntary Retirement Scheme (VRS) or Superannuation in the age bracket 55-60, are also included. Or you can be a retired Military person with a minimum age of 50 years, to be able to take advantage of this scheme. The benefits are the same as those Tax Saving investment that is usually associated with any government-sponsored savings or investment scheme.
Under Employees Provident Fund or EPF Scheme, an employee has to pay a certain contribution towards the scheme and this contribution is to be matched by the employer. The employee gets a Lump Sum amount, at the time of retirement. Some eligibility criteria apply to this option. The number of employees working under that employer (minimum 20) and the basic wages of the employee (maximum Rs. 15,000 per month) who want to invest.
VI. Bank FD
Though Bank Fixed deposits are deemed as the safest savings option that helps you increase your finances without getting influenced by the market highs and lows. But the returns from these schemes are Limited & Taxed.
NSC, short for National Saving Certificate, is a type of Tax Saving Investment offered by India Post. Just like the PPF and Bank FDs, this scheme too is a secure and low-risk fixed-income instrument. The benefits, as well as the drawbacks, are similar. But unlike PPF, the Returns in NSC at maturity are taxable.
VIII. Life Insurance
Life Insurance cannot be called a purely tax saving investment. And, thanks to the life cover, it is essential to buy one. At least for the earning member of the family, to have a sort of financial cushion in case of a contingency. The Premium paid is deductible u/s 80C, thereby lowering your taxable income.
Moreover, now Life Insurance has been offering a whole new variety of options for investment. These are, generally, divided under these headings:
- Term Plans,
- Endowment Plans,
- Money-Back Plans, and,
- ULIPs, Unit Linked Plans.
Coupled with the Lump Sum that is paid to the beneficiary in case of an eventuality being not taxable, under Section 10(10D), this is a must-have instrument for all investors. In the case of a pension plan, 1/3rd of the maturity amount that is paid out as a Lump Sum is not taxable. Although, the balance 2/3rd paid out as annuity is taxable.
Still, when we review the kind of returns being offered, as well as the long lock-in period, this option, though necessary, turns out to be number 2.
Apart from the above-listed Tax Saving Investment options, there are much more available in the market. However, for now, we suggest you start investing with these. By investing in only 2-3 schemes, you should be able to cover the limit of tax exemption of Rs. 1,50,000.
And if you are finding the choice a burdensome task, Help is at hand, just dial +91 8750005655. Or get registered at WealthBucket. You would be able to select amongst the best performing mutual funds, with the assistance of our experts, that is most suited to your needs.