All of us want to fulfil our life goals such as marriage, child's education, or financial security. However, to make them happen for real, you require a structured and systematic plan of action which is possible only by investing in a savings plan. The plan should be flexible in terms of guaranteed returns that aren't subject to capital market idiosyncrasies and provide protection. Also, it should be achievable even in mishappenings. However, the returns you get are most often subject to income tax.
According to the provisions of the Income Tax Act, 1961, the government of India allows multiple tax exemptions and deductions on the guaranteed savings plan. The taxpayer can claim these deductions while filing an Income Tax Return. The deductions are subtracted from the gross income and tax you have to pay is calculated on the net income at the required tax rate. If you are an informed and active tax planner, you can understand how these deductions are calculated and plan your investment plans and resonate those plans to serve the purpose of tax-saving.
What are tax saving plans?
Tax-saving plans are products where the investor claims the benefits for the amount invested according to the tax laws. As per the section 80C and 80D of the Indian Income Tax Act, anyone can claim deduction on the premium payment made or the investment they have done. These investments consist of funds such as Life Insurance Plans, Equity Linked Saving Scheme, Bonds, Public Provident Funds, and Fixed Deposits. For reducing the burden of tax of taxpayers of India, the laws allow several ways to save tax. The most popular ways are making tax saving investments and claiming the deductions.
Why is investing in a Tax Saving plan beneficial?
Everyone in the world works hard to earn money. Irrespective of our profession, we need money to have the desired livelihood. Our desires are shattered when we pay a huge amount of tax from our income. If the income of a person exceeds a saturation amount, he/she is required to pay taxes. The only solution to this problem is Tax planning. Tax planning will help you to reduce the burden of taxes and increase your saving at the same time. There are various financial instruments that help out others in saving their tax. A good Tax Saving Investment not only saves your taxes but also provides safety, return and liquidity. An exemplary financial institution will offer you beneficial advice, but at the same time, it will reap benefits in the form of satisfactory return and the flexibility to draw out funds.
How will the Income Tax act of 1961 help you to save tax?
Many of us are aware of the fact that the Income Tax act of 1961 helps us to save taxes in multiple ways. Here are some of the ways:
The sections 80C, 80CCC, and 80CCD(1) allow every individual a deduction up to Rs 1,50,000 (which was 1 lakh till FY 2014-15) in a fiscal year. These sections allow you to invest in a wide range of investment options, starting from simple life insurance to hybrid ULIP, even pension plans, among others. You can easily save money by investing in any of these financial instruments.
You can claim a deduction of interest paid on a home loan if it is yet to be repaid. This can be availed under Section 24 of the Income Tax act of 1961.
Section 80E helps you out to deduct the interest paid on your education loan to an extent. Under Section 80G, you can deduct taxes on the amounts which you paid as a donation to charities, social organisations, relief funds, etc.
The idea of the tax deduction is straightforward. You are exempted from paying taxes where your money is donated for a good cause, or you are investing it for your future.
How is tax calculated?
The calculation of tax is done on your entire net income. According to the rule, the total gross income is to be taken into consideration, and then all the deductions or exemptions are deducted out of it, and thus the remaining amount is your own net income. The net income is then calculated based on the income tax slab that is specified in the yearly Union Budget.
Since we have already talked about how to save tax by investing in guaranteed savings plans, here are some of the options:
- UPIL - Unit Linked Insurance Plan
- ELSS - Equity Linked Savings Scheme
- NPS - National Pension Scheme
- SSY - Sukanya Samridhi Yojana
- NSC - National Savings Certificate
- SCSS - Senior Citizen Saving Scheme
- 5 Year Bank Fixed Deposit
- Pension Plans
Income Tax Savings for young unmarried taxpayers
As it is important to start saving from your early 20s and early 30s, it is equally essential to save your taxes for maximum possible savings. There are various tax saving options that can benefit young taxpayers. Here are a few of them:
- You can opt Term Insurance as it will cover a sum equal to 15 to 20 times your annual income. It will not only save your tax but will also secure the future of your dear ones.
- You can always go for the Public Provident Fund(PPF), it provides triple exemption benefits(EEE).
- Additional taxes can always be saved by investing a part of your gross income in ULIP(Unit Linked Insurance Plans) or ELSS(Equity Linked Savings Schemes).
- Investing in house properties offers you an opportunity to save additional taxes on interest amount up to Rs. 2 lakh per annum.
- You can save up to Rs. 50,000 or even more if you invest in a National Pension Scheme.
- Rs. 1 lakh can be saved via Health Insurance cover for your family under Section 80D of Income Tax Act of 1961.
Smart Income Tax Saving for Single Income Couple
- If you are married and have a child with only one of the partners earning, your investment options must change as per your financial goals and family requirements. To save tax with these goal-specific instruments is not difficult. Here are a few ways:
- Under Section 80C, you can save up to ₹1.5 lakh by purchasing term insurance which will also protect the future of your loved ones.
- Invest in a Public Provident Fund. It is one of the best options that provide EEE pr triple tax exemption benefits.
- By allocating some part of your annual income to market-linked options such as Equity Linked Savings Schemes (ELSS) or Unit Linked Insurance Plans, you can save taxes.
- You can invest in pension funds such as a National Pension Scheme if you want to save ₹50,000 or more.
- Under 80C, you can also claim a deduction for your child's academic fee.
- For additional tax savings on interest money up to ₹2 lakh, you can invest in house property.
- Under Section 80E, you can use an education loan to sponsor your child's higher education. It will deduct the rate of interest.
Smart Income Tax Saving for Double Income Couples
- If you happen to be married and both of the partners are earning, with right investments, you can jointly claim deductions. Here are a few ways-
- Under 80C, you can save up to ₹3 lakh through investments in savings plans such as term insurance plans.
- Investment in a Public Provident Fund, which is instrumental in providing EEE or triple exemption benefits.
- Allocation of a part of your annual income to market linked investment options such as Unit Linked Insurance Plans or Equity Linked Savings Schemes (ELSS).
- Investments in pension funds such as a National Pension Scheme in order to save Rs. 50,000 or more.
Tax Saving for Retired Individuals
It is important to shift focus towards making sure of financial stability and maximising savings when the retirement is near. If you don't have a fixed income source, it is the savings that help in gaining financial independence after your retirement. However, it becomes difficult with a tax burden. Here are a few ways you can get the tax benefits.
- Invest in Savings Plans such as annuity schemes that not only offer regular income but also help save you tax, such as the Senior Citizen Saving Scheme.
- Investment in special annuity products by insurance companies.
- Investing in retirement fund creation such as Unit Linked insurance helps you can get tax free proceeds on the maturity under article 80C.
Tax Saving for Family Business Owners
If you have a family run business or enterprises, income tax on their revenues is a liability which can be a significant amount. Thus, you must opt for the benefit of tax exemptions and deductions to lower the tax liability as a company. Here are a few ways:
- You can make a HUF for reducing the total overall tax outgo of the company or enterprise.
- If you're investing in a medical or health savings plan of premiums up to ₹25,000, you can claim for a tax deduction under section 80D.
- Donation of money also offers you tax exemption.
Maximum Tax Savings you can avail
|Deductions||Max Amount in ₹|
|Section 80CCD(1B) NPS||50,000|