Tax-savings play a very important role in meeting your future financial goals. But, many of us leave it for the last few months of the financial year, which is not a prudent behavior. A poor tax planning strategy would make it difficult for you to meet your financial targets on time. Thus, if you haven’t done your tax savings yet, then listed below are 6 popular tax-saving instruments that will help you plan your taxes well in 2021
1. Unit Linked Insurance Plan – ULIPs have now become a popular investment option due to its flexibility, low cost, and tax-free returns. Unit Linked Insurance Plan is a market-linked insurance plan that comes with a lock-in period of 5 years. Furthermore, this insurance-cum-investment product is eligible for deduction as per Section 80C of the Income Tax Act. Deciding to invest in the best ULIP is wise as it offers you a life cover along with an investment avenue, where you can expect returns.
2. Public Provident Fund – Though interest rates are low, but PPF offers tax-free guaranteed returns. This is a long-term investment option that helps you avail tax benefits. The current interest rate for PPF is 7.9% and it comes with a lock-in period of 15 years. As compared to other bank deposit options, PPF is a much better option because the interest rates are tax free.
3. Tax-saving FDs – This is yet another best tip that will help you saves on taxes. Though they rank low on returns but is the simplest way to save tax. The interest rate you get is as per the prevailing FD rates. Also, tax-saving FDs come with a lock-in period of 5 years which means you cannot withdraw your money before 5 years. You will only make a one-time lump sum payment. No premature withdrawals are allowed. In addition to this, tax-saving FDs are also good for those who plan their taxes at the last minute.
4. Senior Citizen Savings Scheme – This risk-free tax-saving instrument is an ideal option for those who have already retired or going to retire soon. Senior Citizen Savings Scheme comes with a lock-in period of 5 years and is the best option for retirees. Also, the interest earned from the scheme is tax-free which makes it one of the best tax-saving options for senior citizens.
Read about the top investment options for retirees.
5. National Savings Certificate -The best part about National Savings Certificate is that the interest earned is eligible for tax deduction. This fixed-income investment option also comes with a lock-in period of 5 years with the current interest rate of 7.9%. This used to be one of the popular investment options, but not now as many bank fixed deposits have come under Section 80C.
6. Life insurance – This is considered as a default tax-saving instrument by investors Although this purpose is best served by term insurance policy as other life insurance policies such as endowment plans or ULIP offer poor returns at high premiums. On the other hand, a term insurance plan offers life coverage along with tax benefits. It allows you to avail tax deductions as per Section 80C of the Income Tax Act. Buy the best life insurance plan to suit your financial requirements and goals.
These are some of the pragmatic tax-saving tips that you should find very useful. Besides, if you are looking forward to buy an adequate insurance plan that also helps you save on taxes. Canara HSBC Oriental Bank of Commerce Life Insurance’s iSelect Star Term Plan allows you to enjoy tax benefits of up to 1.5 Lakh/annum on the premiums paid towards the policy as per Section 80C of the Income Tax Act.
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First of all, your gross total income is taken into account and all applicable deductions/exemptions are deducted out of it, the resultant amount is the net income, upon which the Income Tax is calculated, on the basis of income tax slabs that are announced each year in the Union Budget.
How much tax you can save depends on your financial portfolio and profile. The most common avenue for tax-saving is Section 80C, which allows you deductions up to Rs 1.5 lakh in your taxable income. The implication is that you can save up to Rs 46,800*in taxes in a year, depending upon the income tax slab you belong to. Similarly, other avenues like interest on loans, health insurance etc also provide deductions capped at a certain amount.
You can choose from many investments that are tax-exempt: not an exhaustive list, but includes Equity Linked Saving Scheme (ELSS), Public Provident Fund (PPF), life insurance plans, Unit Linked Insurance Plans (ULIPs), Sukanya Samriddhi Yojana, Senior citizens Savings scheme, National Pension Scheme (NPS), tax-saving bank FDs.
First of all, make investment of Rs 1.5 lakh in investments instruments covered under Sections 80C to reduce your taxable income. Claim deductions for the interests paid on home loan and/or education loan if any. Get a health insurance policy and claim for other medical expenditure like preventive medical healthcare check-up, expenditure on rehabilitation of handicapped dependent relative, among others. Mainly, the idea should be finding out which tax saving avenues fit well with your larger financial goals and invest in them!
The maximum limit of investment that will reap the benefits of deduction from taxable income under Section 80C is Rs 1.5 lakh.
There is no limit to the number of tax-exempt investments one can have in a financial portfolio. However, it is important to note that there is a limit to how useful any instrument can be for the purpose. This is because the amount of deduction that can be claimed for specific instruments is capped at a maximum value. At the same time, keep your financial portfolio balanced so that it also provides safety, returns and liquidity.
First of all, make use of the Rs 1.5 lakh deduction allowed under Section 80C. This can be done by making investments in life insurance premium, Equity Linked Saving Scheme (ELSS), Public Provident Fund (PPF), Unit Linked Insurance Plans (ULIPs), Sukanya Samriddhi Yojana, Senior citizens Savings scheme, National Pension Scheme (NPS), among others.
Second, make use of the deductions available in respect of health insurance and other medical expenses. Under Section 80D of the Income Tax Act, 1961, a deduction of up to Rs 25,000 is allowed in a year in terms of the premium paid towards a health insurance policy of Self and your family i.e., Spouse and children. This can include preventive healthcare check-ups too upto Rs 5000/-. Under section 80D you can also claim additional deduction upto Rs. 25000/- (Rs. 50000 in case of senior Citizen) for health insurance of your parents.
Apart from Section 80C, various deductions and exemptions has been provided under the provision of Income Tax Act, 1961 like deduction under section 80D can be claimed for the payment of health insurance, deduction upto Rs 50,000 on home loan interest under Section 80EE. Any donations you make to charitable institutions are also allowed as deduction under Section 80G, subject to condition prescribed therein.