Tax-saving is often the checkpoint of investment decisions. The most common question is whether your investment amount will save you tax. However, if you are looking for investments that truly help you save tax, you need to dig deeper than this.
Every investment has three universally applicable transactions:
Investment of capital comes from your taxable income. So, for the most part, it is already taxable. But you can invest in instruments which will make your money deductible from your taxable income.
For example, instruments which are eligible for 80C deduction reduce your net taxable income.
Other two transactions are taxable or exempt depending on the instrument. Their taxability does not depend on the 80C exemption.
‘E’ in EEE, EET and ETE refers to ‘exempt’ status of the transaction, whereas ‘T’ stands for the ‘taxable’ status. So, here’s how EEE, EET and ETE define the tax status of various investment instruments:
Thus, EEE stands for overall the best tax saving plans. EET investment would be the second-best investment option, as you get to postpone your tax liability till maturity.
We have a few amazing investment options under EEE segment in India. Some of these investments are not the best investment schemes due to their tax-exempt status, but they offer a great many features too.
Some of the prominent EEE investment options are:
Although, RGESS was also there offering tax saving. But the scheme only benefits the first-time equity investor. So, not apt for long term investors.
ELSS, on the other hand, works for everyone, and you can invest over multiple years. So, if you plan to invest in equities while enjoying tax benefits, ELSS would be your go-to investment option.
Every investment in ELSS scheme has a 36 months lock-in period.
When it comes to protection benefits, these plans are very similar to ULIPs. For example, you can protect your goal value in guaranteed plans, where the insurer will invest the remaining premiums on your behalf in case of your untimely demise.
While the returns are guaranteed, with insurance you can ensure that even the maturity value is guaranteed to your family. Thus, for important family goals like child’s education, these plans could be the best investment schemes.
EET investments are the second-best tax saving schemes, as you get to postpone your tax liabilities for a few years. Few of the popular investments under this segment are as follows:
For taxation, interest reinvestment also qualifies for the deduction. So, as long as you stay invested in the instrument nothing is taxed. But maturity value is taxable with all the gain added to your taxable income for tax estimate.
The growth of your corpus is also not taxable. But the pension you receive is taxable at normal income tax slabs. However, pension plans also help you defer your tax liability, as there is no tax on the maturity value of the deferred annuity plan.
ETE investments are a curious lot, as they are almost the same as ETT investment. However, since the interest has been taxed already, there is no need to tax the maturity value.
Some of these investments are:
Banks are liable to deduct a 10% TDS on your FD’s interest every year. However, Post Offices can pay your interest without TDS. You should note here that Post Office FDs may ultimately result in higher maturity value due to higher reinvestment.
With plenty of EEE investments on the line and a Rs. 1.5 lakh limit on tax saving investment, you feel unnecessary to think of the other two sections. But you should know these investments as they are useful in one or the other way.
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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.