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Tax Saving Investment Tips For Self-Employed

Tax Saving Investment Tips For Self-Employed

It may sound surprising, but self-employed people outnumber salaried individuals in the country. In 2013, over half of the 473 million workers in the country were self-employed. A large number of self-employed people has made India the country with one of the largest gig economies in the world. However, self-employment is a broad term and encompasses a wide variety of workers ranging from casual labours to freelance writers and graphic designer. There is a significant difference in the functioning and payment schedules of self-employed and salaried individuals. Most self-employed workers have irregular payment schedules and need tax saving investment options in sync with their payment timetable.

While opting for an investment, a self-employed individual should not just look at the initial tax saving but also seek tax-free returns. There are three phases to an investment - investment phase, accumulation phase and withdrawal phase. Many instruments help in tax saving in the investment and the accumulation phase but are taxed in the withdrawal phase. Self-employed people should invest in a mix of instruments with different tax saving capabilities. Here are a few tax-saving tips for self-employed people.

  • tax saving tips

    Bank fixed deposits: Bank fixed deposits are not fully tax-free but are a good short-term investment option. One has to remain invested in a bank fixed deposit for a certain number of years. Investment in five-year bank fixed deposits qualify for tax deduction under Section 80C of the Income Tax Act, 1961. Fixed deposits are also suitable for self-employed people as they require a lump-sum payment. The returns of fixed deposits vary but hover around 7-8%. Fixed deposits help in tax saving in the investment phase but the interest earned is taxable, which may diminish the returns in the long run.

  • Unit-linked insurance plans: ULIPs are a mix of insurance and investment and can be an ideal tax-saving instrument for self-employed workers. While investing, one should also consider the rate of return and liquidity, along with saving taxes. The contributions made to a unit-linked plan are eligible for tax deduction under Section 80C of the Income Tax Act, 1961. With an array of investment funds ranging from debt to equity offered by ULIPs, one can invest according to his/her risk profile. Many ULIPs allow partial withdrawals to take care of urgent liquidity needs. ULIPs being long term instruments can help build a considerable corpus to fulfil life goals. ULIPs are essentially insurance products, which allows them to escape the purview of long-term capital gains even though a part of the contribution is invested in market-linked instruments
  • Equity-linked savings scheme: Self-employed people can consider ELSS as an ideal option for tax saving as well as capital appreciation. ELSS are diversified equity mutual funds that have a minimum lock-in period of three years for investment. Investment in ELSS is eligible for a tax deduction of up to Rs 1.5 lakhs under Section 80C of the Income Tax Act. The accumulation and withdrawal were earlier completely tax-free, but after 2018, gains made over Rs 1 lakh per year attract long term capital gains tax at the rate of 10%. Beyond tax saving, ELSS can deliver decent returns as the entire corpus is invested in equity instruments.
  • National Pension Scheme: The NPS is a government-backed scheme open to all, introduced to promote retirement planning among people. The defining feature of NPS is that it allows exposure to equities to an extent at a very low cost when compared to mutual funds. Contributions to NPS qualify for a deduction of up to Rs 1.5 lakhs per year under Section 80C of the income tax laws. Individuals can claim an additional deduction of Rs 50,000 under Section 80CCD (1B) for investing in NPS. You are allowed to withdraw 60% of the accumulated corpus, but the balance 40% has to be used to buy an annuity plan. The lump-sum amount allowed to be withdrawn is tax-free, but the regular annuity payments will be taxed as per the income slab

Self-employed individuals can use a mix of tax-free investment options for tax savings along with optimizing returns. Fixed deposits and ELSS can be used for short-term goals, while NPS and ULIP can be used to fulfil long-term goals such as retirement planning and child's education. The Invest 4G unit-linked insurance plan from Canara HSBC Oriental Bank of Commerce can be an ideal choice for self - employed people. Wealth boosters and loyalty additions boost Invest 4G plan's returns, while a host of portfolio management strategies helps you manage risks efficiently

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Annual Income (In Lacs)

FAQs Related to Tax Saving

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.

*Tax saving of Rs.46,800/- is calculated at the highest tax slab of 31.2% (including 4% Cess) for an individual assessee on life insurance premium of Rs.1.5 lakh, who is having taxable income upto Rs.50 lakhs.

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.

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