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Tax Saving Plans

Top Tax Saving Plans in India that helps to Save your Tax Burden

Tax Saving Plans

Tax Saving Plan
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Overview

As per the provisions of the Income Tax Act, 1961, various tax exemptions and deductions are allowed to a taxpayer. These deductions can be claimed by the taxpayer at the time of filing of the Income Tax Return. For computation of net income in the Income Tax Return, the deductions are subtracted from the gross income and the tax payable is calculated on the net income at the applicable tax rate. An informed and active tax planner will understand how these deductions are computed, make his/her investment plans and align those plans to serve the purpose of tax-saving.

Why Should You Invest In Tax Saving Plans

All individuals work hard to earn their money - whether they are salaried professionals, freelancers, self-employed businessmen etc. On the income so earned, they are required to pay taxes if this income exceeds a prescribed threshold limit. Tax planning can help reduce the burden of taxes that falls on an individual and maximize their savings. There are many financial instruments that serve the purpose of saving taxes. The mark of a good tax saving investment is that it provides not just tax saving, but also safety, returns and liquidity. An ideal financial instrument will help you save taxes at the same time as it reaps benefits in the form of decent returns and the flexibility to withdraw funds. By investing in tax saving plans, individuals also inculcate a habit of saving over time.

Tax Saving Plans

iSelect Plus Term Plan

iSelect+ Term Plan

Whole life cover option available

Increase your life cover with changing life stages

Return of premium & in-built protection options

Multiple premium payment options

Avail tax benefits on premiums paid as per tax laws

Invest4G

Invest4G

7 funds and 4 portfolio strategies to invest

Loyalty additions and wealth booster

Return of mortality charge on maturity under benefit option 1 (Life Option)

Flexibility of switching between the fund options to take benefits of market movements or change in risk preference

Health First Plan

Health First Plan

Option to cover yourself against Major Critical Illness.

Increasing cover option to take care of increasing medical needs.

Lump-sum payout on diagnosis.

Return of Premium Option.

High coverage at affordable premiums

How You Can Save Tax under the provisions of Income Tax Act of 1961

The Income Tax Act, 1961 carries provisions for multiple ways in which tax savings can be done. These include, but are not limited to the following:

  • Section 80C, 80CCC and 80CCD(1) allow an aggregate deduction upto Rs 1.5 lakh in a year. These sections cover a wide variety of investment options, ranging from a simple life insurance plan to a hybrid ULIP, to pension plans among others. You can save taxes by investing your money in one or more of these financial instruments.
  • If you have a home loan to be repaid, you are also allowed to claim a deduction of the interest paid for the same under Section 24. This is over and above the deduction for repayment of the principal amount of home loan that is allowed under Section 80C and is thus a part of the previous point.
  • Under Section 80E, you are allowed a deduction to the extent of the interest paid on an education loan.
  • Section 80G provides for tax deduction on the amounts paid by you as donations to charities, social organisations, relief funds etc.

The idea is simple: if your money goes towards a good cause or towards investment for your future, you are rewarded with tax benefits.

Tax Saving Investment Options Under Sec 80C, 80CCC & 80CCD (1)

As mentioned before, the combined deduction allowed under these three sections is limited to Rs. 1.5 lakh. These sections cover the following tax saving options:

Unit Linked Insurance Plan (ULIP)

ULIPs are a combination of insurance and investment. This means that the premium paid towards the policy goes partly towards insurance and the rest is invested in equity, debt, or money market instruments, as per the choice of the investor. ULIPs come with strings attached - in the form of a lock-in period of 5 years. ULIPs are covered under Section 80C, so the same rules apply for the tax-saving: the deductions up to a limit of Rs 1.5 lakh are allowed from the taxable income for the premium amount paid towards ULIPs. This means that as long as the total amount does not exceed Rs 1.5 lakh, you can also top-up your investments in ULIPs and the additional premium paid will also be eligible for deduction.

Moreover, the payouts under a ULIP, including the death benefits received as well as any partial withdrawals made from the policy are exempt from taxation under Section 10(10D) of the Income Tax Act subject to conditions provided therein. Thus ULIPs are exempt from Long Term Capital Gain (LTCG) as well as Short term Capital Gain (STCG) tax.

ELSS (Equity-Linked Saving Scheme)

An ELSS is a tax-saving, open-ended mutual fund scheme that invests at least 80% of its assets in equity. Equity-Linked Saving Scheme funds also have a lock-in period of 3 years.. ELSS is a good option for investors who wish to quench their risk appetite by investing in the market, but at the same time reap tax benefits. The main incentive in an ELSS fund is the possibility of a high return due to heavy investment in equity.

ELSS also falls under the ambit of Section 80C and can, therefore, help secure a deduction of up to Rs 1.5 lakh from taxable income. By its very nature, tax-saving is a defining property of ELSSs. Depending upon the tax slab of your income, ELSS can help you save maximum upto Rs 46,800*/-in taxes.

National Pension Scheme (NPS)

National Pension Scheme (NPS) is a government-sponsored pension scheme that acts as a combination of an investment and a pension plan. The idea is to encourage people to invest regularly in a plan during the earning year, such that the habit of saving can be inculcated. In the end, i.e., upon retirement, part of the corpus built is available immediately and the rest of it is converted into an annuity plan that provides monthly pension payouts to the investor. NPS also comes with its own bag of tax benefits. One, the employee’s own contribution is eligible for a tax deduction under Section 80CCD(1) of the Income Tax Act. The maximum deduction that can be claimed is 10% of the salary (basic plus DA). If the investor is self-employed, deductions can be claimed for contributions up to 20% of the gross income.

*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.

The aggregate amount of deductions under section 80C, section 80CCC and 80CCD (1) shall not, in any case, exceed ₹1,50,000.

In addition to this, a deduction for investment up to Rs. 50,000 in NPS is also provided under section 80CCD(1B) of the Income Tax Act, 1961 for both salaried and self-employed individuals, however no deduction under this sub-section shall be allowed in respect of the amount on which a deduction has been already claimed and allowed under 80CCD(1).Further, employer’s contribution to NPS account of the individual employee is deductible from his total income under section 80CCD (2) upto 10% of salary (Basic Salary +DA). As per Union budget 2020, amount of employer contribution to PF, NPS and superannuation fund in aggregate has been proposed to cap upto Rs. 7.5 lakh.

Public Provident Fund (PPF)

PPF is a traditional investment vehicle meant for the purpose of tax saving. A PPF is a long-term investment option that helps build a retirement corpus for an individual. It can be opened with the post office or most banks. The minimum duration for a PPF account is 15 years. This means that deposits cannot be withdrawn before that. The risk in PPF investment is the least, as it is backed by the Indian government. PPF is specially opted for by investors with the motive of tax saving.

The tax-saving under PPF extends to both the returns as well as the interest earned on the deposits. PPF falls under the Exempt-Exempt-Exempt category. Not only are all the deposits made by the investor deductible under Section 80C of the Income Tax Act, but the deposits and the interest accumulated in the account are also tax-exempt in the hands of the receiver at the time of withdrawal. Thus, PPF accounts are the best way to inculcate a saving discipline, earn a decent rate of interest, protect from risks and market fluctuations, all the while reaping multiple tax benefits.

Sukanya Samriddhi Yojana

Sukanya Samriddhi Yojana is a small savings scheme, backed and promoted by the government under which the parents can open a savings account in post office or banks in the name of their girl child. This scheme is a part of the larger Beti Padhao, Beti Bachao campaign. It functions like other post office schemes, with the interest rates being declared every quarter. The aim of the scheme is to encourage parents to save for the education of their girl child from an early age. The interest rates under the scheme have been consistently upwards of 8%.

This scheme also offers tax benefits in the form of the EEE status (Exempt-Exempt-Exempt), wherein first, the investments made into the scheme are eligible for deductions under Section 80C up to the maximum amount of Rs 1.5 lakhs. Second, the interest earned on the investments is compounded annually and is exempt from tax. Finally, the proceeds received upon maturity or withdrawal are also exempt from income tax.

National Savings Certificate (NSC)

National Savings Certificate is another fixed-income investment scheme backed by the government. NSC is akin to a savings bond. It encourages the investor to invest in it and earn interest at minimum risk. The maturity period of NSC is fixed at either 5 years or 10 years. NSCs are also covered under Section 80C of the Income Tax Act. This implies that investments in NSC up to a maximum amount of Rs 1.5 lakh can be claimed as deduction while computing income tax.

The interest earned under NSC is computed and compounded annually. This means the investor gets a tax exemption on the interest amount as well. Therefore in the following years, a deduction can be claimed for both the amount of investment as well as the interest earned.

Senior Citizen Saving Scheme

Senior Citizens Savings Scheme (SCSS) is another government-backed savings instrument. This is meant for Indian citizens above the age of 60 years. Aimed at providing some financial comfort to senior citizens after retirement, the scheme offers quarterly interest payments.

The investments made towards SCSS can be claimed as a deduction under section 80C of the Income Tax Act. The Interest under SCSS is taxable and bank/post offices will deduct tax @ 10% under section 194A if annual interest exceeds Rs. 50,000. However, where the person has income below minimum threshold limit and provides form 15H, interest can be received without TDS deduction.

5-Year Bank Fixed Deposit

As per the Section 194A of the Income Tax Act of 1961, the interest that is earned from investing in fixed deposits floated by NBFCs and banks is taxable in case it crosses Rs. 5,000/Rs. 10,000 depending on the type of financial institution. Often, tax is deducted at source for the same. However, banks also provide a specific FD called the 5-Year Tax-Saving Fixed Deposit which is designed for the purpose of saving tax in the year. Section 80C of the Income Tax Act provides that investment in this kind of fixed deposit is deductible from the total income, up to a maximum of Rs 1.5 lakhs. The catch is that you have to stay locked-in the FD for a period of 5 years. Besides the interest earned on the FD is taxable.

Insurance

Life insurance is a simple financial instrument that promises financial security to the beneficiary of the policyholder in exchange for a premium. It helps to provide for the dependents and family of the policyholder in the event of the untimely death of the latter. The premium paid under a life insurance plan is also eligible for a deduction under Section 80C, up to a maximum limit of Rs 1.5 lakh. The amount received on maturity or eventuality is also exempt from tax in the hands of the beneficiary, according to Section 10(10D) of the same Act subject to conditions provided therein.

Pension Plans

As the name explains, pension plans cater to the pensionary needs of the senior citizens after retirement. Such plans act as a financial safeguard for individuals post-retirement. Several pension plans are available in the market, each designed to cater to varied retirement goals that one may have.

A consistent thread across most pension plans is that the investment is eligible for a tax deduction, such that an individual can plan for retirement without having to pay taxes on the amount. Section 80C and 80CCC give specific details about the tax benefits of various kinds of pension plans.

Tax Saving Investment Options under Section 80D, 80DD & 80DDB

Health Insurance

It is crucial to have health insurance in your financial portfolio because medical emergencies have the ability to impair your financial stability. But the benefits of a health insurance policy are not just limited to this purpose. 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, spouse, children.

Deduction on preventive healthcare check-ups

Preventive healthcare check-ups refer to the pre-emptive measures taken to keep diseases and ailments at bay.

The deduction upto Rs 5,000 allowed for preventive health check-ups for self, spouse, children or parents which is a part of the overall deduction one can claim under Sec 80D.

Deductions on Health Insurance Premium Paid For Parents

An individual can claim a deduction of up to Rs 25,000 for the insurance of self, spouse, and dependent children. Additionally, a deduction is allowed on parents insurance too. If parents are below 60 years of age, such deduction is capped at Rs 25,000, whereas in the case of parents aged 60 or more, the cap is at Rs 50,000.

Deduction for Medical Expenditure on Self or Dependent Relative for the treatment of specified disease under Section 80DDB

This is to be seen separately for each case.

  • In case of individuals and HUFs below age 60 The deduction allowed is capped at Rs 40,000, the amount being the expenses incurred towards the treatment of specified medical diseases or ailments for the individual or any of his/her dependents. For a HUF, such a deduction is available with respect to medical expenses incurred towards these prescribed ailments for any of the HUF members.
  • In case of senior citizens and super senior citizens A deduction of up to Rs 1 lakh can be claimed. Earlier the figures were different for senior and super senior citizens.
  • In the case of reimbursement claims Reimbursement of claims by an insurer or employer reduces the deduction claim by that much amount. Proper prescriptions and proofs should be furnished.
Deduction for Rehabilitation of Handicapped Dependent Relative

Section 80DD covers expenditure on medical treatment, rehabilitation, and training of disabled dependent. The section provides for a deduction upto Rs 75,000 for a disability that is classified in 40%-80% range. If such dependant is a person with severe disability, deduction amount can be claimed upto Rs. 125,000.

Investment Guide for Maximum Tax Saving

The goal of tax planning is to maximise tax savings. Since there are multiple investment options for the same tax-saving provision, it is important to build the investment portfolio in a way that makes use of all the available tax exemptions.

  • This includes, first of all, making complete use of Section 80C. From among the investment routes listed above, invest in one or multiple instruments and schemes to be able to claim a deduction of Rs 1.5 lakh, which is the maximum amount allowed under the combination of Sections 80C, 80CCD(1), 80CCC.
  • Under Section 80D, claim deductions upto Rs. 25,000 for your contribution towards health insurance of self, spouse, children. An additional Rs 25,000 can be claimed as a deduction for insurance for parents. This amount can be up to Rs 50,000 for senior citizens parents. Apart from the Rs 25,000 deduction from this, an additional Rs 40,000 deduction is allowed towards treatment of diseases listed under rule 11DD
  • Your borrower’s profile can help claim deductions too. Interest payments made on home loan and on a loan for higher education in a year can be claimed under Section 80EE and 80E respectively.

Related Articles Of Tax Saving

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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