- I don’t know whether I’m planning my taxes right or wrong
- I don’t have any knowledge of Tax Saving Schemes in India
- I don’t know how to Invest for Tax Saving
Do these tax-related questions haunt you? If yes, don’t worry, you need to have some basics information and start from basics for all this, i.e., tax planning.
Tax Planning
tax planning is the analysis of your financial situation i.e.
- Time of the income
- Time of purchase
- Other expenditures
It helps you plan better investment options in which you can invest your hard-earned money to have the least tax outflow.
It plays an essential part in your financial planning.
For a better life after retirement, it is crucial to reduce your tax liability and maximize your ability to contribute to your retirement plans.
The most important thing that can help you save taxes are your investment plans.
“Do not put all your eggs in the same basket.”- Warren Buffet
Warren Buffet was considered one of the most successful investors in the world.
And you indeed should have different investment options.
Your investment portfolio should have a mixture of aggressive, balanced, and conservative investment options, that also includes some government-backed avenues.
Investment for tax saving is an excellent source to put your hard-earned money into good use. It is because the taxes will work in the following two ways:
- Premiums payable on such investments are tax-deductible
In such a case, your taxable income reduces by an amount equal to the premium paid under the plan. This way, it will help you save income tax.
- Returns will be tax-exempt
In this case, the performances received, either as maturity benefit, surrender value or as fixed monthly income, will all be free from tax deductions. It would mean that your income from such sources will not be subject to any deductions that may bring down the monetary benefit for you.
Therefore, going for investments options to save tax will mean getting higher gains for you.
Types of Investments
As mentioned earlier, your investment portfolio should have a mixture of aggressive, balanced, and conservative investment options. Some investments for tax saving options are in detail below:
- Conservative Investments
These are the low-risk investments which pay fixed income – irrespective of the changes in the business or economy. Bonds, debentures, and fixed deposits come under this category.
Also, some select investment vehicles – PPF, EPF, SCSS, Sukanya Samriddhi, National Savings Scheme and other small Post Office Schemes which are created by a government statute for specific purposes are low risk as they guarantee the returns. The returns are periodic and pre-determined.
Government bonds and life insurance policies provide reasonable returns. However, they have long, lock-in periods. So, you will have to wait for a long time to earn substantial profits from these investment options.
Fixed deposit is one of the very few low-risk conservative investments that offer stable, high returns and immediate liquidity.
- Balanced Investments
These are medium-risk investments, which might have a certain percentage of risk, but these also pay higher returns to investors willing to invest in them.
Debt funds, balanced mutual funds, and ULIPs fall in this category. Such investments do have an element of equity and debt, but they have their volatility linked to the markets which can hamper your principal amount. ULIPs are preferable to those investors who wish to combine wealth creation with contingency planning.
ULIPs or Unit Linked Insurance Plans offer the dual benefit of investment returns and life insurance under a single plan.
Also, these plans offer significant tax benefits under Section 80C of the Income Tax Act 1961.
- Aggressive Investments
These are high-risk investments where there is no limit to the upside, along with the downside of risk-returns.
These are ELSS( equity-linked saving scheme), mutual funds, The return on these investments can give huge profits as well as chances of losses depending on various factors such as market conditions, asset allocation, and investment tenure.
ELSS, being a market-linked product they are at high risk but also provides high returns.
ELSS is equity-based, and it has the shortest lock period (3 years) among other tax saving instruments.
Given the fact that these investments are subject to market volatilities, they do not provide fixed returns.
Tax saving Scheme in India
Some tax saving schemes in India are as following:
| Plans | Interest(%) | Minimum Investment | Maximum Investment | Features | Tax Benefit |
| Life Insurance | 0-6% | NA | No upper limit | Maximum 5 years | Under Section 80C and 10D of Income Tax Act, it offers Tax exemption |
| Health Insurance | NA | NA | No upper limit | Tax benefits under Section 80D | |
| Bank FD | 5.5-7.5% | Rs 500 | no limit | 5 years | Under Section 80C offers Tax Deduction |
| PPF* | 8.50% | Rs 500 | Rs 1.5 lacs | 15 years | Under Section 80C investment of upto Rs1.5 lacs is Tax free |
| ELSS** | Variable interest rate | – | – | 3 years | Under Section 80C investment towards ELSS is free |
| ULIPs*** | NA | Depends on the Plans | Depends on the Plans | The benefit of both Life Insurance and investment | Under Section 80C and 10D, it offers Tax Exemption |
| Employee Provident Fund | 8.55% | 12% of Basic salary + Allowance | 12% of Basic salary + Allowance | Creates retirement corpus | Under section 80C |
(*Public Provident Fund ) (**Equity-linked saving Scheme) (***Unit Linked Insurance Plan)
ULIPs Tax Saving Investments
ULIPs plans provide the benefit of both life insurance and investments.
Under Section 80C and 10D, it offers Tax Exemption.
Under the ULIPs plan, investors can get good returns by investing in debt, equity, and market-linked instruments.
Term Insurance
Term insurance is pure life insurance that not only provides financial support to your family after your demise but also Under Section 80C and 10D of the Income Tax Act; it offers Tax exemption.
Critical Insurance
Critical insurance helps you not only when you are suffering from a critical disease like Cancer, but also provide you Tax benefits.
Under Section 80C it provides Tax-free premium up to 1.5 lacs
Invest In Your Life, And Not Just To Save Taxes
In life, investments help you financially secure your goals and your families well being. Therefore, you need to make sure you choose the right investments that go beyond tax savings.
These schemes not only offer you tax benefits, but it also includes a lifetime of financial security to you and to your family to meet their goals.
