Tax Saving Schemes & Investment: Don't let the Government Loot you!
Created on 11 Apr 2023
Wraps up in 12 Min
Read by 2.9k people
Updated on 19 May 2023
All of us work with immense dedication, face Monday blues, toil overtime and put up with our khadoos bosses. Why? Kya karein paapi pet ka sawaal hai! And after so much hard work, what do we get? Peanuts! That’s not even the worst part. Letting go of our hard-earned money as taxes is what kills us the most.
But worry not, our dear government understands that it's painful to say goodbye to the money we make by moving mountains at our workplaces! And hence they offer us tax saving schemes as an ointment to our dard. Tax saving schemes are measures utilised to reduce the amount paid as taxes in the form of various deductions (our favourite is Section 80C. You’ll see it later). This helps us optimise our finances and keep more of our money in our pockets. That too legally!
For taking the utmost benefits from these schemes, we must know all about them. There are loads of options, running the gamut from ULIPS to PPF, ELSS to Fixed Deposits, that will make you say Kya baat hai sir, kya baat hai! To help you learn more, we'll explore the top tax-saving schemes in India in-depth in this article.
Remember studying compound interest in school? FDs are amounts of money you loan to the bank. The amount that you deposit in an FD is the principle. You deposit it into the bank for a definite period of time at an agreed percentage. Finally, you get the amount back along with the byaaj.
When it comes to saving tax, our age-old way called fixed deposit is the safest method. I know supporters of Ankur Warikoo will hate me for this, but a fixed deposit is still a sure-shot way of investing your money and saving tax at the same time.
A couple of things to keep in mind before you rush to the bank and start an FD. One, make sure you wait for the 5-year lock-in period before you think about withdrawing your FD. Why? Because if you don't, then a penalty would be charged to your FD, and no one wants that. The penalty charged varies from bank to bank, but generally ranges from 0.5% to 1.0% of the interest. So have patience just like you wait for your salary to be credited to your account every month.
Secondly, you can save up to ₹1.5 lakh on your investment in FDs according to Section 80C of the income tax act. And to receive these benefits, you must not withdraw the money before five years. Hasty withdrawal will deprive you of the tax-saving privilege. The interest you earn on the FD varies from bank to bank and is taxable.
If it's a joint account where you have the FD operating, then only the primary holder will get the benefits of the tax cut.
ELSS Mutual Funds
Not in favour of a 5-year lock-in period? I have something with a shorter duration too. ELSS Funds or Equity-Linked Saving Scheme Mutual Funds. Oopar se gaya na? 😏
Lemme simplify. Unlike fixed deposits, the rate of interest in ELSS varies according to the fund’s market performance. And a maximum amount of ₹1.5 lakh invested in the ELSS scheme could be claimed as a deduction from your taxable income under Section 80C of the Income Tax Act.
Along with that, when you put your money in ELSS, you have to keep it there for at least three years. After all, sabar ka fal meetha hota hai.
ELSS brings you two options- the growth option and the dividend option.
In the Growth option, your money will keep compounding, and you will earn a larger amount when you withdraw your money after committing to 3 years. And you know what's the best part? The interest, along with invested amount, would not be taxable. Paisa hi Paisa!
But in the Dividend option, you will get a payout whenever the fund declares dividends, but the amount you earn overall will be less, compared to the growth option. Additionally, 10% of the dividend will be taxable.
Besides, remember that ELSS Mutual Funds are slightly risky. It is the performance of the fund that will decide your returns. So if you have the propensity to take risks, you'll benefit a lot from these funds.
National Pension Scheme
The next scheme is something that saves taxes and contributes towards your senior years. Yes, the Pension Scheme! Did you also think that only government employees get pensions? Me too! But turns out that a pension is something every person can get if they subscribe to this scheme, be it a government employee, a corporate employee, or even a self-employed person.
To save taxes, you should open up a Tier 1 account, where your money is locked in till the time you are 60 (if you live that long). After that, all the corpus amount is tax-free. Like it? Wait for the next part! If you want to contribute a big chunk of money to the NPS, according to Section 80 CCE, up to 10% of your salary or ₹1.5 lakh, whichever is lower, can be claimed as a deduction from your taxable income.
If you are self-employed, the above rule still applies to you, but with a little tweak. Instead of 10%, up to 20% of your gross income can be claimed as a deduction to your taxable income. The upper limit of ₹1.5 lakh still applies.
Let's talk about Tier-2 accounts. This account can be opened only if a Tier-1 account is operating. It's like having a backup plan for emergencies! It offers you the benefit of withdrawing your money whenever you want. Don't get excited yet. The money you withdraw will be totally taxable. So there is no ₹1.5 lakh saving by investing in a Tier-2 NPS account. It's a little unfair, right? I know!
All in all, NPS is a great way to save your money from taxes as well as create a corpus for declining years.
Public Provident Fund
The Public Provident Fund is a famous scheme many people invest in. It is backed by the Government of India and hence is super safe to invest in. But what is a PPF? The most flexible fund created for saving money for the future is a provident fund. Anyone can open a PPF account, even minors! The minimum amount with which you can open a PPF Account is ₹500. Yes, that little! And the maximum amount one can contribute to their account is ₹1.5 lakh. So, if you were thinking of investing all your wealth in PPF, sorry to burst your bubble.
You can invest it in a lump sum or monthly instalments, the utmost 12 instalments. The PPF matures after 15 years and can be extended for 5 more years. You are permitted to withdraw your money after the 7th financial year. Isn't that great? It is, until you find out that this withdrawal is limited to only 50% of the balance. Also, keep in mind that in one financial year, you are allowed to withdraw only once and not more.
But how do we save tax by investing in PPF? This is the biggest advantage of PPF. The interest you earn, as well as the total amount you get after the maturity of the PPF, are completely exempted from being taxed.
Now you know everything about a PPF. So if you want to save your money without analysing much, a PPF can be one of the options for you!
National Savings Certificate (NSC)
Ever heard of Benjamin Franklin’s famous quote “A Penny Saved is a Penny Earned”? It promotes the concept of managing money wisely so that it multiplies. Well, the government of India wants the same habit to get inculcated in Indians. Through the National Savings Certificate scheme, the Government of India tries to achieve that goal. It is a one-time investment with no upper limit but needs a minimum of ₹1000. There are two options for you to choose from for term periods- 5 years and 10 years.
In this scheme, the rate of interest is fixed throughout the term. The interest you earn on your investment is reinvested and is eligible for tax exemption. Unfortunately, the maturity amount that you receive is not tax-free. Are you wondering why we have included NSC as a tax-saving alternative? Because investments up to ₹1.5 lakh will be deducted from your taxable income under Section 80C.
If you are looking for a scheme that is pliable in terms of withdrawals, then NSC is not the one. Withdrawal is allowed only in specific cases like the demise of the certificate holder etc.
Thus, National Savings Certificate (NSC) is a good investment scheme with guaranteed returns and tax benefits.
Senior Citizen Saving Scheme
If you are 60 years and above or have any family member who comes in this age group, then read this because this scheme is just WOW! Government-backed, investments in cash, one of the highest rates of interest, tax saving benefits and a short lock-in period - all these features in one scheme- SCSS. Maze hi maze!
SCSS is one of the few government schemes which offers interest rates as high as 8%. Cool, isn't it? Investments can be done online as well as in cash. But investments made in cash must be less than ₹1 lakh. Moreover, the minimum investment should be ₹1000, and the maximum should be ₹30 lakh. The amount you invest in SCSS is eligible for a tax deduction of ₹1.5 lakh under Section 80C.
Now, there is a good part and a bad part about the tax imposed on the interest accrued. If interest is ₹50,000 or less, then you get a tax exemption, but if it is more than that, then the interest is fully taxable.
The scheme matures after 5 years and can be extended further by 3 more years. Beyond that, no extension can be permitted.
Health insurance is a must for each and every one. It is one such expense that shouldn’t be avoided because unforeseen circumstances can knock on anyone's door at any time. So, if you are fretting over this, thinking you are losing money on paying health insurance premiums and taxes, then you, my friend are wrong! How? The Government of India understands that citizens want to save as much money as possible, so they introduced Section 80D under the Income Tax Act.
You will get a tax deduction of ₹25,000 in one financial year if you are paying premiums for yourself and family members who are yet to turn 60. Here, the family doesn't include parents. You get a separate deduction if you pay a premium for your parents who are also below 60 years old. How much? That would be ₹25,000 of additional tax deduction. So ₹50,000 in total.
But what about parents who have turned 60 years or more? For them, you get a total deduction of ₹50,000. So, ₹75,000 sum total. It's like hitting the jackpot of tax deductions!
Finally, in case both you and your parents are above 60 years old, you can get cumulative deduction benefits of ₹1,00,000. Odd case, but not impossible!
Thinking of life insurance and LIC’s tagline Zindagi ke saath bhi, Zindagi ke baad bhi is not popping into your head? That's impossible! Anyways, let's kill two birds with one stone, i.e. save our taxes and get life insurance. You pay premiums for the life insurance policies for yourself, your other half or your children. Under Section 80C, these premiums can get you a tax deduction of ₹1.5 lakh maximum every financial year. But, if your spouse is employed, then they can’t deduct from their taxable income for the same plans.
Folks subscribed to these plans before 1st April 2012 should not pay a premium of more than 20% sum assured. If you do, then you won’t be able to receive the tax benefits mentioned above.
But if you subscribed to a life insurance plan after 1st April 2012, then you are at a disadvantage. Paying even a paisa more than 10% of the assured sum will deprive you of the ₹1.5 lakh deduction.
Furthermore, if you are paying a premium for a disabled person, be it yourself or a family member, then you are permitted to pay a yearly premium of up to 15% of your sum assured and still be able to claim the ₹1.5 lakh deduction.
We discussed paying premiums and getting exemptions for payment of tax, but what about tax benefits after maturity? You would be thrilled to know that paying a premium of up to 10% of the assured sum will make your entire maturity amount TAX-FREE!
To benefit from these deductions, the most important thing to remember is to NOT pull the plug on the life insurance policy and hold it for at least 2 years and a maximum of 5 years. If you do end up pulling the plug, well, then be ready to lose all the deductions you got!
So folks, let's get our lives insured and save taxes at the same time!!
Post Office Tax Saving Scheme
Under the post office tax saving scheme, we have the Post Office Time Deposit (TD) which is just like a fixed deposit. It is an investment option offered by our very own Daak ghar. Tenures offered in these plans are plenty like 1,2,3 or 5 years. You will be allowed to encash the time deposit after 6 months of starting the investment. The minimum investment required is ₹1,000 and the maximum is jitni shraddha, ichha, bhakti.
It is an extremely safe investment option because it is market risk-proof. The interest rate that is offered is 7%. Also, you know what's cherry on the cake? Anyone who is above the age of 10 years can invest in Post Office Saving Scheme.
About tax benefits, you may receive from investing in a Post Office time deposit, only a 5-year plan will fetch you a tax deduction of ₹1.5 lakh as per Section 80C.
Unit Linked Insurance Plan
Some of you might know what ULIP is… For those who don’t, let’s quickly know what ULIP is all about. It is an insurance plan that lets you invest in various market-linked instruments (which mostly don’t yield good returns). So, the premium you pay (which by the way is very high) is divided into two chunks. One for life cover, and the other for the funds you choose to invest in.
Now let's get into the tax you will save if you happen to go for the infamous ULIPs. Enters Section 80C, the much-echoed section for this article. You can get a deduction of ₹1.5 lakh from your taxable income for the premium you pay! But, be mindful of the condition that the premium you pay should be less than 10% of the sum assured.
And what about the amount you receive after maturity? Well, peeps who want to buy (please don’t) and have bought ULIPs after 1st February 2021, this is for you. If you pay a total premium of less than ₹2,50,000, you can avail of the tax deductions.
Those who already committed the crime of getting a ULIP before 1st April 2012 and paying a premium of less than 20% of the assured sum yearly, the income tax department feels sorry for you. How? They let your maturity amount be tax-free.
There have to be some who got themselves this useless plan between 1st April 2012 to 1st February 2021 and paid a premium of less than 10% of the assured plan. These people will get tax benefits under Section 10 (10D). Their amount after maturity will be fully exempt from income tax.
Partial withdrawals are permitted and are also tax-free, but only if the amount is less than 20% of the total value.
You won't be having all these benefits if you abort the plan before 5 years. The benefits that were provided will be withdrawn.
So if you are already in this mess, then ideally, get out of it ASAP. But still, in case you don’t want to, then you might as well take the tax benefits you are being offered.
NOTE: The limit of ₹1.5 lakh deduction is a cumulative deduction. This means that your total contribution to the above instruments will count towards a collective pool of the ₹1.5 lakh.
The Bottom Line
Lastly, various tax-saving schemes are available in India, each with its own set of advantages and disadvantages. Some of the most popular tax-saving schemes in India are fixed deposits, ELSS, National Pension Scheme, ULIPs, PPF, National Saving Certificate, Post Office tax saving scheme, Senior Citizen Saving Scheme, Life Insurance, and Health Insurance. Most of these save taxes under section 80C, making them a smart choice for tax-saving enthusiasts.
Although it is great to reduce your tax burden but jumping into a certain investment just to take its benefits won't be a wise decision. You should research thoroughly and weigh each option’s advantages and disadvantages before zeroing down to one (or more). The ultimate objective of investing in tax-saving strategies is to increase your wealth over time, in addition to tax savings. So, take the time to select a tax-saving strategy that supports your financial objectives and contributes to your long-term financial stability. Let's make our money work smarter, not harder!
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