Do this Now: Your Income Tax Can be Reduced

In the latest Union Budget, Finance Minister Nirmala Sitharaman gave the middle class a reason to breathe a little easier with the announcement that income up to ₹12 lakh will now be tax-free under the new tax regime. However, this is applicable from the next financial year.

This year, if you wish to reduce your taxable income while growing your wealth, we have got you covered, especially if you have chosen the old tax regime.
Investment options like Equity Linked Saving Schemes (ELSS), Public Provident Funds (PPF), Employee Provident Funds (EPF), and Tax-Saving Fixed Deposits offer tax deductions. Their returns are like watching paint dry—safe but slow. Once done, you can see the positive results.

Here, we will cover smart ways to reduce tax liabilities in detail. Let’s find out.

5 Smart Ways to Save Tax

In India, saving on income tax requires some thoughtful investment planning. Here are five simple strategies to reduce your tax payments:

1. Equity-Linked Savings Scheme (ELSS)

An Equity-Linked Savings Scheme (ELSS) is a type of mutual fund in India that primarily invests in stocks and offers tax benefits under Section 80C of the Income Tax Act. For instance, if you invest ₹1.5 lakh in an ELSS fund, you can deduct this amount from your taxable income, potentially saving up to ₹46,800 in taxes, depending on your tax bracket.

ELSS funds have a mandatory lock-in period of three years, which is shorter compared to other tax-saving instruments like the Public Provident Fund (PPF).
While they offer the potential for higher returns due to their equity exposure, it's important to note that these returns are subject to market risks.

To estimate how much your money can grow, you can use a SIP calculator online, which helps estimate your future savings based on how much you invest regularly.

2. National Pension System (NPS)

The National Pension System is a government-sponsored pension plan that allows people to save regularly throughout their careers to create a significant retirement fund.

Contributions up to ₹1.5 lakh are eligible for tax deductions under Section 80C, with an additional ₹50,000 deduction available under Section 80CCD(1B), totalling ₹2 lakh in potential tax benefits.

3. Public Provident Fund (PPF)

PFF is a long-term savings scheme backed by the Indian government, designed to encourage individuals to save for the future while offering tax benefits. It has a tenure of 15 years and allows annual investments ranging from ₹500 to ₹1.5 lakh, with the current interest rate set at 7.1% per annum.

Deposits made into a PPF account are eligible for tax deductions under Section 80C of the Income Tax Act, and the interest earned is tax-free.

This combination of safety, attractive returns, and tax advantages makes PPF a popular choice among investors seeking stable, long-term growth.

4. Tax-Saving Fixed Deposits

A Tax-Saving Fixed Deposit (FD) is a type of investment offered by banks in India that allows individuals to save on taxes under Section 80C of the Income Tax Act. By investing up to ₹1.5 lakh in such an FD, you can reduce your taxable income by the same amount.

These FDs come with a mandatory lock-in period of 5 years, during which premature withdrawals are not permitted. The interest rates vary between 5.5% and 7.75% per annum, depending on the bank.

It's important to note that while the principal amount invested is eligible for tax deduction, the interest earned is taxable as per your income tax slab.
For example, if you invest ₹1.5 lakh in a tax-saving FD at an interest rate of 6.5% per annum, after 5 years, you would earn interest on your investment. But this interest income would be added to your taxable income for that year.

5. Health Insurance Premiums

Paying for health insurance not only safeguards against unexpected medical expenses but also offers tax benefits under Section 80D of the Income Tax Act.
You can claim deductions up to ₹25,000 annually for premiums paid for yourself, your spouse, and dependent children; if you or your family members are senior citizens (aged 60 or above), this limit increases to ₹50,000. Also, premiums paid for insuring your parents are eligible for deductions up to ₹25,000 or ₹50,000 if they are senior citizens.

On top of that, expenses up to ₹5,000 for preventive health check-ups are also deductible within these overall limits. These deductions are available regardless of whether you opt for the old or new tax regime.

Conclusion

In the recent Union Budget, Finance Minister Nirmala Sitharaman announced that individuals earning up to ₹12 lakh annually are now exempt from income tax. This is a significant relief for the middle class. However, to further reduce tax liabilities and enhance savings, it's wise to explore options like ELSS funds, NPS, PPF, tax-saving FDs, and health insurance premiums. By strategically investing in these instruments, you can effectively minimise taxes while working towards your financial goals.

Disclaimer: The stocks and companies discussed above aren't a recommendation from Finology Insider but a guest blog and shall not be construed as a replacement for professional advice. Consult a professional or conduct the necessary research before making investment decisions.