7 Saving Instruments That Can Help You Cut Your Tax Outgo
When we enter the workforce, we work hard to build a financial net for ourselves and our families. The safety net that we build with our hard work will help us achieve our long-term financial goals, protect our families and build a secure future for ourselves. However, as you advance in your career, your income increases and so does your tax* liability.
The Income Tax Act contains many provisions in the form of exemptions and deductions. You should be aware of these to reduce your tax liability to an optimum level. Read on to find out more about some tax-saving instruments that make good savings sense.
Many of us procrastinate with our tax planning and generally begin when the financial year is coming to an end. As there is less time available, we allocate our funds recklessly in offline or online investments. However, an awareness of the tax-saving investment options will help you in planning.
Here are seven savings instruments that can help you cut your tax outgo:
Public Provident Fund (PPF):
PPF is a long-term savings scheme that includes tax-saving to help investors build a financial safety net after retirement. The PPF has a minimum period of 15 years, extended in blocks of 5 years.
A PPF account allows a minimum investment of Rs. 500 and a maximum investment of Rs. 1.5 Lakh for each financial year. All deposits made in a PPF account are deductible under Section 80C of the Income Tax Act (ITA).
In addition, the interest and accumulated amount from the PPF are also exempted from tax during withdrawal.
National Pension Scheme (NPS):
The Central Government runs the National Pension Scheme as a pension program for private, public and organized sectors. It encourages people to invest in a pension account at regular intervals during their employment. The scheme later pays the accumulated amount as a monthly pension to the account holder. The NPS provides tax exemption under the sections mentioned below:
If 10% of the individual's salary is contributed to the NPS, the amount will not be taxed.
As per Section 80CCD (1b), individuals can get an additional deduction of up to Rs. 50,000.
Any contribution up to Rs. 1.5 Lakh as the maximum limit can be claimed for tax exemption under Section 80C of the Income Tax Act.
Senior Citizen Savings Scheme (SCSS)
The Senior Citizen Savings Scheme is a government-supported tax-saving investment scheme. It was specifically designed to provide financial safety to senior citizens. People above 60 years are eligible to invest in the scheme.
This scheme allows individuals to make a one-time deposit: minimum Rs. 1000 and maximum Rs 15 Lakh (in the event of joint holding) and Rs. 9 Lakh (in single holding). Hence, the investment cost in the scheme is quite flexible. In addition, Section 80C of the Income Tax Act allows a tax deduction of Rs. 1.5 Lakh per annum.
Tax-saving Fixed Deposit (FD):
These fixed deposits are security deposits that are similar to other guaranteed1 return investment choices. The only difference is that the period of the investment in the FD is five years. In addition, the FDs offer tax deduction under section 80C Thus, they are optimal plans for individuals with a low-risk appetite who want to save money over a long-term period.
Savings Insurance Plan:
A savings insurance plan is an insurance plan that provides you with an opportunity to save and accumulate a fund for the future. The investment will help the individual invest their funds in a disciplined and systematic way which will help them achieve their long-term and short-term financial goals in life.Additionally, the plan also provides life insurance protection for your loved ones
Along with this, the premiums paid towards the savings insurance plan qualify for tax* deduction under Section 80C of the Income Tax* Act. Savings-cum-insurance plans are considered one of the options for life insurance policies in India, due to the dual benefits of assured returns and life cover, along with features like an insurance for critical illness, rider# options, etc.
TATA AIA life insurance provides extensive features like the ability to get joint life coverage with a single premium and choose the payout options in their savings plans. You can further enhance the policy coverage with a choice of unique riders#.
Equity Linked Savings Scheme (ELSS):
The Equity-Linked Saving Scheme is a diversified mutual fund scheme. These funds invest in the equity and equity-related securities of the company across the market segment. These investment instruments have two distinct features.
Firstly, the investment amount used for investing in this scheme is eligible for tax deduction up to the maximum limit of Rs. 1.5 Lakh as per Section 80C of the ITA. Secondly, investments made in ELSS have a lock-in period of 3 years. These funds provide an interest rate of 15%-18%. But, the returns on these plans are not fixed and will depend on the fund’s market performance.
Investors can go for growth or dividend options in the ELSS fund as per their requirements. These tax-saving instruments provide liquidity and flexibility.
National Savings Certificate:
National Savings Certificate is a fixed-income scheme. It is a savings bond that encourages subscribers to invest while they save on income tax. They are similar to PPF as they are quite secure and are considered low-risk products.
You can get a National Savings Certificate (NSC) from your nearest post office. Investments of up to Rs. 1.5 Lakh in the NSC will provide you with a tax rebate as per Section 80C of the ITA. Along with this, the interest earned on the certificates is also added to the initial investment and will qualify for a tax break.
As evident from the list above, you can rely on these tax-saving instruments to protect yourself and your hard-earned funds from tax liabilities. However, it is important that you carefully research these investments before purchasing them.
Hence, if you're a tax-paying citizen of the country, you must learn about some ways you can reduce the amount paid through tax. You can pick any of the instruments listed above. However, you must be careful in planning your savings not with the intention of mere tax exemption but to ensure you have a sturdy financial future.