The beginning of the financial year is a good time to start planning your taxes, and you might want to consider the following instruments in order to minimise your liability and max your returns:
1. Public Provident Fund (PPF): Public Provident Fund or PPF is a long-term investment plan with fixed returns. Individuals should consider PPF because it comes with low risk, and provides for a deduction from taxable income of as much as Rs 1.5 lakh under Section 80C of the Income tax Act. Any interest that you earn on your PPF is also completely tax free. The current rate of interest payable to you is 7.1 per cent.
2. Employees' Provident Fund (EPF): Under the Employees' Provident Funds & Miscellaneous Provisions Act, your employer will deduct 12 per cent of your basic salary and contribute this amount to your EPF scheme. Most companies contribute a similar amount from their corpus. This means, a sum equivalent to 24 per cent of your basic pay gets contributed to your EPF account. Contributions from your pay are deductible from your taxable income to the extent of Rs 1.5 lakh under section 80C. The interest you earn is also tax free, if your contribution in a year is less than Rs 2.5 lakh. Anything above that will suffer a tax at the slab rate applicable to you.
Please note, however, that the Rs 1.5 lakh deduction under Section 80C is the maximum available to you under that provision. This means that anything you invest beyond that amount will not enjoy such a benefit.
3. Home loan- Under Section 24 of the Income Tax Act, the interest on your home can be claimed as a deductible to the extent of Rs 2 lakhs for self-occupied property. You can, however, claim the entire interest you've paid as a deductible if the property is rented out.
4. Long-term capital: Any gains you make on the sale of property, gold or other specified capital assets will not attract long-term capital gains if they are held for a stipulated period--for example, three years in the case of property--and the proceeds are put into specific instruments.
5. Donations: Contributions made to certain social or charitable causes and to the National Relief Fund, among other things, enjoy relief from tax under Section 80G.
6. Health insurance- Under Section 80D of the Income Tax Act, taxpayers can claim a deduction from taxable income up to Rs 25,000 for health insurance premiums paid for themselves, their spouses, and their children. An additional Rs 25,000 is allowed as deductible on premiums paid for their dependent parents aged below 60, which means a total benefit of Rs 50,000 can be availed. If the dependent parents are senior citizens, the overall benefit is Rs 75,000.
7. Life insurance: A pure life insurance plan or term insurance provides financial protection to the family in the event of the policyholder's death during the policy term. Tax benefits are available under Sections 80C (investment/contribution made up to Rs 1.5 lakh) and Section 10(10D), (lump sum paid on death is not taxed at all).
8. Pension plans: The objective of these plans is quite different from that of term plans and endowment plans. Protection plans provide relief to the survivors of the policyholder in case he/she dies during the currency of the plan. Pension plans, on the other hand, provide income to the policyholder and the family once the former retires.
9. Unit-linked insurance plans: These instruments, which also enjoy relief under Section 80C, offer the investor life insurance cover as well as a play in the stock market. They offer better returns than conventional endowment plans, but carry greater risk as well.
10. ELSS: Equity mutual funds that invest in equity-related instruments are referred to as tax-saving mutual funds or ELSS. Investors with a tolerance for moderate-to-high risk should consider investing in them. These instruments also enjoy relief of up to Rs 1.5 lakh under Section 80C of the Income Tax Act.
11. Senior Citizens Savings Scheme (SCSS): This scheme, which caters solely to the retired, particularly those aged above 60, offers an attractive 8 per cent rate of interest. One can invest up to Rs 30 lakh, though relief under Section 80C is limited to Rs 1.5 lakh and the interest earned is taxed.
12. Sukanya Samriddhi Yojana (SSY): Parents of a girl child can use the SSY, which also enjoys relief under Section 80C, to save for their daughter's education or marriage. The plan is popular because it currently offers an attractive 7.6 per cent rate of interest per annum.
13. Endowment plans: Savings schemes that also offer life insurance are called endowment plans. They help you save money to meet your long-term objectives such as buying a house, travelling, or sending your child to school, while simultaneously keeping the family protected in the event of the policyholder's death. They are eligible for relief under both Section 80C and Section 10(10D).
14. NSC: The National Savings Certificate is a savings plan with a fixed return backed by the Indian government. It is suitable for groups with low to medium incomes. Investments enjoy relief under Section 80C, but the interest earned on these instruments is taxable.
15. Specified fixed deposit: These work much like NSC, expect that they are offered by banks, not by the government. The minimum holding period is five years for Section 80C benefits to kick in. These FDs generally work well for investors with a medium time horizon and low risk.
There are many choices in the universe of tax-saving instruments, each with its own advantages and drawbacks in terms of returns, tenure, liquidity and point of taxability. There is no one-size-fits-all formula and you should pick instruments based on your own finances, long-term financial goals and investment temperament, among other things
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