Learn the essentials of Tax Saving Schemes. Check the details about Income Tax Saving Investments. Let’s have a look at Best Tax Saving Schemes in India and plan for the Financial year.
Best Tax Saving Schemes in India
Tax saving is an important part of the financial planning of an Individual. The Indian Income Tax Act allows certain deductions which can be claimed to save tax at the time of return filing by the Taxpayers of various classes like Salaried employee, Professionals, business person, etc. If an assessee has done proper Tax Planning to save tax, then deductions would be subtracted from the gross total income and income tax would be levied on the balance income as per the income tax slab for the Financial Year.
Life insurance plays a significant role in the individual financial portfolio offering security to their family in case of an eventuality. The primary responsibility of the breadwinners is to take life insurance for the family’s security. Life insurance either it is traditional (endowment) or market-linked (ULIP), offers tax benefits to policyholders on the regular premiums paid.
Let’s have a look at various life insurance plans below.
Regardless of its nature of the plan, life insurance offers tax benefits to policyholders. Under Income Tax Act, Section 80C Premiums paid towards life insurance are covered up to a maximum of Rs 1.5 lakhs. Proceeds on maturity/ death are tax-free under Section 10(D). If the policy is surrendered or terminated within five years, deductions claimed are added to income and taxed accordingly.
Must Read: Tax Benefit on Life Insurance Premium
In Life Insurance, one of the schemes is Pension Plan. Pension Plans serve a different end-objective from other insurance plans like term insurance plans and endowment plans. As per Income Tax Act Section 80CCC, the Contributions towards pension is covered. The aggregate deduction limit under all the sub-sections of Section 80C cannot exceed Rs. 1,50,000/-.
On maturity 1/3rd of the accumulated pension amount is tax-free with the balance 2/3rd treated as income and taxed at the tax marginal rate. The amount is tax-free upon the death of the beneficiary.
Medical Insurance or Health Insurance
Health Insurance is more popularly known covers expenses incurred from an accident or hospitalization. Medical insurance also covers pre- hospitalization and post-hospitalization expenses, subject to the sum assured.
Health insurance offers tax benefits under Section 80D. From Assessment Year 2016-17 onwards Insurance premiums for senior citizens is upto Rs. 30,000/- and for individuals this limit is upto Rs. 15,000/-. In case, the assessee pays a premium of Rs. 15,000/- on his policy and Rs. 30,000/- for his parent, a senior citizen, he can claim tax benefit of Rs. 45,000/- (Rs. 15,000/-+ Rs.30,000/-). Maturity value is tax-free for the sum received under critical illness policies.
National Pension Scheme
National Savings Certificates are also tax-free deposits allowing assessee to save up to Rs. 1,50,000/-under Section 80C of the Income Tax Act. Any deposits made under National Savings Certificate, however, are not tax-free as understood wrongly by many investors. National Savings Certificate investments can be made at the nearest post office of the taxpayer. NSC investments have options of a lock-in period for five years & 10 years. The rate of interest for investments made under NSC is fixed at 8.50% for five years and 8.8% for ten years. The minimum investment here can be as low as Rs.100/-. An additional exclusive tax benefit of Rs. 50,000/- under section 80CCD (1B) per assessment year (applicable from FY 2015-16/AY 2016-17) for NPS investments.
Tax Saving Mutual Funds-ELSS
An Equity Linked Saving Schemes -ELSS are well known as the Investments in tax saving mutual funds Qualify for tax benefits. Tax saving mutual funds invest in stock markets, among other assets, and are more suited for investors with medium to high-risk appetite. Investments are locked in for three years. Investments towards ELSS are covered as per Section 80C of the Income Tax Act up to a maximum of Rs. 1,50,000/-. Proceeds on maturity or death are tax-free under Section 10(D).
ELSS is an equity-linked mutual fund; ELSS funds have the ability to deliver superior returns of 14%-16% over the long term. That’s a full 6%-8% above inflation.This return is not guaranteed though, but historical evidence suggests that these gains are achievable over the long term.
Public Provident Fund
Public Provident Fund -PPF is available for both salaried employee and self-employed. Public Provident Fund (PPF) is one of the best long term saving options which gives the assured and safe returns. Maturity period for this fund is 15 years, and current interest rate for PPF is 8.8% tax-free. Contributions to Public Provident Fund accounts of the spouse and children are also eligible for Tax deduction under section 80C. The maximum amount that can be deposited is Rs. 1,50,000/-. The contribution is exempted under Section 80C of Income Tax Act, and Interest earned is tax exempted, and withdrawal is also tax exempted. PPF- Public Provident Fund is a good option if taxpayer looking for an opportunity with positive returns. The assessee can invest in Public Provident Fund through a bank or Post Office. Ability to invest online is limited.
5 Years Bank Fixed Deposit
This is a variant of the regular Bank Fixed Deposit with a lock-in period of 5-years. They offer slightly higher interest rates compared to normal Fixed Deposits (0.25%-0.5% higher) but does not offer liquidity option, even premature withdrawal with the penalty is not possible.
The amount that the assessee can invest is limited to Rs. 1,50,000/-. The interest earn on 5-year bank FD is fully taxable, and the taxpayer will have to pay taxes on a yearly basis for the interest earn for that period. TDS typically collected by banks is only 10% (20% in case you have not submitted your PAN), and if you happen to be in the 20 or 30% tax bracket, the assessee needs to pay the remaining interest while filing income tax returns.
Post tax, five years Bank Fixed Deposits are not particularly attractive- especially for people in the 20% & 30% tax brackets since the post-tax returns (6%-7%) are typically lower than other tax saving investment options.
National Savings Certificate – NSC
National Savings Certificate interest rates are fixed in April every year. For 5-year lock-in NSCs, the current rate is 8.5% and for the lock-in period of 5-years NSCs and lock-in period of 10-years, the NSC rate is 8.8%.
The interest accumulated on NSC is fully taxable. But, the key difference here is that the interest amount is not paid out to the investor. Instead, it’s re-invested in NSC and therefore can be considered as your investment in NSC for the subsequent year. Needless to say, this is complex.
Investments up to Rs. 1,50,000/- are eligible. The assessee can invest in NSC via your local post office.
Senior citizens saving Plans
The senior citizens savings plan is a product aimed at senior citizens to save the tax. It can only be opened by people whose age is above 60 years old.
There is a maximum capital of 15 lakhs and a lock-in period of 5 years. The assessee may withdraw the money before subject to penalty as follows.
More than one year but less than two years – 1.5% of deposit amount.
More than one year but before maturity – 1 % of deposit amount.
This Senior Citizen savings plan is offered via the post office. The eligible investment is up to Rs. 1,50,000/-.
Must Read: Tax Benefits for Senior Citizens
Employee Provident Fund- EPF
For salaried individuals, EPF is not necessarily an optional thing. The Assessee will need to follow the company’s policy with some leeway available. However, many people forget that the amount contributed to EPF is also eligible for Section 80C deduction.
Employee Provident Fund is typically deducted from employee’s salary every month, and it includes 12% of your Basic Salary + Dearness Allowance(DA) up to a maximum limit of Rs. 6,500/- per month (inclusive of the optional matching employer contribution).
The taxpayer can withdraw Employee Provident Fund when he changes jobs. However, employee accrued amount will be taxed as other income. If you withdraw EPF after five years, you do not attract any tax. Withdrawal after five years is based on qualifying criteria.
The interest rate varies annually; the interest rate is fixed at 8.8% for the AY 2016-17.
Must Read: EPF Withdrawal-EPFO
Tax Benefit on Children Education
To promote education, the government of India allows Income Tax Deduction under Section 80C and Section 80E. Tax Deduction under Section 80C is allowed for payments made by self and deduction under Section 80E is allowed for Education loan. Now a specific assessee can claim Tax Deduction on tuition fee that is paid to schools or colleges for the higher education of children under section 80C of Income Tax Act, 1961.
Must Read: Tax Benefit on Education and Tuition Fee
Sukanya Samriddhi Account
Sukanya Samriddhi Account is a small deposit scheme for the girl child, as part of ‘Beti Bachao Beti Padhao’ campaign, which would fetch the compound yearly interest rate of 9.2% p.a. (Withe effect from 01.04.2016) And provide income tax deduction u/s 80C of the Income Tax Act,1961. The Scheme limits of investment are a minimum of Rs. 1,000/- and the maximum of Rs. 1,50,000/- in a financial year. The Interset is completely exempted from tax u/s 10(11A) and investment qualify for deduction under Section 80C.