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Tax Saving Schemes in India

Tax-saving schemes can help minimize your tax liability, freeing up funds for investments, financial goals, or enhancing disposable income.

  • 3,289 Views | Updated on: Jul 03, 2024

Investments are essential for combating inflation, fostering saving habits, and growing wealth over the short and long term, depending on your needs. Therefore, it is crucial to understand which plans offer the most significant tax saving schemes and also help build a financial cushion for emergencies.

Savings plans are vital for securing your financial future. When these plans also provide tax savings, it is a bonus. It is essential to be informed about the best tax benefits plans. Several tax saving investments in India can help you save money and provide tax advantages.

Best Tax Saving Schemes in India

With a varied market, some of the most popular tax saving options in India that are opted by individuals are:

Unit Linked Insurance Plans (ULIPs)

Unit linked insurance Plans (ULIPs) are India’s most popular investment strategies. By combining life insurance coverage with market-linked investments, ULIPs offer a comprehensive financial solution. ULIPs also provide several tax benefits that make them even more attractive. Premiums paid towards a ULIP are eligible for a deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act, 1961. It significantly reduces your taxable income, allowing you to keep more of your hard-earned money.

Furthermore, income earned on the policy’s maturity is tax-free under section 10 (10D). The income is tax-free if the premium is less than 10% of the total assured. In the instance where the money is given to the nominee, the money is treated as tax-exempted in the nominee’s hands.

Public Provident Fund (PPF)

For many years, the Public Provident Fund (PPF) has been a trusted and popular tax-saving plan for taxpayers in India. Its exempt tax status is a major contributor to its popularity, offering significant tax benefits to investors.

The maximum investment amount in PPF is ₹1.5 Lakh, which can be claimed for deduction. Furthermore, the returns earned on the PPF investment and the maturity amount you receive upon completion of the 15-year lock-in period are both completely tax-free, enhancing the benefits of this scheme. For those who wish to continue investing after the 15-year term, PPF offers the flexibility to extend the tenure by another five years or withdraw a portion of the account proceeds.

Sukanya Samriddhi Yojana (SSY)

Launched in 2015 as part of the Beti Bachao Beti Padhao campaign, the Sukanya Samriddhi Yojana (SSY) has become a prominent tax-saving plan program with a significant positive impact on the public. This scheme empowers individuals to invest in their daughters’ future by offering a fixed-income option where regular deposits earn interest.

Adding to its attractiveness, contributions to SSY are eligible for deductions under Section 80C of the Income Tax Act, further offering incentives to investors and contributing to the financial security and well-being of girls in India.

National Pension Scheme (NPS)

The National Pension Scheme is a tax-saving alternative for government and private employees. It allows the depositor to create a retirement fund while receiving monthly income. The depositor’s money is invested in various schemes, including the stock market. Tier-1 and Tier-2 NPS accounts are the two categories of NPS. The tier-1 account has a lock-in period until the subscriber turns 60. The subscriber’s contributions to tier-1 are offered tax benefits under sections 80CCD (1) and 80CCD (2) (1B). Tier-2 accounts are purely voluntary, allowing users to withdraw funds if and when they choose.

Equity Linked Savings Scheme (ELSS)

ELSS are mutual funds that invest a significant portion of your stock holdings. Investments in ELSS are eligible for a tax deduction of up to ₹1.5 lakh per year under Section 80C of the Income Tax Act, 1961. This deduction applies to lump-sum investments and those made through a Systematic Investment Plan (SIP). ELSS’s three-year statutory lock-in period is the lowest among all tax-saving investment options, offering greater flexibility than other instruments like PPF or NSC.

Employee Provident Fund (EPF)

The Employee Provident Fund (EPF) is a mandatory savings scheme for salaried individuals in India, jointly contributed to by the employee and employer. It is a long-term retirement planning tool that helps build a corpus for financial security after retirement.

The EPF corpus earns interest at a rate fixed by the government annually, currently around 8%. The entire EPF amount becomes available for withdrawal upon retirement (at 58 years) or earlier under certain circumstances (like terminal illness, disability, etc.). Contributions to EPF are eligible for tax deduction under Section 80C of the Income Tax Act. A portion of the EPF corpus can be invested in equity markets through the Equity Linked Scheme (ELS) for higher returns.

Senior Citizen Savings Scheme (SCSS)

The Senior Citizen Savings Scheme (SCSS) is government-backed for Indian citizens aged 60 years and above. It offers a high-interest rate and a guaranteed safe investment option for senior citizens.

SCSS offers senior citizens one of the highest safe interest rates among various saving schemes. It is backed by the government, ensuring capital protection and timely interest payments. Currently, it offers an attractive interest rate of 8.2% per annum, compounded quarterly. It has a fixed maturity period of 5 years, with an option to extend for three more years.

Annuity

Annuity plans are an excellent option for senior citizens since they provide a steady flow of funds into your account and enable tax savings. This scheme is accessible to individuals over 60 through post offices or banks. It provides guaranteed returns and the added advantage of early withdrawals if needed. Additionally, under Section 80C of the Income Tax Act, investments in SCSS qualify for tax deductions, further enhancing its attractiveness.

For those seeking a more comprehensive range of annuity options, age-related annuity programs offered by insurance companies can be explored. These programs provide a variety of features and benefits, allowing you to tailor the plan to your specific needs and risk appetite.

National Savings Certificate(NSC)

The National Savings Certificate (NSC) is a government-backed savings bond that encourages small to mid-income investors to invest while saving on income tax. NSCs have a maturity period of five years and offer a fixed rate of interest, which is compounded annually but payable at maturity. The interest earned on NSC is taxable, but the principal invested qualifies for a deduction under Section 80C of the Income Tax Act up to a limit of ₹1.5 lakh per financial year.

5-Year Fixed Deposit (FD)

This scheme is another popular tax-saving option under Section 80C. Banks and post offices offer fixed deposits, and the principal amount invested is eligible for a tax deduction of up to ₹1.5 lakh. The interest earned is taxable, but these FDs offer the safety of guaranteed returns and are relatively low-risk, making them a secure investment option.

Life Insurance Policy

Investing in a life insurance policy is one of the traditional tax savings methods. Premiums paid for life insurance policies qualify for tax deductions under Section 80C, within the overall limit of ₹1.5 lakh. Additionally, the payout received upon maturity or the sum assured paid to the nominee in case the policyholder’s demise is tax-exempt under Section 10(10D), provided certain conditions are met.

Policy Plans

Various policy plans, such as unit-linked insurance plans (ULIPs), public provident funds (PPF), and employee provident funds (EPF), also offer tax-saving benefits. ULIPs provide the dual benefit of term insurance plans and investment, with premiums eligible for deduction under Section 80C and the maturity proceeds being tax-free. PPF and EPF are long-term investment options with contributions qualifying for tax deductions, and the interest earned and the maturity amount are exempt from tax under specific conditions.

Income Tax Investments Under Section 80

Income tax deductions under Section 80 offer various ways to reduce your taxable income in India. Here are some tax deductions under Section 80:

Section 80D

This section allows deductions for health insurance premiums paid for yourself, your spouse, dependent parents, and children. Limits vary depending on the insured’s age and type of plan.

Section 80DD

This section offers deductions for expenses incurred to care for a disabled dependent, with a higher deduction for those with severe disabilities.

Section 80DDD

This section provides deductions for expenses related to the medical treatment of a resident senior citizen parent or grandparent (aged 60 or above).

Income Tax Saving Schemes for Young Unmarried Tax-payers

Young unmarried taxpayers have a longer investment horizon and potentially a higher risk tolerance than those with dependents. Here are some popular options to consider:

  • Public Provident Fund (PPF): This fund offers a high-interest rate (currently around 7-8%) and tax benefits under Section 80C.
  • Equity Linked Savings Scheme (ELSS): It provides tax deductions up to ₹1.5 lakh under Section 80C and potential for high returns.
  • National Pension Scheme (NPS): It offers tax benefits under Section 80CCD (1) and 80CCD(1B) with additional ₹50,000 deductions.
  • Tax-Saving Fixed Deposits: These are fixed deposits with a 5-year lock-in period that offer tax deductions under Section 80C.
  • Health Insurance Premiums: The premiums paid for health insurance qualify for deductions under Section 80D.

Income Tax Saving Schemes for Single Income Couples

Single-income couples can benefit from tax-saving schemes designed for individuals; some of these schemes are:

    Joint Home Loan: Interest paid on a joint home loan can provide deductions up to ₹2 lakh under Section 24(b) and principal repayment under Section 80C.
  • Sukanya Samriddhi Yojana: If the couple has a daughter, investing in this scheme offers tax benefits under Section 80C.
  • National Savings Certificate (NSC): Investments in NSC are eligible for tax deductions under Section 80C.
  • Voluntary Provident Fund (VPF): Contributions to VPF are eligible for tax deductions under Section 80C and offer guaranteed returns.

Income Tax Saving Schemes for Double Income Couples

Double-income couples have a significant advantage regarding tax-saving schemes in India. Let us take a look at some popular options:

  • Mutual Fund Investments: Utilize the ₹1.5 lakh limit under Section 80C for both partners through ELSS.
  • Individual NPS Accounts: Both partners can open individual NPS accounts for additional tax benefits.
  • House Rent Allowance (HRA): If living in rented accommodation, both partners can claim HRA exemptions.
  • Children’s Tuition Fees: Fees paid for children’s education are eligible for tax deductions under Section 80C.

Tax Saving Investment Options for Senior Citizens

Senior citizens in India have unique tax-saving investment options catering to their security and regular income needs. Here are some popular choices to consider:

  • Senior Citizens Savings Scheme (SCSS): Provides regular income and tax benefits under Section 80C.
  • Pradhan Mantri Vaya Vandana Yojana (PMVVY): Offers an assured return of 7.4% per annum and tax benefits.
  • National Pension System (NPS): Allows to invest for retirement and offers tax benefits under Section 80C and an additional deduction under Section 80CCD (1).
  • Post Office Monthly Income Scheme (POMIS): Provides a steady income and ensures the investment is safe.

Tax Saving Schemes for Family Business Owners

Family business owners have some unique opportunities to save on taxes in India. Some popular options are:

  • Business Expenses: Legitimate expenses, including rent, salaries, and utilities, can be deducted from taxable income.
  • Hiring Family: Consider hiring eligible family members and paying them a reasonable salary. This salary becomes a business expense and reduces taxable income.
  • Health Insurance for Employees and Family: Premiums paid for health insurance can be deducted under Section 80D.

Understanding the Importance of Tax Saving

Tax saving involves utilizing various strategies to reduce your taxable income legally, minimize your tax liability, and maximize your financial resources. Here are some key reasons why tax saving is essential:

Reduce Your Taxes

The most apparent benefit of tax saving is reducing your tax burden. It allows you to save your hard-earned money, which can be used for various purposes like investments, achieving financial goals, or simply increasing your disposable income. Whether investing for your future, attaining specific financial goals, or simply enjoying a higher standard of living, tax savings give you more economic freedom and flexibility.

Increase Savings

Reducing your tax burden frees additional capital for savings and investment goals. It empowers you to build a stronger financial foundation and accumulate wealth over time. With more resources, you can pursue long-term aspirations like retirement planning, purchasing a home, or funding your children’s education.

Comply With the Law and Fulfill Your Civic Duty

Tax saving is about personal benefits and fulfilling your legal obligations as a responsible citizen. You contribute to your community’s and nation’s well-being by paying the correct taxes. Your tax contributions fund essential public services like infrastructure, healthcare, education, and social programs, ultimately improving the quality of life for everyone.

Key Takeaways

  • Tax-saving schemes boost your financial future and reduce your tax burden, leaving you with more disposable income.
  • PPF, ELSS, and NPS offer high returns, tax deductions, and flexibility, making them ideal long-term wealth builders.
  • SSY and SCSS provide guaranteed income and tax benefits, making them perfect for securing your daughters’ future or your retirement.
  • Assess your needs, understand your options, set goals, and diversify your investments to optimize your tax-saving strategy.
  • Begin early for maximum returns and consistently monitor your investments to ensure alignment with your financial goals.

Moving Forward

Investing in tax-saving plans can reduce your tax burden and build a solid financial foundation for yourself and your loved ones. With a wide range of options available, it is crucial to carefully analyze your goals, risk tolerance, and financial situation to choose the most suitable plan. Remember, starting early and making consistent contributions can significantly enhance the effectiveness of your tax-saving strategy. For senior citizens and retirees, securing a regular income stream becomes paramount. Explore annuity plans and consider ULIPs for potential tax benefits and long-term wealth accumulation.

So, take charge of your finances today and embark on a rewarding journey towards financial security through intelligent tax-saving investments.

FAQs on Tax Savings Schemes in India

1

Do I have to pay taxes on the investments?

Short-term capital gains in equity funds are taxed at a rate of 15% plus a 4% cess if units are sold before one year has passed. The long-term capital gains tax rate for equities funds is 10% plus 4% cess if the gain within a fiscal year exceeds ₹1 lakh. Long-term capital gains are tax-free, up to ₹1 lakh.

2

How can I reduce my taxable income?

Everyone aspires to increase their savings and create a secure financial future that will enable them to support themselves even without a regular income. Any successful financial strategy must include savings, and for a good reason. But paying income tax on every dollar of taxable income might deplete your savings and leave you with less cash for long-term planning.

3

How much tax can I save?

The amount of tax you save depends on your income, investments, and deductions. A tax advisor can provide personalized advice.

4

Which investment is tax-exempt?

Certain investments, such as Equity Linked Savings Schemes (ELSS), offer tax benefits on investments and maturity amounts under specific conditions.

5

How can I save my tax apart from Section 80C?

Various deductions and exemptions exist beyond Section 80C, including investments in PPF, NPS, medical insurance, home loan interest, etc. Explore and consult a tax advisor to identify your options.

6

How to save tax on FD interest?

Interest income from regular FDs is taxable. Consider tax-saving FDs with lower interest rates but tax exemption on interest income.

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Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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