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8 Popular Tax-Saving Schemes in India

Tax saving is a crucial part of securing your financial future. By choosing the right plans and investing strategically, you can enjoy the rewards of reduced taxes and a brighter financial tomorrow.

  • 2,586 Views | Updated on: Mar 20, 2024

Investments help fight inflation, build saving habits, and grow your money in the long and short term, depending on your requirements. Hence, having a thorough understanding of what plans can give you the maximum savings and help build a corpus for life emergencies is necessary.

Saving plans play a crucial role in safeguarding your future monetarily. When these plans come with savings on taxes, it is like the cherry on top. Knowing about these plans that offer maximum tax benefits is important. India has several plans that not only fulfill the goal of saving money but also help save taxes.

Understanding the Importance of Tax Saving

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

Reduce Your Taxes

The most obvious 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, achieving specific financial goals, or simply enjoying a higher standard of living, tax savings give you more financial freedom and flexibility.

Increase Savings

By reducing your tax burden, you free up additional capital that can be directed toward savings and investment goals. It empowers you to build a stronger financial foundation and accumulate wealth over time. With more resources at your disposal, 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 not just about personal benefits but also about fulfilling your legal obligations as a responsible citizen. By paying the correct amount of taxes, you contribute to the well-being of your community and nation. Your tax contributions fund essential public services like infrastructure, healthcare, education, and social programs, ultimately improving the quality of life for everyone.

Best Tax Saving Schemes in India

With a varied market of different tax saving plans, some of the most popular schemes that are opted by individuals:

 5 popular and efficient tax saving schemes in India

Unit Linked Insurance Plans (ULIPs)

Unit Linked Insurance Plans (ULIPs) stand out as one of India’s most popular investment strategies. By combining life insurance coverage with market-linked investments, ULIPs offer a comprehensive financial solution. ULIPs offer 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. This 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)

The Public Provident Fund (PPF) has been a trusted and popular tax-saving plan for taxpayers in India for many years. 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 that lasts 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 potentially higher returns.

Senior Citizen Savings Scheme (SCSS)

The Senior Citizen Savings Scheme (SCSS) is a government-backed savings scheme specifically 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 one of the highest safe interest rates among various saving schemes for senior citizens. 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 3 more years.

Annuity

Annuity plans are a great 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 years old 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 wider range of annuity options, age-related annuity programs offered by insurance companies can be explored. These programs offer a variety of features and benefits, allowing you to tailor the plan to your specific needs and risk appetite.

How do You Plan Your Tax-saving Investments for the Year?

The tax-saving period for salaried and non-salaried taxpayers begins on April 1 of the financial year. A smart tax-saving investment should generate income free of taxes and provide tax exemption. Here are some steps you can take for tax-planning:

Assess your Financial Situation

As an investor, knowing your total income for the year from all sources should be your first task. You should also estimate your essential and discretionary expenses for the year. Reviewing your existing investments and their tax implications will help you analyze the situation better.

Understand Tax-saving Options

Explore various options like Public Provident Fund (PPF), Employee Provident Fund (EPF), National Pension Scheme (NPS), Unit Linked Insurance Plans (ULIPs), Equity Linked Savings Schemes (ELSS), Sukanya Samriddhi Yojana, etc. you should also consider other deductions like Section 80D (health insurance premiums), Section 80E (education loan interest), Section 80G (donations), etc.

Set tax-saving goals

Determine the tax bracket you want to fall into based on your income and deductions. Calculate the total amount you need to invest to reach your tax-saving goals.

Choose Investments

Investors should choose options that align with their risk tolerance and investment horizon. Researching and comparing interest rates, fees, and returns of different options will help with portfolio diversification. This will spread the investments across various options and save you during any economic crisis.

Track and Review

Monitoring and tracking your investments is very important. This will help keep a check on any unnecessary tax deductions or any other discrepancies. Stay updated on any changes in tax laws or regulations.

Start Planning Early

It would be a wiser strategy to start investing in the first quarter of the fiscal year rather than waiting until the end of the fiscal year and using ad hoc tax-saving instruments, giving taxpayers more time to plan their investments and receive the highest possible returns.

Moving Forward

By investing in tax-saving plans, you 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 for you. 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 smart tax-saving investments.

Key Takeaways

  • Tax-saving plans not only boost your financial future but also reduce your tax burden, leaving you with more disposable income.
  • Schemes like 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.
  • To optimize your tax-saving strategy, assess your needs, understand options, set goals, and diversify your investments.
  • Begin early for maximum returns and consistently monitor your investments to ensure alignment with your financial goals.

FAQs

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.

- A Consumer Education Initiative series by Kotak Life

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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