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Tax Saving Tips: Best Ways to Save Income Tax for 2021

Save Tax Now
  • 10th Mar 2021
  • 1,153
Tax Saving Tips: Best Ways to Save Income Tax for 2021

Saving on your tax outflow becomes challenging when efficient tax planning strategies have not been incorporated at the beginning of the financial year. Understanding this, Kotak Life has curated an insurance guide to ensure that the right steps are taken for tax saving. In keeping with this tradition, we have enlisted efficient tax-saving tips for 2021

Investing in Insurance Policies to Secure the Life of Loved Ones and Save on Taxes:

While purchasing an insurance policy comes with numerous benefits, it is also one of the best ways to save income tax. Some insurance policies that help save taxes are:

  • Life Insurance: Life insurance helps you secure the future of your family and yourself while saving taxes. Premiums paid towards life insurance are eligible for a tax exemption under Section 80C of the Income Tax Act. Additionally, the maturity benefits or the death benefit received under the plan are exempt from taxation under Section 10 (10D) of the Act.
  • ULIPs: Unit Linked Insurance Plans are market-linked plans offering the dual benefit of insurance and investment. ULIPs not only assist with tax-saving but also help your money grow. The premiums paid and the maturity/death payouts under ULIPs are subject to the same tax laws as a life insurance policy.
  • Health Insurance: As the cost of medical treatments rapidly accelerates, purchasing health insurance has become imperative to financial planning. Investing in health insurance policies undertakes the burden of paying for medical expenses and helps save taxes under Section 80D of the Income Tax Act. The applicable tax deduction can be anywhere between ₹25,000 to ₹1,00,000 based on the nature of the policies and the age of the insured members.

Undertaking Planned Investments for a Comprehensive Financial Wellbeing:

Watering the tree of investments helps you reap its fruit when you most need it. Moreover, they help with saving taxes. Popular investment options include:

  • Mutual Funds: While various tax saving instruments help you accumulate wealth; Equity Linked Saving Scheme (ELSS) has the potential to offer the highest returns, among other 80C options. ELSS helps save up to ₹1,50,000 a year in taxes, and it comes with a lock-in period of three years which is the shortest among the other 80C investment options.
  • Fixed Deposits: Not only do fixed deposits help you inculcate the habit of saving but are also an efficient tax-saving instrument. The investor has the opportunity to save any amount under a tax-saving fixed deposit and gain an attractive interest, along with the benefit of tax saving for that year. The tax-saving fixed deposit comes with a lock-in period of five years.
  • Post Office Time Deposit: This is similar to FD wherein the individual has no limit to the amount that can be invested; however, the minimum amount needed is ₹200 in a year. One of its benefits includes that it provides an attractive interest rate of 8.5% per annum with a lock-in period of five years. Investments made here are eligible for tax exemption under Section 80C.
  • National Saving Certificates (NSC): These can be procured from the post office, and a minimum investment of ₹100 is required. NSCs come in with a lock-in period of 5 and 10 years and the investments made under NSCs are exempted from taxes up to ₹1,50,000 under Section 80C.
  • Public Provident Funds (PPFs): PPFs are commonly known as a pension fund, as these have been conventionally used to save for the post-retirement years. PPFs are an amazing instrument for low-risk investors to ensure long-term wealth creation. They have a lock-in period of 14 years. Deposits made under this segment, up to ₹1,50,000 in a financial year, are eligible for tax deduction under Section 80C of the Income Tax Act.

Claiming Tax Exemptions for Home Loans:

Another effective way to save on taxes is through home loans. Whether it is for construction or purchasing a new house, the principal and the interest paid each year of up to ₹1 lakh are eligible for tax exemption under Section 80C of the Income Tax Act. Unbeknownst to many, loans undertaken for the reconstruction and renovation of the house are also eligible for tax exemptions.

To conclude, incorporating the aforementioned strategies early-on, can help you ward off some of the tax burden. The most important tip is to not wait for the end of the financial year for tax-saving and ensure a steady, year-long investment strategy.

- A Consumer Education Initiative series by Kotak Life

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