We can all agree that it is a good practice to plan your tax saving investments at the beginning of the financial year. Nonetheless, most people make the rookie mistake of waiting till the last minute.
But tax planning is a crucial aspect of investment planning and must be done as early as possible to avoid expensive errors. In the absence of a proper plan, taxes can eat into your annual income. To overcome this, you need to plan your taxes in such a way that it reduces your liabilities.
You can do that by utilizing tax rebates and exemptions offered by the government in the best possible way. The bottom line – tax planning allows you to analyse your financial situation from the purview of tax efficiency.
This article will discuss some of the best tax saving options for salaried people to help them save taxes and build their investment portfolio efficiently.
1. Life Insurance Policy
Life insurance is one of the most crucial tax savings instruments in India. It gives your family peace of mind that their financial situation will remain stable, even if something happens to the breadwinner. By adding a life insurance plan to your investment portfolio, you can also take tax benefits as per the prevailing tax laws in India.
You can avail up to Rs. 1.5L in tax deductions for the premiums paid u/s 80C of the Income Tax Act. You can also enjoy tax-free maturity benefits u/s 10(10D). Any income you generate from the life insurance plan is also tax-free if the premium is no more than 10% of the sum assured.
2. Public Provident Fund (PPF)
The PPF remains one of the most sought after tax savings instruments in India. These are also relatively risk-free because the instruments are backed by the government. You need to stay invested in PPF for at least 15 years, but you are allowed to make partial withdrawals after 6 years.
If you are a conservative investor looking for low-risk tax savings instruments, then PPF is the perfect option for you.
3. Fixed Deposits
5-year bank fixed deposits are also popular tax saving investments. As an investor, you need to deposit a lumpsum amount to your FD account for a fixed period of time. In return, you get a fixed rate of return throughout the tenure.
You can claim tax rebates up to Rs. 1.5 Lakhs under section 80C. However, it is important to note that the interest income generated by FDs is fully taxable.
4. Equity Linked Saving Schemes (ELSS)
ELSS is an equity-linked investment scheme that is eligible for tax deductions u/s 80C of the Income Tax Act. It is a mutual fund scheme that invests at least 80% of the funds in equities for a lock-in period of 3 years.
However, for the best return on your investment, you must choose a scheme that has been delivering consistent results over a long period of time.
5. Unit-Linked Insurance Plans (ULIP)
ULIPs are an investment plus insurance scheme. It is also a popular tax saving investment for many investors. This scheme allows you to invest a part of your premium in life cover and another part in debt-equity funds as per your risk tolerance.
ULIPs come with a minimum 5-year lock-in period to give you market-linked returns on your investment. ULIPs have an EEE advantage, that is, exempt-exempt-exempt. You can enjoy tax exemption at all the three stages of investment, earning, and maturity under various sections of the Income Tax Act.
6. Health Insurance
Health insurance is an important investment instrument you need to add to your portfolio. A robust health insurance policy will provide you with financial cover in case you are diagnosed with a life-threatening disease or hospitalized due to an accident.
At the same time, it is also one of the best tax saving investments because you can claim a tax benefit of up to Rs. 25,000 u/s 80D of the income tax act.
7. National Savings Certificate (NSC)
NSC is a fixed income investment plan that you can open at any post office. It is backed by the government and encourages investors to invest in a savings bond while saving tax in the process. It is a low-risk product that comes with a fixed maturity period of 5 years. You can save up to Rs. 1.5L in taxes by investing in NSCs. They earn you a fixed rate of interest at 6.8% per annum.
If you want to save taxes in India, the best way to do it is by educating yourself about various tax saving investments. According to reputed insurance providers, you need to ensure that your tax saving instruments are aligned with your long-term goals and not just meant to save you taxes. Remember to read about all the policies and their benefits carefully before investing.
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