As the famous saying goes ‘A penny saved is a penny earned ‘. Tax planning is one of the ways which can help you save on taxes and increase your income. The income tax act provides deductions for various investments, savings and expenditure incurred by the taxpayer in a particular financial year. We will discuss some of the avenues which can help you save taxes.
1. ELSS
Equity Linked Saving Scheme (ELSS), as the name suggests, is one of the types of mutual fund scheme that primarily invests in the stock market. Investments of up to 1.5 Lakh done in ELSS Mutual Funds are eligible for tax deduction under section 80C of the Income Tax Act.
The advantage ELSS has over other tax-saving instruments is the shortest lock-in period of 3 years. This means you can sell your investment only after 3 years from the date of purchase.
If you have a SIP (Systematic Investment Plan) in ELSS Scheme, each installment has a lock-in period of three years. For example, if you start a SIP for 5 years, the 12th SIP will mature after 4th year and 60th SIP will mature after 8th year.
It is observed that ELSS schemes provides better returns than any other tax saving instrument in a long run. So it is recommended to keep your investments intact for the maximum duration possible.
2. National Pension Scheme (NPS)
Tax deduction on investments up to Rs 1.5 lakh can be availed under Section 80C and an additional of Rs 50,000 under section 80CCD of the Income Tax Act in each financial year. However, as per the current law, the amount received at the end from NPS would be taxable. It is a case of EET (exempt on contributions made, exempt on accumulation, taxed on maturity)
Tax benefits can be claimed under Section 80CCD(1), 80CCD(2), and 80CCD(1B) of the Income Tax Act.
A) 80CCD(1), which comes under Section 80C, covers self-contribution. Salaried employees can claim a maximum deduction of 10% of their salary, while self-employed individuals can claim up to 20% of their gross income.
B) 80CCD(2), which is also a part of Section 80C, covers the employer’s contribution towards NPS. This benefit cannot be claimed by self-employed individuals. The maximum amount that an individual is eligible for deduction is either the employer’s NPS contribution or 10% of basic salary plus Dearness Allowance (DA).
C) Main attraction of NPS is that under section 80CCD(1B), individuals can claim an additional amount of Rs.50,000 for any other self-contributions as an NPS tax benefit.
3. Insurance
3a. Life Insurance policies can be useful tax planning tools as the policyholder is eligible for tax benefits under section 80C of Income Tax Act.
Though there are multiple modes for saving tax, life insurance is one of the most effective tax planning instruments. Plans from Life Insurance can be used for protection, long-term savings, and tax planning.
3b. Health Insurance plans provide tax benefits. Premiums paid towards your health care policy are eligible for tax deductions under Section 80D of the Income Tax Act, 1961.
4. PPF
Public Provident Fund (PPF) is one of the most popular tax saving investment instrument that falls under the Exempt-Exempt-Exempt (EEE) category. EEE means that all deposits made in the PPF are deductible under Section 80C of the Income Tax Act. Furthermore, the accumulated amount and interest is also exempt from tax at the time of withdrawal.
But it is important to note that a PPF account has a lock-in period of 15 years.
5. Home Loans
A) Under Section 80C, you can claim a deduction up to ₹ 1.50 Lakh for the principal repayment done in the financial year.
B) Under Section 24B, you can claim a deduction for up to ₹ 2 Lakh for the accrual and payment of interest on the home loan.
C) Under Section 80EEA, you can claim a deduction for up to ₹ 1.50 Lakh for the interest payment of a home loan availed during the financial year.
D) Under Section 80EE, you can claim an additional deduction of up to ₹ 50,000 for the interest payment of the home loan, if you have availed home loan for an amount less than ₹ 35 Lakh and the value of the property is within ₹ 25 Lakh.
E) In the case of a joint home loan, each borrower can claim a deduction of principal repayment (section 80C) and interest payment (section 24b) if they are also the co-owners of the property.