Hyderabad: With only 10 days away from the financial year 2023-24 to close many of us are scrambling to get our tax savings exercise t be completed before March 31, 2024. Tax saving can often be a stressful task for many individuals, but it doesn’t have to be. By strategically investing in tax-saving instruments, one can not only reduce his or her tax obligation but also build a secure financial future with ample savings.
Before delving into the specifics of various instruments, let’s first understand the significance of tax-saving investments. The government provides various avenues for taxpayers to save on taxes under Section 80C of and other sections of the Income Tax Act. These investments not only reduce your taxable income but also offer the potential for wealth creation.
What is Section 80C?
Section 80C is one of the sections in the Income Tax Act, 1961 which allows taxpayers to claim deductions on their taxable income by investing in deposit schemes and expenditures. As of the current regulations, one can claim deductions of up to Rs. 1.5 lakh in a fiscal year under this provision. It’s important to note that the Rs. 1.5 lakh limit applies cumulatively to all the eligible investments and expenses under Section 80C.
Let us see how we can utilise various banking and financial instruments to save taxes effectively for the current financial year.
Tax-Saving Instruments:
1. Tax saving Fixed Deposits: Fixed deposits with banks are a simple yet effective way to save taxes. They offer tax deductions under Section 80C and come with various tenures and interest rates. These are a popular choice among individuals looking for a safe and guaranteed return on their investments. Here’s what you need to know:
Lock-in Period: Tax-saving FDs come with a lock-in period of 5 years, which means your money remains invested for this duration.
Tax Benefit: Investments in tax-saving FDs are eligible for deductions under Section 80C, up to a maximum limit of Rs. 1.5 lakh in a financial year.
Interest Taxation: The interest earned on tax-saving FDs is taxable as per your income tax slab.
2. Pubic Provident Fund (PPF): PPF is a long-term savings and investment scheme offered by the government and falls under the category of small savings schemes. Since it is government-backed, it is one of the safest investment options available to the taxpayers. PPF offers the opportunity to claim tax deductions under Section 80C.
PPF has a longer lock-in period of 15 years, in comparison to many other tax-saving investments. It also offers the flexibility of partial withdrawals from the seventh year onwards, allowing individuals to access a portion of their savings if needed.
The current PPF interest rate is 7.1% for Q4 of FY24.PPF interest rate is regulated by the government of India and reviewed every quarter. The interest on PPF is computed monthly, compounded annually and credited at the end of the financial year, that is, 31st March. The minimum investment per year is Rs 500 to keep the account active.
Following the maturity of your PPF account, you have the choice to extend it. It can be extended in five-year intervals indefinitely. You are not required to make new deposits throughout the extended term, and you can even make partial withdrawals, subject to certain conditions.
Interest earned as well as the maturity amount are tax-free.
3. National Savings Certificate (NSC): NSC is a government-backed savings scheme available to Indian residents. It is a fixed-income investment option as it offers a predefined rate of interest set by govt. NSC is eligible for tax deductions under Section 80C of the Income Tax Act, 1961. It has a lock-in period of 5 years and provides a guaranteed return. Thus, it is a suitable choice for individuals looking for safety, predictable returns, and tax benefits over a 5-year investment horizon.
The interest income accrued from NSC is subject to taxation based on the investor’s tax bracket. However, the interest earned on NSC is not paid to the investor every financial year.
While there is no upper limit on the amount that can be invested in NSC, only investments up to Rs 1.5 lakh a year can earn a subscriber a tax rebate under section 80C of the Income Tact Act 1961. Furthermore, the interest earned on the certificates is also added back to the initial investment and qualifies for a tax break. The rate of interest on NSC is current at 7.7 per cent.
For the first four years, the interest gained on NSC is assumed to be reinvested and so eligible for a tax credit, subject to the overall annual limit of Rs 1.5 lakh. The interest earned in the fifth year, however, is not re-invested and is thus taxed at the investor’s applicable slab rate.
4. Senior Citizens’ Saving Scheme (SCSS): Designed for senior citizens aged 60 years and above, this scheme provides tax benefits under Section 80C. One can invest a maximum amount of Rs 30 Lakh.
As mentioned, this scheme is exclusively for senior citizens. However, retired individuals aged 55-60 can also invest in it but they need to invest within a month of receiving the retirement benefits.
The SCSS has a lock-in period of 5 years, which can be extended for an additional 3 years after maturity. The interest rate on SCSS is set by the government and is subject to change. It is typically higher than regular FDs.
Investments in the SCSS qualify for deductions under Section 80C, subject to the overall limit of Rs. 1.5 lakh. Interest income from the SCSS is fully taxable if it exceeds Rs 50,000 in a fiscal year. The rate of interest on SCSS is 8.2 per cent per annum.
5. Sukanya Samriddhi Yojana (SSY): Sukanya Samriddhi Yojana is an excellent tax-saving investment scheme that is specifically designed for the benefit of the girl child. Only one account can be opened for a girl child (under the age of 10) and a maximum of 2 girl children in one family. An SSY account holder can invest a minimum Rs 250 and a maximum of Rs 1.5 lakh in a financial year.
The scheme comes with a lock-in period, typically until the girl child reaches 21 years of age or gets married, whichever is earlier. Partial withdrawal can be made for educational purposes after the girl child attains the age of 18 years or after passing the 10th standard, whichever is earlier.
Under Section 80C of the Income Tax Act, contributions made to the SSY account are eligible for tax deductions. This means that you can reduce your taxable income by the amount you invest in your daughter’s SSY account, up to a maximum limit of Rs. 1.5 lakh per financial year. The interest rate on SSY is 8.2 per annum.
Not only does SSY help you save on taxes, but it also offers tax-free returns. The interest earned on the SSY account and the maturity amount are both exempt from income tax.
6. Insurance: Life and health insurance policies offer significant tax-saving benefits. These policies can help you reduce your taxable income and, in turn, lower your overall tax liability. Here’s how life and health insurance can help you save on taxes in India:
Premiums paid for life insurance policies, including term insurance and endowment plans, are eligible for deductions under Section 80C of the Income Tax Act. Additionally, the proceeds received from a life insurance policy upon maturity or in the event of the policyholder’s demise are generally tax-free under Section 10(10D) of the Income Tax Act. This means that the maturity amount or death benefit is exempt from income tax. The exception to this is that as per latest CBDT guidelines, policies bought on or after 01.04.2023 will not be fully tax-exempt. The maturity amount will be taxable if the premium paid in a financial year exceeds Rs. 5 Lakh.
Premiums paid for health insurance policies, including individual and family health plans, are eligible for deductions under Section 80D of the Income Tax Act.
These tax benefits associated with life and health insurance policies in India not only encourage individuals to protect their financial well-being and health but also provide a valuable avenue for tax saving.
7. National Pension System (NPS) It is a voluntary tax-saving investment option that offers financial security through regular post-retirement income.
NPS is open to all Indian citizens between 18 and 65, including private and public sector employees. It offers two types of accounts, Tier 1 and Tier 2. To open a Tier 2 account, the customer must have an active Tier 1 account. Tax benefits are offered under Section 80CCD(1) and Section 80CCD(2) of the Income Tax Act. Customers can claim a deduction of up to 10% of their salary (for salaried individuals) or gross income (for self-employed individuals) under Section 80CCD(1). Additionally, customers can claim a deduction of up to Rs. 50,000 under Section 80CCD(1B), which is over and above the Section 80C limit. Furthermore, customers employed by the Central Government or any other employer can request an additional deduction of up to 14% ( Central Government or State Government) and 10% ( for any other employer) of their basic salary (plus dearness allowance) under Section 80CCD(2).
8. Equity-Linked Savings Schemes (ELSS): ELSS funds are mutual funds that primarily invest in equities or stocks. ELSS is designed to provide investors with the opportunity to participate in the stock market while also offering tax-saving benefits. ELSS offer tax deductions under Section 80C.
The lock-in period is three years which is relatively shorter in comparison to many other tax saving tools. However, long-term capital gains from ELSS exceeding Rs. 1 Lakh a year, is subject to a 10% tax, without the benefit of indexation.
A popular choice for those seeking higher returns, as ELSS funds primarily invest in equities, which historically have the potential to offer higher returns compared to traditional fixed-income investments.
It’s important to note that the returns from ELSS funds are market-linked and subject to market fluctuations. While they have the potential for higher returns, they also come with higher risk levels.
9. Unit Linked Insurance Plans (ULIPs): ULIPs are financial products that combine both insurance and investment components into a single policy. A portion of the premium you pay for a ULIP goes toward providing life insurance coverage and the remaining portion of the premium is invested in a range of investment funds, which can include equity, debt, or a combination of both, as chosen by the policyholders. Premiums paid for ULIPs are eligible for deductions up to Rs. 1.5 lakh per year under Section 80C of the Income Tax Act and the maturity or death benefit is generally tax-free. However, as per the latest CBDT guidelines, for ULIPs purchased on or after 01.02.2021, returns at maturity will be taxable if the premium paid is more than Rs. 2.5 Lakh in a fiscal year, except death benefits.
10. Loans: Taking certain types of loans can provide tax benefits under specific sections of the Income Tax Act such housing loans and education loans.
Housing loan: Interest paid on a home loan is eligible for deductions under Section 24(b) of the Income Tax Act up to a maximum limit of Rs. 2 lakh (subject to conditions) and the principal amount repaid on a home loan is eligible for deductions under Section 80C up to a maximum limit of Rs. 1.5 Lakh per financial year. This is part of the overall deduction limit under Section 80C, which includes other eligible investments and expenditures. Additional deduction towards interest paid on the loan is also available u/s 80EE up to Rs. 50,000/- provided the loan is sanctioned between 01.04.2016 and 31.03.2017 and subject to fulfilling other conditions. Also, deduction towards interest paid on the loan is available u/s 80 EEA up to Rs. 1,50,000/- (to assessees who are not eligible u/s 80EE) provided the loan is sanctioned between 01.04.2019 and 31.03.2022 and subject to fulfilling other conditions.
Educational Loan
: Interest paid on education loans for higher education is eligible for full deduction under Section 80E of the Income Tax Act. There is no maximum limit on this deduction, and it can be claimed for a maximum of 8 years or until the interest is fully repaid, whichever is earlier
