Tax is an important source of income for the government but a lot of people would not want to pay taxes if it was optional. Taxes are used to make public facilities and infrastructure better so as good citizens we should all pay taxes towards this. Earning a taxable income is no small feat as a large part of the population is unable to make enough money to enter the threshold of tax paying citizens. Tax payers should be proud of their ability to contribute to a better society. While you are expected to pay taxes, there is allowance for saving on taxes. Some deductions and exemptions are available for everyone and it is wise to take advantage of it.
Choosing a tax saving investment in india
There are different tax saving options and investments available. You have to choose one that best suits your particular needs and you can do this yourself. Everyone has different financial goals and needs, you should choose based on yours and not what anyone else thinks.
- Equity Linked saving scheme: is a type of equity mutual fund that branches out and has two distinct features. One feature is that investing in them incurs tax benefits under the 1961 Income Tax Act section 80C and the second is there is a lock period of three years on any amount invested in them. They are offered alongside other mutual fund schemes and will probably be named under tax savings in mutual fund houses. Returns on ELSS is dependent on performance from equity markets and so it is not assured or fixed. The charges are lower on the direct plan for this fund and the returns are higher. You can opt for a growth option if you want to save for a long term or dividend if you want a regular income, although not assured. Investing in ELSS is a goo way to generate income that is exempted from taxes and save on taxes too.
- Unit Linked Insurance Plan: ULIP combines as a protection and a savings plan in one. It provides life insurance and also serves as a method to funnel savings into different assets linked to the market for achieving long term goals. There are varied asset allocation options ranging from equity to debt and the lock period for this is five years. ULIP could have a duration from fifteen to twenty years and even more. The value of the fund when leaving the policy is completely free of tax. No matter the holding period, switching between the different options within the fund is also tax free. ULIPS is best suited for those with long term financial plans who do not already have an insurance plan and/or are not comfortable managing other types of tax saving schemes.
- Employee’s Provident Fund: this scheme helps salary earners to gather tax free corpus and also be involved in involuntary savings all at the same time. The EPF account demands that an employee contributes twelve percent of his or her earnings towards it monthly. The same portion is contributed by the employer but only a portion of it goes towards the EPF. The contribution of the employee under the 1961 Income Tax Act section 80C qualifies for tax benefits. The contribution by the employer and employee both qualify for tax free resources. An employee can increase the contribution up to a hundred percent and it all has the same benefits as the EPF funds. All interest incurred from the EPF is tax free as long as the employee continues at the same place of work for five consecutive years.
- Public Provident Fund: this has been and is still a long standing tax saving avenue for investors. This is an ultra safe method for the conservative investor and has a sovereign guarantee for interest earned as well as tax free returns. An account can be opened on behalf of a minor or for one’s self with a minimum of Rs 500 and maximum of Rs 1.5 lakh. The scheme is for fifteen years but can be indefinitely extended in blocks of five years at any bank branch or post office. A PPF account can be opened by someone with an EPF account and people of all ages.
- Sukanya Samriddhi Yojana: this scheme was launched as a part of the Beti Bachao Beti Padhao campaign and is for the benefit of the girl child. This small deposit scheme has tax benefits. The account can be opened upon birth up to ten years of a girl child deposits are made for up to twenty-one years or until marriage. Minimum yearly deposit is Rs 1000 and maximum is Rs 1.5 lakh. The interest on this account has tax benefits.
- Conventional insurance plans are also a good option for saving on taxes. The premium paid is based on age and qualifies for tax benefits under the 1961 Income Tax Act section 80C. death benefit and maturity value of these plans are completely tax free. They also have a saving element and have fixed tem and assured fixed sum. These plans, however, can prove to be inflexible and have potential for lower returns. The sum assured cannot be changed.
Planning your tax saving investment for the year
To avoid making hurried decisions, it is best to plan tax saving investments at the beginning of the financial year and not in the last quarter. Tax saving investments should be used in building wealth and not just saving on taxes so it is also wise to plan for a long term option so you don’t have to bother at the start of every year.
Make sure to check your already existing tax savings investments and expenses you can claim as tax free. Do your calculations to determine how much to spend. Choose an option based on your desired gals and specific needs. When you determine how much you need to invest in order to save on taxes, you are well n your way.