Paying taxes is a legal, ethical duty that every individual has to fulfil. The government uses your tax money towards the development and progress of the country. The government even offers some tax relief if one invests in certain instruments. However, most people tend not to follow a disciplined approach with regards to tax savings and investments. Either they begin investing towards the end of the financial year or they choose their investments to avail tax savings benefits. Both these methods of tax saving are wrong. The smart thing to do is to begin investing in the early months of the financial year. You can choose from the top 5 tax saving investment options to avail maximum benefits.
ELSS mutual funds
Specially designed for tax savings, Equity Linked Saving Scheme or ELSS mutual funds are considered one of the best tax saving investments. ELSS funds are market-linked products, which, though regarded as high-risk products, also offer higher returns. ELSS funds allow you to save taxes under Section 80C of the Income Tax Act of 1961. Also, ELSS funds are equity-linked products that come with a short lock-in period of 3 years. Moreover, ELSS investments can also be made through SIP or systematic investment plans, which allows you to spend a small, fixed, monthly amount as opposed to a lump-sum amount at one time.
Public Provident Fund
A favourite of the conservative investor, the PPF refers to the government issued, long-term savings scheme. Launched in 1968, the PPF tax saving scheme allows the investor to earn tax-free returns. Currently, you can earn 7.6% interest per annum on your PPF savings, and is especially beneficial for individuals of high-income slabs, paying 30.9% tax. Such individuals can earn taxable returns of approximately 11.04%. However, it is mandatory for one to deposit at least a minimum amount of ₹500 per annum, whereas the maximum savings per annum cannot exceed ₹1.5 lakhs. Also, the PPF scheme lasts for a minimum period of 15 years, and partial withdrawals can only be made after the 8th year of investment.
Unit Linked Insurance Plans
Regarded as hybrid products that provide both, protection and savings, Unit Linked Insurance Plans or ULIPs are regarded as great tax saving schemes, because they provide the investor with the much-needed life insurance policy, while also helping him invest in different market-linked assets, which help him meet his long-term goals. Most ULIPs come with 5 to 9 fund options, with variable asset allocation between equity and debt. While the duration of ULIPs is approximately 15-20 years, there is a minimum lock-in period of 5 years. Also, the fund value of an ongoing/matured policy is tax-free.
National Pension Scheme
One of the few tax savings schemes, which allow the investor to surpass the maximum ₹1 lakh limit of deduction, as set by Section 80C of the Income Tax Act; the National Pension Scheme or NPS is also ideal for tax saving investments. Under this scheme, the percentage of the investor’s basic salary (not exceeding 10%), as contributed by the employer towards the national pension scheme, is tax deductible. That said, the investor’s contribution towards NPS is still governed under Section 80 C, which allows you to surpass the ₹1 lakh limit.
Health insurance investments
Although not traditionally regarded as an investment for tax saving purposes, health insurance plans offer coverage that adds more value than any other form of investment. Apart from providing you security against unpredictable health scares, you also earn a tax deduction on health insurance plans, making them one of the best tax saving investments. One can avail a tax deduction of up to ₹15,000 on health insurance plans, where the upper limit on tax deduction for senior citizens is ₹20,000.
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