Income Tax is a tax imposed by the government on individuals and businesses based on their income. It is a primary source of revenue for most governments, used to fund public services and infrastructure. Income taxes can be levied at the federal, state, and local levels, depending on the country and its tax system.
Benjamin Franklin said once, ‘There are just two things certain in life: Death and Taxes.’ There is nothing much we can plan about the former. But as for the latter, you can certainly plan and find an effective way to know how much you pay every year.
A taxpayer who finds himself in the new regime can switch to the old tax regime at the time of filing tax returns. “However, taxpayers can claim deduction only if they make their tax-saving investments before 31 March”. The taxpayers who changed jobs during the year may not have been asked to submit proof of investment either. The new employer might not have considered the income from the previous job and would have calculated a lower tax. “They should also complete their tax-saving investments now.”
Best Tax Saving Investment Options
NPS (National Pension System)
RETURNS 8.16% in past five years
Lock-in: Till retirement
The additional deduction offered by the scheme is very useful for those with surplus funds.
The NPS continues to be the top tax-saver for the second year running. The NPS saves tax under three sections: contributions up to Rs.1.5 lakh can be claimed as deduction under Section 80C; there is an additional deduction of up to Rs.50,000 under Section 80CCD(1b); and if the employer puts up to 10% of the basic salary of the individual in the NPS, that amount is deductible under Section 80CCD(2)
ELSS funds (Equity -Linked savings scheme)
RETURNS: 18.24% Past five years
Lock-in: 3 years
With equity markets on a roll, ELSS funds, especially large-cap oriented schemes, are expected to do well in the near term
ELSS funds have moved up to second place in the ranking this year, buoyed by the improvement in the prospects of the stock markets. With large-cap stocks expected to outperform, ELSS funds with a larger allocation to this segment will obviously do better. Our top picks have more than 75% of their corpus in large-cap stocks.
Ulips (Unit Linked Insurance Plans)
RETURNS: 8.15% in past five years
Lock-in:5 years
As the tax net spreads, these insurance-cum-investment plans are a tax-free haven. However, these are not as flexible as ELSS.
Ulips continue to be a tax-efficient option. Gains from ELSS funds beyond Rs.1 lakh in a year are taxed at 10%, but in case of Ulips, the maturity proceeds are tax-free under Section 10(10d), provided the life cover is at least 10 times the annual premium. The policyholder can also switch from a debt fund to an equity fund, and vice versa, without any tax implication. However, ELSS funds don’t require a multi-year commitment and have shorter lock-in periods.
Senior Citizens’ Savings Scheme
RETURNS: 8.2% in Jan-Mar 2024
Lock-in: 5 years
It’s the best way to save tax for senior citizens. A new rule that allows unlimited extensions makes it more attractive.
The Senior Citizens’ Savings Scheme (SCSS) is the best investment option for those above 60. The interest rate of 8.2% is better than that offered by most banks. Last year’s budget gave a bonanza to senior citizens by hiking the investment limit per individual to Rs.30 lakh. In November, the extension rules were also relaxed. Investors can also extend the SCSS account multiple times, in blocks of three years each. Earlier, one could extend it only once, and for three years, at the end of the original five-year term.
Sukanya Samriddhi Yojana
RETURNS: 8.2% in Jan-Mar 2024
Lock-in: Till child is 18
The recent hike in interest rates has made it an attractive option for parents with girl children. But it has a limited scope.
The interest rate of the Sukanya Samriddhi Yojana was raised to 8.2%, making it the most lucrative scheme in the small savings basket. The Senior Citizens’ Savings Scheme also gives 8.2%, but the income is fully taxable. The interest earned by the Sukanya scheme is tax-free. The only problem is that the scheme has a very restrictive entry. It is open only to taxpayers with daughters under 10 years. There is also an annual cap of Rs.1.5 lakh on the investment. These restrictions bring down the score of the scheme.
Retirement Mutual Funds
RETURNS: 7-9% in past five years
Lock-in: 5 years
These hybrid funds invest in a mix of equity and debt. The debt portion gives stability to the portfolio, while the equity portion helps them generate good returns.
Equity markets have been on a roll, but not everyone can stomach the risk. At the same time, high inflation means that the real returns of fixed income portfolios will be very low. Some hybrid schemes give investors the best of both worlds by investing in a mix of debt and equity.
Pension Plans
RETURNS: 7-14% in past five years
Lock-in: Till retirement
Pension plans from insurance companies can’t match the NPS on costs, flexibility and tax benefits.
Pension plans from life insurance companies basically work like Ulips, but they can’t match the numerous tax advantages that the NPS and Ulips enjoy. Making pension plans eligible for deduction under Section 80CCD is one of the long-standing demands of the life insurance industry. However, it is unlikely that the coming budget will curtail the exclusive benefit enjoyed by the government-sponsored NPS.
PPF
RETURNS: 7.1% in Jan-Mar 2024
Lock-in: 15 years from inception
Tax-free interest makes this more attractive than bank deposits but watch out for the long lock-in period.
The PPF interest rate has not been hiked for almost four years now, even though government bond yields have consistently risen in the past two years. Even so, the 7.1% offered by the PPF is better than what banks offer. Investors should go for this safe and assured option even if they have exhausted the Section 80C deduction limit. It will help them build a tax-free corpus even as other tax-free options have shrunk. Keep in mind that the tenure of the PPF is 15 years. it does not lock up your money for that long. The 15-year term is from the day of opening the account and the lock-in progressively reduces
NSCs, Tax-Saving FDs (National Savings Certificate)
RETURNS:7-8%
Lock-in: 5 years
Good option only for late risers and senior citizens who may have exhausted the investment limit in SCSS.
Compared to bank deposits, NSCs are more attractive. They are offering 7.7%, and the interest earned on the NSC is eligible for deduction in the following years. If an investor buys Rs.50,000 worth of NSCs in January 2024, the investment will earn Rs.3,840 in a year. The investor can claim deduction for this Rs.3,840 in 2024-25. The next year, the Rs.4,000 interest can be claimed as a deduction in 2025-26.
Life Insurance Policies
RETURNS: 5-6%
Lock-in: Minimum 5 years
Insurance policies continue to be the worst way to save tax. Corpus is tax-free but flexibility and returns are very low.
Life insurance is the bulwark of a financial plan because it safeguards all other financial goals. However, these are the worst ways to save tax in our ranking. The objective of life insurance is to provide financial support to a family if the breadwinner dies.
“Let’s invest in a top tax-saving scheme and reduce our tax burden.”
Read more at:
https://economictimes.indiatimes.com/wealth/tax/best-ways-to-save-income-tax-10-tax-saving-investment-options-for-you/articleshow/106590948.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
