Tax Saving Schemes

In India, under the Income Tax Act 1961, taxes are levied on income, wealth and property. The income tax is levied on individual incomes, while the wealth tax is levied on the net value of assets owned by individuals or companies. The revenue generated by these taxes is used for the smooth functioning of the country to foster economic growth and development. On the other hand, income taxpayers look for tax-saving options that can help them reduce their entire tax liability and help them save taxes. A smart tax planning strategy can help taxpayers serve the dual objective of meeting their financial goals and saving tax in the future. Under the Income Tax Act 1961, numerous lawful ways exist to save taxes and build wealth while reducing taxable income. By investing in tax saving schemes, taxpayers can inculcate a habit of saving more over time.

Equity Linked Saving Scheme or ELSS is a tax saving scheme under Section 80C of the Income Tax Act that invests at least 80% of its assets in equity. ELSS is one of the best tax exemption investment plans for taxpayers with a high-risk appetite. Furthermore, ELSS has a three-year mandatory lock-in period, which means that you cannot withdraw the money before the completion of the three-year lock-in period. The investment is tax-deductible for up to INR 1.5 lakh under Section 80C of the Income Tax Act. The ELSS tax saving scheme deduction is available for lump sum investments and investments made through Systematic Investment Plan (SIP) method.

Tax-saver FDs are somewhat similar to regular Fixed Deposits or FDs in almost every way. The only difference is that tax-saver fixed deposit provides the taxpayer with a tax break on investments up to INR 5 lakhs under Section 80C of the Income Tax Act, and they have a lock-in period of 5 years. Under tax-saver FD investment, the banks set the interest rate, which can be changed every quarter or financial year. As tax-saving FDs have a tenure of five years, the tax-saving investment plan does not allow premature withdrawal. The tax-saver investment plan is ideal for taxpayers who want to invest in a low-risk avenue for the long term. This is because tax-saving fixed deposits ensure investment safety for the entire tenure and offer individual investors a guaranteed return on investment.

The post office tax saving scheme includes a list of schemes offered by India Post that offer risk-free and reliable returns on the investment made. As per Income Tax Act under Section 80C in post office tax saving schemes, these programs offer tax benefits as well. The Post Office Tax Saving Schemes are available across all India Post offices in India. In the purview of the Post Office Tax Saving Schemes, the program consists of various schemes, which are Public Provident Fund (PPF), National Savings Scheme (NSS), Kisan Vikas Patra (KVP), Sukanya Samriddhi Accounts (SSA), Senior Citizen Savings Scheme (SCSS), Post Office Monthly Income Scheme Account (MIS), Five Years Post Office Recurring Deposit Account (RD), Post Office Savings Account and Post Office Time Deposit Account (TD). Taxpayers can select the plan that best suits their investment objectives.

The National Pension Scheme is a contribution-based pension scheme administered and regulated by the Pension Regulatory Fund Authority of India. Under the NPS tax saving scheme, if a taxpayer subscribes to National Pension Scheme, the money will be invested primarily in equity and debt instruments, and the value of the investment on maturity will depend on the performance of these contributions. The National Pension Scheme helps an individual build a retirement corpus systematically during working life. Investments of up to INR 1.5 lakh in NPS are eligible for tax deductions under Section 80C of the Income Tax Act. An individual can avail of an additional tax benefit of INR 50,000 under Section 80CCD(1B). Since the National Pension Scheme is a pension scheme, the contributions are locked in until the investor turns 60.

Most taxpayers start tax planning exercises only in the last quarter of the financial year, which results in hurried decisions and poor financial planning. Hence, the best time to start planning for tax-saver investment options is at the beginning of the financial year, when the investments made can help the investor achieve long-term goals. Ideally, one must begin investing in tax-saver schemes and bonds by making a checklist of the following practical steps.

• Give a quick check if any investment made or premiums paid during the financial year is eligible for tax deductions.
• Identify investment goals and analyse the risk profile to choose the right investment avenue.
• Invest the amount in making a corpus to reach financial goals and save taxes simultaneously.

Following the aforementioned good practices, taxpayers won’t burden themselves while making informed investment decisions.