“This is too difficult for a mathematician. It takes a philosopher. The hardest thing in the world to understand is the income tax.”–Albert Einstein
“I am proud to be paying taxes in the United States. The only thing is I could be just as proud for half of the money.”–Arthur Godfrey
If you are reading these statements here, it is likely that you are above the threshold of Rs. 2.5 lakhs, and fall into the bracket where you need to pay taxes. While you cannot completely evade paying taxes, you can try to reduce your tax in legal ways. And sometimes, these methods act as an icing on the cake, as they not only help you save taxes, but grow your wealth too. Let’s gorge on some of the investment tools available for this purpose.
Comparing the options first:
The first thing a tax payer should do is check the 80C investment options for fixed and flexible options. For instance, instruments like Employee Provident Fund, Home Loan repayment, and Tuition Fees of kids are fixed. Once you have added them up, check how much of the 1.5 lakh’s exemption is utilized. Now, further decide on where to invest by looking at the table below:
this could change each year. One benefit of this instrument os that returns earned are tax-free. A PPF account has a lock-in period of 15 years, and can be extended by 5 years at a time. Pre-mature withdrawals are allowed from the seventh year onwards, but these are only partial withdrawals. The amount can only be withdrawn in full after maturity. A PPF account can be opened through a bank or Post Office.
- 5 Year Bank FDs:
This option is different from regular bank FDs, as it has a lock-in period of 5 years. It usually has a slightly high interest rate as compared to regular bank FDs. However, liquidity is limited in this investment, as it does not permit premature withdrawal. Additionally, it limits the amount to be invested, i.e. Rs. 1,50,000.
- National Savings Certificate (NSC):
An NSC account can be opened at a post office. At a current rate of 8.5%, interest rates for NSC are fixed every year, and this investment has a 5-year lock-in period. While the interest accrued is entirely taxable, a prime modification here is that the interest sum is not paid out to the depositor. As an alternative, it is re-invested in NSC, and consequently can be well-thought-out as your investment in NSC for the succeeding year. You can make investments of up to Rs. 150,000 through this scheme.
- Life Insurance Premium:
There are 2 varieties of Life Insurance Policies. Pure risk insurance is called term life, and provides policy holders with financial cover for a specific period. In the event of death before the term ends, death benefits are paid out to the beneficiary. Term life is inexpensive, and for approximately Rs. 10,000/ year, you can procure a shield of Rs. 1 crore.
The other is risk+ investment, which pays you money over time. While anyone with a dependant should ideally have term life, it is not an asset. Life insurance is an expenditure- an amount that you pay to ensure that your dependents are not financially helpless in case something happens to you.
- National Pension Scheme:
Anyone between 18 and 60 years old can invest in the NPS. As per section 80C, through this investment, you can claim up to Rs.1,50,000 of your total, taxable income. It is a retirement scheme in which contributions are made by both, employer and employee. At the time of retirement, the built-up wealth becomes payable to the employee. The scheme allows you to choose between investment options and switch investment funds.
- Pension Funds:
Pension funds are intended to provide an income stream post retirement. They are available in two types: Deferred Annuity & Immediate Annuity. In the deferred annuity scheme, you capitalize annually till your superannuation. Once you approach your retirement, you can pull out up to 60% of the total amount collected. The rest must be re-invested in an annuity fund that will provide you with a monthly pension. While talking of immediate annuity plans, it is best to invest a lump-sum amount, and obtain monthly pensions from the following month.
- Senior citizens savings scheme:
The senior citizens savings plan is an investment product designed to help senior citizens save on taxes. It is meant for individuals above 60 years, and can be availed from post offices and certified banks. There is a cap of 15 lakhs along with a lock-in period of 5 years. You can withdraw partial amounts, but these are subject to certain conditions:
- More than 1 year but less than 2 years – 1.5% of deposited amount
- More than 1 year but before maturity – 1 % of deposited amount
- EPF (Employee Provident Fund):
EPF is usually deducted from an individual’s monthly salary, comprising of 12% of your Basic salary + DA up to a maximum limit of INR 6,500 per month. EPF includes a tax rates that changes every year. The amount in an EPF is qualified for tax deduction under section 80C. You can pull out of an EPF when you change employers. Nevertheless, your ensued amount will be taxed as other income. However, you do not attract any tax if you pull out after 5 years.
- Additional Tax Saving Investments:
There are other involuntary savings/ expenses that are eligible for tax saving. For instance, tuition fees for up to 2 kids are shielded under section 80C. Home Repayment of loan principal amount makes you qualified for tax exclusion for the repayment you make on the way to your home loan principal.
Please make a note that this article does not endeavour to be a wide-ranging tax saving educator; only an entry of the most common options. Other options contain Infrastructure bonds, PO payments etc.