The last quarter of the financial year is here and you are thinking about ways to reduce your tax liability. However, there may be some instances when you may not require investing in order to save your taxes.
When you invest in certain investment instruments, you are able to reduce your tax liability. However, such investments are beneficial only if your cost-to-company (CTC) exceeds INR 4 lakh per annum.
Here is when you may not need to invest in tax-saving investments.
- Non-taxable salary components
There are certain components within your salary that do not entail any tax. Here are five such components.
- An amount of up to INR 15000 per annum received as medical allowance
- Leave Travel Allowance (LTA) when incurred; domestic airfare or first class air conditioner fare by shortest route
- Travel allowance of up to INR 19200 per year
- House Rent Allowance (HRA) as per applicable rules
- Up to INR 26400 per annum for food coupons
In addition, if your CTC includes deduction towards Employee Provident Fund (EPF), it helps you to save tax under section 80C of the Income Tax Act, 1961.
- Existing commitments
Certain loans and insurance premiums reduce your taxable income. Here are seven such commitments.
- Charitable contributions: 50% or entire donation to eligible organizations may be reduced from taxable income capped to a maximum of 10% of your gross income
- Interest paid on education loan availed for self, spouse, or children
- An amount of up to INR 25000 paid as medical insurance premium for self, spouse, or children is exempted from your taxable income
- Repayment of home loan principal is eligible to save tax under section 80C of the Income Tax Act
- Life insurance premium is eligible for tax deductions up to a maximum limit of INR 1.5 lakh according to section 80C
- An amount of INR 1200 per child for two children incurred towards school fees may be reduced from your taxable income
After considering all the aforementioned salary components and commitments, if you still need to pay taxes, you may consider investing in tax-saving options. Here are five such investment instruments.
- Public Provident Fund (PPF)
PPF has been popular for decades and continues to be a popular tax-saving avenue. You may open a PPF account with any bank or post office. Such accounts have a 15-year lock-in period and currently offer 7.8% interest. You must contribute at least INR 500 per year to this account. It is an EEE (exempt, exempt, exempt) investment, which means the principal, interest, and maturity proceeds are tax-free.
- Equity-Linked Savings Schemes (ELSS)
ELSS funds are diversified mutual funds that qualify for tax exemptions according to section 80C of the Income Tax Act. A majority of the fund corpus is invested in equities and related instruments. Therefore, there is a potential to earn inflation-beating returns on your investments. However, you must stay invested for at least three years in such funds. If you invest in ELSS funds through a Systematic Investment Plan (SIP), each installment is considered as a fresh investment and must adhere to the three-year lock-in period. The principal, dividends, and maturity benefits are all tax-free.
- Unit-Linked Insurance Plans (ULIPs)
ULIPs are hybrid insurance policies that offer protection as well as savings. A portion of your premium is invested in market-related securities to deliver higher returns than regular insurance plans. ULIPs invest money in both debt and equity instruments and has a lock-in period of five years. The maturity proceeds are also exempt from tax.
- Tax-saving fixed deposits (FDs)
You may avail of such FDs from any bank. These deposits come with a lock-in period of five years and offer an interest rate that is slightly higher than regular FDs. However, tax-saving FDs are taxable, which means the effective returns are lower than other investment options.
- Sukanya Samriddhi Yojana (SSY)
These schemes are available for girls less than ten years old. You may deposit a maximum of INR 1.5 lakh until the girl turns 18 years old. The account continues to be operative until she reaches the age of 21 years. Currently, SSY is in the EEE status, which means the principal, returns, and maturity proceeds are all tax-free.
With a large number of available options, making the right decisions to save tax may be difficult. However, ARQ, the proprietary investment engine in Angel Wealth’s mobile application, simplifies this task by analyzing over a billion data points to offer customized recommendations. This investment engine uses advanced techniques to match investments with your financial goals and risk appetite without any human bias.
Download the Angel Wealth mobile app and maximize your tax benefits.