Paying taxes can become too burdensome, especially during times of certain unprecedented financial crises. Therefore, if the maximum benefits of tax-saving schemes could be accessed, then it may provide some relief.
Approaching in a carefully planned manner from an early age is the key to win the game here. However, with long-term financial goals, investments in tax-saving schemes are never too late, to begin with. For maximum benefits through tax-saving, a well-chalked-out organised approach is needed so that the long-term financial health is not hampered.
Based on long-term investments and financial planning, here are certain methods to maximise the gain through tax-saving schemes:
Investments in Insurance
The premiums paid for life term coverages, including the proposer, the spouse, the children, and other dependents, are liable to get a deduction of up to INR 1 lakh under Section 80C of the Indian Income Tax Act. In case the insured person opts for a tax deduction, the total premium payment should be less than 10% of the insured amount.
In the case of health insurance, the premiums paid for any particular health plan that insure the proposer and other dependents and the spouse, are eligible to receive up to 15,000 INR in a single financial year. If any single dependent belongs to the senior citizen category, then the deduction limit rises to 20,000 INR under Section 80D.
Investing in Wealth Boosters
Since the Union budget of 2012-’13, the government tax incentive schemes have popularised equity investments. Under Section 80CCG, during a single financial year, if a first-time equity buyer buys shares worth up to 50,000 INR is eligible to claim 50% of the total investment as a deduction. This is applicable only for individuals with a gross annual income of up to 10 lakh INR.
But in this case, the investor cannot redeem or sell off the equities in the first year.
Equity-based mutual funds are also a tax-saving investment scheme. The benefits received here are based on Section 80C. The fixed lock-in period for equity-linked savings schemes is 3 years. There is no issue here with capital gains tax.
ULIPS or Unit-linked Insurance Plans provides a dual job of getting insurance coverage along with equity exposure. Under Section 80C, these investments are eligible for a maximum deduction of 1 lakh INR. Moreover, the maturity proceeds of the plan are tax-free.
Planning for Retirement
EPF is the most popular scheme in this sector, needing consistent investment both from the employer as well as the employee. The employee’s contribution is eligible for a limit of deduction of 1 lakh INR under Section 80C.
In the case of PPF or Public Provident Fund, the proposer can invest from 500 INR to 1 lakh INR in a particular financial year. The lock-in period for this is 15 years although loans are granted at an increased rate of interest. From the 6th year onwards, the proposer is allowed to make partial withdrawals.
The investments in National Savings Certificates are also eligible for tax deduction under Section 80C however, the earned interest is taxable.
The Senior Citizens’ Savings Scheme has a maturity period of 5 years. A single individual is liable to open several accounts under this scheme, provided, the total investment amount does not exceed 15 lakh INR. The interest is taxable and possesses the benefits of Section 80C.
There are multiple Pension fund schemes like NPS, mutual fund pension schemes, unit-linked pension plans which reduce the tax burden. A minimum of 6000 INR yearly contribution is needed for NPS, a scheme eligible for total deduction under Section 80C. If the NPS is a part of the employer’s scheme, then the individual is liable to claim for a higher percentage of deduction.
While the contribution of an individual is included under the limit of INR 1 lakh under Section 80C, 80CCC and 80CCD, the contribution of the employer is deductible under Section 80CCE, above this limit.
Indirect Savings
If the income through the savings account does not cross the standard deduction limit of INR 10,000, it remains tax-free under Section 80TTA applicable for Hindu Undivided Families and individuals.
Income through house rent is eligible for tax deduction within a specified limit. The House Rent Allowance is a part of the salary for a salaried individual. Income through rent is liable to a standard tax deduction rate of 30%.
Principal and interest payment in the home loan sector is also eligible for tax deduction up to INR 1 lakh under Section 80C. If the house gets completed and owned by the individual, then the interest component is eligible for claiming up to INR 1.5 lakh under Section 24B.
Investment in the education sector, like tuition fees up to 2 children, comes under the purview of tax deduction under Section 80C within a maximum limit of INR 1 lakh. This deduction is applicable only in the case of tuition fees and not any other costs in the educational sector. Interest paid for any education loan for the spouse or children is eligible for a tax deduction.
Section 80DDB allows a tax deduction in case of medical expenses for the taxpayer or his/her dependents for certain specified diseases up to INR 40,000. In the case of senior citizens, this limit is INR 60,000. If the individual has any disability like mental illness, blindness, hearing disability, Section 80U mentions the deduction limit of INR 50000. In case of severe disability, this limit rises to INR 1 lakh.
Section 80G allows tax deduction in case of charitable donations within the limits of INR 10000. The total donation amount must not exceed 10% of the gross total income of the taxpayer.
From the above discussion, a clear picture is received of the multiple tax-saving schemes that are currently in operation in the market. If investments are planned carefully beforehand in an organised way keeping all these aspects in mind, building up a strong financial base becomes far easier.