How can you save tax efficiently with a savings plan?

Investment is very essential to generate income and fulfil certain targeted financial goals. However, smart investment planning is essential to fulfil your targets well on time. To ensure optimum returns and gains, you must invest carefully to avoid paying taxes. A carefully planned savings plan is essential to fulfil this target.

The market is currently loaded with various types of investment options. You must remember in this context that the needs of every individual vary from one another. Therefore, the investment portfolio should also differ accordingly based on your current financial status, financial targets, investment tenure, risk appetite, etc. What works brilliantly for your friend might not prove to be quite useful in your context.

So, careful planning is the ideal tool to succeed in this context.

Tax-saving investment instruments

Based on your income status and investment targets, you must select the funds wisely to avoid paying taxes and losing the gains on your part. Some significant tax-saving investment instruments include the following:

1. Fixed deposit: FDs are age-old trustworthy investment instruments that aid tax deduction u/s 80C of the IT Act. The optimum tax deduction limit is up to INR 1.5 lakhs per annum, provided it is a tax-saving FD scheme. The standard lock-in period is 5 years, and the interest remains taxable, ranging between 5.5% and 7.5%, but with a lock-in of 5 years.

2. PPF: This is a popular tax-saving instrument, usually for long-term savings. You can open a PPF account easily through any post office or certain designated branches of private and public sector banks. They offer a fixed and guaranteed interest. Tax deduction of up to INR 1.5 lakhs can be claimed per financial year.

3. ULIP: ULIPs are long-term market-linked investment products allowing insurance coverage. You can switch and alter funds between equities and debts depending on the market performance and your requirements. You can save taxes here under Section 80C and Section 10 (10D) of the IT Act, subject to terms and conditions.

4. National Savings Certificate: NSC is primarily suitable for mid-income group investors. It allows tax savings under Section 80C. You can even purchase NSC on behalf of a minor or another adult, provided you both maintain a joint account.

5. Senior Citizen Savings Scheme: As the name suggests, this instrument is ideally crafted and sponsored by the Indian government for people over 60 years of age. This offers a guaranteed income source post-retirement. The SCSS principal qualifies for tax deductions u/s 80C up to INR 1.5 lakhs per financial year. The interest received is taxable under the existing income tax slab.

6. Life insurance: Life insurance tax benefits deserve a special mention in this context. Life insurance allows financial protection coverage in the case of any unfortunate casualty of the concerned policyholder during the plan tenure, taking care of the family members. If there is a sole breadwinner in the family, ensuring your family is under a competent life insurance plan is essential. You can choose from several life insurance plans, such as term, endowment, money-back, ULIPs, etc.

7. Pension plans: Unlike term and endowment plans, pension plans are crafted to care for the concerned policyholder and his/her family if he lives on. Pension plan contributions are covered under Section 80CCC of the IT Act 1961. The optimum tax deduction limit is restricted to INR 1.5 lakhs. The 1/3rd of the accumulated maturity amount remains tax-free, while the other 2/3rd is taxed marginally. However, if the policyholder passes away, then the maturity proceeds remain tax-free.

8. Health plan or Mediclaim: As the name suggests, this plan covers the medical expenses of the concerned policyholder. As per the terms of the chosen plan, the coverage span may allow pre-and-post-hospitalisation coverage based on the sum assured amount. Section 80D allows tax benefits for the premiums paid towards health insurance. The maturity value remains tax-free for the benefits received under critical illness insurance.

9. NPS: The New Pension Scheme, or NPS, is regulated by the PFRDA. Any Indian citizen aged between 18 and 60 is eligible to participate in it. Since the fund management costs are low, it is very cost-effective. There are 3 individual asset profiles managed here: corporate bonds, equities, and government securities. NPS contributions are covered under Section 80CCD of the IT Act.

10. Tax-saving mutual funds: These are also termed ELSS or Equity-Linked Savings Scheme. Here, the funds are invested in stock markets, provided your risk appetite is comparatively on the higher side. The standard lock-in period is 3 years.

Conclusion

This is a comprehensive guide to several tax-saving financial tools. Critically analysing the needs and targets along with market performance and tax regime is very crucial to enjoying the full benefits of any savings plan.