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Every individual qualifying above the taxable limits needs to file a return of income. Saving a part of your income is equally important. However, a prominent question that poses is – Have I saved enough?
While saving is a part of earning, making investments that help save tax is another. There are many investment options in India. One needs to carefully determine which investment needs to be selected depending on their financial goals.
Here are a few must-have tax saving options in Indiathat should be considered as a viable investment –
Unit Linked Insurance Plans (ULIPs)
ULIP is an investment avenue where the investor not only gets tax benefits but also can gain substantial returns. While ULIPsprovide a life insurance cover, it takes a step further to provide long term returns too. Modern-day ULIPs have negligible or even zero premium allocation and administration charges. It ensures the entire amount of premium is bifurcated and invested.
The premiums paid under ULIPs can be availed as a deduction under section 80C whereas the return on such investment is exempt u/s 10(10D) of the Income Tax Act, 1961. A point to note that ULIPs have a lock-in duration of 5 years meaning, no investment can be withdrawn before the end of this tenure. This lock-in duration gives scope for the investor’s money to go as generally observed, longer the investment, higher are the returns.
Moreover, one can also switch between the different funds in case the returns are inadequate or fall short of expectations. Since the returns under ULIPs are based on investment in markets, the performance of your fund shall also depend on the same.
Public Provident Fund (PPF)
Another example of popular tax saving options in India is a Public Provident Fund (PPF). Here, you can invest in the PPF account at your desired interval to create a corpus. The interest is compounded every quarter; thereby each interest earned in the previous quarter earns interest on itself. This has a compounding effect to create long-term wealth.
Any investment, interest earned as well as maturity proceeds are exempt under tax and thus it is a completely exempt income. The maximum amount of investment in a PPF account, which is exempt, is up to ₹ 1.5 lakhs as provided under section 80C. A PPF has a lock-in period of 15 years after which a further extension of 5 years can be obtained. Since PPF is an investment having government backing, it is termed as one of the safest investment alternatives with guaranteed returns.
National Savings Certificate (NSC)
Another alternative for goal-based investing is a National Savings Certificate. It is a government-initiated savings scheme, which is specifically designed to encourage investors with middle income. Moreover, an NSC is designed to provide tax benefits to its investors. Akin to PPF and fixed deposits, NSC is also considered as a low-risk investment along with guaranteed returns as its highlight feature.
The interest earned on such NSCs is added back to the initial investment, and the investor can avail an exemption of the same. The maximum deduction one can avail by investing in NSCs is to the tune of ₹ 1.5 lakhs covered under section 80C. The maturity proceeds are taxable, and there are no tax deductions at source. Thus, one needs to pay the tax on such income at maturity.
Health Insurance Plans
While most people assume that health insurance provides a financial cover for your health, it gives protection to your savings too. If viewed from a different point of view, one would understand that it is not only a way to mitigate your medical emergency requirement of funds, but also a way to protect your existing savings. In addition, the health insurance premiums paid are deductible under section 80D of the IT Act.
These are some of the ways using which you can plan your taxes for the upcoming financial year 2020-21. Make sure you understand each of the product and make an informed choice depending on your financial goals.
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