7 Income Tax Saving Investments for the Hard Working Soul
Vol 13 | Issue 10
It’s that time of the year again – when you rush around, invest in whatever instrument claims to save you even a rupee in tax, and somehow get your employer to deduct a little less TDS, by hook or by crook.
Pause and take a deep breath. Yes, it is important to save tax, but not all tax-saving instruments are built equally. Each instrument is geared towards a certain type of investor and towards specific goals, and that is where one must start.
|A careful selection of tax saving investments can help you reach your financial goals besides giving you tax benefit (Photos for representational purpose only)|
Generally speaking, the government wants to incentivize long-term savings, which is why most of the tax-saving schemes have long lock-in periods. It also wants to reward responsible behaviour like buying insurance for yourself and your family or saving up for your kids’ education. A healthy mix of these instruments can reward you with much more than just the tax benefit – it can help you reach your financial goals.
So, here are 7 of them, that will not only save you tax but also help you streamline your financial life:
1. Equity Linked Savings Scheme (ELSS)
An equity-linked savings scheme, known as an ELSS in popular parlance, is nothing but a mutual fund. It will invest in equities on your behalf, meaning that it is a high risk-high return investment, ideally suited for those in their early or mid-career.
Whatever amount you invest in an ELSS will be reduced from your income before tax is calculated on it. For example, if you earn 7 lakhs per annum, and invest 1 lakh in an ELSS, you will be taxed on only 6 lakhs of your income, saving you tax on the entire 1 lakh that you invested.
The great part about ELSSs is that the ‘lock-in’ period, i.e. the period for which you cannot touch your money, is pretty short – just three years. So, after your initial three years of investing in an ELSS, you can keep recycling your investments and take advantage of the tax savings without putting in any additional money.
|ELSS is ideally suited for those in their early or mid-career (Photo: IANS)|
2. Public Provident Fund (PPF)
The PPF is a low risk-low return scheme, and has a lock-in of 15 years. Even then, it is one of the best investments for those with a lower risk appetite.
Safer than even a savings bank account but with a much higher return, it is ideal for longer-term financial goals like kids’ education or retirement. Its tax-saving potential is the same as the ELSS, so the choice between the two should depend solely on your financial goals.
3. Sukanya Samriddhi Yojna (SSY)
If you happen to have a daughter, you can replace the PPF with its sister scheme, the SSY. It is similar to the PPF in most respects, though the lock-in increases from 15 years to 21 years. It does give a higher return though!
4. National Savings Certificate (NSC)
If you are risk-averse but don’t want to lock in your funds for 15 or 21 years, the NSC is a happy middle. Giving slightly lower returns than the PPF, it reduces your lock-in to just 5 years and can be a great place to invest for shorter-term financial goals.
|National Pension Scheme can be customized to your own level of risk|
5. National Pension Scheme (NPS)
Going from shorter lock-in to the other extreme is the NPS. If you are saving for goals that are far into the future, like retirement, the NPS is perfect, since it is built specifically for them.
It is one of the most flexible tax-saving instruments since you can customize it to your own level of risk, meaning it can vary from a low-risk PPF-like scheme to one similar to a high-risk ELSS.
The NPS is also the only scheme that has an additional tax-free deduction of Rs.50,000 over and above the usual Rs.1.5 lakh that is available for the other schemes. The only catch is that since it is a retirement scheme, you can only freely withdraw the money after you turn 60.
6. Life Insurance Policy
A basic term-life insurance is essential for all of us, for reasons completely unconnected to taxation. However, the cherry on top is the tax benefit that the premium paid on such insurances gives us. The tax saving and the assurance that our family will be fine even in our absence makes this one a no-brainer.
|Health insurance policies allow you to bring your parents too under its cover|
7. Health Insurance Policy
Similar to the life insurance policy, health insurance is critical to our peace of mind – and our physical health. The tax benefit that comes with health insurance is over and above all the schemes listed here. You can deduct an additional Rs. 25,000/- (Rs. 50,000/- in case you also pay for your parents) for the payment you make for health insurance.
A healthy approach to tax-saving is one where the taxation (or lack thereof) is simply an added bonus, and not the sole reason for you investing in a particular scheme.
Fortunately, there is a whole plethora of schemes, covering the entire spectrum of financial goals, from kids’ education to your own retirement, that can also help you save tax. So, choose wisely and create your own personal blend of tax-saving!
Priyanka Mashelkar is Dy. Commissioner of Income Tax and Author, 15 Sure-shot ways to Hit the Jackpot