How to Save Income Tax?

Nobody likes paying tax, but there is no escaping it! Considering the fact that it is used for building & maintaining the economy and infrastructure of the nation, we should be paying the tax. However, since the government itself has given us certain incentives by which we can save on the amount of tax we pay, it is only prudent that we utilize the same.

Save Tax & Earn Tax-Free Income

How to Save Income Tax

  • Equity-linked savings schemes (ELSS)

These schemes are diversified equity mutual funds with two distinct features; the investment amount is eligible for tax benefit under Section 80C of the Income Tax Act, 1961 and amount invested has a lock-in period of 3 years. The returns of this scheme are not fixed but equity market dependent.

One who goes with this scheme can either opt for dividend or growth option. The former (even though not assured) is suited for people who are looking for regular income and the latter is best suited for someone who is planning to save for a long-term need.

When considering long-term capital gains, these equity oriented schemes offer no gains since more than 65 percent of these are allocated to equities. Further, the dividends in these equity schemes are tax-free. Hence these schemes yield tax-free income for both; the dividend holders and the growth unitholders.

  • Public Provident Fund (PPF)

This scheme is quite popular since the returns are tax-free and the principal and the interest earned have a sovereign guarantee! PPF currently offers 7.8 percent per annum (although it changes every 3 months). For people coming in the highest taxable income group (paying 30.9 percent tax) this translates to 11.28 percent taxable return. Now that is something which is very difficult for an FD to provide; such high pre-tax return!

Employees’ Provident Fund (EPF) Under this scheme, an employee mandatorily contributes 12 percent of his basic salary each month towards his EPF account. An equal share is contributed by the employer but only a portion (3.67 percent) of it goes into EPF account. Under Section 80C of the Income Tax Act, 1961, the employee’s contribution qualifies for tax benefit but not the employer’s share.

  • Unit-linked insurance plan (Ulip)

This is basically a hybrid of protection and saving; helps in channeling the savings into different market-linked assets for meeting the long-term goals with the added benefit of life insurance cover. This scheme may not be suitable for all investors; best suited for people whose need is 10 years or so away. Exit after 5-7 years could be financially damaging.

  • Sukanya Samriddhi Yojana (SSY)

This is a small deposit scheme launched as a part of the ‘Beti Bachao Beti Padhao’ campaign for the girl child. This scheme provides 8.1 percent interest rate and with a sovereign guarantee and comes with the exempt-exempt-exempt (EEE) status. The annual deposits of this scheme come under the benefit of Section 80C and maturity benefits are non-taxable. For more details, visit Sukanya Samriddhi Yojana.

It is always advised to start your investment during the first quarter of the financial year so that you can spread the investment over the entire year. This will help in reducing the burden that comes at the end of the year with the added benefit of informed investment decisions.

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About trekkerp

Author of The Girl from the Woods and a Travel writer from India looking forward to collect quirky tales from around the world

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