Wednesday, October 20, 2021

How To Save Tax- 5 Best Tax Saving Options For Taxpayers In India

Finance Minister Nirmala Sitharaman is set to present the Union Budget 2021 on the 1st of February 2021. This will be the first budget introduced by the NDA government since the pandemic and the very first paperless budget in the history of India.

The last budget– Budget 2020 introduced the option of a ‘New Tax Scheme’, changed the slab rates, and removed certain exemptions afforded to taxable persons under the Income Tax Act. Pending changes in the forthcoming Union Budget, here are the TOP 5 tax saving instruments available to assess today, that will help you save hard-earned money from being slashed away as part of tax cuts.

5 Best Options For Taxpayers In India To Save Tax- How To Reduce Your Tax-Cuts

1.  PPF (Public Provident Fund); Exempt u.s. 80C; Lock-in period – 15 years

Public Provident Fund or PPF is a long-term tax saving option backed by the Government of India. Thus, it is a completely safe, long-term investment with a lock-in period of 15 years, allowing partial withdrawals after completion of 7 years. PPFs provide attractive interest rates, and investment of a minimum of INR 500 must be made every year for 15 years to keep the account active. A minimum period of investment is 15 years, extendable in blocks of 5 years.

Deposit of amount into PPF is exempt up to INR 1,50,000 per annum under section 80C of the Income Tax Act, 1956, making PPF the only instrument on this list with an EEE rating. i.e. invested amount, interest amount, as well as principal on maturity, are exempt from tax. This makes PPF a favorite savings-cum-investment vehicle for millennials and people just starting out in their careers.

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A person can open a PPF account with either a Post Office or with any nationalized bank such as State Bank of India (SBI) or Punjab National Bank (PNB). Some private banks have also started the facility recently. The interest rate offered keeps changing every quarter as per the rate set by The Finance Ministry. However, interest rates nevertheless range between 6.5% to 7.5%.

An investment of INR 10,000 per month for 15 years will earn you an amount of INR 32,54,567 at an interest rate of 7.1%. You can use a PPF Calculator and curate an investment schedule as per your personal financial targets.

2.  ELSS (Equity Linked Saving Scheme); Exempt u.s. 80C; Lock-in period – 3 years

ELSS are equity-linked Mutual Funds that offer tax exemption under section 80C up to INR 1,50,000 annually. ELSS relies heavily on underlying equities hence are more volatile than PPFs, but simultaneously offer the possibility of higher returns. 

ELSS schemes have a lock-in of 3 years, and after that long-term capital gains up to INR 1 lakh is exempt from tax each year. Above that, a tax of 10% is levied. Unlike PPFs, which are tax-free at every stage, ELSS is taxable above INR 1 lakh post-3-year lock-in at 10%.

3.  National Pension System (NPS); Exemption u.s. 80C + 80CCD; Lock-in period – till retirement

National Pension System or NPS qualifies for tax deduction under section 80C like PPF and ELSS, but also an additional deduction of INR 50,000 under section 80CCD (1B), which is exclusive for NPS. It is one of the more popular instruments for building a retirement corpus.

The interest offered on NPS by the government can range from 8-14% and maturity is on retirement, i.e. 60 years. In the scheme, subscribers must make a minimum contribution of INR 6,000 annually in monthly installments or at once.

NPS is available to all employees from public, private, and even the unorganized sector, except for the people in the armed forces. Employer and employee contribution to NPS is available for deduction.

4.  Provident Fund (PF) ; Exemption u.s. 80C; Lock-in period– min. 5 years

Both the employer and employee contribution towards the PF corpus earns interest declared by the government each year. The contribution you make as an employee is liable for deduction under section 80C up to a limit of INR 1,50,000.

5.  Tax-saving Fixed Deposit(FD) Account; Exemption u.s. 80C; Lock-in period– min. 5 years

Many risk-averse people may choose to invest in the risk-free fixed deposit account. The amount deposited into such an account is eligible for tax deductions under section 80C after calculation of Gross Total Income (GTI). 

However, remember that in the New Tax Scheme, deductions under section 80C have been disallowed, owing to the reduced slab rates. Ensure you maximize your tax savings while planning your finances and hope you all have filed your IT-returns on time for the Financial Year 2020-2021.

Now that you know how to save your hard earned tax, try options today and let us know in the comments what you think about these.

Rahul Sinha
Rahul is a B.Com(Hons) graduate from Delhi University and a CA final candidate. He is also the co-founder and CFO of a healthcare start-up based out of New Delhi, India. Rahul is an avid investor and holds a diverse portfolio. Having worked for 3+ years with Deloitte in Statutory Audit and then later in a tax profile, Rahul believes in understanding the bottom-up functioning of established businesses and leverages this very knowledge to create value through his company. His next challenge lies in Germany where he will soon be pursuing his masters degree in Finance.

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