5 smart ways of tax saving with wealth creation for salaried persons
As the year end approaches, every taxpayer searches for most effective investments where they could save their taxes and also get good investment returns. There are a number of options with them like Insurance, ULIP, ELSS, NPS, PPF etc. but which one would be better for them is always a question. This article guides you about the 5 smart ways of adding to your wealth with tax benefits under section 80C of the Income Tax Act, 1961. Let’s discuss…
1. Unit Linked Insurance Policies (ULIP):
Insurance policies are generally meant for providing life cover. But ULIPs are the insurance policies where the policyholder gets a life cover with benefits of wealth creation. In ULIP, a part of the insurance premium is allocated towards risk cover and the balance premium is invested in equity or debt market or both to yield returns. Thus, you get a life cover coupled with returns on investment. But ULIPs have a lock-in-period of 5 years so many aggressive investors dislike ULIPs.
The premium paid towards ULIP is eligible for deduction under section 80C of the Income Tax Act up to Rs. 1,50,000. Also, the amount received at the time of maturity of ULIP is tax free if the annual premium is below Rs. 2.50 lakhs.
2. Tax Saver Fixed Deposits (FD):
Generally, any investor can invest in fixed deposits in a bank or post office. Tax-saver fixed deposits are a specially designed fixed deposits meant for income tax saving. Any taxpayer can invest in tax-saver fixed deposits with any bank or post office and get a deduction up to Rs. 1,50,000 under section 80C of the Act. Tax-saver FDs also come with a lock-in-period of 5 years. Interest earned on tax-saver fixed deposit is taxable under the head of “Income from Other Sources”.
3. Public Provident Fund (PPF):
PPF is one of the most popular Central Government saving scheme which has attractive interest rates and tax saving benefits. For investing in PPF, you need to open your PPF account with an authorized bank or post office. Interest earned on PPF is tax-exempted. Also, the amount received at the time of maturity is exempted. Any amount invested in PPF up to Rs. 1,50,000 shall be allowed as deduction under section 80C of the Income Tax Act. But PPF is a long-term investment option as it has a maturity period of 15 years. However, you can make a partial withdrawal after 5 years of opening the PPF account.
Read More about PPF: https://www.taxwink.com/blog/public-provident-fund-scheme
4. National Pension Scheme (NPS):
National Pension Scheme (NPS) is specifically designed to provide social security to individuals post-retirement. Any person can subscribe to NPS scheme and make a regular contribution to the NPS account during his/her working life. The amount contributed by NPS accountholder is invested in various schemes including equity market. After retirement, you can avail the benefit of regular annuity against the amount invested and return accrued. Here also, the NPS accountholder is eligible for deduction under section 80C for an amount up to Rs. 1,50,000 every year.
5. Equity Linked Savings Scheme (ELSS): ELSS is a kind of mutual fund scheme which invests majorly in equity or equity related instruments. ELSS is also a tax saving instrument as section 80C of the Income Tax Act allows a deduction for investment made in ELSS up to Rs. 1,50,000 every year.
ELSS has a lock-in-period of 3 years and the profits generated on redemption of ELSS after 3 years is subject to long-term capital gain tax at the rate of 10% in case the long-term capital gain is in excess of Rs. 1 lakh. However, the returns from ELSS are subject to market risk.
Conclusion: The choice of investment is primarily dependant on the risk appetite of the investor. Higher the risk, higher the return. If you are ready to take risk, you can opt for ELSS otherwise you may choose out of the remaining 4 options based on their rate of returns, lock-in-period etc.
Related Articles:
NPS vs PPF- Which is a better Investment Option
PPF Account for Minors: Eligibility, Documents required and Taxation
Income Tax on FD Interest Income- Everything you should know about
Disclaimer: The above article is meant for educational purposes only. Taxwink is not responsible for any loss or damage caused to any person from use of the information contained in this article. Readers (Investors) are requested to make their own decision while making any investment in equity/ debt market or in Government securities after making a proper analysis of risk and returns associated with them.
