Every person who is earning any kind of income is liable to pay income tax. However, the taxpayer tries every possible way to pay less tax which sometimes leads to tax evasion i.e. saving tax via illegal ways which are not intended by the law. But when the taxpayer tries to plan or manage his transactions in such a way that it does not contravene the provisions of the Income-tax Act, 1961 then it takes the form of tax planning which is considered as the right of every taxpayer.
This tax planning can be done by virtue of investing in such ventures/funds etc. where any deduction or exemption is provided under the law. As per the Income-tax Act, 1961 various deductions and exemptions are provided so that tax obligation on the taxpayer can be reduced by claiming those deductions or exemptions by fulfilling all the conditions required.
There are few best tax saving instruments or ways which are commonly known or should be known to every taxpayer in order to reduce his tax liability and save more from his hard-earned money. The best tax saving options are discussed below:
Equity Linked Saving Scheme Funds:
Equity-linked saving scheme funds have high growth potential with 3-year lock-in period. Some growth potential has been taken away by the introduction of 10% of tax on LTCG beyond Rs. 1 Lac. However, still, it is considered as the best way to save tax. According to associated risks, it can be divided into 3 categories:
Turbocharged: These funds are both very risky and very rewarding with small caps account for over 10% of their portfolios.
Moderately aggressive: These funds expect good growth but only in case of calculated risks. Here, more than 25% of their corpus is in between mid and small-cap stocks.
Stable growth: These funds are less volatile and have more than 75% of the corpus in large-cap stocks.
National Pension Scheme:
Investment in the National Pension scheme with a view to save for their retirement is eligible as a deduction under Chapter VI A of the Income-tax Act, 1961. Also, the periodic returns & entire withdrawal of 60% of corps are made 100% tax-free. NPS can generate high returns in the long term while higher exposure to equities.
The benefit of NPS can be claimed in 3 ways. One, u/s 80C up to Rs. 1,50,000. Two, u/s 80CCD(!b) up to Rs. 50,000. Three, no tax if 10% of the basic salary of contributed towards NPS.
Public Provident Fund:
Tax on Public profit fund can be saved by claiming deduction u/s 80C. However, the minimum amount of contribution must be Rs. 500 up to maximum of Rs. 1,50,000. The lock-in period for PPF is 15 years. Also, the interest earned on this small savings scheme is exempt.
This investment is highly secured and flexible. This investment in PPF is generally offered by PSU banks or post office branches & by only some private banks. It is advisable that one should before selecting the bank, must check various other facilities like online excess to PPF account.
Senior citizen’s saving scheme:
SCSS is a tax saving venture only for senior citizen above the age of 60 years whereas in case of voluntary retirement this minimum age of 60 years has been reduced to 58 years. With the introduction of additional deduction on account of tax income earned of amount Rs. 50,000 made the total benefit jump to Rs. 3.5 Lac to senior citizen above the age of 60 years & benefit of Rs. 5.5 Lac to senior citizen above the age of 80 years.
Sukanya Samriddhi Yojana:
Another emerging mode of saving tax is deposit the minimum amount of Rs. 250 in account opened in designated bank or any post office. The advantage of this option is that it offers higher rate of interest than PPF. However, the maximum amount of investment is combined Rs. 1.5 Lac for maximum of 2 girl child of below 10 years off age.
United Linked Insurance Plan Scheme:
Unit linked insurance plans are the long term market-linked plans that offers benefits of both investment and protection. It provides the opportunity of growth with the benefit of tax deduction as well. Income from UILPS is 100% tax-free irrespective of short term or long term gains. Hence, it has an advantage over mutual funds.
Now adays to compete with the cost structure of mutual funds, the cost structure of UILPS is rationalized to make it less costly, this is likely to attract more investors.
National Saving Certificates:
Interest income from a National saving certificate is allowed as deduction u/s 80C. This investment is marginally better than fixed deposits. The minimum amount of investment prescribed is Rs. 100. So, the taxpayers falling within the tax bracket of 5% can take benefit of these investments. Now, NSCs can be availed only from banks.
The option of investment in FDs is considered a last-minute tax planning option but considered a highly secured form of investment due to the fixed rate of interest irrespective of market conditions. Although, FDs do not offer high-interest rates they offer a convenient online facility to keep the check and for the purpose of furnishing proofs. However, the banks charge a high price for this online facility. The interest gained deposits attract the benefit of tax saving for that year.
Life insurance is considered as a good tax saving option as the premium paid can be claimed as deduction u/s 80C of the Act.
In the case of health, insurance deduction can be claimed to the extent of Rs. 25,000. In case insurance of persons above the age of 60 years, the amount of deduction can now be claimed to the extent of Rs. 50,000 (by Budget 2018) which was earlier is Rs.30,000.
However, life insurance policies are critical because a pure protection term plan can serve a better purpose due to cost effectiveness. Also, when the parents buy policies for their children they pay the first premium amount and the rest of the obligations are to be met by children making very difficult as meager returns of 4-5%. So, various other options are available as they sometimes are not able to fully cover the needs of the insured in the required situations.
Another tax-saving option only for the first time home buyers is in the form of home loans taken by them. They can claim deduction on principal amount paid as well as interest paid under the income tax Act, 1961.
To Conclude, it can be said that the tax-free investment & expenditures allowed in Chapter VI-A forms the basis of tax planning. However, it is upon the taxpayer to choose which is best tax saving way/investment suitable to him/her as per by taking into consideration the risk associated, time duration, returns, amount of deduction or exemption allowed, etc.
Legal Suvidha is a team of Expert Professionals including Chartered Accountant, Company Secretary, Cost Accountants and Advocates who can assist you in your Tax planning and Income Tax Return Filing, so you can contact us at firstname.lastname@example.org or call us at 9599937963 or 8130645164. visit www.legalsuvidha.com
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