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Investment Plans 101 views November 18, 2020
Tax saving is a crucial aspect of an individual’s financial planning. If not done properly, an individual may end up paying a huge chunk of their hard-earned money towards taxes. Sometimes people make costly mistakes while completing the tax-saving exercises before the end of the financial year. It happens mostly due to their lack of knowledge. That’s why it is important to understand the best investment options for Tax Savings in the current financial year of 2020-21. Let us tell you first what makes a good investment option? There are a few factors that determine if they are good enough for you to invest.
Freedom to invest & withdraw anytime, flexibility to invest any amount, safety, and flexible investment period are some of these factors. These factors can vary from one individual to another based on their investment goals. Of all, the most crucial factor is the tax benefits these investments provide. A well-planned investment strategy can help people not only in tax savings but also in achieving their financial goals. So, what are these investment options for tax savings that you can choose? Well, some of them are Life Insurance, Health Insurance, Fixed Deposit (FDs), National Savings Certificate, Pension Plans, Tax-savings mutual funds.
In this article, we will be discussing how these investment options can help you save taxes under different sections of the Income Tax Act, 1961. Keep reading to know more!
Table of Contents
As we said earlier, there are a few investment options for Tax Savings such as Life Insurance, Health Insurance, Fixed Deposits (FDs), etc. You must want to know how much tax amount you can save from these options under different sections of the Income Tax Act, 1961. Well, don’t worry, as we will be telling each of these investment options in detail. Have a look!
The first option among the best investment options for Tax Savings is the Life Insurance Policy. Since we are living in a world full of uncertainties, a Life Insurance Policy can be a suitable option to cover you and your family. But do you know other than providing financial aid to your family in case something unfortunate happens to you, it also offers several tax benefits to you? No! Well, with an investment in Life Insurance Policy, individuals can enjoy tax benefits under Section 80C, Section 10(10D), and Section 80D.
These tax benefits are available not only on the premium paid by you towards the life insurance policy but also on the maturity amount (sum assured or coverage). Under Section 80C, individuals can enjoy tax benefits on paying the premium of life insurance plans for themselves, their spouse, or their dependent children.
For Policy issued before March 31, 2012, the tax deduction under this section will be available if the total paid premium is not above 10% of the sum assured. On the other hand, for the plans issued on or after April 1, 2012, it should not exceed 20% of the sum assured. Also, you need to remember that you will not receive any tax benefits under Section 10 (10D) if the Total Premiums Paid during the overall policy period are more than 20% of the Sum Assured received. Under Section 80D, individuals can also get tax benefits on the premium paid towards policies that provide additional rides such as Hospital Care Rider, Critical Illness Rider, Surgical Care Rider, etc.
Other than Life Insurance, people have started to realize the importance of having Health Insurance for them and their families. The reason: Health Emergencies can come from anywhere, and hospital bills in today’s times can ruin the financial life of an individual. A Health Insurance Plan covers you in case a health emergency happens. But what makes it one of the best investment options for tax savings?
Well, to encourage the adoption of Health insurance among the masses, the government also provides tax benefits on the premium paid towards a policy under Section 80D of the Income Tax Act. This tax deduction is available on the health insurance for self, spouse, and children. Remember, you can only get tax benefits if you are paying the premium by any means other than cash. The best thing about these deductions under Section 80D is that they can be claimed by both individuals as well as Hindu Undivided Families (HUFs).
Tax deductions that individuals can get under Section 80D can be one among four amounts of up to INR 25,000, INR 50,000, INR 75,000, and INR 1 lakh, depending on different scenarios. For example, up to INR 1 lakh tax deduction is available only if the eldest member in your family (yourself, spouse, or dependent children) is above 60 years of age and your parents are also above 60 years. Other than this, individuals can also enjoy tax benefits up to INR 5,000 on the preventive health check-up within the pre-decided limits and not above the individual limits.
Fixed Deposits are one of the most popular and safest investment avenues for people to park their hard-earned money and get stable returns over time. But do you know that it can also be one of the best investment options for tax saving purposes in the financial year 2020-21? Several banks and NBFCs provide the tax-saver Fixed Deposits with which individuals can fulfill their tax-saving purposes along with getting low-risk returns over time.
Under Section 80C of the Income Tax Act, by investing in any of the Tax Saving FDs, you can claim deductions of up to INR 1,50,000 in a financial year. The invested amount in these FDs will be deducted from the gross total income to get to your Net Taxable Income. However, there is an important thing you need to remember about Tax Saving FDs – The Lock-in period of these deposits is 5 years, which means you cannot withdraw the amount before this period. Interest rates on these FDs generally range from 5.50% to 7.75% per annum. So, you can see it as a safe and effective tax saving option for you in FY 2020-21.
When we talk about investment options for Tax Savings, the National Savings Certificate (NSC) is also one of the popular ones among customers. An NSC is nothing but a fixed income investment scheme that you can open with the Post Office. Suitable for people with low to mid-income levels, this certificate provides the option to invest alongside giving the tax benefits. You can open an NSC for 5 years after which you can get the maturity amount. So, what are the tax benefits that individuals can get with this investment option?
Well, investments in National Savings Certificates up to INR 1,50,000 are eligible for tax deductions under Section 80C. The best thing about this investment is from the second year of your investment where you can also claim a tax deduction on the interest earned on your investment amount. The reason being the interest earned is added to the original investment amount and compounded on an annual basis.
In the past few years, Mutual Funds have also emerged as one of the popular investment options for customers. But for an individual who wants to invest in mutual funds and enjoy tax benefits too, what can be a suitable option? Well, that’s where ELSS funds can help you! Also known as tax-saving mutual funds, Equity-linked Savings schemes (ELSS) is a type of equity fund that invests a majority in equities and equity-related instruments. But why are they known as tax-saving mutual funds? The answer is these mutual funds help individuals avail tax benefits up to INR 1,50,000 under Section 80C.
These schemes have a lock-in period of three years. But you can choose to keep your investment after this lock-in period. So, the income an individual earns with an ELSS scheme will be considered as a Long-term Capital Gain (LTCG) and will be taxed at 10% if the total income is above INR 1 lakh. Incomes under INR 1 lakh will not be exempt from LTCG tax. This is why it is considered to be one of the best investment options for Tax Savings.
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