Tax planning is necessary because it changes your experience of paying tax. Where you would have to simply find out the amount of tax payable and make the payment, tax planning helps you knowing the different types of ITR and smartly minimizing the income tax payable. This means that you end up with more money in your hands. This money can be used to invest in profitable avenues for financial security today and in the future.
Many taxpayers are fully aware of this. Hence, near the end of each financial year, there is a rush to find new and effective ways to save tax. This search primarily involves finding investment options that would be great tax saving options as well. But, to know which investment options to look for, you need to know the various tax benefits that financial instruments can offer.
Tax planning through investment
Tax planning and tax saving can be done by investing your money into the right investment opportunities. More precisely, you have invested it in opportunities that the government grants tax benefits for. Since, tax deductions can only be granted by the government, it is important that every investment opportunity you look into has provision in the Income Tax Act, 1961. Here are the various investment opportunities that the government offers tax provisions under:
- Life insurance
Life insurance is one of the most preferred types of tax saving opportunities. However, most people look at it as simply a safety net to be used in the case of an unfortunate event. But the ones that have a better financial knowledge know how much of a tax saving tool life insurance can be. It qualifies you for a tax deduction under the Section 80C of the Income Tax Act.
In addition to the tax deduction, premiums for life insurance are also very affordable. This means it is one of the most cost-effective tools you can have for financial security. The tax deduction in life insurance depends on the amount of life insurance you get. The amount of life insurance, in turn, depends on a host of factors like income, expenses, liabilities, financial goals etc. Nearly all life insurance products offer tax benefits. However, if you want to get higher coverage and in turn get higher tax benefits, you should go for term insurance.
- Equity Linked Savings Schemes (ELSS)
First thing you should know about ELSS funds is that they are a type of mutual fund. However, what is unique about them is that they are the only mutual fund type that come under the scope of Section 80C of the Income Tax act. ELSS funds make you eligible for a tax deduction up to a maximum of ₹ 1,50,000 per financial year.
Before the year 2018, the returns that you would earn after you invest in ELSS funds would be tax-free. However, the 2018 budget by the government added a stipulation to the gains you make off of ELSS tax saving mutual funds. As per these changes, any long-term capital gains you may have above the limit of ₹ 1,00,000 will be taxed at a percentage of 10%. This means earnings made from ELSS funds do not work on an income tax slab. However, even with the 10% tax payable, you would still have enough returns left with you.
- Fixed deposits
The idea of a fixed deposit is that invest a lump sum amount with a bank or other financial institution. This lump sum amount then earns you profits in the form of interests. While you are earning profit from it, the principal investment that you made remains the same.
A tax saving fixed deposit comes under the Income Tax Act’s Section 80C. Under it, the amount you invest can earn you tax deduction. How much of a deduction you get depends on the amount of money you invest in the FD. However, you can only get a maximum of ₹ 1,50,000 in tax deduction each financial year.
Tax is a mandatory and important contribution you have to make as a citizen of the country. But paying large amounts as tax can have a bad effect on your finances. Hence, picking the right investment plan to invest and save tax in the process is the best way you have to contribute and save money at the same time.
