Income Tax Saving Investment Options & Tips

Paying income tax on your income/salary is an annual affair, yet most people find it challenging. We will highlight few tips and options through this article for effective tax planning.

The secret to effective tax planning is always, 'Plan in Advance'. Smart individuals do tax forecasting in advance thus avoiding last minute rush. This also gives them time to choose prudent investment avenues which not only amplifies their savings but also reduces risk and tax liability.

Every individual pays taxes as per the income tax slab one falls under. Based on your annual income, the tax payers are categorized into various income tax slabs. Thus depending on the slab, you either have an option to claim your paid finances annually (Loan Instalments, House Rent Allowance, Leave Travel Allowance, etc.), buy an insurance policy for you/your family (Sec 80D) or invest in long term saving instruments like Equity Linked Saving Scheme (ELSS), Public Provident Fund (PPF), Life Insurance policies or Fixed Deposits (FDs) under Sec 80C of the Income Tax Act, 1961. Remember, no investment decision should be made on tax saving alone, but should be made on investment's credibility to fulfil your future goals and aspirations within the stipulated time frame.

One of the most lucrative section of the Income tax Act, 1961 is Sec 80C. The most obvious reason for making 80C investments is Tax Savings. You can claim up to Rs. 1.5 Lakh deduction from your gross taxable income by investing an equivalent amount in ELSS or other eligible 80C investment options.

Life Insurance –

This investment avenue is a wise option since it offers dual benefits – covers the risk of your life and the premium paid for regular life insurance policies qualifies for tax deduction under Sec 80C upto the extent of 10% of the sum assured.

Public Provident Fund (PPF) –

Contributions made towards PPF offers tax benefits of upto Rs 1.5 Lakh under Sec 80C. The interest earned and received during the time of maturity is tax free. Though impressive, a lock-in of 15 years; where once a year withdrawal, from the 7th year onwards with certain conditions makes it less favorable for investors with shorter time horizon.

Fixed Deposit for 5 Years –

Deposits in these are exempt from taxation up to Rs 1.5 lakh, underSection 80C of the Income Tax Act, 1961. However, minimum lock-in in these fixed deposits are for 5 years for income tax planning.

Equity Linked Savings Scheme (ELSS) –

ELSS in mutual fund is one of the most preferred income tax saving options in India for two major reasons - (i) its equity based and (ii) It has the shortest lock-in period comparatively. Being market linked, ELSS are high on risk parameter however; they have the potential to offer better returns.

An important income tax saving tip is, investments in ELSS can be made in small proportions through SIP instead of paying a lump sum.

In addition, capital gains of up to Rs 1 Lakh inELSS mutual funds  are tax exempt, however, gains in excess of Rs 1 Lakh will be taxed at 10% (plus cess). Similarly, dividend distribution tax will be borne by investors who have opted for dividend payout option in ELSS.

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