If you have been procrastinating on your tax planning, there is no more time to defer it. If you do not plan now, you may have to pay a lot of taxes. However, because of the delay, you may not receive the maximum tax benefits due to notional loss. Nonetheless, planning now will still control some of the damage.
You may choose from several tax-saving instruments. However, before investing you must consider certain factors such as your age, dependents, risk appetite, liabilities, and returns expectations.
Every investment must be linked to a certain financial goal to maximize its efficiency. Furthermore, you must distribute your investments among different asset classes to ensure not only tax savings but also achieve portfolio diversification.
Here are some instruments you may use to reduce your tax liability before the financial year ends.
Table of Contents
Debt-related investments
- Public Provident Fund (PPF)-An amount of up to INR 1.5 lakh may be invested in PPF to claim tax deductions according to section 80C of the Income Tax Act, 1961. The interest rate is determined by the government each year. PPF comes with a lock-in period of 15 years.
- National Pension System (NPS)-NPS provides tax benefits of INR 1.5 lakh as per section 80C of the Income Tax Act. An additional INR 50000 is eligible for deductions under section 80CCD (1b). You must contribute to your NPS account until you reach the retirement age. On maturity, some portion of the corpus may be withdrawn while the balance is converted to a pension plan.
- Other debt products-National Savings Certificate (NSC) and tax-savings fixed deposits (FDs) also offer tax benefits of up to INR 1.5 lakh as per section 80C. NSC tax rates are benchmarked to government bonds with the same maturity. Tax-saving FDs have a lock-in period of five years.
Equity-related investments
Do you know how to save tax with tax saver funds? If not continue reading.
- Unit-Linked Insurance Plans (ULIPs)-These types of insurance policies offer life coverage as well as investment benefits. Some portion of your premium is invested in different asset classes such as equities to offer growth benefits. The premium is eligible for tax deductions as per section 80C of the Income Tax Act. Furthermore, the maturity benefits are also tax-free.
- Equity-Linked Savings Scheme (ELSS)-Do you want to know how to save tax with ELSS? ELSS funds fall under the EEE (Exempt, exempt, exempt) category. This means that you may claim maximum tax benefits of INR 1.5 lakh invested in ELSS as per section 80C of the Income Tax Act. In addition, the dividends earned on your investment along with the maturity proceeds are tax-free. A majority of the corpus of ELSS funds is invested in equities, which provides you with the opportunity to earn potentially higher returns.
When you research abouthow to save tax with ELSS, consider the lock-in period. All your investments must be invested for at least three years to make these eligible for tax benefits. If you invest in ELSS through a Systematic Investment Plan (SIP), each installment is considered as a fresh investment. Therefore, every SIP installment must adhere to the lock-in period.
Other options
In addition to investing, there are other ways to reduce your tax liability. Here are three such options.
- Home loan-The principal repaid for up to INR 1.5 lakh on your home loan is eligible for deduction as per section 80C of the Income Tax Act. Furthermore, interest up to INR 2 lakh may be claimed as a tax deduction under section 24 of the Income Tax Act.
- Insurance premium-Life and health insurance premium paid to cover self, spouse, and children is eligible for tax benefits. The tax benefits for life insurance are available as per section 80C and for health insurance fall under section 80D of the Income Tax Act.
- Education loan-If you avail of an education loan for self, spouse, or children, you receive tax benefits under section 80E for the interest paid. There is no limit on the claim and the entire interest is eligible for deduction.
Although there are several ways in which you may reduce your tax liability, it is important to take action now. Most people know how to save tax with tax saver funds like ELSS but are unaware of the other available options. Do not limit yourself to ELSS and choose other options to make your money work for you.
Choosing the right products for investment is a difficult task. The ARQ investment engine, an integral highlight of Angel Wealth’s mobile application, makes the investment process quite simple for you. It considers a billion data points to provide customized recommendations that match your investment goals and risk profile.
What differentiates ARQ from others is that all recommendations are machine-oriented with no human interference.Download the Angel Wealth mobile app today and reduce your tax liability with the help of the technology-driven ARQ investment engine.
