If you were born in human form and are blessed with an income that puts you into a higher tax bracket, chances are you dread the taxman's annual knock on your door. So do millions of others.
While most of us grew up memorising Shakespeare, theorems and ancient history, no one really bothered to educate us about how to manage our hard-earned money. That part, we have to figure out ourselves. Even today, a surprisingly large number of people don't know how the income tax drill works. Therefore, we let the money lie idle in the account, or just leave everything to investment advisors who, well-meaning though they may be, might not fully comprehend our unique goals and aspirations.
Tax planning should be something that takes into account your individual earning and saving potential, responsibilities, priorities, and future plans. The instrument(s) you choose should give you good returns while keeping your principal safe, and you shouldn't have to wait too long to get it back. The good news is that there are several instruments to choose from, depending on your risk appetite and financial wellness goals. We've covered most of them in this easy guide that will help you save tax like a champ.
EPF and PPF – Salaried people can choose to increase their Employee Provident Fund (EPF) contribution beyond what's mandatorily deducted by their employer. There is also the option of the Public Provident Fund (PPF), which salaried and non-salaried people can avail of. Since both of these come under Section 80C of the Income Tax Act, you are currently allowed tax relief of up to Rs.1.5 lakh through them. There is one thing to remember with PPF, though: the maturity period is 15 years.
Insurance – Life insurance, health insurance, and Unit-Linked Insurance Policies can all help you save tax, as long as they are from approved providers. With life policies, the premium needs to be under 10% of the sum assured. Since life and ULIP policies fall under 80C, you get a maximum deduction of Rs.1.5 lakh. However, tax deduction through health insurance is under Section 80D, and you can avail a maximum relief of Rs.60,000 per annum (for self + family + parents) over and above 80C.
National Pension System – NPS is a retirement planning tool with partial exposure to equities (up to 50%), that allows full 80C deduction, plus an additional Rs.50,000 under 80CCD(1B). However, the NPS corpus is taxable when you retire, and 40% of the corpus has to be compulsorily invested in an annuity.
National Savings Certificates – Like the PPF, NSCs invest in government securities and are considered highly safe. NSCs can be bought for a period of either 5 or 10 years, and the premium and interest are tax-free. There is no upper investment limit for NSCs, only a tax deduction ceiling of Rs.1.5 lakh.
Miscellaneous – Under different sections of the IT Act, you can save tax by investing in certain bank fixed deposits (with tenure of 5 years), pension funds, Sukanya Samriddhi, Senior Citizens Savings Scheme, charitable donations and more. Each instrument comes with its own limits, terms and conditions, so do read up and ensure you're not missing out.
Equity Linked Saving Schemes – But we've saved the best for last. Equity Linked Savings Schemes offered by mutual funds invest at least 65% of the premium amount in stocks. Despite a lock-in period of only 3 years (the lowest of all instruments), they are completely tax free on maturity. ELSS schemes are hailed by experts for their ability to generate significantly more returns than the other instruments covered so far (whose returns would typically be in the 7-9% range). ELSS schemes don't offer guaranteed returns, but tax experts widely recommend that they be a part of any portfolio, both for their tax benefits and wealth-creation potential.
Taxes, as the idiom goes, are one of only two things that are certain in life. Most of us prefer not to unnecessarily fork over our hard-earned money to the taxman. However, wading through heavy financial jargon and stock market literature can be a taxing experience in itself. So switch to a good ELSS like Birla SunLife Tax Relief 96, and watch how saving tax becomes #NotSoTaxing