Paying your taxes is an essential component of being a responsible citizen, in addition to there being a number of legal and financial consequences to not paying your taxes. However, the government also recognises that citizens should also have the choice to spend their money in other places, either for necessary expenses or in investments and funds for retirement. Arguably, these are more useful in building a strong economy, than simply giving the government money to allocate where it wishes to do so. As a result, tax laws have been developed to incorporate several tax-saving components to ensure that while you are doing your duty as a responsible citizen and paying your taxes, you are also able to make savings where possible, and spend money to fuel the economy. In this article, we will break down the most beneficial tax-saving instruments for you, some that are well known and some being the first you’ve heard about, such as tax-saving instruments other than 80c.
Top Five tax-saving instruments
The way tax-saving components work, they allow you to claim deductions on certain payments you make, rendering them exempt from any taxation banner. There are a number of reasons one can seek such exemptions, from it contributing to the betterment of society, to it being in the interest of the population. Let’s take a look at the top five most beneficial tax-saving instruments.
A public provident fund
A public provident fund, or PPF, is an investment and saving opportunity offered to citizens, and is backed by the government of India. Let’s have a look at how a PPF works.
As part of a public provident fund, those who are earning income can invest a part of their earnings, limited to 1.5 lakhs per annum in the fund. Being one of the most beneficial tax-saving instruments, public provident funds offer attractive interest rates. Additionally, what grants PPFs their tax-saving components is the fact that interest earned on the amount in a PPF is exempt from tax and cannot be charged. The one caveat, however, is that a public provident fund has a lock-in period of 15 years. This means that any amount invested in a PPF is only accessible after a limited period of 15 years. This might contradict the liquidity requirements for some investors. On the flip side, however, given the attractive interest rates and tax exemptions offered by these tax instruments, investors are allowed to extend their PPF for an additional duration of time.
Health insurance as a tax-saving component that is one of the tax-saving instruments other than 80C, and adopts a two birds with one stone approach. For one, health insurance is a beneficial investment to make in order to protect yourself against the financial costs that may crop up in the case of illness or medical emergency. However, the tax-saving component here is that the premium payments you make on your health insurance plan are exempt from tax. This means that you can save on tax charges whilst also securing yourself medical costs and funds. While this might not be one of the most beneficial tax-saving instruments, as premium payments are limited ( in fact, we seek the lowest possible premium rates based on the requirements we have) and cannot seek to attain significant returns here, it serves its purpose as a tax-saving instrument.
FDs to Save Tax
Tax-saving FDs function like any other fixed deposit would. You lock in a certain sum of money for a certain period of time. The interest this amount gathers is returned to you with the initial sum after the term has concluded. These FDs however, as the name implies, have tax-saving components They offer tax benefits under section 80C of the income tax act, and individuals can claim up to 1.5 lakhs in tax benefits per annum. Additionally, interest earned can be reinvested but is also subject to TDS charges.
Infrastructure bonds are offered by companies under the infrastructure sector of the country and are backed by the Indian government, making them a relatively safer investment that has tax-saving components. Similar to using health insurance for its tax-saving components, infrastructure bonds also offer relatively modest benefits. However, this functions as the cost of the increased stability of them being government-backed. As a result, only investments of up to 20,000 are allowed, and income tax benefits can be claimed under section 80C. This tax-saving instrument, however, is more suited for those who are on a fixed income salary.
Equity Linked Saving Schemes (ELSS)
Equity-linked saving schemes, or ELSS, is another tax-saving instrument offered under section 80c of the IT act. These are offered by mutual funds and are one of the most beneficial tax-saving instruments for those looking to make short term investments and tax-savings since the lock-in period is a relatively low three years. The tax-saving components of this instrument offer relatively higher tax-saving opportunities, as one can claim up to 1.5 lakhs per annum in benefits.
Paying taxes is mandatory for all citizens that fall under any given tax banner, and is generally the right thing to do as a responsible citizen. However, as an investor, you are always looking for investment opportunities that might allow you to maximise returns. Given that tax benefits are also part of returns you earn, there are a number of tax-saving instruments other than 80C as well as a plethora of options offered by the act that you can employ to get tax benefits on your taxes. In some cases, usual investments you would make also have tax-saving components that you can employ, such as the tax-exempt premium payments for health insurance, or the various saving schemes and funds on offer. One might benefit from conducting further research on the various tax-saving instruments available in order to maximise their savings.