The income tax system in India provides several avenues for individual taxpayers to save on
taxes. By investing in specific long-term schemes or making necessary family-related expenses,
you can reduce your taxable income.
Starting from the financial year 2020-21, individual taxpayers have the option to choose
between two tax regimes: the existing (old) tax regime and the new concessional regime.
These regimes differ in the tax rates applicable to each tax slab. Under the old tax regime, tax-saving investments reduce your taxable income.
However, these investments also help build long-term wealth.
Therefore, most tax-saving investments are beneficial for both your present and future
financial well-being.
Let’s delve into how business people and salaried employees can save taxes.
Section 80C is a widely used provision in the Indian Income Tax Act of 1961 for saving income
tax. This section offers a variety of investment options that can help you save tax, with some
investments even offering tax-free returns in the future.
In addition to investments, certain important family expenses also qualify for deductions under
Section 80C. You can also claim deductions for emergency medical expenses under other
sections such as 80D, 80DD, etc.
Here are the most popular investments under section 80C for tax saving:
a) Equity Linked Savings Scheme
Equity-Linked Savings Scheme or ELSS is a pure equity mutual fund with allocation to specified
equity stocks. Being a pure equity mutual fund, ELSS holds 90-95% of their assets in equity
stocks. The scheme also has a lock-in period of three years, which is among the lowest for a
tax-saving investment.
However, the recommended holding period for your ELSS investments should be 5 to 10 years.
SIP into ELSS has to be planned with a margin of at least 3 years. This is because every SIP
into the scheme will face a 3-year lock-in.
b) Senior Citizen Savings Scheme
The Senior Citizen Savings Scheme (SCSS) is a government-backed savings option for senior
citizens in India, offering quarterly interest payments. Individuals can invest up to Rs 15 lakhs in
a single account.
This scheme provides a higher rate of return compared to other deposits with a similar maturity
period of five years. While there is no lock-in period, early withdrawals are subject to a penalty.
Additionally, account holders can extend the account for another three years after maturity.
As of April 1, 2020, the interest rate for the Senior Citizen Savings Scheme is 7.4% per annum.
Importantly, interest earned on these deposits is not subject to TDS charges.
c) National Pension System
The National Pension System of NPS is a modern retirement investment option open to all
Indian residents. NPS allows you to invest in market portfolios of fixed income corporate,
government securities and equity stocks.
The tax-saving scheme allows you to invest in a mix of funds as per your risk appetite. You can
invest up to 75% in equity funds, depending on your age.
Alternatively, you can invest in an automated mode where your asset allocation will
automatically change as per your age.
Withdrawals from the account are available after you reach 60 years of age. You can withdraw
up to 60% of the total corpus tax-free. The remaining 40% must be invested in a pension fund.
d) Life insurance premiums:
Life insurance premiums are eligible for tax savings under section 80C of the Income Tax Act.
This includes various types of life insurance policies such as term life insurance, endowment
plans, and money-back policies.
It’s important to note that the total investment in a life insurance policy in a financial year should
not exceed 10% of the base death benefit amount to qualify for tax benefits.
Here are some common tax-saving strategies that individuals and businesses can consider:
- Contribute to Retirement Accounts: Contributions to retirement accounts like 401(k)s,
IRAs, and SEP-IRAs can reduce taxable income. - Utilize Health Savings Accounts (HSAs): Contributions to HSAs are tax-deductible, and
withdrawals for qualified medical expenses are tax-free. - Take Advantage of Flexible Spending Accounts (FSAs): Contributions to FSAs are made
with pre-tax dollars, reducing taxable income. - Itemize Deductions: Consider itemizing deductions instead of taking the standard deduction
if you have significant deductible expenses like mortgage interest, state and local taxes, or
charitable contributions. - Harvest Tax Losses: Sell investments that are at a loss to offset capital gains and potentially
reduce taxable income. - Maximize Tax Credits: Take advantage of tax credits like the Earned Income Tax Credit
(EITC), Child Tax Credit, and education credits to reduce tax liability. - Invest in Tax-Efficient Funds: Consider investing in mutual funds or ETFs that are
tax-efficient to minimize capital gains taxes. - Contribute to a 529 Plan: Contributions to a 529 plan for education expenses are typically
tax-deductible at the state level, and withdrawals for qualified education expenses are tax-free. - Donate to Charity: Charitable donations are tax-deductible, so consider donating to qualified
charities to reduce taxable income. - Utilize Business Deductions: For businesses, consider maximizing deductions for
expenses such as business-related travel, equipment purchases, and home office expenses.
It’s important to note that tax laws are complex and can vary based on individual circumstances.
Consult with a tax professional to determine the best tax-saving strategies for your situation.
