India has two types of tax structure – direct taxes and indirect taxes. While indirect taxes are collected through various products and services, direct taxes are charged on the taxable income of the eligible taxpayers. Taxes are essential for the progress of any state but tax-payers have the option of investing in tax-saving schemes to reduce their tax outgo. These tax savings provide a dual benefit i.e. tax-saving and building an investment portfolio.
As we approach the fag end of this Financial year (2020-21), we bring to you 10 tax savings schemes that you could consider if you haven’t done your investments yet.
Best tax saving options for FY 2020-21
Public Provident Funds
Public Provident Funds are a very traditional investment tool for the taxpayers where the taxpayer can get a deduction of up to Rs. 1,50,000 under section 80C of the Income Tax Act, 1961. PPF is a completely tax-free saving scheme where the contribution made, the interest earned and the proceeds received at the time of maturity are all exempt from taxation. The rate of interest is fixed by the Central Government every quarter. The current rate of interest of PPF is 7.10% per annum. Investment in PPF has a lock-in period of 15 years which can be extended for blocks of 5 years each upon application for the same. The investor is allowed one withdrawal from the PPF account each year only after completion of 7 years from the date of the initial investment.
National Savings Certificate
National Savings Certificate is another government-backed low-risk tax-saving scheme for the tenure of 5 years. This scheme is also eligible to be deductible under section 80C of the Income Tax Act. The minimum investment to be made in this scheme is Rs.1,000 and investments can be made in multiples of Rs.100. There is no limit to the maximum amount of investment that can be made by an investor in NSC. The current interest rate for NSC is 6.8% per annum and is compounded annually but will be paid at the time of maturity.
ULIPs are Unit Linked Insurance Plans that are eligible for deduction under section 80C up to Rs.1,50,000 per financial year. ULIPs have a minimum lock-in period of 5 years but the investor should stay invested for the entire term of the policy to get better benefits. ULIPs provide for a portion of the investment made to be transferred towards life insurance and the balance to be transferred to an equity-based or debt-based fund or a fund that is a combination of the two. The investor can also get an exemption of the returns of this scheme under section 10(10D) of the Income Tax Act.
Equity Linked Savings Scheme
ELSS are Equity Linked Savings Schemes that are tax saving mutual funds where investment up to Rs.1,50,000 is eligible for deduction under section 80C of the Income Tax Act. These funds have a lock-in period of 3 years (lowest among all tax-saving financial instruments) and are subject to capital gains tax at the rate of 10% if the gains exceed Rs. 1,00,000 in a financial year. These investments are ideal for high-risk appetite taxpayers that can stay invested in the fund for the long term.
Insurance is another tax saving scheme that allows the investor to gain the benefit of life cover along with tax benefit under section 80C of the Income-tax Act for the premiums paid. The investor can also get the benefit of tax exemption of the insurance proceeds under section 10(10D) of the Income Tax Act provided they meet the necessary conditions in this regard.
Bank Fixed Deposits
Banks have been traditionally providing the facility of fixed deposits or security deposits that earn higher interest as compared to the savings account of the bank. Tax saving bank FDs have a minimum lock-in period of 5 years. These deposits are eligible for tax deductions under section 80C of the Income Tax Act. Private sector banks usually provide higher interest rates for FDs as compared to public sector banks. Premature withdrawals are not usually allowed except under special circumstances as per the guidelines of the bank.
Senior Citizen Savings Scheme
This is a special tax savings scheme that is designed for the senior citizens of the country i,e., individuals over 60 years. The minimum lock-in period for this scheme is 5 years and the interest is payable every quarter. the minimum amount of investment under this scheme is Rs.1,000 and the maximum amount is Rs.15,00,000 (in case of joint investment) and Rs.9,00,000 (in case of single holding). The current interest rate of this scheme for the financial year 2020-21 is 7.4% per annum. Investors can get deductions up to Rs. 1,50,000 under section 80C of Income Tax Act. The scheme gives the benefit of premature withdrawals in case of emergencies.
Sukanya Samriddhi Yojana
Sukanya Samriddhi Yojana is a small deposit scheme targeted at benefitting girl children. It is part of the ‘Beti Bachao Beti Padhao’ campaign of the Central Government. The scheme provides deduction up to Rs. 1,50,000 under section 80C of the IT Act. An investor can open an account under the scheme when the girl child is born till the time she turns 10 and the account can remain operative till the girl child reaches 21 years of age. The initial investment under this scheme is Rs. 250 and the maximum investment per financial year is Rs. 1,50,000. The scheme is eligible for a maximum of 2 girl children from each family.
National Pension Scheme provides tax exemption up to Rs.1,50,000 under section 80C of IT Act and additional deduction of Rs.50,000 under section 80CCD. If the employer contributes 10% of the basic salary of the employee under this scheme, then such an amount is not taxable. The additional deduction provided under the Act makes it a lucrative investment option and a tax-saving tool. On maturity, investors can get 40% of the accumulated sum in lump sum. This amount is tax-free
Post Office Time Deposit Schemes
Post Office Time Deposit (POTD) Scheme is a tax saving scheme offered by Post Offices in India for tenure up to 5 years. There is no upper limit for investment in POTD and the minimum amount that can be invested under the scheme is Rs.1000. The current rate of interest for POTD is 6.70% per annum. The scheme is eligible for deduction under section 80C of the IT act for a maximum amount of Rs.1,50,000.
There are many types of tax saving schemes like pension funds, loans, the deduction for the expenses like education of children, etc. Investors can plan their investments to get the maximum benefit of tax savings at the same time increase their corpus fund to build a suitable nest egg for their retirement or meeting any other financial goals.