Every taxpayer in India is always on a lookout for identifying the best schemes that can help to save taxes. Accordingly, there are several schemes available in the market that can significantly reduce the tax liability of taxpayers legitimately. These schemes are commonly referred to as tax saving schemes. The most popular of the lot are the National Savings Scheme, Senior Citizens Savings Schemes, National Pension Scheme, term deposits with post offices, Equity Linked Savings Schemes, Public Provident Fund, etc. The investments/contributions made in these schemes can be claimed as tax deductions under specific provisions of the Income Tax Act. The chief attraction for investors investing in these schemes is the tax benefit offered. Let’s take a look at some of the popular tax saving schemes in the country at present that can help you to save a chunk of your tax payments legally.
Income Tax Saving Schemes
Following are examples of a tax saving scheme that you can consider investing in:
Public Provident Fund
Public provident fund, commonly known as PPF, is one of the most popular long term saving-cum-investment options. It is also a very common tax saving scheme in India. PPF was introduced in 1968 to incentivize small savings. PPF is popular as it offers attractive returns and tax benefits. You need to maintain a minimum deposit of INR 500 in a financial year. The maximum amount of deposit can be up to INR 1,50,000. Any amount over INR 1,50,000 is not eligible to earn any interest or receive any tax benefits. The returns from PPF depend on the rate of interest, which is decided by the Government of India every quarter. The current rate of interest is 8% per annum (with effect from October 2018). The interest is calculated on the minimum balance, which is available in the PPF account between the 5th day and end of the month. The interest payout takes place on 31st March every year. When it comes to tax benefits, the interest and the principal amount of PPF is fully exempt from income tax under Section 80C of the Income Tax Act, 1961.
Equity Linked Saving Scheme
Another popular tax saving scheme is Equity Linked Saving Scheme. In this scheme, the investment amount invested in equity. One can start investing in ELSS with just INR 500. There is no upper cap on the amount of investment. There are two types of ELSS options. A dividend ELSS will either provide a dividend payout or an alternative to reinvest the dividend to reinvest in equity. A growth ELSS can help you to generate more wealth. The average returns offered by ELSS range between 15% to 18% per annum.
Further, ELSS is the only pure equity investment, which is a great tax saving scheme. It offers deductions up to INR 1.5 lakh in a financial year under Section 80C of the Income Tax Act, 1961. If you invest in ELSS, then long term capital gains above INR 1 lakh are taxed at 10%.
National Pension Scheme
Another popular tax saving scheme is the National Pension Scheme, which is regulated by the Pension Fund Regulatory and Development Authority. NPS is based on a contribution model where the subscriber is required to contribute towards the retirement account on a regular basis. In the case of salaried employees, this contribution can be made by the employer. The investment corpus is invested by pension funds in equity, corporate bonds, government bonds, and other alternative assets. NPS offers a lot of tax saving options. For a salaried employee, investment of up to 10% of the salary is exempted from taxable income under Section 80 CCD (1), IT Act, subject to an upper limit of INR 1.5 lakhs.
Additionally, INR 50,000 is also deductible from taxable income under Section 80CCD (IB) over and above INR 1.5 lakh. Further, contributions by employer up to 10% of salary is allowed a deduction under Section 80CCD (2), IT Act. NPS also has a Tier II account, which is a voluntary savings account. However, this account does not offer any tax saving options.
Senior Citizens Savings Scheme
For senior citizens who want to save on payment of taxes, the Senior Citizen Savings Scheme is a great tax saving scheme. The subscriber should be 60 years or above. You are also allowed to open joint accounts under SCSS. The age of the primary depositor should be as per the prevailing eligibility criteria. There is no restriction on the age of the second applicant provided the secondary applicant is the spouse of the primary subscriber. You are allowed to make a lump sum deposit with a minimum deposit of INR 1000. However, an individual cannot deposit more than INR 15 lakhs in the account. In the case of a joint account, the investment limit applies to the accounts collectively. Deposits can be made in multiples of INR 1000. Investments made to SCSS are eligible for tax deduction under Section 80C of the Income Tax Act up to INR 1.5 lakh per annum. It is important to note that any interest earned on the investments under SCSS is fully taxable at the hand of the investor.
Tax saving sections
Sections 80C to 80U of the Income Tax Act,1961, are the various sections that provide for deductions under a tax saving scheme. The key sections are as follows:
Section 80C: Individuals and HUFs can claim tax deductions up to INR 1.5 lakh for contributions made to PPF, NSC, payment of LIC premium, fixed deposits with banks, etc.
Section 80CCD: Individuals are eligible to claim tax deductions up to INR 1.5 lakh for contributions made by themselves or employers to a pension fund notified by the government.
Section 80D: Individuals and HUFs can claim tax deductions for payment of premium towards the medical insurance policy. The amount of tax deduction available under this section is INR 25,000 for individuals or HUFs and INR 30,000 for senior citizens.
Section 80TTA: Under this section, you are eligible to claim a tax deduction for the interest earned on a savings account. At present, the amount of deduction is capped at INR 10,000.
Section 80CCF: Long term infrastructure bonds of the government are also a tax saving scheme. If you have invested in these, you are eligible to claim a deduction of up to INR 20,000.
Rajesh is a salaried individual. He does not receive a Housing Rent Allowance as part of his salary. However, he wishes to save tax on the rent that he is paying. Is it possible?
Yes, he can claim the deduction under Section 80GG. The lowest of the three amounts can be claimed as a deduction: INR 5,000 per month OR 25% of the total Income (such income shall exclude any long term capital gains and short term capital gains under Sections 111A,115A or 115D and deductions made pursuant to Section 80C to 80U OR the actual rent paid less 10% of Income.
What are some of the well-known income tax saving scheme fit for a millennial?
The best options include the Public Provident Fund, National Savings Certificates, National Pension Scheme, fixed deposits with banks, and ULIPs.
Nita is considering an investment in an income tax saving scheme. She came across tax-saving FDs. Will the interest earned on the fixed deposit eligible for tax deductions?
No, the interest earned is fully taxable at the hand of the investor. She will not receive any tax deductions for the same.
Rahul is looking for tax saving options. He has a daughter who wants to pursue higher studies abroad. Will availing an educational loan help Rahul in his pursuit of saving taxes?
Yes, it is an option that he can definitely consider. As per the provisions of Section 80E of the Income Tax ACT, Rahul is eligible to claim the full amount of interest on the educational loan as a deduction from total gross income. This deduction can be claimed prior to the computation of the total taxable income.
Raj has taken a health insurance policy for his parents, who are senior citizens. Can he claim a tax deduction on the premium amounts paid by him?
Yes, payment of premium can be claimed as deduction from the taxable income. As his parents are senior citizens, Raj is eligible to claim a maximum of Rs. 30,000 as a deduction.
Neha wants to invest in a five year fixed deposit with a nationalized bank. What are the tax saving options available for FDs?
Fixed deposits with banks are a perfect tax saving scheme. The deductions can be claimed under Section 80C of the Income Tax Act. These fixed deposits have a lock-in period of 5 years when no withdrawals are allowed. The interest earned on the fixed deposit does not enjoy any tax deductions. However, these fixed deposits offer a much higher rate of interest compared to standard FDs or savings account.
If I invest in a Unit Linked Investment Plan, can I avail of tax deductions?
Yes, Section 80C provides for tax deductions on the revenue generated from ULIPs. It is an option you can consider.