Income tax saving schemes can be a great way to save on taxes, but there are so many options that it’s hard to know which is best for you.
The Indian government offers various income tax saving schemes, but it’s essential to understand each before investing in one.
Doing research and knowing what kind of returns you can expect from an income tax saving scheme can help you decide which one is right for you. It’s also essential to understand how the returns will be taxed—if they’re taxable, then the scope for long-term wealth creation gets constrained. While planning how to invest in income tax savings plans and schemes, you must avoid some common mistakes. These mistakes might cost you more than you’d expect, so steer clear of them.
In this article, we’ll talk about the different tax savings schemes offered by the government of India and the mistakes to avoid while investing in them.
What are tax saving schemes?
Tax saving is a scheme that helps you save money from being stolen by the government. The tax saving schemes are the best way to save tax, which can be claimed as deductions under the provisions of the Income Tax Act, 1961.
The most confusing question in the minds of every taxpayer is how to save tax? The answer is simple: it is possible through tax saving schemes. These schemes provide a platform to taxpayers through which they can easily save tax legally. The investment in income tax deductions is a way to save tax legally. The tax-saving schemes keep these deductions in mind and bring you the best way to save taxes.
Various tax saving schemes in India
In order to save money on taxes, you should know about the following tax saving schemes:
Public Provident Fund (PPF)
Public Provident Fund is an excellent option to save tax under section 80C. It is most suitable tax saving schemes in India for retirement. It offers a return on par with inflation mostly. Public Provident Fund allows contributions up to Rs 150000, which can be done by small investments or lump-sum. The Ministry of Finance defines the rate of interest from time to time. Interest earned is tax-free. The lock-in period for Public Provident Fund is 15 years. After five years, the amount can be withdrawn subject to certain conditions. It is one of the best schemes for tax savings.
Five-Year Bank Fixed Deposits (FDs)
Five-year fixed deposits are among the best ways to save money on taxes under section 80C of the Income Tax Act, 1961. They’re identical to regular savings accounts in how they work but can yield higher interest rates. Any interest earned at the end of five years is fully taxable.
Unit Linked Investment Plan (ULIP)
Unit-linked investment plans are eligible for 80C deductions and provide a combination of investment and insurance. Depending on the scheme, returns can range from 5% to 11%. The maturity revenues earned are tax-free.
Equity Linked Saving Schemes (ELSS)
They are mutual funds linked to equity. It’s an investment in equity aiming for higher returns of about 15%. There is no guarantee for such returns but the study shows that they are achievable. The returns and capital gains are tax-free. Dividend option can be taken to enjoy regular return during the lock-in period. The investment can be claimed u/s 80C easily. ELSS is a great saving scheme helping to save tax and offering superior returns.
Premium of Life Insurance
Under section 80C, life insurance is a default tax-saving strategy. Life insurance policies protect people and their dependents from potential risks. However, if somebody abandons the plan before the two-year mark, the tax benefit can be reversed.
National Pension Scheme
The National Pension Scheme includes low-cost investing options as well as tax advantages. Its returns vary as well, ranging from 3 to 10 percent. Due to the constraints on this scheme, including the fact that withdrawals are taxed in addition to the maturity amount, it is neither appealing nor advised only after retirement is a person able to access the funds.
Senior Citizens Savings Scheme (SCSS)
The Senior Citizens Savings Scheme (SCSS) is for senior citizens to save on tax. People who are above 60 years of age can invest in this scheme. The interest is taxable but primarily covered in the taxable limit. The limit for investment is Rs. 15 lakhs. There’s a lock-in period of 5 years also. The government backs up the principal amount of investment. This scheme offers quarterly interest returns. The Ministry of Finance defines the rate of interest from time to time. This deduction is allowed under section 80C.
Mistakes to avoid when investing in tax saving schemes
These mistakes can cost you more than you’d expect and must be avoided –
Mistake 1 – You postponed making investments in the last quarter.
Planning systematic investments over some time helps you build a sound investment portfolio. People tend to save and invest their savings at the last minute; little do they know that this hinders your investment returns. Therefore, it is best to start investing as soon as possible, preferably at the start of a financial year.
Mistake 2 – Not making the proper insurance selection:
Many people get insurance to satisfy Section 80C regulations, but they might not know the benefits. The main goal of purchasing an insurance policy is to financially safeguard you and your family in an unpleasant event.
Mistake 3 – Missing the taxable income calculation:
Remember that there are various other incomes besides your salary, such as business income, interest from deposits and mutual funds, capital gains from stocks, rent from property, and gold. Calculate your taxable income correctly to know precisely what deductions you need to aim to reduce your taxes.
Mistake 4 – Having no idea of the return rate:
Taxpayers usually don’t know the rate of returns offered by various investment avenues. Know your return options, and then invest accordingly. Before investing, consider analysing possible alternatives and then invest. Look for getting better returns instead of focusing on simply saving taxes.
Mistake 5 – Investing without considering your financial objectives:
Don’t just choose a financial instrument for its tax benefits. Consider your family’s needs, long-term goals, and life stage requirements to find a plan that fits all your goals.
Mistake 6 – Not accounting for tax deductions
Take tax-exempt expenses into account when calculating your savings. For instance, salaried individuals are entitled to a standard deduction of Rs. 50,000 under the Income Tax Act of 1961, and under certain conditions, if they are paying for two children’s education, they may also be eligible for exemptions or deductions for their rent or home loan principal and interest payments.
There are many types of tax saving schemes available in India and while investing it becomes essential to understand the rules governing its purchase and usage. Every scheme has its own set of conditions, so please read them carefully before buying to avoid any problems when filing your income tax return.