SIMPLE WAYS OF SAVING TAX FOR A COMMON MAN

Tax savings can significantly reduce your financial burden, allowing you to retain more of your hard-earned money. Tax-saving investments provide deductions, exemptions, or lower tax rates, making them essential for effective financial planning. If you haven’t completed your tax planning yet, don’t panic.

Here are some simple yet effective ways to save taxes:

1. Equity Linked Savings Scheme (ELSS)

Equity Linked Savings Scheme (ELSS) is a popular tax-saving investment option that offers the dual benefit of wealth creation and tax savings. ELSS funds primarily invest in equities and come with a lock-in period of three years.

• Average Returns: ELSS funds have delivered an average return of 17.8% over the last three years, making them one of the best-performing tax-saving options.

• Dividend Option: Investors can opt for the dividend option to receive periodic returns even during the lock-in period.

• Tax Benefits: Investments in ELSS are eligible for tax deductions under Section 80C, up to a limit of ₹1.5 lakh annually.

  
  

Why Choose ELSS?

ELSS offers the potential for high returns while also providing tax benefits. The three-year lock-in period is relatively short compared to other tax-saving options, making it a preferred choice for those seeking short-term investment options.

2. National Pension System (NPS)

National Pension System (NPS) is a government-backed retirement-focused investment scheme that not only ensures a financially secure retirement but also provides attractive tax benefits.

• Additional Deduction: NPS allows investors to claim an additional tax deduction of ₹50,000 under Section 80CCD(1B), over and above the ₹1.5 lakh limit under Section 80C.

• Tax Benefits on Contributions: Employee and employer contributions up to 10% of the salary (basic + DA) are also eligible for tax deductions.

• Tax-Free Maturity Benefits: 60% of the corpus withdrawn at maturity is tax-free.

Why Choose NPS?

NPS is a suitable option for individuals seeking long-term retirement planning with tax benefits. It provides exposure to both equity and debt instruments, ensuring diversified growth.

3. Insurance Plans

Insurance plans, such as life insurance and health insurance, not only provide financial security but also offer tax-saving opportunities.

• Health Insurance: Under Section 80D, individuals can claim a deduction of up to ₹35,000 for health insurance premiums, including coverage for self, spouse, children, and parents.

• Life Insurance: Premiums paid for life insurance policies are eligible for tax deductions under Section 80C, up to ₹1.5 lakh annually.

Why Choose Insurance?

While insurance may not provide substantial returns like other investments, it offers comprehensive coverage for unforeseen risks along with tax-saving benefits.

4. Public Provident Fund (PPF)

Public Provident Fund (PPF) is a government-backed savings scheme that offers a stable and secure way to save for the long term while earning tax-free returns.

• Tax-Free Returns: The interest earned on PPF is completely tax-free under Section 10(11).

• Tax Deductions: Investments in PPF are eligible for deductions under Section 80C, up to ₹1.5 lakh annually.

• Rate of Return: PPF currently offers an interest rate of approximately 8% per annum, compounded annually.

• Lock-In Period: PPF has a lock-in period of 15 years, making it a long-term investment option.

Why Choose PPF?

PPF is ideal for conservative investors seeking safe, long-term investment options with tax benefits. The tax-free returns and government backing make it a risk-free option for wealth accumulation.

Conclusion

Choosing the right tax-saving investment depends on your financial goals, risk appetite, and investment horizon. ELSS is ideal for those looking for higher returns and a shorter lock-in period. NPS provides an additional tax-saving avenue for retirement planning, while insurance plans offer dual benefits of protection and tax savings. PPF, on the other hand, is a reliable long-term investment for conservative investors.

Evaluate these options, align them with your financial objectives, and make an informed decision to optimize your tax savings effectively.