Effective tax planning involves strategic investments that save taxes and offer the potential for higher returns. The Indian Income Tax Act provides several options under Section 80C and other sections. It allows taxpayers to reduce tax liabilities while building a diversified and growth-oriented portfolio. This blog post explores various tax-saving investment options available for the financial year 2024-25, aiming to guide investors on where to invest for optimal tax efficiency and returns.
Understanding Tax
What is Tax Concept? It is a compulsory monetary levy or charges the government imposes on individuals, businesses, and other entities to fund public services and infrastructure. Effective tax planning involves managing your finances to minimise tax liability through various legal means. That includes investing in tax-saving instruments, claiming deductions, and taking advantage of exemptions.
Best Investment Instruments to Save Tax in 2024-45
There are a lot of tax-saving mutual funds wherein you can invest a part of your income. Let’s find out.
Equity-Linked Savings Schemes (ELSS)
ELSS are diversified equity mutual funds with a mandatory lock-in period of three years. They provide tax benefits under the Income Tax Act’s Section 80C, letting investors claim up to ₹1.5 lakh deductions annually. Due to their exposure to equity markets, ELSS funds can potentially deliver higher returns than traditional tax-saving instruments.
Public Provident Fund (PPF)
The PPF is a long-term savings instrument supported by the government of India. It provides tax benefits as per Section 80C. It has a 15-year tenure, with an option to extend it in blocks of 5 years. PPF offers interest free of tax. The current interests rate are competitive.
National Pension System (NPS)
The NPS is a voluntary, long-term retirement savings scheme. It offers tax benefits under Section 80CCD(1) and additional benefits under Section 80CCD(1B) for contributions up to ₹50,000. The scheme allows investment in equity, corporate bonds, and government securities, offering the potential for higher returns over the long term.
Unit-Linked Insurance Plans (ULIPs)
ULIPs combine insurance and investment components, offering tax benefits under Section 80C. Based on the investor’s risk profile, they invest in equity, debt, or a mix of both. ULIPs have a lock-in period of five years and provide the potential for market-linked returns.
Tax-Saving Fixed Deposits (FDs)
Several banks offer tax-saving FDs with a five-year lock-in period. Investments in these fixed deposits are eligible for tax deductions as per Section 80C. While FDs provide funds protection and guaranteed returns, their returns offered are generally less than equity-linked instruments in the long run. Tax-saving FDs are ideal for risk-averse investors seeking fixed returns.
Equity and Equity-Related Investments
Apart from ELSS funds, direct investments in stocks, equity mutual funds, and exchange-traded funds (ETFs) also offer tax benefits on long-term gains. A well-managed equity fund can offer inflation-defying returns over time. These investments suit investors with a higher risk tolerance and a long-term investment horizon.
Life Insurance for Tax Benefits
Life insurance plans are not only a critical part of financial planning but also provide significant tax benefits as per the Income Tax Act. Here’s how you can benefit from these plans:
- Premium Payments (Section 80C): You can claim tax deductions on the premiums paid for life insurance under Section 80C, up to a maximum of Rs 1.5 lakh annually. The premium must be less than 10% of the total sum assured for policies issued after April 1, 2012. For policies issued before this date, the premium should not exceed 20% of the sum assured to be eligible for Section 80C benefits.
- Death or Maturity Benefit (Section 10(10D)): The amount obtained on the death or maturity of the insured is exempt from tax as per Section 10(10D).
- Section 80CCC: This part covers the acquiring or renewing of life insurance coverage. It includes annuity payments done through monthly earnings. There is up to Rs 1.5 lakh tax exemption as per this section that can be claimed.
- Section 80CCD(1): Exemptions as per this section apply to certain pension funds recognised under section 23AAB, with a limit of Rs 1.5 lakh.
Final Thought
Strategic tax planning for FY2024-25 involves selecting the right mix of investments that offer both tax-saving benefits and the potential for higher returns. Understanding each investment option’s tax implications and potential returns can help you make informed decisions and optimise your tax-saving strategy.
