Income Tax Saving Scheme? The most confusing question in every taxpayer’s mind is how to save tax? Making investments in tax-saving schemes is the best way of claiming deductions under the provisions of Income Tax Act, 1961.
There are various deductions allowed under the Income Tax Act, 1961 to reduce the tax liability. The deductions can be availed if investments are made in tax saving schemes or a taxpayer has incurred eligible expenses. The 80C of Chapter VIA is the most preferable deduction of tax payers. Other preferred deductions under the Income Tax Act are 80D, 80E, 80G, 80DDB and so on.
In this article, tax saving schemes are discussed in which an individual taxpayer can invest in claiming the tax-saving benefits under Section 80C of Income tax Act, 1961.
Section 80C: A total of Rs 1.5 lakhs can be deducted from the total income of a tax payer, which is available for individuals and HUFs. If taxes are paid in excess but a taxpayer has invested in LIC, Public Provident Fund or Mediclaim and has missed claiming a deduction for the same, a taxpayer can claim a deduction for the same while filing Income Tax Return. The IT Department will refund the excess money to your bank account.
Individuals should initiate to make the best use of the year in terms of tax savings.
Income Tax Saving Scheme for the purpose of claiming deductions in the year 2021 are discussed below:
Public Provident Fund (PPF):
A Public provident fund scheme is ideal for individuals who are interested in low-risk investments. Since this plan is authorized by the government, it comes up with assured returns to protect the financial needs of the investors.
Features of PPF Account:
- Investment Tenure: PPF has lock-in period of 15 years which can be further increased for 5 years after the completion of lock-in period.
- Principal Amount: A minimum of Rs. 500 and up to Rs. 1.5 Lakh can be invested in a provident fund scheme in a year. This investment can be made in lumpsum or installment basis.
- Loan against Investment: 25% or less of the total amount available in the PPF account can be availed as loan against investment.
- Interest Rates: Presently, interest rate stands at 7.10%, and is subject to quarterly updates at the discretion of the government.
How to Open a PPF Account
If an individual satisfies the requisite parameters in the eligibility criteria then he can open a PPF Account by visiting a chosen bank or post office or applying online by visiting the website of a particular bank or post office.
5 Year Bank Fixed Deposits (FDs):
FD Accounts are offered by banks and various financial institutions where an investor can deposit a lump sum amount over a period of time. In return, individual investors get interest at fixed rate throughout the investment tenure.
Fixed deposit accounts are categorised based on the benefits offered by the account, the account holder type, and the purpose for which the account is opened.
- Regular FD Account
- FD Account for Senior Citizens
- Corporate FD Account
- Tax Saving FD Account
- NIRO FD Account
- NRE FD Account
- FCNR FD Account
- FD Account with Monthly Payout
- FD Account with Maturity Payout
How to open a FD Account
An FD account can be opened either by visiting a Bank or Financial Institution and filling an application for opening an account or applying online by filling the application with relevant documents and depositing investment amount.
An individual strictly cannot withdraw the funds within five years from the date of opening of the account if the FD Account is opened for the purpose of tax-saving. Whereas premature withdrawals are allowed with certain penalties defined at the time of opening of an account which differs from bank to bank.
Unit Linked Investment Plan (ULIP):
ULIPs are a combination of insurance and investment. A portion of invested money is further invested by insurance companies in shares, bonds or other investment instruments, and remaining portion is considered as an amount for insurance premium. ULIPs are offered by insurance companies that provide investors both insurance and investment under a single integrated plan.
Features of Unit Linked Investment Plan
- Ideal For: ULIPs (Unit Insurance-Linked Plans) is ideal for individuals who are interested in long-term investments.
- Interest Rates: It generally provides higher returns depend upon the tenure of investment. For Example, For 5 years term, an average interest of 15% will be provided to an investor.
- Flexibility: An investor has the option to invest in ULIPs according to their risk factors.
How to invest in ULIPs
An investor can apply online to invest in ULIPs on the website of a particular insurance company or contact the nearest branch of an insurance company.
Equity Linked Saving Schemes (ELSS):
ELSS Funds are mainly invested in stocks of listed companies in a specific proportion according to the investment objectives of the fund. The purpose of these funds is to maximise capital appreciation.
Features of Equity Linked Saving Schemes:
- Lowest lock-in period: ELSS has the lowest lock-in period with a period of 3 years.
- Dividend and growth: An individual can invest in either dividend or growth option depending upon the requirement of money. In growth, option money is re-invested and keeps on growing till the time it is redeemed, whereas dividend is being paid out in dividend pay-out option.
- Interest rates: ELSS are market-linked products and returns vary depending on the scheme selected. But an investor can expect 12%-14% returns approximately.
How to invest in ELSS Funds
An individual can invest in ELSS the same way an investment is done in mutual funds. Online Investment Services Account is the easiest way to invest in ELSS. Investment can be done either in lump sum amount or via SIP.
Premium of Life Insurance
There are various life insurance policies that provide an opportunity to save taxes under Section 80C. An individual can claim deduction from total tax liability by showing that he paid premium or purchased a new life insurance policy for the purpose of saving tax.
Features of Life Insurance Premium
- Life Cover: Life Insurance provides life cover to an individual by paying monthly premium.
- Pay out Options: Term insurance can be claimed by various pay out options.
How to buy Life Insurance Policies
There are various parameters one has to consider while buying a life insurance policy and after considering all the relevant things one can contact the agent of an insurance company or can directly apply online on the website of that particular insurance company with all the relevant documents.
National Pension Scheme (NPS):
National Pension Scheme is a retirement investment plan where an individual invests voluntarily under the purview of the Pension Fund Regulatory and Development Authority and Central Government. Under NPS Scheme, an individual receives the invested amount as monthly pension post their retirement.
Features of National Pension Scheme:
- Portability: NPS Account can be opened and accessed in any of the states across India which is also transferable between employers, in corporate cases.
- Flexible: An investor gets to choose the fund manager, investment option, and annuity service, provider.
- Economical: NPS is one of the cheapest investment products in India for the purpose of claiming tax benefits.
- Voluntary: NPS is a voluntary product for citizens of India except for Central and State Government employees.
- Interest Rates: NPS Schemes has so far delivered 8% to 10% returns annually.
The NPS is a good scheme for anyone who wants to plan for their retirement early interested in low risk investments.
How to open a NPS Account
PFRDA regulates the operations of the NPS, and they offer both an online as well as an offline means to open this account.
- Offline Process
To open an NPS account offline, an individual will have to find a Point of Presence (PoP). Collecting a subscriber form from the nearest PoP and submitting it along with the KYC papers to PoP which can be a bank too. Once an initial investment (not less than Rs.500 or Rs.250 monthly or Rs. 1,000 annually), the PoP will send a Permanent Retirement Account Number (PRAN). This number and the password in your sealed welcome kit will help you operate your account. There is a one-time registration fee for this process.
- Online Process
Opening an account online (enps.nsdl.com) is easy, if an individual link their account to your PAN, Aadhaar and mobile number. One can validate the registration using the OTP sent to your mobile. This will generate a PRAN which can be used for NPS login.
Senior Citizens Savings Scheme (SCSS)
The Senior Citizens Savings Scheme (SCSS) is mainly for the senior citizen class of India. The scheme offers a regular stream of income with low risk and tax saving benefits. It is a better choice of investment for those over 60 years of age.
This is a good long-term saving option which offers security and added features linked with any government-sponsored savings scheme. These schemes are available through banks and post offices across the country.
Features of Senior Citizens Savings Scheme (SCSS)
- Interest Rates: Presently, the rate of interest applicable on SCSS is 7.4% P.A.
- Deposit Limit: Depositors are allowed to make a lump sum deposit with a minimum deposit of Rs.1000. The maximum limit of SCSS deposit is Rs.15 lakh.
- Maturity: Deposits in Senior Citizens’ Savings Scheme mature after 5 years from the date of account opening. However, the account holder has the option of extending the for an additional 3 years after it has matured.
How to open an SCSS Account
An SCSS account can be opened in any of the authorized banks or post office branches across India with relevant documents.
Sukanya Samriddhi Yojana (SSY):
Sukanya Samriddhi Yojana is a savings scheme that enables guardians to open a savings account for their girl child with an authorized bank or post office branch. It targets the parents of the girl child and encourages them to build a fund for her future education and marriage.
Features of Sukanya Samriddhi Account:
- Deposit Limit: A minimum of Rs 250 and maximum Rs 1.5 lakhs can be deposited in SSY Account.
- Withdrawal: After a girl in whose name account is created turns 18, she can withdraw 50% of the balance.
- Interest Rates: Presently, approved rate of interest of SSY Account is 7.6%
- A maximum of two accounts can be opened, and three in case of twin daughters.
How to open a SSY Account
A SSY Account can be opened by visiting any authorised bank and submitting the relevant documents or it can be set up online via Internet banking facility also.
National Savings Certificate
Like Public Provident Fund or Post Office FDs, National Savings Certificate is a fixed income investment instrument which encourages small and mid-investors to invest while saving on income tax. This scheme is for investors interested in low risk and secured investments.
Features of National Savings Certificate
- Fixed Interest rate: Presently, an investor gets guaranteed 8% annual return on NCSs.
- Investment: A minimum of Rs 100 can be invested initially, which can be increased gradually.
- Easy Accessibility: A NSC can be purchased from any of the nearest post office.
- NSC as collateral: A bank or financial institution can provide loan against the NSC as collateral.
How to buy National Savings Certificate
An individual can visit nearest post office and fill the application form for NSC and submit it with the relevant documents.
A NSC can be collected from the post office where the application has been filed.