The Best Investment Strategies to Reduce Taxes

A tax deduction is an important aspect of financial planning. An effective tax-planning strategy can accomplish the dual aims of assisting people in reaching their financial goals and reducing taxes at the same time. Investment Strategies: Know about the Best Tax Saving Investment Schemes to reduce taxes that meet your investment needs in India. Read the full blog to get more details. 

Instruments and sections that reduce taxes:

1. Fixed deposit

By making investments in tax-saving fixed deposits, you can reduce your tax liability by section 80C of the Indian Income Tax Act, 1961. By making investments in tax-saver fixed deposits, you can deduct up to Rs. 1.5 lakh from your income. Such FDs have a 5-year lock-in period, and the interest received is taxable. Typically, interest rates fall between 5.5% and 7.75%.

2. PPF (Public provident scheme)

Public Provident Scheme is a well-liked investing tool for tax reduction. You must first open a PPF account at the post office or specific branches of public and private sector banks to use a long-term savings, Investment Strategies. A guaranteed rate of interest is earned on contributions to the PPF account. These deposits are eligible for Section 80C deductions worth up to Rs 1.5 lakh each fiscal year.

3. ULIP (Unit linked insurance plan)

ULIPs are long-term investment solutions that let you pick from a variety of equity, debt, or both funds. With ULIPs, you have the freedom to switch between funds to your financial objective. By sections 80C and 10(10D) of the Income Tax Act of 1961, investing in ULIPs can result in tax savings.

4. National Savings Certificate

National Savings Certificates are a savings bond program that primarily encourages participants with low to moderate incomes to invest while minimizing their income tax liability under Section 80C. If you have a savings account with a bank or a post office and have access to internet banking, you can purchase NSC certificates in e-mode. An investor may purchase NSCs for their account, on behalf of a juvenile, or in a joint account with another adult.

5. Senior Citizen Savings scheme

The Senior Citizen Savings Scheme (SCSS) is a government-sponsored savings program for anyone over 60. It provides a reliable and stable source of income for people's post-retirement years and delivers relatively high returns.

Section 80C of the Income Tax Act of 1961 permits tax deductions for principal deposits made into SCSS accounts up to a maximum of Rs. 1.5 lakh. This exemption, however, is only valid under the current tax laws. If a person decides to file tax returns using the new approach outlined in the Union Budget 2020, it is not permitted.

However, the interest is subject to taxation according to the taxpayer's applicable tax bracket.

6. Life insurance

Life insurance is an important factor in a person's financial plan since it protects the person's family in case of an emergency. Because of this, getting life insurance as soon as possible is the breadwinner's top priority for the security of the family.

Traditional life insurance (endowment) and market-linked life insurance (ULIP) both provide tax advantages to policyholders on the premiums paid.

Different life insurance policies include:

Plans for life insurance give policyholders tax advantages regardless of their nature.

Section 80C of the Income Tax Act covers life insurance premiums up to a maximum of Rs. 1.5 lakhs. Under Section 10, proceeds on death or maturity are tax-free (D). The claimed deductions are added to income and subject to the appropriate taxation if insurance is surrendered or canceled within five years.

• Terms plan
• Plans for endowment
• Unit-linked plans, or ULIPs
• Refundable plans
• Retirement planning

Another type of life insurance is a pension. They are referred to as protection plans and they have a different goal than other insurance plans like term plans and endowment plans. Pension plans aim to support the individual and his family if he lives on, in contrast to protection plans, which are designed to financially safeguard the individual's family in the event of his death.

The Income Tax Act's Section 80CCC (a sub-section of Section 80C) covers pension contributions. The total deduction allowed under all of Section 80C's sub-sections cannot be more than Rs 1.5 lakhs.

At maturity, one-third of the accrued pension amount is tax-free, while the remaining two-thirds are considered earnings and are subject to marginal tax rates. In the event of the beneficiary's passing, the sum is tax-free.

7. Mediclaim or health insurance

The costs associated with an accident or hospitalization are covered by health insurance, or Mediclaim as it is more often called. By the sum assured, Mediclaim also covers pre- and post-hospitalization costs.

Section 80D of the tax code provides benefits for health insurance. Tax benefits are available on insurance premiums up to Rs 20,000 for senior citizens and Rs 15,000 for everyone else. The policyholder can claim a tax benefit of Rs 35,000 (Rs 15,000 + 20,000) if he pays a premium for his coverage of Rs 15,000 and Rs 20,000 for his elder parent. The amount received under critical illness insurance policies' maturity value is tax-free.

8. NPS (New Pension Scheme)

The PFRDA, or Pension Funds Regulatory and Development Authority, oversees the NPS, or New Pension Scheme. Any Indian citizen between the ages of 18 and 60 is eligible to participate. As a result of the minimal fund management fees, it is very cost-effective. The money is managed by the fund managers among three unique accounts with various asset profiles. Corporate bonds (C), equity (E), and government securities (G) (G). Investors have the option of actively managing their portfolios or passively (auto choice).

Under Section 80CCD of the Income Tax Act, contributions made to the NPS are tax deductible. This section's combined deduction cap, along with the caps for Sections 80C and 80CCC, cannot exceed Rs 1.5 lakhs.

Given the variety of possibilities, NPS is especially helpful for people trying to save money for retirement who have different risk tolerance levels.

9. Mutual funds that reduce taxes

Equity-linked savings systems (ELSS), often known as tax-saving mutual funds, are eligible for tax advantages. Tax-saving mutual funds invest in the stock market among other assets and are better suitable for risk-taking investors. Three years are the three-year lock on investments.

Section 80C of the Income Tax Act covers investments in tax-saving mutual funds up to a total of Rs. 1.5 lakhs. Under Section 10, proceeds on death or maturity are tax-free (D).

What investments should you make this year to minimize your taxes?

Tax season for both paid and non-salaried taxpayers officially begins on April 1^st. A wise tax-saving investment should have both tax exemption and income-earning potential as goals.

It would be a wiser strategy to start investing in the first quarter of the fiscal year rather than waiting until the end of the fiscal year and using ad hoc tax-saving instruments, giving taxpayers more time to plan their investments and receive the highest possible returns. When choosing the investment strategy, factors such as the fund’s safety, liquidity, and return size should be taken into account.

The majority of tax-saving investment schemes are covered by Section 80C of the Income Tax Act, which entitles the taxpayer to an exemption of up to Rs 1,50,000. ELSS (Equity Linked Savings Scheme), Public Provident Fund, Life Insurance, National Savings Scheme, Fixed Deposits, and Bonds are among the alternatives available to investors.

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