It feels wonderful to receive your salary every month and use it for your present needs. However, that is all that your earnings do- help you live well in the present time. What you really need to do is plan to safeguard your future. Other than that, it is also important to plan ahead for factors like emergencies, vacations, and most importantly tax deductions that could create an unexpected bump in your finances.
While the rest of these emergencies can be taken care of with some savings plans like health insurance and life cover, maximizing your tax-benefits is a different game altogether. For instance, did you know that the finance market has certain tax saving investments that can help you reduce your taxes in the long run? With these investments, your tax burdens would be much reduced. All that you need to have is an understanding of investments you should make.
Let us have a look at some investment plans that can help you maximize your tax benefits like a professional.
Table of Contents
1. Unit Linked Investment Plans (ULIPs)
ULIPs are a combination of investment and life insurance cover. This means that it helps an investor to channel his/her savings to more than one market-linked asset so that long-term goals can be met and also works as life insurance.
In some of the best ULIP plans available in the market today, investors are presented with over 5-9 fund options that vary in asset allocation between equity and debt. The lock-in period of a ULIP is 5 years, however, an investor can choose to keep it going for a duration of 15-20 years.
The ULIP tax benefit is that when an investor chooses to exit the policy, which is after the lock-in period or on maturity, the fund value remains tax-free. Other than that, any switches that are made irrespective of the holding period are also exempt from tax. Most importantly, insurers like Max Life Insurance allow ULIP tax benefits up to a maximum of Rs 1.5 lakhs in a financial year under Section 80C. Therefore, ULIPS are one of the most highly chosen tax saving investment options in the market.
2. Equity Linked Savings Scheme (ELSS)
ELSS is a high-risk market-linked product, which offers the potential of high-returns in the future (*returns are dependent on market conditions). ELSS has the shortest lock-in period of 3 years. Another perk of this investment plan is that one can invest through a Systematic Investment Plan (SIP) which allows them to pay a small fraction every month instead of paying a heavier sum at once. This makes the investment affordable and easy. ELSS too offer tax deductions up to Rs 1.5 lakh under Section 80C.
3. Public Provident Fund (PPF)
PPFs are long-term savings scheme that is issued by the Central Government. What makes this investment useful is that any contribution made towards it is tax deductible under Section 80C. Furthermore, the interest earned on this investment is completely tax-free. The maximum limit of investment in PPF is Rs. 1.5 lakhs with an assured return of 8%. Looking at all these benefits that PPF gives, it really comes across as a good tax saver. The only drawback of this investment plan is that it has a lock-in period of 15 years, which is not a good option for those looking for a short-term tax saving investment.
4. National Saving Certificate
NSC is another saving plan that offers investors a guaranteed return of interest (8%) and a tax-free levy on any contributions made towards it. Investors who opt for the NSC investment plan can be assured to receive a regular income upon maturity. Considering that this scheme is government-backed, investors can invest up to amounts surmounting to Rs 1.5 lakhs, benefits of which can be claimed under Section 80C tax deductions. NSC is a savings scheme exceptionally designed for individuals only which is why the Hindu Undivided Families and Trusts cannot invest in it.
5. Term Insurance
Term Insurance plans give the investor a life cover along with tax deductions on the premiums paid from the total income under section 80C of Income Tax Act. The upper limit for tax deductions is up to Rs 1.5 lakhs. Furthermore, in case of death of the investor, the lump sum that is paid to the beneficiary is also not taxable under Section 10 (10D) of the Income Tax Act.
So, these were the five very important investment plans which can help you fulfil the requirements to maximize your tax benefits. It’s not necessary that you pick all of them. Just go ahead with the one that fits your needs and budget. After all, as the saying goes “A penny saved today is a penny earned tomorrow.”