Tax Planning - Axe The Tax

Finally, we are in the month, when investors are most actively hunting for an investment option. A lucrative bait of “Tax Cuts” is the root cause that leads to the bumper sale of investment products in the last month of every financial year.

According to the Income Tax Act 1961, there are some legal & legitimate ways to lower your tax bill under the sections listed below.

Section 80C

80C is known to be the most popular section under the Income Tax Act 1961, as individuals and HUF can save taxes on an Income of up to Rs.1, 50,000/- in a financial year by investing in various government and Non-government investment options

· ELSS Mutual Funds: ELSS stands for equity linked saving scheme, a special mutual fund category where minimum investment in equity & equity related instruments is 80% of total assets (in accordance with Equity Linked Saving Scheme, 2005 notified by Ministry of Finance). Investors with a high-risk appetite can invest to take advantage of equity as an asset class and save their tax.

Compared to other investment options ELSS has the lowest lock-in period of 3 years, which also helps investors to stay invested for a longer period, as it’s a prime requirement while investing in equity. The general return expectations from ELSS mutual fund varies from 12%-15% which is the highest among other tax saving options. Here are the some best ELSS funds one can invest.

Note: Returns are in the form of CAGR

· NPS: NPS stands for National Pension Scheme, a government-sponsored pension scheme, regulated by PFRDA, first launched in 2004 for government employees only, later, opened for all sections to motivate them to save for their retirement corpus. An Indian citizen aged 18-60 can easily start investing in NPS with a minimum contribution of Rs. 1000 per annum. Amount Invested in NPS is diversified across Equity, Alternative Investments, Corporate debt & Government Debt.

Subscribers have two investment options i.e. active choice and auto choice, later comes with three different templates based on the life cycle of the investors. NPS offers two account services i.e. Tier 1 & Tier 2. Tier 1, a retirement account, is considered cardinal as it is mandatory to open a Tier 2 account. Moreover, Tier 1 accounts also offer tax savings, as under :

- Section 80CCD (1): tax is deductible within the total ceiling of 1.5 lakh

- Section 80CCD 1(B): In addition to deduction under 80CCD (1), Investors can claim Rs 50,000 towards NPS tier 1 Account

The general return expectations for NPS investment vary between 8-10 %

· ULIP: It has been more than 2 years since the pandemic knocked us, which is also in the most unprecedented way, made us realize that there is no certainty about the life expectancy, even for those who have not entered their 30s yet. Unit Linked Insurance Plan is a hybrid product offering its subscribers a blend of insurance & Investment, hence getting its popularity as it solves both the benchmarks of successful wealth management planning.

The insurance company segregates the premium received, as one part is put into the securities like shares & bonds etc., while the other part of the premium is reserved for the insurance cover. For the benefit of subscribers, in 2010 lock-in period in ULIP has been raised from 3 years to 5 years. As per the different risk appetites, ULIP allows switching from debt to equity or vice versa. The general return expectations for ULIP investment vary between 13-15%.

Section 80D

Not as popular as 80C, but 80D is a hidden gem for those taxpayers who have maxed out 80C.

With the rising cost of healthcare & medicals, a family might lose its lifetime saving mapped towards various goals in an unfortunate emergency. Hence Health Insurance acts as a shield to your bank account.

In addition, subscribers can also claim tax benefits for the premium paid towards the Health insurance policy under section 80D of the Income Tax Act 1961.

Tax benefits can be claimed as below: -

Note: You cannot claim premiums paid for your in-laws, brothers, or sisters

You must consider your risk appetite and investment goals to select the investment option from the above-mentioned alternatives to axe your taxes!